UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED:
December 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
Commission File Number:
Horizon PCS, Inc.
(Exact name of registrant as specified in its charter)
Delaware 31-1707839
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
68 East Main Street, Chillicothe, OH 45601-0480
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code): (740) 772-8200
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of March 1, 2002, there were 26,646 shares of class A common stock
outstanding and 58,445,288 shares of class B common outstanding.
TABLE OF CONTENTS
Page
PART I ----
ITEM 1. Business............................................................ 2
ITEM 2. Properties.......................................................... 29
ITEM 3. Legal Proceedings................................................... 29
ITEM 4. Submission of Matters to a Vote of Security Holders................. 29
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder
Matters............................................................. 29
ITEM 6. Selected Financial Data............................................. 32
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operation............................................ 33
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk.......... 55
ITEM 8. Financial Statements and Supplementary Data......................... 56
ITEM 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure............................................ 56
PART III
ITEM 10. Directors and Executive Officers of the Registrant.................. 56
ITEM 11. Executive Compensation.............................................. 59
ITEM 12. Security Ownership of Certain Beneficial Owners and Management...... 62
ITEM 13. Certain Relationships and Related Transactions...................... 63
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K................................................................. 68
Horizon PCS, Inc. ("Horizon PCS") is the issuer of 14% Senior Discount
Notes due 2010 (the "discount notes"). In March 2001, the discount notes were
the subject of an exchange offer which was registered with the Securities and
Exchange Commission ("SEC") (Registration No. 333-51238). The Co-Registrants are
Horizon Personal Communications, Inc. ("HPC") and Bright Personal Communications
Services, LLC ("Bright PCS"), collectively, the "Operating Companies," which are
wholly-owned subsidiaries of Horizon PCS. Each of the Operating Companies has
provided a full, unconditional, joint and several guaranty of Horizon PCS'
obligations under the discount notes. Horizon PCS has no operations separate
from its investment in the Operating Companies. Pursuant to Rule 12h-5 of the
Securities Exchange Act, no separate financial statements and other disclosures
concerning the Operating Companies other than narrative disclosures set forth in
the Notes to the Consolidated Financial Statements have been presented herein.
Concurrent with the offering of the discount notes discussed above, Horizon PCS
issued 295,000 warrants to purchase up to 3,805,000 shares of Horizon PCS' class
A common stock. The warrants were registered with the SEC (Registration No.
333-51240). As used herein and except as the context otherwise may require, the
"Company," "we," "us," "our" or "Horizon PCS" means, collectively, Horizon PCS,
Inc., and the Operating Companies.
i
PART I
FORWARD-LOOKING STATEMENTS
This annual report on Form 10-K includes forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended (the
Securities Act), and Section 21E of the Securities Exchange Act of 1934, as
amended (the Exchange Act), which can be identified by the use of
forward-looking terminology such as: "may", "might", "could", "would",
"believe", "expect", "intend", "plan", "seek", "anticipate", "estimate",
"project" or "continue" or the negative thereof or other variations thereon or
comparable terminology. All statements other than statements of historical fact
included in this annual report on Form 10-K, including without limitation, the
statements under "ITEM 1. Business" and "ITEM 7. Management's Discussion and
Analysis of Financial Condition and Results of Operation" and located elsewhere
herein regarding our financial position and liquidity are forward-looking
statements. These forward-looking statements also include, but are not limited
to:
o estimates of current and future population for our markets;
o forecasts of growth in the number of consumers and businesses using
personal communication services ("PCS");
o statements regarding our plans for and costs of the build-out of our
PCS network; and
o statements regarding our anticipated revenues, expense levels,
liquidity and capital resources and projections of when we will launch
commercial PCS and achieve break-even or positive operating cash flow.
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 annual report on Form 10-K, including, without limitation, in
conjunction with the forward-looking statements included in this annual report
on Form 10-K. 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. All
subsequent written and oral forward-looking statements attributable to us or
persons acting on our behalf are expressly qualified in their entirety by the
Cautionary Statements.
ITEM 1. Business
References in this annual report on Form 10-K to us as a provider of
wireless personal communications services ("PCS") or similar phrases generally
refer to our building, owning and managing our portion of the Sprint PCS
wireless network pursuant to our affiliation agreements with Sprint PCS. Sprint
PCS holds the spectrum licenses and controls the network through its agreements
with us.
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 December 31, 2001, we managed approximately 194,100 Sprint PCS
subscribers in our territory.
History and Background
In October 1996, the Federal Communications Commission ("FCC")
conditionally granted HPC 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 HPC construct and operate facilities that
offer coverage to a defined population within the relevant license areas within
a defined period. HPC began the engineering and design phase in 1996 and began
the construction of the personal communications network in early 1997. HPC 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 HPC could
afford at face value while returning other licenses in exchange for debt
forgiveness (prepayment).
During 1998, HPC 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, HPC entered into management agreements with Sprint PCS, the PCS
group of Sprint Corporation, during 1998. These agreements provided HPC 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.
During 1999 HPC 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. (the "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).
2
In May 2000, the Company expanded its management agreement with Sprint PCS.
This allowed 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.
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 and
approximately 40% of the Horizon Telcom, Inc. common stock owned by the Company.
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 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 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. 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.
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.
3
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;
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 national 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.
4
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.
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:
5
Estimated Total Interstate Miles (1):
Between In Our
Interstate Major Destination Cities 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
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:
6
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;
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
7
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:
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
8
Sprint PCS MHz of Estimated
Market Grant(1) Spectrum Total Population(2)
------ -------- -------- -------------------
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
----------
(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 December 31, 2001, we had launched service in markets covering
approximately 6.9 million residents, or 68% of the total population in our
territory and had approximately 194,100 customers. According to our original
business plan, our network, when completed, would have covered 6.9 million
residents. We have decided to expand the coverage in our markets from 6.9
million to 7.9 million residents, increasing our planned coverage from 68% to
77% of the total population of our territory. We believe that our expanded
network will be substantially complete by December 31, 2002.
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
9
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.
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 a site development fee from SBA for
tower sites which SBA constructs on our behalf. We have agreed to lease space on
a number of existing SBA towers for which we pay a fixed amount per month, per
10
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.
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" under "ITEM 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operation" included herein.
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.
11
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.
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.
12
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
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:
13
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. At present, 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
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.
14
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.
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.
15
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:
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
16
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.
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
17
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."
This annual report on Form 10-K 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 December 31, 2001, we employed 531 full-time employees, including 356
in sales and marketing, 142 technicians and 33 in executive, finance and
administration. None of our employees are represented by a labor union. We
believe we have good relations with our employees.
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.
The Sprint PCS agreements, in their entirety, are included as exhibits to this
annual report of Form 10-K.
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 twenty years with three ten-year renewals which would lengthen the
contracts to a total of fifty years. The Sprint PCS agreements will
automatically renew for each additional ten-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 buildout delay to be a breach of the Sprint PCS agreement. We have
agreed to continue to use commercially reasonable efforts to reach buildout
completion by either June 30, 2002 (for most of the affected markets) or April
30, 2002 (for a few of these markets). If we fail to launch a market by more
than 90 days after the extended deadlines and if our failure is ultimately
determined to be for non-force majeure reasons, Sprint PCS would have the right
to terminate our Sprint PCS agreements or enforce monetary penalties.
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
19
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.
20
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
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
21
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 the Company's class A common stock (See
"Recent Sales of Unregistered Securities" under "ITEM 5. Market for Registrant's
Common Equity and Related Stockholder Matters" included herein).
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
22
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.
Consent and Agreement for the Benefit of the Holders of the Senior Secured
Credit Facility
On September 26, 2000, the Company entered into a senior 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 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.
Sprint PCS entered into a consent and agreement (the "senior secured
consent") for the benefit of the holders of the indebtedness under the Company's
senior secured credit facility. This agreement was acknowledged by us, and
modified Sprint PCS' rights and remedies under our Sprint PCS agreements, for
the benefit of the existing and future holders of indebtedness under our senior
23
secured credit facility and any refinancing of the senior secured credit
facility, which was a condition to the funding of any amounts under our senior
secured credit facility.
The senior secured consent principally provides for the following:
o Sprint PCS' consent to the pledge of substantially all of our assets,
including our rights in the Sprint PCS agreements;
o Sprint PCS' consent to the pledge of all our equity interests in
Horizon Personal Communications, Inc. and the pledge by Horizon
Personal Communications, Inc. of all of its equity interests in each
of its subsidiaries;
o for redirection of payments due to us under our Sprint PCS agreements
to the administrative agent during the continuation of our default
under our senior secured credit facility;
o for Sprint PCS to maintain 10 MHz of PCS spectrum in all of our
markets until our senior secured credit facility is satisfied or our
operating assets are sold after our default under our senior secured
credit facility;
o for Sprint PCS and the administrative agent to provide each other with
notices of default by us under the Sprint PCS agreements and the
senior secured credit facility, respectively; and
o the ability to appoint interim replacements, including Sprint PCS or a
designee of the administrative agent, to operate our portion of the
Sprint PCS network under the Sprint PCS agreements after an
acceleration of or event of default under our senior secured credit
facility or an event of termination under the Sprint PCS agreements.
Sprint PCS' right to purchase on acceleration of amounts outstanding under
our senior secured credit facility. Subject to the requirements of applicable
law, so long as our senior secured credit facility remains outstanding, Sprint
PCS has the right to purchase our operating assets or pledged equity of our
operating subsidiaries, upon its receipt of notice of an acceleration of our
senior secured credit facility upon the following terms:
o Sprint PCS elects to make such a purchase of our operating assets
within a specified period;
o the purchase price of our operating assets is the greater of an amount
equal to 72% of our "Entire Business Value" or the amount we owe under
our senior secured credit facility;
o if Sprint PCS has given notice of its intention to exercise the
purchase right for our operating assets, then the administrative agent
is prohibited from enforcing its security interest for a time period
after the acceleration or until Sprint PCS rescinds its intention to
purchase; and
o if we receive a written offer within a time period after acceleration
that is acceptable to us to purchase our operating assets or pledged
equity of our operating subsidiaries after the acceleration, then
Sprint PCS has the right to purchase our operating assets or pledged
equity of our operating subsidiaries on terms at least as favorable to
us as the offer we receive.
Sale of operating assets to third parties. If Sprint PCS does not purchase
our operating assets after an acceleration of the obligations under our senior
secured credit facility, then the administrative agent will be able to sell the
operating assets, subject to the requirements of applicable law, including the
law relating to foreclosures of security interests. The administrative agent
will have two options:
o to sell the assets to an entity that meets the requirements to be our
successor under the Sprint PCS agreements; or
o to sell the assets to any other third-party (including competitors of
Sprint PCS), principally subject to the condition that Sprint PCS does
not have to accept the third party as a Sprint PCS affiliate and may
terminate our Sprint PCS agreements.
24
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 10MHz 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 believe meets the FCC requirements for licensee control of licensed
spectrum. However, the FCC decides whether a licensee has maintained the
25
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
companies. In June 1996, the FCC adopted rules requiring broadband PCS and other
26
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. The Company's
Chillicothe PCS system, the licenses to which the Company owns, 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 of 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.
27
Other Federal Regulations
Wireless systems must comply with FCC and FAA regulations regarding the
siting, lighting and construction of transmitter towers and antennas. In
addition, FCC environmental regulations may cause some cell site locations to
become subject to regulation under the National Environmental Policy Act (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
28
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.
ITEM 2. 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 37 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 switching 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.
ITEM 3. 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.
ITEM 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of shareholders during the fourth
quarter of 2001.
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters
There is no established public trading market for the Company's common
stock nor for the Company's convertible preferred stock. The following table
summarizes the Company's 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 148.0 million shares of convertible preferred stock are
reserved for issuance as dividends on the convertible preferred stock, if
necessary.
We intend to retain our future earnings, if any, to fund the development
and growth of our business and, therefore, do not anticipate paying cash
dividends in the foreseeable future. Our future decisions concerning the payment
of dividends on the common stock will depend upon our results of operations,
financial condition and capital expenditure plans, as well as any other factors
29
that the board of directors, in its sole discretion, may consider relevant. In
addition, provisions of the senior secured credit agreement and indentures
governing the senior discount notes and the senior notes restrict, and we
anticipate our future indebtedness may restrict, our ability to pay dividends.
In September 2000, we paid a dividend consisting of substantially all of the
shares of our parent, Horizon Telcom, owned by us, to our stockholders.
Recent Sales of Unregistered Securities:
During the last three years, the Company has sold or issued the following
unregistered securities:
(1) On April 25, 2000, in connection with the incorporation of the
Company, the Company issued one share of its class B common stock to
Horizon Telcom, Inc. ("Horizon Telcom") in return for the payment of
$100.
(2) On June 27, 2000, in connection with the initial capitalization of the
Company, the Company issued 53,806,200 shares of its class B common
stock to Horizon Telcom in return for Horizon Telcom's contribution to
the Company of all the issued and outstanding capital stock of Horizon
Personal Communications, Inc.
(3) On June 27, 2000, in connection with the initial capitalization of the
Company, the Company issued an aggregate of 4,678,800 shares of its
class B common stock to the former non-Horizon members of Bright
Personal Communication Services, LLC ("Bright PCS"), in return for the
contribution by the former members of approximately 70% of their
ownership interest in Bright PCS.
(4) On June 27, 2000, the Company granted incentive stock options to
purchase 3,874,047 shares of the Company's class B common stock at an
exercise price of $0.1209 per share, and nonqualified options to
purchase 322,837 shares of its class B common stock, at an exercise
price of $0.1209 per share. These options were granted in replacement
of stock options which had been granted by Horizon Personal
Communications, Inc. on November 16, 1999, prior to the incorporation
of the Company as a holding company for Horizon Personal
Communications, Inc. and Bright PCS.
(5) In connection with Sprint PCS' grant of the Company's new markets on
May 19, 2000, the Company agreed to grant warrants to Sprint PCS to
acquire 2,510,460 shares of the Company's class A common stock at an
exercise price equal to the initial public offering price per share.
The warrants will expire on the 3rd anniversary of the completion of
the initial public offering.
(6) On February 15, 2000, Horizon Personal Communications, Inc. borrowed
$13 million from First Union Investors, Inc. in connection with
Horizon Personal Communication, Inc.'s purchase of shares of the
outstanding common stock of Horizon Telcom. In connection with the
loan transaction, the Company and First Union Investors, Inc., agreed
that, upon the completion of certain types of offerings, the
outstanding principal amount, and accrued interest thereon, under the
note to First Union Investors, Inc. would be converted into shares of
the same class of the Company's capital stock as that issued in the
offering. In September 2000, the First Union note was converted into
convertible preferred stock as part of the transaction described in
item (8) below.
(7) On September 8, 2000, the Company effected a 1.1697 for 1 stock
dividend of its issued and outstanding class B common stock and made
corresponding adjustments to the outstanding options and warrants.
(8) On September 26, 2000, the Company issued 26,087,237 shares of its
convertible preferred stock at a weighted average purchase price of
$5.39 per share (consisting of 10,252,239 shares of Series A Preferred
Stock at $5.88 per share and 15,834,998 shares of Series A-1 Preferred
Stock at $5.07 per share). The purchasers of the preferred stock and
the amount purchased are listed in the table below.
30
Number of Shares
Name of Purchaser Series A Series A-1
----------------- ------------- ------------
Apollo Investment Fund IV, L.P.............. 7,854,719 12,132,161
Apollo Overseas Partners IV, L.P............ 436,097 673,582
Ares Leveraged Investment Fund, L.P......... 467,687 722,375
Ares Leveraged Investment Fund II, L.P...... 467,687 722,375
First Union Capital Partners, L.P........... 1,026,049 1,584,505
First Union received its convertible preferred stock upon conversion of the
note described in item (6) above.
(9) On September 26, 2000, the Company issued 295,000 units ("Units")
consisting of $295 million principal amount of 14% Senior Discount
Notes due October 1, 2010, and warrants to purchase 3,805,500 shares
of class A common stock at an exercise price of $5.88 per share. The
initial purchasers of the Units and the amount purchased are listed in
the table below.
Initial Purchasers Number of Units
------------------ ---------------
Credit Suisse First Boston Corporation (formerly Donaldson, Lufkin
& Jenrette Securities Corporation).............................. 206,500
First Union Securities, Inc......................................... 88,500
-------
Total......................................................... 295,000
=======
The initial purchasers subsequently resold the Units to the warrant
holders listed at "Warrant Holders" in the prospectus, in reliance
upon Rule 144A of the Securities Act.
(10) In May 2001 and November 2001, the Company issued an additional
1,163,051 and 1,021,882 shares, respectively, of convertible preferred
stock as a dividend-in-kind to the holders of the outstanding
convertible preferred stock.
(11) 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.
(12) On December 7, 2001, the Company issued $175 million in principal
amount of 13.75% Senior Notes due June 15, 2011. The initial
purchasers of these notes are listed in the table below.
Initial Purchasers Amount Purchased
------------------ -------------------
Credit Suisse First Boston Corporation............. $ 87,500,000
First Union Securities, Inc........................ 52,500,000
Bear, Stearns & Co. Inc............................ 17,500,000
Lehman Brothers Inc................................ 17,500,000
----------
Total........................................ $ 175,000,000
===========
Exemption from the registration provisions of the Securities Act for the
transactions described in paragraphs (7), (10) and (11) above was claimed on the
basis that such transaction did not constitute an "offer," "offer to sell,"
"sale," or "offer to buy" under Section 5 of the Securities Act. Exemption from
the registration provisions of the Securities Act for the other transactions
described above was claimed under Section 4(2) of the Securities Act and the
rules and regulations promulgated thereunder on the basis that such transactions
did not involve any public offering, the purchasers were sophisticated with
access to the kind of information registration would provide and that such
purchasers acquired such securities without a view towards distribution thereof.
In addition, exemption from the registration provisions of the Securities Act
for the transactions described in paragraph 4 was claimed under Section 3(b) of
the Securities Act on the basis that such securities were sold pursuant to a
written compensatory benefit plan or pursuant to a written contract relating to
compensation and not for capital raising purposes under Rule 701 of the
Securities Act, and exemption from the registration provisions of the Securities
Act for the transactions described in paragraphs (8), (9), (10) and (12) above
was claimed under Rule 144A of the Securities Act.
31
ITEM 6. Selected 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. We
derived the balance sheet and statements of operations data as of and for the
five years ended December 31, 2001, for Horizon PCS from the audited
consolidated financial statements of Horizon PCS. The following information
should be read together with "ITEM 7. Management's Discussion and Analysis of
Financial Condition and Results of Operation," and "ITEM 8. Financial Statements
and Supplementary Data":
Year Ended December 31,
--------------------------------------
1997 1998 1999 2000 2001
(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
Roaming revenues............... -- 18 642 8,408 38,540
Equipment revenues............. 138 309 600 3,061 7,106
------- --------- --------- --------- ---------
Total revenues............... 164 783 4,907 29,194 123,304
Operating expenses:
Cost of service (exclusive of
items shown below)........... 683 4,404 8,204 27,452 100,516
Cost of equipment.............. 422 994 2,444 9,775 14,872
Selling and marketing.......... 992 1,440 3,475 18,026 48,993
General and administrative
(exclusive of items shown
below)....................... 1,344 1,852 3,944 12,477 28,384
Non-cash compensation expense.. -- -- 291 490 1,434
Depreciation and amortization.. 419 1,748 2,685 6,135 18,519
------- --------- --------- --------- ---------
Total operating expenses..... 3,860 10,438 21,043 74,355 212,718
------- --------- --------- --------- ---------
Operating loss............. (3,696) (9,655) (16,136) (45,161) (89,414)
Gain (Loss) on exchange of stock. -- -- -- 11,551 (400)
Gain (Loss) on sale of PCS assets -- -- 1,388 -- (1,297)
Interest income and other, net... 100 (1,690) 52 4,804 5,063
Interest expense, net............ (264) (838) (1,529) (10,318) (27,434)
--------- --------- --------- --------- ---------
Loss from continuing
operations before income
taxes.................... (3,860) (12,183) (16,225) (39,124) (113,482)
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)
Preferred stock dividend......... -- -- -- (2,782) (10,930)
Loss from continuing
operations available
to common stockholders... $(2,552) $ (8,038) $ (10,950) $ (42,981) $(124,412)
======= ========= ========= ========= =========
Basic and diluted loss per share
from continuing operations $ (0.05) $ (0.15) $ (0.20) $ (0.76) $ (2.13)
Basic and diluted loss per share
available to common
stockholders $ (0.06) $ (0.15) $ (0.20) $ (0.77) $ (2.13)
32
Year Ended December 31,
--------------------------------------
1997 1998 1999 2000 2001
(Dollars in thousands, except per share and
other data)
Balance Sheet Data:
Cash and cash equivalents........ $ 200 $ 27 $ 147 $ 191,417 $ 123,776
Total property and equipment, net 14,996 17,880 22,894 109,702 214,868
Total assets..................... 33,328 26,862 32,879 385,295 481,338
Long-term debt................... 16,611 21,180 24,590 185,283 384,056
Total liabilities................ 29,094 24,919 35,042 238,300 447,957
Convertible preferred stock...... -- -- -- 134,422 145,349
Total stockholders' equity
(deficit)...................... 4,234 1,943 (2,163) 12,573 (111,967)
Other Data:
Number of PCS subscribers(1)..... 300 2,100 13,700 66,400 194,100
Total population in our markets
(millions)..................... 0.1 1.6 4.9 10.2 10.2
ARPU (including roaming)(2)...... NM $ 46 $ 64 $ 75 $ 83
ARPU (excluding roaming)(2)...... NM 44 55 51 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 "ITEM 7. Management's Discussion and Analysis
of Financial Condition and Results of Operation."
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation
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.
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.
33
Year Ended December 31, 2001, Compared to Year Ended December 31, 2000
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 will be 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.
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.
34
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
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 year 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 will cease as of December 31, 2001, with the adoption of SFAS No.
142. See "Recent Accounting Pronouncements" below.
35
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 $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, the Company distributed
7,249 shares of Horizon Telcom stock to employees of Horizon PCS. In conjunction
with this transaction, the Company 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, the Company 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
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 escrow
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.
We are required, and we expect, to borrow an additional $105.0 million by
March 26, 2002, under the terms of the secured credit facility. The interest
rate on the tranche that must be drawn by March 26, 2002, will be 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
36
$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
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.
37
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
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.
38
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. The Company has not determined the financial impact the adoption of SFAS
No. 142 will have on its 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
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.
39
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.
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 senior 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
40
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. We are required, and we expect, to
draw the remaining $105.0 million tranche by March 26, 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, the Company amended its 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 base interest
rate by 25 basis points to LIBOR plus 375 to 425 basis points.
On December 7, 2001, the Company 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 unaccreted 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.
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
41
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.
At December 31, 2001, we had $200.0 million available to be borrowed under
our senior secured credit facility. 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 approximately $140.0 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.
The Company has significant related party transactions that are described
under "ITEM 13. Certain Relationships and Related Transactions."
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 the Company.
42
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
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. 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.
43
RISK FACTORS
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 2003 while we continue to
construct our network and grow our customer base. We have already incurred a
total of approximately $201.3 million in losses through December 31, 2001. 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 the terms of our
Sprint PCS agreements, we are required to provide additional coverage in
specified markets by April 28, 2002.
We did not launch all of our Bright PCS markets by the date set forth in
the Sprint PCS agreements. We were unable to obtain the required backhaul from
local exchange carriers by that date, despite using commercially reasonable
efforts. We have subsequently obtained the required backhaul services and
launched these markets and Sprint PCS agreed in writing that we are in
compliance with the build-out requirements in these markets.
Under our original Sprint PCS agreements, we were required to complete the
build-out in several of our markets in Pennsylvania and New York by December 31,
2000. Sprint PCS and HPC agreed to an amendment of the build-out requirements,
which extended the dates by which we were to launch coverage in several markets.
The amended Sprint PCS agreement provides for monetary penalties to be paid by
us if coverage is not launched by these 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 capital 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 buildout delay to be a
breach of the Sprint PCS agreement. We have agreed to continue to use
commercially reasonable efforts to reach buildout completion by either June 30,
2002 (for most of the affected markets) or April 30, 2002 (for a few 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
44
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" under "ITEM 1.
Business" included herein.
Our substantial indebtedness could adversely affect our financial health and
prevent us from fulfilling our long-term debt obligations.
As of December 31, 2001, our total debt outstanding was $520.0 million,
comprised of $50.0 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
December 31, 2001, net of a discount of approximately $135.9 million). In
addition, we are required and intend to borrow an additional $105.0 million
under our senior secured credit facility by March 26, 2002.
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 senior 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.
45
Sprint PCS' rights as a senior lender would enable it to exercise rights with
respect to our assets and Sprint PCS' continuing relationship in a manner not
otherwise permitted under the Sprint PCS agreements.
If Sprint PCS terminates the Sprint PCS agreements, the buy-out provisions of
those agreements may diminish the valuation of our company.
Provisions of the Sprint PCS agreements could affect 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 the Entire Business Value. If the termination is due to our breach of the
Sprint PCS agreements, the percent is reduced to 72% instead of 80%. Under our
Sprint PCS agreements, the Entire Business Value is generally 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 the Company and may operate to reduce the Entire Business
Value of the Company.
The termination of our strategic affiliation with Sprint PCS or Sprint PCS'
failure to perform its obligations under the Sprint PCS agreements would
severely restrict our ability to conduct our business.
Because 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
offering circular. 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
cost-effective alternative, our operating costs may increase beyond our
expectations and restrict our ability to operate successfully.
46
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 senior secured credit
facility, we may not be able to draw down all of the funds under the facility
and, as a result, we may not be able to complete the build-out of our network,
which may result in the termination of the Sprint PCS agreements.
Our senior secured credit facility provides for aggregate borrowings of
$250.0 million of which $50.0 million was borrowed as of December 31, 2001.
Availability of future borrowings will be subject to customary credit conditions
at each funding date, including the following:
o the absence of any default or event of default;
o the continuing accuracy of all representations and warranties; and
o no material adverse change.
If we do not meet these conditions at each funding date, our senior secured
lenders may choose not to lend any or all of the remaining amounts, and if other
sources of funds are not available, we may not be in a position to complete the
build-out of our network. If we do not have sufficient funds to complete our
network build-out, we may be in breach of the Sprint PCS agreements and in
default under our senior secured credit facility.
Material restrictions in our debt 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 notes contains various covenants that limit our
ability to engage in a variety of transactions. In addition, the indenture
governing our senior discount notes and the senior secured credit agreement both
impose additional material operating and financial restrictions on us. These
restrictions, subject to ordinary course of business exceptions, limit our
ability to engage in some transactions, including the following:
o designated types of mergers or consolidations;
o paying dividends or other distributions to our stockholders;
o making investments;
o selling assets;
o repurchasing our common stock;
o changing lines of business;
o borrowing additional money; and
o transactions with affiliates.
47
In addition, our senior secured credit facility requires us to maintain certain
ratios, including:
o leverage ratios;
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 senior secured credit facility may prohibit
us and the guarantors of the notes from paying the notes or the guarantees of
the notes.
The terms of the convertible preferred stock may affect our financial results.
The terms of the convertible preferred stock give the holders of the
preferred stock the following principal rights:
o to initially designate two members of our board of directors, subject
to reduction based on future percentage ownership;
o to approve or disapprove fundamental corporate actions and
transactions;
o to receive dividends in the form of additional shares of our
convertible preferred stock, which may increase and accelerate upon a
change in control; and
o to require us to redeem the convertible preferred stock in 2005.
If we become subject to the repurchase right or change of control
redemption requirements under the convertible preferred stock while our senior
secured debt, our senior discount notes or the notes are outstanding, we will be
required to seek the consent of the lenders under our secured debt, 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
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 senior
secured debt. In addition, if we do not repurchase or redeem the convertible
preferred stock and the holders of the convertible preferred stock obtain a
judgment against us, any judgment in excess of $5.0 million would constitute an
event of default under the 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.
48
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. The demand for the equipment required to construct our network
is considerable, and manufacturers of this equipment could have substantial
order backlogs. Accordingly, the lead time for the delivery of this equipment
may be longer than anticipated. In addition, the demand for specific types of
handsets is strong and the manufacturers of those handsets may have to
distribute their limited supply of products among their numerous customers. Some
of our competitors purchase large quantities of communications equipment and may
have established relationships with the manufacturers of this equipment.
Consequently, they may receive priority in the delivery of this equipment. If we
do not obtain equipment or handsets in a timely manner, we could suffer delays
in the build-out of our network, disruptions in service and a reduction in
customers.
If the West Virginia PCS Alliance and Virginia PCS Alliance fail to provide
their network to us in their markets, or if our network services agreement with
the Alliances is otherwise terminated, we will lose the ability to use the
Alliances' networks.
West Virginia PCS Alliance and Virginia PCS Alliance, which we refer to as
the Alliances, are two related, independent PCS providers whose network is
managed by NTELOS. Under our network services agreement, the Alliances provide
us with the use of and access to key components of their network in most of our
markets in Virginia and West Virginia. We directly compete with the Alliances in
the markets where we use their network. If the Alliances fail to maintain the
standards for their network as set forth in our network services agreement with
them or otherwise fail to provide their network for our use, our ability to
provide wireless services in these markets may be adversely affected, and we may
not be able to provide seamless service for our customers. If we breach our
obligations to the Alliances, or if the Alliances otherwise terminate the
network services agreement, we will lose our right to use the Alliances' network
to provide service in these markets. In that event, it is likely that we will be
required to build our own network in those markets and incur the substantial
costs associated with doing so.
Sprint PCS' vendor discounts may be discontinued, which could increase our
equipment costs and require more capital than we had projected to build-out 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.
49
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.
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 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.
50
If Sprint PCS customers are not able to roam instantaneously or efficiently onto
other wireless networks, we may suffer a reduction in our revenues and number of
customers.
The Sprint PCS network operates at a different frequency and uses or may
use a different signal transmission technology than many analog cellular and
other digital systems. To access another provider's analog cellular, TDMA or GSM
digital system when outside the territory served by the Sprint PCS network, a
Sprint PCS customer is required to utilize a dual-band/dual-mode handset
compatible with that provider's system. Generally, because dual-band/dual-mode
handsets incorporate two radios rather than one, they are more expensive, larger
and heavier than single-band/single-mode handsets. The Sprint PCS network does
not allow for call hand-off between the Sprint PCS network and another wireless
network, so a customer must end a call in progress on the Sprint PCS network and
initiate a new call when outside the territory served by the Sprint PCS network.
In addition, the quality of the service provided by a network provider during a
roaming call may not approximate the quality of the service provided by Sprint
PCS. The price of a roaming call may not be competitive with prices of other
wireless companies for roaming calls, and Sprint PCS customers may not be able
to use Sprint PCS advanced features, such as voicemail notification, while
roaming. These roaming issues may cause us to suffer a reduction in our revenues
and number of customers.
Parts of our territories have limited licensed spectrum, which may adversely
affect the quality of our service.
In the majority of our markets, Sprint PCS has licenses covering 20 or 30
MHz of spectrum. However, Sprint PCS has licenses covering only 10 MHz in parts
of our territory covering approximately 3.8 million residents out of a total
population of over 10.2 million residents. In the future, as our customers in
those areas increase in number, this limited licensed spectrum may not be able
to accommodate increases in call volume and may lead to increased dropped calls
and may limit our ability to offer enhanced services.
Non-renewal or revocation by the FCC of the Sprint PCS licenses would
significantly harm our business because we would no longer have the right to
offer wireless service through our network.
We are dependent on Sprint PCS' licenses, which are subject to renewal and
revocation by the FCC. Sprint PCS' licenses in many of our territories will
expire as early as 2005 but may be renewed for additional ten-year terms. There
may be opposition to renewal of Sprint PCS' licenses upon their expiration and
the Sprint PCS licenses may not be renewed. The FCC has adopted specific
standards to apply to PCS license renewals. For example, if Sprint PCS does not
demonstrate to the FCC that Sprint PCS has met the five-year construction
requirements for each of its PCS licenses, it can lose those licenses. Failure
to comply with these standards in our territory could cause the imposition of
fines on Sprint PCS by the FCC or the revocation or forfeiture of the Sprint PCS
licenses for our territory, which would prohibit us from providing service in
our markets.
If the Sprint PCS agreements do not comply with FCC requirements, Sprint PCS may
terminate the Sprint PCS agreements, which could result in our inability to
provide service.
The FCC requires that licensees like Sprint PCS maintain control of their
licensed spectrum and not delegate control to third-party operators or managers
like us. Although the Sprint PCS agreements reflect an arrangement that the
parties believe meets the FCC requirements for licensee control of licensed
spectrum, we cannot be certain the FCC will agree with us. If the FCC were to
determine that the Sprint PCS agreements need to be modified to increase the
level of licensee control, we have agreed with Sprint PCS to use our best
efforts to modify the Sprint PCS agreements to comply with applicable law. If we
cannot agree with Sprint PCS to modify the Sprint PCS agreements, they may be
terminated. If the Sprint PCS agreements are terminated, we would no longer be a
part of the Sprint PCS network and we would have extreme difficulty in
conducting our business.
51
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 recently required us to upgrade our network to provide
"third generation" technology, we will face additional capital expenses.
The wireless industry is seeking to implement new "third generation," or
"3G," technology. Sprint PCS has recently selected a version of 3G technology
for its own networks and required us to upgrade our network to provide those
services. We currently estimate 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;
52
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
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 58.1% of our outstanding
common stock on fully diluted basis as of December 31, 2001. In addition, the
shares held by Horizon Telcom are class B shares, which have ten votes per
share. The class A shares have only one vote per share. As a result, Horizon
Telcom holds approximately 84.5% of the voting power, on a fully diluted basis
at December 31, 2001. 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.
53
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 84.5% 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,
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 58.1% 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.
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;
54
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.
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.
ITEM 7A. 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.
55
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
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.
As of December 31, 2001, 100% of our variable-rate long-term debt has been
swapped for fixed-rate debt, thus reducing our exposure to interest rate risk.
Therefore, an increase in the base lending rate would have an immaterial effect
on our annual earnings. However, our swap interest rates are currently greater
than the market interest rates on our underlying debt. Thus, our results from
operations currently reflect a higher interest expense than had we not hedged
our position. If we do not renew our swaps, or, if we do not hedge incremental
borrowings under our senior secured credit facility, of which we have $200.0
million available at December 31, 2001, we will increase our interest rate risk
which could have a material impact on our future earnings.
ITEM 8. Financial Statements and Supplementary Data
Financial statements and supplementary data required by this item are
submitted as a separate section of this annual report on Form 10-K. See "Index
to Consolidated Financial Statements" commencing on page F-1 herein.
ITEM 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
PART III
ITEM 10. Directors and Executive Officers of the Registrant
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........................ 46 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..................... 30 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
56
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, a
traditional local 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 the Company 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,
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.,
57
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 "ITEM 13. 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 "ITEM 13. 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.
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
The board of directors has appointed 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 audit committee
will consist of at least three members. The current members of the audit
committee are Messrs. Pedersen, Zinterhofer and Holland. Horizon will maintain
at least two independent directors on the audit committee.
58
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.
ITEM 11. Executive Compensation
The following table presents summary information with respect to the
compensation paid to our Chief Executive Officer and each of our other executive
officers whose salary and bonus exceeded $100,000 during the year ended December
31, 2001.
Long-Term
Compensation
Name and Principal Annual Compensation Securities Underlying All Other
Position Year Salary($) 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. See "ITEM 13. Certain Relationships
and Related Transactions" for a discussion of consulting fees received by
the Pinnacle Group, a company that was 50% owned by Mr. Holland. Pinnacle
received consulting fees of $267,000 in 1999, $204,000 in 1998 and $419,000
in 1997.
(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.
59
(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,
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 ten years from the date of grant. In the case of option holders that own
more than 10% of Horizon PCS' stock, the exercise price for an 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
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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
$5.39 per share. This valuation at December 31, 2001, does not represent the
actual value of our stock at December 31, 2001.
Aggregated Option Exercises In Fiscal Year 2001
And 2001 Fiscal Year-End Option Values
Number of Securities Value of Unexercised
Underlying Unexercised In-The-Money
Options At Year End (#) Options At Year End ($)
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.
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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.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information regarding the beneficial
ownership of our voting securities, as of December 31, 2001, by:
o each person who, to our knowledge, is the beneficial owner of 5% or
more of a class of our outstanding common stock;
o each of our directors;
o each of the executive officers; and
o all executive officers and directors as a group.
Beneficial ownership is determined in accordance with Rule 13d-3 of the
Securities Exchange Act. A person is deemed to be the beneficial owner of any
shares of common stock if that person has or shares voting power or investment
power with respect to the common stock, or has the right to acquire beneficial
ownership at any time within 60 days of the date of the table. "Voting power" is
the power to vote or direct the voting of shares and "investment power" is the
power to dispose or direct the disposition of shares.
class A class B
Common Stock Common Stock Percentage of Total Voting
Name and Address Number Percent Number Percent Power (All Classes)(2)
- ---------------- ------------ ------------ ------------ ------------ ---------------------------
Horizon Telcom (1)................ -- -- 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 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, New
York, 10019.
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(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 Annual Report on Form 10-K. 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. 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 Annual Report on Form 10-K.
(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 Annual Report on Form 10-K.
ITEM 13. 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
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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 the Company 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
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. The Company
expects 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 "ITEM 11. Executive Compensation."
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Tax-Sharing Agreement
In 1997, HPC 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 HPC will
be paid for the amount of its taxable net operating losses used by Horizon
Telcom to offset taxable income. During 1999, HPC had taxable net operating
losses of $16.5 million. For 2000, HPC had taxable net income of $18.6 million.
For the years ended December 31, 2000 and 1999, Horizon Telcom paid an aggregate
of $4.5 million and $5.2 million, respectively, to HPC under the agreement. Due
to the sale of the convertible preferred stock in September 2000, the Company
will no longer be 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. For the
year ended December 31, 2001 and 2000, the Company paid $338,000 and $5.2
million, respectively, to Horizon Telcom for taxes. As of December 31, 2001 and
2000, we had a receivable and a payable to Horizon Telcom of approximately
$484,000 and $338,000, respectively, for Federal income taxes attributable
primarily to the tax liability for the tax deconsolidation and the dividend of
the Horizon Telcom stock offset by the utilization of net operating losses.
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 the independent directors sitting on our audit committee. 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 therefor 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
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 the Company.
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.
65
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
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;
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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 "ITEM 10.
Directors and Executive Officers of the Registrant."
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's independent directors who do not
have an interest in the transaction and who have access, at Horizon's expense,
to Horizon's counsel.
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.
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PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following documents are filed as part of this annual report on Form
10-K:
1. Financial Statements
Report of Independent Public Accountants, Consolidated Balance Sheets as of
December 31, 2001 and 2000, Consolidated Statements of Operations for the
Years Ended December 31, 2001, 2000 and 1999, Consolidated Statements of
Comprehensive Income (Loss) for the Years Ended December 31, 2001, 2000 and
1999, Consolidated Statements of the Changes in Stockholders' Equity
(Deficit) for the Years Ended December 31, 2001, 2000 and 1999,
Consolidated Statements of Cash Flows for the Years Ended December 31,
2001, 2000 and 1999, and Notes to Consolidated Financial Statements.
2. Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts
3. Exhibits
See the Index to Exhibits immediately preceding the exhibits filed with
this Report.
(b) Reports on Form 8-K
On December 10, 2001, we filed a Current Report on Form 8-K with the
Securities and Exchange Commission that provided information under "Item
5--Other Events" disclosing we issued a press release announcing the completion
of our private offering of notes.
On November 28, 2001, we filed a Current Report on Form 8-K with the
Securities and Exchange Commission that provided information under "Item
5--Other Events" disclosing we entered into a Third Amendment to Credit
Agreement and Waiver attached hereto as Exhibit 10.40. The amendment revises
several definitions and financial covenants under the facility to provide for
the Registrant's new Senior Notes.
On November 27, 2001, we filed a Current Report on Form 8-K with the
Securities and Exchange Commission that provided information under "Item
9--Regulation FD Disclosure" disclosing we amended our senior secured credit
facility, attached hereto as Exhibit 10.17, in connection with our private
placement of notes. Pursuant to the amendment, the Company's operating
subsidiaries will be permitted to make distributions to the Company to make
regularly scheduled payments of interest on the notes. In addition, the
restrictions on our ability to incur additional indebtedness were modified to
permit the issuance of the notes. The Company also amended certain financial
covenants under the senior secured credit facility.
On November 27, 2001, we filed a Current Report on Form 8-K with the
Securities and Exchange Commission that provided information under "Item
5--Other Events" disclosing we issued a press release announcing our proposed
private offering of $175 million of 13-3/4% senior notes due 2011.
On November 14, 2001, we filed a Current Report on Form 8-K with the
Securities and Exchange Commission that provided information under "Item
9--Regulation FD Disclosure" disclosing we made a presentation at the UBS Global
Telecom Conference.
On November 12, 2001, we filed a Current Report on Form 8-K with the
Securities and Exchange Commission that provided information under "Item
5--Other Events" disclosing we issued a press release announcing our financial
results for the third quarter of fiscal year 2001.
68
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
HORIZON PCS, INC.
By: /s/ WILLIAM A. MCKELL
-------------------------------
William A. McKell
Chairman of the Board, President
and Chief Executive Officer
Date: March 3, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
NAME TITLE DATE
/s/ WILLIAM A. MCKELL Chairman of the Board, February 28, 2002
- ------------------------------- President, Chief Executive Officer
William A. McKell
(Principal Executive Officer)
/s/ PETER M. HOLLAND Chief Financial Officer, February 28, 2002
- ------------------------------- Director
Peter M. Holland
(Principal Financial and
Accounting Officer)
/s/ THOMAS MCKELL Director February 28, 2002
- -------------------------------
Thomas McKell
/s/ PHOEBE H. MCKELL Director February 28, 2002
- -------------------------------
Phoebe H. McKell
/s/ LONNIE D. PEDERSEN Director February 28, 2002
- -------------------------------
Lonnie D. Pedersen
/s/ ROBERT A. KATZ Director February 28, 2002
- -------------------------------
Robert A. Katz
/s/ ERIC L. ZINTERHOFER Director February 28, 2002
- -------------------------------
Eric L. Zinterhofer
69
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.
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** Amended and Restated 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* Form of Registered Note (included in Exhibit 4.2).
4.5* Note Guarantee of Horizon Personal Communications, Inc.
4.6* Note Guarantee of Bright Personal Communications Services, LLC
10.1* Form of Employment Agreement, dated September 26, 2000, by and between
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)).
10.4**+ Sprint PCS Services Agreement between Sprint Spectrum L.P. and Horizon
Personal Communications, Inc., dated June 8, 1998.
10.5** Sprint Trademark and Service Mark License Agreement between Sprint
Communications Company, L.P. and Horizon Personal Communications,
Inc., dated June 8, 1998.
10.6** Sprint Spectrum Trademark and Service Mark License Agreement between
Sprint Spectrum L.P. and Horizon Personal Communications, Inc., dated
June 8, 1998.
10.7**+ Sprint PCS Management Agreement between Wirelessco, L.P., SprintCom,
Inc., Sprint Spectrum, L.P. and Bright Personal Communications
Services, LLC, dated October 13, 1999.
10.8**+ Sprint PCS Services Agreement between Sprint Spectrum, L.P. and Bright
Personal Communications Services, LLC, dated October 13, 1999.
10.9** Sprint Trademark and Service Mark License Agreement between Sprint
Communications Company, L.P. and Bright Personal Communications
Services, LLC, dated October 13, 1999.
10.10** Sprint Spectrum Trademark and Service Mark License Agreement between
Sprint Spectrum, L.P. and Bright Personal Communications Services,
LLC, dated October 13, 1999.
70
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+ 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 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.
10.23** 13% Senior Subordinated Promissory Note from Horizon Personal
Communications, Inc. to First Union Investors, Inc., dated February
15, 2000.
10.24** Conversion Agreement, by and between Horizon Personal Communications
and First Union Investors, Inc., dated February 15, 2000.
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.
10.28**+ 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.
71
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).
10.41* 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.
21.1** Subsidiaries of Horizon.
* 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-1 of the Registrant (File No.
333-37516).
(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.
72
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-31
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.
ARTHUR ANDERSEN LLP
Columbus, Ohio
February 12, 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
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 ten 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.
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)
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.
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.
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)
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
ten-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............................. 13.75% $ 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 twenty 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 twenty-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 Increase Point 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 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 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 ten-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 ten 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.
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
============= =============
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 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.
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
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 (Continued)
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.
Financial Statement Schedule
Valuation and Qualifying Accounts
- --------------------------------------------------------------------------------
Balance at Balance at
Beginning Charged to Deductions End of
Description of Period Expense (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-31
1449831