As filed with the Securities and Exchange Commission on May 17, 2002
Registration No.333-85626
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
HORIZON PCS, INC.
(Exact name of registrant as specified in its charter)
(For co-registrants, please see "Co-Registrant
Information" on the following page)
DELAWARE 4812 31-1707839
(State of Incorporation) (Primary Standard Industrial (I.R.S. Employer
Classification Code Number) Identification No.)
68 EAST MAIN STREET
CHILLICOTHE, OHIO 45601-0480
(740) 772-8200
(Address, including zip code and telephone number,
including area code, of registrant's
principal executive offices)
MR. WILLIAM A. MCKELL
PRESIDENT AND CHIEF EXECUTIVE OFFICER
HORIZON PCS, INC.
68 EAST MAIN STREET
CHILLICOTHE, OHIO 45601-0480
(740) 772-8200
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
COPIES TO:
ROBERT F. DOW, ESQ.
DONALD I. HACKNEY, JR., ESQ.
ARNALL GOLDEN GREGORY LLP
2800 ONE ATLANTIC CENTER
1201 WEST PEACHTREE STREET
ATLANTA, GEORGIA 30309-3450
(404) 873-8500
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of the Registration Statement.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
THE CO-REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE CO-REGISTRANTS
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
CO-REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
HORIZON PERSONAL COMMUNICATIONS, INC.
BRIGHT PERSONAL COMMUNICATIONS SERVICES, LLC
(Exact name of co-registrant as specified in its charter)
OHIO 4812 31-0802877
(State of Incorporation) (Primary Standard Industrial 34-1903266
Classification Code Number) (I.R.S. Employer
Identification No.)
68 EAST MAIN STREET
CHILLICOTHE, OHIO 45601-0480
(740) 772-8200
(Address, including zip code and telephone number,
including area code, of the co-registrant's
principal executive offices)
MR. WILLIAM A. MCKELL
PRESIDENT AND CHIEF EXECUTIVE OFFICER
HORIZON PCS, INC.
68 EAST MAIN STREET
CHILLICOTHE, OHIO 45601-0480
(740) 772-8200
(Name, address, including zip code, and telephone
number, including area code, of agent for service
for each of the co-registrants)
COPIES TO:
ROBERT F. DOW, ESQ.
DONALD I. HACKNEY, JR., ESQ.
ARNALL GOLDEN GREGORY LLP
2800 ONE ATLANTIC CENTER
1201 WEST PEACHTREE STREET
ATLANTA, GEORGIA 30309-3450
(404) 873-8500
SUBJECT TO COMPLETION, DATED MAY 17, 2002
PROSPECTUS
$175,000,000
[HORIZON LOGO]
OFFER TO EXCHANGE
ALL OUTSTANDING 13 3/4% SENIOR NOTES DUE 2011
FOR
REGISTERED 13 3/4% SENIOR NOTES DUE 2011
THE REGISTERED NOTES
The terms of the registered notes that we are offering in exchange for the
outstanding notes are substantially identical to the terms of the outstanding
notes, except that certain transfer restrictions and registration rights
relating to the outstanding notes will not apply to the registered notes.
MATERIAL TERMS OF THE EXCHANGE OFFER
o The exchange offer will expire at 5:00 p.m., New York City time, on
___________, 2002, unless extended.
o The exchange offer is subject to the condition that the exchange offer not
violate applicable law or any applicable interpretation of the staff of the
Securities and Exchange Commission.
o You may withdraw tenders of outstanding notes at any time before the
exchange offer expires.
o We will exchange all outstanding notes that are validly tendered and not
withdrawn before the exchange offer expires. We will issue the registered
notes promptly after the exchange offer expires.
o We believe that the exchange of outstanding notes will not be a taxable
event for federal income tax purposes, but you should read "Certain U.S.
Federal Tax Considerations" on page 129 for more information.
o We will not receive any proceeds from the exchange offer. All
broker-dealers must comply with the registration and prospectus delivery
requirements of the Securities Act of 1933.
o Each broker-dealer that receives registered notes for its own account
pursuant to the exchange offer must acknowledge that it will deliver a
prospectus in connection with any resale of the registered notes.
o The new notes will not be listed on any securities exchange.
BEFORE PARTICIPATING IN THE EXCHANGE OFFER, PLEASE REFER TO THE SECTION IN
THIS PROSPECTUS ENTITLED "RISK FACTORS" BEGINNING ON PAGE 9.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE REGISTERED NOTES OR DETERMINED IF
THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS MAY 17, 2002
TABLE OF CONTENTS
PAGE
PROSPECTUS SUMMARY............................................................1
RISK FACTORS..................................................................9
FORWARD-LOOKING STATEMENTS...................................................24
USE OF PROCEEDS..............................................................26
CAPITALIZATION...............................................................27
SELECTED CONSOLIDATED FINANCIAL DATA.........................................28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.............................30
BUSINESS.....................................................................47
THE SPRINT PCS AGREEMENTS....................................................63
DESCRIPTION OF CERTAIN INDEBTEDNESS..........................................71
MANAGEMENT...................................................................77
PRINCIPAL STOCKHOLDERS.......................................................83
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...............................85
REGULATION OF THE WIRELESS TELECOMMUNICATIONS INDUSTRY.......................90
DESCRIPTION OF CAPITAL STOCK.................................................95
THE EXCHANGE OFFER...........................................................99
DESCRIPTION OF THE REGISTERED NOTES.........................................109
CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS..............................129
PLAN OF DISTRIBUTION........................................................133
WHERE YOU CAN FIND MORE INFORMATION.........................................133
LEGAL MATTERS...............................................................134
EXPERTS.....................................................................134
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS..................................F-1
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS INFORMATION THAT WE BELIEVE IS ESPECIALLY IMPORTANT
CONCERNING OUR BUSINESS AND THE EXCHANGE OFFER. IT DOES NOT CONTAIN ALL OF THE
INFORMATION THAT MAY BE IMPORTANT TO YOUR INVESTMENT DECISION. YOU SHOULD READ
THE ENTIRE PROSPECTUS, INCLUDING "RISK FACTORS" AND OUR FINANCIAL STATEMENTS AND
RELATED NOTES, BEFORE DECIDING TO PARTICIPATE IN THE EXCHANGE OFFER.
UNLESS INDICATED OTHERWISE, "HORIZON," "WE," "US" AND "OUR" REFERS TO
HORIZON PCS, INC., AND ITS SUBSIDIARIES. HORIZON HAS NO OPERATIONS SEPARATE FROM
ITS INVESTMENT IN ITS SUBSIDIARIES AND THE SUBSIDIARIES HAVE FULLY AND
UNCONDITIONALLY GUARANTEED THE OBLIGATIONS UNDER THE REGISTERED NOTES.
ACCORDINGLY, WE HAVE PROVIDED OUR FINANCIAL INFORMATION IN THIS PROSPECTUS ON A
CONSOLIDATED BASIS.
WHO WE ARE
We are one of the largest Sprint PCS affiliates based on our exclusive right
to market Sprint PCS products and services to a total population of over 10.2
million in portions of twelve contiguous states. A Sprint PCS affiliate is an
entity that has agreed to act as Sprint PCS' exclusive agent to market its
services in a particular area. Our markets are located between Sprint PCS'
Chicago, New York and Raleigh/Durham markets and connect or are adjacent to 15
major Sprint PCS markets that have a total population of over 59 million. As a
Sprint PCS affiliate, we market digital personal communications services, or
PCS, under the Sprint and Sprint PCS brand names. We offer the same national
pricing plans and use the same sales and marketing strategies and national
distribution channels that have made Sprint PCS the fastest growing wireless
company in the country.
As of March 31, 2002, we had launched service in markets covering
approximately 7.2 million residents, or 71% of the total population in our
territory, and had approximately 222,700 customers. According to our business
plan, our network, when completed, will cover 7.9 million residents, or 77%, of
the total population in our territory. We believe that our network will be
substantially complete by December 31, 2002. For the year ended December 31,
2001, we had revenues of $123.3 million and a loss from continuing operations of
$113.5 million.
We became one of the five charter Sprint PCS affiliates in June 1998, when
we were awarded our initial seven markets in Ohio, West Virginia and Kentucky
with a total population of approximately 1.6 million. Since our initial
territory grant, we have substantially expanded the size of our territory, as
follows:
o in August 1999, Sprint PCS granted us additional markets in Virginia, West
Virginia, Kentucky, Maryland, North Carolina and Tennessee with a total
population of approximately 3.3 million;
o in May 2000, Sprint PCS granted us additional markets in Pennsylvania, New
York, Ohio and New Jersey with a total population of approximately 2.9
million; and
o in June 2000, we completed the acquisition of Bright PCS, a Sprint PCS
affiliate, adding markets in Indiana, Ohio and Michigan with a total
population of approximately 2.4 million.
Our territory includes significant market coverage in Indiana, Ohio,
Pennsylvania, Tennessee, Virginia and West Virginia and selected markets in
Kentucky, Maryland, Michigan, New Jersey, New York and North Carolina. Our
markets are adjacent to or connect a number of major markets owned and operated
by Sprint PCS, including Buffalo, Chicago, Cincinnati, Cleveland, Columbus,
Detroit, Indianapolis, Knoxville, Lexington, New York, Philadelphia, Pittsburgh,
Raleigh/Durham, Richmond and Washington, D.C.
We are a Delaware corporation. Our principal executive offices are located
at 68 East Main Street, Chillicothe, Ohio 45601-0480; and our telephone number
is (740) 772-8200.
1
THE EXCHANGE OFFER
The following is a summary of the principal terms of the exchange offer. A
more detailed description is contained in this prospectus under the section
entitled "The Exchange Offer." The terms "registered notes" and "registered
senior notes" refer to the 13 3/4% Senior Notes due 2011 being offered in the
exchange offer. The terms "outstanding notes" and "outstanding senior notes"
refer to our currently outstanding 13 3/4% Senior Notes due 2011 that are
exchangeable for the registered notes. The term "indenture" refers to the
indenture that applies to both the outstanding notes and the registered notes.
The Exchange Offer We are offering to exchange $1,000 principal amount of
registered notes and integral multiples of $1,000 in excess
thereof which have been registered under the Securities Act
for each $1,000 principal amount of outstanding notes and
integral multiples of $1,000 in excess thereof. We issued
the outstanding notes on December 7, 2001 in a private
offering. In order to be exchanged, an outstanding note must
be properly tendered and accepted before expiration of the
exchange offer. All outstanding notes that are validly
tendered and not validly withdrawn will be exchanged. We
will issue the registered notes promptly after the
expiration of the exchange offer.
As of the date of this prospectus, there is outstanding
$175.0 million principal amount of outstanding notes.
Outstanding notes may be tendered for exchange in whole or
in part for minimum denominations of $1,000 principal amount
and integral multiples of $1,000 in excess thereof.
Registration Simultaneously with the sale of the outstanding notes on
Rights Agreement December 7, 2001, we entered into a registration rights
agreement under which we committed to conduct the exchange
offer. You are entitled under the registration rights
agreement to exchange your outstanding notes for registered
notes with substantially identical terms. The exchange offer
is intended to satisfy these rights. After the exchange
offer is complete, except as set forth in the next
paragraph, you will no longer be entitled to any exchange or
registration rights with respect to your outstanding notes.
The registration rights agreement requires us to file a
registration statement for a continuous offering in
accordance with Rule 415 under the Securities Act for your
benefit if:
- we are not permitted to consummate the exchange offer
because the exchange because the exchange offer is not
permitted by applicable law or SEC policy;
- you are ineligible to participate in the exchange offer
and indicate that you wish to have your outstanding
notes registered under the Securities Act; or
- you have acquired in the exchange offer to the public
without delivering a prospectus and this prospectus
(including any amendment or supplement thereto) is not
appropriate or available for resales by you.
Resales of the We believe that registered notes to be issued in the
Registered Notes exchange offer in exchange for the outstanding notes may be
offered for resale, resold and otherwise transferred by you
without compliance with the registration and prospectus
delivery provisions of the Securities Act if you meet the
following conditions:
(1) the registered notes are acquired by you in the
ordinary course of your business;
(2) you are not engaging in and do not intend to engage in
a distribution of the registered notes;
(3) you do not have an arrangement or understanding with
any person to participate in the distribution of the
registered notes; and
2
(4) you are not an affiliate of ours, as that term is
defined in Rule 405 under the Securities Act.
However, the SEC has not considered this exchange offer in
the context of a no-action letter and we cannot be sure that
the staff of the SEC would make the same determination with
respect to the exchange offer as in other circumstances.
Furthermore, if you do not meet the above conditions, you
may incur liability under the Securities Act if you transfer
any registered note without delivering a prospectus meeting
the requirements of the Securities Act. We do not assume, or
indemnify you against, that liability.
Each broker-dealer that receives registered notes for its
own account in the exchange offer in exchange for
outstanding notes which that broker-dealer acquired as a
result of market-making activities or other trading
activities must acknowledge that it will comply with the
prospectus delivery requirements of the Securities Act in
connection with any resale of the registered notes.
Broker-dealers who acquired outstanding notes directly from
us and not as a result of market-making activities or other
trading activities may not participate in the exchange offer
and must comply with the prospectus delivery requirements of
the Securities Act in order to resell the outstanding notes.
Expiration Date The exchange offer will expire at 5:00 p.m., New York City
time, on _____________, 2002, unless we decide to extend the
exchange offer.
Withdrawal You may withdraw the tender of your outstanding notes at any
time prior to 5:00 p.m., New York City time, on the
expiration date.
Conditions to The only conditions to completing the exchange offer are
the Exchange Offer that the exchange offer not violate applicable law or any
applicable interpretation of the staff of the SEC and no
injunction, order or decree has been issued, or any action
or proceeding has been instituted or threatened that would
reasonably be expected to prohibit, prevent or materially
impair our ability to proceed with the exchange offer. If
any of these conditions exist prior to the expiration date,
we may take the following actions:
- refuse to accept any outstanding notes and return all
previously tendered outstanding notes;
- extend the duration of the exchange offer; or
- waive these conditions to the extent permissible under
applicable law.
Procedures for We issued the outstanding notes as global securities in
Tendering fully registered form without coupons. Beneficial interests
Outstanding Notes in the outstanding notes which are held by direct or
indirect participants in The Depository Trust Company
through certificateless depositary interests are shown on,
and transfers of the outstanding notes can be made only
through, records maintained in book-entry form by DTC with
respect to its participants. If you are a holder of an
outstanding note held in the form of a book-entry interest
and you wish to tender your outstanding notes for exchange
pursuant to the exchange offer, you must transmit to Wells
Fargo Bank Minnesota, National Association, as exchange
agent, on or prior to the expiration of the exchange offer
either:
- a written or facsimile copy of a properly completed and
executed letter of transmittal and all other required
documents to the address set forth on the cover page of
the letter of transmittal; or
- a computer-generated message transmitted by means of
DTC's Automated Tender Offer Program system and forming
a part of a confirmation of book-entry transfer in
which you acknowledge and agree to be bound by the
terms of the letter of transmittal. The exchange agent
3
must also receive on or prior to the expiration of the
exchange offer either:
- a timely confirmation of book-entry transfer of your
outstanding notes into the exchange agent's account at
DTC, in accordance with the procedure for book-entry
transfers described in this prospectus under the
heading "The Exchange Offer--Book-Entry Transfer," or
- the documents necessary for compliance with the
guaranteed delivery procedures described below.
A letter of transmittal accompanies this prospectus. By
executing the letter of transmittal or delivering a
computer-generated message through DTC's Automated Tender
Offer Program system, you will represent to us that, among
other things:
(1) the registered notes to be acquired by you in the
exchange offer are being acquired in the ordinary
course of your business;
(2) you are not engaged in, and do not have an arrangement
or understanding with any person to participate in, the
distribution of the registered notes; and
(3) you are not an affiliate of ours.
Procedures for If you are a holder of book-entry interests in the
Tendering outstanding notes, you are entitled to receive, in limited
Certificated circumstances, in exchange for your book-entry interests,
Outstanding Notes certificated notes which are in equal principal amounts to
your book-entry interests. See "The Exchange
Offer--Procedures for Tendering--Book-Entry Interests." No
certificated notes are issued and outstanding as of the date
of this prospectus. If you acquire certificated outstanding
notes prior to the expiration of the exchange offer, you
must tender your certificated outstanding notes in
accordance with the procedures described in this prospectus
under the heading "The Exchange Offer--Procedures for
Tendering--Certificated Outstanding Notes."
Special If you are the beneficial owner of outstanding notes and
Procedures for they are registered in the name of a broker, dealer,
Beneficial Owner commercial bank, trust company or other nominee, and you
wish to tender your outstanding notes, you should promptly
contact the person in whose name your initial notes are
registered and instruct that person to tender on your
behalf. If you wish to tender on your own behalf, you must,
prior to completing and executing the letter of transmittal
and delivering your outstanding notes, either make
appropriate arrangements to register ownership of the
outstanding notes in your name or obtain a properly
completed bond power from the person in whose name your
outstanding notes are registered. The transfer of registered
ownership may take considerable time and it may not be
possible to complete prior to the expiration date.
Guaranteed If you wish to tender your outstanding notes and your
Delivery outstanding notes are not immediately available or you
Procedures cannot deliver your outstanding notes, the letter of
transmittal or any other documents required by the letter of
transmittal to the exchange agent, or you cannot complete
the procedure for book-entry transfer, then prior to the
expiration date you must tender your outstanding notes
according to the guaranteed delivery procedures set forth in
"The Exchange Offer--Procedures for Tendering--Guaranteed
Delivery Procedures."
Acceptance of Except under the circumstances described above under
Outstanding Notes "Conditions to the Exchange Offer," we will accept for
and Delivery of exchange any and all outstanding notes which are properly
Registered Notes tendered in the exchange offer before 5:00 p.m., New York
City time, on the expiration date. We will deliver the
registered notes promptly following the expiration date. If
4
we do not accept any of your outstanding notes for exchange
we will return them to you as promptly as practicable after
the expiration or termination of the exchange offer without
any expense to you.
Exchange Agent Wells Fargo Bank Minnesota, National Association is serving
as the exchange agent in connection with the exchange offer.
Use of Proceeds We will not receive any cash proceeds from the issuance of
the registered notes in the exchange offer.
Consequences of Outstanding notes that are not tendered or that are tendered
Failure to but not accepted will continue to be subject to the existing
Exchange restrictions on transfer provided in the outstanding notes
and in the indenture. U.S. Federal Tax Considerations The
exchange of the outstanding notes generally will not be a
taxable exchange for federal income tax purposes.
IF YOU DO NOT EXCHANGE YOUR OUTSTANDING NOTES FOR REGISTERED NOTES IN THE
EXCHANGE OFFER, YOUR OUTSTANDING NOTES WILL CONTINUE TO BE SUBJECT TO THE
RESTRICTIONS ON TRANSFER CONTAINED IN THE LEGEND ON THE OUTSTANDING NOTES. IN
GENERAL, THE OUTSTANDING NOTES MAY NOT BE OFFERED OR SOLD UNLESS THEY ARE
REGISTERED UNDER THE SECURITIES ACT OF 1933. HOWEVER, YOU MAY OFFER OR SELL YOUR
OUTSTANDING NOTES UNDER AN EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO,
THE SECURITIES ACT OF 1933 AND APPLICABLE STATE SECURITIES LAWS. WE DO NOT
CURRENTLY ANTICIPATE THAT WE WILL REGISTER YOUR OUTSTANDING NOTES UNDER THE
SECURITIES ACT OF 1933.
5
TERMS OF THE REGISTERED NOTES
Issuer Horizon PCS, Inc.
Registered Notes Offered $175,000,000 aggregate principal amount of
Registered 13 3/4% Senior Notes due 2011. The
registered notes will evidence the same debt as
the outstanding notes and will be issued under,
and entitled to the benefits of, the same
indenture. The terms of the registered notes are
the same as the terms of the outstanding notes in
all material respects except that the registered
notes:
- have been registered under the Securities Act;
- do not include rights to registration under the
Securities Act; and
- do not contain transfer restrictions applicable
to the outstanding notes.
Maturity Date June 15, 2011.
Interest 13 3/4% per annum, accruing from December 7, 2001,
payable in cash semi-annually on June 15 and
December 15 of each year, commencing on June 15,
2002.
Guarantees Our obligations under the registered notes will be
fully and unconditionally guaranteed by our
subsidiaries, Horizon Personal Communications,
Inc. and Bright Personal Communications Services,
LLC, and all of our future domestic restricted
subsidiaries. The guarantees will be subordinate
in right of payment to all existing and future
senior indebtedness of the guarantors, including
each guarantor's obligations under our senior
secured credit facility. The guarantees will rank
equal in right of payment to other existing and
future senior subordinated indebtedness of the
guarantors and senior in right of payment to all
of the existing and future obligations of the
guarantors that are expressly subordinated in
right of payment to the guarantees.
6
SUMMARY FINANCIAL DATA
SUMMARY CONSOLIDATED FINANCIAL DATA
On April 26, 2000, Horizon Telcom formed Horizon PCS and on June 27, 2000
transferred its 100% ownership of Horizon Personal Communications, Inc. to
Horizon PCS in exchange for 53.8 million shares of Horizon PCS class B common
stock, representing 100% of the outstanding shares of Horizon PCS. This transfer
was accounted for in the financial statements as a reorganization of companies
under common control in a manner similar to a pooling-of-interests. We have
reflected the reorganization and the adjusted number of shares outstanding
retroactively for all periods and we have presented the prior financial
statements of Horizon Personal Communications, Inc. as those of Horizon PCS.
The following tables present summary consolidated historical financial and
other data for Horizon PCS for the three years ended December 31, 2001, and as
of December 31, 2001, which we derived from the audited consolidated financial
statements of Horizon PCS, and unaudited consolidated historical financial data
for the three months ended March 31, 2002 and as of March 31, 2002, which we
derived from the unaudited interim consolidated financial statements of Horizon
PCS. In the opinion of management, the unaudited consolidated financial
statements were prepared on the same basis as the audited consolidated financial
statements and include all normal and recurring adjustments and accruals
necessary for a fair presentation of this information. Financial results for the
three months ended March 31, 2002 are not necessarily indicative of the results
that may be expected for the full year.
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
----------------------------------------- ----------------
1999 2000 2001 2002
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AND OTHER DATA)
STATEMENTS OF OPERATIONS DATA:
Operating revenues:
Subscriber revenues............... $ 3,665 $ 17,725 $ 77,658 $ 35,015
Roaming revenues.................. 642 8,408 38,540 10,819
Equipment revenues................ 600 3,061 7,106 2,376
----------- ------------ ------------- --------------
Total revenues................. 4,907 29,194 123,304 48,210
----------- ------------ ------------- ---------------
Operating expenses:
Cost of service (exclusive of items
shown below).................... 8,204 27,452 100,516 35,751
Cost of equipment................. 2,444 9,775 14,872 4,920
Selling and marketing............. 3,475 18,027 48,993 14,707
General and administrative expenses
(exclusive of items shown below) 3,944 12,476 28,384 9,175
Non-cash compensation expense..... 291 490 1,434 177
Depreciation and amortization..... 2,685 6,134 18,519 7,950
----------- ------------ ------------- ---------------
Total operating expenses....... 21,043 74,354 212,718 72,680
----------- ------------ ------------- ---------------
Operating loss................. (16,136) (45,160) (89,414) (24,470)
Gain (loss) on exchange of stock.. -- 11,551 (400) --
Gain (loss) on disposal of PCS
assets......................... 1,388 -- (1,297) (286)
Interest income and other, net.... 52 4,804 5,063 744
Interest expense, net............. (1,529) (10,318) (27,434) (12,738)
----------- ------------ ------------- ---------------
Loss from continuing operations
before income taxes......... (16,225) (39,123) (113,482) (36,750)
Income tax benefit (expense)...... 5,275 (1,076) -- --
----------- ------------ ------------- ---------------
Loss from continuing operations (10,950) (40,199) (113,482) (36,750)
----------- ------------ ------------- ---------------
Preferred stock dividend.......... -- (2,782) (10,930) (2,857)
Loss from continuing operations
available to common
stockholders.............. $ (10,950) $(42,981) $(124,412) $(39,607)
=========== ============ ============= ===============
OTHER DATA:
Number of PCS subscribers(1)...... 13,749 66,447 194,100 222,700
Total population in our markets 4.9 10.2 10.2 10.2
(millions)........................
ARPU (including roaming)(2)....... $ 64 $ 75 $ 83 $ 74
ARPU (excluding roaming)(2)....... 55 51 56 56
Deficiency of earnings to fixed
charges (dollars in
thousands)(3)................... 16,136 40,488 119,905 38,578
7
AS OF AS OF
DECEMBER 31, MARCH 31,
2001 2002
---------------- ---------------
BALANCE SHEET DATA:
Cash and cash equivalents.................... $ 123,776 $ 195,871
Restricted cash.............................. 48,660 48,660
Total property and equipment, net............ 214,868 230,290
Total assets................................. 481,338 569,355
Total debt................................... 384,056 495,410
Total liabilities............................ 447,956 572,156
Convertible preferred stock.................. 145,349 148,205
Total stockholders' deficit.................. (111,967) (151,007)
- ----------
(1) Represents the number of PCS subscribers at the end of each period.
(2) Represents average monthly revenue per unit (subscriber). For more detail on
how ARPU is computed, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Results of Operations."
(3) For purposes of computing the deficiency of earnings to fixed charges, fixed
charges consist of interest expense and amortization expense related to
indebtedness. The deficiency of earnings to fixed charges is the amount
required for the ratio of earnings to fixed charges to be one-to-one.
8
RISK FACTORS
You should carefully consider the following risk factors in addition to the
other information contained in this prospectus before purchasing the registered
notes. The cautionary statements set forth below and elsewhere in this
prospectus should be read in conjunction with accompanying forward-looking
statements included under "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Business" and elsewhere herein.
RISKS PARTICULAR TO HORIZON PCS
WE HAVE NOT HAD ANY PROFITABLE YEARS IN THE PAST FIVE YEARS, AND WE MAY NOT
ACHIEVE OR SUSTAIN OPERATING PROFITABILITY OR POSITIVE CASH FLOW FROM OPERATING
ACTIVITIES.
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. We have already incurred a
total of approximately $240.9 million in losses through March 31, 2002. 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.
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. We and Sprint PCS 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 specified 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.
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 all 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
9
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. See "The Sprint PCS Agreements."
OUR SUBSTANTIAL INDEBTEDNESS COULD ADVERSELY AFFECT OUR FINANCIAL HEALTH AND
PREVENT US FROM FULFILLING OUR LONG-TERM DEBT OBLIGATIONS.
As of March 31, 2002, our total debt outstanding was $625.0 million,
comprised of $155.0 million borrowed under our secured credit facility, $175.0
million due under our senior notes issued in December 2001 and $295.0 million
represented by our discount notes (which are reported on our 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 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 senior 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.
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
10
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 our valuation 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 our Entire Business Value. If the termination is due to our breach of the
Sprint PCS agreements, the percent is reduced to 72% instead of 80%. Under our
Sprint PCS agreements, the Entire Business Value is generally 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 our company or our
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 and may operate to reduce our Entire Business
Value. See "The Sprint PCS Agreements" for a description of these termination
provisions.
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
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, to varying degrees, to the economic,
administrative, logistical, regulatory and other risks described in this
prospectus. 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, AND 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, 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
11
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 OUR 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 senior secured credit facility.
Horizon PCS' secured credit facility includes financial covenants that must
be met each quarter. We 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, we incurred additional expenses to add
those customers. Although we ultimately benefit from the revenues generated by
new subscribers, we 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, we entered into a waiver agreement with our 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 our cash and cash equivalents (excluding restricted
cash) exceeds $10.0 million and would maintain the $105.0 million in loan
proceeds recently received from the lending group in a separate account. We are
currently in negotiations with the bank group to obtain amendments to the
covenants. We anticipate finalizing these amendments by June 15, 2002.
The failure to comply with the covenant was an event of default under our
secured credit facility, and will give the lender the right to pursue remedies
if we 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 our senior notes and discount notes.
One option available to us would be to prepay the indebtedness under the secured
credit facility, together with prepayment fees. If we prepaid the facility prior
to acceleration, we would avoid default under the indentures for our senior
12
notes and discount notes. In the event of such a prepayment, we believe that we
could obtain replacement financing to the extent necessary to fund our 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
indentures governing our senior notes and discount notes and the secured credit
agreement all 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 minimum EBITDA;
o an interest coverage ratio; and
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.
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 prohibit us and
the guarantors of the notes from paying the notes or the guarantees of the
notes.
13
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 senior 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 debt, 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.
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 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 demand for specific types of handsets
is strong and the manufacturers of those handsets may have to distribute their
limited supply of products among their numerous customers. Some of our
competitors purchase large quantities of communications equipment and may have
established relationships with the manufacturers of this equipment.
Consequently, they may receive priority in the delivery of this equipment. If we
do not obtain equipment or handsets in a timely manner, we could suffer delays
in the build-out of our network, disruptions in service and a reduction in
customers.
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
14
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 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
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 have significantly greater financial and technical
resources than we do, could offer attractive pricing options and may have a
wider variety of handset options. We expect that existing cellular providers
will continue to upgrade their systems and provide expanded digital services to
compete with the Sprint PCS products and services that we offer. Many of these
wireless providers generally require their customers to enter into long-term
contracts, which may make it more difficult for us to attract customers away
from them.
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.
15
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
approximately $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.
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.
16
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 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 10-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.
WE MAY NEED MORE CAPITAL THAN WE CURRENTLY ANTICIPATE TO COMPLETE THE BUILD-OUT
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 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
17
services. We currently estimate that this network upgrade will cost
approximately $35 million, but actual costs could exceed this estimate. The
current deadline for completion of our 3G upgrade generally 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 that 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;
o inability to successfully incorporate acquired assets and rights into our
service offerings;
o inability to maintain uniform standards, controls, procedures and policies;
and
o impairment of relationships with employees, customers or vendors.
Failure to overcome these risks or any other problems encountered in these
transactions could have a material adverse effect on our business. In connection
with these transactions, we may also issue additional equity securities, incur
additional debt or incur significant amortization expenses related to intangible
assets.
THE SPRINT PCS AGREEMENTS AND OUR 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 our
company. For example, our 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
18
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
restated certificate of incorporation could discourage any sale of our operating
assets or common stock.
WE WILL NOT BE ABLE TO RECEIVE THE TAX BENEFIT OF FUTURE LOSSES UNTIL WE BEGIN
TO GENERATE TAXABLE INCOME.
From our 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 the tax-sharing agreement with
Horizon Telcom, Horizon Telcom filed a consolidated tax return and paid us an
amount equal to the tax savings realized by Horizon Telcom as a result of our
taxable operating losses being used to offset consolidated taxable income. As a
result of the sale of convertible preferred stock in September 2000, we are no
longer included in Horizon Telcom's consolidated tax return and, as a result,
will no longer be able to recognize any tax benefits from our operating losses
until we generate 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 54.7% of our outstanding
common stock on fully diluted basis as of May 1, 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 81.2% of the voting power, on a fully diluted basis at May 1,
2002. Horizon Telcom will have the voting power to control the election of our
board of directors and it will be able to cause amendments to our restated
certificate of incorporation or our restated bylaws. Horizon Telcom also may be
able to cause changes in our business without seeking the approval of any other
party. These changes may not be to the advantage of our company or in the best
interest of our other stockholders or the holders of our notes. For example,
Horizon Telcom will have the power to prevent, delay or cause a change in
control of our company and could take other actions that might be favorable to
Horizon Telcom, but not necessarily to other 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
us.
WE MAY FACE CONFLICTS OF INTEREST WITH HORIZON TELCOM WHICH MAY HARM OUR
BUSINESS.
Conflicts of interest may arise between us 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 our common stock held by it; and
o the exercise by Horizon Telcom of its ability to control our
management and affairs.
Horizon Telcom controls approximately 81.2% of the voting power of our
shares on a fully diluted basis. Horizon Telcom is engaged in a diverse range of
telecommunications-related businesses, such as a local telephone services and
Internet services, and these businesses may have interests that conflict or
compete in some manner with our business. Horizon Telcom is under no obligation
to share any future business opportunities available to it with us, unless
Delaware law requires it to do so. Any conflicts that may arise between us and
Horizon Telcom or any of its affiliates or any loss of corporate opportunity to
Horizon Telcom that may otherwise be available to us may impact our 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,
19
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 our board of directors, conflicts may not be resolved in our
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, we have entered into transactions with Horizon Telcom
including the leasing of towers by Horizon Telcom to us and the advancing of
cash to us to finance our operations. In addition, Horizon Services, a
subsidiary of Horizon Telcom provides administrative services to us 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 54.7% of our outstanding common stock on a fully diluted
basis, third-parties with which we wish 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 our
board of directors, we may not be able to renew these agreements on terms
favorable to us.
INDUSTRY RISKS
WE MAY EXPERIENCE A HIGH RATE OF CUSTOMER TURNOVER, WHICH WOULD INCREASE OUR
COSTS OF OPERATIONS AND REDUCE OUR REVENUE AND PROSPECTS FOR GROWTH.
Our strategy to minimize customer turnover, commonly known as churn, may
not be successful. As a result of customer turnover, we lose the revenue
attributable to these customers and increase the costs of establishing and
growing our customer base. The PCS industry has experienced a higher rate of
customer turnover as compared to cellular industry averages. The rate of
customer turnover is affected by the following factors, several of which are not
within our ability to address:
o extent of network coverage;
o reliability issues such as blocked calls, dropped calls and handset
problems;
o non-use of phones;
o change of employment;
o the decision not to require our customers to sign contracts, unlike
most cellular providers that do require contracts;
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.
20
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 FAA and, depending on the jurisdiction, state and local
regulatory agencies and legislative bodies. Adverse decisions regarding these
regulatory requirements could negatively impact our operations and our cost of
doing business.
USE OF HAND-HELD PHONES MAY POSE HEALTH RISKS, REAL OR PERCEIVED, WHICH COULD
RESULT IN THE REDUCED USE OF OUR SERVICES OR LIABILITY FOR PERSONAL INJURY
CLAIMS.
Media reports have suggested that radio frequency emissions from wireless
handsets may be linked to various health problems, including cancer, and may
interfere with various electronic medical devices, including hearing aids and
pacemakers. Concerns over radio frequency emissions may discourage use of
wireless handsets or expose us to potential litigation. Any resulting decrease
in demand for our services, or costs of litigation and damage awards, could
impair our ability to profitably operate our business.
RISKS RELATING TO THIS OFFERING
THE SENIOR NOTES MAY NOT HAVE AN ACTIVE MARKET AND THE PRICE MAY BE
VOLATILE, SO YOU MAY BE UNABLE TO SELL THEM AT THE PRICE YOU DESIRE OR AT ALL.
We cannot ensure that a liquid market will develop for the senior notes,
that you will be able to sell any of the senior notes at a particular time, if
at all, or that the prices that you receive when you sell will be favorable.
There is currently no public market for the senior notes, and there can be no
assurance that such a market will develop. The initial purchasers have advised
us that they intend to make a market in the senior notes, but they are not
obligated to do so. The initial purchasers may discontinue any market-making in
the senior notes at any time in their sole discretion. Future trading prices of
the securities will depend on many factors, including our operating performance
and financial condition, prevailing interest rates and the market for similar
securities.
BECAUSE THE SENIOR NOTES ARE SUBORDINATED TO OTHER DEBT THAT ENCUMBERS THE
ASSETS OF THE GUARANTORS, YOU MAY NOT BE FULLY REPAID IF WE OR THEY BECOME
INSOLVENT.
If we or any of the guarantors become insolvent, we may not have sufficient
assets to make payments on amounts due on any or all of the senior notes or the
subsidiary guarantees. Each subsidiary guarantee of the senior notes will be
subordinated to all existing and future senior debt of the applicable guarantor.
If we or any of the guarantors become bankrupt, liquidate, dissolve, reorganize
or undergo a similar proceeding, each guarantor's assets will be available to
21
pay obligations on the senior notes or the applicable guarantee only after all
outstanding senior debt of that party has been paid in full.
BECAUSE THE SENIOR NOTES AND GUARANTEES WILL BE UNSECURED, YOU MAY NOT BE
FULLY REPAID UNDER THE SENIOR NOTES OR GUARANTEES IF WE BECOME INSOLVENT.
Because the guarantees of the senior notes will be unsecured, if we become
insolvent, you may be repaid only after our obligations under our secured credit
facility are satisfied. Our secured credit facility is secured by liens on
substantially all of our assets and those of our current and future
subsidiaries. If we were to default under our secured credit facility, the
lenders could foreclose on the collateral regardless of any default with respect
to the senior notes. These assets would first be used to repay in full all
amounts outstanding under our secured credit facility.
Our Sprint PCS agreements and the infrastructure equipment used in our
network create the value of our assets. These assets are highly specialized and,
taken individually, have limited marketability, particularly as a result of some
of the provisions in our Sprint PCS agreements. Therefore, in a foreclosure
sale, these assets are likely to be sold as an entirety, and the lenders may not
realize enough money to satisfy all obligations under our secured credit
facility.
THE LENDERS UNDER OUR SECURED CREDIT FACILITY WILL CONTROL ENFORCEMENT OF
THE PLEDGES OF ANY OF OUR SUBSIDIARIES' STOCK, WHICH MAY AFFECT THE TRUSTEE'S
ABILITY TO INDEPENDENTLY PURSUE REMEDIES ON BEHALF OF HOLDERS OF THE SENIOR
NOTES.
The lenders under our secured credit facility are given the exclusive right
to control all decisions relating to the enforcement of remedies under the
senior debt pledge agreement with respect to the stock of our current and future
subsidiaries. These lenders may have interests that are different from yours and
may elect to pursue their remedies under the pledge agreement at a time when it
would be disadvantageous for you to do so.
BECAUSE FEDERAL AND STATE STATUTES MAY ALLOW COURTS TO VOID THE GUARANTEES
OF THE SENIOR NOTES, YOU MAY NOT HAVE THE RIGHT TO RECEIVE ANY MONEY PURSUANT TO
THE GUARANTEES.
Although the guarantees of the senior notes provide you with a direct claim
against the assets of the applicable guarantor, creditors of a bankrupt
guarantor may challenge the guarantee. If a challenge to a guarantee were
upheld, then the applicable guarantee would be invalid and unenforceable, and
junior to all creditors, including trade creditors, of that guarantor.
The creditors of a bankrupt guarantor could challenge a guarantee on the
grounds that the guarantee constituted a fraudulent conveyance under bankruptcy
law. If a court were to rule that the guarantee did constitute a fraudulent
conveyance, then the court could void the obligations under the guarantee or
subordinate the guarantee to other debt of the guarantor or take other action
detrimental to holders of the senior notes. In addition, any of the guarantees
could be subject to the claim that, since the guarantee was incurred for our
benefit, and only indirectly for the benefit of our subsidiary that provided the
guarantee, the obligations of the applicable guarantor were incurred for less
than fair consideration.
IF AN EVENT CONSTITUTING CERTAIN CHANGES IN CONTROL OF US OCCURS, WE MAY BE
UNABLE TO FULFILL OUR OBLIGATION TO PURCHASE YOUR SENIOR NOTES.
Our secured debt prohibits us from purchasing any of the senior notes
before their stated maturity. Under the indenture governing the senior notes,
upon certain changes in control we will, subject to certain contractual
limitations, be required to make an offer to repurchase all of the senior notes.
In the event we become subject to a change in control at a time when we are
prohibited from purchasing the senior notes, we may seek the consent of the
holders of our senior secured debt to purchase the senior notes or attempt to
refinance the debt that contains the prohibition. If we do not obtain a consent
or repay the secured credit debt, our failure to purchase the tendered senior
notes would constitute an event of default under the indenture, which would in
turn result in a default under the secured debt. Even if we obtain the consent,
we cannot assure you that we will have sufficient resources to repurchase the
senior notes following a change in control.
22
BUSINESS COMBINATIONS WITH SPRINT PCS AFFILIATES MAY NOT RESULT IN A CHANGE
OF CONTROL THAT OBLIGATES US TO REPURCHASE YOUR SENIOR NOTES.
Consistent with our business strategy, we discuss potential strategic
business combinations with other Sprint PCS affiliates from time to time. We
have not reached any agreements or understandings with respect to such a
business combination or other transaction. We cannot assure you as to whether we
will enter into any such business combination or as to the terms of any such
business combination. Under the senior notes, certain business combinations that
might otherwise be a change of control that triggers your repurchase rights
would not trigger the repurchase rights if the business combination involved
Sprint PCS or another Sprint PCS affiliate.
YOU MAY NOT BE ABLE TO SELL YOUR OUTSTANDING SENIOR NOTES IF YOU DO NOT
EXCHANGE THEM FOR REGISTERED SENIOR NOTES IN THE EXCHANGE OFFER.
If you do not exchange your outstanding senior notes for registered senior
notes in the exchange offer, your outstanding notes will continue to be subject
to the restrictions on transfer as stated in the legend on the outstanding
senior notes. In general, you may not offer or sell the outstanding senior notes
unless they are:
o registered under the Securities Act of 1933;
o offered or sold pursuant to an exemption from the Securities Act of
1933 and applicable state securities laws; or o offered or sold in a
transaction not subject to the Securities Act of 1933 and applicable
state securities laws.
We do not currently anticipate that we will register the outstanding senior
notes under the Securities Act of 1933; thus, if you do not participate in this
exchange offer, your notes will be restricted. In addition, holders who do not
tender their outstanding notes, except for certain instances involving the
initial purchasers or holders of outstanding notes who are not eligible to
participate in the exchange offer or who do not receive freely transferrable
registered notes pursuant to the exchange offer, will not have any further
registration rights under the registration rights agreement or otherwise and
will not have rights to receive liquidated damages as provided in the
registration rights agreement.
SOME PERSONS WHO PARTICIPATE IN THIS EXCHANGE OFFER MUST DELIVER A
PROSPECTUS IN CONNECTION WITH RESALES OF THE REGISTERED NOTES.
Based on no-action letters issued by the staff of the SEC to third parties,
we believe that you may offer for resale, resell or otherwise transfer the
registered notes without compliance with the registration and prospectus
delivery requirements of the Securities Act of 1933. However, in some instances
described in this prospectus under "The Exchange Offer," you will remain
obligated to comply with the prospectus delivery requirements of the Securities
Act of 1933 to transfer your registered notes. In these instances, if you
transfer any registered note without delivering a prospectus meeting the
requirements of the Securities Act of 1933 or without an exemption from
registration of your registered notes under the Securities Act of 1933, you may
incur liability under this Act. We do not and will not assume, or indemnify you
against, this liability.
23
FORWARD-LOOKING STATEMENTS
This prospectus contains statements about future events and expectations,
which are "forward-looking statements." Any statement in this prospectus that is
not a statement of historical fact may be deemed to be a forward-looking
statement. These statements include:
o estimates of current and future population for our markets;
o forecasts of growth in the number of consumers and businesses using
PCS 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 projection of when we will launch
commercial PCS service and achieve break-even operating cash flow; and
o other statements, including statements containing words such as
"anticipate," "believe," "plan," "estimate," "expect," "seek,"
"intend" and other similar words that signify forward-looking
statements.
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 prospectus, including, without limitation, in conjunction with
the forward-looking statements included in this prospectus. 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;
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 our lack of operating history and anticipation of future losses;
o potential fluctuations in our operating results;
o our potential inability to expand our services and related products in
the event of substantial increase in demand for these services and
related products;
o our ability to attract and retain skilled personal;
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. For a
discussion of some of these factors, see "Risk Factors" beginning on page 9.
You are cautioned not to place undue reliance on any forward-looking statements,
which speak only as of the date of this prospectus. We undertake no obligation
to review or confirm analysts' expectations or estimates or to release publicly
24
any revisions to any forward-looking statements to reflect events or
circumstances after the date of this prospectus or to reflect the occurrence of
unanticipated events.
25
USE OF PROCEEDS
We will not receive any proceeds from the exchange offer. In consideration
for issuing the registered notes as contemplated in this prospectus, we will
receive in exchange the outstanding notes in like principal amount. The
outstanding notes surrendered in exchange for the registered notes will be
retired and cancelled and cannot be reissued. The issuance of the registered
notes will not result in any increase in our indebtedness
The proceeds from the sale of the outstanding notes, after deducting
underwriting discounts and commissions and estimated offering expenses, were
approximately $169.0 million. We intend to use these proceeds (after placing a
portion of the proceeds in an escrow account to cover the first four semi-annual
interest payments), together with other funds we have available, to pursue other
corporate opportunities, such as expanding the coverage in our markets to
include an additional 1.0 million residents, opening up to an additional ten
retail stores, expanding our territory and/or expanding our network.
We will retain broad discretion in the allocation of these net proceeds. We
may decide to reallocate the net proceeds within the above-described categories
or to use portions for other purposes. Additionally, we may use a portion of the
net proceeds to acquire or invest in businesses, products or technologies that
are complementary to our business. The timing and the coverage of our build-out
plan may change due to various reasons, including shifts in populations or
network focus, changes or advances in technology, acquisition of other markets,
businesses, products or technologies, and factors causing a delay in the
build-out plan may cause changes in our use of the net proceeds. We currently do
not have any commitments or agreements for any acquisitions or investments of
this kind.
26
CAPITALIZATION
The following table shows our cash and cash equivalents, long-term debt,
stockholders' deficit and capitalization as of March 31, 2002:
AS OF MARCH 31,
2002
--------------
(IN THOUSANDS)
Cash and cash equivalents....................................... $ 195,871
==============
Restricted cash(1).............................................. $ 48,660
==============
Long-term debt:
Senior secured credit facility................................ 155,000
Senior discount notes......................................... 165,410
Senior notes.................................................. 175,000
Convertible preferred stock, 27,250,288 shares
issued and outstanding 148,205 Stockholders' deficit:
Preferred stock, 10,000,000 shares authorized;
no shares outstanding, at $0.0001 par value................ --
Class A common stock, par value $0.0001 per share,
300,000,000 shares authorized; no shares outstanding....... --
Class B common stock, par value $0.0001 per share,
75,000,000 shares authorized; 58,485,354 shares
issued, 58,445,288 outstanding............................. 6
Treasury stock-- class B, 13,066 shares at $8.50 per share.... (111)
Accumulated other comprehensive loss.......................... (448)
Additional paid-in capital.................................... 91,852
Deferred stock option compensation............................ (1,389)
Retained deficit.............................................. (240,917)
--------------
Total stockholders' deficit................................ (151,007)
--------------
Total capitalization.................................. $ 492,608
==============
- ----------
(1) A portion of the proceeds of the notes offering were placed in an escrow
account to cover the first four semi-annual interest payments on the notes.
27
SELECTED CONSOLIDATED FINANCIAL DATA
On April 26, 2000, Horizon Telcom formed Horizon PCS and on June 27, 2000,
transferred its 100% ownership of Horizon Personal Communications, Inc. to
Horizon PCS in exchange for 53.8 million shares of Horizon PCS class B common
stock, representing 100% of the outstanding shares of Horizon PCS. This transfer
was accounted for in the financial statements as a reorganization of companies
under common control in a manner similar to a pooling-of-interests. We have
reflected the reorganization and the adjusted number of shares outstanding
retroactively and we have presented the prior financial statements of Horizon
Personal Communications, Inc. as those of Horizon PCS.
The following tables present selected consolidated historical financial
data for Horizon PCS, as of and for the five years ended December 31, 2001, and
selected unaudited consolidated financial data for the three months ended March
31, 2002. We derived the balance sheet and statements of operations data as of
and for the periods ended December 31, 1997, 1998, 1999, 2000 and 2001, for
Horizon PCS from the audited consolidated financial statements of Horizon PCS.
We derived the financial data of all other periods from the unaudited
consolidated financial statements of Horizon PCS. In the opinion of management,
the unaudited consolidated financial statements have been prepared on the same
basis as the audited consolidated financial statements and include all normal
and recurring adjustments and accruals necessary for a fair presentation of such
information. Financial results for the three months ended March 31, 2002 are not
necessarily indicative of the results that may be expected for the full year.
The following information should be read together with "Management's
Discussion and Analysis of Financial Condition and Results of Operation," and
"Financial Statements and Supplementary Data":
Three Months
Year Ended December 31, Ended March 31,
1997 1998 1999 2000 2001 2002
--------- - --------- -- --------- -- --------- -- ---------- ---------------
(Dollars in thousands, except per share and other data)
Statements of Operations Data:
Operating revenues:
Subscriber revenues............ $ 26 $ 456 $ 3,665 $ 17,725 $ 77,658 $ 35,015
Roaming revenues............... - 18 642 8,408 38,540 10,819
Equipment revenues............. 138 309 600 3,061 7,106 2,376
---------- ---------- ----------- ---------- --------- -------------
Total revenues............... 164 783 4,907 29,194 123,304 48,210
Operating expenses:
Cost of service (exclusive of
items
shown below)................. 683 4,404 8,204 27,452 100,516 35,751
Cost of equipment.............. 422 994 2,444 9,775 14,872 4,920
Selling and marketing.......... 992 1,440 3,475 18,026 48,993 14,707
General and administrative
(exclusive
of items shown below)........ 1,344 1,852 3,944 12,477 28,384 9,175
Non-cash compensation expense.. - - 291 490 1,434 177
Depreciation and amortization.. 419 1,748 2,685 6,135 18,519 7,950
---------- ---------- ----------- ---------- --------- -------------
Total operating expenses..... 3,860 10,438 21,043 74,355 212,718 72,680
---------- ---------- ----------- ---------- --------- -------------
Operating loss............. (3,696) (9,655) (16,136) (45,161) (89,414) (24,470)
Gain (Loss) on exchange of stock. - - - 11,551 (400) -
Gain (Loss) on sale of PCS assets - - 1,388 - (1,297) (286)
Interest income and other, net... 100 (1,690) 52 4,804 5,063 744
Interest expense, net............ (264) (838) (1,529) (10,318) (27,434) (12,738)
---------- ---------- ----------- ---------- ---------
Loss from continuing (3,860) (12,183) (16,225) (39,124) (113,482) (36,750)
operations before income
taxes
Income tax benefit (expense)..... 1,308 4,145 5,275 (1,075) - -
---------- ---------- ----------- ---------- --------- -------------
Loss from continuing
operations............... (2,552) (8,038) (10,950) (40,199) (113,482) (36,750)
Preferred stock dividend......... - - - (2,782) (10,930) (2,857)
Loss from continuing
operations
available to common
stockholders............. $ (2,552) $ (8,038) $ (10,950) $ (42,981) $(124,412) $(39,607)
========== ========== =========== ========== ========== =============
Basic and diluted loss per share
from continuing operations..... $ (0.05) $ (0.15) $ (0.20) $ (0.76) $ (2.13) $ (0.38)
Basic and diluted loss per share
available to common
stockholder.................... $ (0.06) $ (0.15) $ (0.20) $ (0.77) $ (2.13) $ (0.38)
28
YEAR ENDED DECEMBER 31, AS OF MARCH 31,
1997 1998 1999 2000 2001 2002
--------- ---------- ---------- --------- --------- ----------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND OTHER DATA)
BALANCE SHEET DATA:
Cash and cash equivalents....... $ 200 $ 27 $ 147 $191,417 $123,776 $195,871
Restricted cash................. -- -- -- 48,660 48,660
Total property and equipment, net 14,996 17,880 22,894 109,702 214,868 230,290
Total assets.................... 33,328 26,862 32,879 385,295 481,338 569,355
Long-term debt.................. 16,611 21,180 24,590 185,283 384,056 495,410
Total liabilities............... 29,094 24,919 35,042 238,300 447,956 572,156
Convertible preferred stock..... -- -- -- 134,422 145,349 148,205
Total stockholders' equity (deficit) 4,234 1,943 (2,163) 12,573 (111,967) (151,007)
OTHER DATA:
Number of PCS subscribers (1).... 300 2,100 13,700 66,400 194,100 222,700
Total population in our markets
(millions)..................... 0.1 1.6 4.9 10.2 10.2 10.2
ARPU (including roaming) (2)..... NM $ 46 $ 64 $ 75 $ 83 $ 74
ARPU (excluding roaming) (2)..... NM 44 55 51 56 56
- ----------
(1) Represents the approximate number of PCS subscribers at the end of each
period.
(2) Represents average monthly revenue per unit (subscriber). For more detail
on how ARPU is computed, see "Management's Discussion and Analysis of
Financial Condition and Results of Operation."
29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
consolidated financial statements and the related notes included elsewhere in
this prospectus. The discussion contains forward-looking statements that involve
risks and uncertainties. Our actual results could differ materially from the
results anticipated in these forward-looking statements as a result of factors
including, but not limited to, those under "Risk Factors" and elsewhere in this
prospectus.
RESULTS OF OPERATION
Service revenues consist primarily of PCS subscriber revenues, Sprint PCS
roaming revenues and non-Sprint PCS roaming revenues. PCS subscriber revenues
consist primarily of monthly service fees and other charges billed to our
customers for Sprint PCS service in our territory under a variety of service
plans. 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
revenues. 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.
Equipment revenues consist of digital handsets and accessories sold to
customers in our territory through our directly owned channels.
THREE MONTHS ENDED MARCH 31, 2002, COMPARED TO THREE MONTHS ENDED MARCH 31, 2001
The following table sets forth a breakdown of our revenues by type:
For the Three Months Ended March 31,
2002 2001
--------------------------- -------------------------------
Amount % Amount %
----------- --------- ------------- ----------
Subscriber revenues...................... $ 35,015 73% $ 12,063 63%
Roaming revenues......................... 10,819 22% 6,115 32%
Equipment revenues....................... 2,376 5% 1,076 5%
----------- --------- ------------- ----------
Total revenues......................... $ 48,210 100% $ 19,254 100%
=========== ========= ============= ==========
ARPU including roaming (1)............... $ 74 $ 80
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. "ARPU including roaming", is ARPU
with Sprint PCS roaming and travel and non-Sprint PCS roaming and travel.
"ARPU excluding roaming", excludes Sprint PCS roaming and non-Sprint PCS
roaming.
Subscriber revenues. Subscriber revenues for the three months ended March
31, 2002, were approximately $35.0 million, compared to approximately $12.1
million for the three months ended March 31, 2001, an increase of approximately
$22.9 million. The growth in subscriber revenues is primarily the result of the
growth in our customer base. We managed approximately 222,700 customers at March
31, 2002, compared to approximately 84,700 at March 31, 2001. Our customer base
has grown because we have launched additional markets and increased our sales
force. ARPU excluding roaming increased in 2002 to $56 from $53 in 2001,
primarily as a result of increased minutes of use by our customers. As our
customers exceed their allotted plan minutes, they incur additional charges for
their usage.
30
Roaming revenues. Roaming revenues increased from approximately $6.1 million
during the three months ended March 31, 2001, to approximately $10.8 million for
the three months ended March 31, 2002, an increase of approximately $4.7
million. 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 decrease 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.
Equipment revenues. Equipment revenues for the three months ended March 31,
2002, were approximately $2.4 million, compared to approximately $1.1 million
for the three months ended March 31, 2001, representing an increase of
approximately $1.3 million. The increase in equipment revenues is the result of
an increase in the number of handsets sold, somewhat offset by a lower sales
price per unit.
Cost of service. Cost of service includes costs associated with operating our
network, including site rent, utilities, engineering personnel and other
expenses related to operations. Cost of service also includes interconnection
expenses, customer care, Sprint charges, Sprint PCS roaming fees and non-Sprint
PCS roaming fees. We pay roaming fees to Sprint PCS when our customers use
Sprint PCS' network outside of our territory. We pay non-Sprint PCS roaming fees
to other wireless service providers when our customers use their networks.
Also included in cost of service are costs incurred under our 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 minimum monthly fee for a stated minimum period.
Horizon PCS expects to incur lower overall fees under this new arrangement 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 modifications if the
Alliances fail to comply.
Cost of service for the three months ended March 31, 2002, was approximately
$35.8 million, compared to approximately $18.0 million for the three months
ended March 31, 2001, an increase of approximately $17.8 million. This increase
reflects an increase in 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, our 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.
Cost of equipment. Cost of equipment includes the cost of handsets and
accessories sold by our stores and direct sales force to our customers. Cost of
equipment for the three months ended March 31, 2002, was approximately $4.9
million, compared to approximately $2.2 million for the three months ended March
31, 2001, an increase of approximately $2.7 million. The increase in the cost of
equipment 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 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.
31
Selling and marketing expenses. Selling and marketing expenses consist of
costs associated with operating our retail stores, including marketing,
advertising, payroll and sales commissions. Selling and marketing expense also
includes 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. Selling and marketing expenses rose to approximately $14.7
million for the three months ended March 31, 2002, compared to approximately
$7.1 million for the three months ended March 31, 2002, an increase of
approximately $7.6 million. This 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 Sprint PCS management fee (which is 8% of "collected revenues"
defined above), a provision for doubtful accounts and costs related to corporate
support functions including costs associated with functions performed for us by
Horizon Services under our services agreement. These include finance and
accounting services, computer access and administration, executive, supervisory,
consulting, customer relations, human resources and other administrative
services. Horizon Services' costs for these functions are charged to us using a
standard FCC cost allocation methodology. Under this methodology, all costs that
can be specifically identified to us are directly charged to us, and all costs
that are specifically identified to other subsidiaries of Horizon Telcom are
charged to them. Costs incurred by Horizon Services that cannot be specifically
identified to a company for which Horizon Services provides service are
apportioned among the Horizon Telcom subsidiaries based on appropriate measures.
Because of the economies of scale inherent in a centralized service company, we
believe we are able to receive these services less expensively through this
arrangement than if we provided them ourselves.
General and administrative expenses for the three months ended March 31,
2002, were approximately $9.2 million compared to approximately $4.6 million in
2001, an increase of approximately $4.6 million. The increase reflects an
increase in the provision for doubtful accounts of approximately $2.8 million,
an increase in the Sprint PCS management fee of approximately $1.7 million as a
result of higher subscriber revenues in 2002 and other general expenses of
approximately $100,000.
Non-cash compensation expense. We recorded approximately $177,000 for the
three months ended March 31, 2002 and 2001 for certain stock options granted in
November 1999. Stock-based compensation expense will continue to be recognized
through the conclusion of the vesting period for these options in 2005. The
annual non-cash compensation expense expected to be recognized for these stock
options is approximately $681,000 in 2002, $622,000 in 2003, $193,000 in 2004,
and $71,000 in 2005.
Depreciation and amortization expense. Depreciation and amortization
expenses increased by approximately $4.5 million to a total of approximately
$7.9 million during the three months ended March 31, 2002. The increase reflects
the continuing construction of our network as we funded approximately $23.4
million of capital expenditures during the three months ended March 31, 2002.
Since our acquisition of Bright PCS was accounted for as a purchase
transaction, we recorded goodwill and intangible assets. Amortization expense of
the intangible asset was approximately $427,000 during the three months ended
March 31, 2002 and 2001. Related goodwill amortization was approximately $97,000
during the three months ended March 31, 2001. Goodwill amortization ceased as of
December 31, 2001, with the adoption of SFAS No. 142. See "Recent Accounting
Pronouncements" below.
Amortization expense also includes amortization of an intangible asset
recorded in September 2000 related to the new markets granted to us by Sprint
PCS in September 2000. We agreed to grant warrants 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 the Company's
common stock or July 31, 2003. 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. Accordingly,
amortization expense related to this intangible asset was approximately $188,000
for the three months ended March 31, 2002 and 2001.
32
Loss on sale of property and equipment. During the three months ended March
31, 2002, we 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.
Interest income and other, net. Interest income and other income for the
three months ended March 31, 2002, was approximately $744,000 compared to
approximately $2.9 million in 2001 and consisted primarily of interest income.
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.
Interest expense, net. Interest expense for the three months ended March 31,
2002, was approximately $12.7 million, compared to approximately $6.2 million in
2001. The increase in interest expense was a result of our additional
indebtedness. Interest on the outstanding balance of our secured credit facility
accrues at LIBOR plus a specified margin. On June 29, 2001, we agreed to several
changes in the secured credit facility including a 25 basis point increase in
the annual interest rate. At March 31, 2001, $50.0 million was outstanding under
the secured credit facility. We 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 our secured credit facility was 5.75%, while the interest rate on the
$50.0 term loan B was 6.30%. Interest expense on the secured credit facility was
$1.2 million and $1.3 million during the three months ended March 31, 2002 and
2001, respectively.
We accrue interest at a rate of 14.00% annually on our 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, we 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 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 $1.5 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.
During 2001, we entered into interest rate swap agreements, effectively
fixing the interest rate on $50.0 million borrowed under our variable-rate
secured credit facility. We recognized a loss of approximately $34,000 during
the first quarter of 2002, in the statement of operations, related to the
ineffectiveness of a portion of the hedge.
Income taxes. Until September 26, 2000, we were included in the consolidated
Federal income tax return of Horizon Telcom. We provided for Federal income
taxes on a pro rata basis, consistent with a consolidated tax-sharing agreement.
As a result of the sale of the convertible preferred stock on September 26,
2000, we are not able to participate in the tax-sharing agreement. Additionally,
we are not able to recognize any net operating loss benefits until we generate
taxable income. We did not record any income tax benefit for the three months
ended March 31, 2002 or 2001, because of the uncertainty of generating future
taxable income to be able to recognize current net operating loss carryforwards.
Net loss. Our net loss for the three months ended March 31, 2002, was
approximately $36.8 million compared to approximately $19.5 million for the
three months ended March 31, 2001. The increase in our loss reflects the
continued expenses related to launching our markets and building our customer
base. We expect to incur significant operating losses and to generate
33
significant negative cash flow from operating activities while we continue to
construct our network and increase our customer base.
Preferred stock dividend. Our convertible preferred stock pays a stock
dividend at the rate of 7.5% per annum, payable semi-annually commencing May 1,
2001. The dividends are paid with additional shares of convertible preferred
stock. Through May 1, 2002, we have issued an additional 3,245,134 shares of
convertible preferred stock in payments of all dividends through April 30, 2002,
including 1,060,201 shares on May 1, 2002.
Other comprehensive income (loss). 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 an additional $25.0 million of our term loan borrowed under
the secured credit facility at 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.
We recovered approximately $390,000 of previously unrealized losses in other
comprehensive income during the first quarter of 2002 and recognized
approximately $34,000 of loss in the statement of operations due to the
ineffectiveness of the hedge.
YEAR ENDED DECEMBER 31, 2001, COMPARED TO YEAR ENDED DECEMBER 31, 2000
The following table sets forth a breakdown of our revenues by type.
FOR THE YEARS ENDED DECEMBER 31,
(DOLLARS IN THOUSANDS, EXCEPT ARPU) 2001 2000 1999
------------------------ -------------------------- ------------------------
AMOUNT % AMOUNT % AMOUNT %
------------ ------------ ----------- ------------ ------------ -----------
Subscriber revenues..............$...77,658 63% $ 17,725 61% $ 3,665 75%
Roaming revenues.....................38,540 31% 8,408 29% 642 13%
Equipment revenues....................7,106 6% 3,061 10% 600 12%
------------ ------------ ----------- ------------ ------------ -----------
Total revenues.................$..123,304 100% $ 29,194 100% $ 4,907 100%
============ ============ =========== ============ ============ ===========
ARPU including roaming (1).......$.......83 $ 75 $ 64
ARPU excluding roaming (1)...............56 51 55
- -----------
(1) ARPU, average revenue per unit, is an industry term that measures total PCS
service revenues per month from our subscribers divided by the average
number of digital subscribers for that month. ARPU (including roaming) is
ARPU with Sprint PCS roaming and non-Sprint PCS roaming. ARPU (excluding
roaming) excludes Sprint PCS roaming and non-Sprint PCS roaming.
Subscriber revenues. Subscriber revenues for the year ended December 31,
2001, were $77.7 million, compared to $17.7 million for the year ended December
31, 2000, an increase of $60.0 million. The growth in subscriber revenues is
primarily the result of the growth in our customer base. We managed
approximately 194,100 customers at December 31, 2001, compared to approximately
66,400 at December 31, 2000. Our customer base has grown because we have
launched additional markets and increased our sales force. ARPU excluding
roaming increased in 2001 to $56 from $51 in 2000, primarily as a result of
increased minutes of use by our customers. As our customers exceed their
allotted plan minutes, they incur additional charges for their usage.
Roaming revenues. Roaming revenues increased from $8.4 million during the
year ended December 31, 2000, to $38.5 million for the year ended December 31,
2001, an increase of $30.1 million. ARPU including roaming increased from $75 to
$83 for the year ended December 31, 2000, and December 31, 2001, respectively.
This increase primarily resulted from the continued build-out of our network,
including highways covering northwest Ohio, northern Indiana and Pennsylvania.
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 was changed to approximately $0.10 in 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.
34
Equipment revenues. Equipment revenues consist of handsets and accessories
sold to customers through our stores and through our direct sales force.
Equipment revenues for the year ended December 31, 2001, were $7.1 million,
compared to $3.1 million for the year ended December 31, 2000, representing an
increase of $4.0 million. The increase in equipment revenues is the result of an
increase in the number of handsets sold by our stores and direct sales force,
somewhat offset by a lower sales price per unit.
Cost of service. Cost of service includes costs associated with operating
our network, including site rent, utilities, engineering personnel and other
expenses related to operations. Cost of service also includes interconnection
expenses, customer care, Sprint charges, Sprint PCS roaming fees and non-Sprint
roaming fees. We pay Sprint PCS roaming fees to Sprint PCS when our customers
use Sprint PCS' network outside of our territory. We pay non-Sprint PCS roaming
fees to other wireless service providers when our customers use their networks.
Also included in cost of service are costs incurred under our 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 minimum monthly fee for a stated minimum period.
Horizon PCS expects to incur lower overall fees under this new arrangement 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 modifications if the
Alliances fail to comply.
Cost of service for the year ended December 31, 2001, was $100.5 million,
compared to $27.5 million for the year ended December 31, 2000, an increase of
$73.0 million. This increase reflects an increase in roaming expense and long
distance charges of $29.9 million and the increase in costs incurred under our
network services agreement with the Alliances of $12.4 million, both as a result
of our subscriber growth during 2001. Additionally, cost of service in 2001 was
higher than 2000 due to the increase in network operations, including tower
lease expense, circuit costs and payroll expense, of $18.1 million, increased
customer care, activations, and billing expense of $9.6 million and the increase
in other variable expenses, including switching and national platform expenses,
of $3.0 million.
Cost of equipment. Cost of equipment includes the cost of handsets and
accessories sold by our stores and direct sales force to our customers. Cost of
equipment for the year ended December 31, 2001, was $14.9 million, compared to
$9.8 million for the year ended December 31, 2000, an increase of $5.1 million.
The increase in the cost of equipment is the result of the growth in our
wireless customers, partially offset by the decreasing unit cost of the
handsets. For competitive and marketing reasons, we have sold handsets to our
customers below our cost and expect to continue to sell handsets at a price
below our cost for the foreseeable future.
Selling and marketing expenses. Selling and marketing expenses consist of
costs associated with operating our retail stores, including marketing,
advertising, payroll and sales commissions. Selling and marketing expense also
includes 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. Selling and marketing expenses rose to $49.0 million for the
year ended December 31, 2001, compared to $18.0 million for the year ended
December 31, 2000, an increase of $31.0 million. This increase reflects the
increase in the costs of operating our 38 retail stores, 22 of which were
launched during 2001. The costs include marketing and advertising in our sales
territory of $17.6 million, the increase in subsidies on handsets sold by third
parties of $10.1 million and the increase in commissions paid to third parties
of $3.3 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 Sprint management fee (which is 8% of "collected revenues" defined
above), a provision for doubtful accounts and costs related to corporate support
functions, including costs associated with functions performed for us by Horizon
Services under our services agreement. These include finance functions,
accounting services, computer access and administration, executive, supervisory,
consulting, customer relations, human resources and other administrative
services. Horizon Services' costs for these functions are charged to us using a
standard FCC cost allocation methodology. Under this methodology, all costs that
can be specifically identified to us are directly charged to us, and all costs
that are specifically identified to other subsidiaries of Horizon Telcom are
35
charged to them. Costs incurred by Horizon Services that cannot be specifically
identified to a company for which Horizon Services provides service are
apportioned among the Horizon Telcom subsidiaries based on appropriate measures.
Because of the economies of scale inherent in a centralized service company, we
believe we are able to receive these services less expensively through this
arrangement than if we provided them ourselves.
General and administrative expenses for the year ended December 31, 2001,
were $28.4 million compared to $12.5 million in 2000, an increase of $15.9
million. The increase reflects an increase in the provision for doubtful
accounts of $5.0 million, an increase in the Sprint PCS management fee of $4.6
million as a result of higher subscriber revenues in 2001, increased
professional fees, including non-recurring costs related to pursuing strategic
business alternatives of $1.3 million, increased headcount and professional
services at Horizon Services of $1.8 million needed to support our growth, and
other general expenses, including property and franchise taxes, of $3.2 million.
Non-cash compensation expense. For the years ended December 31, 2001 and
2000, we recorded stock-based compensation expense of approximately $1.4 million
and $490,000, respectively. The $1.4 million includes approximately $725,000
related to the distribution of 7,249 shares of Horizon Telcom stock to employees
of Horizon PCS and approximately $709,000 for certain stock options granted in
November 1999. Stock-based compensation expense will continue to be recognized
through the conclusion of the vesting period for these options in 2005. The
annual non-cash compensation expense expected to be recognized for these stock
options is approximately $681,000 in 2002, $622,000 in 2003, $193,000 in 2004,
and $71,000 in 2005.
Depreciation and amortization expense. Depreciation and amortization
expenses increased by $12.4 million to a total of $18.5 million in 2001. The
increase reflects the continuing construction of our network as we funded
approximately $116.6 million of capital expenditures during 2001. In addition,
because our acquisition of Bright PCS was accounted for as a purchase
transaction, amortization has increased as a result of amortizing the related
goodwill and intangible assets. Amortization expense of the intangible asset was
$1.7 million and $868,000 during 2001 and 2000, respectively. Related goodwill
amortization was $389,000 and $198,000 in 2001 and 2000, respectively. Goodwill
amortization ceased as of December 31, 2001, with the adoption of SFAS No. 142.
See "Recent Accounting Pronouncements" below.
Amortization expense also includes amortization of an intangible asset
recorded in September 2000 related to the new markets granted to us by Sprint
PCS in September 2000. We agreed to grant warrants 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 our 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 $752,000 and $188,000 for the years ended December 31,
2001 and 2000, respectively.
Gain (Loss) on exchange of stock. On April 2, 2001, we distributed 7,249
shares of Horizon Telcom stock to employees of Horizon PCS. In conjunction with
this transaction, we recognized a non-operating loss of approximately $400,000
representing the reduced fair market value of the stock at the time of the
transaction compared to the original holding value of the investment. The
related compensation expense is recorded as a component of non-cash compensation
expense in 2001. In 2000, we recognized a gain of approximately $11.6 million on
Horizon Telcom stock used in the acquisition of Bright PCS.
Gain (Loss) on disposal of PCS assets. During 2001, we incurred a loss of
approximately $1.3 million related to the upgrade of network equipment to 3G
technology. The loss represents the net book value of the assets disposed of,
less proceeds received for the equipment. We expect to incur additional expenses
in 2002 as we continue to upgrade our network.
Interest income and other, net. Other income for the year ended December 31,
2001, was $5.0 million. Interest income was generated from the short-term
investment of cash proceeds from our private equity sales, discount notes and
drawings under the secured credit facility, all completed on September 26, 2000.
Additionally, in conjunction with our offering of $175.0 million in senior notes
in December 2001, we were required to escrow approximately $48.7 million of the
36
proceeds (in an interest bearing account) for the first four interest payments
due under the notes' terms. We recorded $69,000 of interest income on the
escrowed funds.
Interest expense, net. Interest expense for the year ended December 31,
2001, was $27.4 million, compared to $10.3 million in 2000. Interest on the
outstanding balance of our secured credit facility accrues at LIBOR plus a
specified margin. On June 29, 2001, we agreed to several changes in the secured
credit facility including a 25 basis point increase in the annual interest rate.
At December 31, 2001, the interest rate on the amount borrowed on our secured
credit facility was 6.16%. Interest expense on the secured credit facility was
$4.8 million and $1.2 million during 2001 and 2000, respectively.
As required, we borrowed an additional $105.0 million in March 2002, under
the terms of the secured credit facility. The interest rate on that tranche is
LIBOR plus 375 basis points (5.66% at December 31, 2001).
We accrue interest at a rate of 14.00% per annum on our discount notes
through October 1, 2005, and will pay interest semi-annually in cash thereafter.
Unaccreted interest expense on the discount notes was $135.9 million at December
31, 2001. Interest expense on the discount notes was $23.8 million and $5.1
million during 2001 and 2000, respectively.
On June 15, 2002, we 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 $1.5 million during 2001. 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 $1.1 million and $1.0 million
in 2001 and 2000, 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 2001 was $2.8
million in commitment fees we paid on the unused portion of our secured credit
facility.
The increase in interest expense as a result of our additional indebtedness
was somewhat offset by capitalized interest related to our network build-out.
Capitalized interest during 2001 and 2000 was approximately $6.6 million and
$1.5 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.
Income tax (expense) benefit. Until September 26, 2000, we were included in
the consolidated Federal income tax return of Horizon Telcom. We provided for
Federal income taxes on a pro rata basis, consistent with a consolidated
tax-sharing agreement. As a result of the sale of the convertible preferred
stock on September 26, 2000, we will not be able to participate in the
tax-sharing agreement. Additionally, we will not be able to recognize any net
operating loss benefits until we generate taxable income. We did not record any
income tax benefit for the year ended December 31, 2001, because of the
uncertainty of generating future taxable income to be able to recognize current
net operating loss carryforwards.
In 2000, we recorded an income tax expense of $1.1 million from continuing
operations, resulting primarily from the recognition of an excess loss account
on the deconsolidation from the Horizon Telcom affiliated group, reduced by the
benefit of the carryback net operating losses and an increase in the valuation
allowance. In addition, we generated a tax of $4.3 million on a stock dividend
of 10% of Horizon Telcom stock held by us to Horizon Telcom. The tax on the
stock dividend was charged directly to equity and not recorded as an income tax
expense.
Loss on continuing operations. Our loss on continuing operations for the
year ended December 31, 2001, was $113.5 million compared to $40.2 million for
the year ended December 31, 2000. The increase in our loss reflects the
continued expenses related to launching our markets and building our customer
base. We expect to incur significant operating losses and to generate
significant negative cash flow from operating activities while we continue to
construct our network and increase our customer base.
Discontinued operations. In April 2000, we transferred our Internet, long
distance and other businesses unrelated to PCS wireless operations to Horizon
Technology (formerly United Communications), a separate subsidiary of Horizon
37
Telcom, at net book value. Accordingly, the results of operations for these
business units have been reported as discontinued operations in the prior
period, net of tax benefits.
Extraordinary loss. As a result of the September 26, 2000, financings, we
retired long-term debt payable to financial institutions. As a result of the
debt extinguishments, we expensed the unamortized portion of the related
financing costs, as well as fees associated with the debt extinguishments. These
fees and expenses amounted to approximately $748,000 and are shown on the
statement of operation net of a tax benefit of $262,000.
Preferred stock dividend. Our convertible preferred stock pays a stock
dividend at the rate of 7.5% per annum, payable semi-annually commencing May 1,
2001. The dividends are paid with additional shares of convertible preferred
stock. On May 1, 2001, we issued an additional 1,163,051 shares of preferred
stock in payment of the stock dividends through April 30, 2001, and on November
1, 2001, we issued an additional 1,021,882 shares of preferred stock in payment
of the stock dividends through October 31, 2001.
Other comprehensive income (loss). 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 the remaining $25.0 million of our term loan borrowed under
the secured credit facility at 7.65%. Other comprehensive income may fluctuate
based on changes in the fair value of the swap instrument. Other comprehensive
loss of approximately $838,000 and an other expense of approximately $176,000
were recorded for the year ended December 31, 2001. We do not expect the effect
of these swaps to have a material impact to interest expense for the remainder
of their lives.
YEAR ENDED DECEMBER 31, 2000, COMPARED TO YEAR ENDED DECEMBER 31, 1999
Subscriber revenues. Subscriber revenues for the year ended December 31,
2000, were $17.7 million, compared to $3.7 million for the year ended December
31, 1999, an increase of $14.0 million. The growth in subscriber revenues is
primarily the result of the growth in our customer base. We managed
approximately 66,400 customers at December 31, 2000, compared to approximately
13,700 at December 31, 1999. We believe our customer base has grown because we
have launched additional markets, increased our sales force and are now
marketing under the Sprint PCS brand rather than our own.
Roaming revenues. Roaming revenues increased from $642,000 for the year
ended December 31, 1999, to $8.4 million for the year ended December 31, 2000,
an increase of $7.8 million. This increase primarily resulted from the launch of
portions of our network covering two heavily traveled interstate highways in
western Virginia in the fourth quarter of 1999, as well as our launch of our
northwest Ohio and northern Indiana markets in the fourth quarter of 2000.
ARPU excluding roaming and travel decreased from the year ended December 31,
1999, to the year ended December 31, 2000, primarily as a result of the change
in the mix of the packages our subscribers have selected. Our subscribers have
selected packages with lower monthly recurring charges made available to our
subscribers as a result of our seasonal promotions. The decrease caused by the
change in the mix of packages was partially offset by the increase in the
charges to our subscribers for minute sensitive usage (long distance and
overage) and the growth in our Sprint PCS roaming revenues. ARPU including
roaming and travel increased in the year ended December 31, 1999, as compared to
the same period in 2000, as a result of the increase in travel revenue from
customers other than our own on our network.
Equipment revenues. Equipment revenues consist of handsets and accessories
sold to customers. Equipment revenues for the year ended December 31, 2000, were
$3.1 million, compared to $600,000 for the year ended December 31, 1999, an
increase of $2.5 million. The increase in equipment revenues is the result of
our increase in customers.
Cost of service. Cost of service for the year ended December 31, 2000, was
$27.5 million, compared to $8.2 million for the year ended December 31, 1999, an
increase of $19.3 million. This increase reflects the increase in roaming fees
of $5.8 million, the increase in costs incurred under our network services
agreement with the Alliances of $6.7 million, $1.5 million of additional costs
38
for rent expense for the additional towers leased, additional customer care
support of $2.7 million and $2.6 million of network operational and payroll
expenses.
Cost of equipment. Cost of equipment for the year ended December 31, 2000,
was $9.8 million, compared to $2.4 million for the year ended December 31, 1999,
an increase of $7.4 million. The increase in the cost of equipment is the result
of the growth in our wireless customers, partially offset by the decreasing unit
cost of the handsets. For competitive and marketing reasons, we have sold
handsets to our customers below our cost and expect to continue to sell handsets
at a price below our cost for the foreseeable future.
Selling and marketing expenses. Selling and marketing expenses consist of
costs associated with operating our 16 retail stores, including marketing,
advertising, payroll, and sales commissions. Selling and marketing expense also
includes 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. Selling and marketing expenses rose to $18.0 million for the
year ended December 31, 2000, compared to $3.5 million for the same period in
1999, an increase of $14.5 million. This increase reflects the increase in the
costs of operating our 16 retail stores of $7.7 million, the increase in
subsidies on handsets sold by third parties of $4.0 million, and the increase in
commissions paid to third parties of $2.8 million.
General and administrative expenses. General and administrative expenses
rose to $12.5 million for the year ended December 31, 2000, compared to $3.9
million for the same period in 1999, an increase of $8.6 million. This increase
reflects the 8% fee paid to Sprint PCS on our increased collected service
revenues of $1.2 million, increased headcount and professional services at
Horizon Services needed to support our growth of $3.6 million, increased
building and maintenance expenses of $1.4 million, consulting, legal and bank
fees of $900,000, an increase in the provision for doubtful accounts of $1.0
million, and increased other general expenses of $500,000.
Non-cash compensation expense. For the years ended December 31, 2000 and
1999, we recorded stock-based compensation expense of $490,000 and $291,000,
respectively, for certain stock options granted in November 1999. Stock-based
compensation expense will continue to be recognized through the conclusion of
the vesting period for these options in 2005. The annual non-cash compensation
expense expected to be recognized is approximately $709,000 in 2001, $681,000 in
2002, $622,000 in 2003, $193,000 in 2004, and $71,000 in 2005.
Depreciation and amortization expenses. Depreciation and amortization
expenses increased by $3.4 million to a total of $6.1 million in 2000. The
increase reflects the continuing construction of our network. Because our
acquisition of Bright PCS was accounted for as a purchase transaction,
amortization will increase as a result of amortizing the related goodwill and
intangible assets. Amortization expense of the intangible asset was $868,000
during 2000. Related goodwill amortization was $198,000 during 2000. Goodwill
amortization will cease as of December 31, 2001, with the adoption of SFAS No.
142. We have not determined the financial impact the adoption of SFAS No. 142
will have on our financial position or results of operations.
At September 30, 2000, we recorded an intangible asset of $13.4 million for
the value of warrants we agreed to grant to Sprint in exchange for the right to
provide service in additional markets. This intangible asset will be amortized
over the remaining term of the Sprint PCS management agreement, resulting in
$752,000 of amortization expense per year. Amortization expense related to the
intangible asset was approximately $188,000 for the year ended December 31,
2000.
Gain on exchange of stock. We transferred 40% of our Horizon Telcom stock to
the former members of Bright PCS as part of the consideration for the
acquisition of Bright PCS. This transaction resulted in a gain of $10.5 million.
In addition, in September 2000, 10% of the 12% of the stock of Horizon Telcom
was distributed to the shareholders in the form of a dividend. To the extent
that the dividend was paid to shareholders other than Horizon Telcom, a non-cash
gain of $1.0 million was recognized.
Interest income and other, net. Other income (expense) in 2000 was $4.8
million and consisted primarily of interest income of approximately $4.2 million
and dividend income of approximately $600,000. Interest income was generated
from cash proceeds from our private equity sales, senior discount notes and
drawings under the senior secured credit facility, all completed on September
26, 2000. The proceeds were invested in short term accounts waiting to be
39
deployed. As capital expenditures are made to complete the build-out of our
network, decreasing cash balances may result in lower daily interest income in
the future.
Interest expense, net. Interest expense for the year ended December 31,
2000, was $10.3 million, compared to $1.5 million in 1999. The increase in
interest expense is the result of our additional debt outstanding during the
year ended December 31, 2000, compared to the same period in 1999. We incurred
approximately $2.0 million from the senior secured credit facility entered into
in September, 2000. Interest on our senior credit facility accrues at LIBOR plus
our specified margin (approximately 10.6% at December 31, 2000). We accrue
interest at a rate of 14% per annum on our senior discount notes through October
1, 2005 and will pay interest semi-annually in cash thereafter. Non-cash
interest expense also included the amortized amount of deferred financing fees
related to our senior secured credit facility, our senior discount notes, and
the accretion of our warrants related to the senior discount notes. Total
non-cash interest expense for the year ended December 31, 2000, was $6.5 million
compared to $4,700 for the same period in 1999. In addition, the $13.0 million
short-term convertible note issued to obtain funds used to purchase common stock
of Horizon Telcom resulted in an increase in interest expense of $1.1 million.
We expect our interest expense to increase in the future as we borrow under our
senior secured credit facility to fund our network build-out and operating
losses.
Income tax (expense) benefit. Until September 26, 2000, we were included in
the consolidated Federal income tax return of Horizon Telcom. We provided for
Federal income taxes on a pro rata basis, consistent with a consolidated
tax-sharing agreement. As a result of the sale of the convertible preferred
stock on September 26, 2000, we will not be able to participate in the
tax-sharing agreement nor will we be able to recognize any net operating loss
benefits until we generate taxable income. Thus, we filed a separate Federal
income tax return for the short period after deconsolidation through December
31, 2000, and will file a separate return for all subsequent periods.
We recorded an income tax expense from continuing operations of $1.1 million
for the year. This expense was primarily a result of the recognition of an
excess loss account on the deconsolidation from the Horizon Telcom affiliated
group, reduced by the benefit of the carryback net operating losses and an
increase in the valuation allowance.
We generated a tax of $4.3 million on a stock dividend of 10% of Horizon
Telcom stock held by us to Horizon Telcom. The tax on the stock dividend was
charged directly to equity and not recorded as an income tax expense.
Loss from continuing operations. Our loss from continuing operations for the
year ended December 31, 2000, was $40.2 million compared to $11.0 million for
the year ended December 31, 1999. The increase in our loss reflects the
continued expenses related to launching our markets and building our customer
base partially offset by the $11.6 million gain on exchange of stock.
Discontinued operations. In April 2000, we transferred our Internet, long
distance and other businesses unrelated to PCS wireless operations to Horizon
Technology (formerly United Communications), a separate subsidiary of Horizon
Telcom, at net book value. Accordingly, the results of operations for these
business units have been reported as discontinued operations in the current and
prior periods. Income from discontinued operations, net of tax expense, was
$141,000 for the year ended December 31, 2000, and $282,000 for the year ended
December 31, 1999.
Extraordinary loss. As a result of the September 26, 2000, financings
described earlier, we retired long-term debt payable to financial institutions.
As a result of this debt extinguishment, we expensed the unamortized portion of
the related financing costs as well as fees associated with the debt
extinguishments. These fees and expenses amounted to $748,000 and are shown on
the statement of operations net of a tax benefit of $262,000.
Preferred stock dividend. Our convertible preferred stock pays a stock
dividend at the rate of 7.5% per annum, payable semi-annually commencing April
30. For the year ended December 31, 2000, we recorded the accrual of a stock
dividend payable in additional stock of $2.8 million.
40
LIQUIDITY AND CAPITAL RESOURCES
Before September 26, 2000, we financed our operations through equity
contributions from Horizon Telcom and through debt financing provided by the
Rural Telephone Finance Cooperative (RTFC). To that date, we had received $21.2
million of equity contributions from Horizon Telcom consisting of $18.7 million
in cash contributions and $2.5 million in property contributions. Horizon
Telcom's equity contribution during 1999 consisted of a contribution of property
of $2.5 million and $3.7 million in cash contributions. Of this amount, $2.0
million was funded by Horizon Telcom's sale of towers to SBA. The equity
contributions for the year ended December 31, 2000, consisted of $1.4 million in
cash contributions. There were no equity contributions from Horizon Telcom for
the year ended December 31, 2001.
On September 26, 2000, an investor group led by Apollo Management purchased
$126.5 million of our convertible preferred stock in a private placement.
Concurrent with the closing, the holder of our $14.1 million short-term
convertible note (including accrued interest of $1.1 million) converted the note
into the same convertible preferred stock purchased by the investor group.
On September 26, 2000, we received $149.7 million from the issuance of
$295.0 million of senior discount notes due October 1, 2010 (the "discount
notes"). The discount notes accrete in value until October 1, 2005 at a rate of
14.00% compounded semi-annually. The discount notes do not require us to pay
cash interest until the fifth year after they are issued, at which point we will
pay semi-annual interest until maturity. The discount notes are general
unsecured obligations and are guaranteed by our existing and future domestic
restricted subsidiaries. The guarantees are senior subordinated obligations of
our existing and future domestic restricted subsidiaries. The rights of the
holders of our discount notes to receive payments pursuant to the guarantees are
subordinated in right of payment to the holders of our existing and future
senior indebtedness, including our $250.0 million secured credit facility
described below.
Also on September 26, 2000, we received $50.0 million as part of a $225.0
million senior secured credit facility the ("secured credit facility") with a
bank group led by First Union National Bank. The borrowing capacity of the
secured credit facility was increased to $250.0 million in November 2000. The
secured credit facility consists of the following two loans:
o a $155.0 million term loan, available in a $50.0 million tranche and a
$105.0 million tranche, under which we may borrow to finance (i) the
direct cost of the construction and operation of a regional digital
wireless telecommunications network on the Sprint PCS system; (ii)
transaction costs and expenses; and (iii) working capital and other
general corporate purposes; and
o a $95.0 million revolving credit facility, the proceeds of which may
be used to fund working capital.
The $50.0 million tranche was drawn on September 26, 2000, and had an
interest rate of 6.16% at December 31, 2001. As required, we drew the remaining
$105.0 million tranche in March 2002. The interest rate on the $105.0 million
tranche, which had not been drawn as of December 31, 2001, was 5.66% at December
31, 2001.
On June 29, 2001, and December 7, 2001, we amended our secured credit
facility with the bank group. These modifications amended and restated certain
financial covenants, including EBITDA (earnings before interest, taxes,
depreciation and amortization), revenue thresholds and imposed limitations on
capital expenditures. The June 2001 amendment also increased the margin on the
base interest rate by 25 basis points to LIBOR plus 375 to 425 basis points.
Horizon PCS' secured credit facility includes financial covenants that must
be met each quarter. We 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, we incurred additional expenses to add
those customers. Although we ultimately benefit from the revenues generated by
new subscribers, we 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.
41
On May 9, 2002, we entered into a waiver agreement with our 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 our cash and cash equivalents (excluding restricted
cash) exceeds $10.0 million and would maintain the $105.0 million in loan
proceeds recently received from the lending group in a separate account. We are
currently in negotiations with the bank group to obtain amendments to the
covenants. We anticipate finalizing these amendments by June 15, 2002.
The failure to comply with the covenant was an event of default under our
secured credit facility, and will give the lender the right to pursue remedies
if we 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 our senior notes and discount notes.
One option available to us would be to prepay the indebtedness under the secured
credit facility, together with prepayment fees. If we prepaid the facility prior
to acceleration, we would avoid default under the indentures for our senior
notes and discount notes. In the event of such a prepayment, we believe that we
could obtain replacement financing to the extent necessary to fund our business
plan. There can be no assurance, however, that we could obtain adequate or
timely replacement financing on acceptable terms or at all.
On December 7, 2001, we received $175.0 million from the issuance of
unsecured senior notes (the "senior notes") due on June 15, 2011. Interest is
paid semi-annually on June 15 and December 15 at 13.75% annually, with interest
payments commencing June 15, 2002. Approximately $48.7 million of the offering's
proceeds were placed in an escrow account to fund the first four semi-annual
interest payments.
During the year ended December 31, 2000, we borrowed $13.0 million in the
form of a short-term convertible note to purchase 19.78% of the outstanding
capital stock of Horizon Telcom. The $14.1 million total of principal and
accrued interest on this note was converted into 2.6 million shares of
convertible preferred stock on September 26, 2000. In May 2000, we exchanged
31,912 shares of Horizon Telcom common stock, which we acquired in February
2000, along with 4.7 million newly issued shares of our class B common stock,
for the remaining 74% ownership interest in Bright PCS which we did not
previously own.
The following table summarizes contractual principal maturities of long-term
debt outstanding (which is recorded net of unaccredited interest on the balance
sheet) and minimum payments required under operating leases and other long-term
commitments as of December 31, 2001:
ALLIANCES
LONG-TERM OPERATING NETWORK
YEAR DEBT LEASES AGREEMENT TOTAL
- ---- --------------- ------------------------------- --------------
2002............$...........--...$...12,551,000..$ 27,400,000 $ 39,951,000
2003........................--.......12,614,000.. 38,600,000 51,214,000
2004..................375,000........11,974,000.. -- 12,349,000
2005..................500,000.........9,351,000.. -- 9,851,000
2006..................500,000.........4,873,000.. -- 5,373,000
Thereafter........518,625,000.........9,102,000.. -- 527,727,000
------------- -------------- --------------- --------------
Total........$.520,000,000....$...60,465,000..$ 66,000,000 $ 646,465,000
============= ============== =============== ==============
At December 31, 2001, we had cash and cash equivalents of $123.8 million and
working capital of $117.0 million. At December 31, 2000, we had cash and cash
equivalents of $191.4 million and working capital of $162.4 million. The
decrease in cash and cash equivalents of $67.6 million is primarily attributable
to funding our loss from continuing operations of $113.5 million (this loss
includes certain non-cash charges) and funding our capital expenditures of
$116.6 million during 2001.
Net cash used in operating activities for the year ended December 31, 2001,
was $72.9 million. This reflects the continuing use of cash for our operations
to build our customer base, including but not limited to providing service in
our markets and the costs of acquiring new customers. For the years ended
December 31, 2001 and 2000, our cost per gross additional customer was
approximately $339 and $373, respectively. The net loss of $113.5 million was
partially offset by increases to depreciation and other non-cash charges.
42
Net cash used in investing activities for the year ended December 31, 2001,
was $162.3 million. Our capital expenditures for that period were $116.6
million, reflecting the continuing build-out of our network. At December 31,
2001, we operated approximately 604 cell sites in our network. This represents
an addition of approximately 301 sites during 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 16 at the end of 2000 to 38 at
December 31, 2001. We will incur additional capital expenditures as we complete
the build-out of our network, including the launch of additional retail stores,
completing additional cell sites and expanding capacity at our switches as
needed. The investment of restricted cash of $48.7 million relates to the escrow
funds required by the terms of the senior notes discussed above.
Net cash provided by financing activities for the year ended December 31,
2001, was $167.6 million consisting primarily of the December 2001 senior notes
offering ($175.0 million). We paid approximately $7.4 million of financing fees
related to both the senior notes offering and the amendments to the senior
secured credit facility on June 29, 2001, and December 7, 2001.
On March 22, 2002, we received an additional $105.0 million as part of the
secured credit facility. On December 7, 2001, we received $175.0 million from
the issuance of unsecured senior notes due June 15, 2011. Interest is paid
semi-annually on June 15 and December 15 at 13.75% commencing June 15, 2002.
Approximately $48.7 million of the offering proceeds were placed in an escrow
account to fund the first four semi-annual interest payments.
At March 31, 2002, we had cash and cash equivalents of approximately $195.9
million and working capital of approximately $177.7 million. At December 31,
2001, we had cash and cash equivalents of approximately $123.8 million and
working capital of approximately $117.0 million. The increase in cash and cash
equivalents of approximately $72.1 million is primarily attributable to the
$105.0 million draw on the secured credit facility, offset by the funding of our
loss from continuing operations of approximately $36.8 million (this loss
includes certain non-cash charges) and funding our capital expenditures of
approximately $23.4 million during the first quarter of 2002.
Net cash used in operating activities for the three months ended March 31,
2002, was approximately $10.7 million. This reflects the continuing use of cash
for our operations to build our customer base, including but not limited to
providing service in our markets and the costs of acquiring new customers. For
the three months ended March 31, 2002 our cost per gross additional customer was
approximately $342. The net loss of approximately $36.8 million was partially
offset by increases to depreciation, increases in accrued liabilities, including
the payable to Sprint, offset by increases to accounts receivable.
Net cash used in investing activities for the three months ended March 31,
2002, was approximately $22.2 million. Our capital expenditures for that period
were approximately $23.4 million, reflecting the continuing build-out and
upgrade of our network. At March 31, 2002, we operated approximately 700 cell
sites in our 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 approximately 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 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 $105.0 million consisting of the March 2002 draw on the term loan
A required under our secured credit facility.
At March 31, 2002, we had a $95.0 million line of credit remaining under our
secured credit facility. In connection with the waiver agreement entered into
with our lending group (discussed in Note 9 and in greater detail below), we
agreed not to borrow on this line of credit before June 15, 2002, as long as our
cash balance, excluding restricted cash and compensating balances, was greater
than $10.0 million. We anticipate our existing cash will be sufficient to meet
capital expenditure and working capital requirements until June 15, 2002, and we
believe the available borrowings under our secured credit facility will be
adequate to fund our network build-out, anticipated operating losses and working
capital requirements until we achieve positive EBITDA, which we expect to occur
in the third quarter of 2003.
43
At December 31, 2001, we had $200.0 million available to be borrowed under
our senior secured credit facility. We borrowed $105.0 under this facility in
March 2002. We anticipate that our existing cash and available borrowings under
our secured credit facility will be adequate to fund our network build-out,
anticipated operating losses and working capital requirements until we achieve
positive earnings before interest, taxes, depreciation and amortization, which
we expect to achieve in the third quarter of 2003. We expect that our future
funding needs, including our anticipated funding needs over the next 12 months,
will be satisfied by our existing working capital and borrowings under our
senior secured credit facility. These funds will be used for capital
expenditures and to fund working capital and operating losses.
From January 1, 2002, to December 31, 2002, we anticipate that our funding
needs requirements will be between $140.0 million and $150.0 million, of which
approximately $60 million to $70 million will be used for capital expenditures;
the remainder will be utilized primarily to fund working capital and operating
losses. The actual funds required to build-out our network and to fund operating
losses, working capital needs and other capital needs may vary materially from
these estimates and additional funds may be required because 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
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.
If we are unable to obtain any necessary additional funding and we are
unable to complete our network build-out, this may result in a termination of
our Sprint PCS agreement; we will no longer be able to offer Sprint PCS products
and services. In this event, Sprint PCS may purchase our operating assets or
capital stock for 72% of the entire business value. Also, any delays in our
build-out may result in penalties under our Sprint PCS agreement, as amended.
We have significant related party transactions that are described under
"Certain Relationships and Related Transactions."
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not engage in commodity futures trading activities and do not enter
into derivative financial instruments for trading purposes. We also do not
engage in transactions in foreign currencies that would expose us to additional
market risk.
In the normal course of business, our operations are exposed to interest
rate risk on our variable-rate secured credit facility. Our primary interest
rate risk exposures relate to (i) the interest rate on our financing, (ii) our
ability to refinance our 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
44
fixing $25.0 million of the 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 the remaining $25.0 million of
the term loan borrowed under the secured credit facility at 7.65%. 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 (100% hedged) debt. While a 100-basis point change
in interest rates would not affect our current earnings, it would have an impact
on the market value of our debt.
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 83% 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
increased 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.
If we do not renew our swaps, or, if we do not hedge variable-rate
incremental 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.
REGULATORY DEVELOPMENTS
See "Regulation of the Wireless Telecommunications Industry" under "ITEM 1.
Business" for a discussion of regulatory developments that could have a future
impact on our operations.
SEASONALITY
Our business is subject to seasonality because the wireless industry is
heavily dependent on calendar fourth quarter results. Among other things, the
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.
INFLATION
We believe that inflation has not had a material adverse effect on our
results of operation.
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
45
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 us on January 1, 2002. Goodwill
amortization ceased as of December 31, 2001, and we will be required to complete
an impairment test of the remaining goodwill balance annually (or more
frequently if impairment indicators arise). We have not yet determined the
financial impact the adoption of these pronouncements will have on our financial
position or results of operations. As of December 31, 2001, we have goodwill of
approximately $7,191,000, net of accumulated amortization, related to the
acquisition of Bright PCS and recognized approximately $389,000 of amortization
expense during 2001. The valuation of this goodwill will be subject to an
impairment test as of the date of adoption. We 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. We will adopt this statement effective January 1, 2003. The
adoption is not expected to have a material effect on our 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. We adopted SFAS No. 144 on January 1, 2002. The adoption did not have a
material effect on our financial position, results of operations or cash flows.
46
BUSINESS
OVERVIEW
We are one of the largest Sprint PCS affiliates based on our exclusive right
to market Sprint PCS products and services to a total population of over 10.2
million people in portions of twelve contiguous states. Our markets are located
between Sprint PCS' Chicago, New York and Raleigh/Durham markets and connect or
are adjacent to 15 major Sprint PCS markets that have a total population of over
59 million people. As a Sprint PCS affiliate, we market digital personal
communications services under the Sprint and Sprint PCS brand names. At March
31, 2002, we managed approximately 222,700 Sprint PCS subscribers in our
territory.
HISTORY AND BACKGROUND
In October 1996, the Federal Communications Commission ("FCC ")
conditionally granted us licenses to provide personal communications services in
various parts of Ohio, West Virginia and Kentucky (a total of five licenses).
The FCC financed the licenses. According to FCC rules, the licenses were
conditional upon the full and timely payment of the licenses' cost. The licenses
were subject to a requirement that we construct and operate facilities that
offer coverage to a defined population within the relevant license areas within
a defined period. We began the engineering and design phase in 1996 and began
the construction of the personal communications network in early 1997. We began
providing personal communications services in August 1997.
In 1997, the FCC offered four options to certain PCS license holders to
change the payment terms of the FCC financed debt. These options were:
continuing with the current installment plan (status quo); return half of the
spectrum from any or all of the licenses in exchange for a proportionate
reduction in debt (disaggregation); turning in all licenses in exchange for
total debt forgiveness (amnesty); or prepay for as many licenses as we could
afford at face value while returning other licenses in exchange for debt
forgiveness (prepayment).
During 1998, we elected to return all of the spectrum from four licenses and
half of the spectrum from the fifth license. In connection with the return of
the spectrum, we entered into management agreements with Sprint PCS, the PCS
group of Sprint Corporation, during 1998. These agreements provided us with the
exclusive right to build, own and manage a wireless voice and data services
network in certain markets located in Ohio, West Virginia, Kentucky, Virginia,
Tennessee, North Carolina and Maryland under the Sprint PCS brand.
During 1999 we entered into a joint venture agreement through the purchase
of 25.6% of Bright PCS. The joint venture was established in October 1999 to
provide personal communications services in Ohio, Indiana and Michigan.
On April 26, 2000, Horizon Telcom, Inc. ("Horizon Telcom") formed Horizon
PCS, Inc. (the "Company", or "HPCS"). On June 27, 2000, Horizon Telcom
transferred its 100% ownership of HPC to HPCS in exchange for 53,806,200 shares
of stock of HPCS (as adjusted for the 1.1697-for-one stock split in the form of
a stock dividend effective on September 8, 2000).
In May 2000, we expanded our management agreement with Sprint PCS. This
allowed us to have the exclusive right to build, own and manage a wireless voice
and data services network in markets located in Pennsylvania, New York, Ohio and
New Jersey.
On June 27, 2000, we acquired the remaining 74.4% of Bright PCS in exchange
for 4.7 million shares of our class B common stock, equal to approximately 8% of
our outstanding shares of all classes of our common stock prior to the
acquisition, and 31,912 shares of Horizon Telcom common stock, equal to 8% of
the outstanding shares of Horizon Telcom, which Horizon PCS acquired in February
2000. In conjunction with this transaction, we 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.
The Sprint PCS agreements require us to interface with the Sprint PCS
wireless network by building our network to operate on PCS frequencies licensed
to Sprint PCS in the 1900 MHz range. Under the Sprint PCS agreements, we have
agreed to:
47
o construct and manage a network in our territory in compliance with
Sprint PCS' PCS licenses and the terms of the management agreement;
o distribute, during the term of the management agreement, Sprint PCS
products and services;
o conduct advertising and promotion activities in our territory; and
o manage that portion of Sprint PCS' customer base assigned to our
territory.
We must comply with Sprint PCS' program requirements for technical
standards, customer service standards, national and regional distribution and
national accounts programs to the extent that Sprint PCS meets these
requirements. For further discussion on the Sprint PCS agreements, see "The
Sprint PCS Agreements" below.
SPRINT PCS
Sprint PCS, a wholly-owned subsidiary of Sprint, operates the largest 100%
digital, 100% PCS wireless network in the United States. The digital technology
that Sprint PCS uses is code division multiple access technology, referred to as
CDMA. Sprint PCS has licenses to provide PCS nationwide. Sprint PCS operates its
PCS network in major metropolitan markets throughout the United States and has
entered into agreements with affiliates, such as ourselves, to build and manage
networks in smaller metropolitan areas and along major highways.
Sprint first launched its commercial PCS network in the United States in
November 1995. By combining its brand name, national footprint, competitively
priced plans and extensive product offerings, Sprint PCS has experienced rapid
customer growth. In the fourth quarter of 2001, Sprint PCS reported its 14th
consecutive industry-leading quarter of customer growth, adding over 1.1 million
direct customers and 381,000 affiliate customers. As of December 31, 2001,
Sprint PCS had more than 13.6 million direct customers and, together with its
affiliates, provided service to 15.8 million customers on an all-digital network
covering almost 247 million people with licenses to provide coverage to 285
million people in all 50 states, Puerto Rico and the U.S. Virgin Islands.
Statements in this document regarding Sprint and Sprint PCS are derived
from information contained in the periodic reports and other documents filed
with the Securities and Exchange Commission by Sprint or press releases issued
by Sprint or Sprint PCS.
COMPETITIVE STRENGTHS
Our long-term strategic affiliation with Sprint PCS provides us with many
business, operational and marketing advantages including the following:
Sprint PCS' national brand name recognition and national advertising
support. We have the exclusive right to use the Sprint and Sprint PCS brand
names for the sale of Sprint PCS products and services in our territory. We
benefit from the strength and the reputation of the Sprint and Sprint PCS
brands. Sprint PCS' national advertising campaigns and developed marketing
programs are provided to us at little or no additional cost under our Sprint PCS
agreements. We offer the same strategic pricing plans, promotional campaigns and
handset and accessory promotions as Sprint PCS, and we have the ability to add
pricing plans and marketing promotions that target local market needs.
Established and available distribution channels. We benefit from immediate
access to major national retailers under Sprint PCS' existing sales and
distribution agreements and other national sales and distribution channels,
including:
o a sales and distribution agreement with RadioShack, which provides us
with access to approximately 178 stores in our territory;
48
o the sales and distribution agreements with other major national
third-party retailers such as Best Buy, Circuit City, Office Depot and
Wal-Mart, which collectively provide us with access to approximately
277 additional retail outlets in our territory;
o Sprint PCS' national inbound telemarketing sales force;
o Sprint PCS' national accounts sales team; and
o Sprint PCS' electronic commerce sales platform.
Sprint PCS' nationwide digital PCS network. As of December 31, 2001, Sprint
PCS, together with its affiliates, operated PCS systems providing service to
nearly 247 million people nationwide, or 87% of Sprint PCS' licensed population
of 285 million people, including all of the 50 largest metropolitan markets. Our
network operates with Sprint PCS' national network and extends Sprint PCS'
coverage into our markets, which we believe is important to Sprint PCS' national
strategy. We believe our ability to provide customers with access to Sprint PCS'
nationwide network represents a competitive advantage over other nationwide and
regional providers of wireless services.
Sprint PCS Wireless Web. Our network supports and we market the Sprint PCS
Wireless Web. The Sprint PCS Wireless Web allows customers with data-capable or
web browser-enabled handsets to connect to the Internet and browse specially
designed text-based web sites, including AOL, Yahoo!, Amazon.com, Bloomberg.com,
CNN Interactive, MapQuest.com, Fox Sports, Ameritrade, InfoSpace.com and
Weather.com. For more information on the Sprint PCS Wireless Web, see "Products
and Services: Access to the Sprint PCS Wireless Web" below. Sprint PCS'
investment to upgrade its network to third generation wireless network services
("3G") is expected to result in up to a doubling of voice capacity nationwide
and dramatically increased data transmission speeds. The migration to 3G is also
expected to provide better economies for Sprint PCS and its affiliates through
improved spectrum efficiency.
Sprint PCS' extensive research and development. We benefit from Sprint PCS'
extensive research and development effort, which provides ongoing access to new
technological products and enhanced service features without significant
research and development expenditures of our own. We have prompt access to any
developments produced by Sprint PCS for use in our network.
Better equipment availability and pricing. We are able to acquire our
network equipment, handsets and accessories more quickly and at a significantly
lower cost than we would without our strategic relationship with Sprint PCS. We
purchase our network equipment, handsets and accessories under Sprint PCS'
vendor arrangements that provide volume discounts. These discounts significantly
reduce the overall capital required to build our network and significantly
reduce our costs of handsets and accessories.
Sprint PCS licenses and long-term commitments. We have the exclusive right
to use Sprint PCS' licensed spectrum to provide Sprint PCS products and services
in our territory. Sprint PCS has funded the purchase of the licenses covering
our territory at a cost of approximately $57.0 million and has incurred
additional expenses for microwave clearing. As a Sprint PCS affiliate, we did
not have to fund the acquisition of these licenses, thereby reducing our
start-up costs. The Sprint PCS agreements are for a total of 50 years, including
an initial term of 20 years, which will expire June 2018, and three 10-year
renewal terms. These agreements will automatically renew for each renewal period
unless, at least two years prior to the commencement of any renewal period,
either party notifies the other party that it does not wish to renew the
agreement.
Sprint PCS' back office services. When we initially launched our independent
PCS operations, we provided our own back office services, such as customer
services and billing services. In May 2000, we amended the Sprint PCS agreements
so that Sprint PCS will provide these back office services to us. We completed
conversion of our existing customers to these services in June 2001. We expect
the cost of these services will be at or below the cost of providing the
services ourselves, due to anticipated rate reductions and Sprint PCS' ability
to economically manage the support of new services. We also believe this
arrangement will allow us to more quickly roll out new Sprint PCS products and
services in our markets.
49
OTHER COMPETITIVE STRENGTHS OF OUR BUSINESS
In addition to the advantages provided by our strategic affiliation with
Sprint PCS, we have the following additional competitive strengths:
Attractive markets. Our markets, with a total population of approximately
10.2 million people, are in areas with attractive demographic characteristics,
including the following:
o Fewer competitors in our markets compared to major metropolitan areas.
We face fewer competitors in our markets than is the case in the
surrounding urban markets. In addition, we were the first or second
PCS provider in a majority of our markets.
o High volume of commuter and long-distance travel. Our territories
include more than 2,600 interstate miles and numerous other Federal
and major state highways. We believe coverage along these highways
will generate significant roaming revenues.
o Significant overlap with Sprint PCS and Horizon Telcom local telephone
service areas. Approximately 20% of the people in our territory are
residents in Sprint Local Telephone Division markets. We believe that
we can take advantage of Sprint PCS' local telephone customers'
familiarity with Sprint PCS' brand and product quality when marketing
our wireless service. Similarly, we benefit from local brand awareness
of Horizon Telcom, the majority owner of Horizon PCS. Horizon Telcom
provides local telephone service in our Chillicothe, Ohio market where
we have a company record penetration of covered residents of
approximately 17%. The former owners of Bright PCS also offer local
telephone service in northwestern Ohio, and we expect to benefit
positively from their long-term relationships with their local
telephone customers.
o Large student population. There are over 240,000 students attending
more than 60 four-year colleges and universities located in our
territories, including Notre Dame, Penn State, Ohio University, the
University of Virginia, Virginia Tech and West Virginia University.
There are also numerous other colleges and universities throughout our
markets. We believe college students are among the heaviest users of
wireless services.
o Popular resorts and day-trip destinations. There are more than 25 ski
resorts, three major NASCAR speedways, popular resorts, state parks
and other tourist destinations in our service areas.
Potential for significant roaming revenue. We receive Sprint PCS roaming
revenue from Sprint PCS subscribers based outside our territory who roam on our
network. Our territory is adjacent to or connects 15 major markets owned and
operated by Sprint PCS, including Buffalo, Chicago, Cincinnati, Cleveland,
Columbus, Detroit, Indianapolis, Knoxville, Lexington, New York, Philadelphia,
Pittsburgh, Raleigh/ Durham, Richmond and Washington, D.C. These markets include
five of the ten largest metropolitan areas in the United States, which have a
total population of approximately 59 million residents. Our territory also
contains more than 2,600 interstate miles, as follows:
INTERSTATE MAJOR DESTINATION CITIES ESTIMATED TOTAL INTERSTATE MILES (1):
BETWEEN IN OUR
DESTINATIONS TERRITORY
- ----------- --------------------------------------- -----------------------------------------
I-80/I-90 Chicago, IL to New York, NY 787 478
I-90 Cleveland, OH to Buffalo, NY 188 117
I-75 Detroit, MI to Cincinnati, OH 264 57
I-77 Cleveland, OH to Charlotte, NC 510 314
I-79 Erie, PA to Charleston, WV 337 234
I-81 Syracuse, NY to Knoxville, TN 790 419
I-64 Lexington, KY to Richmond, VA 473 350
I-69 Indianapolis, IN to Lansing, MI 241 106
50
ESTIMATED TOTAL
INTERSTATE MILES (1):
BETWEEN IN OUR
INTERSTATE MAJOR DESTINATION CITIES DESTINATIONS TERRITORY
- ----------------- --------------------------------------- -----------------------------------------
I-476 Scranton, PA to Philadelphia, PA 124 60
Other interstates -- 519
------ ------
3,714 2,654
- ----------
(1) Source: Rand McNally.
Our territory also includes numerous other Federal and major state highways.
The proximity of our markets to major Sprint PCS markets and the concentration
of major interstates and highways in our territory create significant potential
for roaming revenue.
High-capacity, spectrum efficient network. We have built an all-digital PCS
network that we believe is high-quality. Our strategy is to provide service to
the largest communities in our markets and the interstates and primary roads
connecting these communities to one another and to the adjacent major markets
owned and operated by Sprint PCS. We believe our network design will allow our
network to handle more customers with fewer dropped calls and better clarity
than our competitors. In accordance with Sprint PCS' national plan, we are in
the process of upgrading most of our network to 1XRTT, a 3G technology, by
mid-year 2002. Because we believe our CDMA technology is more efficient than GSM
or TDMA, we believe that, unlike our GSM and TDMA competitors, we will not
require additional spectrum in order to operate our 3G network. We believe our
early nationwide deployment of 3G technology will provide us with a competitive
advantage in the market for wireless data services.
Fully-funded business plan. We are currently fully-funded under our revised
business plan, which includes completing the build-out of a network which will
cover approximately 7.9 million residents and operating up to 50 company-owned
retail stores. At December 31, 2001, our network covered 6.9 million people and
38 company owned retail stores were in operation. We expect to achieve positive
earnings before interest, taxes, depreciation and amortization in the third
quarter of 2003. Our current projections of operating results are a function of
a number of factors, many of which are beyond our control.
Proven track record; strong management and sponsorship. We entered the
wireless industry in 1997 to capitalize on the strong growth opportunities that
we believed existed and launched independent PCS service before Sprint PCS was
offering affiliation opportunities. To successfully offer service as an
independent provider, we were required to finance, build and launch our initial
markets without any of the benefits of affiliation. As a result of our success
as an independent PCS provider we were able to become a charter Sprint PCS
affiliate. Since then we have expanded our territory from a total population of
less than 1.0 million in 1998 to a total population of 10.2 million today. We
have accomplished this by developing our relationship with the Alliances,
investing in and subsequently acquiring Bright PCS, and establishing a strategic
partnership with Sprint PCS.
BUSINESS STRATEGY
We believe the following elements of our business strategy will enable us to
rapidly complete our network, distinguish our wireless service offerings from
those of our competitors and compete successfully in the wireless communications
marketplace:
Taking full advantage of the benefits of our affiliation with Sprint PCS.
The benefits of our affiliation with Sprint PCS include:
o Sprint PCS brand awareness and national marketing programs;
o access to established Sprint PCS distribution channels and outlets,
national marketing plans and marketing strategies;
o Sprint PCS nationwide coverage;
51
o availability of discount prices for network and subscriber equipment
under Sprint PCS' vendor contracts;
o revenues from Sprint PCS subscribers traveling onto our network;
o use of Sprint PCS' back office services including customer activation,
billing and customer care; and
o use of Sprint PCS' national network control center which is
responsible for continually monitoring the performance of our network
and providing rapid response for systems maintenance needs.
Rapidly completing the expanded build-out of our network. We have
successfully developed several key relationships which allow us to efficiently
launch our markets. For the build-out in our Bright PCS markets and for fill-in
coverage in our initial markets, we rely on our build-to-suit arrangements with
SBA Communications Corporation ("SBA"). These arrangements allow us to minimize
capital costs and take advantage of SBA's expertise in quickly completing the
site acquisition process. For markets with a high concentration of existing
towers or zoning challenges, we employ a co-location strategy. In our Virginia
and West Virginia markets, we use our network services agreement with the
Alliances (See "Alliances Network Services Agreement" below) to increase our
coverage to those markets with a total population of 2.9 million. For our
markets in Pennsylvania, New York, Ohio and New Jersey, we purchased network
assets under construction from Sprint PCS, enabling us to launch these markets
much earlier than if we had to complete the entire build-out of these markets
independently.
Executing an integrated local marketing strategy. Our marketing strategy is
to take full advantage of Sprint's and Sprint PCS' nationwide presence and brand
names while at the same time establishing a strong local presence in each of our
markets. We emphasize the improved clarity and quality, enhanced features and
favorable pricing of Sprint PCS products and services and replicate the
marketing strategies that have resulted in Sprint PCS becoming the fastest
growing wireless service provider in the country. In addition, on the local
level, we are or soon will be:
o establishing up to 50 Sprint PCS stores within our territory;
o establishing local third-party sales and distribution relationships on
an as-needed basis;
o directing our media efforts at the community level by advertising in
local publications and radio;
o sponsoring local and regional events; and
o using the local telephone offices of Sprint and the former owners of
Bright PCS that are located in our markets to offer our products and
services.
Continuing to explore opportunities to expand our territory and provide
complementary products and services. Since the initial grant of our markets, we
have significantly expanded the geographic scope of our territory through three
separate transactions. We expect to continually evaluate ways to strategically
expand our territory. Similarly, we expect to consider offering complementary
products and services.
MARKETS
Our territory covers 54 markets in parts of Indiana, Kentucky, Maryland,
Michigan, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Tennessee,
Virginia, and West Virginia. Sprint PCS has launched service in 15 major
metropolitan areas that are adjacent to our markets and have a combined total
population of approximately 59 million. We believe that connecting or being
adjacent to existing Sprint PCS markets is important to Sprint PCS' and our
strategy to provide seamless, nationwide PCS. The following chart identifies our
markets:
52
SPRINT PCS MHZ OF ESTIMATED
MARKET GRANT(1) SPECTRUM TOTAL POPULATION(2)
Fort Wayne, IN Bright 10 689,200
Kingsport (Tri-Cities), TN 2nd 20 689,100
Scranton, PA 3rd 30 664,700
Roanoke, VA 2nd 10 645,200
Charleston, WV 1st 20 492,700
Huntington, WV 1st 20 369,700
South Bend, IN Bright 10 348,800
Erie, PA 3rd 10 280,200
Elkhart, IN Bright 10 256,900
Lima, OH Bright 30 251,800
Olean, NY 3rd 30 240,200
Charlottesville, VA 2nd 30 218,600
Clarksburg, WV 2nd 30 195,600
Sunbury, PA 3rd 30 194,300
Zanesville, OH 1st 20 187,200
Kokomo, IN Bright 30 186,000
Williamson, WV 2nd 20 183,900
Parkersburg, WV 1st 20 182,000
Jamestown, NY 3rd 30 180,100
Bluefield, WV 2nd 20 176,200
New York, NY (Partial) (3) 3rd 30 169,673
Beckley, WV 2nd 20 169,500
Danville, VA 2nd 10 168,600
Williamsport, PA 3rd 30 161,200
Benton Harbor, MI Bright 10 160,100
Lynchburg, VA 2nd 10 160,100
Cumberland, MD 2nd 10 159,000
Findlay, OH Bright 30 152,900
Pottsville, PA 3rd 30 151,000
State College, PA 3rd 30 134,900
Athens, OH 1st 20 132,100
Stroudsburg, PA 3rd 30 128,100
DuBois, PA 3rd 30 127,900
Cincinnati, OH (Partial) (3) 2nd 10 127,400
Sharon, PA 3rd 10 122,300
Michigan City, IN (Partial) (3) Bright 10 109,900
Marion, IN Bright 30 108,600
Morgantown, WV 2nd 30 107,800
Staunton, VA 2nd 10 107,600
Chillicothe, OH (4) 1st 35 104,700
Oil City, PA 3rd 30 104,500
Ashtabula, OH 3rd 10 103,500
Portsmouth, OH 1st 20 93,800
Martinsville, VA 2nd 10 90,400
Meadville, PA 3rd 10 90,000
Allentown, PA (Partial) (3) 3rd 30 59,094
Fairmont, WV 2nd 30 56,800
Knoxville, TN (Partial) (3) 3rd 10 54,201
Dayton, OH (Partial) (3) Bright 10 41,065
Logan, WV 2nd 10 40,900
Canton, OH (Partial) (3) 2nd 10 36,215
Toledo, OH (Partial) (3) Bright 30 30,066
Kalamazoo, MI (Partial) (3) Bright 30 20,009
Battle Creek, MI (Partial) (3) Bright 30 8,980
----------
Estimated total population 10,225,303
53
- ------------------
(1) Indicates the grant from Sprint PCS in which we received our respective
markets. "Bright" indicates markets granted to Bright PCS in October 1999.
The following summarizes our other grants:
1st: June 1998
2nd: August 1999
3rd: May 2000
(2) Estimated total population is based on January 1, 1999, estimates compiled
by Rand McNally Commercial Atlas & Marketing Guide, 2000 Edition.
(3) The estimated total population in these markets represents the population
of the counties within the market granted to us in the Sprint PCS
agreements, not the total population of that market.
(4) Includes 15 MHz of spectrum owned directly by us.
NETWORK BUILD-OUT PLAN
Our network build-out strategy is to provide service to the largest
communities in our markets and to cover interstates and primary roads connecting
these communities to each other, and to the adjacent major markets owned and
operated by Sprint PCS. We believe that our schedule for completing the
build-out is achievable based on our prior experience in network build-out, the
digital PCS technology we will use to build our PCS network and the established
standards of Sprint PCS. We have designed our build-out to exceed the
requirements of the Sprint PCS agreements.
Our markets have a total population of approximately 10.2 million people. As
of March 31, 2002, we had launched service in markets covering approximately 7.2
million residents, or 71% of the total population in our territory and had
approximately 222,700 customers. According to our business plan, our network,
when completed, will cover 7.9 million residents, or 77%, of the total
population in our territory. We believe that our network will be substantially
complete by December 31, 2002. For the year ended December 31, 2001, we had
revenues of $123.3 million and a loss from continuing operations of $113.5
million.
NETWORK BUILD-OUT ELEMENTS
As part of our network build-out strategy, we entered into outsourcing
relationships with the third parties described below to assist us in building
out our network. We believe that these relationships result in a more timely,
efficient and cost effective build-out process.
Radio frequency design. We have engaged an outside design firm to provide
radio frequency design, engineering and optimization services for our markets.
This firm assists us in determining the required number of cell sites to operate
the network and identifies the general geographic areas in which each of the
required cell sites will be located.
Site acquisition, project management and construction. We use a combination
of build-to-suit and co-location opportunities in the design and construction of
our network. We consider these arrangements to be preferable to building our own
towers.
Build-to-suit arrangements are contractual relationships whereby a tower
company constructs and owns a cell tower at a location that we approve and
leases the cell tower to us for use in our network. Co-location is an
arrangement whereby a wireless service provider, like us, is allowed to use
another party's cell tower as part of its network. Generally we prefer
build-to-suit opportunities because of the favorable development fees and
leasing terms associated with our arrangement with SBA. Under our build-to-suit
agreement, SBA acquires the site, builds the tower and leases it to us.
In situations where we determine that build-to-suit is not appropriate, we
use a co-location strategy. For sites where co-location leases are utilized,
zoning, permitting and surveying approvals and licenses have already been
secured, which minimizes our start-up costs and accelerates access to the
markets.
We expect that approximately 1,380 sites will be required to achieve our
planned expanded coverage of the residents in our territory, including those
provided to us through our network services agreement.
54
Microwave relocation. At the time of the FCC's auction of PCS licenses,
other third parties were using portions of the same frequency bandwidths for the
operation of microwave facilities. The FCC has established procedures for PCS
licensees to relocate these existing microwave paths, generally at the PCS
licensee's expense. Sprint PCS relocates the microwave paths that use
frequencies owned by Sprint PCS, and is analyzing these relocations as we
continue the build-out of our network. Sprint PCS is also paying for a portion
of the relocation costs. Sprint PCS has substantially completed the necessary
relocation for the microwave paths in our markets.
Switching. We currently use two switching centers in Chillicothe, Ohio, and
Fort Wayne, Indiana, to provide services to our network. We also utilize the
Alliance's two switching centers under our network services agreement (see
"Alliances Network Services Agreement" below) and use Sprint PCS switching
centers on an interim basis to more rapidly launch our markets in western
Pennsylvania and northern Ohio. A switching center serves several purposes,
including routing calls, managing call handoff, managing access to the public
telephone network and providing access to voice mail. As of December 31, 2001,
we are constructing two additional switching centers which we plan to complete
in 2002: one in Johnson City, Tennessee, and one in Erie, Pennsylvania. The new
Nortel switch in Johnson City will replace the older Motorola switch in
Chillicothe. We believe the capacity of our switching centers is adequate to
accommodate our planned growth.
Interconnection. Our network connects to the public telephone network
through local exchange carriers. Through our Sprint PCS agreements, we benefit
from Sprint PCS-negotiated interconnection agreements with local exchange
carriers, which govern the terms of the relationship between telephone service
carriers which interconnect in order to provide service between networks.
Long distance and back haul. We use Sprint and other third-party providers
for long distance services and for back haul services. Back haul services are
the telecommunications services that other carriers provide to carry our voice
traffic from our cell towers to our switching facilities. When we use Sprint, we
receive the same preferred rates made available to Sprint PCS.
Network monitoring. We use Sprint PCS' Network Operations Control Center to
monitor continuously our owned and operated network. The Alliances operate a
comparable network operations control center that provides network monitoring in
our resale markets.
SBA AGREEMENT
Prior to August 1999, Horizon Telcom owned the cell site towers we used in
our network. In August 1999, Horizon Telcom sold to SBA the towers we used in
our network; we subsequently entered into lease arrangements with SBA. We now
pay a fixed amount per month, per cell site, to SBA for the right to use their
towers in our markets. This fixed fee is subject to an annual percentage
increase for each site beginning on the third anniversary of the date we began
using the site. We believe the rates we pay under this agreement are generally
more favorable than average co-location rates available in our markets.
In August 1999, we also entered into a build-to-suit agreement with SBA.
Under this agreement, SBA acquires and develops the sites and installs the
towers at locations we approve. We receive site development fees or credits for
future service fees from SBA for tower sites which SBA constructs on our behalf.
We have agreed to lease space on a number of existing SBA towers for which we
pay a fixed amount per month, per cell site. For some of the leases, we receive
a one year rent abatement on these sites. Rent expense for the leases which
include abatement will be recognized on a straight-line basis over the life of
the lease.
MOTOROLA PRODUCT SUPPLY AGREEMENT
In December 1999, we entered into a product supply agreement with Motorola
for the purchase of the telecommunications products and services for our
network. Motorola also provides installation services for our network equipment.
We intend to use Motorola equipment for the build-out of our new markets in
Pennsylvania, New York, Ohio and New Jersey and the Bright PCS markets. Since
entering into the Sprint PCS agreements in June 1998, we have benefited from
Sprint PCS' volume pricing arrangements with Motorola on our equipment purchases
and expect to continue to benefit going forward.
55
ALLIANCES NETWORK SERVICES AGREEMENT
The Alliances are two related, independent PCS providers offering service
under the NTELOS brand name. In August 1999, we entered into a network services
agreement with the Alliances for 13 of our markets in Virginia and West
Virginia. Under this agreement, we are entitled to use the Alliances' wireless
network and equipment to provide services to our customers in these markets. The
Alliances are required to maintain their network to Sprint PCS technical
standards. We pay the Alliances a minimum monthly charge for a fixed number of
minutes and a per minute of use charge for minutes in excess of the fixed number
of minutes.
We believe this arrangement eliminates or defers capital costs and reduces
network expenses while permitting a faster launch of service and preserving our
capital for other uses. In addition, this arrangement gives us access to
additional spectrum in markets where Sprint PCS has limited bandwidth and
reduces our risk of technological obsolescence in these markets. We are subject
to the risk that the Alliances will not satisfactorily build-out, operate,
maintain or upgrade their network. See "Risk Factors."
As of December 31, 2001, the Alliances had deployed 481 cell sites within
our markets in West Virginia and Virginia and had complied with their
contractual build-out requirements to date. At December 31, 2001, the Alliances
provided coverage to approximately 62% of the total population of 2.9 million
residents in the markets covered by our network services agreement.
In the event we terminate our agreement with the Alliances because of the
Alliances' breach of the agreement, we have the right to continue to use the
Alliances' network for up to 36 months after the termination at rates which
reflect a significant discount from the standard pricing terms under our
agreement. This is intended to enable us to continue to provide services to our
customers while we build-out our own network. In addition, after December 31,
2003, we have the right to overbuild the Alliances' markets, on a
market-by-market basis, at any time for any reason.
PRODUCTS AND SERVICES
Our products and services mirror the service offerings of Sprint PCS and are
designed to integrate seamlessly with the Sprint PCS nationwide network. Sprint
PCS Wireless Services currently serve the majority of the nation's metropolitan
areas, including more than 4,000 cities and communities, providing customers
with affordable, reliable 100% digital, 100% PCS services. The Sprint PCS
service package we offer includes the following:
100% digital wireless mobility and nationwide service. Our primary service
is wireless mobility coverage. Our PCS network is part of the largest 100%
digital, 100% PCS network in the nation and our customers are able to use Sprint
PCS services in our markets and seamlessly throughout the Sprint PCS network. We
offer customers in our territory enhanced voice clarity, advanced features and
simple, affordable Sprint PCS pricing plans. These plans include free long
distance and wireless airtime minutes for use throughout the Sprint PCS network
at no additional charge. Our basic wireless service includes voice mail, caller
ID, enhanced call waiting, three-way calling, call forwarding, distinctive
ringing and call blocking.
Nationwide service. Dual-band/dual-mode handsets allow roaming on wireless
networks where Sprint PCS is not available and with which Sprint PCS has roaming
agreements. These handsets are designed to operate on analog and digital
cellular networks, as well as on Sprint PCS' digital PCS networks.
Advanced handsets. CDMA handsets offer significantly extended battery life
relative to earlier technologies, providing up to five days of standby time and
approximately two to four hours of talk time. Handsets operating on a digital
system are capable of saving battery life while turned on but not in use,
improving efficiency and extending the handset's use. We also offer
dual-band/dual-mode handsets that allow customers to make and receive calls on
both PCS and cellular frequency bands and both digital or analog technology.
These handsets allow roaming on cellular networks where Sprint PCS digital
service is not available through carriers with which Sprint PCS has roaming
agreements. All handsets are equipped with preprogrammed features such as speed
dial and last number redial, and are sold under the Sprint and Sprint PCS brand
names.
56
Improved voice quality. We believe the Sprint PCS CDMA technology offers
significantly improved voice quality compared to existing analog and TDMA
networks and more powerful error correction, less susceptibility to call fading
and enhanced interference rejection; all of which result in fewer dropped calls.
See "CDMA Technology" below for a discussion of the reasons CDMA technology
offers improved voice quality.
Privacy and security. Sprint PCS provides secure voice transmissions encoded
into a digital format to prevent eavesdropping and unauthorized cloning of
subscriber identification numbers.
Easy activation. Customers can purchase a Sprint PCS handset off the shelf
at a retail location and activate their service by calling customer service or
by visiting Sprint PCS' website. Either option allows the customer to activate
the handset over the air. We believe over-the-air activation will reduce the
training requirements for salespersons at the retail locations.
Customer care. By using Sprint PCS' established back office services such as
customer care and billing services, we believe our operating costs will be
reduced. By using Sprint PCS' services, we also expect to more rapidly implement
new products and services offered by Sprint PCS. Sprint PCS offers customer care
24 hours a day, seven days a week. Customers can call the Sprint PCS toll-free
customer care number from anywhere on the national Sprint PCS network. All
Sprint PCS phones are preprogrammed with a speed dial feature that allows
customers to easily reach customer care at any time.
Access to the Sprint PCS Wireless Web. We support and market the Sprint PCS
Wireless Web throughout our network. The Sprint PCS Wireless Web allows
subscribers with data-capable handsets to connect their portable computers or
personal digital assistants to the Internet. Sprint PCS subscribers with
data-capable handsets also have the ability to receive periodic information
updates such as stock prices, airline schedules, sports scores and weather
reports directly on their handsets. Sprint PCS subscribers with web
browser-enabled handsets have the ability to connect to and browse specially
designed text-based Internet sites on an interactive basis. Sprint PCS has
agreements with numerous Internet providers to provide services for the Sprint
PCS Wireless Web. Sprint PCS offers Sprint PCS Wireless Web as an add-on to
existing Sprint PCS' Free and Clear pricing plans.
Clear Pay pricing plan. We offer Sprint PCS' "Clear Pay" pricing plan in our
markets. The "Clear Pay" plan is a credit policy which is designed to enable
potential subscribers who may not have a credit history that qualifies for
standard Sprint PCS post-pay pricing plans to become subscribers without having
to pay high rates customarily associated with pre-paid plans or having to
provide a large deposit. We believe the "Clear Pay" pricing plan allows us to
obtain subscribers which we would not be able to otherwise obtain if we used
standard post-pay credit policies.
Other services. We believe new features and services will be developed on
the Sprint PCS nationwide network to take advantage of CDMA technology. As a
leading wireless provider, Sprint PCS conducts ongoing research and development
to produce innovative services that give Sprint PCS a competitive advantage. We
intend to offer a portfolio of products and services developed by Sprint PCS to
accommodate the growth in, and the unique requirements of, high speed data
traffic and demand for video services. We plan to provide, when available, a
number of applications for wireless data services including facsimile, Internet
access, wireless local area networks and point-of-sale terminal connections.
MARKETING STRATEGY
Our marketing and sales strategy uses Sprint PCS' strategies and developed
national distribution channels that have helped Sprint PCS generate rapid
customer growth. We augment Sprint PCS' strategies with marketing programs
tailored to our specific territory.
Use of Sprint PCS' brand equity and marketing. We feature exclusively and
prominently the nationally recognized Sprint and Sprint PCS brand names in our
marketing effort. From the customers' point of view, they will use our PCS
network and the Sprint PCS national network seamlessly as a unified national
network. We are building on Sprint PCS' national distribution channels and
advertising programs.
Pricing. We believe our use of the Sprint PCS pricing strategy offers
customers in our territory simple, easy-to-understand service plans. Sprint PCS'
consumer pricing plans are typically structured with competitive monthly
57
recurring charges and large local calling areas, service features such as
voicemail, enhanced caller ID, call waiting and three-way calling and what we
believe to be competitive per-minute rates. Lower per-minute rates relative to
analog cellular providers are possible in part because the CDMA system that both
we and Sprint PCS employ has greater capacity than current analog cellular
systems, which we believe enables us to market high usage customer plans at
lower prices. All of Sprint PCS' current national plans:
o include minutes in any Sprint PCS market with no roaming charges;
o offer a wide selection of phones to meet the needs of consumers and
businesses; and
o provide a limited-time money-back guarantee on Sprint PCS handsets.
In addition, Sprint PCS' national Free and Clear plans, which we believe
offer simple, affordable plans for every consumer and business customer, include
the option to choose free long distance calling from anywhere on Sprint PCS'
nationwide network, a package of off-peak minutes or the Sprint PCS Wireless
Web.
Local focus. Our local focus enables us to supplement Sprint PCS' marketing
strategies with our own strategies tailored to each of our specific markets.
These include attracting local businesses to diversify our distribution channels
and using local radio and newspaper advertising to sell our products and
services in each of our launched markets. We have established a local sales
force to execute our marketing strategy through company-owned Sprint PCS stores
and also employ a direct sales force targeted to business sales. In addition,
Sprint PCS' existing agreements with national retailers provide us with access
to over 455 retail locations in our territory. The former owners of Bright PCS
also offer Sprint PCS products in their local telephone offices in northwestern
Ohio. Sprint-owned local exchange carriers provide local telephone service to
approximately 20% of the total population in our territory, which provides us
with an additional distribution channel through which we can market to an
established base of Sprint customers. Some of the Sprint local exchange markets
have a store for Sprint customers to pay their bills, which we use to sell
Sprint PCS products and services.
Advertising and promotions. Sprint PCS uses national and regional
television, radio, print, outdoor and other advertising campaigns to promote its
products. We benefit from this national advertising in our territory at no
additional cost to us.
Sponsorships. Sprint PCS is a sponsor of numerous selected, broad-based
national and regional events. These sponsorships provide Sprint PCS with brand
name and product recognition in high profile events, provide a forum for sales
and promotional events and enhance our promotional efforts in our territory.
Bundling of services. We intend to take advantage of the complete array of
communications services offered by bundling Sprint PCS services with other
Sprint products, such as long distance and Internet access.
SALES AND DISTRIBUTION
Our sales and distribution plan mirrors Sprint PCS' multiple channel sales
and distribution plan. Key elements of our sales and distribution plan consist
of the following:
Sprint store within a RadioShack store. Sprint has an arrangement with
RadioShack to install a "store within a store" for the sale of Sprint PCS
service. RadioShack has approximately 178 stores in our territory.
Other national and regional third party retail stores. We also benefit from
the distribution agreements established by Sprint PCS with other national and
regional retailers which currently include Best Buy, Circuit City, Office Depot,
OfficeMax, Ritz Camera, Staples, Cord Camera, The Wiz, Wal-Mart and h.h. gregg
department stores. As of December 31, 2001, these retailers operate
approximately 277 retail stores in our territory. We also believe that we
benefit from stores located in major Sprint PCS markets near our markets because
residents of our territory who buy PCS handsets at those stores become our
subscribers.
Sprint PCS stores. At December 31, 2001, we operated 38 Sprint PCS stores.
We plan to have up to 50 Sprint PCS stores in our territory by the end of 2002.
These stores will be located in larger markets within our territory, which we
58
believe will provide us with strong local presence and a high degree of
visibility. Following the Sprint PCS model, these stores will be designed to
facilitate retail sales, bill payment and customer service.
Local telephone stores. We also offer Sprint PCS products and services
through the Sprint Local Telephone Division retail centers in our service area
and through local telephone service centers of former owners of Bright PCS and
their affiliates located in our markets.
National accounts and direct selling. We participate in Sprint PCS' national
accounts program. Sprint PCS has a national accounts team which focuses on the
corporate headquarters of Fortune 500 companies. Once a representative reaches
an agreement with the corporate headquarters, we service the offices of that
corporation located in our territory. Our direct sales force will target the
employees of these corporations in our territory and cultivate other local
business clients.
Inbound telemarketing. Sprint PCS provides inbound telemarketing sales when
customers call from our territory. As the exclusive provider of Sprint PCS
products and services in our market, we use the national Sprint 1-800-480-4PCS
number campaigns that generate call-in leads. These leads are then handled by
Sprint PCS' inbound telemarketing group.
Electronic commerce. A visitor to Sprint PCS' Internet site can order and
pay for a handset and select a service plan. Customers visiting the site can
review the status of their account, including the number of minutes used in the
current billing cycle. We manage customers in our territory who purchase
products and services over the Sprint PCS Internet site.
CDMA (CODE DIVISION MULTIPLE ACCESS) TECHNOLOGY
Sprint PCS' nationwide network and its affiliates' networks all use digital
CDMA technology. CDMA technology is fundamental to accomplishing our business
objective of providing high-volume, high-quality airtime at a low cost. We
believe CDMA provides important system performance benefits.
Voice quality. We believe CDMA systems offer less interference, more
powerful error correction and less susceptibility to fading than analog systems.
Using enhanced voice-coding techniques, CDMA systems achieve voice quality that
is comparable to that of the typical wireline telephone. This CDMA voice-coding
technology also filters annoying background noise more effectively than existing
wireline, analog cellular or other digital PCS phones.
Capacity. CDMA technology allows a greater number of calls within one
specific frequency and reuses the entire frequency spectrum in each cell. CDMA
systems provide capacity gains of up to seven times over current analog systems
and up to three times greater than TDMA and GSM systems used by some of our
competitors. Additional voice capacity improvements are expected for CDMA
networks over the next two years as new 3G standards are approved and
implemented. Additionally, 3G will allow higher data transmission speeds than
are currently available.
CDMA technology is designed to provide flexible or "soft" capacity that
permits networks like ours to temporarily increase the number of telephone calls
that can be handled within a cell. When capacity limitations in analog, TDMA and
GSM systems are reached, additional callers in a given cell must be given a busy
signal. Using CDMA technology, networks like ours can allow a small reduction in
voice quality to provide temporary increases in capacity. This reduces blocked
calls and increases the probability of a successful cell-to-cell hand-off.
Soft hand-off. As a subscriber travels from one cell site to another cell
site, the call must be "handed-off" to the next site. CDMA systems transfer
calls throughout the network using a technique referred to as a soft hand-off,
which connects a mobile customer's call with a new cell site while maintaining a
connection with the cell site currently in use. CDMA networks monitor the
quality of the transmission received by both cell sites simultaneously to select
a better transmission path and to ensure that the network does not disconnect
the call in one cell until it is clearly established in a new one. As a result,
fewer calls are dropped compared to analog, TDMA and GSM networks which use a
"hard hand-off" and disconnect the call from the current cell site as it
connects with a new one.
59
Integrated services. CDMA systems permit us to offer advanced features,
including voice mail, caller ID, enhanced call waiting, three-way calling, call
forwarding, Internet access, paging and text-messaging. These advanced features
may also be offered by companies utilizing competing technologies.
Privacy and security. Another benefit of CDMA technology is that it combines
a constantly changing coding scheme with a low-power signal to enhance security
and privacy. Vendors are currently developing additional encryption capabilities
which we believe will further enhance overall network security.
Frequency planning. Frequency planning is the process used to analyze and
test alternative patterns of frequency use within a wireless network to minimize
interference between one call and another call and to maximize capacity.
Currently, cellular service providers spend considerable money and time on
frequency planning. Since TDMA and GSM systems have frequency reuse constraints
similar to present analog systems, frequency reuse planning for TDMA and GSM
based systems is expected to be comparable to planning for the current analog
systems. With CDMA technology, however, the same group of frequencies can be
reused in every cell, substantially reducing the need for costly frequency reuse
patterning and constant frequency plan management.
Battery life. Due to their greater efficiency in power consumption, CDMA
handsets provide up to five days of standby time and approximately two to four
hours of talk time availability. We believe this generally exceeds the battery
life of handsets using alternative digital or analog technologies.
Third generation technology. In addition, wireless carriers are beginning to
implement a new "third generation," or "3G," technology throughout the industry.
The 3G technology is intended to increase networks' capacity for voice calls and
enable better transmission of high-speed data. Sprint PCS has selected a version
of 3G technology, 1XRTT, for its own networks which requires us to upgrade our
network to provide it. We currently estimate this network upgrade will cost
approximately $35 million, but actual costs could exceed this estimate. To date,
this technology has not been deployed on a commercial basis by Sprint PCS. It is
our belief that CDMA technology is more efficient than GSM or TDMA. As a result,
we believe that, unlike our GSM and TDMA competitors, we will not require
additional spectrum in order to operate our 3G network. Additionally, we believe
our early nationwide deployment of 3G technology will provide us with a
competitive advantage in the market for wireless data services.
Benefits of other technologies. While CDMA has the benefits discussed above,
TDMA networks are generally less expensive when overlaying existing analog
systems. In addition, the GSM technology standard, unlike CDMA, supports a more
robust interoperability standard which more easily allows a network operator to
use equipment from several different vendors in the same network. This, along
with the fact that the GSM technology is currently more widely deployed
throughout the world than CDMA, provides economies of scale for handset and
equipment purchases. A standards process is also underway which will allow
wireless handsets to support analog, TDMA and GSM technologies in a single unit.
Currently, there are no plans to have CDMA handsets that support either the TDMA
or GSM technologies.
COMPETITION
Given the broad geographic coverage of our territory, the competition that
we face from other wireless providers is fragmented. We compete, to varying
degrees, with regional and national cellular, PCS and other wireless service
providers. Currently, we believe our strongest competition is from cellular
providers, many of which have been operating in our markets and building their
customer base for a number of years.
Our largest single competitor is Verizon Wireless, which offers service in
the majority of our markets. We also face significant competition from AT&T
Wireless, which operates in conjunction with its affiliates in almost all of our
markets. After Verizon and AT&T Wireless, our strongest competitors are regional
wireless providers, ALLTEL, Centennial and NTELOS.
The following table lists the material operational competitors known to us
within our various geographic areas:
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PRIMARY OPERATING TYPE OF
GEOGRAPHIC AREA COMPETITORS SERVICE
- --------------- ----------- -------
Ohio markets ALLTEL Cellular
AT&T Wireless Cellular
Verizon Wireless Cellular
Nextel ESMR
Indiana markets Centennial Cellular
CenturyTel Cellular
Verizon Wireless Cellular
VoiceStream PCS
Nextel ESMR
Pennsylvania and New York markets AT&T Wireless Cellular
Verizon Wireless Cellular
VoiceStream PCS
Nextel ESMR
Virginia and West Virginia markets ALLTEL Cellular
AT&T Wireless Cellular
Triton PCS (1) PCS
Verizon Wireless Cellular
NTELOS PCS
Tennessee markets ALLTEL Cellular
Verizon Wireless Cellular
Cingular PCS
Triton PCS (1) PCS
Nextel ESMR
- ----------
(1) Triton PCS in an AT&T Wireless affiliate offering AT&T Wireless and SunCom
co-branded service.
Our primary competitors offer a wireless service that is generally
comparable to our PCS service. However, as a Sprint PCS affiliate, we believe we
are positioned to successfully compete with all of these wireless providers due
to the strength of the Sprint PCS brand name, distribution channels and Sprint
PCS' nationwide CDMA-only network. Verizon Wireless, in particular, lacks a
single technology throughout all of its markets. We also believe that our
primary competitors do not offer 100% digital technology.
Nextel Communications, together with its affiliate Nextel Partners, has
licenses to offer service in the vast majority of our markets and currently
offers service to less than half of our planned covered residents. We believe
Nextel's coverage in many of these markets is focused primarily on highway
coverage as opposed to community coverage.
Our ability to compete effectively with these other providers will depend on
a number of factors, including the continued success of CDMA technology in
providing better call clarity and quality as compared to analog cellular
systems, Sprint PCS' competitive pricing with various options suiting individual
customer's calling needs, the continued expansion and improvement of the Sprint
PCS nationwide network, our extensive direct and indirect sales channels, our
centralized Sprint PCS customer care systems and our selection of handset
options.
Many of our competitors have access to more licensed spectrum than the 10MHz
or 20MHz licensed to Sprint PCS in some of our markets and also have established
infrastructures, marketing programs and brand names. Many of our competitors may
be able to offer coverage in areas not served by our network, or, because of
their calling volumes or their affiliations with, or ownership of, other
wireless providers, may be able to offer roaming rates that are lower than those
offered by Sprint PCS. PCS operators compete with us in providing some or all of
the services available through the Sprint PCS network and may provide services
that we do not. Additionally, we expect existing cellular providers will
continue to upgrade their systems to provide digital wireless communication
services competitive with Sprint PCS.
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We also face limited competition from "resellers" which provide wireless
service to customers but do not hold FCC licenses or own facilities. Instead,
the reseller buys blocks of wireless telephone numbers and capacity from a
licensed carrier and resells service through its own distribution network to the
public. Thus, a reseller is both a customer of a wireless licensee's services
and a competitor of that and other licensees. The FCC requires all cellular and
PCS licensees to permit resale of carrier service to resellers. Although Sprint
PCS is required to resell PCS in our markets, currently there are no resellers
of Sprint PCS in our markets. Any reseller of Sprint PCS in our markets would be
required to pay us for the use of our capacity and their use of the Sprint PCS
service marks in our markets would be restricted to describing their handsets as
operational on the Sprint PCS network.
In addition, we compete with paging, dispatch and other mobile
telecommunications companies in our markets. Potential users of PCS systems may
find their communications needs satisfied by other current and developing
technologies. One or two-way paging or beeper services that feature voice
messaging and data display as well as tone-only service may be adequate for
potential customers who do not need immediate two-way voice communications.
In the future, we expect to face increased competition from entities
providing similar services using other communications technologies, including
satellite-based telecommunications and fixed wireless providers. While few of
these technologies and services are currently operational, others are being
developed or may be developed in the future.
Over the past several years the FCC has auctioned, and will continue to
auction, large amounts of wireless spectrum that could be used to compete with
Sprint PCS service. Based upon increased competition, we anticipate that market
prices for two-way wireless services generally will decline in the future. We
will compete to attract and retain customers principally on the basis of:
o the strength of the Sprint and Sprint PCS brand names, services and
features;
o the location of our markets;
o the size of our territory;
o national network coverage and reliability;
o customer care; and
o pricing.
INTELLECTUAL PROPERTY
"Sprint," the Sprint diamond design logo, "Sprint PCS," "Sprint Personal
Communications Services," "The Clear Alternative to Cellular" and "Experience
the Clear Alternative to Cellular Today" are service marks registered with the
United States Patent and Trademark Office. These service marks are owned by
Sprint. Pursuant to the trademark and service mark license agreements, we have
the right to use, royalty-free, the Sprint and Sprint PCS brand names and the
Sprint diamond design logo and other service marks of Sprint in connection with
marketing, offering and providing licensed services to end-users and resellers,
solely within our territory.
Except in limited instances, Sprint PCS has agreed not to grant to any other
person a right or license to provide or resell, or act as agent for any person
offering, licensed services under the licensed marks in our market areas except
as to Sprint PCS' marketing to national accounts and the limited right of
resellers of Sprint PCS to sell their products and services in our market areas.
In all other instances, Sprint PCS reserves for itself and its affiliates the
right to use the licensed marks in providing its services, subject to its
exclusivity obligations described above, whether within or without our
territory.
The trademark license agreements contain numerous restrictions with respect
to the use and modification of any of the licensed marks. See "The Sprint PCS
Agreements: The Trademark and Service Mark License Agreements."
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This prospectus includes product names, trade names and trademarks of other
companies. We do not have any rights with respect to these product names, trade
names and trademarks.
EMPLOYEES
As of March 31, 2002, we employed 498 full-time employees, including 325 in
sales and marketing, 143 technicians and 30 in executive, finance and
administration. None of our employees are represented by a labor union. We
believe we have good relations with our employees.
PROPERTIES
Our principal executive offices are leased from a subsidiary of Horizon
Telcom and are located at 68 E. Main Street, Chillicothe, Ohio 45601-0480, which
is also the location of our first retail store. We lease an additional 39 retail
stores throughout our territory. We own two switching facilities in Fort Wayne,
Indiana, and Chillicothe, Ohio, and are in the process of constructing two
additional switching centers in Tennessee and Pennsylvania. One of the new
centers will replace the facility in Chillicothe, Ohio. As of December 31, 2001,
we leased 604 on-air towers; we co-locate with other wireless service providers
on approximately 72% of them. We believe our facilities are adequate for our
current operations and are in good condition and additional leased space can be
obtained if needed on commercially reasonable terms.
LEGAL PROCEEDINGS
We are not aware of any pending legal proceedings against us which,
individually or in the aggregate, if adversely determined, would have a material
adverse effect on our financial condition or results of operations.
THE SPRINT PCS AGREEMENTS
The following is a summary of the material terms and provisions of the
Sprint PCS agreements. The summary applies to the Sprint PCS agreements for both
Horizon Personal Communications and Bright PCS except where otherwise indicated.
We have filed the Sprint PCS agreements as exhibits to our filings with the
Securities and Exchange Commission. We urge you to review them carefully.
OVERVIEW OF SPRINT PCS RELATIONSHIP AND AGREEMENTS
We have eight major agreements with Sprint and Sprint PCS (collectively, the
"Sprint PCS Agreements"). Under the Sprint PCS agreements, we exclusively market
PCS services under the Sprint and Sprint PCS brand names in our markets. The
Sprint PCS agreements require us to interface with the Sprint PCS wireless
network by building our network to operate on PCS frequencies licensed to Sprint
PCS in the 1900 MHz range. The Sprint PCS agreements also give us access to
Sprint PCS' equipment discounts, roaming revenue from Sprint PCS customers
traveling into our territory, and various other back office services. The Sprint
PCS agreements provide strategic advantages, including avoiding the need to fund
up-front spectrum acquisition costs and the costs of maintaining billing and
other customer services infrastructure. The Sprint PCS agreements have initial
terms of 20 years with three 10-year renewals which would lengthen the contracts
to a total of 50 years. The Sprint PCS agreements will automatically renew for
each additional 10-year term unless we or Sprint PCS provide the other with two
years' prior written notice to terminate the Sprint PCS agreements. The initial
term of the agreements will expire in 2018.
The agreements consist of one of each of the following for Horizon Personal
Communications and one of each for Bright PCS:
o the management agreement;
o the services agreement;
o the trademark and service mark license agreement with Sprint; and
o the trademark and service mark license agreement with Sprint PCS.
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THE MANAGEMENT AGREEMENT
Under our Sprint PCS agreements, we have agreed to:
o construct and manage a network in our territory in compliance with
Sprint PCS' PCS licenses and the terms of the management agreement;
o distribute, during the term of the management agreement, Sprint PCS
products and services;
o conduct advertising and promotion activities in our territory; and
o manage that portion of Sprint PCS' customer base assigned to our
territory.
Sprint PCS will monitor our network operations and has unconditional access
to our network.
Exclusivity. We are designated as the only person or entity that can manage
or operate a PCS network for Sprint PCS in our territory. Sprint PCS is
prohibited from owning, operating, building or managing another wireless
mobility communications network in our territory while our management agreement
is in place and no event has occurred that would permit the agreement to
terminate. Sprint PCS is permitted under our agreement to make national sales to
companies in our territory, and as required by the FCC, to permit resale of the
Sprint PCS products and services in our territory. We accrue the financial
benefits of either of these activities.
Network build-out. The management agreement specifies the terms of the
Sprint PCS affiliation, including the required network build-out plan. We have
agreed to operate our network to provide for a seamless handoff of a call
initiated in our territory to a neighboring Sprint PCS network.
Under our 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. We and Sprint PCS agreed to an amendment of our build-out requirements,
which extended the date by which we were to launch coverage in several markets.
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 to missing the original
launch date. 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
all of these markets.
Products and services. The management agreement identifies the products and
services that we can offer in our territory. These services include Sprint PCS
consumer and business products and services available as of the date of the
agreements, or as modified by Sprint PCS. We are allowed to sell wireless
products and services that are not Sprint PCS products and services if those
additional products and services do not otherwise violate the terms of the
agreement, cause distribution channel conflicts, materially impede the
development of the Sprint PCS network, cause consumer confusion with Sprint PCS'
products and services or violate the trademark lease agreements. We may
cross-sell services such as Internet access, customer premise equipment and
prepaid phone cards with Sprint, Sprint PCS and other Sprint PCS affiliates. If
we decide to use third parties to provide these services, we must give Sprint
PCS an opportunity to provide the services on the same terms and conditions. We
cannot offer wireless local loop services specifically designed for the
competitive local exchange market in areas where Sprint owns the local exchange
carrier unless we name the Sprint owned local exchange carrier as the exclusive
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distributor or Sprint PCS approves the terms and conditions. Subject to
agreements existing before we became a Sprint PCS affiliate, we are required to
use Sprint's long distance service which we can buy at wholesale rates.
Service pricing. We must offer Sprint PCS subscriber pricing plans
designated for regional or national offerings, including Sprint PCS' Free and
Clear plans. We are permitted to establish our own local price plans for Sprint
PCS' products and services offered only in our territory, subject to the terms
of the agreement, consistency with Sprint PCS' regional and national pricing
plans, regulatory requirements, capability and cost of implementing the rate
plans in Sprint PCS' systems and Sprint PCS' approval.
Fees. We are entitled to receive from Sprint PCS an amount equal to 92% of
collected revenues under the Sprint PCS agreements. Collected revenues include
revenue from Sprint PCS subscribers based in our territory, excluding outbound
roaming, and inbound non-Sprint PCS roaming. Except in the case of taxes, we are
entitled to 100% of the following revenues that are not considered collected
revenues:
o outbound non-Sprint PCS roaming revenue;
o inbound and outbound Sprint PCS roaming fees;
o proceeds from the sales of handsets and accessories through our
distribution channels;
o proceeds from sales not in the ordinary course of business; and
o amounts collected with respect to taxes.
Roaming. Although many Sprint PCS subscribers will purchase a bundled
pricing plan that allows roaming anywhere on the Sprint PCS' and its affiliates'
network without incremental roaming charges, we will earn roaming revenues from
every minute that a Sprint PCS subscriber not based in our territory and any
non-Sprint PCS subscriber uses our network. We will earn revenues from Sprint
PCS based on an established per-minute rate for Sprint PCS' or its affiliates'
subscribers roaming in our territory. Similarly, we will pay for every minute
our own subscribers use the Sprint PCS nationwide network outside our territory.
The analog roaming rate onto a non-Sprint PCS provider's network is set under
Sprint PCS' third-party roaming agreements.
Advertising and promotions. Sprint PCS is responsible for all national
advertising and promotion of the Sprint PCS products and services. We are
responsible for advertising and promotion in our territory, including the pro
rata cost of any promotion or advertising done by any third-party retailers in
our territory pursuant to a national cooperative advertising agreement with
Sprint. Sprint PCS' service area includes the urban markets around our
territory. Sprint PCS will pay for advertising in these markets. Given the
proximity of these markets to ours, we expect considerable spill-over from
Sprint PCS' advertising in surrounding urban markets.
Program requirements. We must comply with Sprint PCS' program requirements
for technical standards, customer service standards, national and regional
distribution and national accounts programs to the extent that Sprint PCS meets
these requirements. Sprint PCS can adjust the program requirements from time to
time. We have the right to appeal to Sprint PCS' management adjustments which
could cause an unreasonable increase in cost to us if the adjustment: (1) causes
us to incur a cost exceeding 5% of the sum of our equity plus our outstanding
long-term debt, or (2) causes our long-term operating expenses to increase by
more than 5% (10% for Bright PCS) on a net present value basis. If Sprint PCS
denies our appeal, we must then comply with the program adjustment, or Sprint
PCS has the right to exercise the termination rights described below. There is
no cross-default provision between the Sprint PCS agreements for Horizon
Personal Communications and the Sprint PCS agreements for Bright PCS.
Non-competition. We may not offer Sprint PCS products and services outside
our territory without the prior written approval of Sprint PCS. Within our
territory we may offer, market or promote telecommunications products and
services only under the Sprint PCS brands, our own brand, brands of related
parties of ours or other products and services approved under the management
agreement, except that no brand of a significant competitor of Sprint PCS or its
related parties may be used for those products and services. To the extent we
have or obtain licenses to provide PCS services outside our territory, we may
not use the spectrum to offer Sprint PCS products and services without prior
written consent from Sprint PCS.
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Termination of management agreement. The management agreement can be
terminated as a result of:
o termination of Sprint PCS' PCS licenses;
o an uncured breach under the management agreement;
o bankruptcy of a party to the management agreement;
o the management agreement not complying with any applicable law in any
material respect;
o the termination of either of the trademark and service mark license
agreements; or
o our failure to obtain the financing necessary for the build-out of our
network and for our working capital needs.
The termination or non-renewal of either of the management agreements
triggers our rights and those of Sprint PCS, as described below.
If we have the right to terminate the management agreement because of an
event of termination caused by a Sprint PCS breach under the management
agreement, we may generally:
o require Sprint PCS to purchase all of our operating assets used in
connection with our network for an amount equal to at least 80% of our
Entire Business Value as defined below;
o if Sprint PCS is the licensee for 20MHz or more of the spectrum on the
date the management agreement was executed, require Sprint PCS to sell
to us, subject to governmental approval, up to 10MHz of licensed
spectrum for an amount equal to the greater of (1) the original cost
to Sprint PCS of the license plus any microwave relocation costs paid
by Sprint PCS or (2) 9% of our Entire Business Value; or
o sue Sprint PCS for damages or submit the matter to arbitration and
thereby not terminate the management agreement.
If Sprint PCS has the right to terminate the management agreement because of
an event of termination caused by us, Sprint PCS may generally:
o require us to sell our operating assets to Sprint PCS for an amount
equal to 72% of our Entire Business Value;
o require us to purchase, subject to governmental approval, up to 10MHz
of licensed spectrum for an amount equal to the greater of (1) the
original cost to Sprint PCS of the license plus any microwave
relocation costs paid by Sprint or (2) 10% of our Entire Business
Value;
o take any action as Sprint PCS deems necessary to cure our breach of
the management agreement, including assuming responsibility for and
operating our network; or
o sue us for damages or submit the matter to arbitration and thereby not
terminate the management agreement.
Non-renewal. If Sprint PCS gives us timely notice that it does not intend
to renew the management agreement, we may:
o require Sprint PCS to purchase all of our operating assets used in
connection with our network for an amount equal to 80% of our Entire
Business Value; or
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o if Sprint PCS is the licensee for 20MHz or more of the spectrum on the
date the management agreement was executed, require Sprint PCS to sell
to us, subject to governmental approval, up to 10MHz of licensed
spectrum for an amount equal to the greater of (1) the original cost
to Sprint PCS of the license plus any microwave relocation costs paid
by Sprint PCS or (2) 10% of our Entire Business Value.
If we give Sprint PCS timely notice of non-renewal, or we both give notice
of non-renewal, or the management agreement can be terminated for failure to
comply with legal requirements or regulatory considerations, Sprint PCS may:
o purchase all of our operating assets for an amount equal to 80% of our
Entire Business Value; or
o require us to purchase, subject to governmental approval, up to 10 MHz
of licensed spectrum for an amount equal to the greater of (1) the
original cost to Sprint PCS of the license plus any microwave
relocation costs paid by Sprint PCS or (2) 10% of our Entire Business
Value.
Determination of Entire Business Value. If the Entire Business Value is to
be determined, we and Sprint PCS will each select one independent appraiser and
the two appraisers will select a third appraiser. The three appraisers will
determine the Entire Business Value on a going concern basis using the following
guidelines:
o the Entire Business Value is based on the price a willing buyer would
pay a willing seller for the entire on-going business;
o then-current customary means of valuing a wireless telecommunications
business will be used;
o the business is conducted under the Sprint and Sprint PCS brands and
the Sprint PCS agreements;
o that we own the spectrum and frequencies presently owned by Sprint PCS
that we use and are subject to the Sprint PCS agreements; and
o the valuation will not include any value for businesses not directly
related to the Sprint PCS products and services, and these businesses
will not be included in the sale.
Indemnification. We have agreed to indemnify Sprint PCS and its directors,
employees and agents and related parties of Sprint PCS and their directors,
employees and agents against any and all claims against any of these parties
arising from our violation of any law, a breach by us of any representation,
warranty or covenant contained in the management agreement or any other
agreement between us and Sprint PCS, our ownership of the operating assets or
the actions or the failure to act of anyone who is employed or hired by us in
the performance of any work under the management agreement, except we will not
indemnify Sprint PCS for any claims arising solely from their negligence or
willful misconduct. Sprint PCS has agreed to indemnify us and our directors,
employees and agents against all claims against any of these parties arising
from Sprint PCS' violation of any law, from Sprint PCS' breach of any
representation, warranty or covenant contained in the management agreement or
any other agreement between Sprint PCS and us, or the actions or the failure to
act of anyone who is employed or hired by Sprint PCS in the performance of any
work under the management agreement except Sprint PCS will not indemnify us for
any claims arising solely from our negligence or willful misconduct.
Sprint PCS warrants. In connection with Sprint PCS' grant to us of our
markets in Pennsylvania, New York, Ohio and New Jersey, we agreed to grant to
Sprint PCS warrants to acquire shares of our class A common stock.
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THE SERVICES AGREEMENTS
The services agreements outline back office services provided by Sprint PCS
and available to us at established rates. Sprint PCS can change any or all of
the service rates one time in each twelve month period. Some of the available
services include: billing, customer care, activation, credit checks, handset
logistics, home locator record, voice mail, prepaid services, directory
assistance, operator services, roaming fees, roaming clearinghouse fees,
interconnect fees and inter-service area fees. Sprint PCS offers three packages
of available services. Each package identifies which services must be purchased
from Sprint PCS and which may be purchased from a vendor or provided in-house.
Essentially, services such as billing, activation and customer care must either
all be purchased from Sprint PCS or we may provide those services ourselves.
When we signed our original Sprint PCS agreements, we elected to provide
billing, activation and customer care services on our own. In connection with
the May 2000 grant by Sprint PCS of additional markets to us, we agreed to
change our arrangement under the services agreement so that Sprint PCS will
provide activation, billing and customer care. Accordingly, in June 2001, we
discontinued the use of our own activation, billing, and customer care
capabilities. We now purchase those services from Sprint PCS. For our Bright PCS
markets and our new markets in Pennsylvania, New York and New Jersey, we
launched these markets using Sprint PCS billing and customer care services.
Sprint PCS may contract with third parties to provide expertise and services
identical or similar to those to be made available or provided to us. We have
agreed not to use the services received under the services agreement in
connection with any other business or outside our territory. We may discontinue
use of any service upon three months' prior written notice. Sprint PCS may
discontinue a service provided that Sprint PCS provides us with nine months'
prior notice.
We have agreed with Sprint PCS to indemnify each other as well as officers,
directors, employees and other related parties and their officers, directors and
employees for violations of law or the services agreement except for any
liabilities resulting from the indemnitee's negligence or willful misconduct.
The services agreement also provides that no party to the agreement will be
liable to the other party for special, indirect, incidental, exemplary,
consequential or punitive damages, or loss of profits arising from the
relationship of the parties or the conduct of business under, or breach of, the
services agreement except as may otherwise be required by the indemnification
provisions. The services agreement automatically terminates upon termination of
the management agreement and neither party may terminate the services agreement
for any reason other than the termination of the management agreement.
THE TRADEMARK AND SERVICE MARK LICENSE AGREEMENTS
We have non-transferable, royalty-free licenses to use the Sprint and Sprint
PCS brand names and "diamond" symbol, and several other U.S. trademarks and
service marks such as "The Clear Alternative to Cellular" and "Clear Across the
Nation" on Sprint PCS products and services. We believe that the Sprint and
Sprint PCS brand names and symbols enjoy a very high degree of awareness,
providing us an immediate benefit in the market place. Our use of the licensed
marks is subject to our adherence to quality standards determined by Sprint and
Sprint PCS and use of the licensed marks in a manner which would not reflect
adversely on the image of quality symbolized by the licensed marks. We have
agreed to promptly notify Sprint and Sprint PCS of any infringement of any of
the licensed marks within our territory of which we become aware and to provide
assistance to Sprint and Sprint PCS in connection with Sprint's and Sprint PCS'
enforcement of their respective rights. We have agreed with Sprint and Sprint
PCS to indemnify each other for losses incurred in connection with a material
breach of the trademark license agreements. In addition, we have agreed to
indemnify Sprint and Sprint PCS from any loss suffered by reason of our use of
the licensed marks or marketing, promotion, advertisement, distribution, lease
or sale of any Sprint or Sprint PCS products and services other than losses
arising solely out of our use of the licensed marks in compliance with the
contractual guidelines.
Sprint and Sprint PCS can terminate the trademark and service mark license
agreements if we file for bankruptcy, materially breach the agreement or our
management agreement is terminated. We can terminate the trademark and service
mark license agreements upon Sprint's or Sprint PCS' abandonment of the licensed
marks or if Sprint or Sprint PCS files for bankruptcy, or the management
agreement is terminated.
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CONSENT AND AGREEMENT FOR THE BENEFIT OF THE HOLDERS OF THE SECURED CREDIT
FACILITY
On September 26, 2000, we entered into a secured credit facility (the
"secured credit facility") with a group of financial institutions to provide an
aggregate commitment, subject to certain conditions, of up to $250 million. The
secured credit facility is collateralized by a perfected security interest in
substantially all of our tangible and intangible current and future assets,
including an assignment of our affiliation agreements with Sprint PCS and a
pledge of all of the capital stock of Horizon PCS and its subsidiaries.
Sprint PCS entered into a consent and agreement (the "secured consent") for
the benefit of the holders of the indebtedness under our senior secured credit
facility. This agreement was acknowledged by us, and modified Sprint PCS' rights
and remedies under our Sprint PCS agreements, for the benefit of the existing
and future holders of indebtedness under our secured credit facility and any
refinancing of the secured credit facility, which was a condition to the funding
of any amounts under our secured credit facility.
The secured consent principally provides for the following:
o Sprint PCS' consent to the pledge of substantially all of our assets,
including our rights in the Sprint PCS agreements;
o Sprint PCS' consent to the pledge of all our equity interests in
Horizon Personal Communications, Inc. and the pledge by Horizon
Personal Communications, Inc. of all of its equity interests in each
of its subsidiaries;
o for redirection of payments due to us under our Sprint PCS agreements
to the administrative agent during the continuation of our default
under our senior secured credit facility;
o for Sprint PCS to maintain 10 MHz of PCS spectrum in all of our
markets until our senior secured credit facility is satisfied or our
operating assets are sold after our default under our senior secured
credit facility;
o for Sprint PCS and the administrative agent to provide each other with
notices of default by us under the Sprint PCS agreements and the
secured credit facility, respectively; and
o the ability to appoint interim replacements, including Sprint PCS or a
designee of the administrative agent, to operate our portion of the
Sprint PCS network under the Sprint PCS agreements after an
acceleration of or event of default under our secured credit facility
or an event of termination under the Sprint PCS agreements.
Sprint PCS' right to purchase on acceleration of amounts outstanding under
our secured credit facility. Subject to the requirements of applicable law, so
long as our secured credit facility remains outstanding, Sprint PCS has the
right to purchase our operating assets or pledged equity of our operating
subsidiaries, upon its receipt of notice of an acceleration of our secured
credit facility upon the following terms:
o Sprint PCS elects to make such a purchase of our operating assets
within a specified period;
o the purchase price of our operating assets is the greater of an amount
equal to 72% of our "Entire Business Value" or the amount we owe under
our secured credit facility;
o if Sprint PCS has given notice of its intention to exercise the
purchase right for our operating assets, then the administrative agent
is prohibited from enforcing its security interest for a time period
after the acceleration or until Sprint PCS rescinds its intention to
purchase; and
o if we receive a written offer within a time period after acceleration
that is acceptable to us to purchase our operating assets or pledged
equity of our operating subsidiaries after the acceleration, then
Sprint PCS has the right to purchase our operating assets or pledged
equity of our operating subsidiaries on terms at least as favorable to
us as the offer we receive.
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Sale of operating assets to third parties. If Sprint PCS does not purchase
our operating assets after an acceleration of the obligations under our secured
credit facility, then the administrative agent will be able to sell the
operating assets, subject to the requirements of applicable law, including the
law relating to foreclosures of security interests. The administrative agent
will have two options:
o to sell the assets to an entity that meets the requirements to be our
successor under the Sprint PCS agreements; or
o to sell the assets to any other third-party (including competitors of
Sprint PCS), principally subject to the condition that Sprint PCS does
not have to accept the third party as a Sprint PCS affiliate and may
terminate our Sprint PCS agreements.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
SENIOR SECURED CREDIT FACILITY
Our wholly-owned subsidiaries, Horizon Personal Communications, Inc. and
Bright Personal Communications Services, LLC, entered into the secured credit
facility with a syndicate of banks led by First Union National Bank for a $250.0
million facility. This facility constitutes senior debt secured by a first
priority security interest in substantially all of our assets. The senior
secured credit agreement provides that we and all of our current and future
subsidiaries will guarantee this secured credit facility.
Amount and purpose. The secured credit facility provides for a:
o $95.0 million revolving credit commitment; and
o $155.0 million term loan commitment consisting of a $105.0 million
Term Loan A and $50.0 million Term Loan B.
We may borrow up to an additional $50.0 million upon approval of the lenders
so long as:
o the additional facility has a final maturity date no earlier than
March 31, 2009;
o each lender under the credit agreement is offered the opportunity (but
is not obligated) to issue a commitment for its pro rata share of the
additional facility; and
o the additional facility will constitute obligations under the secured
credit agreement and will rank pari passu with the other obligations
under the senior secured credit agreement.
The proceeds of the term loan will be used to help finance:
o the direct cost of the construction and operation of a regional
digital wireless telecommunications network on the Sprint PCS system;
o repayment of some existing indebtedness;
o transaction costs and expenses; and
o working capital and other general corporate purposes.
Conditions to borrowing. Each borrowing under the senior secured credit
facility is subject to the conditions that the representations and warranties
continue to be true and correct, and that there is no default or event of
default under the loan documents and that the most current officer's compliance
certificate shall have been delivered.
Interest. Interest on the term loans accrues, at our option, either at:
o a rate based on London Interbank Offered Rate (LIBOR); or
o an alternative base rate, which is the greatest of the prime rate as
specified in the senior secured credit facility, or the federal funds
rate plus 1/2%, plus the following margin percentages:
LIBOR ALTERNATE BASE
BASED LOANS RATE LOANS
----------- --------------
Term loan A.......................... 3.75% 2.75%
Term loan B.......................... 4.25% 3.25%
Revolving credit loans............... 3.75% 2.75%
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After April 1, 2004 the margin percentage will be reduced to vary between
1.25% and 3.25% for alternate base rate loans and 2.25% and 4.25% for
LIBOR-based loans depending on our ratio of debt to earnings before interest,
taxes, depreciation, amortization plus other adjustments (EBITDA).
If an event of default under the loan documents exists, interest on any
amounts outstanding accrues at a rate per annum equal to 2.0% above the rate
otherwise applicable.
Commitment fees. The secured credit facility requires us to pay a quarterly
commitment fee for the unused portion of the facility. The commitment fee varies
between an annual rate of 0.75% and 1.375% of the unused commitments. We are
also required to pay a separate agent's fee to the administrative agent.
Scheduled payments and commitment reductions. The revolving commitment
expires and all unpaid revolving loans become due on or about September 30,
2008. Generally, amounts repaid under the revolving credit facility may be
reborrowed until expiration of the revolving credit commitment; provided that
the revolving commitment shall be permanently reduced in eighteen quarterly
installments commencing on June 30, 2004 as follows:
o for the four quarters commencing with the fiscal quarter ending June
30, 2004, $2,375,000;
o for the following quarters five and six, $4,750,000;
o for the following quarters seven through fourteen, $5,937,500; and
o for the last four quarters, $7,125,000.
The Term Loan A shall amortize in eighteen quarterly installments commencing
on June 30, 2004 with the final installment due on or about September 30, 2008
as follows:
o for the four quarters commencing with the calendar quarter ending June
30, 2004, $2,625,000;
o for the following quarters five and six, $5,250,000;
o for the following quarters seven through fourteen, $6,562,500; and
o for the last four quarters, $7,875,000.
The Term Loan B shall amortize in twenty quarterly installments commencing
on June 30, 2004 with the final installment due on or about March 31, 2009 as
follows:
o for the eighteen quarters commencing with the calendar quarter ending
June 30, 2004, $125,000; and
o for the last two quarters, $23,875,000.
Optional prepayments. We may voluntarily prepay any of the loans at any
time. Generally, amounts repaid under the revolving credit facility may be
reborrowed until expiration or reduction of the reducing credit facility as
described above.
Mandatory prepayments. We must make mandatory prepayments on the term loans
and the revolving credit loans, and the loan commitments will be reduced, in an
aggregate amount equal to:
o 50.0% of excess cash flow in each fiscal year beginning in 2003;
o 100.0% of the net proceeds of asset sales other than in the ordinary
course of business, except if no event of default under the senior
secured credit facility exists to the extent not otherwise reinvested
in telecommunications assets within 180 days of the receipt of the
proceeds;
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o 100.0% of the net cash proceeds of debt issuances, except for the
issuance of the notes up to proceeds of $200.0 million and other
permitted debt;
o 50.0% of the net cash proceeds of specified issuances of equity
securities, other than proceeds from the exercise of warrants issued
in connection with the senior discount notes, proceeds from an initial
public offering of our common stock and proceeds used to acquire
additional telecommunications assets within 18 months of the receipt
of the proceeds or used to redeem up to 35.0% of the outstanding
principal amount of the notes in each case if no event of default
under the senior secured credit facility exists; and
o 100.0% of insurance proceeds not reinvested within 180 days.
Collateral and guarantors. The senior secured credit facility is
collateralized by a perfected security interest in substantially all of our and
our subsidiaries' tangible and intangible current and future assets, including
an assignment of our affiliate agreements with Sprint PCS and a pledge of all of
the capital stock of our subsidiaries. We will guarantee the obligations under
the senior secured credit facility and pledge the stock of Horizon Personal
Communications, Inc.
Covenants. The senior secured credit facility contains customary covenants,
including covenants limiting indebtedness, liens, dividends and distributions
on, and redemptions and repurchases of, capital stock and other similar payments
with respect to capital stock, prepayments of and amendments to these high yield
notes, and the acquisition and disposition of assets. The senior secured credit
facility also requires that we comply with specified financial covenants during
the term of the senior secured credit facility as follows:
o For the period commencing with the date of closing of the senior
secured credit facilities through March 31, 2004, a maximum ratio of
total indebtedness to total capital, a maximum ratio of total senior
indebtedness to total capital, minimum EBITDA (as defined in the
senior secured credit facility), minimum total revenue, maximum
capital expenditures, minimum number of subscribers, and coverage
requirements for the population in our market areas.
o For the period commencing with April 1, 2004, until termination of the
senior secured credit facilities, a maximum total debt to EBITDA, a
maximum senior debt to EBITDA, a minimum interest coverage ratio, a
minimum fixed charge coverage ratio and maximum capital expenditures.
We recently amended our senior secured credit facility. Pursuant to the
amendment, our operating subsidiaries will be permitted to make distributions to
us to make regularly scheduled payments of interest on the notes, so long as no
default or event of default has occurred and is continuing under the senior
secured credit facility; provided, however, that no such distributions will be
permitted until the full depletion of the interest escrow for the notes. In
addition, the restrictions on our ability to incur additional indebtedness were
modified to permit the issuance of the outstanding notes. We also amended
certain financial covenants under the senior secured credit facility.
Events of default. Our senior secured credit facility provides for customary
events of default, including non-payment, judgment defaults, breaches of
covenants, making misleading or inaccurate representations and warranties,
cross-defaults with other debt, changes in control, default under material
contracts and affiliate agreements with Sprint PCS, and events of bankruptcy.
Upon the existence of an event of default, our lenders may declare our
obligations due and payable and terminate the revolving loan commitment.
Dividends and distributions. The senior secured credit facility restricts
our ability to pay dividends and make other cash distributions. This restriction
will not prevent Horizon Personal Communications, Inc. or Bright Personal
Communications Services, LLC from making dividends to us to service scheduled
cash interest payments on the notes provided no event of default or event which,
with the passage of time or the giving of notice or both, would constitute an
event of default under the senior secured credit facility at the time of any
dividend of this type or would result from that dividend.
Consent and agreement. Sprint PCS entered into a consent and agreement for
the benefit of the senior secured lenders. The terms of the consent and
agreement are described under "The Sprint PCS Agreements."
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SENIOR DISCOUNT NOTES
On September 26, 2000, we issued 295,000 units consisting of senior discount
notes due October 1, 2010 and warrants to purchase 3,805,500 shares of our class
A common stock, which yielded gross proceeds of $149.7 million. The senior
discount notes were issued under an indenture, dated as of September 26, 2000,
by and among us, Horizon Personal Communications, Inc. and Bright Personal
Communications Services, LLC and Wells Fargo Bank Minnesota, National
Association, as trustee. The senior discount notes:
o mature on October 1, 2010 and are limited to an aggregate principal
amount at maturity of $295.0 million;
o are general, unsecured obligations of us, equal in right of payment to
all of our senior debt and senior in right of payment to all of our
subordinated debt;
o accrue interest at a rate of 14% per annum, computed on a semi-annual
basis, calculated from September 26, 2000, will not bear interest
payable in cash prior to April 1, 2006, and will bear interest payable
semi-annually in cash on each April 1 and October 1, beginning April
1, 2006; and
o are guaranteed by all of our current and future domestic subsidiaries
on a senior subordinated basis.
We may elect to redeem all or part of the senior discount notes at any time
on or after October 1, 2005 and before maturity, at the following redemption
prices:
REDEMPTION PRICE
PER $1,000 OF
YEAR BEGINNING PRINCIPAL AMOUNT
-------------- ----------------
October 1, 2005........................................ $ 1,070.00
October 1, 2006........................................ 1,046.67
October 1, 2007........................................ 1,023.33
October 1, 2008 and thereafter......................... 1,000.00
In addition, on or before October 1, 2003, we may redeem up to 35% of the
principal amount at maturity of senior discount notes issued under the
indenture, at a redemption price equal to $1,140 for each $1,000 of accreted
value of a senior discount note to the redemption date, with the net proceeds of
one or more equity offerings. However, at least 65% of the aggregate principal
amount at maturity of senior discount notes issued under the indenture must
remain outstanding immediately after giving effect to the redemption.
Our senior secured credit facility prohibits the purchase of outstanding
notes before repayment of the borrowings under the credit facility.
We paid fees to our initial purchasers of the senior discount notes and
warrants of approximately $6.1 million which will be amortized as interest
expense over the term of the financing using the effective interest method.
The senior discount notes are guaranteed by our existing subsidiaries,
Horizon Personal Communications, Inc. and Bright Personal Communications
Services, LLC, and will be guaranteed by all of our future domestic restricted
subsidiaries. The guarantees are general unsecured obligations. Each guarantor
unconditionally guarantees, jointly and severally, on a senior subordinated
basis, the full and punctual payment of principal of, and premium and liquidated
damages, if any, and interest on the senior discount notes when due. All of our
current subsidiaries are guarantors. If we create or acquire unrestricted
subsidiaries and foreign restricted subsidiaries, these subsidiaries need not be
guarantors. The ability of holders of our senior discount notes to receive
payment on the guarantees is subordinated in right of payment to all senior
debt, including all obligations under our new senior secured credit facility.
Holders of the senior discount notes have the right to require us to
repurchase all or part of the senior discount notes at a premium upon the
occurrence of events constituting a change in control of Horizon. Any of these
repurchases would be for cash at an aggregate price of 101% of the accreted
value of the senior discount notes to be repurchased, if the repurchase were
prior to October 1, 2005 or, if the repurchase were on or after October 1, 2005,
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at an aggregate price of 101% of the aggregate principal amount thereof plus
accrued and unpaid interest thereon. Under the indenture governing the senior
discount notes, a change of control includes:
o sale or other disposition of substantially all of our and our
subsidiaries' assets;
o our adoption of a plan of liquidation or dissolution;
o consummation of a transaction in which any person or group, other than
certain current stockholders or their affiliates, become the
beneficial owner of more than 50% of our voting stock;
o continuing directors ceasing to comprise a majority of our board of
directors; and
o a merger or consolidation of Horizon in which our voting stock is
converted into or exchanged for cash, securities or other property,
unless our voting stock is converted into or exchanged for a majority
of the outstanding shares of one of the other parties to the merger or
consolidation.
The indenture governing the senior discount notes contains covenants that
principally limit our ability and the ability of our subsidiary and future
subsidiaries to:
o pay dividends, redeem capital stock or make other restricted payments
or investments;
o incur additional indebtedness or issue preferred stock;
o create liens on assets;
o merge, consolidate or dispose of assets;
o dispose of less than all of the equity in a wholly owned subsidiary;
o engage in any business other than PCS telecommunications and related
or ancillary businesses;
o enter into transactions with affiliates; and
o enter into sale and leaseback transactions.
These covenants are substantially identical to the covenants in the
indenture governing the notes offered hereby.
Events of default under the senior discount notes include the following:
o default in the payment when due of interest on the senior discount
notes;
o default in payment when due of the principal of or premium, if any, on
the senior discount notes;
o our failure, or the failure of any of our subsidiaries, to comply with
provisions of the senior discount notes indenture relating to change
of control and with limitations on asset sales;
o our failure, or the failure of any of our subsidiaries, to comply with
any other provisions of the indenture or the pledge agreement relating
to the senior discount notes;
o our default, or default by any of our subsidiaries, with respect to
other debt of $5.0 million or more, which default either is caused by
failure to pay the principal or premium thereof or results in
acceleration of the other debt;
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o our failure, or failure of any of our subsidiaries, to pay within 60
days a final judgment exceeding $5.0 million;
o a judicial determination rendering any of the guarantees unenforceable
or a guarantor's denial or disaffirmance of its obligations under the
guarantee;
o bankruptcy or insolvency of Horizon PCS or any of our subsidiaries;
and
o the occurrence of any event that causes, subject to any applicable
grace period, an event of termination under the Sprint PCS Agreements.
In the case of an event of default arising from events of bankruptcy or
insolvency, all outstanding senior discount notes would become due and payable
immediately. If any other event of default occurs and is continuing, the trustee
for the senior subordinated discount note holders or the holders of at least 25%
in accreted value or principal amount, as the case may be, of the then
outstanding senior discount notes may declare the notes to be due and payable
immediately.
76
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following are our directors and executive officers:
NAME AGE POSITION
- ---- ---- --------
William A. McKell.................. 41 Chairman of the Board, President and
Chief Executive Officer
Peter M. Holland................... 36 Director, Chief Financial Officer
Alan G. Morse...................... 43 Chief Operating Officer
Joseph E. Corbin................... 47 Vice President, Engineering and
Operations
Joseph J. Watson................... 36 Vice President, Sales and Marketing
Monesa S. Skocik................... 40 Vice President, External Affairs
Robert A. Katz..................... 33 Director
Thomas McKell...................... 66 Director
Phoebe H. McKell................... 55 Director
Lonnie D. Pedersen................. 44 Director
Eric L. Zinterhofer................ 31 Director
William A. McKell has served as Chairman of the Board, President and Chief
Executive Officer of Horizon PCS since its inception in April 2000 and has
served as President, Chief Executive Officer and Chairman of the Board of
Horizon Personal Communications since May 1996 and as President of Bright PCS
since its formation in September 1999. Mr. McKell has 14 years of
telecommunications experience. Mr. McKell served as Vice President of Network
Services from January 1996 to April 1996 and Director of Network Services from
August 1994 to December 1995 for The Chillicothe Telephone Company. Mr. McKell
is a graduate of Ohio Northern University and is the son of Thomas McKell.
Peter M. Holland has served as the Chief Financial Officer of Horizon PCS
since its inception in April 2000 and has served as the Chief Financial Officer
of Horizon Personal Communications since November 1999. Mr. Holland has served
as Vice President of Finance and Treasurer of Horizon Telcom since November
1999. Mr. Holland has been a member of the management committee of Bright PCS
since its formation in September 1999. Mr. Holland has nearly 14 years of
telecommunications experience. From May 1996 to December 1999, Mr. Holland was a
principal and owner of The Pinnacle Group located in Langley, Washington.
Pinnacle provides strategic business planning and regulatory consulting services
to independent wireless and wireline companies, including Horizon PCS. Prior to
joining Pinnacle in May 1996, Mr. Holland was a manager in Nextel
Communications' Business Development and Corporate Strategy groups. Mr. Holland
started his career in telecommunications with Ernst & Young's telecommunications
consulting group and is a Certified Public Accountant. Mr. Holland received his
Bachelor of Business Administration with an accounting concentration from
Pacific Lutheran University.
Alan G. Morse was appointed Chief Operating Officer of Horizon PCS on March
1, 2002. Previously, Mr. Morse was chief operating officer of TelePacific
Communications, Inc., an integrated telecommunications provider operating in
California and Nevada. Prior to that, he was area vice president for Sprint PCS,
where he managed the buildout, launch and operation of Sprint PCS businesses in
Cleveland, Cincinnati, Columbus and Indianapolis. He has held management
positions with Nextel Communications, Inc., Lightbridge, Inc., and New Par, Inc.
(Cellular One of Ohio and Michigan). Mr. Morse earned a Bachelor of Arts in
social and behavioral sciences and a minor in marketing from The Ohio State
University.
Joseph E. Corbin has served as Vice President, Engineering and Operations
since June 2001. He previously served as Vice President of Technology of Horizon
PCS from its inception in April 2000 and of Horizon Personal Communications
since May 1996. He is responsible for the engineering, build-out and operations
of our PCS network. Mr. Corbin also was Manager of Information Technology for
The Chillicothe Telephone Company and then Horizon Services from January 1993 to
April 2000 and has been in the telecommunications industry for 23 years
including various management and technical positions at The Chillicothe
Telephone Company.
Joseph J. Watson has served as Vice President, Sales and Marketing, since
August 2000. He served as Vice President of Business Development of Horizon PCS
since its inception in April 2000 and of Horizon Personal Communications since
August 1999. Mr. Watson is responsible for all of our sales and marketing
efforts and regulatory matters. From May 1996 to August 1999, Mr. Watson held
various senior management positions with Horizon Personal Communications,
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including the positions of Vice President of Administration, Director of Finance
and General Manager -- Horizon Long Distance. Mr. Watson has been in the
telecommunications industry for eight years including various management
positions at The Chillicothe Telephone Company and sales positions at Cincinnati
Bell Long Distance. Mr. Watson is a graduate of Ohio University's School of
Telecommunications.
Monesa S. Skocik has served as a Vice President of Horizon PCS since its
inception in April 2000 and of Horizon Personal Communications since August
1999. Ms. Skocik has over four years of telecommunications experience. Ms.
Skocik is responsible for our coordination, management and implementation of
Sprint PCS new product launches, compliance monitoring and other corporate
customer service functions. Since March 1997, Ms. Skocik held various positions
with Horizon Personal Communications, including Vice President of Customer
Operations, Director-Customer Service and Manager-Customer Care. From August
1995 to February 1997, Ms. Skocik was the Administrator for Riverside
Professional Corporation, Inc., a physician medical facility, where she was
responsible for all operational aspects of the practice. Ms. Skocik is a
graduate of The Ohio State University and received a master's degree in
Communications from Ohio University.
Robert A. Katz was appointed a director of Horizon PCS in September 2000.
Mr. Katz is a senior principal of Apollo Advisors, with which he has been
associated since 1990, and which, together with affiliated investment managers,
manages the Apollo investment funds, including Apollo Investment Fund IV, L.P.
Mr. Katz is also a director of Aris Industries, Inc., Clark Retail Group, Inc.,
Quality Distribution, Inc., Vail Resorts, Inc. and Vinciv Corporation. Mr. Katz
was appointed to the board pursuant to the terms of the Investors Rights and
Voting Agreement entered into in connection with the sale of convertible
preferred stock in September 2000. See "Certain Relationships and Related
Transactions." Mr. Katz received a Bachelor of Science in Economics from the
University of Pennsylvania.
Thomas McKell has served as the President and a Director of Horizon Telcom
since its inception in 1996 and of The Chillicothe Telephone Company since 1988.
Mr. McKell has 46 years of telecommunications experience and received a Bachelor
of Science in Electrical Engineering. Mr. McKell is the father of William A.
McKell.
Phoebe H. McKell has served as the President of Horizon Services since its
inception in 1996. Ms. McKell has 23 years of telecommunications experience.
From 1989 to 1996, she was Director of Administration for The Chillicothe
Telephone Company. Ms. McKell is the niece of Thomas McKell.
Lonnie D. Pedersen has served as President of Telephone Service Company
since 1993. Mr. Pedersen has 23 years of telecommunications experience. He began
his career in the Air Force and has since held management positions in the
independent telephone industry in Iowa and Ohio. Mr. Pedersen has served as
President of the Rural Iowa Independent Telephone Association and is currently
on the board of the Ohio Telecommunications Industry Association. He is also
director and president of Com Net, a consortium of companies that provide
Internet service (bright.net), long distance resale and other telecommunications
services. Mr. Pedersen has served as a director of Minster Bank, a community
bank based in Minster, Ohio since 1995. Mr. Pedersen was appointed to the board
pursuant to the terms of our agreement to purchase the remaining 74% of Bright
PCS. Prior to the Bright PCS acquisition, Mr. Pedersen was Vice President of
Bright PCS and served as a member of the Bright PCS management committee. Mr.
Pedersen received his Bachelor of Arts in business administration from Buena
Vista University and has an associate degree in Technology from Fort Steilacoom
Community College.
Eric L. Zinterhofer was appointed a director of Horizon PCS in November
2001. Mr. Zinterhofer is a principal of Apollo Advisors, with which he has been
associated since 1998, and which, together with affiliated investment managers,
manages the Apollo investment funds, including Apollo Investment Fund IV, L.P.
Prior to joining Apollo, he was a member of the corporate finance department at
Morgan Stanley and Co. and the investment management group at J.P. Morgan. Mr.
Zinterhofer also serves on the board of directors of Clark Retail Enterprises,
Inc. Mr. Zinterhofer was appointed to the board pursuant to the terms of the
Investors Rights and Voting Agreement entered into in connection with the sale
of convertible preferred stock in September 2000. See "Certain Relationships and
Related Transactions." Mr. Zinterhofer holds Bachelor of Arts degrees in
Economics and European History from the University of Pennsylvania. He received
his Masters in Business Administration from Harvard University.
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BOARD OF DIRECTORS
There are presently seven members of the board of directors. Pursuant to
Horizon PCS' Certificate of Incorporation, the board of directors is divided
into three classes of directors -- Class I, Class II and Class III. Phoebe H.
McKell and Eric Zinterhofer serve as Class I. Peter M. Holland and Thomas McKell
serve as Class II directors. Robert A. Katz, William A. McKell and Lonnie
Pedersen serve as Class III directors. Directors in each class will serve for a
term of three years, or until their successors have been elected and qualified.
Directors may be compensated at the discretion of the board of directors.
Executive officers are ordinarily elected annually and serve at the discretion
of the board of directors.
BOARD COMMITTEES
On February 28, 2002, we formed an audit committee which is responsible for
recommending to the board of directors the engagement of our independent
auditors and reviewing with the independent auditors the scope and results of
the audits, our internal accounting controls, audit practices and the
professional services furnished by the independent auditors. The board appointed
Messrs. Pedersen, Holland and Zinterhofer to the audit committee. Horizon PCS
will maintain at least two independent directors on the audit committee.
LIMITATION ON LIABILITY AND INDEMNIFICATION
Our certificate of incorporation limits the liability of directors to the
maximum extent permitted by Delaware law. Our certificate of incorporation
provides that we shall indemnify our directors and executive officers and may
indemnify our other officers and employees and agents and other agents to the
fullest extent permitted by law. Our certificate of incorporation also permits
us to secure insurance on behalf of any officer, director, employee or other
agent for any liability arising out of actions in his or her official capacity.
We have entered into agreements to indemnify our directors and officers in
addition to indemnification provided for in our certificate of incorporation.
These agreements indemnify our directors and officers for certain expenses,
including attorneys' fees, judgments, fines and settlement amounts incurred by
any of these persons in any action or proceeding, including any action by us or
in our right, arising out of that person's services as a director or officer of
ours, any subsidiary of ours, or any other company or enterprise to which the
person provides services at our request. In addition, we have directors' and
officers' insurance providing indemnification for certain of our directors,
officers and employees for these types of liabilities. We believe that these
provisions, agreements and insurance are necessary to attract and retain
qualified directors and officers.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent of ours where indemnification will be
required or permitted. We are not aware of any threatened litigation or
proceeding that might result in a claim for indemnification.
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EXECUTIVE COMPENSATION
The following table presents summary information with respect to the
compesation paid to our Chief Executive Officer and each of our other executive
officers whose salary and bonus exceeded $100,000 during the year ended December
31, 2001.
LONG-TERM COMPENSATION
NAME AND PRINCIPAL POSITION ANNUAL COMPENSATION SECURITIES UNDERLYING ALL OTHER
YEAR SALARY($) BONUS($) OPTIONS(#) COMPENSATION($)
William A. McKell........... 2001 $ 195,833 $ 65,935 -- $ 116,885 (1)
Chairman of the Board, 2000 154,167 21,458 -- 12,497 (2)
President and Chief 1999 107,125 9,641 1,614,186 8,934 (3)
Executive Officer
Peter M. Holland............ 2001 $ 170,833 $ 57,479 -- $ 129,032 (5)
Chief Financial Officer(4) 2000 150,000 20,625 -- 11,971 (6)
1999 -- -- 1,614,186 --
Joseph E. Corbin............ 2001 $ 121,667 $ 44,428 -- $ 126,797 (7)
Vice President, 2000 105,000 14,438 -- 20,254 (8)
Engineering/Operations 1999 85,200 9,200 188,322 13,528 (9)
Joseph J. Watson............ 2001 $ 121,667 $ 40,733 -- $ 123,884 (10)
Vice President, 2000 105,000 14,438 -- 14,862 (11)
Sales and Marketing 1999 76,240 7,668 188,322 12,825 (12)
Monesa S. Skocik............ 2001 $ 121,667 $ 40,733 -- $ 126,501 (13)
Vice President, 2000 105,000 14,438 -- 12,692 (14)
External Affairs 1999 65,750 6,850 188,322 3,024 (15)
- -----------------
(1) Includes an award of Horizon Telcom shares valued at $100,900 at the date
of the award, a yearly car allowance of $10,985 and a 401(k) contribution
of $5,000.
(2) Includes a yearly car allowance of $7,784 and a 401(k) contribution of
$4,713.
(3) Includes a yearly car allowance of $7,428 and a 401(k) contribution of
$1,506.
(4) Mr. Holland became Chief Financial Officer on November 17, 1999, but did
not receive any compensation in 1999. Prior to November 1999, consulting
fees were paid by Horizon PCS to the Pinnacle Group, a company that was 50%
owned by Mr. Holland. Pinnacle received consulting fees of $267,000 in
1999.
(5) Includes an award of Horizon Telcom shares valued at $116,000 at the date
of the award, a yearly car allowance of $7,892 and a 401(k) contribution of
$5,140.
(6) Includes yearly car allowance of $7,578 and a 401(k) contribution of
$4,393.
(7) Includes an award of Horizon Telcom shares valued at $116,000 at the date
of the award, a yearly car allowance of $7,839 and a 401(k) contribution of
$2,958.
(8) Includes yearly car allowance of $9,981 and a 401(k) contribution of
$10,273.
(9) Includes yearly car allowance of $4,328 and a 401(k) contribution of
$9,200.
(10) Includes an award of Horizon Telcom shares valued at $116,000 at the date
of the award, a yearly car allowance of $7,619 and a 401(k) contribution of
$265.
(11) Includes yearly car allowance of $8,435 and a 401(k) contribution of
$6,427.
(12) Includes yearly car allowance of $7,851 and a 401(k) contribution of
$4,974.
(13) Includes an award of Horizon Telcom shares valued at $116,000 at the date
of the award, a yearly car allowance of $6,807 and a 401(k) contribution of
$3,694.
(14) Includes yearly car allowance of $6,330 and a 401(k) contribution of
$6,362.
(15) Includes a 401(k) contribution of $3,024.
2000 STOCK OPTION PLAN
The 2000 Stock Option Plan has been adopted by our board of directors and
stockholders. The option plan permits the granting of both incentive stock
options and nonqualified stock options to employees. The aggregate number of
shares of common stock that may be issued pursuant to options granted under the
option plan is 7,500,000 shares of class A common stock and 4,196,884 shares of
class B common stock, subject to adjustments in the event of certain changes in
the outstanding shares of common stock. On December 1, 1999, our subsidiary,
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Horizon Personal Communications, granted options to purchase 3,588,000 shares of
its class B common stock with an exercise price of $0.1414 per share to 13
individuals under its 1999 Stock Option Plan. After we were incorporated, we
issued options to replace those initial options, on the same economic terms
adjusted for the fact that Horizon Personal Communications was our subsidiary.
After taking into account the adjustment, we issued 4,196,884 substituted
options on class B common stock at an exercise price of $0.1209. In November
2000, we granted options to purchase 116,971 shares of class A common stock at
an exercise price of $5.88 per share.
The option plan will be administered by our board of directors or by a
compensation committee appointed by our board of directors, which will be
authorized, subject to the provisions of the option plan, to grant options and
establish rules and regulations as it deems necessary for the proper
administration of the option plan and to make whatever determinations and
interpretations it deems necessary or advisable.
An incentive option may not have an exercise price less than the fair market
value of the common stock on the date of grant or an exercise period that
exceeds 10 years from the date of grant. In the case of option holders that own
more than 10% of Horizon PCS' stock, the exercise price for an inactive option
cannot be less than 110% of the fair market value of the common stock on the
date of grant and the exercise period cannot exceed five years from the date of
grant. Incentive options are also subject to other limitations which allow the
option holder to qualify for favorable tax treatment. Nonqualified options may
have an exercise price of less than, equal to or greater than the fair market
value of the underlying common stock on the date of grant but are limited to an
exercise period of no longer than ten years. However, we will not grant
non-qualified options with an exercise price less than 85% of fair market value
of the common stock on the date of the grant.
The board of directors or the compensation committee will determine the
persons to whom options will be granted and the terms, provisions, limitations
and performance requirements of each option granted, and the exercise price of
an option.
An option will not be transferable except by will or by the laws of descent
or distribution or unless determined otherwise by our board of directors or the
compensation committee.
Unless previously exercised, a vested option granted under the option plan
will terminate automatically:
o twelve months after the employee's termination of employment by reason
of disability or death; and
o three months after an employee's termination of employment for reasons
other than disability or death.
The plan contains provisions that give the compensation committee or our
board of directors or the acquiring entity's board of directors discretion to
take specified actions if Horizon PCS is acquired, unless the individual option
grants provide otherwise. Those actions can include the authorization to
purchase option grants from plan participants, or make adjustments or
modifications to outstanding options granted to protect and maintain the rights
and interests of the plan participants or accelerate the vesting of outstanding
options. To date, all individual option grants have provided that the options
will accelerate and become fully exercisable upon an acquisition of Horizon PCS.
Our board of directors has adopted a policy to the effect that, for at least
one year from March 27, 2001, 3,000,000 of the shares authorized to be issued
under the plan are subject to the condition that they must either be issued to
non-promoter employees (as defined in the North American Securities
Administration Association's statement of policy on options and warrants) or at
an exercise price no less than $5.88 per share. The board also has undertaken
not to grant options (other than under the 2000 Stock Option Plan) with a term
of longer than 5 years until the class A common stock is listed on either the
New York Stock Exchange, the American Stock Exchange, or the NASDAQ National
Market.
None of our named executive officers were granted stock options during
fiscal year 2001. Additionally, none of our named executive officers exercised
stock options in the fiscal year ended December 31, 2001. The following table
sets forth information concerning the number and value of unexercised options
held by each of our named executive officers on December 31, 2001. There was no
public market for our common stock as of December 31, 2001. Accordingly, the
fair market value on December 31, 2001, is based on an average assumed value of
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$5.39 per share. This valuation at December 31, 2001, does not represent the
actual value of our stock at December 31, 2001.
AGGREGATED OPTION EXERCISES IN FISCAL YEAR 2001
AND 2001 FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT YEAR END (#) OPTIONS AT YEAR END ($)
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- --------------- -------------------------------- ---------------
William A. McKell..................... 706,206 907,980 $ 3,721,708 $ 4,785,053
Peter M. Holland...................... 706,206 907,980 3,721,708 4,785,053
Joseph E. Corbin...................... 117,701 70,621 620,285 372,171
Joseph J. Watson...................... 117,701 70,621 620,285 372,171
Monesa S. Skocik...................... 117,701 70,621 620,285 372,171
COMPENSATION OF DIRECTORS
Currently, we do not compensate our directors. We do reimburse directors for
their expenses incurred in connection with attending board meetings.
EMPLOYMENT AGREEMENTS
We entered into employment agreements with Mr. McKell and Mr. Holland,
Horizon PCS' Chief Executive Officer and Chief Financial Officer, respectively.
The employment agreements provide for an annual base salary of $200,000 to Mr.
McKell and $175,000 to Mr. Holland beginning in 2002. In addition to their base
salary, Mr. McKell and Mr. Holland are eligible to receive an annual bonus up to
40% of their base salary. In addition, Mr. McKell and Mr. Holland are eligible
to participate in all of our employee benefit plans.
The employment agreements provide that Mr. McKell's or Mr. Holland's
employment may be terminated with or without cause, as defined in the agreement.
If either Mr. McKell or Mr. Holland is terminated without cause, he is entitled
to receive 24 months of base salary, the vesting of all of his stock options on
the date of termination and 24 months of health and dental benefits. Under the
employment agreements, both Mr. McKell and Mr. Holland have agreed to a
restriction on their present and future employment. They have agreed not to
compete in the business of wireless telecommunications either directly or
indirectly within our markets while employed by us and for a period of twelve
months after termination of employment.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
For the year ended December 31, 2001, the entire board of directors of
Horizon Personal Communications, Inc. determined executive compensation. None of
our executive officers served as a director or member of the compensation
committee or other board committee performing equivalent functions of another
corporation.
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PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of our voting securities, as of March 31, 2002 by:
o each person who, to our knowledge, is the beneficial owner of 5% or
more of a class of our outstanding common stock;
o each of our directors;
o each of the executive officers; and
o all executive officers and directors as a group.
Beneficial ownership is determined in accordance with Rule 13d-3 of the
Securities Exchange Act. A person is deemed to be the beneficial owner of any
shares of common stock if that person has or shares voting power or investment
power with respect to the common stock, or has the right to acquire beneficial
ownership at any time within 60 days of the date of the table. "Voting power" is
the power to vote or direct the voting of shares and "investment power" is the
power to dispose or direct the disposition of shares.
CLASS A CLASS B
COMMON STOCK COMMON STOCK PERCENTAGE OF TOTAL VOTING
NAME AND ADDRESS (1) NUMBER PERCENT NUMBER PERCENT POWER (ALL CLASSES) (2)
- -------------------- ------------ ------------ ------------ ------------ -------------------------
Horizon Telcom....................... -- -- 53,806,200 92.0% 87.8%
Apollo Management VI, L.P. (3)....... 22,863,502 80.8% -- -- 3.7%
Ares Management II L.P. (4).......... 2,604,468 9.2% -- -- *
First Union (5)...................... 2,838,230 10.0% -- -- *
William A. McKell (6)................ -- -- 706,206 1.2% 1.1%
Peter M. Holland (6)................. -- -- 706,206 1.2% 1.1%
Joseph E. Corbin (6)................. -- -- 117,701 * *
Joseph J. Watson (6)................. -- -- 117,701 * *
Monesa S. Skocik (6)................. -- -- 117,701 * *
Thomas McKell (7).................... -- -- 53,806,200 92.0% 87.8%
Phoebe H. McKell (6)................. -- -- 33,629 * *
Lonnie D. Pedersen (8)............... -- -- 1,519,907 2.6% 2.5%
Robert A. Katz (9)................... -- -- -- -- --
Eric L. Zinterhofer (9).............. -- -- -- -- --
All Executive Officers and
Directors as a Group (10
persons) (9)(10)................... -- -- 57,125,251 94.8% 90.5%
- ---------------
* Less than one percent.
(1) The address for Horizon Telcom and each executive officer and director
is 68 E. Main Street, Chillicothe, Ohio 45601-0480.
(2) Holders of class A common stock are entitled to one vote per share and
holders of class B common stock are entitled to ten votes per share.
Holders of both classes of common stock will vote together as a single
class on all matters presented for a vote, except as otherwise
required by law. Each share of class B common stock is convertible
into one share of class A common stock.
(3) Represents 22,863,502 shares of common stock issuable upon the
conversion of the convertible preferred stock. Assuming conversion of
all the convertible preferred stock held by the Apollo stockholders,
the shares of common stock would consist of 21,660,884 shares of
common stock beneficially owned by Apollo Investment Fund IV, L.P.,
and 1,202,618 shares of common stock beneficially owned by Apollo
Overseas Partners IV, L.P. Apollo Management IV, L.P. manages these
two Apollo funds. The holders of the convertible preferred stock are
entitled to one vote per share of convertible preferred stock. Messrs.
Katz and Zinterhofer, directors of Horizon PCS and associated with
Apollo Advisers IV, L.P., disclaim beneficial ownership of the shares
held by the Apollo stockholders. The managing general partner of the
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Apollo funds is Apollo Advisors, a Delaware limited partnership, the
general partner of which is Apollo Capital Management, Inc., a
Delaware corporation. The address for the Apollo stockholders is 1301
Avenue of the Americas, 38th Floor, New York, NY 10019.
(4) Includes 2,579,468 shares of common stock issuable upon the conversion
of the convertible preferred stock. Assuming conversion of all the
convertible preferred stock held by the Ares stockholders, the shares
of common stock would consist of 1,289,734 shares of common stock
beneficially owned by Ares Leveraged Investment Fund, L.P., and
1,289,734 shares of common stock beneficially owned by Ares Leveraged
Investment Fund II, L.P. The holders of the convertible preferred
stock are entitled to one vote per share of convertible preferred
stock. The managing general partner of the Ares funds is Ares
Management II, L.P., a Delaware corporation, which together with its
affiliate investment manager, serves as investment manager of the Ares
funds. Also includes warrants to purchase 12,500 shares held by each
of these two funds which are not exercisable within 60 days of the
date of this prospectus. The address for the Ares stockholders is 1999
Avenue of the Stars, Suite 1900, Los Angeles, California 90067.
(5) Includes 2,829,200 shares issuable upon the assumed conversion of the
convertible preferred stock and 9,030 shares issuable upon the assumed
exercise of warrants issued with the September 2000 discount notes.
Each share of convertible preferred stock is convertible into one
share of class A common stock and each warrant may be exercised at
$5.88 per share of class A common stock. Each holder of convertible
preferred stock is entitled to one vote per share. See "Description of
Capital Stock -- Convertible Preferred Stock." First Union is an
affiliate of one of the initial purchasers of the outstanding notes.
See "Plan of Distribution." The address for First Union is 301 South
College Street, Charlotte, North Carolina 28288.
(6) Reflects shares of class B common stock issuable upon exercise of
stock options that are presently exercisable or exercisable within 60
days of the date of this prospectus.
(7) Includes 53,806,200 shares held by Horizon Telcom. Thomas McKell is
the President of Horizon Telcom, and shares voting and investment
power with regard to these shares. Mr. McKell disclaims beneficial
ownership of these shares.
(8) Includes 1,455,678 shares of class B common stock held by Telephone
Service Company. Mr. Pedersen is the President of Telephone Service
Company and shares voting and investment power with regard to these
shares. Mr. Pedersen disclaims beneficial ownership of these shares.
(9) Does not include shares held by Apollo. Each of Messrs. Katz and
Zinterhofer, directors of Horizon PCS and principals of Apollo
Advisors, L.P., disclaims beneficial ownership of the securities held
by Apollo.
(10) Includes 1,799,145 shares of class B common stock issuable upon
exercise of stock options that are presently exercisable or
exercisable within 60 days of the date of this prospectus.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
SERVICE AGREEMENTS WITH HORIZON TELCOM SUBSIDIARIES
Horizon Personal Communications and Bright PCS, our subsidiaries, have
entered into service agreements with Horizon Services, Inc. and a separate
services agreement with Horizon Technology (formerly United Communications,
Inc.). Horizon Services and Horizon Technology are both wholly-owned
subsidiaries of Horizon Telcom.
Under our agreement with Horizon Services, Horizon Services provides
services to Horizon Personal Communications and Bright PCS including insurance
functions, billing services, accounting services, computer access and other
customer relations, human resources, and other administrative services that
Horizon Personal Communications and Bright PCS would otherwise be required to
undertake on their own. These agreements have a term of three years, with the
right to renew the agreement for additional one-year terms each year thereafter.
We have the right to terminate each agreement during its term by providing 90
days written notice to Horizon Services. Horizon Services may terminate the
agreement prior to its expiration date only in the event that we breach our
obligations under the services agreement and we do not cure the breach within 90
days after we receive written notice of breach from Horizon Services. Horizon
Services is entitled to the following compensation from Horizon Personal
Communications for services provided:
o direct labor charges at cost; and
o expenses and costs which are directly attributable to the activities
covered by the agreement on a direct allocation basis.
The agreement provides that Horizon Services' obligations do not relieve
Horizon Personal Communications of any of their rights and obligations to their
customers and to regulatory authorities having jurisdiction over them.
Additionally, Horizon Services, upon request, is required to provide Horizon
Personal Communications with access to Horizon Services' records with respect to
the provision of services, and Horizon Services is also required to provide
regular reports to Horizon Personal Communications, as it may request. Horizon
Services received compensation from Horizon Personal Communications of
approximately $6.2 million, $4.4 million and $815,000 in the years ending
December 31, 2001, 2000 and 1999, respectively. As of December 31, 2001, Horizon
Personal Communications, Inc. had a receivable from Horizon Services of
approximately $101,000. As of December 31, 2001, Horizon Personal
Communications, Inc. had a receivable from Horizon Telcom of approximately
$484,000.
Horizon Personal Communications, our subsidiary, entered into a services
agreement with Horizon Technology, Inc., a wholly-owned subsidiary of Horizon
Telcom. Under the services agreement, Horizon Personal Communications provided
services to Horizon Technology including customer activation and deactivation,
customer care support and other administrative services that Horizon Technology
would otherwise have been required to undertake on its own. Under the agreement,
Horizon Technology paid Horizon Personal Communications $4,000 each month of the
term of the services agreement. This agreement was terminated in August 2001.
Horizon Technology paid a total of $32,000 to Horizon PCS during 2001.
SALE OF ASSETS TO AFFILIATE
On April 1, 2000, we transferred the assets and contractual rights that
made up our Internet, long distance and other businesses unrelated to our PCS
wireless operations to Horizon Technology, a subsidiary of Horizon Telcom, for a
purchase price of approximately $708,000. Horizon Technology paid the purchase
price by delivering a promissory note with an interest rate equal to the
applicable Federal rate, which was 6.0%. The note was repaid in 2001.
OFFICE LEASE
Horizon PCS leases its principal office space, the space for one of our
retail locations and the space for certain equipment from The Chillicothe
Telephone Company, a wholly-owned subsidiary of Horizon Telcom. Under the lease,
Horizon PCS paid The Chillicothe Telephone Company $120,000, $97,500 and $22,300
in 2001, 2000 and 1999, respectively. We believe the lease was made on terms no
85
less favorable to Horizon PCS than would have been obtained from a
non-affiliated third party. The lease term expires in May 2005. Horizon PCS has
the option to renew the lease for an additional two year period. We expect that
the lease will be renewed.
STOCK DIVIDEND
Prior to September 2000, we owned 46,988 shares of common stock of Horizon
Telcom, representing approximately 12% of the total outstanding Horizon Telcom
stock. In September 2000, we distributed 39,890 of these shares to the Horizon
PCS stockholders as a dividend, retaining approximately 2% of the total
outstanding Horizon Telcom stock. We made this distribution so that our existing
stockholders could receive the full value of the distributed shares prior to the
issuance of the convertible preferred stock. This distribution resulted in the
recognition of a gain of $1.0 million. In April 2001, we distributed the
remaining 2% of the Horizon Telcom stock that we owned to a group of officers
and key employees in the form of a bonus. The officer group will include each of
the named executive officers. See "Management - Executive Compensation."
TAX-SHARING AGREEMENT
In 1997, Horizon PCS entered into a tax-sharing agreement with Horizon
Telcom. This agreement provides that Horizon Telcom and its subsidiaries will
file a consolidated tax return as long as they are eligible to do so, and that
Horizon PCS will be paid for the amount of its taxable net operating losses used
by Horizon Telcom to offset taxable income. During 1999, Horizon PCS had taxable
net operating losses of $16.5 million and received an aggregate of $5.2 million
from Horizon Telcom under the agreement. During 2000, Horizon PCS had taxable
net income of $18.6 million and paid an aggregate of $2.2 million to Horizon
Telcom under the agreement. Due to the sale of the convertible preferred stock
in September 2000, Horizon PCS is no longer included in the consolidated tax
return of Horizon Telcom. This change in our tax status is referred to as a tax
deconsolidation. The tax-sharing agreement provides that Horizon Telcom will
indemnify Horizon PCS to the extent of any aggregate tax liability in excess of
$11.5 million related to the tax deconsolidation and the dividend of the Horizon
Telcom stock.As of December 31, 2001, Horizon PCS had a receivable from Horizon
Telcom of approximately $484,000. As of December 31, 2000, Horizon PCS had a
payable to Horizon Telcom of approximately $338,000.
POLICY REGARDING RELATED PARTY TRANSACTIONS
We have established a policy that all future related party transactions
(including transactions with Horizon Telcom and its affiliates) will be reviewed
by our board of directors. Our policy is that all related party transactions
will be on terms no less favorable to Horizon PCS than a similar transaction
with unrelated parties, and must be approved by a majority of the directors,
including a majority of the disinterested directors.
Horizon believes that the terms of the related party transactions disclosed
above were as favorable as those generally available from unaffiliated third
parties. Each transaction was approved by the entire board of directors of
Horizon PCS. However, at those times our board did not include at least two
"disinterested directors," as defined by the North American Securities
Administrators Association, and therefore lacked the required directors to
ratify the transactions under their policy on such related party transactions.
The board of directors has adopted a policy that all future material affiliated
transactions and loans will be made or entered into on terms that are not less
favorable to Horizon than those that can be obtained from unaffiliated third
parties. In addition, all future material affiliated transactions and any
forgiveness of loans must be approved by Horizon's independent directors who
have no interest in the transactions and who have access, at Horizon's expense,
to Horizon's counsel.
ISSUANCE OF CONVERTIBLE PREFERRED STOCK
In September 2000, an investor group led by Apollo Management purchased
approximately $126.5 million of our convertible preferred stock in a private
placement. Prior to the investment this group had no relationship with Horizon
PCS. This investment consisted of 9.2 million shares of Series A Convertible
Preferred Stock, with an issue price of $5.88 per share, and 14.3 million shares
of Series A-1 Convertible Preferred Stock, with an issue price of $5.07 per
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share. The convertible preferred stock is convertible into shares of our class A
common stock (on a share-for-share basis subject to anti-dilution adjustments)
at any time by the holders thereof. The convertible preferred stock also is
convertible automatically upon the occurrence of a public offering of our common
stock with aggregate gross proceeds of at least $65.0 million in which we
receive a per share price that exceeds 1.75 multiplied by the conversion price
of the convertible preferred stock or the consummation of a business combination
transaction that results in a change in control of Horizon PCS.
Assuming full conversion of the convertible preferred stock outstanding at
December 31, 2001, the investor group or its successors will beneficially own
approximately 29.3% of our outstanding class A and class B common stock on a
combined basis, based on the number of class A and class B common stock
outstanding at December 31, 2001. This percentage represents approximately 4.2%
of the combined voting power of our class A and class B common stock. These
percentages do not give effect to the warrants to be issued to Sprint PCS, the
warrants issued as part of the discount note offering and the options which have
been granted under the 2000 stock option plan.
Securities Purchase Agreement. The Securities Purchase Agreement between
the investor group and us limits actions relating to our business, our capital
stock and other aspects of our operations without the prior approval of the
investor group. Among the types of actions that we cannot take are the
following:
o the declaration or payment of dividends or distributions;
o entering into business combination transactions, including mergers or
consolidations;
o amending the terms of our class B common stock or issue any new shares
of our class B common stock, other than pursuant to the exercise of
outstanding options;
o engaging in any business other than the business we currently engage
in;
o entering into transactions with affiliates or making disallowed
payments to related parties under existing services agreements;
o acquiring or disposing of assets or a business with an aggregate value
in excess of $5.0 million;
o adopting a new employee option or incentive plan;
o issuing or selling shares of our capital stock or the capital stock of
our subsidiaries, other than in a public offering of our class A
common stock, pursuant to an employee benefit plan or in connection
with mergers and acquisitions;
o increasing the size of our board of directors;
o incurring any indebtedness for borrowed money;
o subject to fiduciary duties, retaining or terminating senior executive
officers including the chief executive officer and the chief financial
officer; and
o making capital expenditures, unless permitted by the senior secured
credit facility.
If we have not completed either (i) a public offering of our class A common
stock in which we receive at least $50.0 million or (ii) a merger or
consolidation with a publicly listed company that has a market capitalization of
at least $100.0 million, in each case by September 26, 2005, the investor group
may request that we repurchase all of their shares of convertible preferred
stock at fair market value, as determined by three investment banking
institutions. If the investor group requests that we repurchase their
convertible preferred stock and we decline, we will be required to auction
Horizon PCS. If no bona fide offer is received upon an auction, the repurchase
right of the investor group expires. If, however, a bona fide offer is received
upon the auction, we must sell Horizon PCS or the dividend rate on the
convertible preferred stock will increase from 7.5% to 18.0% and we will be
87
required to re-auction the company annually until the convertible preferred
stock is repurchased or the repurchase right expires. The secured credit
facility and the senior notes prohibit us from repurchasing any convertible
preferred stock.
The approval rights of the investor group under the securities purchase
agreement relating to its ownership of our convertible preferred stock will
terminate upon the earlier to occur of (a) the closing of an underwritten public
offering of our class A common stock in which we receive aggregate gross
proceeds of at least $65.0 million and in which we receive a price per share
that exceeds 1.75 multiplied by the conversion price of the convertible
preferred stock (at which time the convertible preferred stock will convert into
class A common stock), and (b) the date upon which no convertible preferred
stock remains outstanding.
Investors' Rights and Voting Agreement. In connection with the purchase and
sale of our convertible preferred stock, we entered into an Investors' Rights
and Voting Agreement with the investor group and Horizon Telcom. This agreement
principally provides for the following:
o rights in favor of the investor group allowing it to participate in
sales of our capital stock by Horizon Telcom;
o rights in favor of Horizon Telcom requiring the investor group to sell
all of their shares of Horizon PCS stock if Horizon Telcom accepts an
offer to sell all of its shares of Horizon PCS stock;
o rights in favor of Horizon Telcom requiring the investor group to sell
all of our capital stock owned by them if Horizon Telcom accepts an
offer to sell all of our capital stock owned by Horizon Telcom to a
non-affiliated purchaser;
o as long as the investor group beneficially owns at least 5% of our
fully diluted common stock, the right of the investor group to
designate at least one member of our board of directors;
o as long as the investor group beneficially owns at least 12.5% of our
fully diluted common stock, the right of the investor group to
designate up to two members of our board of directors; and
o as long as the investor group beneficially owns at least 5% of our
fully diluted common stock, the requirement that Horizon Telcom vote
all of our capital stock owned by it to ensure that the size of our
board of directors is set and remains at seven directors unless the
designee members of the investor group of our board of directors agree
to an increase in the size of our board of directors.
Under the terms of this agreement, we appointed Robert Katz and Eric
Zinterhofer as Apollo's designees to our board of directors. See "Management -
Directors and Executive Officers."
Registration rights agreement. We also entered into a registration rights
agreement in connection with the purchase and sale of our convertible preferred
stock in which we granted to holders of our convertible preferred stock the
following registration rights:
o demand registration rights that entitle them to require us to
register, at our expense, the resale of their shares under the
Securities Act; and
o piggyback registration rights that entitle them to require us to
include, at our expense, their shares in a registration of any of our
equity securities for sale by us or by any of our other security
holders, other than in connection with an initial public offering and
other than pursuant to the registration of the warrants comprising
part of the units or the warrants to be issued to Sprint PCS.
Policy regarding preferred stock. All future issuances of preferred stock
must be approved by a majority of Horizon PCS' independent directors who do not
have an interest in the transaction and who have access, at Horizon PCS'
expense, to Horizon PCS' counsel.
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OTHER FEES PAID TO STOCKHOLDERS
An affiliate of Donaldson, Lufkin & Jenrette, now known as Credit Suisse
First Boston, entered into an engagement letter with us in late July 2000 to act
as placement agent for the placement of private equity. The commitment letter
provided that the affiliate of Credit Suisse First Boston would be paid a fee
upon the closing of our private equity offering. We paid the placement fee of
$3.6 million on September 26, 2000. Credit Suisse First Boston and First Union
Securities were also initial purchasers under our sale of units of warrants and
senior discount notes in September 2000, for which they received approximately
$5.2 million for performing these services. In September 2000, an affiliate of
First Union Securities acted as sole lead arranger for our senior secured credit
facility and received fees totaling $7.0 million for these services. Donaldson,
Lufkin & Jenrette Securities Corporation, a predecessor of Credit Suisse First
Boston, and First Union Securities also acted as the lead managers of our
proposed initial public offering. In 2000, we entered into engagement letters
with Credit Suisse First Boston and First Union Securities to act as our
co-advisors in possible strategic transactions, for which they expected to
receive fees customarily charged by investment bankers of international standing
in similar transactions. We have paid a total of $450,000 in fees under this
arrangement. Credit Suisse First Boston, First Union Securities and two other
firms acted as initial purchasers under our sale of senior notes in December
2001, for which they received approximately $5.3 million for performing these
services.
89
REGULATION OF THE WIRELESS TELECOMMUNICATIONS INDUSTRY
The FCC regulates the licensing, construction, operation, acquisition and
interconnection arrangements of wireless telecommunications systems in the
United States. As an FCC licensee in our Chillicothe, Ohio market, and as an
entity facilitating PCS operations on Sprint PCS' spectrum under our Sprint PCS
agreements, we must ensure that all of our operations comply with FCC
requirements.
The FCC has adopted, or is in the process of adopting, a series of rules,
regulations and policies to, among other things:
o grant or deny licenses for PCS frequencies;
o grant or deny PCS license renewals;
o rule on assignments and/or transfers of control of PCS licenses;
o govern the interconnection of PCS networks with the networks of other
wireless and wireline carriers;
o possibly facilitate the offering of a "calling party pays" service
which would require that a party who calls a subscriber would pay for
the call;
o establish access and universal service funding provisions in an effort
to raise funds to help defray the cost of providing telecommunications
services to rural and other high-cost areas;
o possibly permit commercial mobile radio service spectrum to be used
for transmission of programming material targeted to a limited
audience;
o impose fines and forfeitures for violations of any of the FCC's rules;
and
o regulate the technical standards of PCS networks.
The FCC currently prohibits a single entity from having a combined
attributable interest of 20% or greater in broadband PCS, cellular, and
specialized mobile radio service licenses totaling more than 55 MHz in any urban
areas or rural areas. This "spectrum cap" was raised from 45 MHz to 55 MHz in
urban areas as the result of recent FCC action. Interests held by passive
institutional investors, small companies and rural telephone companies are not
usually deemed attributable for purposes of this prohibition if these interests
do not exceed 40%. The FCC recently decided that this restriction will be
eliminated on January 1, 2003. We cannot predict whether these actions will lead
to more consolidation in the wireless telecommunication industry generally, or
in any of our PCS service areas.
TRANSFERS AND ASSIGNMENTS OF PCS LICENSES
The FCC must give prior approval to the assignment of, or transfers
involving, substantial changes in ownership or control of a PCS license.
Non-controlling interests in an entity that holds a PCS license or operates PCS
networks generally may be bought or sold without prior FCC approval. In
addition, a recent FCC order requires only post-consummation notification of
certain pro forma assignments or transfers of control.
CONDITIONS OF PCS LICENSES
All PCS licenses are granted for ten-year terms conditioned upon timely
compliance with the FCC's build-out requirements. Pursuant to the FCC's
build-out requirements, all 30 MHz broadband PCS licensees must construct
facilities that offer coverage to one-third of the population within five years
and to two-thirds of the population within ten years, and all ten and 15 MHz
broadband PCS licensees must construct facilities that offer coverage to at
least one-quarter of the population within five years or make a showing of
"substantial service" within that five-year period. Failure to meet these build
out requirements can result in license cancellation without a hearing. Other
rule violations could result in license revocations and/or monetary fines. The
FCC also requires licensees to maintain a certain degree of control over their
licenses. The Sprint PCS agreements reflect an arrangement that the parties
90
believe meets the FCC requirements for licensee control of licensed spectrum.
However, the FCC decides whether a licensee has maintained the requisite degree
of control on a case-by-case basis, upon consideration of the "totality of
circumstances." It is therefore difficult to predict in advance with absolute
certainty whether a particular arrangement will pass FCC muster. If the FCC were
to determine that our agreements with Sprint PCS need to be modified to increase
the level of licensee control, the Sprint PCS agreements may be modified to cure
any purported deficiency regarding licensee control of the licensed spectrum.
However the business arrangement between the parties may have to be
restructured.
PCS LICENSE RENEWAL
PCS licensees can renew their licenses for additional ten-year terms. PCS
renewal applications are not subject to auctions. However, under the FCC's
rules, third parties may oppose renewal applications and/or file competing
applications. If one or more competing applications are filed, a renewal
application will be subject to a comparative renewal hearing. The FCC's rules
afford PCS renewal applicants involved in comparative renewal hearings with a
"renewal expectancy." The renewal expectancy is the most important comparative
factor in a comparative renewal hearing and is applicable if the PCS renewal
applicant has: (1) provided "substantial service" during its license term; and
(2) substantially complied with all applicable laws and FCC rules and policies.
The FCC's rules define "substantial service" in this context as service that is
sound, favorable and substantially above the level of mediocre service that
might minimally warrant renewal.
INTERCONNECTION
The FCC has the authority to order interconnection between commercial
mobile radio providers and any other common carrier. The FCC has ordered
traditional telephone companies to provide compensation to commercial mobile
radio providers for the termination of traffic. Using these new rules, we have
negotiated interconnection agreements for the Sprint PCS network in our market
area with the major regional Bell operating companies, GTE, Sprint and several
smaller independent local exchange carriers. Interconnection agreements are
negotiated on a state-wide basis. If an agreement cannot be reached, parties to
interconnection negotiations can submit outstanding disputes to state
authorities for arbitration. Negotiated interconnection agreements are subject
to state approval. On July 18, 2000, the FCC adopted an order denying requests
for mandatory interconnection between resellers' switches and commercial mobile
radio providers' networks, and declining to impose general interconnection
obligations between these networks.
ALLOCATION OF ADDITIONAL PCS AND OTHER WIRELESS LICENSES
The FCC from time to time re-auctions PCS licenses that it has re-claimed
from other carriers, or PCS licenses that carriers have voluntarily returned to
the agency. The FCC also periodically allocates and assigns new spectrum for the
provision of wireless services. It is possible that such actions could create
new competitors in our current PCS service areas, and we cannot predict the
effect that such actions would have on our business.
OTHER FCC REQUIREMENTS
In June 1996, the FCC adopted rules that prohibit broadband PCS providers
from unreasonably restricting or disallowing resale of their services or
unreasonably discriminating against resellers. Resale obligations will
automatically expire on November 24, 2002. The FCC recently decided that these
prohibitions apply to services and not to equipment such as handsets, whether
alone or in bundled packages.
The FCC also adopted rules in June 1996 that require local exchange and
most commercial mobile radio carriers, to program their networks to allow
customers to change service providers without changing telephone numbers, which
is referred to as service provider number portability. Most commercial mobile
radio carriers are required to implement nationwide roaming by November 24, 2002
as well. The FCC currently requires most commercial mobile radio providers to be
able to deliver calls from their networks to numbers anywhere in the country,
and to contribute to the Local Number Portability Fund.
The FCC has adopted rules permitting broadband PCS and other commercial
mobile radio providers to provide wireless local loop and other fixed services
that would directly compete with the wireline services of local telephone
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companies. In June 1996, the FCC adopted rules requiring broadband PCS and other
commercial mobile radio providers to implement enhanced emergency 911 (E911)
automatic location identification (ALI) capabilities within 18 months after the
effective date of the FCC's rules. Sprint PCS' initial compliance with these
rules occurred on or before October 1, 2001.
Additional compliance deadlines include: (1) ensuring that 25% of new
mobile phones activated after December 31, 2001 are ALI capable; (2) ensuring
that 50% of new mobile phones activated after June 30, 2002 are ALI capable; and
(3) ensuring that 95% of all customer mobile phones are ALI capable by December
31, 2005. On October 12, 2001, the FCC granted Sprint PCS an extension of the
December 31, 2001 deadline, valid until July 31, 2002. Sprint PCS was also given
more time in which to upgrade its E911 system software. Horizon's Chillicothe
PCS system is currently exempt from E911 ALI requirements.
On June 10, 1999, the FCC initiated a regulatory proceeding (the
competitive networks proceeding) seeking comment from the public on a number of
issues related to competitive access to multiple-tenant buildings, including the
following:
o the FCC's tentative conclusion that the Communications Act of 1934, as
amended, requires utilities to permit telecommunications carriers
access to rooftop and other rights-of-way in multiple tenant buildings
under just, reasonable and nondiscriminatory rates, terms and
conditions; and
o whether building owners that make access available to a
telecommunications carrier should be required to make access available
to all other telecommunications carriers on a nondiscriminatory basis,
and whether the FCC has the authority to impose such a requirement.
On October 25, 2000, the FCC issued an order that addressed certain of the
issues in the competitive networks proceeding. Notably, the FCC:
o prohibits carriers from entering into contracts that restrict owners
of commercial office buildings from permitting access from competing
carriers;
o clarifies the FCC's rules governing control of in-building wiring;
o concludes that utilities that own conduits or rights-of-way within a
building must give non-discretionary access thereto; and
o concludes that parties with a direct or indirect ownership or
leasehold interest in property, including building tenants, should
have the ability to place antennas one meter or less in diameter used
to receive or transmit any fixed wireless service in other areas.
This proceeding could affect the availability and pricing of sites for our
antennae and those of our competitors.
COMMUNICATIONS ASSISTANCE FOR LAW ENFORCEMENT ACT
The Communications Assistance for Law Enforcement Act, or CALEA, was
enacted in 1994 to preserve electronic surveillance capabilities by law
enforcement officials in the face of rapidly changing telecommunications
technology. CALEA requires telecommunications carriers, including us, to modify
their equipment, facilities, and services to allow for authorized electronic
surveillance based on either industry or FCC standards. The FCC has adopted
rules implementing this statute and has established various implementation
deadlines. Like other wireless carriers, Sprint PCS has sought certain
extensions of the deadlines, and these requests remain pending. We may be
subjected to fines as much as $10,000 per day if we are unable to comply with a
surveillance request from law enforcement due to the lack of a required CALEA
capability for which we or Sprint PCS have not sought or received an extension.
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OTHER FEDERAL REGULATIONS
Wireless systems must comply with FCC and Federal Aviation Administration
(FAA) regulations regarding the siting, lighting and construction of transmitter
towers and antennas. In addition, FCC environmental regulations may cause some
cell site locations to become subject to regulation under the National
Environmental Policy Act (NEPA). The FCC is required to implement this Act by
requiring carriers to meet land use and radio frequency standards.
In general, carriers are required to clear any tower or antenna structure
proposals with the FAA if the structure will be 200 feet or more in height, or
will be within 20,000 feet of an airport. Carriers must also ensure that antenna
structures will comply with NEPA-related regulations protecting wilderness
areas, wildlife preserves, endangered species habitats, Indian religious sites,
flood plains, wetlands and historic places. In protecting historic places,
carriers must comply with the requirements of the National Historic Preservation
Act and the regulations of the National Council for Historic Preservation
(NCHP). This generally requires consultation with the appropriate "State
Historic Preservation Officer" (SHPO) prior to each site construction. However,
in March 2001, the FCC issued a programmatic agreement approved by the NCHP,
which allows carriers to avoid SHPO approval and other time-consuming historic
preservation measures, if the carrier proposes to use an existing tower, and
satisfies certain other conditions.
Carriers must comply with certain other FCC requirements:
o payment of annual regulatory user fees;
o submission of FCC Form 499A and 499Q reports, providing the FCC with
information needed to calculate universal service, local number
portability and other contribution amounts owed by the carrier;
o compliance with the FCC's 711 hearing-impaired access requirements by
October 1, 2001;
o compliance with the FCC's digital TTY (access for the deaf)
requirements, including purchase of necessary software and equipment
by December 31, 2001, implementation by June 30, 2002, and filing of
quarterly progress reports during the interim;
o submission of an annual Form 395 employment report;
o periodic filing of Form 602 ownership report; and
o submission of other required reports, as applicable, including Form
502 Number Utilization and Forecast Report, Form 477 Local Competition
and Broadband Reporting Worksheet, Form 478 Slamming Complaint Report,
International Traffic Data Report, and Annual Financial Report.
REVIEW OF UNIVERSAL SERVICE REQUIREMENTS
The FCC and the states are required to establish a universal service
program to ensure that affordable, quality telecommunications services are
available to all Americans. Sprint PCS is required to contribute to the federal
universal service program as well as existing state programs. The FCC has
determined that Sprint PCS' contribution to the federal universal service
program is a variable percentage of "end-user telecommunications revenues."
Although many states are likely to adopt a similar assessment methodology, the
states are free to calculate telecommunications service provider contributions
in any manner they choose as long as the process is not inconsistent with the
FCC's rules. At the present time it is not possible to predict the extent of the
Sprint PCS total federal and state universal service assessments or its ability
to recover from the universal service fund.
WIRELESS FACILITIES SITING
States and localities are allowed to apply zoning requirements to PCS
facility and tower proposals, but are not permitted to regulate the placement of
wireless facilities so as to prohibit the provision of wireless services or to
discriminate among providers of these services. In addition, so long as a
wireless system complies with the FCC's rules, states and localities are
prohibited from using radio frequency health effects as a basis to regulate the
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placement, construction or operation of wireless facilities. The FCC is
considering numerous requests for preemption of local actions affecting wireless
facilities siting. The Federal courts have been inconsistent in deciding such
disputes.
STATE REGULATION OF WIRELESS SERVICE
Section 332 of the Communications Act preempts states from regulating the
rates and entry of commercial mobile radio providers, like us. However, states
may attempt to regulate other aspects of our service provision. In addition,
states may petition the FCC to regulate these providers and the FCC may grant a
state's petition if the state demonstrates that (1) market conditions fail to
protect subscribers from unjust and unreasonable rates or rates that are
unjustly or unreasonably discriminatory, or (2) when commercial mobile radio is
a replacement for landline telephone service within the state. To date, the FCC
has granted no petition of this type. To the extent that we may provide fixed
wireless service in the future, we may be subject to additional state
regulation.
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DESCRIPTION OF CAPITAL STOCK
GENERAL
The following table summarizes our capital stock as of December 31, 2001:
NUMBER OF SHARES
CAPITAL STOCK AUTHORIZED OUTSTANDING
- ------------- --------------- --------------
Convertible preferred stock................. 175,000,000 28,272,170
Preferred stock............................. 10,000,000 --
Class A common stock........................ 300,000,000 26,646
Class B common stock........................ 75,000,000 58,445,288
--------------- ---------------
Total..................................... 560,000,000 86,744,104
=============== ===============
An additional 146.7 million shares of convertible preferred stock are
reserved for issuance as dividends on the convertible preferred stock, if
necessary. The following summarizes all of the material terms and provisions of
our capital stock.
COMMON STOCK
The holders of class A common stock are entitled to one vote for each share
held of record on all matters submitted to a vote of stockholders and do not
have any cumulative rights. The holders of class B common stock are entitled to
ten votes for each share held of record on all matters submitted to a vote of
stockholders and do not have any cumulative rights. All shares of class B common
stock are convertible into class A common stock at any time, at the election of
the holder. In addition, in the event that a holder of class B common stock
attempts to transfer the stock in violation of the certificate of incorporation,
that class B common stock will automatically convert into class A common stock.
We will reserve and keep available out of our authorized but unissued shares of
class A common stock the number of shares of class A common stock necessary to
effect the conversion of all outstanding shares of class B common stock.
Subject to the rights of the holders of any series of preferred stock,
holders of common stock are entitled to receive dividends out of assets legally
available therefore as may be declared by the board of directors. Other than the
conversion rights of class B common stockholders described above, holders of
shares of common stock have no preemptive, conversion, redemption, subscription
or similar rights. If we liquidate, dissolve or wind up, the holders of shares
of common stock are entitled to share ratably in proportion to the number of
shares of common stock held in the assets which are legally available for
distribution, if any, remaining after the payment or provisions for the payment
of all debts and other liabilities and the payment and setting aside for payment
of any preferential amount due to the holders of shares of any series of
preferred stock. A consolidation, merger or reorganization of Horizon PCS with
any other corporation, or a sale of all or substantially all of the assets of
Horizon PCS is not considered a dissolution, liquidation or winding up of
Horizon PCS.
CONVERTIBLE PREFERRED STOCK
In September 2000, we sold $126.5 million of convertible preferred stock to
an investor group led by Apollo Management. For a description of the terms of
the documents governing the purchase of the convertible preferred stock, see
"Certain Transactions -- Issuance of Convertible Preferred Stock." We also
issued units of convertible preferred stock upon conversion of the $14.1 million
short-term convertible note. The convertible preferred stock was issued as units
consisting of 1.0000 share of Series A Convertible Preferred Stock and 1.5446
shares of Series A-1 Convertible Preferred Stock. Unless otherwise indicated,
the summary of terms and provisions of the convertible preferred stock set forth
below applies to both the Series A Convertible Preferred Stock and the Series
A-1 Convertible Preferred Stock.
Each series of the units has a term of eleven years from the initial closing
date and will accrue dividends at a rate of 7.5% per annum (or 18.0% per annum,
if Horizon PCS is in default under the terms and provisions of the convertible
preferred stock), paid in additional shares of convertible preferred stock.
These dividends will accrue daily whether or not we have earnings or profit,
whether or not there are funds legally available for payment of these dividends
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and whether or not dividends are declared. Dividends shall accumulate and
compound semi-annually. In addition to the 7.5% dividend, when and if our board
of directors declares a dividend payable with respect to the then outstanding
shares of our common stock, the holders of the convertible preferred stock shall
be entitled to the amount of dividends per share as would be payable on the
number of shares of our common stock into which the share of convertible
preferred stock could then be converted. The convertible preferred stock ranks
senior to both our class A and class B common stock with respect to dividends
and distributions upon our liquidation, winding-up and dissolution. Each share
of convertible preferred stock is convertible at the option of the holder at any
time into one share of class A common stock, subject to anti-dilution
adjustments. Each share of convertible preferred stock will be automatically
converted into one share of class A common stock, subject to anti-dilution
adjustments, upon the earliest to occur of:
(a) a public offering of our common stock with aggregate gross proceeds of
at least $65.0 million in which we receive a per share price that
exceeds 1.75 multiplied by the conversion price of the convertible
preferred stock; and
(b) the consummation of merger, consolidation, sale of assets or other
similar business combination transactions.
The holders of the convertible preferred stock may redeem their shares (the
holders' "put" right) upon changes of control, including a transaction pursuant
to which Mr. William McKell ceases to hold his current position and a change in
control of Horizon Telcom but excluding transactions with specified Sprint PCS
affiliates, at 101% of their accrued liquidation preference, plus the unpaid
dividends that would have been payable from the date of the change of control
through September 26, 2005.
If certain business combination transactions occur prior to September 26,
2005, and a portion of the consideration received by our shareholders in the
transaction is consideration other than equity in the surviving entity, we will
be obligated to pay a special dividend in shares of additional convertible
preferred stock to holders of our convertible preferred stock.
Holders of our convertible preferred stock are entitled to vote on all
matters on an as-converted basis. In addition, the vote of at least a majority
of the outstanding shares of convertible preferred stock, voting as a single
class, shall be necessary for effecting or validating significant corporate
actions specified in the certificate of incorporation.
The convertible preferred stock is subject to optional redemption by us
after the fifth year at its liquidation value plus accrued but unpaid dividends,
plus a premium of 4.0%. If we have not completed either (i) a public offering of
our class A common stock in which we receive at least $50.0 million or (ii) a
merger or consolidation with a publicly listed company that has a market
capitalization of at least $100.0 million, in each case by September 26, 2005,
the investor group may request that we repurchase all of their shares of
convertible preferred stock at fair market value, as determined by three
investment banking institutions. See "Certain Relationships and Related
Transactions -- Issuance of Convertible Preferred Stock -- Securities Purchase
Agreement."
PREFERRED STOCK
Under our certificate of incorporation, the board of directors is
authorized, subject to limitations prescribed by law, without further
stockholder approval, from time to time to issue up to an aggregate of 10.0
million additional shares of preferred stock. The preferred stock may be issued
in one or more series. Each series may have different rights, preferences and
designations and qualifications, limitations and restrictions that may be
established by our board of directors without approval from the stockholders.
These rights, designations and preferences include:
o number of shares to be issued;
o dividend rights;
o dividend rates;
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o right to convert the preferred shares into a different type of
security;
o voting rights attributable to the preferred shares;
o right to set aside a certain amount of assets for payment relating to
the preferred shares; and
o prices to be paid upon redemption of the preferred shares or a
bankruptcy type event.
If our board of directors decides to issue any preferred stock, it could
have the effect of delaying or preventing another party from taking control of
Horizon PCS which could have a depressive effect on the market price of Horizon
PCS' common stock. This is because the terms could make it prohibitively
expensive for any unwanted third party to make a bid for our shares. In
addition, the issue of preferred stock could adversely affect the voting power
of holders of common stock and the likelihood that they will receive dividend
payments and payments upon liquidation. We have no present plans to issue any
additional shares of preferred stock.
SPRINT PCS WARRANTS
In connection with Sprint PCS' grant to us of our markets in Pennsylvania,
New York, Ohio and New Jersey in May 2000, we agreed to grant to Sprint PCS
warrants to acquire shares of class A common stock at the earlier of (i) the
date on which we close an initial public offering, or (ii) July 31, 2003. These
warrants become exercisable on January 1, 2003 in the case of an IPO. If these
warrants are granted on July 31, 2003, they will be immediately exercisable.
Under the terms of the warrant agreement, in the case of an IPO, Sprint PCS is
entitled to receive 2,510,460 shares, which number shall be no more than 4.2%
and no less than 3.0% of our equity securities outstanding immediately after the
offering. The number of shares subject to the warrants will be adjusted, if
necessary, to reflect these limits. The exercise price will be equal to the
initial public offering price per share. If there has not been an IPO on or
before July 31, 2003, the number of shares of common stock subject to the
warrant will represent 3.0% of the "Private Valuation" of Horizon PCS (as
determined by the appraisal process set forth in the agreement) and the exercise
price will be the lower of per share private valuation as of July 31, 2003, or
the price per share of the most recent negotiated private placement of our
equity securities within the last twelve months. In either case, the exercise
price is subject to anti-dilution adjustments after the issuance of the warrant.
Sprint PCS will have registration rights for the shares subject to the warrants.
UNIT WARRANTS
As part of our units offering in September 2000, we issued warrants to
purchase a total of 3,805,500 shares of class A common stock pursuant to a
warrant agreement by and among Horizon PCS and Wells Fargo Bank Minnesota,
National Association, as warrant agent.
General. Each warrant, when exercised, will entitle the holder to receive
12.90 fully paid and non-assessable shares of Horizon PCS' class A common stock,
at an exercise price of $5.88 per share, subject to adjustment. The number of
warrant shares is subject to adjustment in the cases referred to below. The
holders of the warrants would be entitled, in the aggregate, to purchase shares
of Horizon PCS' class A common stock representing approximately 4% of the issued
and outstanding shares of our class A and class B common stock on a fully
diluted basis on the date hereof, assuming exercise of all outstanding warrants.
The warrants will be exercisable at any time on or after October 1, 2001. Unless
exercised, the warrants will automatically expire at 5:00 p.m. New York City
time on October 1, 2010.
The warrants may be exercised by surrendering the warrant certificates
evidencing the warrants to be exercised with the accompanying form of election
to purchase properly completed and executed, together with payment of the
exercise price. Payment of the exercise price may be made at the holder's
election:
o by tendering notes having an aggregate accreted value, plus accrued
and unpaid interest, if any, to the date of exercise equal to the
exercise price; and
o in cash in United States dollars by wire transfer or by certified or
official bank check to the order of Horizon PCS.
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Upon surrender of the warrant certificate and payment of the exercise
price, Horizon PCS will deliver or cause to be delivered, to or upon the written
order of the holder, stock certificates representing the number of whole warrant
shares to which the holder is entitled. If less than all of the warrants
evidenced by a warrant certificate are to be exercised, a new warrant
certificate will be issued for the remaining number of warrants. Holders of
warrants will be able to exercise their warrants only if a registration
statement relating to the warrant shares underlying the warrants is then in
effect, or the exercise of their warrants is exempt from the registration
requirements of the Securities Act, and the securities are qualified for sale or
exempt from qualification under securities laws of the states in which the
various holders of warrants or other persons to whom it is proposed that warrant
shares be issued on exercise of the warrants reside.
Adjustments. The number of warrant shares purchasable upon exercise of
warrants will be subject to adjustment in several circumstances.
In the case of consolidations or mergers of Horizon PCS, or the sale of all
or substantially all of the assets of Horizon PCS to another corporation, (1)
each warrant will be exercisable for the right to receive the kind and amount of
shares of stock or other securities or property to which the holder would have
been entitled as a result of the consolidation, merger or sale had the warrants
been exercised immediately prior to the transaction and (2) the person formed by
or surviving any the consolidation or merger, (if other than Horizon PCS) or to
which the sale shall have been made will assume the obligations of Horizon PCS
under the warrant agreement.
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THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
As a condition to the sale of the outstanding notes, we and the initial
purchasers of the outstanding notes entered into the registration rights
agreement. Under the registration rights agreement, we agreed to:
o file with the SEC an exchange offer registration statement under the
Securities Act with respect to the registered notes no later than
April 6, 2002;
o use our best efforts to cause the exchange offer registration
statement to be declared effective under the Securities Act no later
than July 5, 2002; and
o keep the exchange offer open for a period not less than 20 business
days (or longer if required by applicable law) after the date notice
of the exchange offer is mailed to holders of the outstanding notes;
and
o cause the exchange offer to be consummated no later than the 30th
business day after it is declared effective under the Securities Act.
The exchange offer being made by this prospectus is intended to satisfy our
obligations under the registration rights agreement. You may be entitled to
"shelf" registration rights. In accordance with the registration rights
agreement, we are required to file a shelf registration covering your
outstanding notes for a continuous offering in accordance with Rule 415 of the
Securities Act if:
o we are not permitted to consummate the exchange offer because the
exchange offer is not permitted by applicable law or SEC policy; or
o any holder of outstanding notes which are Transfer Restricted
Securities notifies us before the 20th business day following the
consummation of the exchange offer that:
o it is prohibited by law or SEC policy from participating in the
exchange offer;
o it may not resell the registered notes acquired by it in the exchange
offer to the public without delivering a prospectus, and the
prospectus (including any amendment or supplement thereto) contained
in the exchange offer registration statement is not appropriate or
available for such resales by it; or
o it is a broker-dealer and holds notes acquired directly from us or any
of our affiliates.
In the event that we are obligated to file a shelf registration statement,
we will be required to keep the shelf registration statement effective until the
later of two years from the date the shelf registration is declared effective by
the SEC or the date on which all of the outstanding notes have been sold
thereunder.
For purposes of the registration rights agreement, "Transfer Restricted
Securities" means each note until the earlier of:
(1) the date on which such note is exchanged in the exchange offer and
entitled to be resold to the public by the holder thereof without
complying with the prospectus delivery requirements of the Securities
Act;
(2) the date on which such note has been disposed of in accordance with
the shelf registration statement;
(3) the date on which such note is disposed of by a broker-dealer pursuant
to the "Plan of Distribution" contemplated by the exchange offer
registration statement (including delivery of the prospectus contained
therein);
(4) the date on which such note is distributed to the public pursuant to
Rule 144 under the Securities Act.
The registration rights agreement provides that:
(1) if we fail to file an exchange offer registration statement with the
SEC on or before April 6, 2002;
(2) if the exchange offer registration statement is not declared effective
before July 5, 2002;
(3) if the exchange offer is not consummated on or before the 30th
business day after the exchange offer registration statement is
declared effective;
(4) if we are obligated to file the shelf registration statement and we
fail to file the shelf registration statement with the SEC on or
before the 30th day after such filing obligation arises;
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(5) if we are obligated to file a shelf registration statement and the
shelf registration statement is not declared effective on or before
the 60th day after the obligation to file a shelf registration
statement arises; or
(6) if the exchange offer registration statement or the shelf registration
statement, as the case may be, is declared effective but thereafter
ceases to be effective or useable in connection with resales of the
Transfer Restricted Securities, for the time of non-effectiveness or
non-usability (each, a "Registration Default"),
then we will pay to each holder of Transfer Restricted Securities affected
thereby liquidated damages ("Liquidated Damages") in an amount equal to $0.05
per week per $1,000 in principal amount of the Transfer Restricted Securities
held by such holder for each week or portion thereof that the Registration
Default continues for the first 90 day period immediately following the
occurrence of such Registration Default. The amount of the Liquidated Damages
shall increase by an additional $0.05 per week per $1,000 in principal amount of
Transfer Restricted Securities with respect to each subsequent 90 day period
until all Registration Defaults have been cured, up to a maximum amount of
Liquidated Damages of $0.50 per week per $1,000 in principal amount of Transfer
Restricted Securities. We will not be required to pay Liquidated Damages for
more than one Registration Default at any given time. Following the cure of all
Registration Defaults, the accrual of Liquidated Damages will cease.
We will pay all accrued Liquidated Damages to holders entitled thereto by
wire transfer to the accounts specified by them or by mailing checks to their
registered address if no such accounts have been specified.
EFFECT OF THE EXCHANGE OFFER
Based on no-action letters issued by the staff of the SEC to third parties,
we believe that you may offer for resale, resell and otherwise transfer the
registered notes issued to you under the exchange offer without further
compliance with the registration and prospectus delivery provisions of the
Securities Act, provided that you can represent that:
o you are acquiring the registered notes in the ordinary course of your
business;
o you are not engaging in and do not intend to engage in a distribution
of the registered notes;
o you have no arrangements or understandings with any person to
participate in the exchange offer for the purpose of distributing the
registered notes; and
o you are not an "affiliate" (as defined in Rule 405 of the Securities
Act) of ours.
If you are not able to make these representations, you are a "Restricted
Holder." As a Restricted Holder, you will not be able to participate in the
exchange offer, may not rely on the SEC staff positions set forth in the Exxon
Capital Holdings Corporation no-action letter and similar no-action letters and
may only sell your outstanding notes as part of a registration statement
containing the selling security holder information required by Item 507 or 508
of SEC Regulation S-K, as applicable, or under an exemption from the
registration requirements of the Securities Act.
In addition, each broker-dealer, other than a Restricted Holder, that
receives registered notes for its own account in exchange for outstanding notes
which were acquired by such broker-dealer as a result of market-making or other
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trading activities (a "Participating Broker-Dealer") may be a statutory
underwriter and must acknowledge in the letter of transmittal that it will
deliver a prospectus meeting the requirements of the Securities Act upon any
resale of such registered notes. The letter of transmittal states that by so
acknowledging and by delivering a prospectus, a broker-dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
Based upon interpretations by the SEC staff, we believe that a Participating
Broker-Dealer may offer for resale, resell and otherwise transfer registered
notes issued under the exchange offer upon compliance with the prospectus
delivery requirements, but without compliance with the registration
requirements, of the Securities Act. This prospectus, as it may be amended or
supplemented from time to time, may be used by a Participating Broker-Dealer as
part of their resales. We have agreed that, for a period of one year after the
completion of the exchange offer, we will make this prospectus available to any
broker-dealer for use by the broker-dealer in any resale. For more information,
please see the section in this prospectus entitled "Plan of Distribution."
CONSEQUENCES OF FAILURE TO EXCHANGE
To the extent outstanding notes are tendered and accepted in the exchange
offer, the principal amount of outstanding notes will decrease with a resulting
decrease in the liquidity in the market for the outstanding notes. In addition,
following completion of the exchange offer, except as provided in the
registration rights agreement, you will not have any further registration rights
and your outstanding notes will continue to be subject to certain restrictions
on transfer. Accordingly, if you do not participate in the exchange offer, your
ability to sell your outstanding notes could be adversely affected. You may
suffer adverse consequences if you fail to exchange your outstanding notes.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions contained in this prospectus
and in the letter of transmittal, we will accept for exchange any and all
outstanding notes that are validly tendered and not withdrawn prior to 5:00
p.m., New York City time, on the expiration date. We will issue $1,000 principal
amount at maturity of registered notes in exchange for each $1,000 principal
amount at maturity of outstanding notes accepted in the exchange offer. You may
tender some or all of your outstanding notes under the exchange offer. However,
outstanding notes may be tendered only in minimum denominations of $1,000
principal amount and integral multiples of $1,000 in excess thereof. As of the
date of this prospectus, an aggregate of $175,000,000 in principal amount of the
notes is outstanding. This prospectus, together with the accompanying letter of
transmittal, is first being sent on or about ______________, 2002, to the
nominee of The Depository Trust Company ("DTC" or the "Depository") and to
others believed to have beneficial ownership in the outstanding notes.
The form and terms of the registered notes will be substantially identical
to the form and terms of the outstanding notes, except that:
o the offering of the registered notes has been registered under the
Securities Act;
o the registered notes will not be subject to transfer restrictions; and
o the registered notes will be issued free of any covenants regarding
registration rights and free of any provision for Liquidated Damages.
The registered notes will evidence the same debt as the outstanding notes
and will be issued under the same indenture.
You do not have any appraisal or dissenters rights under law or the
indenture in the exchange offer. We intend to conduct the exchange offer in
accordance with the applicable requirements of the Exchange Act. Outstanding
notes which are not tendered for, or are tendered but not accepted in connection
with, the exchange offer will remain outstanding.
We will be deemed to have accepted validly tendered outstanding notes when,
as and if we have given oral notice, promptly confirmed in writing, or written
notice of the acceptance to the exchange agent. The exchange agent will act as
agent for the tendering holders for the purpose of receiving the registered
notes from us.
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If we do not accept for exchange any tendered outstanding notes because of
an invalid tender, the occurrence of other events described in this prospectus
or otherwise, certificates for any such unaccepted outstanding notes will be
returned to you, without expense, as promptly as practicable after the
expiration date.
If you tender outstanding notes in the exchange offer, you will not be
required to pay brokerage commissions or fees or, subject to the instructions in
the letter of transmittal, transfer taxes relating to the exchange of
outstanding notes under the exchange offer. We will pay all charges and
expenses, other than underwriting discounts and commissions and transfer taxes,
as part of the exchange offer. See "--Fees and Expenses."
INTEREST ON THE REGISTERED NOTES
The registered notes will accrue cash interest on the same terms as the
outstanding notes, i.e., at the rate of 13 3/4% per year (using a 360-day year
consisting of twelve 30-day months), payable semi-annually in arrears on June 15
and December 15 of each year. The amount of interest payable for any period
shorter than a full semi-annual period for which interest is computed will be
computed on the basis of the actual number of days elapsed in the 180-day
period. Outstanding notes accepted for exchange will not receive accrued
interest at the time of exchange. However, each registered note will bear
interest:
o from the later of (1) the last interest payment date on which interest
was paid on the outstanding note surrendered in exchange for the
registered note or (2) if the outstanding note is exchanged for the
registered note on a date after the record date for an interest
payment date to occur on or after the date of the exchange and as to
which that interest will be paid, the date of that interest payment
date, or
o if no interest has been paid on the outstanding notes, from December
7, 2001.
EXPIRATION DATE, EXTENSIONS, TERMINATION
The term "expiration date" means 5:00 p.m., New York City time, on
________, 2002, unless we, in our sole discretion, extend the exchange offer, in
which case the term "expiration date" shall mean the latest date and time to
which the exchange offer is extended.
We have the right, subject to applicable law, in our reasonable discretion,
at any time and from time to time, (1) to extend the exchange offer or (2) to
terminate the exchange offer, if any of the conditions set forth below under
"--Conditions" shall not have been satisfied by giving oral or written notice of
such extension or termination to the exchange agent. Any such extension or
termination will be followed as promptly as practicable by a public
announcement.
Any such termination or extension will be followed promptly by oral or
written notice to the exchange agent (any such oral notice to be promptly
confirmed in writing) and by making a public announcement, and such announcement
in the case of an extension will be made no later than 9:00 a.m. New York City
time, on the next business day after the previously scheduled expiration date.
Without limiting the manner in which we may choose to make any public
announcement, and subject to applicable laws, we shall have no obligation to
publish, advertise or otherwise communicate any such public announcement, other
than by issuing a timely release to an appropriate news agency.
PROCEDURES FOR TENDERING
BOOK-ENTRY INTERESTS
The outstanding notes were issued as global securities in fully registered
form without interest coupons. Beneficial interests in the global securities,
held by direct or indirect participants in DTC, are shown on, and transfers of
these interests are effected only through, records maintained in book-entry form
by DTC with respect to its participants.
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If you hold your outstanding notes in the form of book-entry interests and
you wish to tender your outstanding notes for exchange pursuant to the exchange
offer, you must transmit to the exchange agent on or prior to the expiration
date either:
(1) written or facsimile copy of a properly completed and duly executed
letter of transmittal, including all other documents required by such
letter of transmittal, to the exchange agent at the address set forth
on the cover page of the letter of transmittal; or
(2) computer-generated message transmitted by means of DTC's Automated
Tender Offer Program system and received by the exchange agent and
forming a part of a confirmation of book-entry transfer, in which you
acknowledge and agree to be bound by the terms of the letter of
transmittal.
In addition, in order to deliver outstanding notes held in the form of
book-entry interests:
(A) a timely confirmation of book-entry transfer of such notes into the
exchange agent's account at DTC pursuant to the procedure for
book-entry transfers described below under "--Book-Entry Transfer" must
be received by the exchange agent prior to the expiration date; or
(B) you must comply with the guaranteed delivery procedures described below.
THE METHOD OF DELIVERY OF OUTSTANDING NOTES AND THE LETTER OF TRANSMITTAL
AND ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT YOUR ELECTION AND
RISK. INSTEAD OF DELIVERY BY MAIL, WE RECOMMEND THAT YOU USE AN OVERNIGHT OR
HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE
DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION DATE. YOU SHOULD NOT SEND
THE LETTER OF TRANSMITTAL OR OUTSTANDING NOTES TO US. YOU MAY REQUEST YOUR
BROKER, DEALER, COMMERCIAL BANK, TRUST COMPANY, OR NOMINEE TO EFFECT THE ABOVE
TRANSACTIONS FOR YOU.
CERTIFICATED OUTSTANDING NOTES
Only registered holders of certificated outstanding notes may tender those
notes in the exchange offer. If your outstanding notes are certificated notes
and you wish to tender those notes for exchange pursuant to the exchange offer,
you must transmit to the exchange agent on or prior to the expiration date a
written or facsimile copy of a properly completed and duly executed letter of
transmittal, including all other required documents, to the address set forth
below under "--Exchange Agent." In addition, in order to validly tender your
certificated outstanding notes:
(1) the certificates representing your outstanding notes must be received
by the exchange agent prior to the expiration date, or
(2) you must comply with the guaranteed delivery procedures described
below.
PROCEDURES APPLICABLE TO ALL HOLDERS
If you validly tender outstanding notes and you do not withdraw the tender
prior to the expiration date, you will have made an agreement with us in
accordance with the terms and subject to the conditions set forth in this
prospectus and in the letter of transmittal.
If your outstanding notes are registered in the name of a broker, dealer,
commercial bank, trust company or other nominee and you wish to tender your
notes, you should contact the registered holder promptly and instruct the
registered holder to tender on your behalf. If you wish to tender on your own
behalf, you must, prior to completing and executing the letter of transmittal
and delivering your outstanding notes, either make appropriate arrangements to
register ownership of the outstanding notes in your name or obtain a properly
completed bond power from the registered holder. The transfer of registered
ownership may take considerable time.
Signatures on a letter of transmittal or a notice of withdrawal must be
guaranteed by an eligible institution unless:
(A) outstanding notes tendered in the exchange offer are tendered either:
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(1) "Special Delivery Instructions" on the letter of transmittal; or
(2) for the account of an eligible institution; and
(B) the box entitled "Special Registration Instructions" on the letter of
transmittal has not been completed.
If signatures on a letter of transmittal or a notice of withdrawal are
required to be guaranteed, the guarantee must be by a financial institution,
which includes most banks, savings and loan associations and brokerage houses,
that is a participant in the Securities Transfer Agents Medallion Program, the
New York Stock Exchange Medallion Program or the Stock Exchanges Medallion
Program.
If the letter of transmittal is signed by a person other than you, your
outstanding notes must be endorsed or accompanied by a properly completed bond
power and signed by you as your name appears on those outstanding notes.
If the letter of transmittal or any outstanding notes or bond powers are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations, or others acting in a fiduciary or representative
capacity, those persons should so indicate when signing. Unless we waive this
requirement, in this instance you must submit with the letter of transmittal
proper evidence satisfactory to us of their authority to act on your behalf.
We will determine, in our sole discretion, all questions regarding the
validity, form, eligibility, including time of receipt, acceptance and
withdrawal of tendered outstanding notes. This determination will be final and
binding. We reserve the absolute right to reject any and all outstanding notes
not properly tendered or any outstanding notes our acceptance of which would, in
the opinion of our counsel, be unlawful. We also reserve the right to waive any
defects, irregularities or conditions of tender as to particular outstanding
notes. Our interpretation of the terms and conditions of the exchange offer,
including the instructions in the letter of transmittal, will be final and
binding on all parties.
You must cure any defects or irregularities in connection with tenders of
your outstanding notes within the time period we will determine unless we waive
that defect or irregularity. Although we intend to notify you of defects or
irregularities with respect to your tender of outstanding notes, neither we, the
exchange agent nor any other person will incur any liability for failure to give
this notification. Your tender will not be deemed to have been made and your
notes will be returned to you if:
(1) you improperly tender your outstanding notes;
(2) you have not cured any defects or irregularities in your tender; and
(3) we have not waived those defects, irregularities or improper tender.
The exchange agent will return your outstanding notes, unless otherwise
provided in the letter of transmittal, as soon as practicable following the
expiration of the exchange offer.
By tendering, you will represent to us that, among other things:
(1) the registered notes to be acquired by you in the exchange offer are
being acquired in the ordinary course of your business;
(2) you are not engaging in and do not intend to engage in a distribution
of the registered notes to be acquired by you in the exchange offer;
(3) you do not have an arrangement or understanding with any person to
participate in the distribution of the registered notes to be acquired
by you in the exchange offer; and
(4) you are not an "affiliate" of ours, as defined under Rule 405 of the
Securities Act.
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In all cases, issuance of registered notes for outstanding notes that are
accepted for exchange in the exchange offer will be made only after timely
receipt by the exchange agent of certificates for your outstanding notes or a
timely book-entry confirmation of your outstanding notes into the exchange
agent's account at DTC, a properly completed and duly executed letter of
transmittal, or a computer-generated message instead of the letter of
transmittal, and all other required documents. If any tendered outstanding notes
are not accepted for any reason set forth in the terms and conditions of the
exchange offer or if outstanding notes are submitted for a greater principal
amount than you desire to exchange, the unaccepted or non-exchanged outstanding
notes, or outstanding notes in substitution therefor, will be returned without
expense to you. In addition, in the case of outstanding notes tendered by
book-entry transfer into the exchange agent's account at DTC pursuant to the
book-entry transfer procedures described below, the non-exchanged outstanding
notes will be credited to your account maintained with DTC, as promptly as
practicable after the expiration or termination of the exchange offer.
GUARANTEED DELIVERY PROCEDURES
If you desire to tender your outstanding notes and your outstanding notes
are not immediately available or one of the situations described in the
immediately preceding paragraph occurs, you may tender if:
(1) you tender through an eligible financial institution;
(2) on or prior to 5:00 p.m., New York City time, on the expiration date,
the exchange agent receives from an eligible institution, a written or
facsimile copy of a properly completed and duly executed letter of
transmittal and notice of guaranteed delivery, substantially in the
form provided by us; and
(3) the certificates for all certificated outstanding notes, in proper form
for transfer, or a book-entry confirmation, and all other documents
required by the letter of transmittal, are received by the exchange
agent within three NYSE trading days after the date of execution of the
notice of guaranteed delivery.
The notice of guaranteed delivery may be sent by facsimile transmission,
mail or hand delivery. The notice of guaranteed delivery must set forth:
(1) your name and address;
(2) the amount of outstanding notes you are tendering; and
(3) a statement that your tender is being made by the notice of guaranteed
delivery and that you guarantee that within three New York Stock
Exchange trading days after the execution of the notice of guaranteed
delivery, the eligible institution will deliver the following documents
to the exchange agent:
(A) the certificates for all certificated outstanding notes being
tendered, in proper form for transfer or a book-entry
confirmation of tender;
(B) a written or facsimile copy of the letter of transmittal, or a
book-entry confirmation instead of the letter of transmittal; and
(C) any other documents required by the letter of transmittal.
BOOK-ENTRY TRANSFER
The exchange agent will establish an account with respect to the book-entry
interests at DTC for purposes of the exchange offer promptly after the date of
this prospectus. You must deliver your book-entry interest by book-entry
transfer to the account maintained by the exchange agent at DTC. Any financial
institution that is a participant in DTC's systems may make book-entry delivery
of book-entry interests by causing DTC to transfer the book-entry interests into
the exchange agent's account at DTC in accordance with DTC's procedures for
transfer.
If one of the following situations occur:
105
(1) you cannot deliver a book-entry confirmation of book-entry delivery of
your book-entry interests into the exchange agent's account at DTC; or
(2) you cannot deliver all other documents required by the letter of
transmittal to the exchange agent prior to the expiration date,
then you must tender your book-entry interests according to the guaranteed
delivery procedures discussed above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of outstanding notes may be
withdrawn at any time prior to 5:00 p.m., New York City time, on the expiration
date.
To withdraw a tender of outstanding notes in the exchange offer, a written
or facsimile transmission notice of withdrawal must be received by the exchange
agent at its address listed in this prospectus prior to 5:00 p.m., New York City
time, on the expiration date. Any notice of withdrawal must:
o specify the name of the person having deposited the outstanding notes
to be withdrawn;
o identify the outstanding notes to be withdrawn, including the
certificate number or numbers and
principal amount of such outstanding notes; and
o be signed by the holder in the same manner as the original signature
on the letter of transmittal by which the outstanding notes were
tendered, including any required signature guarantees, or he
accompanied by documents of transfer sufficient to have the trustee
with respect to the outstanding notes register the transfer of the
outstanding notes into the name of the person withdrawing the tender;
and specify the name in which any outstanding notes are to be
registered if different from that of the person that deposited the
outstanding notes to be withdrawn.
If the outstanding notes have been delivered under the book-entry procedure
set forth above under "--Procedures for Tendering," any notice of withdrawal
must specify the name and number of the participant's account at DTC to be
credited with the withdrawn outstanding notes.
We will determine, in our sole discretion, all questions as to the validity,
form and eligibility, including time of receipt, of withdrawal notices. Our
determination shall be final and binding on all parties. Any outstanding notes
withdrawn will be deemed not to have been validly tendered for purposes of the
exchange offer and registered notes will not be issued in exchange for such
withdrawn outstanding notes unless the withdrawn outstanding notes are validly
retendered. Properly withdrawn outstanding notes may be retendered by following
one of the procedures described above under "--Procedures for Tendering" at any
time prior to the expiration date.
Any outstanding notes that are tendered but not accepted due to withdrawal,
rejection of tender or termination of the exchange offer will be returned as
soon as practicable to the holder without cost to the holder (or, in the case of
outstanding notes tendered by book-entry transfer into the exchange agent's
account at the book-entry transfer facility under the book-entry transfer
procedures described above, these outstanding notes will be credited to an
account maintained with such book-entry transfer facility for the outstanding
notes).
CONDITIONS
Notwithstanding any other term of the exchange offer, we are not required to
accept for exchange any outstanding notes, and may terminate the exchange offer
as provided in this prospectus before the acceptance of any outstanding notes,
if:
o the exchange offer will violate applicable law or any applicable
interpretation of the SEC staff;
o the outstanding notes are not tendered in accordance with the exchange
offer;
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o you do not represent that you are acquiring the registered notes in
the ordinary course of your business, that you are not engaging in and
do not intend to engage in a distribution of the registered notes, and
that you have no arrangement or understanding with any person to
participate in a distribution of the registered notes; or
o any action or proceeding is instituted or threatened by any
governmental agency with respect to the exchange offer which would
reasonably be expected to impair our ability to proceed with the
exchange offer.
These conditions are for our sole benefit and we may assert them regardless
of the circumstances giving rise to any condition or we may waive them in whole
or in part at any time and from time to time in our reasonable discretion. Our
failure at any time to exercise any of the foregoing rights shall not he deemed
a waiver of the right and each right shall be deemed an ongoing right which may
be asserted at any time and from time to time.
If we determine in our reasonable judgment that any of the conditions are
not satisfied, we may (1) refuse to accept any outstanding notes and return all
tendered outstanding notes to the tendering holders (or, in the case of
outstanding notes delivered by book-entry transfer within DTC, credit any
outstanding notes to the account maintained within DTC by the participant in DTC
which delivered the notes), (2) extend the exchange offer and retain all
outstanding notes tendered prior to the expiration of the exchange offer,
subject, however, to the rights of holders to withdraw the tenders of
outstanding notes (see "Withdrawal of Tenders" above) or (3) waive the
unsatisfied conditions with respect to the exchange offer and accept all
properly tendered outstanding notes which have not been withdrawn. If a waiver
constitutes a material change to the exchange offer, we will promptly disclose
the waiver by means of a prospectus supplement that will be distributed to the
registered holders, and we will extend the exchange offer for a period of five
to ten business days, depending upon the significance of the waiver and the
manner of disclosure to the registered holders, if the exchange offer would
otherwise expire during such five to ten business day period.
EXCHANGE AGENT
Wells Fargo Bank Minnesota, National Association has been appointed as
exchange agent for the exchange offer. Delivery of letters of transmittal and
any other required documents, questions, requests for assistance, and requests
for additional copies of this prospectus or of the letter of transmittal should
be directed to the exchange agent as follows:
Registered & Certified mail: Regular mail or Overnight Couriers: In person by hand only:
- --------------------------- ---------------------------------- - ----------------------
Wells Fargo Bank Minnesota, N.A. Wells Fargo Bank Minnesota, N.A. Northstar East Building
MAC #N9303-121 MAC #N9303-121 12th Floor-Corporate Trust Services
Corporate Trust Operations Corporate Trust Operations 608 2nd Avenue South
P.O. Box 1517 6th & Marquette Avenue Minneapolis, MN
Minneapolis, MN 55480-1517 Minneapolis, MN 55479
Facsimile: 612/667-4927
Phone: 612/667-9764
Delivery to other than the above address or facsimile number will not
constitute a valid delivery of your outstanding notes.
FEES AND EXPENSES
We will pay expenses of soliciting tenders. The principal solicitation is
being made by mail; however, additional solicitation may be made by facsimile,
telephone or in person by our officers and regular employees.
We have not retained any dealer-manager as part of the exchange offer and
will not make any payments to brokers, dealers or others soliciting acceptance
of the exchange offer. We will, however, pay the exchange agent reasonable and
customary fees for services and will reimburse it for its reasonable
out-of-pocket expenses under the exchange offer. We will also pay the reasonable
fees and expenses of one firm acting as counsel for the holders of the
outstanding notes. Expenses include fees and expenses of the exchange agent and
trustee, accounting and legal fees and printing costs, among others.
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TRANSFER TAXES
You must pay all transfer taxes, if any, applicable to the exchange of
outstanding notes under the exchange offer. If satisfactory evidence of payment
of the taxes or exemption therefrom is not submitted with the letter of
transmittal, the amount of the transfer taxes will be billed directly to you.
ACCOUNTING TREATMENT
The registered notes will be recorded at the same carrying value as the
outstanding notes on the date of the exchange. Accordingly, we will recognize no
gain or loss for accounting purposes. The expenses of the exchange offer and the
unamortized expenses relating to the issuance of the outstanding notes will be
amortized over the term of the registered notes.
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DESCRIPTION OF THE REGISTERED NOTES
On December 7, 2001, we issued $175.0 million in principal amount of senior
notes due June 15, 2011. Horizon PCS issued the senior notes under an indenture
dated as of December 7, 2001, among itself, the Guarantors and Wells Fargo Bank
Minnesota, National Association, as Trustee. The terms of the notes include
those stated in the indenture and those made part of the indenture by reference
to the Trust Indenture Act of 1939 (the "Trust Indenture Act"). The indenture
will be qualified as an indenture under the Trust Indenture Act. The notes will
be secured in part for two years pursuant to a Pledge and Escrow Agreement among
Horizon PCS, the Guarantors, the Trustee and Wells Fargo Bank Minnesota,
National Association, as Escrow Agent (the "Pledge and Escrow Agreement").
The senior notes:
o mature on June 15, 2011 and are limited to an aggregate principal
amount at maturity of $175.0 million;
o are senior unsecured obligations of Horizon PCS, except to the extent
of the security interest in the Escrow Account as described below
under "-- Interest Escrow";
o are equal in right of payment to all existing and future unsecured
senior indebtedness of Horizon PCS;
o are senior in right of payment to all existing and future subordinated
indebtedness of Horizon PCS;
o accrue interest at a rate of 13 3/4% per annum, computed on a
semi-annual basis, calculated from December 7, 2001, interest payable
semi-annually in cash on each June 15 and October 15, beginning June
15, 2002; and
o are guaranteed by all of our current and future domestic subsidiaries
on a senior subordinated basis.
We may elect to redeem all or part of the senior notes at any time on or
after December 15, 2006 and before maturity, at the following redemption prices:
REDEMPTION PRICE PER $1,000 OF
YEAR BEGINNING PRINCIPAL AMOUNT
----------------------------------------------------------- -----------------------------------
December 15, 2006...................................... $1,068.25
December 15, 2007...................................... 1,045.85
December 15, 2008...................................... 1,022.92
December 15, 2009 and thereafter....................... 1,000.00
In addition, any time prior to December 15, 2004, we may redeem up to 35% of
the principal amount at maturity of senior notes issued under the indenture, at
a redemption price equal to $1,137.50 for each $1,000 of accreted value of a
senior note to the redemption date, with the net proceeds of one or more equity
offerings. However, at least 65% of the aggregate principal amount of senior
notes issued under the indenture must remain outstanding immediately after
giving effect to the redemption.
Our senior secured credit facility prohibits the purchase of outstanding
notes before repayment of the borrowings under the credit facility.
We paid fees to our initial purchasers of the senior notes of approximately
$5.3 million which will be amortized as interest expense over the term of the
financing using the effective interest method.
You can find the definitions of many of the terms used in this description
under the subheading "Certain Definitions." In this description, the words
"Horizon PCS" and "we" refer only to Horizon PCS, Inc. and not to any of its
subsidiaries.
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THE GUARANTEES
The notes will be guaranteed by all of our existing and future Restricted
Subsidiaries other than Foreign Subsidiaries.
The Guarantees of these notes:
o will be general unsecured obligations of each Guarantor;
o will be subordinated in right of payment to all existing and future
Senior Debt of each Guarantor;
o will be equal in right of payment with all future senior subordinated
Indebtedness of each Guarantor; and
o will be senior in right of payment to all future subordinated
Indebtedness of each Guarantor.
As of the Issue Date, all of our Subsidiaries were "Restricted
Subsidiaries." However, in the future, we will be permitted to designate
Subsidiaries meeting particular requirements as "Unrestricted Subsidiaries."
Unrestricted Subsidiaries will not be subject to many of the restrictive
covenants in the indenture. Unrestricted Subsidiaries and Foreign Subsidiaries
will not guarantee these Notes. The rights of holders of notes will be
subordinated by operation of law to all existing and future Indebtedness and
preferred stock of Horizon PCS' Subsidiaries that are not Guarantors.
The Guarantees will be released upon the circumstances described under "--
Guarantees."
PRINCIPAL AND INTEREST
The new notes will evidence the same debt as the original notes and will be
issued under, and be entitled to the benefits of, the indenture, as
supplemented, governing the original notes. The new notes will accrue interest
from the most recent date to which interest has been paid or, if no interest has
been paid, from date of issuance of the original notes. Accordingly, registered
holders of new notes on the record date for the first interest payment date
following the completion of the exchange offer will receive interest accrued
from the most recent date to which interest has been paid or, if no interest has
been paid, from the date of issuance of the original notes. However, if that
record date occurs prior to completion of the exchange offer, then the interest
payable on the first interest payment date following the completion of the
exchange offer will be paid to the registered holders of the original notes on
that record date.
Cash interest will accrue at a rate of 13 3/4% per annum, payable
semi-annually in arrears on June 15 and December 15 of each year, commencing
June 15, 2002 (each an "Interest Payment Date") to holders of record of such
notes at the close of business on the June 1 and December 1 next preceding the
Interest Payment Date (each a "Regular Record Date"). Cash interest will accrue
from the most recent Interest Payment Date to which interest has been paid or
duly provided for or, if no interest has been paid or duly provided for, from
the date of issuance. Cash interest will be computed on a basis of a 360-day
year of twelve 30-day months.
The notes are not be subject to any sinking fund.
The aggregate principal amount, premium, liquidated damages and interest, if
any, on the registered notes will be payable, and the notes will be exchangeable
and transferable, at the office or agency of Horizon PCS in the City of New York
maintained for such purposes, which initially will be the office of the Trustee
located at Corporate Trust Services, Sixth and Marquette, MAC N9303-120,
Minneapolis, MN. The notes will be issued only in registered form without
coupons and only in denominations of $1,000 and any integral multiple thereof.
No service charge will be made for any registration of transfer or exchange or
redemption of notes, but we may require payment in certain circumstances of a
sum sufficient to cover any tax or other governmental charge that may be imposed
in connection therewith.
INTEREST ESCROW
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Horizon PCS' obligations under the notes will be secured in part for two
years pending disbursement pursuant to the Pledge and Escrow Agreement by a
pledge of the Escrow Account. Approximately $48.7 million was deposited in the
Escrow Account and used to purchase a portfolio of Government Securities that
was pledged as security on the notes and the senior discount notes, and under
the related indentures.
The Pledge and Escrow Agreement provides for the grant by Horizon PCS to the
Trustee of security interests in the Escrow Account for the equal and ratable
benefit of the holders of the senior notes and the senior discount notes. The
security interests equally and ratably secure the payment and performance when
due of the obligations of Horizon PCS under the indenture governing the senior
notes and under such notes and under the indenture governing the senior discount
notes and under such senior discount notes, as provided in the Pledge and Escrow
Agreement. The ability of such holders to realize upon such funds or securities
may be subject to certain bankruptcy law limitations in the event of a
bankruptcy of Horizon PCS.
The Escrow Account contains an amount of Government Securities with a value
equal to the total aggregate amount of the first four scheduled interest
payments on the notes. Funds will be disbursed from the Escrow Account to pay
interest on the notes. If at any time the Escrow Account contains Government
Securities and/or cash having an aggregate value in excess of the remaining
interest payments on the notes scheduled to occur on or prior to December 15,
2003, this excess Government Securities or funds may be released to Horizon PCS.
All cash contained in the Escrow Account will continue to be invested in
Government Securities pending release.
PAYING AGENT AND REGISTRAR FOR THE NOTES
The Trustee is acting as Paying Agent and Registrar. We may change the
Paying Agent or Registrar without prior notice to the holders of the notes, and
we or any of our Subsidiaries may act as Paying Agent or Registrar.
REPURCHASE AT THE OPTION OF HOLDERS
Holders of the senior notes have the right to require us to repurchase all
or part of the senior notes at a premium upon the occurrence of events
constituting a change in control of Horizon PCS. Any of these repurchases would
be for cash at an aggregate price of 101% of the aggregate principal amount
thereof plus accrued and unpaid interest and liquidated damages thereon. Under
the indenture governing the senior notes, a change of control includes:
o sale or other disposition of substantially all of our and our
subsidiaries' assets;
o our adoption of a plan of liquidation or dissolution;
o consummation of a transaction in which any person or group, other than
certain current stockholders or their affiliates, become the
beneficial owner of more than 50% of our voting stock;
o continuing directors ceasing to comprise a majority of our board of
directors; and
o a merger or consolidation of Horizon in which our voting stock is
converted into or exchanged for cash, securities or other property,
unless our voting stock is converted into or exchanged for a majority
of the outstanding shares of one of the other parties to the merger or
consolidation.
However, a change of control does not include a merger or consolidation of
Horizon PCS with an affiliate of Sprint PCS if, after that transaction:
o Standard & Poor's or Moody's have not downgraded their ratings of the
senior notes or given notice of a potential downgrading;
o the beneficial owners of Horizon PCS prior to the transaction continue
to be beneficial owners of at least 25% of the voting stock of Horizon
PCS or its successor in the transaction.
COVENANTS
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The indenture governing the senior notes contains covenants that principally
limit our ability and the ability of our subsidiary and future subsidiaries to:
o pay dividends, redeem capital stock or make other restricted payments
or investments;
o incur additional indebtedness or issue preferred stock;
o create liens on assets;
o merge, consolidate or dispose of assets;
o dispose of less than all of the equity in a wholly owned subsidiary;
o engage in any business other than PCS telecommunications and related
or ancillary businesses;
o enter into transactions with affiliates; and
o enter into sale and leaseback transactions.
REGISTRATION RIGHTS
We are required, under the terms of a registration rights agreement, to:
o file an exchange offer registration statement on or before April 6,
2002 covering the exchange of the senior notes for registered notes;
o use our best efforts to cause the exchange offer registration
statement to be declared effective under the Securities Act on or
before July 6, 2002;
o use our best efforts to cause the exchange after registration
statement to be effective continuously;
o keep the exchange offer open for a period of not less than 20 business
days; and
o cause the exchange offer to be consummated no later than the 30
business day after it is declared effective.
We may also be required to file a shelf registration statement to register
for public resale the notes held by any holder who may not otherwise participate
in the exchange offer.
If we fail to file the exchange offer or shelf registration statement, or
fail to cause the exchange offer or shelf registration statement to become
effective, or fail to consummate the exchange offer, in each case by the
deadlines set forth above, a registration default shall be deemed to have
occurred and we will be required to pay liquidated damages to each holder of the
senior discount notes. The liquidated damages payable to each holder of the
senior discount notes will be in an amount equal to $0.05 per week per $1,000 in
principal amount of the senior discount notes held by that holder for each week
or portion thereof that the registration default continues for the first 90-day
period immediately following the occurrence of the registration default. This
amount will increase by an additional $0.05 per week per $1,000 in principal
amount of the notes with respect to each subsequent 90-day period, up to a
maximum amount equal to $0.50 per $1,000 in principal amount of the senior
discount notes. The provision for liquidated damages will continue until that
registration default has been cured. We will not be required to pay liquidated
damages for more than one registration default at any given time.
EVENTS OF DEFAULT AND REMEDIES
Each of the following is an Event of Default:
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(1) the failure by Horizon PCS to pay interest on, or liquidated
damages with respect to, the notes when the same becomes due and payable if
such default continues for a period of 30 days; provided, however, that for
each interest payment scheduled to occur on or prior to December 15, 2003,
failure for two days in the payment when due of that interest on the notes
will constitute an immediate Event of Default;
(2) the failure of Horizon PCS to pay all or any part of the
principal, or premium, if any, on the notes when and as the same becomes
due and payable, redemption, by acceleration or otherwise, including,
without limitation, payment of the Change of Control Payment or the amount
set forth in the Asset Sale Offer, or otherwise on notes validly tendered
and not properly withdrawn pursuant to a Change of Control or Asset Sale
Offer, as applicable, or default in payment when due of the principal of or
premium, if any, on the notes, whether or not prohibited by provisions of
the indenture;
(3) the failure by Horizon PCS or any of its Restricted Subsidiaries
to observe or perform any other covenant or agreement contained in the
notes or the indenture and, except for the provisions under "Repurchase at
the Option of the Holders" and provisions related to Asset Sales, mergers
and consolidations, the continuance of the failure for a period of 30 days
after written notice is given to Horizon PCS by the Trustee or to Horizon
PCS and the Trustee by the holders of 25% in aggregate principal amount of
the notes outstanding;
(4) default under any mortgage, indenture or instrument under which
there may be issued or by which there may be secured or evidenced any
Indebtedness for money borrowed by Horizon PCS or any of its Restricted
Subsidiaries, or the payment of which is guaranteed by Horizon PCS or any
of its Restricted Subsidiaries, whether such Indebtedness or guarantee now
exists, or is created after the Issue Date, if that default:
(a) is caused by a failure to pay principal of or premium, if
any, or interest on such Indebtedness prior to the expiration of the
grace period provided in such Indebtedness on the date of such default
(a "Payment Default"); or
(b) results in the acceleration of such Indebtedness prior to its
express maturity;
and, in each case, the outstanding principal amount of any such
Indebtedness, together with the principal amount of any other such
Indebtedness under which there has been a Payment Default or the maturity of
which has been so accelerated, aggregates $5.0 million or more;
(5) failure by Horizon PCS or any of its Restricted Subsidiaries to
pay final judgments aggregating in excess of $5.0 million, which judgments
are not paid, discharged or stayed for a period of 60 days;
(6) except as permitted by the indenture, any Guarantee shall be held
in any judicial proceeding to be unenforceable or invalid or shall cease
for any reason to be in full force and effect or any Guarantor, or any
Person acting on behalf of any Guarantor, shall deny or disaffirm its
obligations under its Guarantee;
(7) certain events of bankruptcy or insolvency with respect to Horizon
PCS or any of its Restricted Subsidiaries;
(8) (a) if any Credit Facility is not in existence, any event occurs
that causes, subject to any applicable grace period or waiver, an Event of
Termination under any of the Sprint Agreements or (b) if any Credit
Facility is in existence, Sprint shall have commenced to exercise any
remedy under the Sprint Agreements (other than Section 11.6.3 of the
Management Agreement) by reason of the occurrence of an Event of
Termination, and;
(9) any material breach by Horizon PCS of any representation, warranty
or agreement set forth in the Pledge and Escrow Agreement, or a material
default by Horizon PCS in the performance of any covenant set forth in the
Pledge and Escrow Agreement, or a repudiation by Horizon PCS of its
obligations under the Pledge and Escrow Agreement, or the Pledge and Escrow
Agreement is held in any judicial proceeding to be unenforceable or invalid
or ceases for any reason to be in full force and effect.
In the case of an Event of Default arising from certain events of bankruptcy
or insolvency, with respect to Horizon PCS, any Restricted Subsidiary that is a
Significant Subsidiary or any group of Restricted Subsidiaries that, taken
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together, would constitute a Significant Subsidiary, all outstanding notes will
become due and payable immediately without further action or notice. If any
other Event of Default occurs and is continuing, the Trustee or the holders of
at least 25% in aggregate principal amount of all the notes then outstanding,
plus accrued and unpaid interest to the date of acceleration, may declare all
the notes to be due and payable immediately.
Holders of the notes may not enforce the indenture or the notes except as
provided in the indenture. Subject to certain limitations, holders of a majority
in principal amount of the then outstanding notes may direct the Trustee in its
exercise of any trust or power. The Trustee may withhold from holders of the
notes notice of any continuing Default or Event of Default, except a Default or
Event of Default relating to the payment of principal or interest, if it
determines that withholding notice is in their interest.
The holders of a majority in aggregate principal amount of the notes then
outstanding by notice to the Trustee may on behalf of the holders of all of the
notes waive any existing Default or Event of Default and its consequences under
the indenture except a continuing Default or Event of Default in the payment of
interest on, or the principal of, the notes.
In the case of any Event of Default occurring by reason of any willful
action or inaction taken or not taken by or on behalf of Horizon PCS with the
intention of avoiding payment of the premium that Horizon PCS would have had to
pay if Horizon PCS then had elected to redeem the notes pursuant to the optional
redemption provisions of the indenture, an equivalent premium shall also become
and be immediately due and payable to the extent permitted by law upon the
acceleration of the notes. If an Event of Default occurs prior to December 15,
2006, by reason of any willful action or inaction taken or not taken by or on
behalf of Horizon PCS with the intention of avoiding the prohibition on
redemption of the notes prior to December 15, 2006, then the premium specified
in the indenture shall also become immediately due and payable to the extent
permitted by law upon the acceleration of the notes.
Horizon PCS is required to deliver to the Trustee annually a statement
regarding compliance with the indenture. Upon becoming aware of any Default or
Event of Default, Horizon PCS is required to deliver to the Trustee a statement
specifying such Default or Event of Default.
DEFINITIONS
Below are many of the defined terms used in the indenture. Reference is made
to the indenture for a full disclosure of all such terms, as well as any other
capitalized terms used for which no definition is provided.
"Accounts Receivable Subsidiary" means a Subsidiary of Horizon PCS to which
Horizon PCS or any of its Restricted Subsidiaries sells any of their accounts
receivable pursuant to a Receivables Facility.
"Acquired Debt" means, with respect to any specified Person:
(1) Indebtedness of any other Person existing at the time such other
Person is merged with or into or became a Subsidiary of such specified
Person, whether or not such Indebtedness is incurred in connection with, or
in contemplation of, such other Person merging with or into, or becoming a
Subsidiary of, such specified Person; and
(2) Indebtedness secured by a Lien encumbering any asset acquired by
such specified Person.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control,"
as used with respect to any Person, shall mean the possession, directly or
indirectly, of the power to direct or cause the direction of the management or
policies of such Person, whether through the ownership of voting securities, by
agreement or otherwise; provided that beneficial ownership of 10% or more of the
Voting Stock of a Person shall be deemed to be control. For purposes of this
definition, the terms "controlling," "controlled by" and "under common control
with" shall have correlative meanings.
"Annualized Operating Cash Flow" means Operating Cash Flow, for the latest
two full fiscal quarters for which consolidated financial statements of Horizon
PCS are publicly available multiplied by two.
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"Apollo Management" means Apollo Management IV, L.P. and affiliated funds.
"Asset Sale" means:
(1) the sale, lease, conveyance or other disposition of any assets or
rights, other than sales of inventory and sales of obsolete equipment in
the ordinary course of business consistent with past practices; provided
that the sale, conveyance or other disposition of all or substantially all
of the assets of Horizon PCS and its Restricted Subsidiaries taken as a
whole will be governed by the provisions of the indenture described above
under the caption "-- Repurchase at the Option of Holders -- Change of
Control" and/or the provisions described above under the caption "--
Selected Covenants -- Merger, Consolidation or Sale of Assets" and not by
the provisions of the Asset Sale covenant;
(2) the issuance of Equity Interests by any of Horizon PCS's
Restricted Subsidiaries or the sale of Equity Interests in any of its
Restricted Subsidiaries; and
(3) sales of accounts receivable, or participations therein, in
connection with any Receivables Facility.
Notwithstanding the preceding, the following items shall not be deemed to be
Asset Sales:
(1) any single transaction or series of related transactions that: (a)
involves assets having a fair market value of less than $1.0 million; or
(b) results in net proceeds to Horizon PCS and its Restricted Subsidiaries
of less than $1.0 million;
(2) a sale, lease, conveyance or other disposition of assets between
or among Horizon PCS and its Wholly Owned Restricted Subsidiaries that are
Guarantors;
(3) an issuance of Equity Interests by a Wholly Owned Restricted
Subsidiary to Horizon PCS or to another Wholly Owned Restricted Subsidiary;
(4) a Restricted Payment that is permitted by the covenant described
above under the caption "-- Selected Covenants -- Limitation on Restricted
Payments";
(5) any transfer by Horizon PCS or a Subsidiary of property or
equipment with a fair market value of less than $5.0 million to a Person
who is not an Affiliate of Horizon PCS in exchange for property or
equipment that has a fair market value at least equal to the fair market
value of the property or equipment so transferred; provided that, in the
event of a transfer described in this clause (5), Horizon PCS shall deliver
to the Trustee an officer's certificate certifying that such exchange
complies with this clause (5);
(6) the issuance of directors' qualifying shares of Preferred Capital
Stock of such Restricted Subsidiary (other than Preferred Capital Stock
convertible or exchangeable into common stock) that is otherwise permitted
by the indenture; and
(7) the transfer or sale of Equity Interests required by applicable
laws or regulations.
"Attributable Debt" in respect of a sale and leaseback transaction means, at
the time of determination, the present value of the obligation of the lessee for
net rental payments during the remaining term of the lease included in such sale
and leaseback transaction including any period for which such lease has been
extended or may, at the option of the lessor, be extended. Such present value
shall be calculated using a discount rate equal to the rate of interest implicit
in such transaction, determined in accordance with GAAP.
"Beneficial Owner" has the meaning assigned to such term in Rule 13d-3 and
Rule 13d-5 under the Exchange Act, except that in calculating the beneficial
ownership of any particular "person," as such term is used in Section 13(d)(3)
of the Exchange Act, such "person" shall be deemed to have beneficial ownership
of all securities that such "person" has the right to acquire, whether such
right is currently exercisable or is exercisable only upon the occurrence of a
subsequent condition.
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"Board Resolution" means a copy of a resolution certified by the Secretary
or an Assistant Secretary of Horizon PCS to have been duly adopted by the Board
of Directors of Horizon PCS, unless the context specifically requires that such
resolution be adopted by a majority of the disinterested directors, in which
case by a majority of such directors, and to be in full force and effect on the
date such certification is delivered to the Trustee.
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at that time be required to be capitalized on a balance sheet in accordance with
GAAP.
"Capital Stock" means:
(1) in the case of a corporation, corporate stock;
(2) in the case of an association or business entity, any and all
shares, interests, participations, rights or other equivalents, however
designated, of corporate stock;
(3) in the case of a partnership or limited liability company,
partnership or membership interests, whether general or limited; and
(4) any other interest or participation that confers on a Person the
right to receive a share of the profits and losses of, or distributions of
assets of, the issuing Person.
"Cash Equivalents" means:
(1) United States dollars;
(2) securities issued or directly and fully guaranteed or insured by
the United States government or any agency or instrumentality thereof,
provided that the full faith and credit of the United States is pledged in
support thereof, having maturities of less than one year from the date of
acquisition;
(3) certificates of deposit and Eurodollar time deposits with
maturities of less than one year from the date of acquisition, bankers'
acceptances with maturities not exceeding six months and overnight bank
deposits, in each case, with any domestic commercial bank having capital
and surplus in excess of $500.0 million and a Thompson Bank Watch Rating of
"B" or better;
(4) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clauses (2) and (3) above
entered into with any financial institution meeting the qualifications
specified in clause (3) above;
(5) commercial paper having the highest rating obtainable from Moody's
Investors Service, Inc. or Standard & Poor's Corporation and in each case
maturing prior to one year after the date of acquisition; and
(6) money market funds at least 95% of the assets of which constitute
Cash Equivalents of the kinds described in clauses (1) through (5) of this
definition.
"Change of Control" means the occurrence of any of the following:
(1) the sale, transfer, conveyance or other disposition, other than by
way of merger or consolidation, in one or a series of related transactions,
of all or substantially all of the assets of Horizon PCS and its
Subsidiaries taken as a whole to any "person" or "group" as such terms are
used in Section 13(d)(3) of the Exchange Act; (2) the adoption of a plan
relating to the liquidation or dissolution of Horizon PCS;
(3) the consummation of any transaction, including, without
limitation, any merger or consolidation, the result of which is that any
"person" or "group" as defined above, other than the Principals or any of
their Affiliates, becomes the Beneficial Owner, directly or indirectly, of
more than 50.0% of the Voting Stock of Horizon PCS, measured by voting
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power rather than number of shares; provided, that so long as the surviving
Person in such a transaction is a Subsidiary of a parent Person, no Person
shall be deemed under this clause (3) of this "Change of Control"
definition to be or become a Beneficial Owner of more than 50.0% of the
Voting Stock of such surviving Person unless such Person (or any "group,"
as defined above, to which such Person is a member) shall be or become a
Beneficial Owner of more than 50.0% of the Voting Stock of such parent
Person;
(4) the first day on which a majority of the members of the Board of
Directors of Horizon PCS are not Continuing Directors; or
(5) Horizon PCS consolidates with, or merges with or into, any Person,
or any Person consolidates with, or merges with or into, Horizon PCS, in
any such event pursuant to a transaction in which any of the outstanding
Voting Stock of Horizon PCS is converted into or exchanged for cash,
securities or other property, other than any such transaction where the
Voting Stock of Horizon PCS outstanding immediately prior to such
transaction is converted into or exchanged for Voting Stock, other than
Disqualified Stock, of the surviving or transferee Person constituting a
majority of the outstanding shares of such Voting Stock of such surviving
or transferee Person immediately after giving effect to such issuance.
Notwithstanding anything to the contrary contained in clauses (4) and (5) above,
a "Change of Control" shall not be deemed to occur as the result of a merger or
consolidation of Horizon PCS with or into a Sprint PCS Affiliate (including a
Wholly Owned Subsidiary or Sprint PCS Affiliate Parent of a Sprint PCS
Affiliate) if:
(x) after the announcement of the merger or consolidation and prior to
the consummation thereof:
(i) there shall not have occurred any downgrading nor shall any
notice have been given (that is not subsequently removed prior to the
consummation thereof) of any potential or intended downgrading of any
rating of the Notes to a rating that is lower than the rating that
existed or was indicated prior to the announcement of the merger or
consolidation, in any case by Standard & Poor's Corporation or Moody's
Investors Service, Inc. (each a "Rating Organization"), or their
successors that is not subsequently removed prior to such consummation;
(ii) there shall not have occurred any suspension or withdrawal of,
nor shall any notice have been given of any potential or intended
suspension or withdrawal of, any review (or of any potential or intended
review) for a possible change that does not indicate the direction of the
possible change in, any rating of the Notes (including, without
limitation, the placing of any of the Notes on credit watch with negative
or developing implications or under review with an uncertain direction)
by any Rating Organization, in each case that is not subsequently removed
prior to the consummation of such merger or consolidation;
(iii) there shall not have occurred any change, nor shall any notice
have been given of any potential or intended change, in the outlook for
any rating of the Notes to a rating that is lower than the rating that
existed or was indicated prior to the announcement of the merger or
consolidation, in any case by any Rating Organization, that is not
subsequently removed prior to the consummation of such merger or
consolidation;
(iv) no Rating Organization shall have given notice that it has
assigned (or is considering assigning) a rating to the Notes that is
lower than the rating that existed or was indicated prior to the
announcement of the merger or consolidation that is not subsequently
removed prior to such consummation; and
(y) the Beneficial Owners of Voting Stock of Horizon PCS immediately
preceding such merger or consolidation shall continue to be the Beneficial
Owners of at least 25% of the outstanding Voting Stock, other than
Disqualified Stock, of Horizon PCS (or the surviving or transferee Person
referred to in clause (5) above or sole stockholder of such surviving or
transferee Person) immediately after giving effect to the merger or
consolidation.
"Consolidated Debt" means the aggregate amount of Indebtedness of Horizon
PCS and its Restricted Subsidiaries on a Consolidated basis outstanding at the
date of determination; provided, that in the event of a merger or consolidation
(unless as a result of such transaction, such other Person becomes an
Unrestricted Subsidiary) otherwise permitted under the terms of the indenture,
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Consolidated Debt shall include the aggregate amount of Indebtedness outstanding
at the time of such transaction of such other Person party to such merger or
consolidation.
"Consolidated Debt to Annualized Operating Cash Flow Ratio" means, as at any
date of determination, the ratio of (i) Consolidated Debt to (ii) the Annualized
Operating Cash Flow of Horizon PCS as of the most recently completed fiscal
quarter of Horizon PCS for which financial statements are publicly available.
"Consolidated Interest Expense" of any Person means, for any period, the sum
(without duplication and determined in each case in accordance with GAAP) of (1)
the aggregate interest expense and fees and other financing costs in respect of
Indebtedness (including amortization of original issue discount and non-cash
interest payments and accruals), plus (2) the interest component in respect of
Capital Lease Obligations and any deferred payment obligations of such Person
and its Restricted Subsidiaries determined on a consolidated basis in accordance
with GAAP, plus (3) all commissions, discounts, other fees and charges owed with
respect to letters of credit and bankers' acceptance financing and net costs
(including amortization of discounts) associated with interest rate swap and
similar agreements and with foreign currency hedge, exchange and similar
agreements plus (4) the product of (a) all dividend accruals or payments (or
guarantees), whether or not in cash, on any series of Preferred Capital Stock of
such Person or any of its Restricted Subsidiaries, times (b) a fraction, the
numerator of which is one and the denominator of which is one minus the then
current combined federal, state and local statutory tax rate of such Person,
expressed as a decimal, in each case, on a consolidated basis in accordance with
GAAP.
"Consolidated Net Income" means, with respect to any specified Person for
any period, the aggregate of the Net Income of such Person and its Restricted
Subsidiaries for such period, on a consolidated basis, determined in accordance
with GAAP; provided that:
(1) all gains (but not losses) which are either extraordinary (as
determined in accordance with GAAP) or are nonrecurring (including any gain
from the sale or other disposition of assets outside the ordinary course of
business or from the issuance or sale of any capital stock) shall be
excluded;
(2) the Net Income, if positive, of any Person that is not a Wholly
Owned Restricted Subsidiary or that is accounted for by the equity method
of accounting shall be included only to the extent of the amount of
dividends or distributions paid in cash to the specified Person or a Wholly
Owned Restricted Subsidiary thereof;
(3) the Net Income of any Restricted Subsidiary shall be excluded to
the extent that the declaration or payment of dividends or similar
distributions by that Restricted Subsidiary of that Net Income is not at
the date of determination permitted without any prior governmental approval
that has not been obtained or, directly or indirectly, by operation of the
terms of its charter or any agreement, instrument, judgment, decree, order,
statute, rule or governmental regulation applicable to that Restricted
Subsidiary or its stockholders;
(4) the Net Income of any Person acquired in a pooling of interests
transaction for any period prior to the date of such acquisition shall be
excluded;
(5) the Net Income, if positive, of any Unrestricted Subsidiary shall
be excluded, whether or not distributed to the specified Person or one of
its Subsidiaries; and
(6) the cumulative effect of a change in accounting principles shall
be excluded.
"Consolidation" means the consolidation of the accounts of each of the
Restricted Subsidiaries with those of Horizon PCS, if and to the extent that the
accounts of each such Restricted Subsidiary would normally be consolidated with
those of Horizon PCS in accordance with GAAP; provided, however, that
"Consolidation" shall not include consolidation of the accounts of any
Unrestricted Subsidiary, but the interest of Horizon PCS or any Restricted
Subsidiary in any Unrestricted Subsidiary shall be accounted for as an
investment. The term "Consolidated" has a correlative meaning.
"Continuing Directors" means, as of any date of determination, any member of
the Board of Directors of Horizon PCS who:
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(1) was a member of such Board of Directors on the Issue Date; or
(2) was nominated for election or elected to such Board of Directors
with the approval of a majority of the Continuing Directors who were members
of such Board at the time of such nomination or election.
"Credit Facilities" means, with respect to Horizon PCS or any Guarantor, one
or more debt facilities or commercial paper facilities, in each case with banks,
vendors or other institutional lenders providing for revolving credit loans,
term loans, receivables financing, including through the sale of receivables to
such lenders or to special purpose entities formed to borrow from such lenders
against such receivables, or letters of credit, and shall include the Senior
Financing, in each case, as amended, restated, modified, renewed, refunded,
replaced or refinanced in whole or in part from time to time.
"Default" means any event that is, or with the passage of time or the giving
of notice or both would be, an Event of Default.
"Designated Senior Debt" means (a) Indebtedness under the Senior Financing
and (b) any other Senior Debt in excess of $25.0 million of the Guarantors that
has been designated by Horizon PCS in writing to the Trustee as "Designated
Senior Debt."
"Disqualified Stock" means any Capital Stock that, by its terms, or by the
terms of any security into which it is convertible, or for which it is
exchangeable, in each case at the option of the holder thereof, or upon the
happening of any event, matures or is mandatorily redeemable, pursuant to a
sinking fund obligation or otherwise, or redeemable at the option of the holder
thereof, in whole or in part, on or prior to the date that is 91 days after the
date on which the Notes mature. Notwithstanding the preceding sentence, any
Capital Stock that would constitute Disqualified Stock solely because the
holders thereof have the right to require Horizon PCS to repurchase such Capital
Stock upon the occurrence of a change of control or an asset sale shall not
constitute Disqualified Stock if the terms of such Capital Stock provide that
Horizon PCS may not repurchase or redeem any such Capital Stock pursuant to such
provisions unless such repurchase or redemption complies with the covenant
described above under the caption "-- Selected Covenants -- Limitation on
Restricted Payments." In addition, for purposes hereof, (i) Equity Interests in
the form of convertible preferred stock issued on September 26, 2000, and (ii)
Equity Interests issued as payment of dividends on the convertible preferred
stock, which dividends shall be paid in additional shares of convertible
preferred stock, shall not be considered to be Disqualified Stock.
"Domestic Subsidiary" means any Subsidiary other than (a) a Foreign
Subsidiary or (b) a Subsidiary of a Foreign Subsidiary.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock, but excludes any debt security that is
convertible into, or exchangeable for, Capital Stock.
"Equity Offering" means any public offering or private sale of Capital Stock
of Horizon PCS in which the net proceeds to Horizon PCS are at least $35.0
million.
"Escrow Account" means the escrow account provided for under the Pledge and
Escrow Agreement.
"Event of Termination" means any of the events described in (1) Section 11.3
of the Management Agreement; (2) Section 13.2 of the Trademark Agreement; or (3)
Section 13.2 of the Spectrum Trademark Agreement.
"Exchange Act" means the Securities Exchange Act of 1934.
"Fair Market Value" means, with respect to any Property, the price that
could be negotiated in an arm's-length free market transaction, for cash,
between a willing seller and a willing buyer, neither of whom is under undue
pressure or compulsion to complete the transaction. Fair Market Value shall be
determined, except as otherwise provided, (a) if such Property has a Fair Market
Value equal to or less than $5.0 million, by any Officer of Horizon PCS, or (b)
if such Property has a Fair Market Value in excess of $5.0 million, by a
majority of the Board of Directors and evidenced by a Board Resolution, dated
within 30 days of the relevant transaction, delivered to the Trustee.
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"Foreign Subsidiary" means any Subsidiary which is not organized under the
laws of the United States of America or any State thereof or the District of
Columbia.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect from time to time.
"Government Securities" means (1) any security which is (a) a direct
obligation of the United States of America for the payment of which the full
faith and credit of the United States of America is pledged or (b) an obligation
of a Person controlled or supervised by and acting as an agency or
instrumentality of the United States of America the payment of which is
unconditionally guaranteed as a full faith and credit obligation of the United
States of America, which, in either case, is not callable or redeemable at the
option of the issuer thereof, and (2) any depository receipt issued by a bank,
as defined in the Securities Act, as custodian with respect to any Government
Securities and held by such bank for the account of the holder of such
depository receipt, or with respect to any specific payment of principal of or
interest on any Government Securities which is so specified and held, provided
that, except as required by law, such custodian is not authorized to make any
deduction from the amount payable to the holder of such depository receipt from
any amount received by the custodian in respect of the Government Securities or
the specific payment of principal or interest evidenced by such depository
receipt.
"Guarantee" means any guarantee of the notes by any Guarantor pursuant to
the indenture.
"Guarantee Obligations" means the obligation of each Guarantor pursuant to
its Guarantee of:
(a) the full and punctual payment of principal and interest on the Notes
when due, whether at maturity, by acceleration, by redemption or otherwise,
and all other monetary obligations of Horizon PCS under the notes; and
(b) the full and punctual performance within applicable grace periods of
all other obligations of Horizon PCS under the notes.
"Guarantors" means each existing Domestic Subsidiary and any future Domestic
Subsidiary that guarantees the notes in accordance with the provisions of the
indenture, and their respective successors and assigns.
"Hedging Obligations" means, with respect to any Person, the obligations of
such Person under:
(1) interest rate swap agreements, interest rate cap agreements and
interest rate collar agreements; and
(2) other agreements or arrangements designed to protect such Person
against fluctuations in interest rates.
"Horizon Telcom" means Horizon Telcom, Inc., an Ohio corporation.
"Indebtedness" of any Person means, without duplication, (a) all liabilities
and obligations, contingent or otherwise, of such Person, to the extent such
liabilities and obligations would appear as a liability upon the consolidated
balance sheet of such Person in accordance with GAAP, (i) in respect of borrowed
money (whether or not the recourse of the lender is to the whole of the assets
of such Person or only to a portion thereof), (ii) evidenced by bonds, notes,
debentures or similar instruments, or (iii) representing the balance deferred
and unpaid of the purchase price of any property or services, except (other than
accounts payable or other obligations to trade creditors which have remained
unpaid for greater than 60 days past their original due date) those incurred in
the ordinary course of its business that would constitute ordinarily a trade
payable to trade creditors; (b) all liabilities and obligations, contingent or
otherwise, of such Person (i) evidenced by bankers' acceptances or similar
instruments issued or accepted by banks, (ii) relating to Capital Lease
Obligations, or (iii) evidenced by a letter of credit or a reimbursement
obligation of such Person with respect to any letter of credit; (c) all net
obligations of such Person under Hedging Obligations; (d) all liabilities and
obligations of others of the kind described in the preceding clause (a), (b) or
(c) that such Person has guaranteed or provided credit support or that is
otherwise its legal liability or which are secured by any assets or property of
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such Person and all obligations to purchase, redeem or acquire any third party
Equity Interests; (e) any and all deferrals, renewals, extensions, refinancing
and refundings (whether direct or indirect) of, or amendments, modifications or
supplements to, any liability of the kind described in any of the preceding
clauses (a), (b), (c) or (d), or this clause (e), whether or not between or
among the same parties; and (f) all Disqualified Stock of such Person (measured
at the greater of its voluntary or involuntary maximum fixed repurchase price
plus accrued and unpaid dividends); provided, that any indebtedness which has
been defeased in accordance with GAAP or defeased pursuant to the deposit of
cash or Government Securities (in an amount sufficient to satisfy all such
indebtedness obligations at maturity or redemption, as applicable, and all
payments of interest and premium, if any) in a trust or account created or
pledged for the sole benefit of the holders of such indebtedness, and subject to
no other Liens, and the other applicable terms of the instrument governing such
indebtedness, shall not constitute "Indebtedness." The amount of any
Indebtedness outstanding as of any date will be (i) the accreted value thereof,
in the case of any Indebtedness issued with original issue discount, but the
accretion of original issue discount in accordance with the original terms of
Indebtedness issued with an original issue discount will not be deemed to be an
incurrence and (ii) the principal amount thereof, together with any interest
thereon that is more than 30 days past due, in the case of any other
Indebtedness. For purposes of this definition, Indebtedness shall not include
any amounts representing contributions from investors in the investor group led
by Apollo Management in exchange for convertible preferred stock issued on
September 26, 2000.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons, including Affiliates, in the forms of direct or
indirect loans, including guarantees of Indebtedness or other obligations,
advances or capital contributions, excluding commission, travel and similar
advances to officers and employees made in the ordinary course of business,
purchases or other acquisitions for consideration of Indebtedness, Equity
Interests or other securities, together with all items that are or would be
classified as investments on a balance sheet prepared in accordance with GAAP.
If Horizon PCS or any Restricted Subsidiary sells or otherwise disposes of any
Equity Interests of any direct or indirect Restricted Subsidiary such that,
after giving effect to any such sale or disposition, such Person is no longer a
Restricted Subsidiary, Horizon PCS shall be deemed to have made an Investment on
the date of any such sale or disposition equal to the fair market value of any
Equity Interests of such Restricted Subsidiary not sold or disposed of in an
amount determined as provided in the penultimate paragraph of the covenant
described above under the caption "-- Selected Covenants -- Limitation on
Restricted Payments."
"Issue Date" means the date on which the Notes are initially issued.
"Lien" means, with respect to any asset, any mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect of such asset, whether
or not filed, recorded or otherwise perfected under applicable law, including
any conditional sale or other title retention agreement, any lease in the nature
thereof, any option or other agreement to sell or give a security interest in
and any filing of or agreement to give any financing statement under the Uniform
Commercial Code, or equivalent statutes, of any jurisdiction.
"Net Income" means, with respect to any Person, the net income (loss) of
such Person and its Restricted Subsidiaries, determined in accordance with GAAP
and before any reduction in respect of preferred stock dividends, excluding,
however:
(1) any gain, but not loss, together with any related provision for
taxes on such gain (but not loss), realized in connection with: (a) any
Asset Sale; or (b) the disposition of any securities by such Person or any
of its Restricted Subsidiaries or the extinguishment of any Indebtedness of
such Person or any of its Restricted Subsidiaries; and
(2) any extraordinary gain, but not loss, together with any related
provision for taxes on such extraordinary gain, but not loss.
"Net Proceeds" means the aggregate cash proceeds received by Horizon PCS or
any of its Restricted Subsidiaries in respect of any Asset Sale, including,
without limitation, any cash received upon the sale or other disposition of any
non-cash consideration received in any Asset Sale, net of the direct costs
relating to such Asset Sale, including, without limitation, legal, accounting
and investment banking fees, and sales commissions, and any relocation expenses
incurred as a result thereof, taxes paid or payable as a result thereof, in each
case after taking into account any available tax credits or deductions and any
tax sharing arrangements and amounts required to be applied to the repayment of
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Indebtedness, other than Senior Debt, secured by a Lien on the asset or assets
that were the subject of such Asset Sale and appropriate amounts to be provided
by Horizon PCS or any Restricted Subsidiary, as the case may be, as a reserve
required in accordance with GAAP against any liabilities associated with such
Asset Sale and retained by Horizon PCS or any Restricted Subsidiary, as the case
may be, after such Asset Sale, including, without limitation, pension and other
post-employment benefit liabilities, liabilities related to environmental
matters and liabilities under any indemnification obligations associated with
such Asset Sale.
"Non-Recourse Debt" means Indebtedness:
(1) as to which neither Horizon PCS nor any of its Restricted
Subsidiaries (a) provides credit support of any kind, including any
undertaking, agreement or instrument that would constitute Indebtedness, (b)
is directly or indirectly liable as a guarantor or otherwise, or (c)
constitutes the lender;
(2) no default with respect to which, including any rights that the
holders thereof may have to take enforcement action against an Unrestricted
Subsidiary, would permit upon notice, lapse of time or both any holder of
any other Indebtedness, other than the Notes, of Horizon PCS or any of its
Restricted Subsidiaries to declare a default on such other Indebtedness or
cause the payment thereof to be accelerated or payable prior to its stated
maturity; and
(3) as to which the lenders have been notified in writing that they will
not have any recourse to the stock or assets of Horizon PCS or any of its
Restricted Subsidiaries.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Officer" means the Chief Executive Officer, the Chief Operations Officer,
the Chief Financial Officer or the Chief Technology Officer of Horizon PCS.
"Officers' Certificate" means a certificate signed by the Chairman of the
Board, the President or Vice President, and by the Treasurer, an Assistant
Treasurer, the Secretary, or an Assistant Secretary, of Horizon PCS, and
delivered to the Trustee.
"Operating Cash Flow" means, for any fiscal quarter, Horizon PCS'
Consolidated Net Income (Loss) plus (to the extent deducted from net revenues in
determining Consolidated Net Income (Loss) for such period), the sum of (i)
depreciation, amortization and other non-cash charges in respect thereof for
such fiscal quarter, and (ii) all amounts deducted in calculating Consolidated
Net Income (Loss) for such fiscal quarter in respect of Consolidated Interest
Expense, and all income taxes, whether or not deferred, applicable to such
income period, all as determined on a consolidated basis in accordance with
GAAP, less the amount of all cash payments made by Horizon PCS or any of its
Restricted Subsidiaries during such period to the extent such payments relate to
non-cash charges that were added back in determining Operating Cash Flow for
such period or any prior period; provided, that consolidated income tax expense
and depreciation and amortization of a Restricted Subsidiary that is a less than
Wholly Owned Subsidiary shall only be added to the extent of the equity interest
of Horizon PCS in such Restricted Subsidiary. For purposes of calculating
Operating Cash Flow for the fiscal quarter or quarters most recently completed
for which financial statements are publicly available prior to any date on which
an action is taken that requires a calculation of the Operating Cash Flow to
Consolidated Interest Expense Ratio or Consolidated Debt to Annualized Cash Flow
Ratio, (1) any Person that is a Restricted Subsidiary on such date (or would
become a Restricted Subsidiary in connection with the transaction that requires
the determination of such ratio) will be deemed to have been a Restricted
Subsidiary at all times during such fiscal quarter or quarters, (2) any Person
that is not a Restricted Subsidiary on such date (or would cease to be a
Restricted Subsidiary in connection with the transaction that requires the
determination of such ratio) will be deemed not to have been a Restricted
Subsidiary at any time during such fiscal quarter or quarters and (3) if Horizon
PCS or any Restricted Subsidiary shall have in any manner acquired (including
through commencement of activities constituting such operating business) or
disposed of (including through termination or discontinuance of activities
constituting such operating business) any operating business during or
subsequent to the most recently completed fiscal quarter, such calculation will
be made on a pro forma basis (to the extent permitted by Regulation S-X) on the
assumption that such acquisition or disposition had been completed on the first
day of such completed fiscal quarter.
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"Paying Agent" means any Person authorized by Horizon PCS to pay the
principal of, and premium, if any, or interest on any Notes on behalf of Horizon
PCS.
"Permitted Business" means the business primarily involved in the ownership,
design, construction, development, acquisition, installation, integration,
management and/or provision of Telecommunications Assets or any business or
activity reasonably related or ancillary thereto, including, without limitation,
any business conducted by Horizon PCS or any Restricted Subsidiary on the Issue
Date.
"Permitted Investments" means:
(1) any Investment by Horizon PCS in a Wholly Owned Restricted
Subsidiary that is a Guarantor;
(2) any Investment in Cash Equivalents;
(3) any Investment by Horizon PCS or any Restricted Subsidiary in a
Person, if as a result of or in connection with such Investment:
(a) such Person becomes a Wholly Owned Restricted Subsidiary that
is a Guarantor; or
(b) such Person is merged, consolidated or amalgamated with or
into, or transfers or conveys substantially all of its assets to, or
is liquidated into, Horizon PCS or a Wholly Owned Restricted
Subsidiary that is a Guarantor;
(4) any Investment made as a result of the receipt of non-cash
consideration from an Asset Sale that was made pursuant to and in
compliance with the covenant described above under the caption "-- Selected
Covenants -- Asset Sales";
(5) any acquisition of assets solely in exchange for the issuance of
Equity Interests, other than Disqualified Stock, of Horizon PCS;
(6) Investments, the payment of which consists only of Equity
Interests, other than Disqualified Stock; and
(7) other Investments in any Person having an aggregate fair market
value, measured on the date each such Investment was made and without
giving effect to subsequent changes in value, when taken together with all
other Investments made pursuant to this clause (7) since the Issue Date,
not to exceed $50.0 million.
"Permitted Junior Securities" means, with respect to any Guarantor, Equity
Interests in such Guarantor or its Subsidiaries or debt securities of such
Guarantor or its Subsidiaries that are subordinated to all Senior Debt of such
Guarantor (and any debt securities issued in exchange for such Senior Debt) to
substantially the same extent as, or to a greater extent than, the Guarantees
are subordinate to such Senior Debt.
"Permitted Liens" means:
(1) Liens on the assets of Horizon PCS and any Guarantor securing
Indebtedness and other Obligations under Credit Facilities that were
permitted by the terms of the indenture to be incurred;
(2) Liens in favor of Horizon PCS or the Guarantors;
(3) Liens on property of a Person existing at the time such Person is
merged with or into or consolidated with Horizon PCS or any Restricted
Subsidiary; provided that such Liens were in existence prior to the
contemplation of such merger or consolidation and do not extend to any
assets other than those of the Person merged into or consolidated with
Horizon PCS or the Restricted Subsidiary;
(4) Liens on property existing at the time of acquisition thereof by
Horizon PCS or any Restricted Subsidiary, provided that such Liens were in
existence prior to the contemplation of such acquisition;
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(5) Liens and deposits made to secure the performance of statutory
obligations, surety or appeal bonds, performance bonds or other obligations
of a like nature incurred in the ordinary course of business;
(6) Liens to secure Purchase Money Indebtedness and Capital Lease
Obligations, permitted by clause (4) of the second paragraph of the
covenant entitled "Limitation on Incurrence of Indebtedness and Issuance of
Preferred Stock" covering only the assets acquired with such Purchase Money
Indebtedness and Capital Lease Obligations;
(7) Liens existing on the Issue Date;
(8) Liens on Assets of Guarantors to secure Senior Debt of such
Guarantor that was permitted by the indenture to be incurred;
(9) Liens for taxes, assessments or governmental charges or claims
that are not yet delinquent or that are being contested in good faith by
appropriate proceedings promptly instituted and diligently concluded,
provided that any reserve or other appropriate provision as shall be
required in conformity with GAAP shall have been made therefor; and
(10) Liens incurred in the ordinary course of business of Horizon PCS
or any Restricted Subsidiary with respect to obligations that do not exceed
$5.0 million at any one time outstanding.
"Permitted Refinancing Indebtedness" means any Indebtedness of Horizon PCS
or any of its Restricted Subsidiaries issued in exchange for, or the net
proceeds of which are used to extend, refinance, renew, replace, defease or
refund other Indebtedness of Horizon PCS or any of its Restricted Subsidiaries,
other than intercompany Indebtedness; provided that:
(1) the principal amount, or accreted value, if applicable, of such
Permitted Refinancing Indebtedness does not exceed the principal amount of,
or accreted value, if applicable, plus the amount of any premium required
to be paid in connection with such refinancing pursuant to the terms of the
Indebtedness refinanced or the amount of any premium reasonably determined
by Horizon PCS as necessary to accomplish such refinancing, plus accrued
interest on, the Indebtedness so extended, refinanced, renewed, replaced,
defeased or refunded, plus the amount of reasonable expenses incurred in
connection therewith;
(2) such Permitted Refinancing Indebtedness has a final maturity date
later than the final maturity date of, and has a Weighted Average Life to
Maturity equal to or greater than the Weighted Average Life to Maturity of,
the Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded;
(3) if the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded is subordinated in right of payment to the Notes, such
Permitted Refinancing Indebtedness has a final maturity date later than the
final maturity date of, and is subordinated in right of payment to, the
Notes on terms at least as favorable to the holders of Notes as those
contained in the documentation governing the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded; and
(4) such Indebtedness is incurred either by Horizon PCS or by the
Restricted Subsidiary who is the obligor on the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded.
"Permitted Tower Sale and Leaseback Transactions" means the sale and
leaseback transactions contemplated by the Tower Sale and Leaseback Agreement
between Horizon Personal Communications, Inc. and SBA and the Tower Sale and
Leaseback Agreement between Bright Personal Communications Services, LLC and SBA
and any other tower sale and leaseback transactions entered into by Horizon PCS
or any of its Restricted Subsidiaries in the ordinary course of business and
consistent with past practice.
"Person" means any individual, corporation, partnership, joint venture,
trust, unincorporated organization or government or any agency or political
subdivision thereof.
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"Preferred Capital Stock," as applied to the Capital Stock of any Person,
means Capital Stock of such Person of any class or classes, however designated,
that ranks prior, as to the payment of dividends or as to the distribution of
assets upon any voluntary or involuntary liquidation, dissolution or winding up
of such Person, to shares of Capital Stock of any other class of such Person.
"Principals" means Horizon Telcom, Inc., members of the McKell family and
Apollo Management.
"Property" means, with respect to any Person, any interest of such Person
in any kind of property or asset, whether real, personal or mixed, or tangible
or intangible, including Capital Stock in, and other securities of, any other
Person. For purposes of any calculation required pursuant to the indenture, the
value of any Property shall be its Fair Market Value.
"Purchase Money Indebtedness" of any Person means any Indebtedness of such
Person to any seller or other Person incurred solely to finance the acquisition
(including in the case of a Capital Lease Obligation, the lease), construction,
installation or improvement of any acquired real or personal tangible property
which is incurred within 90 days following such acquisition, construction,
installation or improvement and is secured only by the assets so financed.
"Qualified Receivables" means, at any time, net Receivables of Horizon PCS
and its Restricted Subsidiaries, as evidenced on the most recent quarterly
consolidated balance sheet of Horizon PCS as at a date at least 45 days prior to
such time, arising in the ordinary course of business of Horizon PCS or any
Restricted Subsidiary.
"Receivables" means receivables, chattel paper, instruments, documents or
intangibles evidencing or relating to the right of payment of money and proceeds
and products thereof in each case generated in the ordinary course of business.
"Receivables Facility" means one or more receivables financing facilities,
as amended from time to time, pursuant to which Horizon PCS or any of its
Restricted Subsidiaries sells their accounts receivable to an Accounts
Receivable Subsidiary.
"Receivables Fees" means distributions or payments made directly or by
means of discounts with respect to any participation interests issued or sold in
connection with, and other fees paid to a Person that is not a Restricted
Subsidiary in connection with, any Receivables Facility.
"Restricted Investment" means any Investment that is not a Permitted
Investment.
"Restricted Subsidiary" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary. Unless the context otherwise
requires, a Restricted Subsidiary means a Subsidiary of Horizon PCS that is not
an Unrestricted Subsidiary. In addition, unless consented to by the holders of a
majority in aggregate principal amount of Notes, Horizon Personal
Communications, Inc. and Bright Personal Communications, LLC shall at all times
be Restricted Subsidiaries.
"Senior Debt" means:
(1) all Indebtedness outstanding under Credit Facilities and all
Hedging Obligations with respect thereto; and
(2) all Obligations with respect to the items listed in the preceding
clause (1).
Notwithstanding anything to the contrary in the preceding, Senior Debt will
not include:
(1) any liability for federal, state, local or other taxes owed or
owing by Horizon PCS;
(2) any Indebtedness of Horizon PCS to any of its Subsidiaries or
other Affiliates;
(3) any trade payables; or
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(4) any Indebtedness that is incurred in violation of the indenture.
"Senior Financing" means the Credit Agreement dated as of September 26,
2000 by and among Horizon Personal Communications, Inc. and Bright Personal
Communications Services, LLC, as borrowers, Horizon PCS and certain of its
Subsidiaries, as guarantors, First Union National Bank, as administrative agent,
WestDeutsche Landesbank Girozentrale, as syndication agent and arranger, Fortis
Capital Corp., as documentation agent, First Union Securities, Inc., as sole
lead arranger and sole book runner, and the lenders named therein, as such may
be amended, restated, modified, renewed, refunded, replaced, increased (as may
be permitted by the indenture) or refinanced in whole or in part from time to
time.
"Significant Subsidiary" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Act, as such Regulation is in effect on the date hereof.
"Sprint Agreements" means (1) the Management Agreement between SprintCom,
Inc. and Horizon Personal Communications, Inc. and the Management Agreement
between SprintCom, Inc. and Bright Personal Communications, LLC, dated as of
June 8, 1998 and October 13, 1999, respectively, and any exhibits, schedules or
addendum thereto, as such agreements may be amended, modified or supplemented
from time to time (collectively, the "Management Agreement"); (2) the Sprint PCS
Services Agreement between Sprint Spectrum L.P. and Horizon Personal
Communications, Inc. and the Sprint PCS Services Agreement between Sprint
Spectrum L.P. and Bright Personal Communications, LLC, dated as of June 8, 1998
and October 13, 1999, respectively, and any exhibits, schedules or addendum
thereto, as such agreements may be amended, modified or supplemented from time
to time; (3) the Sprint Trademark and Service Mark License Agreement between
Sprint Communications Company, L.P. and Horizon Personal Communications, Inc.
and the Sprint Trademark and Service Mark License Agreement between Sprint
Communications Company, L.P. and Bright Personal Communications, LLC, dated as
of June 8, 1998 and October 13, 1999 respectively, and any exhibits, schedules
or addendum thereto, as such agreements may be amended, modified or supplemented
from time to time (collectively, the "Trademark Agreement"); and (4) the Sprint
Trademark and Service Mark License Agreement between Sprint Spectrum L.P. and
Horizon Personal Communications, Inc. and the Sprint Trademark and Service Mark
License Agreement between Sprint Spectrum L.P. and Bright Personal
Communications, LLC, dated as of June 8, 1998 and October 13, 1999,
respectively, and any exhibits, schedules or addendum thereto, as such
agreements may be amended, modified or supplemented from time to time
(collectively, the "Spectrum Trademark Agreement").
"Sprint PCS Affiliate" means any Person whose sole or predominant business
is operating a personal communications services business pursuant to
arrangements with Sprint Spectrum L.P. and/or Affiliates of Sprint Spectrum
L.P., or their successors, similar to the Sprint Agreements.
"Sprint PCS Affiliate Parent" means any Person that owns 75% or more of the
issued and outstanding common stock, calculated on a fully diluted basis, of a
Sprint PCS Affiliate (other than Horizon PCS, Horizon Personal Communications,
Inc. and Bright Personal Communications Services, LLC) and whose primary
business is either being a Sprint PCS Affiliate or holding the Capital Stock of
one or more Sprint PCS Affiliates.
"Stated Maturity" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which such payment of
interest or principal was scheduled to be paid in the original documentation
governing such Indebtedness, and shall not include any contingent obligations to
repay, redeem or repurchase any such interest or principal prior to the date
originally scheduled for the payment thereof.
"Subsidiary" means, with respect to any Person:
(1) any corporation, association or other business entity of which more
than 50.0% of the total voting power of shares of Capital Stock entitled,
without regard to the occurrence of any contingency, to vote in the election
of directors, managers or trustees thereof is at the time owned or
controlled, directly or indirectly, by such Person or one or more of the
other Subsidiaries of that Person, or a combination thereof; and
(2) any partnership (a) the sole general partner or the managing general
partner of which is such Person or a Subsidiary of such Person or (b) the
only general partners of which are such Person or of one or more
Subsidiaries of such Person, or any combination thereof.
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"Telecommunications Assets" means, with respect to any Person, any asset
that is utilized by such Person, directly or indirectly, for the design,
development, construction, installation, integration, operation, management or
provision of wireless telecommunications equipment, inventory, technology,
systems and/or services. Telecommunications Assets shall include stock, joint
venture or partnership interests of an entity where substantially all of the
assets of the entity consist of Telecommunications Assets.
"Total Invested Capital" means at any time of determination, the sum of,
without duplication, (i) the total amount of equity contributed to Horizon PCS
or any Restricted Subsidiary as of the Issue Date, plus (ii) the sum of (x) the
aggregate net cash proceeds received by Horizon PCS from capital contributions
or any other issuance or sale of Capital Stock (other than Disqualified Stock
but including Capital Stock issued upon the conversion of convertible Debt or
from the exercise of options, warrants or rights to purchase Capital Stock
(other than Disqualified Stock)), subsequent to the Issue Date, other than to a
Restricted Subsidiary, and (y) in the case of any consolidation or merger of
Horizon PCS with or into another Sprint PCS Affiliate (including a Wholly Owned
Subsidiary or Sprint PCS Affiliate Parent of a Sprint PCS Affiliate), the
aggregate net cash proceeds received by such Sprint PCS Affiliate from capital
contributions or any other issuance or sale of Capital Stock (other than
Disqualified Stock but including Capital Stock issued upon the conversion of
convertible Indebtedness or from the exercise of options, warrants or rights to
purchase Capital Stock (other than Disqualified Stock)) through and including
the date of consummation of any such consolidation or merger, other than to a
Subsidiary of such other Sprint PCS Affiliate, plus (iii) the aggregate net
repayment of any Investment made after the Issue Date and constituting a
Restricted Payment in an amount equal to the lesser of (a) the return of capital
with respect to such Investment and (b) the initial amount of such Investment,
in either case, less the cost of the disposition of such Investment, plus (iv)
an amount equal to the Consolidated net Investment (as of the date of
determination) Horizon PCS and/or any of its Restricted Subsidiaries has made in
any Subsidiary that has been designated as an Unrestricted Subsidiary after the
Issue Date upon its redesignation as a Restricted Subsidiary in accordance with
the covenant described under "-- Selected Covenants -- Designation of Restricted
and Unrestricted Subsidiaries," plus (v) Consolidated Debt, minus (vi) the sum
of (x) the aggregate amount of all Restricted Payments declared or made on or
after the Issue Date and (y) in the case of any consolidation or merger of
Horizon PCS with or into another Sprint PCS Affiliate, the aggregate amount of
all payments which, if such other Sprint PCS Affiliate were governed by the
terms of the indenture, would have constituted Restricted Payments declared or
made by such Sprint PCS Affiliate through and including the date of consummation
of any such consolidation or merger.
"Trustee" means the trustee under the indenture for the senior notes.
"Unrestricted Subsidiary" means any Subsidiary of Horizon PCS or a Guarantor
that is designated by the Board of Directors as an Unrestricted Subsidiary
pursuant to a Board Resolution, but only to the extent that such Subsidiary:
(1) has no Indebtedness other than Non-Recourse Debt;
(2) is not party to any agreement, contract, arrangement or
understanding with Horizon PCS or any Restricted Subsidiary unless the
terms of any such agreement, contract, arrangement or understanding are no
less favorable to Horizon PCS or such Restricted Subsidiary than those that
might be obtained at the time from Persons who are not Affiliates of
Horizon PCS;
(3) is a Person with respect to which neither Horizon PCS nor any of
its Restricted Subsidiaries has any direct or indirect obligation (a) to
subscribe for additional Equity Interests or (b) to maintain or preserve
such Person's financial condition or to cause such Person to achieve any
specified levels of operating results;
(4) has not guaranteed or otherwise directly or indirectly provided
credit support for any Indebtedness of Horizon PCS or any of its Restricted
Subsidiaries; and
(5) has at least one director on its board of directors that is not a
director or executive officer of Horizon PCS or any of its Restricted
Subsidiaries and has at least one executive officer that is not a director
or executive officer of Horizon PCS or any of its Restricted Subsidiaries.
127
Any designation of a Subsidiary of Horizon PCS or a Guarantor as an
Unrestricted Subsidiary shall be evidenced to the Trustee by filing with the
Trustee a certified copy of the Board Resolution making such designation and an
Officers' Certificate certifying that such designation complied with the
preceding conditions and was permitted by the covenant described above under the
caption "-- Selected Covenants -- Limitation on Restricted Payments." If, at any
time, any Unrestricted Subsidiary would fail to meet the preceding requirements
as an Unrestricted Subsidiary, it shall thereafter cease to be an Unrestricted
Subsidiary for purposes of the indenture and any Indebtedness of such Subsidiary
shall be deemed to be incurred by a Restricted Subsidiary as of such date and,
if such Indebtedness is not permitted to be incurred as of such date under the
covenant described under the caption "-- Selected Covenants -- Limitation on
Incurrence of Indebtedness and Issuance of Preferred Stock," Horizon PCS shall
be in Default of such covenant. The Board of Directors of Horizon PCS may at any
time designate any Unrestricted Subsidiary to be a Restricted Subsidiary;
provided that such designation shall be deemed to be an incurrence of
Indebtedness by a Restricted Subsidiary of any outstanding Indebtedness of such
Unrestricted Subsidiary and such designation shall only be permitted if (1) such
Indebtedness is permitted under the covenant described under the caption "--
Selected Covenants -- Limitation on Incurrence of Indebtedness and Issuance of
Preferred Stock," calculated on a pro forma basis as if such designation had
occurred at the beginning of the four-quarter reference period; and (2) no
Default or Event of Default would be in existence following such designation.
"Voting Stock" of any Person as of any date means the Capital Stock of such
Person that is at the time entitled to vote in the election of the Board of
Directors of such Person.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing:
(1) the sum of the products obtained by multiplying (a) the amount of
each then remaining installment, sinking fund, serial maturity or other
required payments of principal, including payment at final maturity, in
respect thereof, by (b) the number of years, calculated to the nearest
one-twelfth, that will elapse between such date and the making of such
payment; by
(2) the then outstanding principal amount of such Indebtedness.
"Wholly Owned Restricted Subsidiary" of any Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Stock or other
ownership interests of which, other than directors' qualifying shares, shall at
the time be owned by such Person or by one or more Wholly Owned Restricted
Subsidiaries of such Person and one or more Wholly Owned Restricted Subsidiaries
of such Person.
"Wholly Owned Subsidiary" of any Person means a Subsidiary of such Person
all of the outstanding Capital Stock or other ownership interests of which,
other than directors' qualifying shares, shall at the time be owned by such
Person or by one or more Wholly Owned Subsidiaries of such Person.
128
CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS
EXCHANGE OF NOTES
Your exchange of an outstanding note for a registered note pursuant to the
exchange offer should not be a taxable event for U.S. federal income tax
purposes. Accordingly, you should have the same adjusted basis, holding period,
issue price, adjusted issue price, stated redemption price at maturity, yield
and accrual periods for a registered note acquired pursuant to the exchange
offer as you had in the outstanding note immediately before the exchange. The
tax consequences of ownership and disposition of a registered note should be the
same as the tax consequences of the ownership and disposition of the outstanding
note surrendered in exchange for it.
Accordingly, in the following discussion, the U.S. federal income tax
consequences with respect to a registered note assume that the registered note
is treated, for U.S. federal income tax purposes, as the same note as the
outstanding note for which it was issued and that the registered note has the
same adjusted basis, holding period, issue price, adjusted issue price, stated
redemption price at maturity, yield and accrual periods as the outstanding note
had in your hands immediately before the exchange, and that any amounts that
accrue or are paid or payable on an outstanding note are treated as accruing or
as paid or payable on the registered note.
The following discussion is a summary of the material United States federal
income tax consequences relevant to the purchase, ownership and disposition of
the notes, but does not purport to be a complete analysis of all potential tax
effects. The discussion is based upon the Internal Revenue Code of 1986, as
amended (the "Code"), United States Treasury Regulations issued thereunder,
Internal Revenue Service rulings and pronouncements and judicial decisions now
in effect, all of which are subject to change at any time. Any such change may
be applied retroactively in a manner that could adversely affect a holder of the
notes. This discussion does not address all of the United States federal income
tax consequences that may be relevant to a holder in light of such holder's
particular circumstances or to holders subject to special rules, such as certain
financial institutions, U.S. expatriates, insurance companies, dealers in
securities or currencies, traders in securities, holders whose functional
currency is not the U.S. dollar, tax-exempt organizations and persons holding
the notes as part of a "straddle," "hedge," "conversion transaction" or other
integrated transaction. In addition, this discussion is limited to persons
purchasing the notes for cash at original issue and at their "issue price"
within the meaning of Section 1273 of the Code (i.e., the first price at which a
substantial amount of notes are sold to the public for cash). Moreover, the
effect of any applicable state, local or foreign tax laws is not discussed. The
discussion deals only with notes held as "capital assets" within the meaning of
Section 1221 of the Code.
As used herein, "United States Holder" means a beneficial owner of the notes
who or that is:
o an individual that is a citizen or resident of the United States,
including an alien individual who is a lawful permanent resident of
the United States or meets the "substantial presence" test under
Section 7701(b) of the Code;
o a corporation or other entity taxable as a corporation created or
organized in or under the laws of the United States or political
subdivision thereof;
o an estate, the income of which is subject to United States federal
income tax regardless of its source; or
o a trust, if a United States court can exercise primary supervision
over the administration of the trust and one or more United States
persons can control all substantial trust decisions, or, if the trust
was in existence on August 20, 1996 and has elected to continue to be
treated as a United States person.
We have not sought and will not seek any rulings from the Internal Revenue
Service (the "IRS") with respect to the matters discussed below. There can be no
assurance that the IRS will not take a different position concerning the tax
consequences of the purchase, ownership or disposition of the notes or that any
such position would not be sustained. If a partnership or other entity taxable
as a partnership holds the notes, the tax treatment of a partner will generally
depend on the status of the partner and the activities of the partnership. Such
partner should consult its tax advisor as to the tax consequences.
129
PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISORS WITH REGARD TO
THE APPLICATION OF THE TAX CONSEQUENCES DISCUSSED BELOW TO THEIR PARTICULAR
SITUATIONS AS WELL AS THE APPLICATION OF ANY STATE, LOCAL, FOREIGN OR OTHER TAX
LAWS, INCLUDING GIFT, ESTATE AND INHERITANCE TAX LAWS.
UNITED STATES HOLDERS
INTEREST
Payments of stated interest on the notes generally will be taxable to a
United States Holder as ordinary income at the time that such payments are
received or accrued, in accordance with such United States Holder's method of
accounting for United States federal income tax purposes.
SALE OR OTHER TAXABLE DISPOSITION OF THE NOTES
A United States Holder will recognize gain or loss on the sale, exchange
(other than for exchange notes pursuant to the exchange offer or a tax-free
transaction), redemption, retirement or other taxable disposition of a note
equal to the difference between the amount realized upon the disposition (less a
portion allocable to any accrued and unpaid interest, which will be taxable as
ordinary income if not previously included in such holder's income) and the
United States Holder's adjusted tax basis in the note. A United States Holder's
adjusted basis in a note generally will be the United States Holder's cost
therefor, less any principal payments received by such holder. This gain or loss
generally will be a capital gain or loss, and will be a long-term capital gain
or loss if the United States Holder has held the note for more than one year.
Otherwise, such gain or loss will be a short-term capital gain or loss.
EXCHANGE OFFER AND LIQUIDATED DAMAGES
The exchange of the notes for identical debt securities registered under the
Securities Act should not constitute a taxable exchange. See "Description of
Notes -- Registration Rights; Liquidated Damages." As a result, (1) a United
States Holder should not recognize a taxable gain or loss as a result of
exchanging such holder's notes; (2) the holding period of the notes received
should include the holding period of the notes exchanged therefor; and (3) the
adjusted tax basis of the notes received should be the same as the adjusted tax
basis of the notes exchanged therefor immediately before such exchange.
We believe that the likelihood that additional amounts will become payable
due to a failure to register the notes is remote. Accordingly, we intend to take
the position that if such additional amounts become payable, such amounts will
be taxable to a United States Holder as ordinary income in accordance with such
holder's method of accounting for United States federal tax purposes. However,
the IRS may take a different position, which could affect the timing of both a
United States Holder's recognition of income and the availability of our
deduction with respect to such additional amounts.
BACKUP WITHHOLDING
A United States Holder may be subject to a backup withholding tax (up to
30%) when such holder receives interest and principal payments on the notes held
or upon the proceeds received upon the sale or other disposition of such notes.
Certain holders (including, among others, corporations and certain tax-exempt
organizations) are generally not subject to backup withholding. A United States
Holder will be subject to this backup withholding tax if such holder is not
otherwise exempt and such holder:
o fails to furnish its taxpayer identification number ("TIN"), which,
for an individual, is ordinarily his or her social security number;
o furnishes an incorrect TIN;
o is notified by the IRS that it has failed to properly report payments
of interest or dividends; or
130
o fails to certify, under penalties of perjury, that it has furnished a
correct TIN and that the IRS has not notified the United States Holder
that it is subject to backup withholding.
United States Holders should consult their personal tax advisor regarding
their qualification for an exemption from backup withholding and the procedures
for obtaining such an exemption, if applicable. The backup withholding tax is
not an additional tax and taxpayers may use amounts withheld as a credit against
their United States federal income tax liability or may claim a refund as long
as they timely provide certain information to the IRS.
NON-UNITED STATES HOLDERS
DEFINITION OF NON-UNITED STATES HOLDERS; INTEREST PAYMENTS AND GAINS FROM
DISPOSITIONS
A non-United States Holder is a beneficial owner of the notes who is not a
United States Holder.
Interest paid to a non-United States Holder will not be subject to United
States federal withholding tax of 30% (or, if applicable, a lower treaty rate)
provided that:
o such holder does not directly or indirectly, actually or
constructively, own 10% or more of the total combined voting power of
all of our classes of stock;
o such holder is not a controlled foreign corporation that is related to
us through stock ownership and is not a bank that received such notes
on an extension of credit made pursuant to a loan agreement entered
into in the ordinary course of its trade or business; and
o either (1) the non-United States Holder certifies in a statement
provided to us or our paying agent, under penalties of perjury, that
it is not a "United States person" within the meaning of the Code and
provides its name and address, or (2) a securities clearing
organization, bank or other financial institution that holds
customers' securities in the ordinary course of its trade or business
and holds the notes on behalf of the non-United States Holder
certifies to us or our paying agent under penalties of perjury that
it, or the financial institution between it and the non-United States
Holder, has received from the non-United States Holder a statement,
under penalties of perjury, that such holder is not a "United States
person" and provides us or our paying agent with a copy of such
statement.
The certification requirement described above may require a non-United
States Holder that provides an IRS form, or that claims the benefit of an income
tax treaty, to also provide its United States taxpayer identification number.
The applicable regulations generally also require, in the case of a note held by
a foreign partnership, that:
o the certification described above be provided by the partners; and
o the partnership provide certain information.
Further, a look-through rule will apply in the case of tiered partnerships.
Special rules are applicable to intermediaries. Prospective investors should
consult their tax advisors regarding the certification requirements for
non-United States persons.
A non-United States Holder will generally not be subject to United States
federal income tax or withholding tax on gain recognized on the sale, exchange,
redemption, retirement or other disposition of a note. However, a non-United
States Holder may be subject to tax on such gain if such holder is an individual
who was present in the United States for 183 days or more in the taxable year of
the disposition and certain other conditions are met, in which case such holder
may have to pay a United States federal income tax of 30% (or, if applicable, a
lower treaty rate) on such gain.
If interest or gain from a disposition of the notes is effectively
connected with a non-United States Holder's conduct of a United States trade or
business, or if an income tax treaty applies and the non-United States Holder
maintains a United States "permanent establishment" to which the interest or
gain is generally attributable, the non-United States Holder may be subject to
131
United States federal income tax on the interest or gain on a net basis in the
same manner as if it were a United States Holder. If interest income received
with respect to the notes is taxable on a net basis, the 30% withholding tax
described above will not apply (assuming an appropriate certification is
provided). A foreign corporation that is a holder of a note also may be subject
to a branch profits tax equal to 30% of its effectively connected earnings and
profits for the taxable year, subject to certain adjustments, unless it
qualifies for a lower rate under an applicable income tax treaty. For this
purpose, interest on a note or gain recognized on the disposition of a note will
be included in earnings and profits if the interest or gain is effectively
connected with the conduct by the foreign corporation of a trade or business in
the United States.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Backup withholding will likely not apply to payments made by us or our
paying agents, in their capacities as such, to a non-United States Holder of a
note if the holder has provided the required certification that it is not a
United States person as described above. However, certain information reporting
may still apply with respect to interest payments even if certification is
provided. Payments of the proceeds from a disposition by a non-United States
Holder of a note made to or through a foreign office of a broker will not be
subject to information reporting or backup withholding, except that information
reporting (but generally not backup withholding) may apply to those payments if
the broker is:
o a United States person;
o a controlled foreign corporation for United States federal income tax
purposes;
o a foreign person 50% or more of whose gross income is effectively
connected with a United States trade or business for a specified
three-year period; or
o a foreign partnership, if at any time during its tax year, one or more
of its partners are United States persons, as defined in Treasury
regulations, who in the aggregate hold more than 50% of the income or
capital interest in the partnership or if, at any time during its tax
year, the foreign partnership is engaged in a United States trade or
business.
Payment of the proceeds from a disposition by a non-United States Holder of
a note made to or through the United States office of a broker is generally
subject to information reporting and backup withholding unless the holder or
beneficial owner certifies as to its taxpayer identification number or otherwise
establishes an exemption from information reporting and backup withholding.
Non-United States Holders should consult their own tax advisors regarding
application of withholding and backup withholding in their particular
circumstance and the availability of and procedure for obtaining an exemption
from withholding and backup withholding under current Treasury regulations. In
this regard, the current Treasury regulations provide that a certification may
not be relied on if we or our agent (or other payor) knows or has reason to know
that the certification may be false. Any amounts withheld under the backup
withholding rules from a payment to a non-United States Holder will be allowed
as a credit against the holder's United States federal income tax liability or
may be claimed as a refund, provided the required information is furnished
timely to the IRS.
132
PLAN OF DISTRIBUTION
Each broker-dealer that receives registered notes in exchange for
outstanding notes for its own account pursuant to the exchange offer must
acknowledge that it will deliver a prospectus in connection with any resale of
such registered notes. This prospectus, as it may be amended or supplemented
from time to time, may be used by a broker-dealer in connection with resales of
registered notes received in exchange for outstanding notes where such
outstanding notes were acquired as a result of market-making activities or other
trading activities. We have agreed that we will make this prospectus, as amended
or supplemented, available to any broker-dealer for use in connection with any
such resale for a period of one year after consummation of the exchange offer.
We will not receive any proceeds from any sale of registered notes by
broker-dealers. Registered notes received by broker-dealers for their own
account pursuant to the exchange offer may be sold from time to time in one or
more transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the registered notes or a combination of such
methods of resale, at market prices prevailing at the time of resale, at prices
related to such prevailing market prices or negotiated prices. Any such resale
may be made directly to purchasers or to or through brokers or dealers who may
receive compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any such registered notes. Any
broker-dealer that effects any resale of registered notes that were received by
it for its own account pursuant to the exchange offer and any broker or dealer
that participates in a distribution of such registered notes may be deemed to be
an "underwriter" within the meaning of the Securities Act and any profit on any
such resale of registered notes and any commissions or concessions received by
any such persons may be deemed to be underwriting compensation under the
Securities Act. The letter of transmittal states that by acknowledging that it
will deliver and by delivering a prospectus, a broker-dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
For a period of one year after consummation of the exchange offer, we will
promptly send additional copies of this prospectus and any amendment or
supplement to this prospectus to any broker-dealer that requests such documents
in the letter of transmittal. We have agreed to pay all expenses incident to the
exchange offer (including the expenses of one counsel for the holders of the
outstanding notes) other than commissions or concessions of any brokers or
dealers and will indemnify the holders of the outstanding notes (including any
broker-dealers) against certain liabilities, including liabilities under the
Securities Act.
WHERE YOU CAN FIND MORE INFORMATION
We are subject to the periodic reporting and other informational
requirements of the Exchange Act. We file annual, quarterly and special reports
and other information with the SEC. In addition, we have agreed under the
indenture that governs the outstanding notes and the registered notes that,
whether or not we are required to do so by the rules and regulations of the SEC,
for so long as any of the outstanding notes or registered notes remain
outstanding, we will furnish to the holders of any of those securities and file
with the SEC, unless the SEC will not accept such a filing, (i) all quarterly
and annual financial information that would be required to be contained in a
filing with the SEC on Forms 10-Q and 10-K if we were required to file such
forms, including a "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and, with respect to the annual information only, a
report thereon by our certified independent public accountants and (ii) all
reports that would be required to be filed with the SEC on Form 8-K if we were
required to file such reports. In addition, for so long as any of the
outstanding notes or registered notes remain outstanding, we have agreed to make
available to any prospective purchaser or beneficial owner of any of those
securities in connection with any sale thereof the information required by Rule
144A(d)(4) under the Securities Act.
We have filed a registration statement on Form S-4 with the SEC to register
under the Securities Act the registered notes. This prospectus constitutes a
part of that registration statement. As allowed by the SEC's rules, this
prospectus does not contain all the information set forth in the registration
statement, certain parts of which have been omitted in accordance with the rules
and regulations of the SEC. Please refer to the registration statement and
related exhibits and schedules filed therewith for further information with
respect to us and the registered notes offered hereby. Statements contained
herein concerning the provisions of any document are not necessarily complete
and, in each instance, reference is made to the copy of such document filed as
an exhibit to the registration statement or otherwise filed by us with the SEC
and each such statement is qualified in its entirety by such reference.
133
You may read and copy any document we file at the SEC's public reference
rooms located at 450 5th Street, N.W., Washington, D.C. 20549. Please call the
SEC at 1-800-SEC-0330 for further information on the public reference rooms. Our
SEC filings are also available to the public from commercial document retrieval
services and at the web site maintained by the SEC at: http://www.sec.gov. This
information is available without charge upon written or oral request to:
Horizon PCS, Inc.
68 East Main Street
Chillicothe, Ohio 45601-0480
(740) 772-8200
You should rely only on the information provided in this prospectus or any
prospectus supplement. We have not authorized anyone else to provide you with
different information. We may not make an offer of the registered notes in any
state where the offer is not permitted. The delivery of this prospectus does
not, under any circumstances, mean that there has not been a change in our
affairs since the date of this prospectus. It also does not mean that the
information in this prospectus is correct after this date.
LEGAL MATTERS
The validity of the registered notes offered hereby will be passed upon by
Arnall Golden Gregory LLP, Atlanta, Georgia.
EXPERTS
The financial statements and schedule of Horizon PCS, Inc. as of December
31, 2001 and 2000, and for each of the three years in the period ended December
31, 2001, included in this prospectus and elsewhere in this registration
statement, have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report with respect thereto, and is included
herein in reliance upon the authority of said firm as experts in giving said
reports.
134
HORIZON PCS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
Report of Independent Public Accountants.................................. F-2
Consolidated Balance Sheets as of December 31, 2001 and 2000.............. F-3
Consolidated Statements of Operations for the Years Ended
December 31, 2001, 2000 and 1999........................................ F-5
Consolidated Statements of Comprehensive Income (Loss)
for the Years Ended December 31, 2001, 2000 and 1999.................... F-6
Consolidated Statements of Changes in Stockholders' Equity (Deficit)
for the Years Ended December 31, 2001, 2000 and 1999.................... F-7
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2001, 2000 and 1999........................................ F-8
Notes to Consolidated Financial Statements, as of December 31, 2001
and 2000, and for the Years Ended December 31, 2001, 2000 and 1999...... F-10
Financial Statement Schedule - Valuation and Qualifying Accounts.......... F-32
Condensed Consolidated Balance Sheets as of March 31, 2002, and
December 31, 2001....................................................... F-33
Condensed Consolidated Statements of Operations For the Three Months
Ended March 31, 2002 and 2001 (unaudited)............................... F-35
Condensed Consolidated Statements of Comprehensive Income (Loss) For
the Three Months Ended March 31, 2002 and 2001 (unaudited).............. F-36
Condensed Consolidated Statements of Cash Flows For the Three Months
Ended March 31, 2002 and 2001 (unaudited)............................... F-37
Notes to Interim Condensed Consolidated Financial Statements As of
March 31, 2002, and December 31, 2001, And for the Three Months
Ended March 31, 2002 and 2001 (unaudited)............................... F-38
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Horizon PCS, Inc.:
We have audited the accompanying consolidated balance sheets of Horizon
PCS, Inc. (a Delaware corporation) and Subsidiaries as of December 31, 2001 and
2000, and the related consolidated statements of operations, comprehensive
income (loss), changes in stockholders' equity (deficit) and cash flows for each
of the three years in the period ended December 31, 2001. These consolidated
financial statements and the schedule referred to below are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Horizon PCS,
Inc. and Subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001 in conformity with accounting principles generally accepted in
the United States.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index to
consolidated financial statements is presented for purposes of complying with
the Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
/s/ ARTHUR ANDERSEN LLP
Columbus, Ohio
February 12, 2002 (except with
respect to the matter discussed in
Note 22, as to which the date is
May 9, 2002)
F-2
HORIZON PCS, INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2001 AND 2000
- --------------------------------------------------------------------------------
December 31, December 31,
2001 2000
---------------- ----------------
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents................................................... $ 123,775,562 $ 191,417,394
Restricted cash............................................................. 24,597,222 --
Accounts receivable-- subscriber, less allowance for
doubtful accounts of approximately $1,804,000 and $901,000 at
December 31, 2001 and 2000, respectively.................................. 14,293,771 3,259,634
Receivable from affiliate................................................... 100,437 741,453
Receivable from Parent...................................................... 483,785 --
Equipment inventory......................................................... 3,845,433 3,850,335
Investments................................................................. -- 2,895,646
Interest receivable and other current assets................................ 840,970 4,573,042
---------------- ----------------
Total current assets.................................................. 167,937,180 206,737,504
---------------- ----------------
OTHER ASSETS:
Restricted cash............................................................. 24,062,500 --
Investment in Parent........................................................ -- 1,120,262
Intangible asset-- Sprint PCS licenses, net of amortization................. 42,840,534 45,299,867
Goodwill, net of amortization............................................... 7,191,180 7,580,067
Unamortized debt issuance costs and other assets............................ 24,438,992 14,855,469
---------------- ----------------
Total other assets.................................................... 98,533,206 68,855,665
---------------- ----------------
PROPERTY AND EQUIPMENT, NET 214,867,858 109,701,845
---------------- ----------------
Total assets...................................................... $ 481,338,244 $ 385,295,014
================ ================
(Continued on next page)
F-3
HORIZON PCS, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
AS OF DECEMBER 31, 2001 AND 2000
- --------------------------------------------------------------------------------
December 31, December 31,
2001 2000
---------------- ----------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
- ----------------------------------------------
CURRENT LIABILITIES:
Accounts payable............................................................ $ 9,500,931 $ 12,065,021
Accrued liabilities......................................................... 27,527,462 24,722,200
Payable to Sprint PCS....................................................... 10,244,529 4,959,128
Deferred service revenue.................................................... 3,712,734 1,015,701
Payable to Parent........................................................... -- 427,747
Payable to affiliate........................................................ -- 1,114,727
---------------- ----------------
Total current liabilities............................................. 50,985,656 44,304,524
---------------- ----------------
OTHER LONG-TERM LIABILITIES:
Long-term debt.............................................................. 384,055,643 185,283,104
Payable to affiliates....................................................... -- 192,334
Other long-term liabilities................................................. 2,195,355 1,015,802
Deferred income............................................................. 10,719,888 7,504,268
---------------- ----------------
Total other long-term liabilities..................................... 396,970,886 193,995,508
---------------- ----------------
Total liabilities................................................... 447,956,542 238,300,032
---------------- ----------------
COMMITMENTS AND CONTINGENCIES (Note 12)
CONVERTIBLE PREFERRED STOCK................................................... 145,349,043 134,421,881
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, 10,000,000 shares authorized, none issued
or outstanding, at $0.0001 par value...................................... -- --
Common stock-- class A, 300,000,000 shares authorized,
26,646 issued and outstanding in 2001, at $0.0001 par value............... 3 --
Common stock-- class B, 75,000,000 shares authorized,
58,458,354 issued and 58,445,288 outstanding in 2001; 58,485,000
issued and 58,471,934 outstanding in 2000, at $0.0001 par value........... 5,846 5,849
Treasury stock-- class B, 13,066 shares, at $8.50 per share................. (111,061) (111,061)
Accumulated other comprehensive income (loss)............................... (837,851) --
Additional paid-in capital.................................................. 91,852,117 91,852,117
Deferred stock option compensation.......................................... (1,566,496) (2,275,444)
Retained deficit............................................................ (201,309,899) (76,898,360)
---------------- ----------------
Total stockholders' equity (deficit)................................ (111,967,341) 12,573,101
---------------- ----------------
Total liabilities and stockholders' equity (deficit).............. $ 481,338,244 $ 385,295,014
================ ================
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
HORIZON PCS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
- --------------------------------------------------------------------------------
2001 2000 1999
---------------- ---------------- ----------------
OPERATING REVENUES:
Subscriber revenues................................... $ 77,657,971 $ 17,724,816 $ 3,664,530
Roaming revenues...................................... 38,540,276 8,408,102 641,962
Equipment revenues.................................... 7,105,457 3,061,021 600,451
---------------- ---------------- ----------------
Total operating revenues....................... 123,303,704 29,193,939 4,906,943
OPERATING EXPENSES:
Cost of service (exclusive of items shown below)...... 100,515,780 27,452,382 8,203,598
Cost of equipment..................................... 14,871,647 9,774,881 2,444,322
Selling and marketing................................. 48,992,817 18,025,868 3,475,212
General and administrative (exclusive of items shown
below).............................................. 28,384,548 12,477,034 3,943,931
Non-cash compensation................................. 1,433,848 490,202 291,345
Depreciation and amortization......................... 18,518,948 6,134,458 2,684,644
---------------- ---------------- ----------------
Total operating expenses....................... 212,717,588 74,354,825 21,043,052
---------------- ---------------- ----------------
OPERATING LOSS.......................................... (89,413,884) (45,160,886) (16,136,109)
Gain (Loss) on exchange of stock........................ (399,673) 11,550,866 --
Gain (Loss) on disposal of PCS assets................... (1,296,834) -- 1,387,718
Interest income and other, net.......................... 5,062,780 4,803,820 52,421
Interest expense, net of capitalized interest........... (27,434,076) (10,317,473) (1,529,157)
---------------- ---------------- ----------------
LOSS ON CONTINUING OPERATIONS BEFORE INCOME TAX (EXPENSE)
BENEFIT............................................... (113,481,687) (39,123,673) (16,225,127)
INCOME TAX (EXPENSE) BENEFIT............................ -- (1,075,711) 5,275,125
---------------- ----------------- ----------------
LOSS ON CONTINUING OPERATIONS........................... (113,481,687) (40,199,384) (10,950,002)
DISCONTINUED OPERATIONS:
Income from discontinued operations, net of tax
expense of $73,000 and $145,000 for the years
ended December 31, 2000 and 1999, respectively...... -- 141,245 282,331
---------------- ---------------- ----------------
LOSS BEFORE EXTRAORDINARY ITEM.......................... (113,481,687) (40,058,139) (10,667,671)
EXTRAORDINARY LOSS, NET OF TAX
BENEFIT OF $262,000................................... -- (486,323) --
---------------- ---------------- ----------------
NET LOSS................................................ (113,481,687) (40,544,462) (10,667,671)
PREFERRED STOCK DIVIDEND................................ (10,929,852) (2,782,048) --
---------------- ---------------- ----------------
NET LOSS AVAILABLE TO COMMON STOCKHOLDERS............... $ (124,411,539) $ (43,326,510) $ (10,667,671)
================ ================ ================
Basic and diluted loss per share on continuing operations
available to common stockholders...................... $ (2.13) $ (0.76) $ (0.20)
Basic and diluted income per share from discontinued
operations............................................ -- -- --
Basic and diluted loss per share from extraordinary item -- (0.01) --
---------------- ---------------- ----------------
Basic and diluted net loss per share available to common
stockholders.......................................... $ (2.13) $ (0.77) $ (0.20)
================= ================ ================
Weighted-average common shares outstanding.............. 58,471,934 56,177,948 53,806,200
================= ================ ================
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
HORIZON PCS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
- --------------------------------------------------------------------------------
2001 2000 1999
---------------- ---------------- ----------------
NET LOSS................................................ $ (113,481,687) $ (40,544,462) $ (10,667,671)
OTHER COMPREHENSIVE INCOME (LOSS):
Net unrealized loss on hedging activities............. (837,851) -- --
---------------- ---------------- ----------------
COMPREHENSIVE INCOME (LOSS)............................. $ (114,319,538) $ (40,544,462) $ (10,667,671)
================ ================ ================
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
HORIZON PCS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
- --------------------------------------------------------------------------------
Accumulated
class A class B Other Additional Deferred Total
Preferred Common Common Treasury Comprehensive Paid-in Stock Option Retained Stockholders'
Stock Stock Stock Stock Income (Loss) Capital Compensation Deficit Equity (Deficit)
--------- -------- -------- --------- ------------- ---------- ------------ ------------ -------------
Balance, December 31,
1998.................. $ -- $ -- $5,381 $ -- $ -- $13,550,822 $ -- $(11,613,588) $ 1,942,615
Equity contribution... -- -- -- -- -- 6,270,422 -- -- 6,270,422
Deferred stock option
compensation......... -- -- -- -- -- 2,095,068 (2,095,068) -- --
Stock option compen-
sation expense....... -- -- -- -- -- -- 291,345 -- 291,345
Net loss.............. -- -- -- -- -- -- -- (10,667,671) (10,667,671)
--------- -------- -------- --------- ------------- ---------- ------------ ------------ -------------
Balance, December 31,
1999.................. -- -- 5,381 -- -- 21,916,312 (1,803,723) (22,281,259) (2,163,289)
--------- -------- -------- --------- ------------- ---------- ------------ ------------ -------------
Equity contribution... -- -- -- -- -- 1,373,703 -- -- 1,373,703
Acquisition of Bright
PCS.................. -- -- 468 -- -- 33,999,532 -- -- 34,000,000
Issuance of warrants.. -- -- -- -- -- 33,600,647 -- -- 33,600,647
Acquisition of trea-
sury stock........... -- -- -- (111,061) -- -- -- -- (111,061)
Deferred stock option
compensation........ -- -- -- -- -- 961,923 (961,923) -- --
Stock option compen-
sation expense....... -- -- -- -- -- -- 490,202 -- 490,202
Dividends............. -- -- -- -- -- -- -- (7,033,773) (7,033,773)
Tax on dividend....... -- -- -- -- -- -- -- (4,256,818) (4,256,818)
Net loss.............. -- -- -- -- -- -- -- (40,544,462) (40,544,462)
Preferred Dividend.... -- -- -- -- -- -- -- (2,782,048) (2,782,048)
--------- -------- -------- --------- ------------- ---------- ------------ ------------ -------------
Balance, December 31,
2000.................. -- -- 5,849 (111,061) -- 91,852,117 (2,275,444) (76,898,360) 12,573,101
--------- -------- -------- --------- ------------- ---------- ------------ ------------ -------------
Stock option compen-
sation expense....... -- -- -- -- -- -- 708,948 -- 708,948
Net loss.............. -- -- -- -- -- -- -- (113,481,687) (113,481,687)
Other comprehensive
income (loss)........ -- -- -- -- (837,851) -- -- -- (837,851)
Conversion of class B
common stock......... -- 3 (3) -- -- -- -- -- --
Preferred dividend.... -- -- -- -- -- -- -- (10,929,852) (10,929,852)
--------- -------- -------- --------- ------------- ---------- ------------ ------------ -------------
Balance, December 31,
2001.................. $ -- $ 3 $5,846 $(111,061)$ (837,851) $91,852,117 $(1,566,496)$(201,309,899)$(111,967,341)
========= ======== ======== ========= ============= ========== ============ ============ =============
The accompanying notes are an integral part
of these consolidated financial statements.
F-7
HORIZON PCS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
- --------------------------------------------------------------------------------
2001 2000 1999
---------------- ---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss................................................ $ (113,481,687) $ (40,544,462) $ (10,667,671)
---------------- ---------------- ----------------
Adjustments to reconcile net loss to net cash used in
operating activities, net of effect of acquisition:
Depreciation and amortization........................... 18,518,948 6,189,073 2,911,258
Extraordinary loss...................................... -- 486,323 --
Deferred Federal income taxes........................... -- -- (739,016)
Non-cash compensation expense........................... 1,433,848 490,202 291,345
Non-cash interest expense............................... 19,344,515 5,635,498 --
Non-cash loss (gain) on exchange of stock............... 399,673 (11,550,866) --
Allowance for doubtful accounts......................... 6,409,561 1,407,028 487,595
Loss on hedging activities.............................. 176,322 -- --
Loss (Gain) on disposal of PCS assets and property and
equipment.............................................. 1,296,834 -- (1,387,718)
Change in:
Accounts receivable................................... (17,443,698) (6,075,589) (701,923)
Equipment inventory................................... 4,902 (1,712,998) (1,253,208)
Interest receivable and other......................... 3,732,072 (2,316,514) (39,416)
Deferred income....................................... 3,215,620 7,293,281 --
Accounts payable...................................... (2,564,090) 8,916,376 1,707,749
Accrued liabilities and deferred service revenue...... 10,787,696 23,523,951 164,264
Change in receivable/payable from affiliates and Parent. (1,577,577) 2,837,997 4,857,543
Change in other assets and liabilities, net............. (3,118,592) (167,593) 181,812
---------------- ---------------- ----------------
Total adjustments.................................... 40,616,034 34,956,169 6,480,285
---------------- ---------------- ----------------
Net cash used in operating activities............ (72,865,653) (5,588,293) (4,187,386)
---------------- ---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net............................... (116,574,323) (83,629,782) (6,253,133)
Increase in restricted cash............................. (48,659,722) -- --
Proceeds from redemption of RTFC capital certificates... 2,895,646 -- --
Investment in Parent.................................... -- (11,835,000) --
Investment in joint venture............................. -- (1,032,000) (2,068,000)
Proceeds from the sale of property and equipment........ -- 734,000 4,800,000
Dividends received...................................... (4,311) (160,923) --
Cash acquired in acquisition of Bright PCS.............. -- 4,926,803 --
Equity loss in investments, net......................... -- 28,555 --
---------------- ---------------- ----------------
Net cash used in investing activities............ (162,342,710) (90,968,347) (3,521,133)
---------------- ---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Convertible preferred stock............................. -- 126,500,000 --
Cash dividends paid..................................... -- (18,309) --
Capital contributions................................... -- 1,373,703 3,742,647
Stock issuance costs.................................... -- (9,161,242) --
Deferred financing fees................................. (7,433,469) (15,410,327) --
Intercompany advances (repayments) to Parent............ -- (3,927,545) 1,827,517
Notes payable - borrowings, net of repayments........... 175,000,000 188,470,948 2,258,646
---------------- ---------------- ----------------
Net cash provided by financing activities........ 167,566,531 287,827,228 7,828,810
---------------- ---------------- ----------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS...... (67,641,832) 191,270,588 120,291
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR.............. 191,417,394 146,806 26,515
---------------- ---------------- ----------------
CASH AND CASH EQUIVALENTS, END OF YEAR.................... $ 123,775,562 $ 191,417,394 $ 146,806
---------------- ---------------- ----------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest, net of amounts capitalized.................... $ 6,571,184 $ 2,579,986 $ 1,529,631
Income taxes............................................ 338,141 5,174,949 --
(Continued on next page)
F-8
HORIZON PCS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
- --------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During 2001, the Company paid $11,775,917 of dividends on convertible
preferred stock. The dividends were paid in additional shares of convertible
preferred stock. During 2001 and 2000, the Company accrued $1,935,983 and
$2,782,048, respectively, to be paid in 2002 and 2001, respectively.
The purchase of Horizon Telcom, Inc. (the "Parent") common stock in 2000
(Note 5) was financed through a $13,000,000, one year, unsecured 13% senior
subordinated promissory note to a third party lender. The lender converted 100%
of the outstanding principal and unpaid interest into the Company's convertible
preferred stock valued at $14,066,611 (Note 13).
The proceeds from the issuance of the discount notes in 2000 have been
allocated to long-term debt and the value of the warrants ($20,245,000 or $5.32
per share) has been allocated to additional paid-in capital (Note 9).
During 2000, the Company agreed to grant to Sprint PCS warrants to acquire
2,510,460 shares of class A common stock, valued at approximately $13,356,000,
in exchange for the right to service PCS markets in additional areas. The
warrants will be issued to Sprint at the earlier of an initial public offering
of the Company's common stock or July 31, 2003 (Note 15).
During 1999, the Company received approximately $2,528,000 of net property
from Horizon Telcom, Inc., which was recorded as a capital contribution.
During 1999, the Company had outstanding notes payable totaling $1,032,000
related to the investment in joint venture.
The accompanying notes are an integral part
of these consolidated financial statements.
F-9
HORIZON PCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2001 AND 2000,
AND FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
- --------------------------------------------------------------------------------
NOTE 1 - ORGANIZATION
On April 26, 2000, Horizon Telcom, Inc. (the "Parent") formed Horizon PCS,
Inc. (the "Company" or "HPCS"). On June 27, 2000, Horizon Telcom, Inc.
transferred its 100% ownership of Horizon Personal Communications, Inc. ("HPC")
to HPCS in exchange for 53,806,200 shares of stock of HPCS (as adjusted for the
1.1697-for-one stock split in the form of a stock dividend effective on
September 8, 2000). This transfer was accounted for as a reorganization of
companies under common control in a manner similar to pooling-of-interests in
the consolidated financial statements. Accordingly, the reorganization and the
adjusted number of shares outstanding have been reflected retroactively and the
prior financial statements of Horizon Personal Communications, Inc. are
presented as those of HPCS. HPC will continue to exist and conduct business as a
wholly-owned subsidiary of the Company.
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries, including HPC and Bright Personal
Communications Services, LLC ("Bright PCS"), from the date of its acquisition in
June 2000. All material intercompany transactions and balances have been
eliminated.
NOTE 2 - BUSINESS OPERATIONS
The Company primarily provides wireless personal communications services
("PCS") as an affiliate of Sprint PCS. At December 31, 2001, approximately
194,100 Sprint PCS subscribers were in the Company's territory.
In October 1996, the Federal Communications Commission ("FCC")
conditionally granted the Company licenses to provide personal communications
services in various parts of Ohio, West Virginia and Kentucky (a total of five
licenses). The FCC financed the licenses. According to FCC rules, the licenses
were conditional upon the full and timely payment of the licenses' cost. The
licenses were subject to a requirement that the Company construct and operate
facilities that offer coverage to a defined population within the relevant
license areas within a defined period. The Company began the engineering and
design phase in 1996 and began the construction of the personal communications
network in early 1997. The Company began providing personal communications
services in August 1997.
In 1997, the FCC offered four options to certain PCS license holders to
change the payment terms of the FCC financed debt. These options were:
continuing with the current installment plan (status quo); return half of the
spectrum from any or all of the licenses in exchange for a proportionate
reduction in debt (disaggregation); turning in all licenses in exchange for
total debt forgiveness (amnesty); or prepay for as many licenses as the Company
can afford at face value while returning other licenses in exchange for debt
forgiveness (prepayment).
During 1998, the Company elected to return all of the spectrum from four
licenses and half of the spectrum from the fifth license. In connection with the
return of the spectrum, the Company entered into management agreements with
Sprint PCS, the PCS group of Sprint Corporation, during 1998. These agreements
provide the Company with the exclusive right to build, own and manage a wireless
voice and data services network in certain markets located in Ohio, West
Virginia, Kentucky, Virginia, Tennessee and Maryland under the Sprint PCS brand.
HPCS is required to build-out the wireless network according to Sprint PCS
specifications. The term of the agreements is 20 years with three successive
10-year renewal periods unless terminated by either party under provisions
outlined in the management agreements. The management agreements commenced in
June 1998, but payments of the management fee (Note 3) did not commence until
HPCS converted to a fully branded Sprint PCS affiliate in October 1999. The
management agreements included indemnification clauses between the Company and
Sprint PCS to indemnify each party against claims arising from violations of
laws or the management agreements, other than liabilities resulting from
negligence or willful misconduct of the party seeking to be indemnified.
F-10
HORIZON PCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2001 AND 2000,
AND FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
- --------------------------------------------------------------------------------
NOTE 2 - BUSINESS OPERATIONS (CONTINUED)
In May 2000, the Company expanded its management agreement with Sprint PCS.
This allows the Company to have the exclusive right to build, own and manage a
wireless voice and data services network in markets located in Pennsylvania, New
York, Ohio and New Jersey.
The Sprint PCS agreements require the Company to interface with the Sprint
PCS wireless network by building the Company's network to operate on PCS
frequencies licensed to Sprint PCS in the 1900 MHz range. Under the Sprint PCS
agreements, HPCS has agreed to:
o construct and manage a network in HPCS' territory in compliance with
Sprint PCS' PCS licenses and the terms of the management agreement;
o distribute, during the term of the management agreement, Sprint PCS
products and services;
o conduct advertising and promotion activities in HPCS' territory; and
o manage that portion of Sprint PCS' customer base assigned to HPCS'
territory.
The management agreement specifies the terms of the Sprint PCS affiliation,
including the required network build-out plan. The Company has agreed to operate
its network to provide for a seamless handoff of a call initiated in its
territory to a neighboring Sprint PCS network. The Sprint PCS management
agreements require the Company to complete specified portions of its markets by
specified dates.
The Company must comply with Sprint PCS' program requirements for technical
standards, customer service standards, national and regional distribution and
national accounts programs to the extent that Sprint PCS meets these
requirements.
A failure to meet the build-out requirements for any of HPCS' or Bright
PCS' markets, or to meet Sprint PCS' technical requirements, would constitute a
breach of the Sprint PCS agreements that could lead to their termination if not
cured within a cure period of 30 to 180 days, depending on the nature of the
breach. If Sprint PCS terminates these agreements, the Company will no longer be
able to offer Sprint PCS products and services. Additionally, Sprint PCS may
purchase the Company's operating assets or capital stock for 72% of the "Entire
Business Value," as defined in the management agreements. The Company is in
compliance with these agreements, or has obtained appropriate waivers from
Sprint PCS as of December 31, 2001.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ materially from those
estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand, demand deposits, money
market accounts and investments in commercial paper with original maturities of
three months or less.
F-11
HORIZON PCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2001 AND 2000,
AND FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
- --------------------------------------------------------------------------------
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RESTRICTED CASH
In connection with the Company's December 2001 offering of $175,000,000 of
senior notes due in 2011 (Note 9), approximately $48,660,000 of the offering's
proceeds was 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. The funds are invested in
a government security money market account. Interest earned on the escrow funds
totaled $69,000 in 2001.
EQUIPMENT INVENTORY
Equipment inventory consists of handsets and related accessories.
Inventories are carried at the lower of cost (determined by the weighted average
method) or market (replacement cost).
PROPERTY AND EQUIPMENT
Property and equipment, including improvements that extend useful lives,
are stated at original cost (Note 6), while maintenance and repairs are charged
to operations as incurred. Construction work in progress includes expenditures
for the purchase of capital equipment, construction and items such as direct
payroll-related benefits and interest capitalized during construction. The
Company capitalizes interest pursuant to Statement of Financial Accounting
Standards ("SFAS") No. 34, "Capitalization of Interest Cost." The Company
capitalized interest of approximately $6,579,000, $1,476,000 and $21,000 for the
years ended December 31, 2001, 2000 and 1999, respectively.
The Company accounts for long-lived assets in accordance with the
provisions of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and Long-Lived Assets to be Disposed Of." SFAS No. 121 requires that long-lived
assets and certain identifiable intangibles be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset to future undiscounted net
cash flows expected to be generated by the asset. If such assets are considered
to be impaired, the impairment to be recognized is measured by the amount by
which the carrying amount of the assets exceeds the fair value of the assets.
Assets to be disposed of are reported at the lower of the carrying amount or
fair value, less costs to sell. At December 31, 2001 and 2000, the Company had
no impaired assets.
DEPRECIATION AND AMORTIZATION OF PROPERTY AND EQUIPMENT
The Company provides for depreciation and amortization of property and
equipment under the straight-line method, based on the estimated service lives
of the various classes of property. Estimated useful lives are as follows:
YEARS
-----
Network Assets....................................5-15
Switching Equipment................................5-8
Furniture, vehicles and office equipment...........3-5
F-12
HORIZON PCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2001 AND 2000,
AND FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
- --------------------------------------------------------------------------------
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEBT ISSUANCE COSTS
In connection with the issuance of long-term debt (Note 9), the Company has
incurred approximately $21,761,000 in deferred financing costs through December
31, 2001, including approximately $7,433,000 during 2001. These debt issuance
costs are amortized using the effective interest method over the term of the
underlying obligation, ranging from eight to 10 years. For the years ended
December 31, 2001, 2000 and 1999, approximately $1,120,000, $690,000 and $5,000
of amortization of debt issuance costs, including subsequently retired
financings, was included in interest expense.
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 (Note 19).
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.
REVENUE RECOGNITION
The Company sells handsets and accessories which are recorded at the time
of the sale as equipment revenue. After the handset has been purchased, the
subscriber purchases a service package which is recognized monthly as service is
provided and is included as subscriber revenue. The Company defers monthly
service revenue billed in advance. Roaming revenue is recorded when Sprint PCS
subscribers, other Sprint PCS affiliate subscribers and non-Sprint PCS
subscribers roam onto the Company's network.
The Company's accounting policy for the recognition of activation fee
revenue is to record the revenue over the periods such revenue is earned in
accordance with the current interpretations of SEC Staff Accounting Bulletin
("SAB") No. 101, "Revenue Recognition in Financial Statements." Accordingly,
activation fee revenue and direct customer activation expense is deferred and
will be recorded over the average life for those customers (36 months) that are
assessed an activation fee. The Company recognized approximately $695,000 and
$47,000 of both activation fee revenue and customer activation expense during
2001 and 2000, respectively, and had deferred approximately $3,809,000 and
$393,000 of activation fee revenue and direct customer activation expense at
December 31, 2001 and 2000, respectively, which is shown as a component of
deferred income on the consolidated balance sheets.
A management fee of 8% of collected PCS revenues from Sprint PCS
subscribers based in the Company's territory, is accrued as services are
provided and remitted to Sprint PCS and recorded as cost of service. Revenues
generated from the sale of handsets and accessories, inbound and outbound Sprint
PCS roaming fees, and roaming services provided to Sprint PCS customers who are
not based in the Company's territory are not subject to the 8% affiliation fee.
Expense related to the management fees charged under the agreement was
approximately $5,923,000, $1,302,000 and $130,000 for the years ended December
31, 2001, 2000 and 1999 respectively.
F-13
HORIZON PCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2001 AND 2000,
AND FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
- --------------------------------------------------------------------------------
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ADVERTISING COSTS
Costs related to advertising and other promotional expenditures are
expensed as incurred. Advertising and promotional costs totaled approximately
$10,345,000, $4,506,000 and $1,165,000 for the years ended December 31, 2001,
2000 and 1999, respectively.
STOCK-BASED COMPENSATION
The Company accounts for compensation cost associated with its stock
compensation plans for employees in accordance with Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." The Company
applies SFAS No. 123 "Accounting for Stock Based Compensation" and related
interpretations, for options granted to non-employees.
DEFERRED INCOME
During 2001 and 2000, the Company received $740,000 and $7,220,000,
respectively, of site bonuses from SBA, which constructs towers leased by the
Company. The Company defers and amortizes the site bonus over the life of the
respective lease. During 2001 and 2000, the Company recorded approximately
$916,000 and $320,000, respectively, as a reduction to lease expense.
Additionally, the Company has approximately $3,809,000 and $393,000 of deferred
activation fee revenue at December 31, 2001 and 2000, respectively.
FEDERAL INCOME TAXES
The Company accounts for income taxes pursuant to the requirements of SFAS
No. 109, "Accounting for Income Taxes." Under SFAS No. 109, deferred tax assets
and liabilities are determined based on differences between financial reporting
and tax basis of assets and liabilities and are measured using the enacted tax
rates and laws that will be in effect when the differences are expected to
reverse. Deferred tax assets and liabilities are adjusted for future changes in
tax rates.
CONCENTRATION OF CREDIT RISK
The Company maintains cash and cash equivalents in an account with a
financial institution in excess of the amount insured by the Federal Deposit
Insurance Corporation. The financial institution is one of the largest banks in
the United States and management does not believe there is significant credit
risk associated with deposits in excess of Federally insured amounts.
Restricted cash is invested in short-term government money market funds.
The Company does not believe there is significant credit risk associated with
the funds as the underlying securities are issued by the U.S. Treasury
Department.
The Company maintains accounts with nationally recognized investment
managers. Such deposits are not insured by the Federal Deposit Insurance
Corporation. Management does not believe there is significant credit risk
associated with these uninsured deposits.
Other financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of accounts receivable from
subscribers. Management believes the risk is limited due to the number of
customers comprising the Company's customer base and its geographic diversity.
F-14
HORIZON PCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2001 AND 2000,
AND FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
- --------------------------------------------------------------------------------
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 loss per share from
continuing operations is computed by dividing loss on continuing operations,
less preferred stock dividends, for each period by the weighted-average
outstanding common shares. Basic and diluted net loss per share available to
common stockholders is computed by dividing net loss available to common
stockholders 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 (Note 16), the stock
purchase warrants (Notes 9 and 15) and the convertible preferred stock (Note
13). 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.
These statements will be adopted by the Company on January 1, 2002.
Goodwill amortization will cease as of December 31, 2001, and the Company will
be required to complete an impairment test of the remaining goodwill balance
annually (or 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 December 31,
2001, the Company has goodwill of approximately $7,191,000, net of accumulated
amortization, related to the acquisition of Bright PCS and recognized
approximately $389,000 of amortization expense during 2001 (Note 4). The
valuation of this goodwill will be subject to an impairment test at the date of
adoption. 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 will adopt SFAS No. 144 on January 1, 2002. The adoption is not
expected to have a material effect on the Company's financial position, results
of operations or cash flows.
F-15
HORIZON PCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2001 AND 2000,
AND FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
- --------------------------------------------------------------------------------
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the 2001
presentation.
NOTE 4 - ACQUISITIONS
During 1999 the Company entered into a joint venture agreement through the
purchase of 25.6% of Bright Personal Communications Services, LLC ("Bright
PCS"). The investment was accounted for under the equity method. The joint
venture was established in October 1999 to provide personal communications
services in Ohio, Indiana and Michigan.
On June 27, 2000, the Company acquired the remaining 74.4% of Bright PCS in
exchange for approximately 8% of the Company's class B common stock (4,678,800
shares valued at approximately $34,000,000) and approximately 40% of the Horizon
Telcom, Inc. common stock owned by HPC (31,912 shares valued at approximately
$15,300,000) (Note 5). This acquisition was treated as a purchase for accounting
purposes. The consolidated statements of operations include the results of
Bright PCS from June 28, 2000.
In conjunction with this transaction, the Company 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. The Company has recognized an
intangible asset totaling approximately $33,000,000 related to this licensing
agreement which will be amortized over 20 years, the initial term of the
underlying management agreement. Amortization commenced in June 2000.
Amortization expense for the years ended December 31, 2001 and 2000, was
$1,707,000 and $868,000, respectively. Accumulated amortization on the
intangible asset was approximately $2,575,000 and $868,000 as of December 31,
2001 and 2000, respectively.
The purchase price exceeded the fair market value of the net assets
acquired by approximately $7,778,000. The resulting goodwill is being amortized
on a straight-line basis over 20 years. Amortization commenced in June 2000.
Amortization expense for the years ended December 31, 2001 and 2000, was
$389,000 and $198,000, respectively. Accumulated amortization of goodwill was
approximately $587,000 and $198,000 at December 31, 2001 and 2000, respectively.
The Company will adopt SFAS No. 142 on January 1, 2002. As a result of the
adoption, goodwill amortization will cease as of December 31, 2001, and the
Company will be required to complete an impairment test of the remaining
goodwill balance annually (or more frequently if impairment indicators arise).
The purchase price allocation of the fair value of assets acquired and
liabilities assumed is summarized below:
FAIR VALUE AT
JUNE 27, 2000
-------------
Working capital............................ $ 2,072,000
Property and equipment..................... 6,328,000
Sprint PCS licenses........................ 33,000,000
Goodwill................................... 7,778,000
Other assets............................... 122,000
F-16
HORIZON PCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2001 AND 2000,
AND FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
- --------------------------------------------------------------------------------
NOTE 4 - ACQUISITIONS (CONTINUED)
The following unaudited pro forma summary presents the net revenues, net
loss and loss per share from the combination of the Company and Bright PCS, as
if the acquisition had occurred on January 1, 1999. The pro forma information is
provided for information purposes only. It is based on historical information
and does not necessarily reflect the actual results that would have occurred nor
is it necessarily indicative of the future results of operations of the combined
enterprise:
YEAR ENDED DECEMBER 31,
---------------------------------
2000 1999
---------------- ---------------
Net revenue........................... $ 27,278,629 $ 4,428,240
Net loss.............................. (43,769,291) (10,790,021)
Basic and diluted net loss per share.. (0.78) (0.20)
Prior to acquisition, Bright PCS had not commenced revenue-generating
operations and was paying a management fee to its investor, HPCS. The management
fee recognized by HPCS in the periods prior to the acquisition date is included
in net revenue during 2000 and 1999. In the pro forma disclosure above, this
management fee revenue is fully eliminated.
NOTE 5 - INVESTMENTS
In February 2000, the Company purchased 78,900 shares of common stock of
its parent, Horizon Telcom, Inc. from the Parent's largest unaffiliated
shareholder for approximately $11,835,000. This represented a 19.78% interest in
Horizon Telcom, Inc. The Company exchanged 40% of the shares owned (31,912
shares) to the former members as consideration for the acquisition of Bright PCS
(Note 4). This transaction resulted in a gain of approximately $10,513,000 and
reduced the ownership in Horizon Telcom, Inc. to 11.78%.
On September 26, 2000, the Company distributed 10% of its 11.78% ownership
of Horizon Telcom, Inc. in the form of a dividend, payable pro rata to the
shareholders of record on September 26, 2000. This transaction resulted in a
gain of approximately $1,038,000, as part of the stock was distributed to owners
other than the Parent.
During 2001, the Company distributed its remaining 7,249 shares of Horizon
Telcom, Inc. to employees of HPC as an award. As a result, the Company recorded
non-cash compensation expense of approximately $725,000 and a non-operating loss
of approximately $400,000 representing the reduced fair market value of the
stock at the time of the transaction compared to the original holding value of
the investment.
As part of the term loan facility for the construction of the personal
communications network (Note 9), the Company was required to purchase Rural
Telephone Finance Cooperative's (RTFC, the lender) subordinated capital
certificates with each draw on the loan. The balance of these certificates at
December 31, 2000, was approximately $2,896,000. The certificates were redeemed
in March 2001 for approximately $2,896,000 with no recognized gain or loss on
the redemption.
F-17
HORIZON PCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2001 AND 2000,
AND FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
- --------------------------------------------------------------------------------
NOTE 6 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31:
2001 2000
--------------- ---------------
Network assets.................................... $ 134,257,789 $ 52,242,148
Switching equipment............................... 35,253,986 14,053,810
Furniture, vehicles and office equipment.......... 10,137,175 5,721,617
Land.............................................. 966,689 --
--------------- ---------------
Property and equipment in service, cost....... 180,615,639 72,017,575
Accumulated depreciation.......................... (22,478,698) (9,259,862)
--------------- ---------------
Property and equipment in service, net.... 158,136,941 62,757,713
Construction work in progress..................... 56,730,917 46,944,132
--------------- ---------------
Total property and equipment, net..... $ 214,867,858 $ 109,701,845
=============== ===============
During 2001, the Company retired certain network assets and replaced them
with equipment required to upgrade the network. As a result of these
retirements, the Company recorded a loss on disposal of approximately
$1,297,000.
During 1999, the Company sold certain PCS equipment, including ancillary
equipment and base stations, to an unrelated third party. The sale resulted in a
gain of approximately $1,388,000, which is included in the Company's
consolidated statements of operations, and represents the excess of cash
proceeds over the historical net book value of the assets sold.
NOTE 7 - LINES OF CREDIT
On September 26, 2000, the Company entered into a $95,000,000 line of
credit that expires on September 30, 2008, as part of its senior secured credit
facility agreement (Note 9). As of December 31, 2001, the Company had not
borrowed on this line of credit. The Company pays an annual commitment fee of
1.375% of the unused line at the end of each quarter. The Company incurred
approximately $1,324,000 and $306,000 for the line of credit commitment fee for
the years ended December 31, 2001 and 2000, respectively.
In May 2000, the Company entered into a $5,000,000 general corporate line
of credit with a bank, the proceeds of which were used for financing of
construction expenditures. Interest was at the bank's standard line of credit
rate plus 100 basis points and was payable quarterly beginning in the first
quarter after the initial advance. In September 2000, this line of credit was
fully repaid and terminated with the proceeds from the financing described in
Note 9 below.
In March 2000, the Company entered into a $5,000,000 interim revolving line
of credit with a bank, the proceeds of which were used for general working
capital purposes. Interest was at the bank's prevailing prime rate plus 150
basis points and was payable quarterly, beginning in the first quarter after the
initial advance. In September 2000, this line of credit was fully repaid and
terminated with the proceeds from the financing described in Note 9 below.
NOTE 8 - SHORT-TERM NOTE PAYABLE
The Company's purchase of Horizon Telcom, Inc. common stock (Note 5) was
financed through a $13,000,000, one year, unsecured 13% senior subordinated
promissory note to a third party lender. The lender converted 100% of the
outstanding principal and unpaid interest into the Company's convertible
preferred stock on September 26, 2000, as part of the Company's financing
activities (Note 9). The value converted into convertible preferred stock was
$14,066,611 (Note 13).
F-18
HORIZON PCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2001 AND 2000,
AND FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
- --------------------------------------------------------------------------------
NOTE 9 - LONG-TERM DEBT
On December 7, 2001, the Company received $175,000,000 from the issuance of
unsecured senior notes (the "senior notes") due on June 15, 2011. Interest is
paid semi-annually on June 15 and December 15 at an annual rate of 13.75%, with
interest payments commencing June 15, 2002. Approximately $48,660,000 of the
offering's proceeds was placed in an escrow account to fund the first four
semi-annual interest payments. The senior notes may be redeemed at the Company's
election on or after December 15, 2006, at redemption prices defined in the
senior note agreement. Additionally, on or before December 15, 2004, the Company
may redeem up to 35% of the aggregate principal amount of the senior notes
originally issued at a redemption price of 113.75%, plus accrued and unpaid
interest to the date of redemption, with the proceeds of certain equity
offerings as long as 65% of the aggregate principal amount originally issued
remains outstanding after that redemption.
On September 26, 2000, the Company received $149,680,050 from the issuance
of $295,000,000 of unsecured senior discount notes due on October 1, 2010 (the
"discount notes"). The discount notes accrete in value until October 1, 2005, at
a rate of 14% compounded semi-annually. Cash interest on the notes will become
payable on April 1 and October 1 of each year, beginning on April 1, 2006. The
discount notes may be redeemed at the Company's election on or after October 1,
2005, at redemption prices defined in the discount note agreement. Additionally,
on or before October 1, 2003, the Company may redeem up to 35% of the aggregate
principal amount of the discount notes originally issued at a redemption price
of 114%, plus accrued and unpaid interest to the date of redemption, with the
proceeds of certain equity offerings as long as 65% of the aggregate principal
amount originally issued remains outstanding after that redemption. The discount
notes include warrants to purchase 3,805,500 shares of the Company's class A
common stock at $5.88 per share. The warrants represent the right to purchase an
aggregate of approximately 4.0% of the issued and outstanding common stock of
the Company on a fully diluted basis, assuming the exercise of all outstanding
options and warrants to purchase common stock and the conversion of the
convertible preferred stock (Note 13) into shares of class A common stock. The
proceeds from the issuance of the discount notes were allocated to long-term
debt and the value of the warrants ($20,245,000 or $5.32 per share) was
allocated to additional paid-in capital. The fair value of the warrants was
estimated on the date of the grant using the Black-Scholes option-pricing model
with the following weighted average assumptions: expected dividend yield of
0.0%, a risk-free interest rate of 6.5%, expected life of 10 years (equal to the
term of the warrants) and a volatility of 95%.
On September 26, 2000, and concurrent with the sale of the convertible
preferred stock (Note 13) and the discount notes described above, the Company
entered into a senior secured credit facility (the "secured credit facility")
with a financial institution to provide an aggregate commitment, subject to
certain conditions, of up to $250,000,000 (including a $95,000,000 line of
credit described in Note 7, a $50,000,000 term note and a $105,000,000 term
note) expiring on September 30, 2008. The secured credit facility bears interest
at various floating rates, which approximate one to six month LIBOR rates plus
375 to 425 basis points (5.66% to 6.16% at December 31, 2001). The secured
credit facility is collateralized by a perfected security interest in
substantially all of the Company's tangible and intangible current and future
assets, including an assignment of the Company's affiliation agreements with
Sprint PCS and a pledge of all of the capital stock of the Company and its
subsidiaries. At December 31, 2001, the outstanding balance on the secured
credit facility was $50,000,000. The Company pays a commitment fee of 1.375% on
the unused portion of the $250,000,000 note. The Company incurred a total of
approximately $2,788,000 and $680,000 of commitment fee expense for the years
ended December 31, 2001 and 2000, respectively. Additionally, the Company is
required, and expects, to draw on the $105,000,000 term note by March 26, 2002.
In connection with the acquisition of Bright PCS, the Company assumed a
10-year secured term loan totaling $35,400,000. The note was collateralized by
the equipment acquired. In September 2000, this note was fully repaid and
terminated with the proceeds from the financing described above.
F-19
HORIZON PCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2001 AND 2000,
AND FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
- --------------------------------------------------------------------------------
NOTE 9 - LONG-TERM DEBT (CONTINUED)
In May 2000, the Company entered into a $40,500,000 term loan facility with
a financial institution to purchase certain PCS equipment to construct the
Company's personal communications network. Maximum advances on the note totaled
$38,475,000. This loan was secured by equipment, collateral assignments of the
Company's tower lease (Note 12) and pledges of HPC stock and ownership interests
in Bright PCS. In September 2000, this note was fully repaid and terminated with
the proceeds from the financing described above.
In August 1997, the Company entered into a term loan facility with a
financial institution to purchase certain equipment to construct the Company's
personal communications network. The note was collateralized by the same
equipment. The Parent had unconditionally guaranteed the debt and had pledged a
security interest in all of the outstanding shares of the Company. In addition,
certain obligations under this loan had been guaranteed by a third party vendor.
In September 2000, this note was fully repaid and terminated with the proceeds
from the financings described above.
The components of long-term debt outstanding at December 31, 2001 and 2000, are
as follows:
INTEREST RATE AT
DECEMBER 31, 2001 2001 2000
----------------- --------------- -------------
Senior notes...................... 3.75% $ 175,000,000 $ --
Discount notes.................... 14.00% 159,055,643 135,283,104
Secured credit facility........... 6.16% 50,000,000 50,000,000
--------------- -------------
Total long-term debt.......... $ 384,055,643 $ 185,283,104
=============== =============
Scheduled maturities of long-term debt outstanding at December 31, 2001,
are as follows:
YEAR AMOUNT
---- ---------------
2002........................................ $ --
2003........................................ --
2004........................................ 375,000
2005........................................ 500,000
2006........................................ 500,000
Thereafter.................................. 518,625,000
-----------
Total maturities of long-term debt........ 520,000,000
Less: Unaccreted interest portion of
long-term debt............................ (135,944,357)
------------
Total long-term debt.................... $ 384,055,643
===============
The senior notes, discount notes and secured credit facility contain
various financial covenants. Among other restrictions, the most restrictive
covenants relate to maximum capital expenditures, minimum EBITDA ("earnings
before interest, taxes, depreciation and amortization") requirements, maximum
financial leverage ratios and minimum revenues. There are also limitations on
restricted payments, asset sales, additional debt incurrence and equity
issuance. In June 2001 and December 2001, the Company amended its secured credit
facility with the bank group. These modifications amended and restated certain
financial covenants. The June 2001 amendment also increased the base interest
rate by 25 basis points to LIBOR plus 375 to 425 basis points. As of December
31, 2001, the Company was in compliance with the amended covenants under each
agreement.
F-20
HORIZON PCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2001 AND 2000,
AND FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
- --------------------------------------------------------------------------------
NOTE 10 - FEDERAL INCOME TAXES
The Company's Federal income tax expense (benefit) consists of:
YEAR ENDED DECEMBER 31,
------------------------------------------------
2001 2000 1999
------------- -------------- --------------
Continuing Operations:
Current..................... $ -- $ 1,075,711 $ (4,536,109)
Deferred.................... -- -- (739,016)
--------------- -------------- --------------
-- 1,075,711 (5,275,125)
Discontinued Operations:
Current..................... -- 72,762 145,444
Deferred.................... -- -- --
--------------- -------------- -------------
72,762 145,444
Extraordinary Loss:
Current..................... -- (261,863) --
Deferred.................... -- -- --
--------------- -------------- -------------
-- (261,863) --
--------------- --------------- --------------
Tax expense (benefit)......... $ -- $ 886,610 $ (5,129,681)
=============== =============== ==============
The effective income tax expense (benefit) from continuing operations varies
from the statutory rate as follows:
YEAR ENDED DECEMBER 31,
------------------------------------------------
2001 2000 1999
---------------- -------------- --------------
Tax at statutory rate applied to pretax book
loss from continuing operations............... $ (38,583,774) $ (13,693,286) $ (5,516,543)
Increase (decrease) in tax from:
Non-deductible goodwill amortization.......... 444,227 302,968 --
Tax on interest on warrants................... 695,627 177,210 --
Non-deductible stock option compensation...... 241,044 171,571 --
Tax on excess loss account.................... -- 11,463,395 --
Change in valuation allowance................. 37,163,536 2,484,155 237,519
Tax on rate difference........................ -- 116,296 --
Other, net.................................... 39,340 53,402 3,899
--------------- -------------- -------------
Total tax expense (benefit) from
continuing operations............... $ -- $ 1,075,711 $ (5,275,125)
=============== ============== ==============
F-21
HORIZON PCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2001 AND 2000,
AND FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
- --------------------------------------------------------------------------------
NOTE 10 - FEDERAL INCOME TAXES (CONTINUED)
Deferred income taxes result from temporary differences between the
financial reporting and the tax basis amounts of existing assets and
liabilities. The source of these differences and tax effect of each are as
follows, as of December 31:
2001 2000 1999
-------------- -------------- -------------
Deferred income tax assets:
Deferred income-- site bonuses..................... $ 2,285,961 $ 2,345,943 $ --
Unrealized loss on hedging activity................ 284,869 -- --
Allowance for doubtful accounts.................... 662,084 30,296 125,982
Vacation........................................... 142,427 107,090 39,471
Net operating loss carryforward.................... 36,089,387 -- 903,292
Interest expense on high yield notes............... 9,523,013 1,880,148 --
Personal Communication Services Licenses and
start-up........................................ -- 654,293 381,276
Other.............................................. 965,141 599,936 251,139
------------- ------------- -------------
Total deferred income tax assets........... $ 49,952,882 $ 5,617,706 $ 1,701,160
============= ============= =============
Deferred income tax liabilities:
Property differences............................... $ (7,469,716) $ (2,413,137) $ (1,211,132)
Capitalized interest............................... (2,723,264) (581,953) --
Other.............................................. (172,667) -- (252,509)
-------------- ------------- -------------
Total deferred income tax liabilities...... $ (10,365,647) $ (2,995,090) $ (1,463,641)
============= ============= =============
Deferred income taxes, net........................... $ 39,587,235 $ 2,622,616 $ 237,519
Less: valuation allowance............................ (39,587,235) (2,622,616) (237,519)
------------- ------------- -------------
Total deferred income taxes, net........... $ -- $ -- $ --
============= ============= =============
Until September 26, 2000, HPCS was included in the consolidated Federal
income tax return of the Horizon Telcom affiliated group. HPCS provided for
Federal income taxes on a pro-rata basis, consistent with a consolidated
tax-sharing agreement. As a result of the sale of the convertible preferred
stock, HPCS will not be able to participate in the tax-sharing agreement nor the
filing of a consolidated Federal income tax return with the Horizon Telcom
affiliated group. Thus, HPCS filed a separate Federal income tax return for the
period after deconsolidation through December 31, 2000, and will file a separate
return for all subsequent periods. Additionally, the Company would not have
recorded a tax benefit of $5,129,681 in 1999 had it not been eligible to
participate in the consolidated Federal income tax return of the Parent.
HPCS recorded income tax expense of $886,610 for the year ended December
31, 2000. This expense was primarily a result of the recognition by HPCS of an
excess loss account on the deconsolidation from the Horizon Telcom affiliated
group, reduced by the benefit of net operating losses, and the increase in the
valuation reserve.
HPCS generated a tax of $4,256,818 on the stock dividend of 10% of Horizon
Telcom stock held by HPCS to Horizon Telcom. The tax on the stock dividend was
charged directly to equity and not recorded as income tax expense during 2000.
The Company has generated net operating losses ("NOL") that may be used to
offset future taxable income. Each year's NOL has a maximum carryforward period
of 20 years. The Company's ability to use its NOL carryforwards is dependent on
the future taxable income of the Company. At December 31, 2001, the Company has
NOL carryforwards of approximately $106,145,256, expiring in 2021. The future
tax benefit of these NOL carryforwards of $36,089,387 has been recorded as a
deferred tax asset. As a result of the Company's operating losses and its
deconsolidation from the Horizon Telcom affiliated group for tax purposes, the
Company does not expect to record future tax benefits of operating losses until
such time its operations become profitable and, accordingly, has recognized a
full valuation allowance.
F-22
HORIZON PCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2001 AND 2000,
AND FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
- --------------------------------------------------------------------------------
NOTE 11 - OTHER POSTRETIREMENT BENEFITS
Certain employees of the Company participate in the Parent's postretirement
plan. The plan is maintained by the Parent and the Company is charged based on
its employee participation in the plan. The Company applies the accounting and
measurement practices prescribed by SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions" and the disclosure requirements of
SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits," which superceded the disclosure requirements of SFAS No. 106. As
permitted by SFAS No. 106, the Company has elected to amortize the accumulated
postretirement benefit obligation existing at the date of adoption (the
transition obligation) over a 20-year period. The accrued benefit cost is
included in other long-term liabilities in the accompanying consolidated balance
sheets.
The plan provides coverage of postretirement medical, prescription drug,
telephone service and life insurance benefits to eligible retirees whose status,
at retirement from active employment, qualifies for postretirement benefits.
Coverage of postretirement benefits is also provided to totally and permanently
disabled active employees whose status, at disablement, qualified for
postretirement benefits as a retiree from active employment (retired disabled).
Certain eligible retirees are required to contribute toward the cost of coverage
under the postretirement health care and telephone service benefits plans. No
contribution is required for coverage under the postretirement life insurance
benefits plan. Unrecognized prior service cost is being amortized over 20 years.
The funding status of the Company's participation in the postretirement
benefit plan as of December 31, 2001 and 2000, is as follows:
2001 2000
------------ ------------
(IN THOUSANDS)
CHANGE IN BENEFIT OBLIGATION
Benefit obligation, beginning of year........ $ 90 $ 207
Service cost............................... 183 15
Interest cost.............................. 17 5
Actuarial (gain) or loss................... 167 (137)
---------- ----------
Benefit obligation, end of year.............. $ 457 $ 90
---------- ----------
CHANGE IN PLAN ASSETS
Fair value of plan assets, beginning of
year....................................... -- --
Employer contributions..................... -- --
Benefits paid.............................. -- --
---------- ----------
Fair value of plan assets, end of year....... -- --
---------- ----------
Funded status................................ (457) (90)
Unrecognized transition obligation........... 71 76
Unrecognized prior service cost.............. 75 --
Unrecognized actuarial (gain) or loss........ 42 (127)
---------- -----------
Accrued benefit cost......................... $ (269) $ (141)
=========== ==========
WEIGHTED-AVERAGE ASSUMPTIONS AT DECEMBER 31:
Discount rate................................ 6.50% 7.75%
F-23
HORIZON PCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2001 AND 2000,
AND FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
- --------------------------------------------------------------------------------
NOTE 11 - OTHER POSTRETIREMENT BENEFITS (CONTINUED)
The assumed medical benefit cost trend rate used in measuring the
accumulated postretirement benefit obligation for the under age 65 retirees and
their spouses was 8.0% in 2001 and 7.0% in 2000 and 1999, declining gradually to
5% for all periods presented. For the over 65 retirees and their spouses, the
assumed medical benefit cost trend rate was 7.0% in 2001 and 6.5% in 2000 and
1999, declining gradually to 5% for all periods presented. The assumed dental
and vision benefit cost trend rates used in measuring the accumulated
postretirement benefit obligation in 2001, 2000 and 1999, were 6%, declining
gradually to 5%, for retirees and their spouses. The telephone service benefit
cost trend rate for retirees and their spouses in 2001, 2000 and 1999, was
estimated at 5% for all future years.
The following summarizes the components of net periodic benefit costs of
the Company's participation in the postretirement benefit plan for the years
ended December 31:
2001 2000 1999
--------- --------- ----------
COMPONENTS OF NET PERIODIC BENEFIT COST (IN THOUSANDS)
Service cost................................. $ 104 $ 15 $ 25
Interest cost................................ 17 5 12
Amortization of transition obligation........ 5 5 5
Amortization of prior service cost........... 4 -- --
Recognized net actuarial gain (loss)......... (2) (8) --
--------- --------- ---------
Net periodic benefit cost.................... $ 128 $ 17 $ 42
========= ========= ==========
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plans. A one-percentage-point change in
assumed health care cost trend rates would have the following effects:
1-PERCENTAGE- 1-PERCENTAGE-
POINT POINT
INCREASE DECREASE
-------- --------
(IN THOUSANDS)
Effect on total of service and interest cost components..... $ 41 $ (31)
Effect on postretirement benefit obligation................. $ 153 $ (116)
The Parent also has two defined contribution plans covering certain
eligible salaried and hourly employees. HPCS employees were eligible to
participate in the Parent's plans in 1999. These plans provided for participants
to defer up to 19% of their annual compensation as contributions to the plans.
The Parent matched a participant's contributions equal to 25% of each
participant's salary deferral up to a maximum of 1% of a participant's
compensation. The Parent's contributions to these plans that benefited the
Company were $3,282 for 1999 and are included in expense of the Company.
In May 1999, the Company adopted a defined contribution plan covering
certain eligible employees. The plan provides for participants to defer up to
15% of the annual compensation, as defined under the plan, as contributions to
the plan. The Company has the option, at the direction of the Board of
Directors, to make a matching contribution to the plan of up to 50% of an
employee's contribution to the plan, limited to a maximum of 3% of the
employee's salary. A matching contribution of approximately $309,000, $115,000
and $61,000 was recognized during 2001, 2000 and 1999, respectively.
F-24
HORIZON PCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2001 AND 2000,
AND FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
- --------------------------------------------------------------------------------
NOTE 12 - COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases office space and various equipment under several
operating leases. In addition, the Company leased certain PCS equipment from the
Parent. This lease was terminated during 1999. In October 1999, the Company
signed a tower lease agreement with a third party whereby the Company will lease
the towers for substantially all of the Company's cell sites. The tower leases
are operating leases with a term of five to 10 years with three consecutive
five-year renewal option periods. In addition, the Company receives a site
development fee from the tower lessor for certain tower sites which the lessor
constructs on behalf of the Company.
The Company also leases space for its retail stores. At December 31, 2001,
the Company leased 38 stores operating throughout its territories.
Future minimum operating lease payments are as follows:
YEAR AMOUNT
---- --------------
2002..........................................$ 12,551,000
2003.......................................... 12,614,000
2004.......................................... 11,974,000
2005.......................................... 9,351,000
2006.......................................... 4,873,000
Thereafter.................................... 9,102,000
--------------
Future operating lease obligation.............$ 60,465,000
==============
Rental expense for all operating leases was approximately $8,461,000,
$3,056,000 and $2,693,000 for years ended December 31, 2001, 2000 and 1999,
respectively. Rental expense included above relating to the PCS equipment leased
from the Parent totaled approximately $1,975,000 during 1999.
CONSTRUCTION EXPENDITURES
Construction expenditures in 2002 are estimated to be between approximately
$60,000,000 and $70,000,000. The majority of the estimated expenditures are for
the build-out of the Company's 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.
GUARANTEES
The discount notes (Note 9) are guaranteed by the Company's existing
subsidiaries, Horizon Personal Communications, Inc., and Bright Personal
Communications Services, LLC, and will be guaranteed by the Company's future
domestic restricted subsidiaries. The Company has no independent assets or
operations apart from its subsidiaries. The guarantees are general unsecured
obligations. Each guarantor unconditionally guarantees, jointly and severally,
on a senior subordinated basis, the full and punctual payment of principal
premium and liquidated damages, if any, and interest on the discount notes when
due. If the Company creates or acquires unrestricted subsidiaries and foreign
restricted subsidiaries, these subsidiaries need not be guarantors.
F-25
HORIZON PCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2001 AND 2000,
AND FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
- --------------------------------------------------------------------------------
NOTE 12 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
NTELOS NETWORK AGREEMENT
In August 1999, the Company entered into a wholesale network services
agreement with the West Virginia PCS Alliance and the Virginia PCS Alliance (the
"Alliances"), two related, independent PCS providers whose network is managed by
NTELOS. Under the network services agreement, the Alliances provide the Company
with the use of and access to key components of their network in most of HPCS'
markets in Virginia and West Virginia. The initial term was through June 8,
2008, with four automatic 10-year renewals.
This agreement was amended in the third quarter of 2001 to provide for a
minimum monthly fee to be paid by the Company through December 31, 2003. The
minimum monthly fee includes a fixed number of minutes to be used by the
Company's subscribers. The Company incurs additional per minute charges for
minutes used in excess of the fixed number of minutes allotted each month. The
aggregate amount of future minimum payments is as follows:
2002............... $ 27,400,000
2003............... 38,600,000
-------------
Total............ $ 66,000,000
==============
NOTE 13 - CONVERTIBLE PREFERRED STOCK
The Company has authorized 175,000,000 shares of convertible preferred
stock at $0.0001 par value. On September 26, 2000, an investor group led by
Apollo Management purchased 23,476,683 shares of convertible preferred stock for
approximately $126,500,000 in a private placement offering. Concurrent with the
closing, holders of the $14,100,000 short-term convertible note converted the
principal and unpaid interest into 2,610,554 shares of the same convertible
preferred stock purchased by the investor group. Holders of the convertible
preferred stock have the option to convert their shares (on a share for share
basis) into class A common stock at any time. In addition, the convertible
preferred stock converts automatically upon the completion of a public offering
of class A common stock meeting specified criteria or upon the occurrence of
certain business combination transactions. The convertible preferred stock pays
a 7.5% stock dividend semi-annually, commencing April 30, 2001. The dividends
are payable in additional preferred stock. During 2001, the Company paid
$11,775,917 of dividends in additional shares of convertible preferred stock. At
December 31, 2001, there were 28,272,170 shares of convertible preferred stock
outstanding.
If the Company has not completed either (i) a public offering of its class
A common stock in which the Company receives at least $50,000,000 or (ii) a
merger or consolidation with a publicly-listed company that has a market
capitalization of at least $100,000,000 by the fifth anniversary of the date the
Company issued the convertible preferred stock, the investor group may request
that the Company repurchase all of their shares of convertible preferred stock
at fair market value, as determined by three investment banking institutions. If
the investor group requests the Company repurchase their convertible preferred
stock and the Company declines, the Company will be required to auction Horizon
PCS. If no bona fide offer is received upon an auction, the repurchase right of
the investor group expires. If, however, a bona fide offer is received upon the
auction, the Company must sell Horizon PCS or the dividend rate on the
convertible preferred stock will increase from 7.5% to 18.0% and the Company
will be required to re-auction Horizon PCS annually until the convertible
preferred stock is repurchased. The Company's secured credit facility and the
discount notes, both described in Note 9, prohibit the Company from repurchasing
any convertible preferred stock. Due to a mandatory redemption clause, this
stock is considered a mezzanine financing and is recorded outside of
stockholders' equity (deficit).
Holders of the Company's convertible preferred stock are entitled to vote
on all matters on an as-converted basis. In addition, the vote of at least a
majority of the outstanding shares of convertible preferred stock, voting as a
single class, shall be necessary for effecting or validating significant
corporate actions specified in the certificate of incorporation.
F-26
HORIZON PCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2001 AND 2000,
AND FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
- --------------------------------------------------------------------------------
NOTE 13 - CONVERTIBLE PREFERRED STOCK (CONTINUED)
The Company has agreed that until the conversion of the preferred stock,
the Company will adhere to certain restrictive covenants. Among other
restrictions, the most significant covenants relate to capital expenditures,
asset sales, restricted payments, additional debt incurrence and equity
issuance. As of December 31, 2001, the Company was in compliance with the
covenants under the agreement.
NOTE 14 - COMMON STOCK
Due to the reorganization discussed in Note 1, the Company has authorized
300,000,000 shares of class A common stock at $0.0001 par value. Additionally,
the Company has authorized 75,000,000 shares of class B common stock at $0.0001
par value. Each holder of class A common stock is entitled to one vote per share
and each holder of class B common stock is entitled to ten votes per share. Both
classes of common stock have equal dividend rights. As of December 31, 2001, the
Company had issued 26,646 and 58,458,354 shares of class A and class B stock,
respectively, and had granted warrants to acquire 6,315,960 shares of class A
common stock (Notes 9 and 15).
In June 2000, in conjunction with the Bright PCS purchase (Note 4), the
Company received a distribution of its own stock from a former Bright PCS
shareholder, valued at $111,061. The 13,066 shares of class B common stock
distributed by the former Bright PCS shareholder are held in treasury stock. At
December 31, 2001, 58,445,288 shares of class B common stock remain outstanding.
In September 2001, a previous owner of Bright PCS gifted 26,646 shares of
the Company's class B common stock. This transaction resulted in the conversion
of the class B shares into 26,646 shares of the Company's class A common stock.
NOTE 15 - SPRINT PCS WARRANTS
The Company agreed to grant to Sprint PCS warrants to acquire 2,510,460
shares of 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 the Company completed the
required purchase of certain Sprint PCS assets. The Company valued the warrants
and recorded an intangible asset of approximately $13,356,000 (based on a share
price of $5.88 per share, valued using the Black-Scholes pricing model using an
expected dividend yield of 0.0%, a risk-free interest rate of 6.5%, expected
life of 10 years and a volatility of 95%). The intangible asset is being
amortized over the remaining term of the Sprint PCS management agreement
resulting in approximately $752,000 of amortization expense per year.
Amortization expense for the years ended December 31, 2001 and 2000, was
approximately $752,000 and $188,000 respectively. Accumulated amortization on
the intangible asset was approximately $940,000 and $188,000 and December 31,
2001 and 2000, respectively. The warrants will be issued to Sprint PCS at the
earlier of an initial public offering of the Company's common stock or July 31,
2003.
NOTE 16 - STOCK OPTION PLANS
In November 1999, the Company adopted the 1999 Stock Option Plan, which was
amended in June 2000 and renamed the 2000 Stock Option Plan (the "Plan"). The
Plan is intended to provide directors, officers and other employees of, and
service providers to, the Company and any of its related corporations with
opportunities to purchase stock pursuant to the grant of incentive or
nonqualified options. The Company may grant options for up to 7,500,000 shares
of class A common stock and 4,196,884 shares of class B common stock. The
maximum term of the options is 10 years. Options vest based on the terms of each
individual agreement over four to six years from the date of the grant.
F-27
HORIZON PCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2001 AND 2000,
AND FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
- --------------------------------------------------------------------------------
NOTE 16 - STOCK OPTION PLANS (CONTINUED)
On November 17, 1999, the Company granted 4,196,884 options related to
class B common stock at an exercise price of $0.12 per share. During 2000, the
Company granted 116,971 options related to class A common stock at an exercise
price of $5.88 per share. No options were granted during 2001 and no options
were exercised or forfeited during the three years ended December 31, 2001.
There were 2,017,733 and 1,166,249 and 500,398 exercisable options on class B
common stock at December 31, 2001, 2000 and 1999, respectively. There were
29,243 exercisable options on class A common stock at December 31, 2001.
The Company applies APB Opinion No. 25 and related interpretations in
accounting for the Plan with respect to employees. The Company applies SFAS No.
123 and related interpretations in accounting for stock options granted to
non-employees. Pursuant to this, the Company will recognize approximately
$3,057,000 in compensation expense over the exercise period of the options
(through 2005). The accompanying consolidated financial statements reflect a
non-cash compensation charge relating to the Plan of approximately $709,000,
$490,000 and $291,000 for the years ended December 31, 2001, 2000 and 1999,
respectively.
For the purpose of the SFAS No. 123 disclosure, the fair value of each
option grant is estimated on the date of grant using the Black-Scholes option
pricing model with an assumption of a risk-free interest rate of 5.5% for 2000
options and 6.5% for 1999 options, an expected life equal to the term of the
options and a volatility of 95%. The weighted-average fair value of options on
class B and class A common stock was $0.60 and $4.75, respectively, on the date
of the grants.
Had compensation cost for the Company's Plan with respect to employees been
determined based on the fair value at the grant dates for awards under the Plan
consistent with the method of SFAS No. 123, the Company's net loss available for
common shareholders and losses per common share would have been increased to the
pro forma amounts indicated below for the years ended December 31:
2001 2000 1999
---------------- ---------------- ---------------
Net Loss
As reported................................... $ (124,411,539) $ (43,326,510) $ (10,667,671)
Pro Forma..................................... (124,775,559) (44,020,378) (10,749,411)
Basic and diluted loss per share
As reported................................... $ (2.13) $ (0.77) $ (0.20)
Pro Forma..................................... (2.13) (0.78) (0.20)
NOTE 17 - DISCONTINUED OPERATIONS
Effective April 1, 2000, the Company transferred its Internet, long
distance and other businesses unrelated to its wireless operations to Horizon
Technology (formerly United Communications, Inc.), a wholly-owned subsidiary of
the Parent. Accordingly, the results of operations for these business units have
been reported as discontinued operations in the current and prior periods. At
December 31, 2000, the Company had an interest bearing note receivable of
approximately $700,000 from Horizon Technology which was repaid during 2001.
F-28
HORIZON PCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2001 AND 2000,
AND FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
- --------------------------------------------------------------------------------
NOTE 17 - DISCONTINUED OPERATIONS (CONTINUED)
Operating results for the years ended December 31, 2000 and 1999 for these
businesses are as follows:
YEAR ENDED DECEMBER 31,
2000 1999
------------- -------------
Total revenue............................... $ 1,046,313 $ 3,463,566
Operating income before income taxes........ 214,008 427,775
Earnings before income taxes................ 214,008 427,775
Income tax expense.......................... (72,763) (145,444)
------------- -------------
Net income from discontinued operations..... $ 141,245 $ 282,331
============= =============
NOTE 18 - EXTRAORDINARY LOSS
As a result of the September 26, 2000, financings described in Note 9, the
Company retired long-term debt payable to financial institutions. As a result of
these early debt extinguishments, the Company expensed the unamortized portion
of the related financing costs as well as fees associated with the debt
extinguishments. These fees and expenses amounted to approximately $748,000
during 2000 and are shown on the consolidated statements of operations net of a
tax benefit of approximately $262,000.
NOTE 19 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107 requires disclosure of the fair value of all financial
instruments. For purposes of this disclosure, the fair value of a financial
instrument is the amount at which the instrument could be exchanged in a current
transaction between willing parties, other than in a forced or liquidation sale.
Fair value may be based on quoted market prices for the same or similar
financial instruments or on valuation techniques such as the present value of
estimated future cash flows using a discount rate commensurate with the risks
involved.
The estimates of fair value required under SFAS No. 107 require the
application of broad assumptions and estimates. Accordingly, any actual exchange
of such financial instruments could occur at values significantly different from
the amounts disclosed. As cash and cash equivalents, current receivables,
current payables and certain other short-term financial instruments are all
short term in nature, their carrying amounts approximate fair value. The
carrying values of restricted cash approximate fair value as the investment
funds are short-term. The Company's secured credit facility is based on
market-driven rates and, therefore, its carrying value approximates fair value.
The senior notes were issued in December 2001 and approximate fair value as of
December 31, 2001. The fair value of the discount notes was based on market
rates for the Company's notes. As of December 31, 2001, the estimated fair value
of the discount notes was $141,600,000 and the carrying value was approximately
$159,056,000.
In the first quarter of 2001, the Company entered into a two-year interest
rate swap, effectively fixing $25,000,000 of a term loan under the secured
credit facility (Note 9) at a rate of 9.4%. In the third quarter of 2001, the
Company entered into a two-year interest rate swap, effectively fixing the
remaining $25,000,000 borrowed under the secured credit facility at 7.65%. The
swaps have been designated as a hedge of a portion of the future variable
interest cash flows expected to be paid under the secured credit facility
borrowings. A loss of approximately $838,000 was recorded in other comprehensive
income during the year ended December 31, 2001. The Company also recognized a
loss of approximately $176,000 in the statement of operations during 2001
related to the ineffectiveness of the hedge. Other comprehensive income may
fluctuate based on changes in the fair value of the swap instrument. The Company
has recorded a liability in other long-term liabilities in the accompanying
consolidated balance sheet of approximately $1,014,000 at December 31, 2001,
related to the swap.
F-29
HORIZON PCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2001 AND 2000,
AND FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
- --------------------------------------------------------------------------------
NOTE 20 - RELATED PARTIES
The Company has non-interest bearing receivables from and payables to other
subsidiaries of the Parent related to advances made to and received from or for
services received from those affiliated companies. As a result of the sale of
convertible preferred stock (Note 13), the Company is not able to participate in
the tax-sharing agreement discussed in Note 10. At December 31, 2001, the
Company had a net receivable from the Parent for Federal income taxes. At
December 31, 2000, the Company had a payable to the Parent related to Federal
income taxes and cash advances received from the Parent's line of credit and
associated interest. All payables to the Parent were repaid during 2001. The
balances due to and due from related parties as of December 31, 2001 and 2000,
are as follows:
DECEMBER 31, DECEMBER 31,
2001 2000
----------------- ---------------
Receivable from affiliates............................ $ 100,437 $ 741,453
Receivable from Parent................................ 483,785 --
Payable to affiliates................................. -- 1,307,061
Payable to Parent..................................... -- 427,747
During 2001, 2000 and 1999, affiliated companies provided the Company
management, supervision and administrative services including financial,
regulatory, human resource and other administrative and support services. These
agreements have a term of three years, with the right to renew the agreement for
additional one-year terms each year thereafter. The cost of the management
services, excluding amounts allocated to discontinued operations, for the years
ended December 31, 2001, 2000, and 1999 was approximately $6,217,000,
$4,444,000, and $815,000, respectively.
NOTE 21 - SUPPLEMENTARY FINANCIAL INFORMATION (UNAUDITED)
The quarterly results of operations for the years ended December, 31 2001
and 2000:
FOR THE THREE MONTHS ENDED
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
------------- ------------ -------------- -----------
(Dollars in thousands, except per share data)
Fiscal Year 2001:
- ----------------
Total revenues $ 18,522 $ 24,771 $ 35,204 $ 44,807
Operating loss (16,194) (21,739) (23,271) (28,210)
Net loss available to common shareholders (22,094) (30,004) (31,503) (40,811)
Basic and diluted net loss per share available
to common shareholders $ (0.38) $ (0.51) $ (0.54) $ (0.70)
Fiscal Year 2000:
- ----------------
Total revenues $ 3,503 $ 5,327 $ 7,442 $ 12,922
Operating loss (5,787) (7,508) (12,158) (19,708)
Gain (Loss) on exchange of stock -- 10,513 1,038 --
Income from discontinued operations 141 -- -- --
Income (Loss) before extraordinary item (5,365) 3,547 (17,376) (20,864)
Extraordinary loss, net of taxes -- -- (486) --
Net income (loss) available to common
shareholders (5,365) 3,547 (17,862) (23,647)
Diluted income (loss) per share before
extraordinary item $ (0.10) $ 0.06 $ (0.30) $ (0.40)
Diluted loss per share on extraordinary item -- -- (0.01) --
Diluted net income (loss) per share available
to common shareholders $ (0.10) $ 0.06 $ (0.31) $ (0.40)
F-30
HORIZON PCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2001 AND 2000,
AND FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
- --------------------------------------------------------------------------------
NOTE 22 - SUBSEQUENT EVENT
Horizon PCS' secured credit facility includes financial covenants that must
be met each quarter. The Company complied with these covenants at December 31,
2001. The Company 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, the Company incurred additional expenses to add
those customers. Although the Company ultimately benefits from the revenues
generated by new subscribers, the Company 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, the Company entered into a waiver agreement with its lending
group waiving this non-compliance with the covenant through June 15, 2002. The
Company also agreed that until June 15, 2002, the Company 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 the Company would maintain the
$105,000,000 in loan proceeds recently received from the lending group in a
separate account. The Company is currently in negotiations with the bank group
to obtain amendments to the covenants. The Company 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 the senior notes and discount
notes. One option available to the Company would be to prepay the indebtedness
under the secured credit facility, together with prepayment fees. If the Company
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, the Company believes that it could obtain replacement
financing to the extent necessary to fund its business plan. There can be no
assurance, however, that the Company could obtain adequate or timely replacement
financing on acceptable terms, or at all.
F-31
HORIZON PCS, INC.
FINANCIAL STATEMENT SCHEDULE
VALUATION AND QUALIFYING ACCOUNTS
- --------------------------------------------------------------------------------
BALANCE AT BALANCE AT
BEGINNING CHARGED TO END OF
DESCRIPTION OF PERIOD EXPENSE DEDUCTIONS (1) PERIOD
- ----------- ------------- ------------- -------------- -------------
(IN THOUSANDS)
Allowance for Doubtful Accounts Receivable:
Year Ended December 31, 1999.................... $ 33 $ 488 $ (150) $ 371
======== ========= =========== ========
Year Ended December 31, 2000.................... $ 371 $ 1,382 $ (852) $ 901
======== ========= =========== ========
Year Ended December 31, 2001.................... $ 901 $ 6,410 $ (5,507) $ 1,804
======== ========= =========== ========
- ---------
(1) Represent amounts written off during the period less recoveries of amounts
previously written off.
F-32
HORIZON PCS, INC.
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)................. $ 195,870,817 $ 123,775,562
Restricted cash............................................................. 24,597,222 24,597,222
Accounts receivable-- subscriber, less allowance for
doubtful accounts of approximately $1,878,000 and $1,804,000 at
March 31, 2002 and December 31, 2001, respectively........................ 17,315,739 14,293,771
Receivable from affiliate................................................... 99,451 100,437
Receivable from Parent...................................................... -- 483,785
Equipment inventory......................................................... 1,802,381 3,845,433
Prepaid expenses and other current assets................................... 2,671,494 840,970
--------------- ---------------
Total current assets.................................................. 242,357,104 167,937,180
--------------- ---------------
OTHER ASSETS:
Restricted cash............................................................. 24,062,500 24,062,500
Intangible asset-- Sprint PCS licenses, net of amortization................. 42,225,701 42,840,534
Goodwill, net of amortization............................................... 7,191,180 7,191,180
Unamortized debt issuance costs and other assets............................ 23,227,707 24,438,992
--------------- ---------------
Total other assets.................................................... 96,707,088 98,533,206
--------------- ---------------
PROPERTY AND EQUIPMENT, NET 230,290,376 214,867,858
--------------- ---------------
Total assets...................................................... $ 569,354,568 $ 481,338,244
=============== ===============
(Continued on next page)
F-33
HORIZON PCS, INC.
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:
Accounts payable............................................................ $ 8,544,723 $ 9,500,931
Accrued liabilities......................................................... 34,881,585 27,527,462
Payable to Sprint PCS....................................................... 16,892,532 10,244,529
Deferred service revenue.................................................... 4,326,977 3,712,734
--------------- ----------------
Total current liabilities............................................. 64,645,817 50,985,656
--------------- ----------------
OTHER LONG-TERM LIABILITIES:
Long-term debt.............................................................. 495,410,215 384,055,643
Other long-term liabilities................................................. 2,252,524 2,195,355
Deferred income............................................................. 9,847,400 10,719,888
--------------- ---------------
Total other long-term liabilities..................................... 507,510,139 396,970,886
--------------- ---------------
Total liabilities................................................... 572,155,956 447,956,542
--------------- ---------------
COMMITMENTS AND CONTINGENCIES (Note 6)
CONVERTIBLE PREFERRED STOCK................................................... 148,205,412 145,349,043
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, 10,000,000 shares authorized, none issued
or outstanding, at $0.0001 par value...................................... -- --
Common stock-- class A, 300,000,000 shares authorized,
26,646 issued and outstanding at $0.0001 par value........................ 3 3
Common stock-- class B, 75,000,000 shares authorized,
58,458,354 issued and 58,445,288 outstanding, at $0.0001 par value........ 5,846 5,846
Treasury stock-- class B, 13,066 shares, at $8.50 per share................. (111,061) (111,061)
Accumulated other comprehensive income (loss)............................... (447,908) (837,851)
Additional paid-in capital.................................................. 91,852,117 91,852,117
Deferred stock option compensation.......................................... (1,389,259) (1,566,496)
Retained deficit............................................................ (240,916,538) (201,309,899)
--------------- ----------------
Total stockholders' equity (deficit)................................ (151,006,800) (111,967,341)
--------------- ----------------
Total liabilities and stockholders' equity (deficit).............. $ 569,354,568 $ 481,338,244
=============== ================
The accompanying notes are an integral part of these condensed consolidated
financial statements
F-34
HORIZON PCS, INC.
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:
Subscriber revenues..................................................... $ 35,015,205 $ 12,063,233
Roaming revenues........................................................ 10,819,288 6,114,459
Equipment revenues...................................................... 2,375,289 1,075,965
---------------- ----------------
Total operating revenues......................................... 48,209,782 19,253,657
OPERATING EXPENSES:
Cost of service (exclusive of items shown below)........................ 35,750,809 17,981,365
Cost of equipment....................................................... 4,919,595 2,189,910
Selling and marketing................................................... 14,707,221 7,096,031
General and administrative (exclusive of items shown below)............. 9,175,049 4,589,000
Non-cash compensation................................................... 177,237 177,237
Depreciation and amortization........................................... 7,949,631 3,414,043
---------------- ----------------
Total operating expenses......................................... 72,679,542 35,447,586
---------------- ----------------
OPERATING LOSS............................................................ (24,469,760) (16,193,929)
Loss on sale of property and equipment.................................... (285,738) --
Interest income and other, net............................................ 743,636 2,886,220
Interest expense, net of capitalized interest............................. (12,738,408) (6,150,947)
---------------- ----------------
LOSS ON OPERATIONS BEFORE INCOME TAXES.................................... (36,750,270) (19,458,656)
INCOME TAX EXPENSE........................................................ -- --
---------------- ----------------
NET LOSS.................................................................. (36,750,270) (19,458,656)
PREFERRED STOCK DIVIDEND.................................................. (2,856,369) (2,635,623)
---------------- ----------------
NET LOSS AVAILABLE TO COMMON STOCKHOLDERS................................. $ (39,606,639) $ (22,094,279)
================ ================
Basic and diluted net loss per share available to common stockholders..... $ (0.68) $ (0.38)
=============== ================
Weighted-average common shares outstanding................................ 58,471,934 58,471,934
================ ================
The accompanying notes are an integral part of these condensed consolidated
financial statements
F-35
HORIZON PCS, INC.
Condensed Consolidated Statements of 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.................................................................. $ (36,750,270) $ (19,458,656)
OTHER COMPREHENSIVE INCOME (LOSS):
Net unrealized gain (loss) on hedging activities........................ 389,943 (298,905)
---------------- ----------------
COMPREHENSIVE INCOME (LOSS)............................................... $ (36,360,327) $ (19,757,561)
================ ================
The accompanying notes are an integral part of these condensed consolidated
financial statements
F-36
HORIZON PCS, INC.
Condensed Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 2002 and 2001 (unaudited)
- --------------------------------------------------------------------------------
For the Three Months Ended
March 31,
2002 2001
---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss................................................................ $ (36,750,270) $ (19,458,656)
---------------- ----------------
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization........................................... 7,949,631 3,414,043
Non-cash compensation expense........................................... 177,237 177,237
Non-cash interest expense............................................... 6,118,482 4,490,700
Provision for doubtful accounts......................................... 3,511,642 730,720
Loss on hedging activities.............................................. 34,103 --
Loss on sale of property and equipment.................................. 285,738 --
Change in:..............................................................
Accounts receivable................................................... (6,533,610) (2,698,156)
Equipment inventory................................................... 2,043,052 981,829
Prepaid expenses and other............................................ (1,830,524) 44,710
Deferred income....................................................... (872,488) 849,397
Accounts payable...................................................... (956,208) 1,591,756
Payable to Sprint PCS................................................. 6,648,003 (774,336)
Accrued liabilities and deferred service revenue...................... 7,968,366 (8,263,720)
Change in receivable/payable from affiliates and Parent................. 484,771 (247,656)
Change in other assets and liabilities, net............................. 1,002,160 (487,969)
---------------- ----------------
Total adjustments..................................................... 26,030,355 (191,445)
---------------- ----------------
Net cash used in operating activities............................... (10,719,915) (19,650,101)
---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net............................................... (23,438,012) (32,053,689)
Cash Investments........................................................ -- (31,976,767)
Proceeds from redemption of RTFC capital certificates................... -- 2,895,646
Proceeds from sale of property and equipment............................ 1,253,182 --
Dividends received ..................................................... -- (4,311)
---------------- -----------------
Net cash used in investing activities............................... (22,184,830) (61,139,121)
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Deferred financing fees and other....................................... -- (41,915)
Long Term Debt-- borrowings, net of repayments.......................... 105,000,000 --
---------------- ----------------
Net cash provided by financing activities........................... 105,000,000 (41,915)
---------------- ----------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS............................................................. 72,095,255 (80,831,137)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD............................ 123,775,562 191,417,394
---------------- ----------------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................................. $ 195,870,817 $ 110,586,257
================ ================
The accompanying notes are an integral part of these condensed consolidated
financial statements
F-37
HORIZON PCS, INC.
Notes to Interim Condensed Consolidated Financial Statements
As of March 31, 2002, and December 31, 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
On April 26, 2000, Horizon Telcom, Inc. ("Parent" or "Horizon Telcom")
formed Horizon PCS, Inc. The Company primarily provides wireless personal
communications services ("PCS") as an affiliate of Sprint PCS. The Company
entered into management agreements with Sprint PCS, the PCS group of Sprint
Corporation, during 1998 and 1999. These agreements, as amended, provide the
Company with the exclusive right to build, own, and manage a wireless voice and
data services network in markets located in Ohio, West Virginia, Kentucky,
Virginia, Tennessee, Maryland, Pennsylvania, New York, New Jersey, Michigan,
North Carolina and Indiana under the Sprint PCS brand. The Company is required
to build the wireless network according to Sprint PCS specifications. The term
of the agreements is twenty years with three successive ten-year renewal periods
unless terminated by either party under provisions outlined in the management
agreements. The management agreements commenced in June 1998, but payments of
the management fee did not commence until the Company converted to a fully
branded Sprint PCS network partner in October 1999. The management agreements
include indemnification clauses between the Company and Sprint PCS to indemnify
each party against claims arising from violations of laws or the management
agreements, other than liabilities resulting from negligence or willful
misconduct of the party seeking to be indemnified.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Note 3 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 unaudited condensed consolidated financial statements have
been prepared in accordance with the rules and regulations of the 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. These statements include the accounts of the Company and its
wholly-owned subsidiaries, HPC and Bright PCS. All material intercompany
transactions and balances have been eliminated.
F-38
HORIZON PCS, INC.
Notes to Interim Condensed Consolidated Financial Statements
As of March 31, 2002, and December 31, 2001,
And for the Three Months Ended March 31, 2002 and 2001 (unaudited)
- --------------------------------------------------------------------------------
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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
available to common stockholders is computed by dividing net loss available to
common stockholders 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.
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 (or 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.
F-39
HORIZON PCS, INC.
Notes to Interim Condensed Consolidated Financial Statements
As of March 31, 2002, and December 31, 2001,
And for the Three Months Ended March 31, 2002 and 2001 (unaudited)
- --------------------------------------------------------------------------------
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following at March 31, 2002, and
December 31, 2001:
2002 2001
--------------- ---------------
Network assets................................................... $ 135,254,093 $ 134,257,788
Switching equipment.............................................. 53,718,806 35,253,986
Furniture, vehicles and office equipment......................... 9,310,485 10,137,175
Land............................................................. 966,689 966,689
--------------- ---------------
Property and equipment in service, cost...................... 199,250,073 180,615,638
Accumulated depreciation......................................... (23,462,536) (22,478,697)
--------------- ---------------
Property and equipment in service, net................... 175,787,537 158,136,941
Construction work in progress.................................... 54,502,839 56,730,917
--------------- ---------------
Total property and equipment, net.................... $ 230,290,376 $ 214,867,858
=============== ===============
The Company capitalized interest of approximately $2,090,000 and $1,550,000
for the three months ended March 31, 2002, and 2001, respectively.
F-40
HORIZON PCS, INC.
Notes to Interim Condensed Consolidated Financial Statements
As of March 31, 2002, and December 31, 2001,
And for the Three Months Ended March 31, 2002 and 2001 (unaudited)
- --------------------------------------------------------------------------------
NOTE 5 - 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 loan B............6.30% 50,000,000 50,000,000
Secured credit facility - term loan A............5.75% 105,000,000 --
--------------- ---------------
Total long-term debt........................... $ 495,410,215 $ 384,055,643
=============== ===============
As of March 31 2002, Horizon PCS had $95.0 million available for borrowing
under the Company's secured credit facility in the form of a line of credit at a
variable interest rate of 5.78%.
In connection with the Company's 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 6 - COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases office space and various equipment under several
operating leases. In addition, the Company has a tower lease agreement with a
third party whereby the Company leases towers for substantially all of the
Company's 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, the Company receives a site development fee from the tower lessor for
certain tower sites which the lessor constructs on behalf of the Company.
The Company also leases space for its retail stores. At March 31, 2002, the
Company leased 39 stores operating throughout its territories.
CONSTRUCTION EXPENDITURES
Construction expenditures for the year ended December 31, 2002, are
estimated to be between approximately $60,000,000 and $70,000,000. The majority
of the estimated expenditures are for the build-out and upgrade of the Company's
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.
F-41
HORIZON PCS, INC.
Notes to Interim Condensed Consolidated Financial Statements
As of March 31, 2002, and December 31, 2001,
And for the Three Months Ended March 31, 2002 and 2001 (unaudited)
- --------------------------------------------------------------------------------
NOTE 6 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
GUARANTEES
The discount notes are guaranteed by the Company's existing subsidiaries,
HPC and Bright PCS, and will be guaranteed by the Company's future domestic
restricted subsidiaries. The Company has no independent assets or operations
apart from its subsidiaries. The guarantees are general unsecured obligations.
Each guarantor unconditionally guarantees, jointly and severally, on a senior
subordinated basis, the full and punctual payment of principal premium and
liquidated damages, if any, and interest on the discount notes when due. If the
Company creates or acquires unrestricted subsidiaries and foreign restricted
subsidiaries, these subsidiaries need not be guarantors.
ALLIANCES NETWORK AGREEMENTS
The Alliances are two independent PCS providers offering service under the
NTELOS brand name. In August 1999, the Company 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 FCC's
construction requirements for PCS networks. Horizon PCS is responsible for
completion of the network modification if the Alliances fail to comply.
NOTE 7 - RELATED PARTIES
The Company has non-interest-bearing receivables from affiliate companies
(other subsidiaries of the Parent) related to advances made to and services
received from these affiliated companies. At December 31, 2001, the Company had
a receivable from the Parent related to Federal income taxes. The balances due
to and due from related parties as of March 31, 2002, and December 31, 2001, are
as follows:
March 31, December 31,
2002 2001
----------------- ---------------
Receivable from affiliates................................ $ 99,451 $ 100,437
Receivable from Parent.................................... -- 483,785
During the three months ended March 31, 2002 and 2001, affiliated companies
provided the Company management, supervision and administrative services
including financial, regulatory, human resource and other administrative and
support services. These agreements have a term of three years, with the right to
renew the agreement for additional one-year terms each year thereafter. The cost
of the management services for the three months ended March 31, 2002 and 2001,
was approximately $1,420,000 and $1,612,000, respectively.
F-42
HORIZON PCS, INC.
Notes to Interim Condensed Consolidated Financial Statements
As of March 31, 2002, and December 31, 2001,
And for the Three Months Ended March 31, 2002 and 2001 (unaudited)
- --------------------------------------------------------------------------------
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, the Company agreed to grant to Sprint PCS warrants to acquire
2,510,460 shares of 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 the Company
completed the required purchase of certain Sprint PCS assets. The Company 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 the Company 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, the Company 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. The Company 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.
The following pro forma disclosure reconciles net loss available to common
shareholders, 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............................... $ (36,750,270) $ (19,458,656)
Goodwill amortization........................... -- 97,221
------------------ ------------------
Adjusted net loss ........................... $ (36,750,270) $ (19,361,435)
================== ==================
Basic and diluted net loss per share available
to common stockholders....................... $ (0.68) $ (0.38)
Goodwill amortization........................... -- --
------------------ ------------------
Adjusted basic and diluted net loss per
share available to common stockholders..... $ (0.68) $ (0.38)
================== ==================
F-43
HORIZON PCS, INC.
Notes to Interim Condensed Consolidated Financial Statements
As of March 31, 2002, and December 31, 2001,
And for the Three Months Ended March 31, 2002 and 2001 (unaudited)
- --------------------------------------------------------------------------------
NOTE 9 - SECURED CREDIT FACILITY COVENANTS
Horizon PCS' secured credit facility includes financial covenants that must
be met each quarter. The Company 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, the Company incurred
additional expenses to add those customers. Although the Company ultimately
benefits from the revenues generated by new subscribers, the Company 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, the Company entered into a waiver agreement with its
lending group waiving this non-compliance with the covenant through June 15,
2002. The Company also agreed that until June 15, 2002, the Company 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 the Company would
maintain the $105,000,000 in loan proceeds recently received from the lending
group in a separate account. The Company is currently in negotiations with the
bank group to obtain amendments to the covenants. The Company 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 the senior notes and discount
notes. One option available to the Company would be to prepay the indebtedness
under the secured credit facility, together with prepayment fees. If the Company
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, the Company believes that it could obtain replacement
financing to the extent necessary to fund its business plan. There can be no
assurance, however, that the Company could obtain adequate or timely replacement
financing on acceptable terms, or at all.
F-44
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Certificate of Incorporation of Horizon PCS, Inc. ("Horizon PCS")
provides that the liability of the directors of Horizon PCS to Horizon PCS or
any of its stockholders for monetary damages arising from acts or omissions
occurring in their capacity as directors shall be limited to the fullest extent
permitted by the laws of Delaware or any other applicable law. This limitation
does not apply with respect to any action in which a director would be liable
under Section 174 of the General Corporation Law of the State of Delaware nor
does it apply with respect to any liability in which a director:
o breached his duty of loyalty to Horizon PCS or its stockholders;
o did not act in good faith or, in failing to act, did not act in good
faith;
o acted in a manner involving intentional misconduct or a knowing
violation of law or, in failing to act, shall have acted in a manner
involving intentional misconduct or a knowing violation of law; or
o derived an improper personal benefit.
Horizon PCS' Certificate of Incorporation provides that Horizon PCS shall
indemnify its directors, officers and employees and former directors, officers
and employees to the fullest extent permitted by the laws of Delaware or any
other applicable law. Pursuant to the provisions of Section 145 of the General
Corporation Law of the State of Delaware, Horizon PCS has the power to indemnify
any person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding (other than an
action by or in the right of Horizon PCS) by reason of the fact that he is or
was a director, officer, employee or agent of Horizon PCS, against any and all
expenses, judgments, fines and amounts paid in settlement actually and
reasonably incurred in connection with such action, suit or proceeding. The
power to indemnify applies only if such person acted in good faith and in a
manner he reasonably believed to be in the best interest, or not opposed to the
best interest, of Horizon PCS and with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful.
The power to indemnify applies to actions brought by or in the right of
Horizon PCS as well, but only to the extent or defense and settlement expenses
and not to any satisfaction of a judgment or settlement of the claim itself and
with the further limitation that in such actions no indemnification shall be
made in the event of any adjudication of negligence or misconduct unless the
court, in its discretion, believes that in light of all the circumstances
indemnification should apply.
The statute further specifically provides that the indemnification
authorized thereby shall not be deemed exclusive of any other rights to which
any such officer or director may be entitled under any bylaws, agreements, vote
of stockholders or disinterested directors, or otherwise.
Horizon PCS maintains directors' and officers' liability insurance covering
its directors and officers.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling Horizon PCS
pursuant to the foregoing provisions, Horizon PCS has been advised that in the
opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable.
II-1
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits:
EXHIBIT
NUMBER DESCRIPTION
------ -----------
1.1** Purchase Agreement dated September 18, 2000 between Horizon
PCS, Inc. and Donaldson, Lufkin & Jenrette Securities
Corporation and First Union Securities, Inc.
1.2 Purchase Agreement dated December 4, 2001 between Horizon
PCS, Inc., Horizon Personal Communications, Inc., Bright
Personal Communications Services, LLC, and Credit Suisse
First Boston Corporation, First Union Securities, Inc.,
Bear, Stearns & Co., Inc., Lehman Brothers, Inc.
(incorporated by reference to Exhibit 10.45 filed with the
Registration Statement on Form S-1 of the Registrant (File
No. 333-51240)).
2.1**(1) Asset Purchase Agreement, dated May 19, 2000, by and between
Sprint PCS, Inc. and Horizon Personal Communications, Inc.
2.2**(1) Contribution and Exchange Agreement, as amended, dated May
4, 2000, by and among Horizon Personal Communications, Inc.,
Horizon Telcom, Inc., the Registrant and those persons
listed on the attachment to the Contribution and Exchange
Agreement.
3.1** Form of Certificate of Incorporation of Horizon PCS.
3.2** Bylaws of Horizon PCS.
4.1** Specimen Common Stock Certificate.
4.2** Indenture dated as of September 26, 2000 between Horizon
PCS, Inc. , Horizon Personal Communications, Inc., Bright
Personal Communications, Inc. and Wells Fargo Bank
Minnesota, National Association.
4.3** A/B Exchange Registration Rights Agreement made as of
September 26, 2000 by and among Horizon PCS, Inc. and
Donaldson, Lufkin & Jenrette Securities Corporation and
First Union Securities, Inc.
4.4** Note Guarantee of Horizon Personal Communications, Inc.
4.5** Note Guarantee of Bright Personal Communications Services,
LLC
4.6 Indenture dated December 7, 2001 by and among Horizon PCS,
Inc., as Issuer, Horizon Personal Communications, Inc., and
Bright Personal Communications Services, LLC, as Guarantors,
and Wells Fargo Bank Minnesota, National Association, as
Trustee (incorporated by reference to Exhibit 10.46 filed
with the Registration Statement on Form S-1 of the
Registrant (File No. 333-51240)).
4.7 Form of Registered Note (included in Exhibit 4.6).
5.1*** Opinion of Arnall Golden Gregory LLP regarding legality of
the common stock being issued.
10.1** Form of Employment Agreement, dated September 26, 2000, by
and between Registrant and William A. McKell.
10.2** Form of Employment Agreement, dated September 26, 2000, by
and between Registrant and Peter M. Holland.
10.3**+ Sprint PCS Management Agreement between Sprint Spectrum,
L.P., SprintCom, Inc. and Horizon Personal Communications,
Inc., dated June 8, 1998.
10.3.1** Letter Agreement, dated July 3, 2000, between Sprint
Spectrum, L.P., SprintCom, Inc. and Horizon Personal
Communications, Inc.
10.3.2 Addendum VI to Sprint PCS Management Agreement between the
Registrant and Sprint PCS, Inc. (incorporated herein by
reference to the Registrant's Current Report on Form 8-K
filed on August 24, 2001).
10.3.3+ Addendum V to Sprint PCS Management Agreement between the
Registrant and Sprint PCS, Inc. (incorporated herein by
reference to Exhibit 10.3.1 to the Registration Statement on
Form 10/A of Horizon Telcom, Inc. (File No. 000-32617)).
10.5** Sprint Trademark and Service Mark License Agreement between
Sprint Communications Company, L.P. and Horizon Personal
Communications, Inc., dated June 8, 1998.
10.6** Sprint Spectrum Trademark and Service Mark License Agreement
between Sprint Spectrum L.P. and Horizon Personal
Communications, Inc., dated June 8, 1998.
II-2
10.7**+ Sprint PCS Management Agreement between Wirelessco, L.P.,
SprintCom, Inc., Sprint Spectrum, L.P. and Bright Personal
Communications Services, LLC, dated October 13, 1999.
10.8**+ Sprint PCS Services Agreement between Sprint Spectrum, L.P.
and Bright Personal Communications Services, LLC, dated
October 13, 1999.
10.9** Sprint Trademark and Service Mark License Agreement between
Sprint Communications Company, L.P. and Bright Personal
Communications Services, LLC, dated October 13, 1999.
10.10** Sprint Spectrum Trademark and Service Mark License Agreement
between Sprint Spectrum, L.P. and Bright Personal
Communications Services, LLC, dated October 13, 1999.
10.18** Registration Rights Agreement, dated June 27, 2000, by and
among the Registrant and those persons listed on the
attachment to the Contribution and Exchange Agreement.
10.19**+ Network Services Agreement by and between West Virginia PCS
Alliance, L.C., Virginia PCS Alliance, L.C. and Horizon
Personal Communications, Inc., dated August 12, 1999.
10.19.1 First Amendment to Network Services Agreement by and between
West Virginia PCS Alliance, L.C., Virginia PCS Alliance,
L.C. and Horizon Personal Communications, Inc., dated as of
July 18, 2000 (incorporated herein by reference to Exhibit
10.19.1 to the Registration Statement on Form 10 of Horizon
Telcom, Inc. (File No. 000-32617)).
10.19.2+ Amendment to Network Services Agreement by and among the
Registrant, West Virginia PCS Alliance, L.C. and Virginia
PCS Alliance, L.C. (incorporated herein by reference to
Exhibit 10.19.1 to the Registrant's Current Report on Form
8-K filed on August 24, 2001).
10.21**+ PCS CDMA Product Supply Contract by and between Motorola,
Inc. and Horizon Personal Communications, Inc.
10.25** Form of Horizon PCS, Inc. 2000 Stock Option Plan.
10.26**+ Site Development Agreement by and between Horizon Personal
Communications, Inc. and SBA Towers, Inc., dated August 17,
1999.
10.27**+ Master Site Agreement by and between SBA Towers, Inc. and
Horizon Personal Communications, Inc., dated July 1999.
10.27.1**** Letter Agreement dated April 11, 2002 between SBA Towers,
Inc. and Horizon Personal Communications, Inc.
10.28**+ Master Design Build Agreement by and between Horizon
Personal Communications, Inc. and SBA Towers, Inc., dated
August 17, 1999.
10.29**+ Master Site Agreement by and between SBA Towers, Inc. and
Bright Personal Communications Services, LLC, dated October
1, 1999.
10.30**+ Master Design Build Agreement by and between Bright Personal
Communications Services, LLC and SBA Towers, Inc., dated
October 1, 1999.
10.31** Services Agreement, dated May 1, 2000, between Horizon
Personal Communication, Inc. and Horizon Services, Inc.
10.32** Lease Agreement, dated May 1, 2000 between Chillicothe
Telephone Company and Horizon Personal Communications, Inc.
10.33** Services Agreement, dated May 1, 2000 between Horizon
Personal Communications, Inc. and United Communications,
Inc.
10.34** Form of Indemnification Agreement.
10.35** Amended and Restated Tax Allocation Agreement dated May 1,
2000 by and among Horizon Telcom, Inc., Chillicothe
Telephone Company, Horizon Personal Communications, Inc.,
United Communications, Inc., Horizon Services, Inc., and
Horizon PCS, Inc.
10.35.1* First Amendment to the Amended and Restated Tax Allocation
Agreement dated as of September 26, 2000 by and among
Horizon Telcom, Inc., Chillicothe Telephone Company, Horizon
Personal Communications, Inc., United Communications, Inc.,
Horizon Services, Inc., and Horizon PCS, Inc.
10.37** Securities Purchase Agreement dated September 26, 2000 by
and among Horizon PCS, Inc. Apollo Investment Fund IV, L.P.,
Apollo Overseas Partners IV, L.P., Ares Leveraged Investment
Fund, L.P., Ares Leveraged Investment Fund II, L.P. and
First Union Capital Partners, LLC.
10.38** Investors Rights and Voting Agreement dated September 26,
2000 by and among Horizon PCS, Inc. Apollo Investment Fund
IV, L.P., Apollo Overseas Partners IV, L.P., Ares Leveraged
Investment Fund, L.P., Ares Leveraged Investment Fund II,
L.P. and First Union Capital Partners, LLC.
II-3
10.39** Registration Rights Agreement dated September 26, 2000 by
and among Horizon PCS, Inc. Apollo Investment Fund IV, L.P.,
Apollo Overseas Partners IV, L.P., Ares Leveraged Investment
Fund, L.P., Ares Leveraged Investment Fund II, L.P. and
First Union Capital Partners, LLC.
10.40** Credit Agreement, dated as of September 26, 2000, by and
among Horizon Personal Communications, Inc., and Bright
Personal Communications Services, LLC, Horizon PCS, Inc.
(the "Parent") and certain Subsidiaries of the Parent, the
several banks and other financial institutions as may from
time to time become parties to this Agreement, First Union
National Bank, as Administrative Agent, Westdeutsche
Landesbank Girozentrale, as Syndication Agent and Arranger
and Fortis Capital Corp., as Documentation Agent.
10.40.1** First Amendment to Credit Agreement and Assignment dated
November 20, 2000, by and among Horizon Personal
Communications, Inc. and Bright Personal Communications
Services, LLC, Horizon PCS, Inc. (the "Parent") and certain
subsidiaries of the Parent, Existing Lenders, New Lenders,
First Union National Bank, as Administrative agent,
Westdeutsche Landesbank Girozentrale, as Syndication Agent
and Arranger and Fortis Capital Corp., as Documentation
Agent.
10.40.2 Second Amendment to Credit Agreement and Assignment, dated
June 29, 2001, by and among Horizon Personal Communications,
Inc. and Bright Personal Communications Services, LLC,
Horizon PCS, Inc. (the "Parent") and certain Subsidiaries of
the Parent, Existing Lenders, New Lenders, First Union
National Bank, as Administrative Agent, Westdeutsche
Landesbank Girozentrale, as Syndication Agent and Arranger,
and Fortis Capital Corp., as Documentation Agent
(incorporated herein by reference to the Registrant's
Current Report on Form 8-K filed on July 3, 2001).
10.40.3 Third Amendment to Credit Agreement and Waiver dated as of
November 26, 2001 by and among Horizon Personal
Communications, Inc., and Bright Personal Communications
Services, LLC, Horizon PCS, Inc. (the "Parent") and certain
Subsidiaries of the Parent, the several banks and other
financial institutions as may from time to time become
parties to the Agreement, First Union National Bank, as
Administrative Agent, Westdeutsche Landesbank Girozentrale,
as Syndication Agent and Arranger and Fortis Capital Corp.,
as Documentation Agent (incorporated by reference to Exhibit
10.40.3 filed with the Registrant's Current Report on Form
8-K filed on November 28, 2001).
10.40.4 Waiver Agreement dated as of 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 10.40.4 filed with the
Registrant's Quarterly Report on Form 10-Q for the quarter
ended March 31, 2002).
10.41** Warrant Agreement dated as of September 26, 2000 between
Horizon PCS, Inc. and Wells Fargo Bank Minnesota, National
Association.
10.42** Warrant Registration Rights Agreement made as of September
26, 2000 by and among Horizon PCS, Inc. and Donaldson,
Lufkin & Jenrette Securities Corporation and First Union
Securities, Inc.
10.43* Pledge and Escrow Agreement dated December 7, 2001 by and
among Horizon PCS, Inc., Bright Personal Communications
Services, LLC, Wells Fargo and Minnesota, National
Association, as Escrow Agent.
10.44* Registration Rights Agreement dated December 7, 2001 by and
among Horizon PCS, Inc., Horizon Personal Communications,
Inc., Bright Personal Communications Services, LLC, and
Credit Suisse First Boston Corporation, First Union
Securities, Inc., Bear, Stearns & Co., Inc. and Lehman
Brothers, Inc.
10.45* Indenture dated December 7, 2001 by and among Horizon PCS,
Inc., as Issuer, Horizon Personal Communications, Inc., and
Bright Personal Communications Services, LLC, as Guarantors,
and Wells Fargo Bank Minnesota, National Association, as
Trustee.
10.46* Purchase Agreement dated December 4, 2001 between Horizon
PCS, Inc., Horizon Personal Communications, Inc., Bright
Personal Communications Services, LLC, and Credit Suisse
First Boston Corporation, First Union Securities, Inc.,
Bear, Stearns & Co., Inc., Lehman Brothers, Inc.
12.1**** Statement Re: Computation of Ratios
21.1** Subsidiaries of Horizon.
23.1**** Consent of Arthur Andersen LLP.
23.2*** Consent of Arnall Golden Gregory LLP (contained in legal
opinion filed as Exhibit 5.1).
24.1*** Powers of Attorney (set forth on the signature page hereto).
25.1*** Statement of Eligibility of Trustee.
99.1*** Form of Letter of Transmittal with respect to Exchange
Offer.
99.2*** Form of Notice of Guaranteed Delivery.
99.3*** Form of Tender Instruction Letters.
99.4**** Letter re Arthur Andersen
-----------------
* Incorporated by reference to the same exhibit number previously
filed with the Registration Statement on Form S-1 of the
Registrant (File No. 333-51240).
** Incorporated by reference to the same exhibit number previously
filed with the Registration Statement on Form S-4 of the
Registrant (File No. 333-51238).
*** Previously filed.
**** Filed herewith.
(1) In accordance with Item 601(b)(2) of Regulation S-K, the
schedules have been omitted and a list briefly describing the
schedules is at the end of the Exhibit. The Registrant will
furnish supplementally a copy of any omitted schedule to the
commission upon request.
+ The Registrant has requested confidential treatment for certain
portions of this exhibit pursuant to Rule 406 of the Securities
Act of 1933, as amended.
(b) Financial Statement Schedules:
The following is the schedule filed as a part of the registration statement -
Schedule II - Valuation and Qualifying Accounts.
ITEM 22. UNDERTAKINGS
1. Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
2. The undersigned registrant hereby undertakes as follows: that prior to
any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other items of the applicable form.
II-5
The registrant undertakes that every prospectus (i) that is filed pursuant
to the immediately preceding paragraph, or (ii) that purports to meet the
requirements of section 10(a)(3) of the Securities Act and is used in connection
with an offering of securities subject to Rule 415, will be filed as a part of
an amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
3. The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
items 4, 10(b), 11 or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
4. The undersigned hereby undertakes to supply by means of a post-effective
amendment all information concerning a transaction, and the company being
acquired involved therein, that was not the subject of and included in this
registration statement when it became effective.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Chillicothe, State of
Ohio, on the 17th day of May, 2002.
HORIZON PCS, INC.
By: /s/ William A. McKell
-----------------------------------
William A. McKell
Chairman of the Board, President,
and Chief Executive Officer
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following person in the capacities
and on the dates indicated.
NAME TITLE DATE
---- ----- ----
/s/ William A. McKell Chairman of the Board, President and May 17, 2002
- ----------------------------
William A. McKell Chief Executive Officer (Principal
Executive Officer)
/s/ Peter M. Holland Chief Financial Officer; Director May 17, 2002
- ----------------------------
Peter M. Holland (Principal Financial and Accounting
Officer)
* Director May 17, 2002
- ----------------------------
Thomas McKell
* Director May 17, 2002
- ----------------------------
Phoebe H. McKell
* Director May 17, 2002
- ----------------------------
Lonnie D. Pedersen
* Director May 17, 2002
- ----------------------------
Robert A. Katz
II-6
* Director May 17, 2002
- ----------------------------
Eric L. Zinterhofer
*By /s/ Peter M. Holland
Peter M. Holland
Attorney-in-Fact
II-7
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------ -----------
1.1** Purchase Agreement dated September 18, 2000 between Horizon
PCS, Inc. and Donaldson, Lufkin & Jenrette Securities
Corporation and First Union Securities, Inc.
1.2 Purchase Agreement dated December 4, 2001 between Horizon
PCS, Inc., Horizon Personal Communications, Inc., Bright
Personal Communications Services, LLC, and Credit Suisse
First Boston Corporation, First Union Securities, Inc.,
Bear, Stearns & Co., Inc., Lehman Brothers, Inc.
(incorporated by reference to Exhibit 10.45 filed with the
Registration Statement on Form S-1 of the Registrant (File
No. 333-51240)).
2.1**(1) Asset Purchase Agreement, dated May 19, 2000, by and between
Sprint PCS, Inc. and Horizon Personal Communications, Inc.
2.2**(1) Contribution and Exchange Agreement, as amended, dated May
4, 2000, by and among Horizon Personal Communications, Inc.,
Horizon Telcom, Inc., the Registrant and those persons
listed on the attachment to the Contribution and Exchange
Agreement.
3.1** Form of Certificate of Incorporation of Horizon PCS.
3.2** Bylaws of Horizon PCS.
4.1** Specimen Common Stock Certificate.
4.2** Indenture dated as of September 26, 2000 between Horizon
PCS, Inc. , Horizon Personal Communications, Inc., Bright
Personal Communications, Inc. and Wells Fargo Bank
Minnesota, National Association.
4.3** A/B Exchange Registration Rights Agreement made as of
September 26, 2000 by and among Horizon PCS, Inc. and
Donaldson, Lufkin & Jenrette Securities Corporation and
First Union Securities, Inc.
4.4** Note Guarantee of Horizon Personal Communications, Inc.
4.5** Note Guarantee of Bright Personal Communications Services,
LLC
4.6 Indenture dated December 7, 2001 by and among Horizon PCS,
Inc., as Issuer, Horizon Personal Communications, Inc., and
Bright Personal Communications Services, LLC, as Guarantors,
and Wells Fargo Bank Minnesota, National Association, as
Trustee (incorporated by reference to Exhibit 10.46 filed
with the Registration Statement on Form S-1 of the
Registrant (File No. 333-51240)).
4.7 Form of Registered Note (included in Exhibit 4.6).
5.1*** Opinion of Arnall Golden Gregory LLP regarding legality of
the common stock being issued.
10.1** Form of Employment Agreement, dated September 26, 2000, by
and between Registrant and William A. McKell.
10.2** Form of Employment Agreement, dated September 26, 2000, by
and between Registrant and Peter M. Holland.
10.3**+ Sprint PCS Management Agreement between Sprint Spectrum,
L.P., SprintCom, Inc. and Horizon Personal Communications,
Inc., dated June 8, 1998.
10.3.1** Letter Agreement, dated July 3, 2000, between Sprint
Spectrum, L.P., SprintCom, Inc. and Horizon Personal
Communications, Inc.
10.3.2 Addendum VI to Sprint PCS Management Agreement between the
Registrant and Sprint PCS, Inc. (incorporated herein by
reference to the Registrant's Current Report on Form 8-K
filed on August 24, 2001).
10.3.3+ Addendum V to Sprint PCS Management Agreement between the
Registrant and Sprint PCS, Inc. (incorporated herein by
reference to Exhibit 10.3.1 to the Registration Statement on
Form 10/A of Horizon Telcom, Inc. (File No. 000-32617)).
10.5** Sprint Trademark and Service Mark License Agreement between
Sprint Communications Company, L.P. and Horizon Personal
Communications, Inc., dated June 8, 1998.
10.6** Sprint Spectrum Trademark and Service Mark License Agreement
between Sprint Spectrum L.P. and Horizon Personal
Communications, Inc., dated June 8, 1998.
10.7**+ Sprint PCS Management Agreement between Wirelessco, L.P.,
SprintCom, Inc., Sprint Spectrum, L.P. and Bright Personal
Communications Services, LLC, dated October 13, 1999.
10.8**+ Sprint PCS Services Agreement between Sprint Spectrum, L.P.
and Bright Personal Communications Services, LLC, dated
October 13, 1999.
10.9** Sprint Trademark and Service Mark License Agreement between
Sprint Communications Company, L.P. and Bright Personal
Communications Services, LLC, dated October 13, 1999.
10.10** Sprint Spectrum Trademark and Service Mark License Agreement
between Sprint Spectrum, L.P. and Bright Personal
Communications Services, LLC, dated October 13, 1999.
10.18** Registration Rights Agreement, dated June 27, 2000, by and
among the Registrant and those persons listed on the
attachment to the Contribution and Exchange Agreement.
10.19**+ Network Services Agreement by and between West Virginia PCS
Alliance, L.C., Virginia PCS Alliance, L.C. and Horizon
Personal Communications, Inc., dated August 12, 1999.
10.19.1 First Amendment to Network Services Agreement by and between
West Virginia PCS Alliance, L.C., Virginia PCS Alliance,
L.C. and Horizon Personal Communications, Inc., dated as of
July 18, 2000 (incorporated herein by reference to Exhibit
10.19.1 to the Registration Statement on Form 10 of Horizon
Telcom, Inc. (File No. 000-32617)).
10.19.2+ Amendment to Network Services Agreement by and among the
Registrant, West Virginia PCS Alliance, L.C. and Virginia
PCS Alliance, L.C. (incorporated herein by reference to
Exhibit 10.19.1 to the Registrant's Current Report on Form
8-K filed on August 24, 2001).
10.21**+ PCS CDMA Product Supply Contract by and between Motorola,
Inc. and Horizon Personal Communications, Inc.
10.25** Form of Horizon PCS, Inc. 2000 Stock Option Plan.
10.26**+ Site Development Agreement by and between Horizon Personal
Communications, Inc. and SBA Towers, Inc., dated August 17,
1999.
10.27**+ Master Site Agreement by and between SBA Towers, Inc. and
Horizon Personal Communications, Inc., dated July 1999.
10.27.1**** Letter Agreement dated April 11, 2002 between SBA Towers,
Inc. and Horizon Personal Communications, Inc.
10.28**+ Master Design Build Agreement by and between Horizon
Personal Communications, Inc. and SBA Towers, Inc., dated
August 17, 1999.
10.29**+ Master Site Agreement by and between SBA Towers, Inc. and
Bright Personal Communications Services, LLC, dated October
1, 1999.
10.30**+ Master Design Build Agreement by and between Bright Personal
Communications Services, LLC and SBA Towers, Inc., dated
October 1, 1999.
10.31** Services Agreement, dated May 1, 2000, between Horizon
Personal Communication, Inc. and Horizon Services, Inc.
10.32** Lease Agreement, dated May 1, 2000 between Chillicothe
Telephone Company and Horizon Personal Communications, Inc.
10.33** Services Agreement, dated May 1, 2000 between Horizon
Personal Communications, Inc. and United Communications,
Inc.
10.34** Form of Indemnification Agreement.
10.35** Amended and Restated Tax Allocation Agreement dated May 1,
2000 by and among Horizon Telcom, Inc., Chillicothe
Telephone Company, Horizon Personal Communications, Inc.,
United Communications, Inc., Horizon Services, Inc., and
Horizon PCS, Inc.
10.35.1* First Amendment to the Amended and Restated Tax Allocation
Agreement dated as of September 26, 2000 by and among
Horizon Telcom, Inc., Chillicothe Telephone Company, Horizon
Personal Communications, Inc., United Communications, Inc.,
Horizon Services, Inc., and Horizon PCS, Inc.
10.37** Securities Purchase Agreement dated September 26, 2000 by
and among Horizon PCS, Inc. Apollo Investment Fund IV, L.P.,
Apollo Overseas Partners IV, L.P., Ares Leveraged Investment
Fund, L.P., Ares Leveraged Investment Fund II, L.P. and
First Union Capital Partners, LLC.
10.38** Investors Rights and Voting Agreement dated September 26,
2000 by and among Horizon PCS, Inc. Apollo Investment Fund
IV, L.P., Apollo Overseas Partners IV, L.P., Ares Leveraged
Investment Fund, L.P., Ares Leveraged Investment Fund II,
L.P. and First Union Capital Partners, LLC.
10.39** Registration Rights Agreement dated September 26, 2000 by
and among Horizon PCS, Inc. Apollo Investment Fund IV, L.P.,
Apollo Overseas Partners IV, L.P., Ares Leveraged Investment
Fund, L.P., Ares Leveraged Investment Fund II, L.P. and
First Union Capital Partners, LLC.
10.40** Credit Agreement, dated as of September 26, 2000, by and
among Horizon Personal Communications, Inc., and Bright
Personal Communications Services, LLC, Horizon PCS, Inc.
(the "Parent") and certain Subsidiaries of the Parent, the
several banks and other financial institutions as may from
time to time become parties to this Agreement, First Union
National Bank, as Administrative Agent, Westdeutsche
Landesbank Girozentrale, as Syndication Agent and Arranger
and Fortis Capital Corp., as Documentation Agent.
10.40.1** First Amendment to Credit Agreement and Assignment dated
November 20, 2000, by and among Horizon Personal
Communications, Inc. and Bright Personal Communications
Services, LLC, Horizon PCS, Inc. (the "Parent") and certain
subsidiaries of the Parent, Existing Lenders, New Lenders,
First Union National Bank, as Administrative agent,
Westdeutsche Landesbank Girozentrale, as Syndication Agent
and Arranger and Fortis Capital Corp., as Documentation
Agent.
10.40.2 Second Amendment to Credit Agreement and Assignment, dated
June 29, 2001, by and among Horizon Personal Communications,
Inc. and Bright Personal Communications Services, LLC,
Horizon PCS, Inc. (the "Parent") and certain Subsidiaries of
the Parent, Existing Lenders, New Lenders, First Union
National Bank, as Administrative Agent, Westdeutsche
Landesbank Girozentrale, as Syndication Agent and Arranger,
and Fortis Capital Corp., as Documentation Agent
(incorporated herein by reference to the Registrant's
Current Report on Form 8-K filed on July 3, 2001).
10.40.3 Third Amendment to Credit Agreement and Waiver dated as of
November 26, 2001 by and among Horizon Personal
Communications, Inc., and Bright Personal Communications
Services, LLC, Horizon PCS, Inc. (the "Parent") and certain
Subsidiaries of the Parent, the several banks and other
financial institutions as may from time to time become
parties to the Agreement, First Union National Bank, as
Administrative Agent, Westdeutsche Landesbank Girozentrale,
as Syndication Agent and Arranger and Fortis Capital Corp.,
as Documentation Agent (incorporated by reference to Exhibit
10.40.3 filed with the Registrant's Current Report on Form
8-K filed on November 28, 2001).
10.40.4 Waiver Agreement dated as of 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 10.40.4 filed with the
Registrant's Quarterly Report on Form 10-Q for the quarter
ended March 31, 2002).
10.41** Warrant Agreement dated as of September 26, 2000 between
Horizon PCS, Inc. and Wells Fargo Bank Minnesota, National
Association.
10.42** Warrant Registration Rights Agreement made as of September
26, 2000 by and among Horizon PCS, Inc. and Donaldson,
Lufkin & Jenrette Securities Corporation and First Union
Securities, Inc.
10.43* Pledge and Escrow Agreement dated December 7, 2001 by and
among Horizon PCS, Inc., Bright Personal Communications
Services, LLC, Wells Fargo and Minnesota, National
Association, as Escrow Agent.
10.44* Registration Rights Agreement dated December 7, 2001 by and
among Horizon PCS, Inc., Horizon Personal Communications,
Inc., Bright Personal Communications Services, LLC, and
Credit Suisse First Boston Corporation, First Union
Securities, Inc., Bear, Stearns & Co., Inc. and Lehman
Brothers, Inc.
10.45* Indenture dated December 7, 2001 by and among Horizon PCS,
Inc., as Issuer, Horizon Personal Communications, Inc., and
Bright Personal Communications Services, LLC, as Guarantors,
and Wells Fargo Bank Minnesota, National Association, as
Trustee.
10.46* Purchase Agreement dated December 4, 2001 between Horizon
PCS, Inc., Horizon Personal Communications, Inc., Bright
Personal Communications Services, LLC, and Credit Suisse
First Boston Corporation, First Union Securities, Inc.,
Bear, Stearns & Co., Inc., Lehman Brothers, Inc.
12.1**** Statement Re: Computation of Ratios
21.1** Subsidiaries of Horizon.
23.1**** Consent of Arthur Andersen LLP.
23.2*** Consent of Arnall Golden Gregory LLP (contained in legal
opinion filed as Exhibit 5.1).
24.1*** Powers of Attorney (set forth on the signature page hereto).
25.1*** Statement of Eligibility of Trustee.
99.1*** Form of Letter of Transmittal with respect to Exchange
Offer.
99.2*** Form of Notice of Guaranteed Delivery.
99.3*** Form of Tender Instruction Letters.
99.4**** Letter re Arthur Andersen
-----------------
* Incorporated by reference to the same exhibit number previously
filed with the Registration Statement on Form S-1 of the
Registrant (File No. 333-51240).
** Incorporated by reference to the same exhibit number previously
filed with the Registration Statement on Form S-4 of the
Registrant (File No. 333-51238).
*** Previously filed.
**** Filed herewith.
(1) In accordance with Item 601(b)(2) of Regulation S-K, the
schedules have been omitted and a list briefly describing the
schedules is at the end of the Exhibit. The Registrant will
furnish supplementally a copy of any omitted schedule to the
commission upon request.
+ The Registrant has requested confidential treatment for certain
portions of this exhibit pursuant to Rule 406 of the Securities
Act of 1933, as amended.