<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 1, 2000
REGISTRATION NO. 333-37516
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
AMENDMENT NO. 5
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
HORIZON PCS, INC.
(Exact name of registrant as specified in its charter)
---------------------
<TABLE>
<S> <C> <C>
DELAWARE 4812 31-1707839
(State of Incorporation) (Primary Standard Industrial (I.R.S. Employer Identification
Classification Code Number) No.)
</TABLE>
---------------------
68 EAST MAIN STREET
CHILLICOTHE, OHIO 45601-0480
(740) 772-8200
(Address, including zip code and telephone number, including
area code, of registrant's principal executive offices)
---------------------
MR. WILLIAM A. MCKELL
PRESIDENT AND CHIEF EXECUTIVE OFFICER
HORIZON PCS, INC.
68 EAST MAIN STREET
CHILLICOTHE, OHIO 45601-0480
(740) 772-8200
(Name, address, including zip code, and telephone number, including
area code, of agent for service)
---------------------
COPIES TO:
<TABLE>
<S> <C>
T. CLARK FITZGERALD III, ESQ. GARY P. CULLEN, ESQ.
DONALD I. HACKNEY, JR., ESQ. SKADDEN, ARPS, SLATE, MEAGHER & FLOM (ILLINOIS)
ARNALL GOLDEN & GREGORY, LLP 333 WEST WACKER DRIVE
2800 ONE ATLANTIC CENTER SUITE 2100
1201 WEST PEACHTREE STREET CHICAGO, ILLINOIS 60606
ATLANTA, GEORGIA 30309-3450 (312) 407-0700
(404) 873-8500
</TABLE>
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of the Registration Statement.
If any of the securities being registered on this form are being offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE> 2
WE WILL AMEND AND COMPLETE THE INFORMATION IN THIS PROSPECTUS. ALTHOUGH WE
ARE PERMITTED BY US FEDERAL SECURITIES LAW TO OFFER THESE SECURITIES USING
THIS PROSPECTUS, WE MAY NOT SELL THEM OR ACCEPT YOUR OFFER TO BUY THEM
UNTIL THE DOCUMENTATION FILED WITH THE SEC RELATING TO THESE SECURITIES HAS
BEEN DECLARED EFFECTIVE BY THE SEC. THIS PROSPECTUS IS NOT AN OFFER TO SELL
THESE SECURITIES OR OUR SOLICITATION OF YOUR OFFER TO BUY THESE SECURITIES
IN ANY JURISDICTION WHERE THAT WOULD NOT BE PERMITTED OR LEGAL.
SUBJECT TO COMPLETION -- OCTOBER 31, 2000
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
PROSPECTUS
, 2000
[HORIZON PCS LOGO]
9,650,000 SHARES OF CLASS A COMMON STOCK OF HORIZON PCS, INC.
--------------------------------------------------------------------------------
HORIZON PCS, INC.:
- We are a Sprint PCS affiliate with the right to provide digital
personal communication services under the Sprint PCS brand name in
portions of twelve contiguous states.
PROPOSED SYMBOL & MARKET:
- HPCS/Nasdaq National Market
THE OFFERING:
- We are offering 9,650,000 shares of our class A common stock.
- We have granted the underwriters an option to purchase up to 1,447,500
additional shares of our class A common stock to cover over-allotments.
- This is our initial public offering. We anticipate the initial public
offering price will be between $11.00 and $13.00 per share.
- Closing: , 2000.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
Per Share Total
<S> <C> <C>
-------------------------------------------------------------------------------------
Public offering price: $ $
Underwriting fees: $ $
Proceeds to us: $ $
-------------------------------------------------------------------------------------
</TABLE>
THIS INVESTMENT INVOLVES RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 9.
--------------------------------------------------------------------------------
Neither the SEC nor any state securities commission has determined whether this
prospectus is truthful or complete. Nor have they made, nor will they make, any
determination as to whether anyone should buy these securities. Any
representation to the contrary is a criminal offense.
--------------------------------------------------------------------------------
DONALDSON, LUFKIN & JENRETTE FIRST UNION SECURITIES, INC.
THE ROBINSON-HUMPHREY COMPANY
DLJDIRECT INC.
<PAGE> 3
[Graphics/photographs to come]
-- MAP OF NETWORK COVERAGE AREA
ii
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Prospectus Summary................ 1
Risk Factors...................... 9
Forward-Looking Statements........ 25
Use of Proceeds................... 26
Dividend Policy................... 26
Capitalization.................... 27
Dilution.......................... 29
Selected Consolidated Financial
Data............................ 31
Management's Discussion and
Analysis of Financial Condition
and
Results of Operations........... 33
Industry Background............... 45
Business.......................... 48
The Sprint PCS Agreements......... 69
Management........................ 78
Principal Stockholders............ 84
</TABLE>
<TABLE>
<CAPTION>
Page
<S> <C>
Certain Transactions.............. 86
Regulation of The Wireless
Telecommunications Industry..... 92
Description of Capital Stock...... 95
Unit Warrants..................... 98
Description of Certain
Indebtedness.................... 101
Shares Eligible for Future Sale... 106
U.S. Federal Tax Consequences of
Holding Our Common Stock to
Non-U.S. Holders................ 108
Underwriting...................... 112
Legal Matters..................... 114
Experts........................... 115
Available Information............. 115
Index to Financial Statements..... F-1
</TABLE>
iii
<PAGE> 5
PROSPECTUS SUMMARY
This summary is qualified by more detailed information appearing in other
sections of this prospectus. The other information is important, so please read
this entire prospectus carefully.
THE COMPANY
OVERVIEW
We are one of the largest Sprint PCS affiliates based on our exclusive
right to market Sprint PCS products and services to a total population of over
10.2 million in portions of twelve contiguous states. Our markets are located
between Sprint PCS' Chicago, New York and Raleigh/Durham markets and connect or
are adjacent to 15 major Sprint PCS markets that have a total population of over
59 million. As a Sprint PCS affiliate, we market digital personal communications
services, or PCS, under the Sprint and Sprint PCS brand names. We offer the same
national pricing plans and use the same sales and marketing strategies and
national distribution channels that have made Sprint PCS the fastest growing
wireless company in the country.
As of October 31, 2000, we had launched service in 38 markets covering
approximately 4.9 million residents, or approximately 48% of the total
population in our territory. As of September 30, 2000, we had approximately
36,000 customers. We expect to launch all of our markets and offer service to
approximately 6.9 million residents, or approximately 68% of the total
population in our territory, by the end of the third quarter of 2001, at which
time our planned network build-out will be substantially complete. For the year
ended December 31, 1999, we had revenues of $4.5 million and a loss from
continuing operations of $11.0 million.
We became one of the five charter Sprint PCS affiliates in June 1998, when
we were awarded our initial seven markets in Ohio, West Virginia and Kentucky
with a total population of approximately 1.6 million. Since our initial
territory grant, we have substantially expanded the size of our territory, as
follows:
- in August 1999, Sprint PCS granted us additional markets in Virginia,
West Virginia, Kentucky, Maryland, North Carolina and Tennessee with a
total population of approximately 3.3 million;
- in May 2000, Sprint PCS granted us additional markets in Pennsylvania,
New York, Ohio and New Jersey with a total population of approximately
2.9 million; and
- in June 2000, we completed the acquisition of Bright PCS, a Sprint PCS
affiliate, adding markets in Indiana, Ohio and Michigan with a total
population of approximately 2.4 million.
Our territory includes significant market coverage in Indiana, Ohio,
Pennsylvania, Tennessee, Virginia and West Virginia and selected markets in
Kentucky, Maryland, Michigan, New Jersey, New York and North Carolina. Our
markets are adjacent to or connect a number of major markets owned and operated
by Sprint PCS, including Buffalo, Chicago, Cincinnati, Cleveland, Columbus,
Detroit, Indianapolis, Knoxville, Lexington, New York, Philadelphia, Pittsburgh,
Raleigh/Durham, Richmond and Washington, D.C. In addition, our territory
contains more than 2,600 heavily traveled interstate miles, including over 460
miles of Interstate 80, a major east-west artery connecting New York to Chicago,
and numerous other federal and major state highways. Our territory is also home
to more than 60 four year colleges and universities with a student population of
over 240,000, as well as a number of smaller colleges and universities. As a
result of our proximity to major Sprint PCS markets and these other factors, we
expect to generate substantial roaming revenue from Sprint PCS subscribers based
outside our territory who visit or travel through our markets.
1
<PAGE> 6
COMPETITIVE STRENGTHS
We receive substantial benefits from our long-term strategic relationship
with Sprint PCS, including:
- the exclusive right to use the Sprint and Sprint PCS brand names for the
sale of Sprint PCS products and services, and the exclusive right to use
the Sprint PCS licensed spectrum to provide Sprint PCS products and
services in our territory;
- our customers' access to Sprint PCS' 100% digital, 100% PCS nationwide
network, including the Sprint PCS Wireless Web;
- immediate access to approximately 481 retail locations in our territory
under Sprint PCS' existing distribution agreements with leading national
and regional retailers, including RadioShack on an exclusive basis for
PCS, Best Buy, Circuit City and Office Depot;
- the benefits of Sprint PCS' significant annual advertising expenditures,
national marketing and promotional programs, national account sales
initiatives and marketing and promotional materials;
- the ability to purchase network equipment, handsets and other subscriber
equipment at Sprint PCS' discounted rates;
- the benefits of Sprint PCS' extensive research and development program,
which provides us with ongoing access to new technological products and
enhanced service features without significant research and development
expenditures of our own; and
- the ability to purchase back office services, including customer
activation, billing and 24 hours a day, 7 days a week customer care from
Sprint PCS at rates reflecting Sprint PCS' economies of scale.
In addition to the advantages provided by our strategic relationship with
Sprint PCS, we have a number of other favorable characteristics, including:
- a network build-out that covers approximately 48% of the total population
in our territory at October 31, 2000 and that is expected to cover
approximately 68% by the end of the third quarter of 2001, based on our
Sprint PCS build-out requirements;
- a high growth strategy as demonstrated by our acquisition of Bright PCS,
the recent grant to us of additional markets by Sprint PCS and our
purchase from Sprint PCS of the assets related to those markets;
- the potential for significant roaming revenue;
- fewer competitors in our markets compared to major metropolitan areas,
evidenced by being the first or second PCS provider in 16 of our launched
markets, and with the expectation, based on our build-out schedule and
projections of our competitors' build-out, of being the first or second
PCS provider in 49 of our total 54 markets;
- the provision of local telephone service by Sprint to approximately 20%
of the total population in our markets; and
- a fully financed business plan.
Notwithstanding these competitive strengths, our business is subject to
risk, including lack of profitability, deadlines to complete construction of our
portion of the Sprint PCS network, our reliance on Sprint PCS and the
continuation of our agreements with Sprint PCS, the difficulty of managing rapid
growth and our substantial debt. See "Risk Factors" for further information of
these
2
<PAGE> 7
and other important considerations. An investment in us is not guaranteed by
Sprint PCS and does not represent an investment in Sprint PCS.
BUSINESS STRATEGY
We intend to become a leading PCS provider in our territory by successfully
executing our business strategy, which includes:
- taking full advantage of the benefits of our affiliation with Sprint PCS
by exclusively marketing PCS services under the Sprint and Sprint PCS
brand names, offering the same national pricing plans, and using the same
sales and marketing strategies, distribution channels and back office
services as Sprint PCS;
- rapidly completing the build-out of our high-capacity network and the
launch of our remaining markets;
- executing an integrated local marketing strategy, which includes
establishing 40 Sprint PCS stores in our territory, using numerous Sprint
local telephone and other affiliated local distribution channels,
advertising on local radio and in print media and sponsoring local and
regional events; and
- continuing to explore opportunities to expand our territory and provide
complementary products and services.
RECENT DEVELOPMENTS
On September 26, 2000, an investor group led by Apollo Management purchased
$126.5 million of our convertible preferred stock in a private placement.
Concurrently with the closing, the holder of our $13.4 million short-term
convertible note converted it into the same convertible preferred stock
purchased by the investor group. We have the right under certain circumstances
to redeem $80.3 million of the convertible preferred stock on or before April
30, 2001 at 107% of the original issue price, or $85.9 million. Holders of our
convertible preferred stock have the option to convert their shares (on a share
for share basis) into our class A common stock. In addition, the convertible
preferred stock will convert automatically into shares upon the completion of a
public offering of our class A common stock meeting specified criteria or upon
the occurrence of certain business combination transactions. If the gross
proceeds of this offering are at least $65.0 million, and the price per share is
at least $10.29, then the convertible preferred stock will convert.
We also sold 295,000 units at $507.39 per unit, receiving gross proceeds of
$149.7 million, on September 26, 2000. Each unit consisted of $1,000 principal
amount at maturity of 14% senior discount notes due 2010 and one warrant to
purchase 12.90 shares of class A common stock of Horizon PCS at an exercise
price of $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
Horizon PCS on a fully diluted basis, assuming the completion of this offering,
the exercise of all outstanding options and warrants to purchase common stock,
the conversion into shares of class A common stock of the convertible preferred
stock and the redemption of 15.8 million shares of the convertible preferred
stock.
Concurrently with the sale of the convertible preferred stock and the
units, we also entered into a senior secured credit agreement with First Union
National Bank, to provide us an aggregate commitment, subject to certain
conditions, of up to $225.0 million, completed the purchase from Sprint PCS of
the assets related to our new markets and declared and paid a dividend
consisting of substantially all of the shares of our parent, Horizon Telcom,
owned by us, to our stockholders.
3
<PAGE> 8
THE OFFERING
Class A Common Stock
Offered....................... 9,650,000 shares
Common Stock to be Outstanding
after the Offering.......... 19,902,239 shares of class A common stock
58,485,000 shares of class B common stock
78,387,239 total shares of common stock
Voting and Conversion
Rights........................ Our class A common stock and class B common
stock have the same rights except for voting
and conversion rights. The class A common stock
entitles its holders to one vote per share, and
the class B common stock entitles its holders
to ten votes per share. The holders of class B
common stock may convert their shares at any
time into shares of class A common stock on a
share-for-share basis. In addition, shares of
class B common stock will be automatically
converted into shares of class A common stock
upon any sale or other transfer of shares of
class B common stock, other than a transfer to
a permitted transferee. See "Description of
Capital Stock."
Controlling Stockholder....... Horizon Telcom, Inc. beneficially owns 53.8
million shares of our class B common stock.
Immediately after this offering, Horizon Telcom
will control approximately 82% of the total
voting power of our capital stock.
Proposed Nasdaq National
Market Symbol................. HPCS
Risk Factors.................. See "Risk Factors" beginning on page 9 for a
discussion of the material factors that you
should consider before purchasing shares of our
class A common stock.
Dividend Policy............... We do not intend to pay cash dividends on our
common stock in the foreseeable future. See
"Dividend Policy," for more information.
Use of Proceeds............... We will use the proceeds from this sale of our
class A common stock, to fund the following:
- redemption of 15.8 million shares of our
convertible preferred stock at $5.42 per
share;
- working capital requirements and operating
losses; and
- general corporate purposes.
See "Use of Proceeds" for more detailed
information.
Unless otherwise indicated, the share information in this prospectus
excludes:
- up to 1,447,500 shares of class A common stock that we may issue to the
underwriters to cover over-allotments. See "Underwriting."
- 7,500,000 shares of class A common stock reserved for issuance under our
2000 Stock Option Plan. See "Management -- 2000 Stock Option Plan."
4
<PAGE> 9
- 4,196,884 shares of class B common stock issuable upon the exercise of
options granted under our 2000 Stock Option Plan at an exercise price of
$0.1209 per share.
- 2,510,460 shares of class A common stock issuable upon the exercise of
warrants to be granted to Sprint PCS at an exercise price equal to the
initial public offering price per share.
- 3,805,500 shares of class A common stock issuable upon exercise of
warrants granted to the initial purchasers of our senior discount notes at
an exercise price of $5.88 per share.
------------------------------
We are a Delaware corporation. Our principal executive offices are located
at 68 East Main Street, Chillicothe, Ohio 45601-0480; and our telephone number
is (740) 772-8200.
5
<PAGE> 10
SUMMARY HISTORICAL AND PRO FORMA 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 at that time.
This transfer was accounted for in the financial statements as a reorganization
of companies under common control in a manner similar to a pooling-of-interests.
We have reflected the reorganization and the adjusted number of shares
outstanding retroactively for all periods and we have presented the prior
financial statements of Horizon Personal Communications, Inc. as those of
Horizon PCS.
The following tables present summary consolidated historical financial data
for Horizon PCS for the three years ended December 31, 1999, which we derived
from the audited consolidated financial statements of Horizon PCS, and unaudited
consolidated historical financial data for the six months ended June 30, 1999
and 2000, which we derived from the unaudited interim consolidated financial
statements of Horizon PCS. In the opinion of management, the unaudited
consolidated financial statements were prepared on the same basis as the audited
consolidated financial statements and include all normal and recurring
adjustments and accruals necessary for a fair presentation of this information.
Financial results for the six months ended June 30, 2000 are not necessarily
indicative of the results that may be expected for the full year.
In addition, the following tables present unaudited summary consolidated
financial data for Horizon PCS for the year ended December 31, 1999 and as of
and for the six months ended June 30, 2000:
- Pro forma to reflect:
- our acquisition of the remaining 74% of the equity of Bright PCS not
already owned by us in exchange for 4.7 million shares of our class B
common stock and 31,911 shares of Horizon Telcom Common Stock, which we
acquired in February 2000;
- our acquisition of Sprint PCS' network assets currently under
construction in our new markets in Pennsylvania, New York, Ohio and New
Jersey;
- the issuance of warrants granted to Sprint PCS to acquire 2,510,460
shares of class A common stock at an exercise price equal to the initial
public offering price per share;
- the dividend of substantially all of the shares of Horizon Telcom common
stock held by us to our stockholders;
- the sale of $126.5 million of convertible preferred stock to an investor
group led by Apollo Management;
- the completion of our $149.7 million senior discount notes offering;
- the closing of our new $225.0 million senior secured credit facility and
the repayment of all of our outstanding indebtedness under our senior
credit facilities with the Rural Telephone Finance Cooperative; and
- the issuance of approximately 2.6 million shares of convertible
preferred stock upon conversion of a $13.4 million short-term
convertible note plus accrued interest.
- Pro forma, as adjusted to further reflect:
- the sale in this offering of 9,650,000 shares of class A common stock at
an assumed initial public offering price of $12.00 per share, the
mid-point of the proposed offering price range, less underwriting
discounts and commissions and estimated offering expenses of $9.1
million;
6
<PAGE> 11
- the redemption of 15.8 million shares of our convertible preferred stock
at $5.42 per share from the proceeds of this offering; and
- the conversion of the remaining 10.3 million shares of our convertible
preferred stock into class A common stock upon completion of this
offering.
In the case of the statements of income and other data, the adjustments for
the year ended December 31, 1999 were made as if they had occurred on January 1,
1999 and for the six months ended June 30, 2000, as if they had occurred on
January 1, 2000. In the case of the balance sheet data, the adjustments were
made as if they had occurred as of the balance sheet date.
The unaudited summary pro forma financial data have been prepared by the
management of Horizon PCS based on its consolidated historical financial
statements and do not purport to represent what the results of operations or
financial condition of Horizon PCS would have actually been or what the results
of operations in any future period would be if the transactions that give rise
to the pro forma adjustments had occurred on the dates assumed. The following
information should be read together with "Selected Consolidated Financial Data,"
"Capitalization," "Management's Discussion and Analysis of Financial Condition
and Results of Operations," "Pro Forma Financial Statements" and the
consolidated financial statements and notes included elsewhere in this
prospectus.
7
<PAGE> 12
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
----------------------------------------- -----------------------------
PRO FORMA PRO FORMA
1997 1998 1999 1999 1999 2000 2000
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AND OTHER DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME DATA:
Operating revenues:
Service revenues.............................. $ 26 $ 459 $ 3,903 $ 3,828 $ 1,318 $ 7,469 $ 6,961
Equipment revenues............................ 138 309 600 600 244 1,095 1,095
------- -------- -------- -------- ------- ------- --------
Total revenues.............................. 164 768 4,503 4,428 1,562 8,564 8,056
------- -------- -------- -------- ------- ------- --------
Operating expenses:
Cost of service and equipment................. 941 4,905 9,741 9,741 3,905 11,530 11,178
Selling, general and administrative expenses
(exclusive of non-cash compensation expense
shown below)................................ 2,500 3,770 7,922 8,100 3,239 8,378 8,597
Non-cash compensation expense................. -- -- 291 291 -- 172 172
Depreciation and amortization................. 419 1,748 2,685 4,709 1,178 1,779 2,777
------- -------- -------- -------- ------- ------- --------
Total operating expenses.................... 3,860 10,423 20,639 22,841 8,322 21,859 22,724
------- -------- -------- -------- ------- ------- --------
Operating loss.............................. (3,696) (9,655) (16,136) (18,413) (6,760) (13,295) (14,668)
Interest expense, net......................... (264) (838) (1,529) (1,882) (641) (1,738) (2,219)
Gain on exchange of stock..................... -- -- -- -- -- 10,513 10,513
Other income (expense), net................... 100 (1,690) 1,440 1,570 4 531 825
------- -------- -------- -------- ------- ------- --------
Loss from continuing operations before
income taxes.............................. (3,860) (12,183) (16,225) (18,725) (7,397) (3,989) (5,549)
Income tax benefit (expense).................. 1,308 4,145 5,275 (11,500) 2,449 2,031 (11,500)
------- -------- -------- -------- ------- ------- --------
Loss from continuing operations............. $(2,552) $ (8,038) $(10,950) $(30,225) $(4,948) $(1,958) $(17,049)
======= ======== ======== ======== ======= ======= ========
PER SHARE DATA:
Basic and diluted loss per share of common
stock from continuing operations(1)......... $ (0.05) $ (0.15) $ (0.20) $ (0.52) $ (0.09) $ (0.04) $ (0.29)
OTHER DATA:
Number of PCS subscribers(2).................. 312 2,091 13,749 13,749 4,660 26,980 26,980
Total population in our markets
(millions) ................................. 0.1 1.6 4.9 10.2 1.6 10.2 10.2
ARPU (including roaming)(3)................... NM $ 44 $ 58 $ 58 $ 66 $ 63 $ 63
ARPU (excluding roaming)(3)................... NM 42 49 49 55 46 46
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 2000
---------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................... $ 5,313 $264,412 $285,202
Total property and equipment, net................... 38,148 53,148 53,148
Total assets........................................ 101,591 402,044 422,835
Total debt.......................................... 45,497 179,435 179,435
Total liabilities................................... 70,861 216,101 216,101
Convertible preferred stock......................... -- 133,865 --
Total stockholders' equity.......................... 30,730 52,078 206,734
</TABLE>
-------------------------
(1) Basic and diluted losses per share were calculated as loss from continuing
operations divided by the weighted average number of common shares
outstanding.
(2) Represents the number of PCS subscribers at the end of each period.
(3) Represents average monthly revenue per unit (subscriber). For more detail on
how ARPU is computed, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Results of Operations."
8
<PAGE> 13
RISK FACTORS
You should carefully consider the following risk factors in addition to the
other information in this prospectus before purchasing the class A common stock
we are offering.
RISKS PARTICULAR TO HORIZON PCS
WE HAVE NOT HAD ANY PROFITABLE YEARS IN THE PAST FIVE YEARS AND WE MAY NOT
ACHIEVE OR SUSTAIN OPERATING PROFITABILITY OR POSITIVE CASH FLOW FROM OPERATING
ACTIVITIES
We expect to incur significant operating losses and to generate significant
negative cash flow from operating activities until 2003 while we continue to
construct our network and grow our customer base. We have already incurred a
total of approximately $24.1 million in net losses through June 30, 2000. Our
operating profitability will depend upon many factors, including our ability to
market our services, achieve our projected market penetration and manage
customer turnover rates. If we do not achieve and maintain operating
profitability and positive cash flow from operating activities on a timely
basis, we may not be able to meet our debt service requirements, our stock price
could fall and you could lose all or part of your investment.
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 the portion of the Sprint PCS
network located within our territory, which we refer to as our build-out, and to
operate this portion as our network, in accordance with Sprint PCS' technical
and coverage requirements. The agreements also require that we provide network
coverage to a specified percentage of the total population within each of the
markets which make up our territory by specified dates. As of June 30, 2000, we
had not yet met the minimum covered population requirements under the Sprint PCS
agreements for Roanoke, Fairmont, Martinsville, Lynchburg, Staunton-Waynesboro,
and Danville. Sprint PCS has agreed that the shortfalls were not material and
agreed that if we met our build-out requirement by December 31, 2000, we would
not be in breach of our management agreement. We have subsequently extended our
coverage in these markets.
In addition, we did not launch certain of our Bright PCS markets by the
date set forth in the Sprint PCS agreements. We were unable to obtain the
required backhaul from local exchange carriers by that date, despite using
commercially reasonable efforts. Sprint PCS agreed in writing that we are in
compliance with the build-out requirements in these markets. We have
subsequently obtained the required backhaul services and launched these markets.
By the third quarter of 2001, we are required by our Sprint PCS agreements
to provide aggregate coverage of 65% in the markets granted to us in the third
grant. Sprint PCS has reviewed our build-out plans, and has agreed in writing
that if we meet those plans, we will be fully compliant with their build-out
requirements.
A failure to meet our build-out requirements for any of our markets, or to
meet Sprint PCS' technical requirements, would constitute a breach of the Sprint
PCS agreements that could lead to their termination if not cured within the
applicable cure period. If Sprint PCS terminates these agreements, we will no
longer be able to offer Sprint PCS products and services. See "The Sprint PCS
Agreements."
9
<PAGE> 14
IF SPRINT PCS TERMINATES THE SPRINT PCS AGREEMENTS, THE BUY-OUT PROVISIONS
OF THOSE AGREEMENTS MAY DIMINISH THE VALUATION OF OUR COMPANY
Provisions of the Sprint PCS agreements could affect the valuation of our
company, and lead to a reduction in the market price of our class A common stock
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. To the extent that the appraiser
considers the trading price of our class A common stock as a criteria of the
fair market value, such trading price may itself already have been discounted by
investors because of this buy-out provision and consequently this buy-out
provision may operate to disproportionately reduce the value. In addition,
Sprint PCS must approve any change of control of our ownership and consent to
any assignment of the Sprint PCS agreements. Sprint PCS also has a right of
first refusal if we decide to sell our operating assets in our Bright PCS
markets. We are also subject to a number of restrictions on the transfer of our
business including a prohibition on selling our company or our operating assets
to a number of identified and as yet to be identified competitors of Sprint PCS
or Sprint. These and other restrictions in the Sprint PCS agreements may limit
the marketability of and reduce the value a buyer may be willing to pay for our
company or its business and may operate to reduce the entire business value of
our company.
THE TERMINATION OF OUR STRATEGIC AFFILIATION WITH SPRINT PCS OR SPRINT PCS'
FAILURE TO PERFORM ITS OBLIGATIONS UNDER THE SPRINT PCS AGREEMENTS WOULD
SEVERELY RESTRICT OUR ABILITY TO CONDUCT OUR BUSINESS
Because we own only a single license to operate a wireless PCS network of
our own, our ability to offer Sprint PCS products and services on our network is
dependent on the Sprint PCS agreements remaining in effect and not being
terminated. Sprint PCS may terminate the Sprint PCS agreements for breach of any
material terms. We also depend on Sprint PCS' ability to perform its obligations
under the Sprint PCS agreements. The termination of the Sprint PCS agreements or
the failure of Sprint PCS to perform its obligations under the Sprint PCS
agreements would severely restrict our ability to conduct business.
IF SPRINT PCS DOES NOT COMPLETE THE CONSTRUCTION OF ITS NATIONWIDE PCS
NETWORK, WE MAY NOT BE ABLE TO ATTRACT AND RETAIN CUSTOMERS, WHICH WOULD
ADVERSELY AFFECT OUR REVENUES
Sprint PCS' network may not provide nationwide coverage to the same extent
as its competitors, which could adversely affect our ability to attract and
retain customers. Sprint PCS is creating a nationwide PCS network through its
own construction efforts and those of its affiliates. Today, neither Sprint PCS
nor any other PCS provider offers service in every area of the United States.
Sprint PCS has entered into, and anticipates entering into, affiliation
agreements similar to ours with companies in other territories pursuant to its
nationwide PCS build-out strategy. Our business and results of operations depend
on Sprint PCS' national network and, to a lesser extent, on the networks of its
other affiliates. Sprint PCS and its affiliate program are subject, to varying
degrees, to the economic, administrative, logistical, regulatory and other risks
described in this prospectus. Sprint PCS' and its other affiliates' PCS
operations may not be successful.
10
<PAGE> 15
IF WE DO NOT SUCCESSFULLY MANAGE OUR ANTICIPATED RAPID GROWTH, WE MAY NOT
BE ABLE TO COMPLETE OUR NETWORK BY OUR TARGET DATES, IF AT ALL, WHICH MAY RESULT
IN THE TERMINATION OF THE SPRINT PCS AGREEMENTS
Our performance as a PCS provider will depend on our ability to
successfully manage the network build-out process, attract and retain customers,
implement operational and administrative systems, expand our base of employees
and train and manage our employees, including engineering, marketing and sales
personnel. As of October 31, 2000, we had launched Sprint PCS service in 38
markets covering approximately 4.9 million residents. In other portions of our
territory, we have not yet completed our radio frequency design, network design
and site acquisition and cell site engineering, nor have we commenced
construction of portions of our network. 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.
THE INABILITY TO MAINTAIN OUR BACK OFFICE SYSTEMS OR TO SUCCESSFULLY
CONVERT OVER TO AND USE SPRINT PCS' BACK OFFICE SERVICES AND THIRD PARTY
VENDORS' BACK OFFICE SYSTEMS COULD DISRUPT OUR BUSINESS
In most of our markets, we presently provide our own back office services,
such as customer activation, support and billing. As our business has expanded
our internal support systems have been subject to increased demand. This
increases the risk that our information systems, business processes and related
support functions, especially those related to prompt activation of service upon
receipt of the customer order, customer service and accounts receivable
collection could prove inadequate or inefficient. We recently completed a review
of our internal systems and processes and implemented certain of the
improvements to our process recommended from the review. However, there can be
no assurance that the improvements we have implemented will be sufficient. If
our systems become unable to timely and efficiently meet demands for service,
this could decrease subscriber growth, and delay or otherwise impede billing and
collection of amounts owed, which would adversely affect our revenues.
Furthermore, we have recently engaged Sprint PCS to provide back office
systems. We began the transition to Sprint PCS back office services in September
2000. We expect that these services will be transitioned to Sprint PCS by the
end of the first quarter of 2001. The process of transitioning our own back
office services to Sprint PCS could be accompanied by unanticipated errors,
delays or expenses, which could adversely affect our ability to service our
customers, add new customers, or complete the transition. Once the transition is
complete, our operations could be disrupted if Sprint PCS is unable to maintain
and expand its back office services, or to efficiently outsource those services
and systems through third party vendors. The rapid expansion of Sprint PCS'
business will continue to pose a significant challenge to its internal support
systems. Additionally, Sprint PCS has relied on third-party vendors for a
significant number of important functions and components of its internal support
systems and may continue to rely on these vendors in the future. We depend on
Sprint PCS' willingness to continue to offer these services to us and to provide
these services at competitive costs. The Sprint PCS agreements provide that,
upon nine months' prior written notice, Sprint PCS may elect to terminate any of
these services. If Sprint PCS terminates a service for which we have not
developed a cost-effective alternative, our operating costs may increase beyond
our expectations and restrict our ability to operate successfully.
WE DEPEND ON OTHER TELECOMMUNICATIONS COMPANIES FOR SOME SERVICES WHICH, IF
DELAYED, COULD DELAY OUR PLANNED NETWORK BUILD-OUT AND DELAY OUR EXPECTED
INCREASES IN CUSTOMERS AND REVENUES
We depend on other telecommunications companies to provide facilities and
transport to interconnect portions of our network and to connect our network
with the landline telephone system.
11
<PAGE> 16
American Electric Power, Ameritech, AT&T, Bell Atlantic and GTE are our primary
suppliers of facilities and transport. Without these services, we could not
offer Sprint PCS services to our customers in some areas. From time to time, we
have experienced delays in obtaining facilities and transport from these
companies, and in obtaining local telephone numbers for use 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.
WE HAVE SUBSTANTIAL DEBT WHICH WE MAY NOT BE ABLE TO SERVICE AND WHICH MAY
RESULT IN OUR LENDERS CONTROLLING OUR ASSETS IN AN EVENT OF DEFAULT
Our total debt outstanding at December 31, 1999 was $24.6 million, $23.6
million of which was due under our former senior credit facilities to the Rural
Telephone Finance Cooperative, or RTFC. We used borrowings under our new senior
secured credit facility and proceeds from our other debt and equity financing to
repay all of our outstanding RTFC debt and we have no further obligations to the
RTFC. As of June 30, 2000, after giving effect to our senior discount notes
offering, our new senior secured credit facility, repayment of our RTFC debt and
conversion of a $13.4 million short-term convertible note plus accrued interest,
our total debt outstanding was $179.4 million (total debt outstanding of $199.7
million less a $20.3 million unrecognized discount associated with the warrants
issued in connection with our senior discount notes offering). Pro forma annual
interest on the debt would be approximately $28.9 million.
Our substantial debt will have a number of important consequences for our
operations and our investors, including the following:
- 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;
- we may not have sufficient funds to pay interest on, and principal of,
our debt;
- we may not be able to obtain additional financing for currently
unanticipated capital requirements, capital expenditures, working capital
requirements and other corporate purposes;
- some borrowings likely will be at variable rates of interest, which will
result in higher interest expense in the event of increases in market
interest rates; and
- due to the liens on substantially all of our assets and the pledges of
equity ownership of our subsidiaries that secure our senior debt, our
lenders may control our assets upon a default.
IF WE DO NOT MEET ALL OF THE CONDITIONS UNDER THE 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
$225.0 million of which $50.0 million was borrowed on September 29, 2000.
Availability of future borrowings will be subject to certain conditions at each
funding date, including the following:
- the absence of any default or event of default;
- the continuing accuracy of all representations and warranties; and
- 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
12
<PAGE> 17
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.
OUR INDEBTEDNESS PLACES RESTRICTIONS ON US WHICH LIMIT OUR OPERATING
FLEXIBILITY
The indenture governing the notes and the senior secured credit agreement
both impose material operating and financial restrictions on us. These
restrictions, subject to ordinary course of business exceptions, may limit our
ability to engage in some transactions, including the following:
- designated types of mergers or consolidations;
- paying dividends or other distributions to our stockholders;
- making investments;
- selling assets;
- repurchasing our common stock;
- changing lines of business;
- borrowing additional money; and
- transactions with affiliates.
These restrictions could limit our ability to obtain debt financing,
repurchase stock, refinance or pay principal or interest on our outstanding
debt, consummate acquisitions for cash or debt or react to changes in our
operating environment.
An event of default under the senior secured credit facility may prohibit
us and the guarantors from paying the notes or the guarantees of the notes as
well as liquidated damages with respect to our failure to file or cause or
maintain the effectiveness of certain registration statements with respect to
the notes and the warrants.
THE TERMS OF THE CONVERTIBLE PREFERRED STOCK MAY BE ADVERSE TO YOUR
INTERESTS
If this offering of class A common stock does not yield gross proceeds of
at least $65.0 million with a per share price that exceeds $10.29, our
convertible preferred stock will not convert upon the closing of this offering.
The terms of the convertible preferred stock give the holders of the preferred
stock the right, among other things, to:
- initially designate two members of our board of directors, subject to
reduction based on future percentage ownership;
- approve or disapprove certain corporate actions and transactions;
- receive dividends in the form of additional shares of our convertible
preferred stock, which may increase and accelerate upon certain changes in
control; and
- subject to certain terms and conditions, require us to redeem the
convertible preferred stock in certain circumstances.
If we become subject to the repurchase right or change of control
redemption requirements under the convertible preferred stock while our senior
debt or notes are outstanding, we will be required to seek the consent of the
holders of our senior debt and the holders of the notes to repurchase or redeem
the convertible preferred stock, or attempt to refinance the debt and the notes.
If we fail to obtain these consents, there will be an event of default under the
terms governing our senior debt. In addition, if we do not repurchase or redeem
the convertible preferred stock and the
13
<PAGE> 18
holders of the convertible preferred stock obtain a judgment against us, any
such judgment in excess of $5.0 million would constitute an event of default
under the indenture governing the notes.
The terms and conditions of the convertible preferred stock and the other
terms of the investment may be materially adverse to the holders of common
stock.
IF WE BREACH OUR AGREEMENT WITH SBA, OR IT OTHERWISE TERMINATES ITS
AGREEMENT WITH US, OUR RIGHT TO PROVIDE WIRELESS SERVICE FROM SOME OF OUR CELL
SITES WILL BE LOST
We lease cell sites from SBA Towers, Inc. a wholly-owned subsidiary of SBA
Communications Corporation. We rely on our contract with SBA to provide us with
access to most of our cell sites and to the towers located on these sites. If
SBA were to lose its underlying rights to these sites, our ability to provide
wireless service from these sites would end, subject to our right to cure
defaults by SBA. If SBA terminates our agreement as a result of our breach, we
will lose our right to provide wireless services from most of our current cell
sites.
WE MAY HAVE DIFFICULTY IN OBTAINING INFRASTRUCTURE EQUIPMENT AND HANDSETS,
WHICH ARE AT TIMES IN SHORT SUPPLY, WHICH COULD RESULT IN DELAYS IN OUR NETWORK
BUILD-OUT, DISRUPTION OF SERVICE OR LOSS OF CUSTOMERS
If we cannot acquire the equipment required to build our network in a
timely manner, we may be unable to provide wireless communications services
comparable to those of our competitors or to meet the requirements of the Sprint
PCS agreements. The demand for the equipment required to construct our network
is considerable, and manufacturers of this equipment could have substantial
order backlogs. Accordingly, the lead time for the delivery of this equipment
may be longer than anticipated. In addition, the demand for specific types of
handsets is strong and the manufacturers of those handsets may have to
distribute their limited supply of products among their numerous customers. Some
of our competitors purchase large quantities of communications equipment and may
have established relationships with the manufacturers of this equipment.
Consequently, they may receive priority in the delivery of this equipment. If we
do not obtain equipment or handsets in a timely manner, we could suffer delays
in the build-out of our network, disruptions in service and a reduction in
customers.
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 CFW Communications Company. Under our network services agreement, the
Alliances provide us with the use of and access to key components of their
network in most of our markets in Virginia and West Virginia. We directly
compete with the Alliances in some of our other markets where we don't use their
network. If the Alliances fail to maintain the standards for their network as
set forth in our network services agreement with them or otherwise fail to
provide their network for our use, our ability to provide wireless services in
these markets may be adversely affected, and we may not be able to provide
seamless service for our customers. If we breach our obligations to the
Alliances, or if the Alliances otherwise terminate the network services
agreement, we will lose our right to use the Alliances' network to provide
service in these markets. In that event, it is likely that we will be required
to build our own network in those markets and incur the costs associated with
doing so.
14
<PAGE> 19
SPRINT PCS' VENDOR DISCOUNTS MAY BE DISCONTINUED, WHICH COULD INCREASE OUR
EQUIPMENT COSTS AND REQUIRE MORE CAPITAL THAN WE PROJECT TO BUILD OUT OUR
NETWORK
We intend to continue to purchase our infrastructure equipment under Sprint
PCS' vendor agreements that include significant volume discounts. If Sprint PCS
were unable to continue to obtain vendor discounts for its affiliates, the loss
of vendor discounts could increase our equipment costs for our new markets.
THE FAILURE OF OUR VENDORS, CONSULTANTS AND CONTRACTORS TO PERFORM THEIR
OBLIGATIONS MAY DELAY CONSTRUCTION OF OUR NETWORK WHICH MAY LEAD TO A BREACH OF
THE SPRINT PCS AGREEMENTS
We have retained vendors, consultants and contractors to assist in the
design and engineering of our systems, construct cell sites, switch facilities
and towers, lease cell sites and deploy our network systems, and we will
continue to significantly depend upon them in order to fulfill our build-out
obligations. The failure by any of our vendors, consultants or contractors to
fulfill their contractual obligations to us could materially delay construction
of the remaining portion of our network and may cause us to breach our build-out
commitments to Sprint PCS.
CONFLICTS WITH SPRINT PCS MAY NOT BE RESOLVED IN OUR FAVOR WHICH COULD
RESTRICT OUR ABILITY TO MANAGE OUR BUSINESS AND PROVIDE SPRINT PCS PRODUCTS AND
SERVICES, ADVERSELY AFFECT OUR RELATIONSHIPS WITH OUR CUSTOMERS, INCREASE OUR
EXPENSES AND DECREASE OUR REVENUES
Under the Sprint PCS agreements, Sprint PCS has a substantial amount of
control over the conduct of our business. Conflicts between us may arise, and as
Sprint PCS owes us no duties except as set forth in the Sprint PCS agreements,
these conflicts may not be resolved in our favor. The conflicts and their
resolution may harm our business. For example:
- Sprint PCS could price its national plans based on its own objectives and
could set price levels that may not be economically sufficient for our
business;
- upon expiration, Sprint PCS could decide not to renew the Sprint PCS
agreements on the following renewal dates, which would not be in our best
interest or that of our stockholders:
- the Sprint PCS agreements for Horizon Personal Communications will come
up for renewal on June 8, 2018;
- the Sprint PCS agreements for Bright PCS will come up for renewal on
October 13, 2019;
- Sprint PCS could increase the prices we pay for our back office services;
- Sprint PCS could change the per minute rate for Sprint PCS roaming fees,
adversely affecting our revenues from roaming;
- subject to limitations under the Sprint PCS agreements, Sprint PCS may
alter its network and technical requirements or request that we build-out
additional areas within our markets, which could result in increased
equipment and build-out costs or in Sprint PCS building out that area
itself or assigning it to another affiliate; and
- Sprint or Sprint PCS could make decisions which could adversely affect
the Sprint and Sprint PCS brand names, products or services.
IF WE FAIL TO PAY OUR DEBT, OUR LENDERS MAY SELL OUR LOANS TO SPRINT PCS
GIVING SPRINT PCS CERTAIN RIGHTS OF A CREDITOR TO FORECLOSE ON OUR ASSETS
If the lenders accelerate the amounts due under our new senior secured
credit facility, Sprint PCS has the right to purchase our obligations under this
facility and become a senior lender. To the extent Sprint PCS purchases these
obligations, Sprint PCS' interests as a creditor could conflict with
15
<PAGE> 20
ours. Sprint PCS' rights as a senior lender would enable it to exercise rights
with respect to our assets and Sprint PCS' continuing relationship in a manner
not otherwise permitted under the Sprint PCS agreements.
WE MAY NOT BE ABLE TO COMPETE WITH LARGER, MORE ESTABLISHED WIRELESS
PROVIDERS WHO HAVE RESOURCES TO COMPETITIVELY PRICE THEIR PRODUCTS AND SERVICES,
WHICH COULD IMPAIR OUR ABILITY TO ATTRACT AND RETAIN CUSTOMERS
Our ability to compete will depend in part on our ability to anticipate and
respond to various competitive factors affecting the telecommunications
industry, including new services that may be introduced, changes in consumer
preferences, demographic trends, economic conditions and discount pricing
strategies by competitors. In each market, we compete with two cellular
providers which have had their infrastructure in place and have been operational
for a number of years. They have significantly greater financial and technical
resources than we do, could offer attractive pricing options and may have a
wider variety of handset options. We expect that existing cellular providers
will continue to upgrade their systems and provide expanded, digital services to
compete with the Sprint PCS products and services that we offer. Many of these
wireless providers generally require their customers to enter into long-term
contracts, which may make it more difficult for us to attract customers away
from them. Sprint PCS generally does not require its customers to enter into
long-term contracts, which may make it easier for other wireless providers to
attract Sprint PCS customers away from Sprint PCS. We will also compete with
several PCS providers and other existing communications companies in our
markets, and expect to compete with new entrants as the FCC licenses additional
spectrum to mobile services providers. A number of our cellular, PCS and other
wireless competitors have access to more licensed spectrum than the amount
licensed to Sprint PCS in most of our territory and therefore will be able to
provide greater network call volume capacity than our network to the extent that
network usage begins to reach or exceed the capacity of our licensed spectrum.
Our inability to accommodate increases in call volume could result in more
dropped or disconnected calls. In addition, any competitive difficulties that
Sprint PCS may experience could also harm our competitive position and success.
For further information on the Sprint PCS licensed spectrum in our markets, see
"Business -- Markets."
THERE IS NO UNIFORM SIGNAL TRANSMISSION TECHNOLOGY AND IF WE DECIDE TO USE
OTHER TECHNOLOGIES IN THE FUTURE, SUCH A DECISION COULD SUBSTANTIALLY INCREASE
OUR EQUIPMENT EXPENDITURES TO REPLACE THE TECHNOLOGY USED ON OUR NETWORK
The wireless telecommunications industry is experiencing evolving industry
standards. We have employed code division multiple access, known as CDMA
technology, which is the digital wireless communications technology selected by
Sprint PCS for its network. CDMA is a relatively new technology and may not
provide the advantages expected by us and by Sprint PCS. In addition to CDMA,
there are two other principal signal transmission technologies, time division
multiple access, or TDMA, and global systems for mobile communications, or GSM.
These three signal transmission technologies are not compatible with each other.
If one of these technologies or another technology becomes the preferred
industry standard, we may be at a competitive disadvantage and competitive
pressures may require Sprint PCS to change its digital technology which, in
turn, may require us to make changes at substantially increased costs.
WE MAY NOT RECEIVE AS MUCH SPRINT PCS ROAMING REVENUE AS WE ANTICIPATE AND
OUR NON-SPRINT PCS ROAMING REVENUE IS LIKELY TO BE LOW
We are paid a fee from Sprint PCS or a Sprint PCS affiliate for every
minute that a Sprint PCS subscriber based outside of our territory uses our
network. Similarly, we pay a fee to Sprint PCS or a Sprint PCS affiliate for
every minute that our customers use the Sprint PCS network outside our
16
<PAGE> 21
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. Sprint PCS
could also change the current fee for each Sprint PCS roaming minute used. As a
result, we may receive less Sprint PCS roaming revenue than we anticipate or we
may have to pay more Sprint PCS roaming fees than we anticipate. Furthermore, we
do not expect to receive substantial non-Sprint PCS roaming revenue.
IF SPRINT PCS CUSTOMERS ARE NOT ABLE TO ROAM INSTANTANEOUSLY OR EFFICIENTLY
ONTO OTHER WIRELESS NETWORKS, WE MAY SUFFER A REDUCTION IN OUR REVENUES AND
NUMBER OF CUSTOMERS
The Sprint PCS network operates at a different frequency and uses or may
use a different signal transmission technology than many analog cellular and
other digital systems. To access another provider's analog cellular, TDMA or GSM
digital system when outside the territory served by the Sprint PCS network, a
Sprint PCS customer is required to utilize a dual-band/dual-mode handset
compatible with that provider's system. Generally, because dual-band/dual-mode
handsets incorporate two radios rather than one, they are more expensive, larger
and heavier than single-band/single-mode handsets. The Sprint PCS network does
not allow for call hand-off between the Sprint PCS network and another wireless
network, so a customer must end a call in progress on the Sprint PCS network and
initiate a new call when outside the territory served by the Sprint PCS network.
In addition, the quality of the service provided by a network provider during a
roaming call may not approximate the quality of the service provided by Sprint
PCS. The price of a roaming call may not be competitive with prices of other
wireless companies for roaming calls, and Sprint PCS customers may not be able
to use Sprint PCS advanced features, such as voicemail notification, while
roaming.
PARTS OF OUR TERRITORIES HAVE LIMITED LICENSED SPECTRUM, AND THIS MAY
AFFECT THE QUALITY OF OUR SERVICE, WHICH COULD IMPAIR OUR ABILITY TO ATTRACT OR
RETAIN CUSTOMERS
In the majority of our markets, Sprint PCS has licenses covering 20 or 30
MHz of spectrum. However, Sprint PCS has licenses covering only 10 MHz in parts
of our territory covering approximately 3.8 million residents out of a total
population of over 10.2 million residents, including our Fort Wayne and South
Bend, Indiana, markets. In the future, as our customers in those areas increase
in number, this limited licensed spectrum may not be able to accommodate
increases in call volume and may lead to increased dropped calls and may limit
our ability to offer enhanced services.
NON-RENEWAL OR REVOCATION BY THE FEDERAL COMMUNICATIONS COMMISSION OF THE
SPRINT PCS LICENSES WOULD SIGNIFICANTLY HARM OUR BUSINESS BECAUSE WE WOULD NO
LONGER HAVE THE RIGHT TO OFFER WIRELESS SERVICE THROUGH OUR NETWORK
We are dependent on Sprint PCS' licenses, which are subject to renewal and
revocation by the FCC. Sprint PCS' licenses in many of our territories will
expire as early as 2005 but may be renewed for additional ten year terms. There
may be opposition to renewal of Sprint PCS' licenses upon their expiration and
the Sprint PCS licenses may not be renewed. The FCC has adopted specific
standards to apply to PCS license renewals. For example, if Sprint PCS does not
demonstrate to the FCC that Sprint PCS has met the five-year construction
requirements for each of its PCS licenses, it can lose those licenses. Failure
to comply with these standards in our territory could cause revocation or
forfeiture of the Sprint PCS licenses for our territory or the imposition of
fines on Sprint PCS by the FCC.
THE LOSS OF OUR OFFICERS AND SKILLED EMPLOYEES THAT WE DEPEND UPON TO
OPERATE OUR BUSINESS COULD REDUCE OUR ABILITY TO OFFER SPRINT PCS PRODUCTS AND
SERVICES
The loss of one or more key officers could impair our ability to offer
Sprint PCS products and services. Our business is managed by a small number of
executive officers. We believe that our future
17
<PAGE> 22
success will also depend in large part on our continued ability to attract and
retain highly qualified technical and management personnel. We believe that
there is and will continue to be intense competition for qualified personnel in
the PCS equipment and services industry as the PCS market continues to develop.
We may not be successful in retaining our key personnel or in attracting and
retaining other highly qualified technical and management personnel.
WE MAY NEED MORE CAPITAL THAN WE CURRENTLY PROJECT TO COMPLETE THE
BUILD-OUT OF OUR NETWORK AND A DELAY OR FAILURE TO OBTAIN ADDITIONAL CAPITAL
COULD ADVERSELY AFFECT OUR REVENUES
The completion of our network build-out will require substantial capital.
Additional funds would be required in the event of:
- significant departures from our current business plan;
- unforeseen delays, cost overruns, unanticipated expenses; or
- regulatory, engineering design and other technological changes.
Due to our highly leveraged capital structure, additional financing may not
be available or, if available, may not be obtained on a timely basis and on
terms acceptable to us or within limitations permitted under our existing debt
covenants. Failure to obtain additional financing, should the need for it
develop, could result in the delay or abandonment of our development and
expansion plans, and we may be unable to fund our ongoing operations.
UNAUTHORIZED USE OF OUR NETWORK AND OTHER TYPES OF FRAUD COULD DISRUPT OUR
BUSINESS AND INCREASE OUR COSTS
We will likely incur costs associated with the unauthorized use of our
network, including administrative and capital costs associated with detecting,
monitoring and reducing the incidence of fraud. Fraud impacts interconnection
costs, capacity costs, administrative costs, fraud prevention costs and payments
to other carriers for unbillable fraudulent roaming. Although we believe that we
have a plan in place to implement appropriate controls to minimize the effect to
us of fraudulent usage, we cannot assure you that we will be successful.
EXPANDING OUR TERRITORY MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS
AND REDUCE THE MARKET VALUE OF OUR CLASS A COMMON STOCK
As part of our business strategy, we may expand our territory through the
grant of additional markets from Sprint PCS or through acquisitions of other
Sprint PCS affiliates. We will evaluate strategic acquisitions and alliances
principally relating to our current operations. These transactions may require
the approval of Sprint PCS and commonly involve a number of risks, including:
- difficulty assimilating acquired operations and personnel;
- diversion of management attention;
- disruption of ongoing business;
- inability to retain key personnel;
- inability to successfully incorporate acquired assets and rights into our
service offerings;
- inability to maintain uniform standards, controls, procedures and
policies; and
- impairment of relationships with employees, customers or vendors.
Failure to overcome these risks or any other problems encountered in these
transactions could have a material adverse effect on our business. In connection
with these transactions, we may also issue additional equity securities, incur
additional debt or incur significant amortization expenses related to goodwill
and other intangible assets.
18
<PAGE> 23
IF THE SPRINT PCS AGREEMENTS DO NOT COMPLY WITH FCC REQUIREMENTS, SPRINT
PCS MAY TERMINATE THE SPRINT PCS AGREEMENTS, WHICH COULD RESULT IN OUR INABILITY
TO PROVIDE SERVICE
The FCC requires that licensees like Sprint PCS maintain control of their
licensed spectrum and not delegate control to third-party operators or managers
like us. Although the Sprint PCS agreements reflect an arrangement that the
parties believe meets the FCC requirements for licensee control of licensed
spectrum, we cannot assure you that the FCC will agree with us. If the FCC were
to determine that the Sprint PCS agreements need to be modified to increase the
level of licensee control, we have agreed with Sprint PCS to use our best
efforts to modify the Sprint PCS agreements to comply with applicable law. If we
cannot agree with Sprint PCS to modify the Sprint PCS agreements, they may be
terminated. If the Sprint PCS agreements are terminated, we would no longer be a
part of the Sprint PCS network and we would have extreme difficulty in
conducting our business.
THE SPRINT PCS AGREEMENTS AND OUR CERTIFICATE OF INCORPORATION INCLUDE
PROVISIONS THAT MAY DISCOURAGE, DELAY AND RESTRICT ANY SALE OF OUR OPERATING
ASSETS OR COMMON STOCK TO THE POSSIBLE DETRIMENT OF OUR STOCKHOLDERS
The Sprint PCS agreements restrict our ability to sell our operating assets
and common stock. Generally, Sprint PCS must approve a change of control of our
ownership and consent to any assignment of the Sprint PCS agreements. The Sprint
PCS agreements also give Sprint PCS a right of first refusal if we decide to
sell the operating assets of our Bright PCS markets to a third party. In
addition, provisions of our certificate of incorporation could also operate to
discourage, delay or make more difficult a change in control of our company. For
example, our certificate of incorporation provides for:
- two classes of common stock, with our class B common stock having ten
votes per share;
- the issuance of preferred stock without stockholder approval; and
- a classified board, with each board member serving a three-year term.
See "Description of Capital Stock."
The restrictions in the Sprint PCS agreements and the provisions of our
certificate of incorporation could discourage any sale of our operating assets
or common stock. This could have a material adverse effect on the value of our
common stock and could reduce the price of our company in the event of a sale.
WE WILL NOT BE ABLE TO RECEIVE THE TAX BENEFIT OF OUR FUTURE LOSSES UNTIL
WE BEGIN TO GENERATE TAXABLE INCOME
From our inception until September 2000, we have been included in the
consolidated federal income tax return of Horizon Telcom. Under our tax-sharing
agreement with Horizon Telcom, Horizon Telcom files a consolidated tax return
and pays 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. We also have recorded a tax benefit on our income statement related to
the consolidated tax-sharing agreement. As a result of the sale of convertible
preferred stock in September 2000, we will no longer be 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 start to generate
taxable income. In addition, as a result of this change in our tax status, we
recognized a tax liability of approximately $7.9 million.
19
<PAGE> 24
HORIZON TELCOM WILL BE ABLE TO CONTROL THE OUTCOME OF SIGNIFICANT MATTERS
PRESENTED TO STOCKHOLDERS AS A RESULT OF ITS OWNERSHIP POSITION FOLLOWING THE
COMPLETION OF THIS OFFERING, WHICH COULD POTENTIALLY IMPAIR OUR ATTRACTIVENESS
AS A TAKEOVER TARGET
Upon completion of this offering and our redemption of the Series A-1
Preferred Stock, Horizon Telcom will beneficially own approximately 60.5% of our
outstanding common stock in total on a fully diluted basis, or approximately
59.6% if the underwriters' over-allotment option is exercised in full. In
addition, the shares held by Horizon Telcom are class B shares, which have ten
votes per share. The class A shares offered in this offering have only one vote
per share. As a result, Horizon Telcom will hold approximately 82.4% of the
voting power upon completion of this offering, or approximately 82.2% if the
underwriters' over-allotment option is exercised in full, on a fully diluted
basis. 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. 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
economic and voting interests of Horizon Telcom. Therefore, the McKell family,
acting as a group, may be able to exercise indirect control over us. See
"Management" and "Principal Stockholders."
THE LOWER VOTING RIGHTS OF THE CLASS A COMMON STOCK MAY MAKE IT LESS
PREFERABLE WHICH MAY REDUCE ITS MARKET VALUE
The difference in voting rights may cause investors to view our class A
common stock as being less valuable than the common stock of other companies
that do not have differences in voting power. The shares of class A common stock
offered in this offering have only one vote per share. The shares of class B
common stock held by Horizon Telcom and others have ten votes per share. As a
result, upon completion of the offering, the class A stockholders will have only
a minority voting position in Horizon PCS.
THE PRICE OF OUR CLASS A COMMON STOCK MAY BE MORE VOLATILE THAN THE EQUITY
SECURITIES OF ESTABLISHED COMPANIES AND THIS VOLATILITY MAY DISPROPORTIONATELY
REDUCE THE MARKET VALUE OF OUR CLASS A COMMON STOCK
The market price of our class A common stock could be subject to
significant fluctuations in response to:
- variations in our, or Sprint PCS', quarterly operating results;
- announcements of technological innovations or new products and services
by our competitors, or Sprint PCS' competitors;
- our or Sprint PCS' failure to achieve operating results consistent with
securities analysts' projections;
- the operating and stock price performance of other companies that
investors may deem comparable to us or Sprint PCS;
- market conditions in the technology, telecommunications and other
emerging growth sectors; and
- other events, factors or rumors relating to us, Sprint PCS or our
competitors.
20
<PAGE> 25
The stock market has experienced extreme price volatility. Under these
market conditions, stock prices of wireless telecommunications companies have
often fluctuated in a manner unrelated or disproportionate to the operating
performance of these companies. Our class A common stock may be subject to
greater price volatility than the stock market as a whole.
WE MAY FACE POTENTIAL 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:
- corporate opportunities;
- tax and intellectual property matters;
- potential acquisitions;
- financing transactions, sales or other dispositions by Horizon Telcom of
shares of our common stock held by it; and
- the exercise by Horizon Telcom of its ability to control our management
and affairs.
Horizon Telcom will control approximately 82% of the voting power on a
fully diluted basis after this offering. Horizon Telcom is engaged in a diverse
range of telecommunications-related businesses, such as local telephone services
and Internet services, and these businesses may have interests that conflict or
compete in some manner with 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, under our tax sharing
agreement with Horizon Telcom, Horizon Telcom has used our net operating losses
to offset its taxes. Under this agreement, Horizon Telcom paid us the amount of
its tax savings from our net operating losses used for this purpose. In
addition, a subsidiary of Horizon Telcom provides certain administrative
services to us including finance functions, billing and collections, accounting
services, computer access, customer relations and human resources. Although
these transactions were on terms that we believe are fair, because Horizon
Telcom currently owns 92% of our outstanding common stock and will continue to
be our controlling shareholder after the offering, third-parties with which we
wish to enter into agreements or the market place may not perceive them 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. See "Certain Transactions."
21
<PAGE> 26
INDUSTRY RISKS
WE MAY EXPERIENCE A HIGH RATE OF CUSTOMER TURNOVER WHICH WOULD INCREASE OUR
COSTS OF OPERATIONS AND REDUCE OUR REVENUE AND PROSPECTS FOR GROWTH
Our strategy to minimize customer turnover, commonly known as churn, may
not be successful. Our average monthly churn for the first nine months of 2000
was less than 2.4%. 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:
- extent of network coverage;
- reliability issues such as blocked calls, dropped calls and handset
problems;
- non-use of phones;
- change of employment;
- the decision not to require our customers to sign contracts, unlike most
cellular providers that do require contracts;
- a lack of affordability;
- price competition;
- customer care concerns; and
- other competitive factors.
A high rate of customer turnover could adversely affect our competitive
position, results of operations and our costs of, or losses incurred in,
obtaining new customers, especially because we subsidize some of the cost of
initial purchases of handsets by our customers.
BECAUSE THE WIRELESS INDUSTRY HAS EXPERIENCED HIGHER CUSTOMER ADDITIONS AND
HANDSET SALES IN THE FOURTH CALENDAR QUARTER AS COMPARED TO THE OTHER THREE
CALENDAR QUARTERS, A FAILURE BY US TO ACQUIRE SIGNIFICANTLY MORE CUSTOMERS IN
THIS QUARTER COULD HAVE A DISPROPORTIONATE NEGATIVE EFFECT ON THE MARKET VALUE
OF OUR CLASS A COMMON STOCK
The wireless industry is historically dependent on fourth calendar quarter
results. The price of our class A common stock may drop and 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:
- our inability to match or beat pricing plans offered by competitors;
- our failure to adequately promote Sprint PCS' products, services and
pricing plans;
- our inability to obtain an adequate supply or selection of handsets;
- a downturn in the economy of some or all of the markets in our territory;
or
- a poor holiday shopping season.
WIRELESS PROVIDERS OFFERING SERVICES BASED ON LOWER COST STRUCTURES OR
ALTERNATIVE TECHNOLOGIES AND CURRENT UNCERTAINTIES IN THE WIRELESS MARKET MAY
REDUCE DEMAND FOR PCS
Other wireless providers enjoy economies of scale that can result in a
lower cost structure for providing wireless services. Rapid technological
changes and improvements in the telecommunications
22
<PAGE> 27
market could lower other wireless providers' cost structures in the future.
These factors could reduce demand for PCS because of competitors' ability to
provide wireless services at a lower price. There is also uncertainty as to the
extent of customer demand as well as the extent to which airtime and monthly
recurring charges may continue to decline. As a result, our future prospects,
those of our industry, and the success of PCS and other competitive services,
remain uncertain.
Technological advances and industry changes could cause the technology used
on our network to become obsolete. We may not be able to respond to such changes
and implement new technology on a timely basis, or at an acceptable cost.
The wireless telecommunications industry is experiencing significant
technological change, as evidenced by the increasing pace of digital upgrades in
existing analog wireless systems, evolving industry standards, ongoing
improvements in the capacity and quality of digital technology, shorter
development cycles for new products and enhancements and changes in end-user
requirements and preferences.
If we are unable to keep pace with these technological changes or changes
in the telecommunications market based on the effects of consolidation from the
Telecommunications Act of 1996 or from the uncertainty of future government
regulation, the technology used on our network or our current business strategy
may become obsolete. In addition, wireless carriers are seeking to implement a
new "third generation," or "3G," technology throughout the industry. There can
be no assurance that we can implement the new 3G technology successfully on a
cost-effective basis.
REGULATION BY GOVERNMENT AGENCIES MAY INCREASE OUR COSTS OF PROVIDING
SERVICE OR REQUIRE US TO CHANGE OUR SERVICES, WHICH COULD IMPAIR OUR FINANCIAL
PERFORMANCE
The licensing, construction, use, operation, sale and interconnection
arrangements of wireless telecommunications systems are regulated to varying
degrees by the FCC, the Federal Aviation Administration, and, depending on the
jurisdiction, state and local regulatory agencies and legislative bodies.
Adverse decisions regarding these regulatory requirements could negatively
impact our operations and our cost of doing business.
USE OF HAND-HELD PHONES MAY POSE HEALTH RISKS, WHICH COULD RESULT IN THE
REDUCED USE OF OUR SERVICES OR LIABILITY FOR PERSONAL INJURY CLAIMS
Media reports have suggested that certain radio frequency emissions from
wireless handsets may be linked to various health problems, including cancer,
and may interfere with various electronic medical devices, including hearing
aids and pacemakers. Concerns over radio frequency emissions may discourage use
of wireless handsets or expose us to potential litigation. Any resulting
decrease in demand for our services, or costs of litigation and damage awards,
could impair our ability to profitably operate our business.
RISKS RELATING TO THE OFFERING
PURCHASERS IN THIS OFFERING WILL EXPERIENCE DILUTION
The initial public offering price is substantially higher than the net
tangible book value per share of the outstanding common stock will be
immediately after the offering. Any class A common stock you purchase in the
offering will have a post-offering net tangible book value per share of $10.12
less than the price you paid for the share, assuming an initial public offering
price of $12.00 per share, the mid-point of the proposed offering price range.
You will also experience dilution in the event of the exercise of the stock
options and warrants which we have granted. See "Dilution."
23
<PAGE> 28
POSSIBLE FUTURE SALES OF OUR CLASS A COMMON STOCK BY HORIZON TELCOM AND OUR
MANAGEMENT AND OTHER AFFILIATES COULD CAUSE THE MARKET PRICE OF OUR COMMON STOCK
TO DECREASE
The shares of class B common stock held by Horizon Telcom can be converted
at any time into class A common stock, which might then be sold into the public
market after the offering. The occurrence of those sales, or the perception that
they could occur, could materially and adversely affect our stock price and
could impair our ability to obtain capital through an offering of equity
securities. The shares of class A common stock being sold in this offering will
be freely transferable under the securities laws immediately after issuance,
except for any shares sold to our affiliates. Horizon Telcom, First Union,
former owners of Bright PCS, Sprint PCS, members of our senior management and
our directors have either entered into or have agreed to enter into written
lock-up agreements which provide that, for a period of 180 days from the date of
this prospectus, they will not sell their shares without the prior written
consent of Donaldson, Lufkin & Jenrette Securities Corporation. Upon the
expiration of the 180-day lock-up period, an additional 59.5 million shares of
our common stock will be eligible for sale in the public market subject, in most
cases, to holding period requirements and volume and other restrictions under
federal securities laws. We have agreed to enter into registration rights
agreements under which, subject to the applicable lock-up agreements, Sprint
PCS, the former owners of Bright PCS, holders of the convertible preferred stock
and holders of the warrants issued in our senior discount notes offering may
require us to register their shares. See "Description of Capital Stock" and
"Shares Eligible for Future Sale."
YOU MAY NOT RECEIVE A RETURN ON INVESTMENT THROUGH DIVIDEND PAYMENTS OR
UPON THE SALE OF YOUR SHARES
We do not anticipate paying any cash dividends on our common stock in the
foreseeable future. Instead, we intend to retain future earnings to fund our
growth. Therefore, you will not receive a return on your investment in our class
A common stock through the payment of dividends and may not realize a return on
your investment even if you sell your shares.
24
<PAGE> 29
FORWARD-LOOKING STATEMENTS
This prospectus contains statements about future events and expectations,
which are "forward-looking statements." Any statement in this prospectus that is
not a statement of historical fact may be a forward-looking statement. These
statements include:
- forecasts of growth in the number of consumers using PCS;
- statements regarding our plans for and costs of the remaining build-out
of our PCS network;
- statements regarding our anticipated revenues, expense levels, liquidity
and capital resources and projections of when we will launch additional
markets and achieve break-even operating cash flow; and
- other statements, including statements containing words such as
"anticipate," "believe," "plan," "estimate," "expect," "seek," "intend"
and other similar words that signify forward-looking statements.
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 the forward-looking statements. Specific
factors that might cause such a difference include, but are not limited to:
- our dependence on our affiliation with Sprint PCS;
- the need to successfully complete the build-out of our PCS network;
- our lack of operating history in several of our markets and anticipation
of future losses;
- our dependence on Sprint PCS' back office services;
- our dependence on the use of the Alliances' network in a portion of our
territory;
- potential fluctuations in our operating results;
- our substantial debt and the potential need for additional capital;
- our potential inability to expand our services and related products in
the event of substantial increases in demand for these services and
related products;
- changes or advances in technology;
- our competition;
- changes in government regulation; and
- our ability to attract and retain skilled personnel.
See additional discussion under "Risk Factors" beginning on page 8.
25
<PAGE> 30
USE OF PROCEEDS
The net proceeds to be received from the sale of the class A common stock
we are offering, after deducting underwriting discounts and commissions and
estimated offering expenses, will be approximately $106.7 million, or
approximately $122.8 million if the underwriters' over-allotment option is
exercised in full, assuming an initial public offering price of $12.00 per
share, the mid-point of the proposed offering price range. We intend to use the
net proceeds from this offering, together with cash on hand and available
borrowings under our new senior secured credit facility, to fund:
- repurchase of convertible preferred stock ($85.9 million);
- working capital requirements and operating losses; and
- general corporate purposes.
Pending these uses, we expect to invest the net proceeds from the sale of
the class A common stock in short-term investment grade securities which will
earn interest income.
We will retain broad discretion in the allocation of the net proceeds of
this offering. This discussion represents our best estimate of the allocation of
the net proceeds of the offerings based upon our current plans. Actual
expenditures may vary substantially from these estimates. We may decide to
reallocate the net proceeds within the above-described categories or to use
portions for other purposes. Additionally, we may use a portion of the net
proceeds to acquire or invest in businesses, products or technologies that are
complementary to our business. The timing and the coverage of our build-out plan
may change due to various reasons, including shifts in populations or network
focus, changes or advances in technology, acquisition of other markets,
businesses, products or technologies and factors causing a delay in the
build-out plan may cause changes in our use of the net proceeds. We currently do
not have any commitments or agreements for any acquisitions or investments of
this kind.
DIVIDEND POLICY
We intend to retain our future earnings, if any, to fund the development
and growth of our business. We do not anticipate paying any cash dividends in
the foreseeable future. Our future decisions concerning the payment of dividends
will depend upon our results of operations, financial condition and capital
expenditure plans, as well as any other factors that the board of directors, in
its sole discretion, may consider relevant. In addition, our indebtedness,
including the new senior secured credit facility and the senior discount notes,
restricts our ability to pay dividends.
26
<PAGE> 31
CAPITALIZATION
The following table shows our cash and cash equivalents, short-term debt
and capitalization as of June 30, 2000:
- Pro forma to reflect:
- our acquisition of Sprint PCS' network assets currently under
construction in our new markets in Pennsylvania, New York, Ohio and
New Jersey;
- the issuance of warrants to be granted to Sprint PCS to acquire
2,510,460 shares of class A common stock at an exercise price equal to
the initial public offering price per share;
- the dividend of substantially all of the shares of Horizon Telcom
common stock formerly held by us to our stockholders;
- the sale of $126.5 million of convertible preferred stock to an
investor group led by Apollo Management, less fees and expenses of
$6.3 million;
- the completion of our $149.7 million senior discount notes offering,
less estimated fees and expenses of $6.4 million;
- the closing of our new $225.0 million senior secured credit facility
and the repayment of all of our outstanding indebtedness under our
senior credit facilities with the RTFC, less estimated fees and
expenses of $7.3 million; and
- the issuance of 2.6 million shares of convertible preferred stock upon
conversion of a $13.4 million short-term convertible note plus accrued
interest.
- Pro forma, as adjusted to further reflect:
- the sale in this offering of 9,650,000 shares of class A common stock
at an assumed initial public offering price of $12.00 per share, the
mid-point of the proposed offering price range, less underwriting
discounts and commissions and estimated offering expenses of $9.1
million;
- the redemption of 15.8 million shares of convertible preferred stock
at $5.42 per share from the proceeds of this offering; and
- the conversion of the remaining 10.3 million shares of convertible
preferred stock into class A common stock upon completion of this
offering.
27
<PAGE> 32
<TABLE>
<CAPTION>
AS OF JUNE 30, 2000
----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
(IN THOUSANDS)
<S> <C> <C> <C>
Cash and cash equivalents(1)................................ $ 5,313 $264,412 $285,202
-------- -------- --------
Short-term convertible note................................. $ 13,418 $ -- $ --
======== ======== ========
Long-term debt:
RTFC financing(2)......................................... $ 32,079 $ -- $ --
Senior secured credit facility(3)......................... -- 50,000 50,000
Senior discount notes(4).................................. -- 129,435 129,435
Convertible preferred stock, no shares outstanding, actual
and pro forma as adjusted, and 26,003,478 shares
outstanding, pro forma(5)................................. -- 133,865 --
Stockholders' equity (deficit):
Preferred stock, 10,000,000 shares authorized; no shares
outstanding............................................ -- -- --
Class A common stock, par value $0.0001 per share,
125,000,000 shares authorized; no shares outstanding,
pro forma; 19,902,239 shares outstanding, pro forma as
adjusted............................................... -- -- 2
Class B common stock, par value $0.0001 per share,
75,000,000 shares authorized; 58,485,000 shares
outstanding, actual; 58,485,000 shares outstanding, pro
forma; 58,485,000 shares outstanding, pro forma as
adjusted............................................... 6 6 6
Treasury stock............................................ (111) (111) (111)
Additional paid-in capital(6)............................. 54,934 94,075 254,349
Retained deficit(7)....................................... (24,099) (41,892) (47,512)
-------- -------- --------
Total stockholders' equity............................. 30,730 52,078 206,734
-------- -------- --------
Total capitalization.............................. $ 62,809 $365,378 $386,169
======== ======== ========
</TABLE>
-------------------------
(1)Pro forma cash reflects the acquisition of Sprint PCS network assets of $15.0
million. Subsequent to June 30, 2000, pro forma as adjusted cash will be
reduced by an estimated $32.1 million to reflect the repayment of additional
amounts borrowed under our RTFC credit facility since June 30, 2000.
(2)The $32.1 million outstanding to the RTFC at June 30, 2000 includes $8.5
million of short-term debt.
(3)We closed a new $225.0 million senior secured credit facility. Our new senior
secured credit facility includes a $150.0 million term loan and a $75.0
million revolving credit facility. Under the terms of the credit facility we
were required to draw $50.0 million at closing.
(4)Pro forma and pro forma as adjusted reflect $149.7 million of gross proceeds
at issuance of the notes less a $20.3 million unrecognized discount
associated with the value of warrants issued in connection with this
offering. The unrecognized discount has been allocated to additional paid-in
capital.
(5)Pro forma reflects the sale of $126.5 million of our convertible preferred
stock less offering expenses of $6.3 million and the issuance of $13.6
million of additional convertible preferred stock upon conversion of our
$13.4 million short-term convertible note plus accrued interest.
(6)Pro forma reflects the issuance of warrants to Sprint PCS ($18.9 million) and
the unrecognized discount associated with the value of the warrants issued in
connection with the senior discount notes ($20.2 million). Additionally, pro
forma as adjusted reflects the issuance of the common stock in connection
with the initial public offering and the conversion of the convertible
preferred stock.
(7)Pro forma and pro forma as adjusted reflect the $7.9 million tax liability
arising from tax deconsolidation, the $5.9 million dividend of Horizon Telcom
common stock and the $3.6 million tax liability arising from the dividend.
Pro forma as adjusted also reflects the write-off of $378,000 in RTFC
deferred financing fees and the $5.6 million premium paid in the repurchase
of the convertible preferred stock.
All references to shares of class A or class B common stock in this
prospectus reflect a 1.1697-for-one stock split in the form of a stock dividend,
effective on September 8, 2000.
28
<PAGE> 33
DILUTION
Our pro forma net tangible book value at June 30, 2000, was $(7.3) million
or $(0.12) per share of common stock. Net tangible book value per share
represents the amount of total tangible assets less total liabilities, divided
by the number of shares outstanding. See "Pro Forma Financial Statements." After
giving effect to:
- the sale in this offering of 9,650,000 shares of class A common stock at
an assumed initial public offering price of $12.00 per share, the
mid-point of the proposed offering price range, less underwriting
discounts and commissions and estimated offering expenses of $9.1
million; and
- the issuance of approximately 10,252,139 shares of class A common stock
concurrent with this offering upon the conversion of a portion of the
convertible preferred stock,
our pro forma as adjusted net tangible book value as of June 30, 2000 would have
been approximately $147.4 million, or $1.88 per share. This represents an
immediate dilution of $10.12 per share to new purchasers of class A common stock
in this offering and an immediate increase in net tangible book value to
existing stockholders of $2.00 per share. The following table illustrates the
per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $12.00
------
Pro forma net tangible book value per share as of June 30,
2000...................................................... (0.12)
-----
Increase in net tangible book value per share attributable
to this offering and the conversion of a portion of the
convertible preferred stock............................... 2.00
-----
Pro forma as adjusted net tangible book value per share
after this offering and conversion of a portion of the
convertible preferred stock............................... 1.88
------
Dilution per share to new purchasers of class A common
stock..................................................... $10.12
======
</TABLE>
The following table summarizes, on a pro forma, as adjusted, basis as of
June 30, 2000, the number of shares of common stock purchased, the total
consideration paid and the average price per share paid by our existing
stockholders and by new purchasers of class A common stock in this offering,
with an assumed initial public offering price of $12.00 per share, before the
deduction of underwriting discounts and commissions and estimated offering
expenses of $9.1 million payable by us:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
----------------- ------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
<S> <C> <C> <C> <C> <C>
Existing stockholders (class B common
stock)(1)............................ 58.5 74.6% $ 54.7 24.3% $0.94
New purchasers (class A common
stock)............................... 19.9 25.4% $170.0 75.7% $8.54
---- ----- ------ -----
Total........................ 78.3 100.0% $224.7 100.0%
==== ===== ====== =====
</TABLE>
-------------------------
(1) Includes 4.7 million shares issued in connection with our acquisition of the
74% of Bright PCS not already owned by us. See "Business -- The
Reorganization."
29
<PAGE> 34
The foregoing tables assume no exercise of the underwriters' over-allotment
option and no exercise of outstanding stock options and warrants. See
"Management -- 2000 Stock Option Plan." Options to purchase 511,159 shares of
class B common stock are currently exercisable. The Sprint PCS warrants are not
currently exercisable. To the extent that any shares are issued in connection
with the underwriters' over-allotment option, the exercise of stock options, or
the exercise of the Sprint PCS warrants, you will experience a further reduction
in the percentage of outstanding shares that you own. See "Management -- 2000
Stock Option Plan," and "Description of Capital Stock -- Sprint PCS Warrants."
30
<PAGE> 35
SELECTED CONSOLIDATED FINANCIAL DATA
On April 26, 2000, Horizon Telcom, Inc. 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, 1999, and
selected unaudited consolidated historical financial data for the six months
ended June 30, 1999 and 2000. We derived the statements of income and balance
sheet data as of and for the periods ended December 31, 1997, 1998 and 1999 for
Horizon PCS from the audited consolidated financial statements of Horizon PCS.
We derived the financial data of all other periods from the unaudited
consolidated financial statements of Horizon PCS. In the opinion of management,
the unaudited consolidated financial statements have been prepared on the same
basis as the audited consolidated financial statements and include all normal
and recurring adjustments and accruals necessary for a fair presentation of such
information. Financial results for the six months ended June 30, 2000 are not
necessarily indicative of the results that may be expected for the full year.
The following information should be read together with "Capitalization,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Pro Forma Financial Statements" and the consolidated financial
statements and notes included elsewhere in this prospectus.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------------------------- ------------------
1995 1996 1997 1998 1999 1999 2000
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AND OTHER DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME DATA:
Operating revenues:
Service revenues................................ $ -- $ -- $ 26 $ 459 $ 3,903 $ 1,318 $ 7,469
Equipment revenues.............................. -- -- 138 309 600 244 1,095
------- ------- ------- -------- -------- -------- -------
Total revenues................................ -- -- 164 768 4,503 1,562 8,564
------- ------- ------- -------- -------- -------- -------
Operating expenses:
Cost of service and equipment................... -- -- 941 4,905 9,741 3,905 11,530
Selling, general and administrative expenses.... 289 845 2,500 3,770 7,922 3,239 8,378
Non-cash compensation expense................... -- -- -- -- 291 -- 172
Depreciation and amortization................... 19 13 419 1,748 2,685 1,178 1,779
------- ------- ------- -------- -------- -------- -------
Total operating expenses...................... 308 858 3,860 10,423 20,639 8,322 21,859
------- ------- ------- -------- -------- -------- -------
Operating loss................................ (308) (858) (3,696) (9,655) (16,136) (6,760) (13,295)
Interest expense, net........................... (24) -- (264) (838) (1,529) (641) (1,738)
Gain on exchange of stock....................... -- -- -- -- -- -- 10,513
Other income (expense), net..................... (9) 58 100 (1,690) 1,440 4 531
------- ------- ------- -------- -------- -------- -------
Loss from continuing operations before income
taxes....................................... (341) (800) (3,860) (12,183) (16,225) (7,397) (3,989)
Income tax benefit.............................. 116 262 1,308 4,145 5,275 2,449 2,031
------- ------- ------- -------- -------- -------- -------
Loss from continuing operations............... $ (225) $ (538) $(2,552) $ (8,038) $(10,950) $ (4,948) $(1,958)
======= ======= ======= ======== ======== ======== =======
PER SHARE DATA:
Basic and diluted loss per share of common stock
from continuing operations...................... $ (0.00) $ (0.01) $ (0.05) $ (0.15) $ (0.20) $ (0.09) $ (0.04)
</TABLE>
31
<PAGE> 36
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------------------------- ------------------
1995 1996 1997 1998 1999 1999 2000
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AND OTHER DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Number of PCS subscribers(1)...................... -- -- 312 2,091 13,749 4,660 26,980
Total population in our markets (millions)........ -- -- 0.1 1.6 4.9 1.6 10.2
ARPU (including roaming)(2)....................... -- -- NM $ 44 $ 58 $ 66 $ 63
ARPU (excluding roaming)(2)....................... -- -- NM 42 49 55 46
</TABLE>
<TABLE>
<CAPTION>
AS OF
AS OF DECEMBER 31, JUNE 30, 2000
----------------------------------------------- -------------------------
1995 1996 1997 1998 1999 ACTUAL PRO FORMA
(IN THOUSANDS) AS ADJUSTED(3)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................. $ 185 $11,132 $ 200 $ 27 $ 147 $ 5,313 $285,202
Total property and equipment, net.......... 395 1,435 14,996 17,880 22,894 38,148 53,148
Total assets............................... 4,979 25,102 33,328 26,862 32,879 101,591 422,835
Total debt................................. -- 10,116 16,611 21,180 24,590 45,497 179,435
Total liabilities.......................... 9,432 25,045 29,094 24,919 35,042 70,861 216,101
Total stockholders' equity (deficit)....... (4,453) 57 4,234 1,943 (2,163) 30,730 206,734
</TABLE>
-------------------------
(1) Represents the number of PCS subscribers at the end of each period.
(2) Represents average monthly revenue per unit (subscriber). For more detail on
how ARPU is computed, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Results of Operations."
(3) The pro forma as adjusted Balance Sheet Data reflects (a) the sale in this
offering of 9,650,000 shares of class A common stock at assumed initial
public offering price of $12.00 per share, the mid-point of the proposed
offering range, less underwriters discounts and commissions and estimated
offering expenses of $9.1 million, (b) the issuance of approximately 10.2
million shares of class A common stock upon conversion of a portion of our
convertible preferred stock, and (c) the redemption of approximately 15.8
million shares of convertible preferred stock for approximately $85.9
million.
32
<PAGE> 37
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the consolidated financial statements and the related notes included elsewhere
in this prospectus. The discussion contains forward-looking statements that
involve risks and uncertainties. Our actual results could differ materially from
the results anticipated in these forward-looking statements as a result of
factors including, but not limited to, those under "Risk Factors" and elsewhere
in this prospectus.
OVERVIEW
As of October 31, 2000, we had launched service in 38 markets covering
approximately 4.9 million residents, or approximately 48% of the total
population in our territory. As of September 30, 2000, we had approximately
36,000 customers. We expect to launch all of our markets and be offering service
to approximately 6.9 million residents, or approximately 68% of the total
population in our territory, by the end of the third quarter of 2001, at which
time our planned network build-out will be substantially complete.
Sprint PCS has invested approximately $57.0 million to purchase the PCS
licenses in our territory and has incurred additional expenses for microwave
clearing. Under the Sprint PCS agreements, we manage our network on Sprint PCS'
licensed spectrum and have the right to use the Sprint and Sprint PCS brand
names.
HISTORY AND BACKGROUND
Horizon PCS is a wholly-owned subsidiary of Horizon Telcom. Horizon Telcom
is a holding company which, in addition to Horizon PCS, owns 100% of The
Chillicothe Telephone Company, a local telephone company in service for 105
years. Horizon Telcom also owns 100% of Horizon Services, which provides
administrative services to Horizon PCS and other Horizon Telcom affiliates, and
100% of United Communications, a separate long distance and Internet services
business. Prior to providing PCS service, we were a DirecTV affiliate. We sold
that business in 1996. We also launched a successful Internet services business
in 1995, which we transferred to United Communications in April 2000.
The following are key milestones in our business:
- In November 1996, we acquired PCS licenses in the FCC's C Block auction
giving us the right to provide service to five markets in Ohio, West
Virginia and Kentucky with a total population of approximately 1.0
million. In August 1997, approximately ten months after receiving our
licenses, we launched PCS Service as an independent service provider
operating under the Horizon Personal Communications brand name. We were
the third C Block licensee to launch PCS service in the United States and
the first to use CDMA technology.
- In June 1998, we returned all of our FCC licenses except for a portion of
the license covering our Chillicothe, Ohio market, in exchange for the
forgiveness of our FCC debt. In connection with the return of our FCC
licenses, we agreed to become one of five charter Sprint PCS affiliates.
Our initial grant of markets from Sprint PCS consisted of seven markets
in Ohio, West Virginia and Kentucky with a total population of
approximately 1.6 million. This grant included the five markets for which
we originally held licenses. In November 1998, we began offering Sprint
PCS service. However, we continued to use Horizon Personal Communications
as the primary brand for marketing our PCS service.
33
<PAGE> 38
- In August 1999, Sprint PCS granted us 17 additional markets in Virginia,
West Virginia, Tennessee, Maryland, Kentucky and Ohio with a total
population of approximately 3.3 million. In conjunction with this second
grant, we also entered into a network services agreement with the West
Virginia PCS Alliance and Virginia PCS Alliance, which we refer to as the
Alliances. The Alliances are two related independent PCS providers
offering services under the Intelos brand, and whose network is managed
by CFW Communications. Under this agreement, we obtained the right to use
their wireless network to provide Sprint PCS services to our customers in
most of these new markets. Within two months of receiving our second
grant from Sprint PCS, we were offering Sprint PCS service in 16 of our
markets including eleven markets served under this agreement. If we use
the Alliances' network to the fullest extent permitted by our agreement,
the Alliances' network would provide service to markets with a total
population of 3.3 million and coverage to 1.8 million residents, or 52%
of the total population.
- In September 1999, Horizon Telcom, our parent company, sold its interest
in the towers it owned to SBA for $15.7 million and invested the net
proceeds in us. Prior to the sale, we had been leasing the towers from
Horizon Telcom. We now lease those towers from SBA. Concurrently with the
tower sale, we entered into a build-to-suit agreement with SBA for the
construction of new towers as part of our network build-out. Under the
terms of the agreement, we receive site development fees and reduced
lease rates for specified towers constructed by SBA and leased to us as
an anchor tenant.
- In September 1999, we became one of the founders of Bright PCS, receiving
a 26% equity stake in exchange for approximately $3.1 million. Shortly
after our investment, Bright PCS became the exclusive Sprint PCS
affiliate for 13 markets in Indiana, Ohio and Michigan, with a total
population of approximately 2.4 million. At that time, we also entered
into a management agreement with Bright PCS under which we agreed to
manage all of Bright PCS' network build-out and operations. We launched
service in substantially all of the Bright PCS markets in October 2000.
- In December 1999, we completed a two-month transition from a co-branded
marketing strategy to marketing and selling all of our products and
services exclusively under the "Sprint PCS" brand name, which gave us
full access to Sprint PCS' major national retailers. Since that
transition, we have experienced an accelerated growth in our customer
base.
- In May 2000, Sprint PCS granted us an additional 17 markets in
Pennsylvania, New York, Ohio and New Jersey with a total population of
approximately 2.9 million. In September 2000, we completed the purchase
from Sprint PCS of the assets related to our new markets.
- In June 2000, we acquired the remaining 74% of Bright PCS that we did not
already own to become a 100% owner. As consideration for the outstanding
Bright PCS equity, we exchanged 4.7 million shares of our class B common
stock equal to 8% of our outstanding shares of all classes of our common
stock prior to this offering, and 31,911 shares of Horizon Telcom common
stock equal to 8% of the outstanding shares of Horizon Telcom, which we
acquired in February 2000.
RESULTS OF OPERATIONS
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
34
<PAGE> 39
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 selling, general and administrative expenses.
Equipment revenues consist of digital handsets and accessories sold to our
customers. Certain of our equipment sales are made through independent
distributors under agreements allowing rights of return on merchandise unsold by
the distributors. We defer recognition of such sales until the merchandise is
sold by the distributors.
The following table sets forth a breakdown of our revenues by type.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------------------ ---------------------------
1997 1998 1999 1999 2000
% (DOLLARS IN THOUSANDS, EXCEPT ARPU)
AMOUNT AMOUNT % AMOUNT % AMOUNT % AMOUNT %
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Service revenues................ $ 26 16% $ 459 60% $3,903 87% $1,318 84% $7,469 87%
Equipment revenues.............. 138 84% 309 40% 600 13% 244 16% 1,095 13%
---- ------ ------ ------ ------
Total revenues.................. $164 $ 768 $4,503 $1,562 $8,564
==== ====== ====== ====== ======
ARPU (including roaming)(1)..... NM $ 44 $ 58 $ 66 $ 63
ARPU (excluding roaming)(1)..... NM 42 49 55 46
</TABLE>
(1) ARPU, average revenue per unit, is an industry term that measures total PCS
service revenues per month from our subscribers divided by the average
number of digital subscriber units for that month. ARPU, including roaming,
is ARPU with Sprint PCS roaming and non-Sprint PCS roaming. ARPU excluding
roaming, excludes Sprint PCS roaming and non-Sprint PCS roaming.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
SERVICE REVENUES. Service revenues for the six months ended June 30, 2000
were $7.5 million, compared to $1.3 million for the six months ended June 30,
1999, an increase of $6.2 million. The growth in service revenues is primarily
the result of the growth in PCS subscriber revenues of $3.8 million which
reflects the growth in our customer base, offset in part by a decline in average
revenue per customer. We had 26,980 customers at June 30, 2000, compared to
4,660 at June 30, 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. Our growth in revenues also
reflects a significant increase in Sprint PCS roaming revenues from
approximately $200,000 in 1999 to approximately $1.9 million in 2000. 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. These interstate highways represent less than 15% of our total
interstate miles, and we expect continued increases in Sprint PCS roaming
revenues as we complete the remainder of our network build-out, including
completing other portions of our network covering additional heavily traveled
highways. ARPU decreased from the six months ended June 30, 1999 to the six
months ended June 30, 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
35
<PAGE> 40
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.
EQUIPMENT REVENUES. Equipment revenues consist of handsets and accessories
sold to customers. Equipment revenues for the six months ended June 30, 2000
were $1.1 million, compared to $244,000 for the six months ended June 30, 1999,
an increase of $856,000. The increase in equipment revenues is the result of our
increase in customers.
COST OF SERVICES. Cost of services includes site rent, utilities,
maintenance, engineering and network personnel, interconnection expenses, Sprint
PCS roaming fees, non-Sprint roaming fees, and other expenses related to
operations. 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 services are costs incurred under our network services
agreement with the Alliances. We pay the Alliances a per minute use charge
whenever our customers or Sprint PCS subscribers use their network.
Under our build-to-suit agreement with SBA, we will receive site
development fees for towers SBA constructs and leases to us. Each site
development fee received is recorded as a deferred credit and is amortized over
the term of the lease, thereby effectively reducing our tower lease expense. We
expect to begin receiving site development fees in the third quarter of 2000.
Cost of services for the six months ended June 30, 2000 was $7.4 million,
compared to $2.7 million for the six months ended June 30, 1999, an increase of
$4.7 million. This increase reflects the increase in engineering and network
personnel expenses of $524,000, the increase in Sprint PCS roaming fees of $1.8
million, the increase in non-Sprint roaming fees of $300,000 and the increase in
costs incurred under our network services agreement with the Alliances of $1.8
million. Cost of services has declined as a percentage of service revenues, and
we believe that these costs will continue to decline as a percentage of service
revenues.
COST OF EQUIPMENT. Cost of equipment includes the costs of handsets and
accessories sold to customers. Cost of equipment for the six months ended June
30, 2000 was $4.1 million, compared to $1.2 million for the six months ended
June 30, 1999, an increase of $2.9 million. The increase in the cost of
equipment is the result of the growth in our wireless customers (4,660 customers
at June 30, 1999 compared to 26,980 at June 30, 2000), partially offset by the
decreasing 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, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expenses consist of sales and marketing expenses and general and
administrative costs. Sales and marketing expenses relate to salaries and
commissions paid to our sales representatives and sales support personnel,
commissions paid to national and local third party distribution channels,
operating costs associated with our retail stores, costs associated with
distribution channels and marketing and advertising programs. General and
administrative costs relate to corporate personnel, including executives and
customer care. The 8% of collected service revenues retained by Sprint PCS is
included in selling, general and administrative costs.
Also included in general and administrative costs are costs associated with
functions performed for us by Horizon Services under our services agreement.
These include finance functions, billing and collections, 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
36
<PAGE> 41
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.
These services are provided for under a five-year agreement. We have the
right to terminate the agreement at any time, subject to notice requirements.
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.
In May 2000, we agreed to begin purchasing certain back office services,
including customer activation, billing and customer care, directly from Sprint
PCS. Previously, we provided these services ourselves. We will purchase these
services from Sprint PCS at rates which reflect Sprint PCS' economies of scale.
We expect that the total cost of these services will be at or below the total
cost of providing the services ourselves due to anticipated rate reductions and
Sprint PCS' ability to economically manage the support of new services. We also
believe this arrangement will allow us to more quickly roll out new Sprint PCS
products and services in our markets. We expect to launch new markets using
Sprint PCS back office services. We also expect to transition our existing
customers to Sprint PCS' back office services beginning in the third quarter of
2000. The transition to Sprint PCS' back office services should be completed by
the end of 2001.
Selling, general and administrative expenses rose to $8.4 million for the
six months ended June 30, 2000, compared to $3.2 million for the same period in
1999, an increase of $5.2 million. This increase reflects the 8% fee paid to
Sprint PCS on our increased collected service revenues (an increase of
$383,000), the costs of additional sales and marketing personnel (an increase of
$640,000), additional customer support personnel and associated activities (an
increase of $916,000), commissions paid to national and local third party
distribution channels (an increase of $758,000) and increased headcount and
professional services at Horizon Services needed to support our growth (an
increase of $1.4 million). We expect selling, general and administrative
expenses to increase in the aggregate as we expand our coverage and add
customers, but to decrease as a percentage of service revenues.
NON-CASH COMPENSATION EXPENSE. For the six months ended June 30, 2000, we
recorded stock-based compensation expense of $172,000 associated with 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 $344,000 in 2000, $425,000 in 2001, $397,000 in
2002, $373,000 in 2003, $193,000 in 2004, and $71,000 in 2005.
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization
expenses increased by $600,000 to a total of $1.8 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 intangible assets.
GAIN ON EXCHANGE OF STOCK. We transferred 40% of our Horizon Telcom stock
to the former members of Bright PCS as consideration for the acquisition of
Bright PCS. This transaction resulted in a gain of $10.5 million.
OTHER INCOME (EXPENSE). Other income (expense) in 2000 was $530,000 and
consisted primarily of interest income of approximately $34,000 and dividend
income of approximately $523,000.
37
<PAGE> 42
INTEREST EXPENSE, NET. Interest expense for the six months ended June 30,
2000 was $1.7 million, compared to $641,000 in 1999, and consisted of interest
on debt. The increase in interest expense is the result of increase in
borrowings on the RTFC financing used to build out our network resulting in an
increase in interest expense of $204,000 and the $13.0 million short-term
convertible note issued to obtain funds used to purchase common stock of Horizon
Telcom resulting in an increase in interest expense of $616,000.
INCOME TAX BENEFIT. Until September 2000, we were included in the
consolidated federal income tax return of Horizon Telcom. We provide for federal
income taxes on a pro-rata basis, consistent with a consolidated tax-sharing
agreement. For the six months ended June 30, 2000, we recorded an income tax
benefit of $2.0 million. A valuation allowance of $1.4 million was recorded in
2000 for the amount of the deferred tax assets that exceeded the deferred tax
liabilities at June 30, 2000. As a result of the sale of the convertible
preferred stock in September 2000, we will no longer be included in the
consolidated tax return. As a result, 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 start to generate taxable income.
LOSS FROM CONTINUING OPERATIONS. Our loss from continuing operations for
the six months ended June 30, 2000 was $2.0 million compared to $4.9 million for
the six months ended June 30, 1999. The decrease in our loss reflects the $10.5
million gain on exchange of stock offset by continued expenses relative to
launching our markets and building our customer base.
DISCONTINUED OPERATIONS. As of April 2000, we transferred our Internet,
long distance and other businesses unrelated to the wireless operations to
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 six
months ended June 30, 2000 and $139,000 for the six months ended June 30, 1999.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
SERVICE REVENUES. Service revenues for the year ended December 31, 1999
were $3.9 million, compared to $459,000 for the year ended December 31, 1998, an
increase of $3.4 million. The growth in revenues is the result of the growth in
PCS subscriber revenues of $2.6 million which reflects the growth in our
customer base. We had 13,749 customers at December 31, 1999, compared to 2,091
at December 31, 1998. We have experienced increased growth in our customer base
at the end of 1999 as a result of full branding with Sprint PCS in October 1999
and as a result of utilization of Sprint PCS' national third-party distribution
channels. The growth in revenues also reflects the growth in Sprint PCS roaming
revenues from a nominal amount in 1998 to approximately $642,000 in 1999. This
was the first year we recognized significant roaming revenue. This increase
primarily resulted from the launch of portions of our network covering two
heavily traveled interstate highways in western Virginia. ARPU increased from
the year ended December 31, 1998 to the year ended December 31, 1999. In 1998 we
had substantial promotions for our subscribers, which were phased out in 1999.
In addition, in 1999 we experienced a significant growth in the charges to our
customers for minute sensitive usage (long distance and overage) and a
significant growth in Sprint PCS roaming revenue.
EQUIPMENT REVENUES. Equipment revenues for the year ended December 31,
1999 were $600,000, compared to $309,000 for the year ended December 31, 1998,
an increase of $291,000. The increase in equipment revenues is the result of our
increase in customers.
COST OF SERVICES. Cost of services related to service revenues for the
year ended December 31, 1999 was $7.0 million, compared to $3.9 million for the
year ended December 31, 1998, an increase
38
<PAGE> 43
of $3.1 million. This increase reflects the increase in our operations to
service our growing customer base.
COST OF EQUIPMENT. Cost of equipment for the year ended December 31, 1999
was $2.7 million compared to $994,000 for the year ended December 31, 1998, an
increase of $1.7 million. The increase in the cost of equipment is the result of
the growth in our customer base.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expenses rose to $7.9 million for the year ended December 31,
1999, compared to $3.8 million for the same period in 1998, an increase of $4.1
million. This increase reflects the 8% fee paid to Sprint PCS on our increased
collected service revenues (an increase of $130,000), the costs of additional
sales and marketing personnel and associated activities (an increase of $1.7
million), additional customer support personnel (an increase of $602,000) and
increased headcount and professional services at Horizon Services needed to
support our growth (an increase of $536,000). We expect selling, general and
administrative expenses to increase as we expand our coverage and add customers.
NON-CASH COMPENSATION EXPENSE. For the year ended December 31, 1999, we
recorded stock-based compensation expense of $291,000 associated with certain
stock option grants in November 1999.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased by
$937,000 to a total of $2.7 million for the year ended December 31, 1999. The
increase reflects the continuing construction of our network.
GAIN ON SALE OF PCS ASSETS. During 1999, in connection with entering the
network services agreement with the Alliances, we sold certain PCS ancillary and
base station equipment to the Alliances. The sale resulted in a gain of
approximately $1.4 million, representing the excess of cash proceeds over the
historical net book value of the assets sold.
OTHER INCOME (EXPENSE). Other income (expense) for the years ended
December 31, 1999 and 1998 of $52,000 and $27,000, respectively, consists
primarily of interest and dividend income.
INTEREST EXPENSE, NET. Interest expense for the year ended December 31,
1999 was $1.5 million compared to $838,000 for the year ended December 31, 1998,
and consisted of interest on debt in excess of the amount capitalized for the
purpose of completing the network build-out. The increase in interest expense is
the result of increased borrowings on the RTFC financing to finance the build
out of our network.
INCOME TAX BENEFIT. In 1999, 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. For the
year ended December 31, 1999, we recorded an income tax benefit of $5.3 million.
A valuation allowance of $138,000 was recorded in 1999 for the amount of the
deferred tax assets that exceeded the deferred tax liabilities at December 31,
1999.
LOSS FROM CONTINUING OPERATIONS. Our loss from continuing operations for
the year ended December 31, 1999 was $11.0 million compared to $8.0 million for
the year ended December 31, 1998. The increase in our loss reflects the
continued expenses relative to launching our markets and building our customer
base.
DISCONTINUED OPERATIONS. As of April 2000, we transferred our Internet,
long distance and other businesses unrelated to the wireless operations to
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 $282,000 in 1999 and
$53,000 in 1998.
39
<PAGE> 44
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
SERVICE REVENUES. Service revenues for the year ended December 31, 1998
were $459,000 compared to $26,000 for the year ended December 31, 1997, an
increase of $433,000. PCS service was launched in August 1997. The growth in
revenues is the result of the growth in our customer base. We had 2,091
subscribers on December 31, 1998, compared to 312 on December 31, 1997. We
experienced the growth in customers as the result of becoming co-branded with
Sprint PCS in June 1998 and the continued build-out of our network.
EQUIPMENT REVENUES. Equipment revenues for the year ended December 31,
1998 were $309,000, compared to $138,000 for the year ended December 31, 1997,
an increase of $171,000. The growth in revenues is the result of the growth in
our customer base.
COST OF SERVICES. Cost of services for the year ended December 31, 1998
was $3.9 million, compared to $519,000 for the year ended December 31, 1997, an
increase of $3.4 million. This increase reflects the increase in our operations
to service our growing customer base.
COST OF EQUIPMENT. Cost of equipment for the year ended December 31, 1998
was $994,000, compared to $422,000 for the year ended December 31, 1997, an
increase of $572,000. The increase in the cost of equipment is the result of the
growth in our customer base.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expenses rose to $3.8 million for the year ended December 31,
1998, compared to $2.5 million for the same period in 1997, an increase of $1.3
million. These increased costs reflect the overall growth in our business.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased by
$1.3 million to a total of $1.7 million in 1998. The increase reflects the
continuing construction of our network.
LOSS ON DISPOSITION OF PERSONAL COMMUNICATIONS LICENSES. In June 1998, we
returned four of our FCC licenses and a portion of our license in Chillicothe,
Ohio. In connection with the disposition of these licenses we recorded a loss of
$1.7 million.
OTHER INCOME (EXPENSE). Other income (expense) for the years ended
December 31, 1998 and 1997 of $27,000 and $100,000, respectively, consists
primarily of interest and dividend income.
INTEREST EXPENSE, NET. Interest expense for the year ended December 31,
1998 was $838,000, and consisted of interest on debt in excess of the amount
capitalized for the purpose of completing the network build out. The increase in
interest expense is the result of increased borrowings on the RTFC financing.
INCOME TAX BENEFIT. For the years ended December 31, 1998 and 1997, we
recorded an income tax benefit of $4.1 million and $1.3 million, respectively.
No valuation allowance was considered necessary as the tax loss was realizable
on the consolidated tax return of Horizon Telcom.
LOSS FROM CONTINUING OPERATIONS. Our loss from continuing operations for
the year ended December 31, 1998 was $8.0 million compared to $2.5 million for
the year ended December 31, 1997. The increase in our loss reflects the
continued expenses relative to launching our markets and building our customer
base.
DISCONTINUED OPERATIONS. As of April 2000, we transferred our Internet,
long distance and other businesses unrelated to the wireless operations to
United Communications, a separate subsidiary of Horizon Telcom, at net book
value. In May 1997, we sold a portion of our telecommunication system sales
business and transferred the remaining operations of this business to The
Chillicothe Telephone Company, a sister company, 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 $52,000 in 1998 and loss from
discontinued operations, net of tax benefit, was $487,000 in 1997.
40
<PAGE> 45
LIQUIDITY AND CAPITAL RESOURCES
Through September 2000, we financed our operations through equity
contributions from Horizon Telcom and through debt financing provided by the
RTFC. As of June 30, 2000, we had received $20.9 million of equity contributions
from Horizon Telcom consisting of $18.4 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 six months ended June
30, 2000 consisted of $1.1 million in cash contributions.
We expect that our future funding needs, including our anticipated funding
needs over the next 12 months, will be provided by our existing working capital,
proceeds from this offering, and borrowings under our new senior secured credit
facility. From July 1, 2000 to June 30, 2001, we anticipate that our funding
needs requirements will be approximately $151.6 million, of which approximately
$107.0 million will be used for capital expenditures, $11.5 million will be used
for tax payments, and the remainder will be utilized primarily to fund working
capital and operating losses.
The senior discount notes were issued with aggregate principal amount
sufficient to generate gross proceeds of $149.7 million. These 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 senior discount
notes are general unsecured obligations. The senior discount notes 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 senior
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 new $225.0 million senior secured credit facility.
As of December 31, 1999 and June 30, 2000, we had drawn $23.6 million and
$32.1 million, respectively, from our credit facilities with the RTFC. In
September 2000, all debt outstanding under the RTFC credit facility was repaid
using borrowings under the new senior secured credit facility and proceeds from
our other debt and equity financing, and we received approximately $1.2 million
from the RTFC in redemption of the subordinated capital certificates acquired in
connection with our RTFC borrowings.
Our new senior secured credit facility consists of the following two loans
to provide funds for the build-out of our expansion markets:
- a $150.0 million term loan, available in a $50.0 million tranche and a
$100.0 million tranche, under which we may borrow to finance (i) the
repayment of amounts due under the RTFC credit facility, (ii) the direct
cost of the construction and operation of a regional digital wireless
telecommunications network on the Sprint PCS System; (iii) transaction
costs and expenses; and (iv) working capital and other general corporate
purposes.
- a $75.0 million revolving credit facility, the proceeds of which may be
used to fund working capital and other general corporate purposes.
During the six months ended June 30, 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. This note subsequently accreted to $13.4
million at June 30, 2000. In September 2000, the $13.4 million short-term
convertible note, plus accrued interest, was converted into shares of
convertible preferred stock. In May 2000, we exchanged 31,911 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.
41
<PAGE> 46
Net cash used in operating activities was $3.5 million for the six months
ended June 30, 2000. This reflects the continuing use of cash for our
operations. Net cash used in investing activities was $17.0 million for the six
months ended June 30, 2000. The expenditures were related primarily to the
acquisition of 19.78% of the outstanding common stock of Horizon Telcom for
$11.8 million offset by the cash acquired in the acquisition of Bright PCS of
$4.9 million. Our capital expenditures were $3.1 million in 1999 and $9.8
million for the six months ended June 30, 2000. This reflects the impact of our
agreement with the Alliances whereby we are not required to build out our
network to provide service to our customers in the markets covered by that
agreement. Net cash provided by financing activities for the six months ended
June 30, 2000 was $25.7 million consisting primarily of borrowings under our
$13.4 million short-term convertible note to finance the acquisition of 19.78%
of the outstanding common stock of Horizon Telcom and borrowings of $8.5 million
from RTFC for capital expenditures and working capital.
During 1999 and the six months ended June 30, 2000, Horizon Telcom paid an
aggregate of $5.2 million and $1.2 million, respectively, to us under our
tax-sharing agreement with Horizon Telcom. After the sale of the convertible
preferred stock, we are no longer included in the consolidated tax return of
Horizon Telcom. As a result, we will not be able to participate in the
tax-sharing agreement and will not receive further payments from Horizon Telcom.
In addition, as a result of this change in our tax status, we recognized a tax
liability of approximately $7.9 million. This liability will become payable in
the fourth quarter of 2000.
We anticipate that the proceeds from this offering, when combined with our
existing cash, proceeds from our senior discount notes offering and the sale of
the convertible preferred stock, and borrowings under our new senior 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. The following table sets forth our
estimated sources and uses from June 30, 2000 through December 31, 2003:
<TABLE>
<CAPTION>
AMOUNT
(IN MILLIONS)
<S> <C>
SOURCES:
Cash on hand at June 30, 2000(1)............................ $ 5.3
Gross proceeds of this offering............................. 115.8
Gross proceeds from our issuance of our convertible
preferred stock........................................... 126.5
Gross proceeds from our senior discount notes offering...... 149.7
Borrowings under our new senior secured credit facility..... 225.0
Anticipated build-to-suit site development fees(2).......... 8.2
Additional borrowings under the RTFC credit facility........ 30.8
Proceeds from redemption of RTFC subordinated capital
certificates.............................................. 1.2
--------
Total sources.......................................... $ 662.5
========
</TABLE>
42
<PAGE> 47
<TABLE>
<CAPTION>
AMOUNT
(IN MILLIONS)
<S> <C>
USES:
Capital expenditures(3)..................................... $ 194.0
Working capital and operating losses(4)..................... 99.1
Repayment of RTFC indebtedness (principal and interest)..... 64.2
Repurchase of convertible preferred stock................... 85.9
Debt service on our senior secured debt facility(5)......... 25.2
Tax payments................................................ 11.5
Fees and expenses(6)........................................ 29.1
--------
Total uses............................................. 509.0
Cash on hand at December 31, 2003...................... 153.5
--------
Total uses and cash on hand at December 31, 2003....... $ 662.5
========
</TABLE>
-------------------------
(1) Represents cash on hand at June 30, 2000.
(2) In connection with our build-to-suit agreement with SBA, we will receive
site development fees from SBA for tower sites which SBA constructs on our
behalf.
(3) Capital expenditures include the amounts related to the build-out of our
network, which includes the purchase of $15.0 million of Sprint PCS' network
assets currently under construction in our new markets in Pennsylvania, New
York, Ohio and New Jersey.
(4) Operating losses are defined as losses before interest, taxes, depreciation
and amortization.
(5) Payment of interest and required principal repayments on our new senior
secured credit facility, net of interest income.
(6) Fees and expenses include estimated offering expenses and underwriting
discounts and commissions for this offering, fees and expenses related to
the issuance of convertible preferred stock, offering fees and expenses
related to our senior discount notes offering, and origination and other
fees related to our new senior secured credit facility.
The actual funds required to build-out of 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 an expansion of
our territory, unforeseen delays, cost overruns, unanticipated expenses,
regulatory changes, engineering design changes and required technological
upgrades and other technological risks.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We do not engage in commodity futures trading activities and do not enter
into derivative financial instruments for trading or other speculative purposes.
We also do not engage in transactions in foreign currencies that would expose us
to market risk.
We will be subject to interest rate risk on our new senior secured credit
facility and any future floating rate financing requirements.
The following table presents the estimated future outstanding long-term
debt at the end of each year and future required annual principal payments for
each year then ended associated with our new
43
<PAGE> 48
senior secured credit facility and our senior discount notes financing based on
our projected level of long-term indebtedness:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
----------------------------------------------
2000 2001 2002 2003 2004 THEREAFTER
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Senior secured credit facility... $ 50.0 $150.0 $150.0 $150.0 $150.0 --
Variable interest rate(1)...... 10.5% 10.5% 10.5% 10.5% 10.5% 10.5%
Principal payments............. -- -- -- -- -- $150.0
Senior discount notes............ $155.2 $177.7 $203.4 $232.9 $266.7
Fixed interest rate(2)......... 14.0% 14.0% 14.0% 14.0% 14.0% 14.0%
Principal payments............. -- -- -- -- -- $295.0
</TABLE>
-------------------------
(1) Interest rate on the senior secured credit facility equals the London
Interbank Offered Rate ("LIBOR") plus a margin that varies from 3.5% to
4.0%. The interest rate is assumed to equal 10.5% for all periods presented.
(2) Assumed interest rate for senior discount notes, which will be paid in full
in 2010.
Our primary market risk exposure relates to:
- the interest rate risk on long-term and short-term borrowings, and
- the impact of interest rate movements on our ability to meet interest
expense requirements and meet financial covenants.
The carrying value of the financial instruments approximate fair value.
IMPACT OF YEAR 2000 ISSUE ON THE OPERATIONS AND FINANCIAL CONDITION OF HORIZON
PCS
We rely on several third-party vendors and providers to operate our
business, including Sprint PCS. Sprint PCS will begin providing us back office
services and access to its network. We have also contracted with other
third-party vendors and other providers and believe they are year 2000
compliant.
We have not experienced any material disruptions of our systems or
operations as a result of the year 2000 issue nor are we aware of any
disruptions in the systems or operations of Sprint PCS or other third-party
vendors and providers. While we believe our systems are year 2000 compliant,
there is the risk that they may not be compliant. We believe our greatest risk
is the failure of the systems of our third-party vendors or providers. However,
should we experience any failure, we believe it would result in only temporary
disruption of our service.
REGULATORY DEVELOPMENTS
See "Regulation of the Wireless Telecommunications Industry" for a
discussion of regulatory developments that could have a future impact on us.
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
44
<PAGE> 49
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:
- The increasing use of retail distribution, which is more dependent upon
the year-end holiday shopping season;
- The timing of new product and service announcements and introductions;
- Competitive pricing pressures; and
- Aggressive marketing and promotions.
INFLATION
We believe that inflation has not had, and will not have, a material
adverse effect on our results of operations.
EFFECT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
SOFTWARE COSTS. In March 1998, the American Institute of Certified Public
Accountants (the "AICPA") issued Statement of Position 98-1. "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use." This
statement became effective for us on January 1, 1999 and established accounting
standards for costs incurred in the acquisition or development and
implementation of computer software. This new standard requires the
capitalization of certain software implementation costs relating to software
acquired or developed and implemented for our use. The adoption of this
statement has not had a significant effect on our financial position or results
of operations.
ACCOUNTING FOR START-UP ACTIVITIES. In April 1998, the AICPA issued
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities."
This statement became effective on January 1, 1999 and required that costs of
start-up activities and organization costs be expensed as incurred. This
statement has not had a significant effect on our financial position or results
of operations.
ACCOUNTING FOR DERIVATIVE INSTRUMENT AND HEDGING ACTIVITIES. In June 1998,
the Financial Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments
and Hedging Activities," which establishes accounting and reporting standards
for derivative instruments and for hedging activities by requiring that all
derivatives be recognized in the balance sheet and measured at fair value. SFAS
137, issued August 1999, postpones the mandatory effective date of SFAS 133 for
one year to January 1, 2001. We have not determined the effects of this change
on our financial position or results of operations.
REVENUE RECOGNITION IN FINANCIAL STATEMENTS. In November of 1999, the SEC
released Staff Accounting Bulletin Number 101 -- Revenue Recognition in
Financial Statements. This bulletin became effective for us for the quarter
ended June 30, 2000. This bulletin established more clearly defined revenue
recognition criteria than previously existing accounting pronouncements, and
specifically addresses revenue recognition requirements for nonrefundable fees,
such as activation fees, collected by a company upon entering into an
arrangement with a customer, such as an arrangement to provide
telecommunications services. We believe that the effects of this bulletin will
not be material to our financial position or the results of our operations.
INDUSTRY BACKGROUND
Wireless communications systems use a variety of radio frequencies to
transmit voice and data. These systems include one-way radio applications, such
as paging or beeper services, and two-way
45
<PAGE> 50
radio applications, such as cellular, PCS and enhanced specialized mobile radio,
known as ESMR, networks. Each application is licensed and operates in a distinct
radio frequency block.
In 1993, the FCC allocated the 1900 MHz frequency block of the radio
spectrum for PCS. PCS differs from traditional analog cellular telephone service
principally in that PCS systems operate at a higher frequency and employ
advanced digital technology. PCS providers are among the first direct wireless
competitors of cellular providers to offer all-digital mobile networks. Digital
systems convert voice or data signals into a stream of digits that permit a
single radio channel to carry multiple simultaneous transmissions. Digital
systems also achieve greater frequency reuse than analog systems resulting in
greater capacity than analog systems. This enhanced capacity, along with
enhancements in digital protocols, allows digital-based wireless technologies,
whether using PCS or cellular frequencies, to offer new and enhanced services,
such as greater call privacy and more robust data transmission features, such as
"mobile office" applications including facsimile, electronic mail and connecting
notebook computers with data networks.
Since the introduction of commercial cellular service in 1983, the wireless
communications industry has experienced dramatic growth. The number of wireless
subscribers for cellular, PCS and ESMR has increased from an estimated 340,000
at the end of 1985 to over 86 million as of December 31, 1999, according to the
Cellular Telecommunications Industry Association, an international association
for the wireless industry. This Association published the statistics shown in
the following chart, showing the annual growth in U.S. wireless communication
customers for cellular, PCS and ESMR through December 31, 1999.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------
1995 1996 1997 1998 1999
<S> <C> <C> <C> <C> <C>
WIRELESS INDUSTRY STATISTICS(1)
Annualized total service revenues (in billions)... $ 19.1 $ 23.6 $ 27.5 $ 33.1 $ 40.0
Wireless subscribers at end of period (in
millions)....................................... 33.8 44.0 55.3 69.2 86.0
Subscriber growth................................. 40.0% 30.4% 25.6% 25.1% 24.3%
Average local monthly bill........................ $51.00 $47.70 $42.78 $39.43 $41.24
</TABLE>
-------------------------
Source: Cellular Telecommunications Industry Association.
(1) Reflects domestic commercially operational cellular, ESMR and PCS providers.
Paul Kagan Associates, Inc., an independent media and telecommunications
research firm, estimates in its publication, Kagan's Wireless Telecom
Investor -- January 14, 2000, that the number of wireless users will increase to
approximately 107.4 million by the end of 2000 and 201.9 million by the end of
2005. This growth is expected to be driven largely by a substantial projected
increase in PCS users who are forecast to account for approximately 24.6% of
total wireless users in 2000 and 42.4% in 2005. Paul Kagan Associates, Inc.
projects that total wireless industry penetration, defined as the number of
wireless subscribers nationwide divided by total United States population, will
grow from an estimated 38.2% in 2000 to 68.9% in 2005.
We believe that a significant portion of the predicted growth in the
consumer market for wireless telecommunications will result from:
- anticipated declines in costs of service to consumers;
- increased functional versatility; and
- increased awareness of the productivity, convenience and privacy benefits
associated with the services offered by PCS providers.
46
<PAGE> 51
We also believe that the rapid growth in the use of notebook computers and
personal digital assistants, combined with emerging software applications for
delivery of electronic mail, fax and database searching, will contribute to the
growing demand for wireless service.
47
<PAGE> 52
BUSINESS
OVERVIEW
We are one of the largest Sprint PCS affiliates based on our exclusive
right to market Sprint PCS products and services to a total population of over
10.2 million in portions of twelve contiguous states. Our markets are located
between Sprint PCS' Chicago, New York and Raleigh/Durham markets and connect or
are adjacent to 15 major Sprint PCS markets that have a total population of over
59 million. As a Sprint PCS affiliate, we market digital personal communications
services, or PCS, under the Sprint and Sprint PCS brand names.
SPRINT PCS
Sprint PCS, a wholly-owned subsidiary of Sprint, operates the only 100%
digital, 100% PCS wireless network in the United States. The digital technology
that Sprint PCS uses is code division multiple access technology, referred to as
CDMA. Sprint PCS has licenses to provide PCS service nationwide. Sprint PCS
operates its PCS network in major metropolitan markets throughout the United
States and has entered into agreements with affiliates, such as Horizon PCS, to
build out and manage networks in smaller metropolitan areas and along major
highways.
Sprint launched its first commercial PCS service in the United States in
November 1995. Since then, Sprint PCS has experienced rapid customer growth,
providing service to more than 8.3 million customers as of September 30, 2000.
The Sprint PCS network (including the portions of the network owned, constructed
and operated by the 17 affiliates) operates the largest 100% digital, 100% PCS
nationwide wireless network in the United States. Sprint PCS has licensed PCS
coverage of nearly 270 million people in all 50 states, Puerto Rico and the U.S.
Virgin Islands. The following table, showing the quarterly end-of-period
subscriber data for Sprint PCS, illustrates Sprint PCS' subscriber growth from
the beginning of 1997 through the third quarter of 2000.
<TABLE>
<CAPTION>
1997 1998 1999 2000
--------------------- ----------------------------- ----------------------------- -------------
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total subscribers........ 192 347 570 887 1,114 1,370 1,750 2,586 3,350 3,967 4,687 5,723 6,554 7,437
<CAPTION>
2000
-----
Q3
<S> <C>
Total subscribers........ 8,348
</TABLE>
Statements in this prospectus regarding Sprint Corporation or Sprint PCS
are derived from information contained in the periodic reports and other
documents filed with the Securities and Exchange Commission by Sprint and Sprint
PCS, or press releases issued by Sprint and Sprint PCS.
BENEFITS OF THE SPRINT PCS AFFILIATION
Our long-term strategic affiliation with Sprint PCS provides us with many
business, operational and marketing advantages including the following:
EXCLUSIVE PROVIDER OF SPRINT PCS PRODUCTS AND SERVICES. We have the
exclusive right to use the Sprint and Sprint PCS brand names for the sale of
Sprint PCS products and services in our territory. We provide these products and
services exclusively under the Sprint and Sprint PCS brand names.
SPRINT PCS LICENSES AND LONG-TERM COMMITMENTS. We have the exclusive right
to use Sprint PCS' licensed spectrum to provide Sprint PCS products and services
in our territory. Sprint PCS has funded the purchase of the licenses covering
our territory at a cost of approximately $57.0 million and has incurred
additional expenses for microwave clearing. As a Sprint PCS affiliate, we did
not have to fund the acquisition of these licenses, thereby reducing our
start-up costs. The Sprint PCS agreements are for a total of 50 years, including
an initial term of 20 years and three 10-year renewal
48
<PAGE> 53
terms. These agreements will automatically renew for the renewal period unless
at least two years prior to the commencement of any renewal period either party
notifies the other party that it does not wish to renew the agreement.
SPRINT PCS' NATIONWIDE DIGITAL PCS NETWORK. As of June 30, 2000, Sprint
PCS, together with its affiliates, operated PCS systems providing service in
metropolitan markets within the United States containing nearly 195 million
people nationwide, including all of the 50 largest metropolitan markets. Our
network operates with Sprint PCS' national network and will extend Sprint PCS'
coverage into our markets, which we believe is important to Sprint PCS' national
strategy. Our ability to provide our customers with access to Sprint PCS'
nationwide network represents a competitive advantage over other national and
regional providers of wireless services.
ESTABLISHED AND AVAILABLE DISTRIBUTION CHANNELS. We benefit from immediate
access to major national retailers under Sprint PCS' existing sales and
distribution agreements and other national sales and distribution channels,
including:
- a sales and distribution agreement with RadioShack, which provides us
with access to approximately 142 stores in our territory on an exclusive
basis for PCS;
- the sales and distribution agreements with other major national
third-party retailers such as Best Buy, Circuit City and Office Depot,
which collectively provide us with access to approximately 339 additional
retail outlets in our territory;
- Sprint PCS' national inbound telemarketing sales force;
- Sprint PCS' national accounts sales team; and
- Sprint PCS' electronic commerce sales platform.
SPRINT PCS' NATIONAL BRAND NAME RECOGNITION AND NATIONAL ADVERTISING
SUPPORT. We benefit from the strength and the reputation of the Sprint and
Sprint PCS brands. Sprint PCS' national advertising campaigns and developed
marketing programs are provided to us at little or no additional cost under our
Sprint PCS agreements. We offer the same strategic pricing plans, promotional
campaigns and handset and accessory promotions as Sprint PCS, and have the
ability to add pricing plans and marketing promotions that target local market
needs.
BETTER EQUIPMENT AVAILABILITY AND PRICING. We are able to acquire our
network equipment, handsets and accessories more quickly and at a significantly
lower cost than we would without our strategic relationship with Sprint PCS. We
purchase our network equipment, handsets and accessories under Sprint PCS'
vendor arrangements that provide for volume discounts. These discounts
significantly reduce the overall capital required to build our network and
significantly reduce our costs of handsets and accessories.
SPRINT PCS WIRELESS WEB. Our network will support and 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."
SPRINT PCS' EXTENSIVE RESEARCH AND DEVELOPMENT. We benefit from Sprint
PCS' extensive research and development effort, which provides us with ongoing
access to new technological products and enhanced service features without
significant research and development expenditures of our own. We have prompt
access to any developments produced by Sprint PCS for use in our network.
SPRINT PCS' BACK OFFICE SERVICES. When we initially launched our
independent PCS operations, we provided our own back office services, such as
customer services and billing services. In
49
<PAGE> 54
May 2000, we amended the Sprint PCS agreements so that Sprint PCS will provide
these back office services to us. Beginning in June 2000, all new markets that
we launch will be under our new back office arrangement with Sprint PCS. We
anticipate that we will complete conversion of our existing customers to these
services by the end of first quarter of 2001. We expect the cost of these
services will be at or below the cost of providing the services ourselves, due
to anticipated rate reductions and Sprint PCS' ability to economically manage
the support of new services. We also believe this arrangement will allow us to
more quickly roll out new Sprint PCS products and services in our markets.
OTHER COMPETITIVE STRENGTHS OF OUR BUSINESS
In addition to the advantages provided by our strategic affiliation with
Sprint PCS, we have the following favorable operating characteristics:
A NETWORK BUILD-OUT THAT COVERS APPROXIMATELY 48% OF THE TOTAL POPULATION
IN OUR TERRITORY AT OCTOBER 31, 2000 AND THAT IS EXPECTED TO COVER APPROXIMATELY
68% BY THE END OF THE THIRD QUARTER OF 2001. We have completed approximately
71%, based on population, of our planned construction of our network, which we
refer to as our build-out. We offer service to approximately 4.9 million
residents, or 48% of the total population of our territory at October 31, 2000.
The Alliances have already completed the build-out of 11 of their 13 required
markets and have begun to provide fill-in coverage in our Virginia and West
Virginia markets. We also have utilized third-party relationships to quickly
build out our network. For instance, we used co-location opportunities to build
our Kingsport, Tennessee market, which we launched in late August 2000. We have
also been actively managing the Bright PCS build-out using a build-to-suit
approach which involves engaging a third-party to construct towers and lease
them to us. This approach requires less capital than building our own towers. In
addition, our new markets in Pennsylvania, New York, Ohio and New Jersey include
154 sites already under construction that we are purchasing from Sprint PCS. We
plan to launch the western portion of these new markets within the next three
months using a Sprint PCS switching center on an interim basis and plan to
launch the eastern portion of these new markets before the end of 2000.
A HIGH GROWTH STRATEGY AS DEMONSTRATED BY OUR ACQUISITION OF BRIGHT PCS AND
THE RECENT GRANT TO US OF ADDITIONAL MARKETS BY SPRINT PCS. 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 such as lower infrastructure
and handset costs, national marketing and distribution arrangements or a
nationwide network. Because of our success as an independent PCS provider we
were able to become a charter Sprint PCS affiliate. Since then we have been able
to expand 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.
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
50
<PAGE> 55
approximately 59 million residents. Our territory also contains more than 2,600
interstate miles, as follows:
<TABLE>
<CAPTION>
ESTIMATED TOTAL INTERSTATE MILES(1)
-----------------------------------
BETWEEN IN OUR
INTERSTATE MAJOR DESTINATION CITIES DESTINATIONS TERRITORY
<C> <S> <C> <C>
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
----- -----
Total 3,714 2,654
===== =====
</TABLE>
-------------------------
(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.
FEWER COMPETITORS IN OUR MARKETS COMPARED TO MAJOR METROPOLITAN AREAS, WITH
THE EXPECTATION OF BEING THE FIRST OR SECOND PCS PROVIDER IN 49 OF OUR 54
MARKETS. We expect to face fewer competitors in our markets than is the case in
the surrounding urban markets. We are or expect to be either the first or second
PCS provider in 49 of our 54 markets, representing 82% of our planned covered
residents. Our most extensive competition to date has come from ALLTEL, a
regional provider. However, ALLTEL lacks both the national brand name and scope
of territory that we enjoy as a Sprint PCS affiliate and holds licenses for only
41% of our territory. Two recently created national cellular providers, Verizon
and Cingular, also offer service in portions of our territory. They currently
have licenses to operate in markets representing 60% and 9% of our planned
covered residents, respectively. We believe, however, that neither of these
providers has a well-established national brand name or an integrated operating
platform. AT&T has launched cellular service in markets representing only 27% of
the planned covered residents in our markets and only 49% including its Suncom
PCS affiliate.
ACCESS TO THE LOCAL TELEPHONE CUSTOMERS OF SPRINT AND OTHER AFFILIATED
LOCAL TELEPHONE COMPANIES. Sprint's Local Telephone Division provides local
telephone service to residents in several of our key markets, including our
Charlottesville, Virginia and Kingsport, Tennessee markets. In the aggregate,
residents in Sprint Local Telephone Division markets represent approximately 20%
of the total population in our territory. We believe this local Sprint presence
contributes to the overall market awareness of Sprint's telecommunications
services and provides us with an additional distribution channel. Based on our
experience in the Sprint Local Telephone Division market of Charlottesville, we
believe we will likely be able to penetrate the Sprint Local Telephone Division
markets more quickly and to an overall higher percentage than if Sprint did not
provide local service. We have a similar relationship in our home market of
Chillicothe, Ohio, where our sister company, The
51
<PAGE> 56
Chillicothe Telephone Company, provides local telephone service. Since launching
service in that market in 1997, we have experienced strong subscriber growth,
reaching a penetration rate in excess of 10% of total covered residents. 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.
FULLY FINANCED BUSINESS PLAN. We believe that our existing cash and
available borrowings under our new senior secured credit facility will be
adequate to fund our PCS network build-out, tax payments, anticipated operating
losses and working capital requirements until we achieve positive earnings
before interest, taxes, depreciation and amortization, which we expect to
achieve in the third quarter of 2003. Because we are fully financed, we are able
to use the proceeds of this offering to redeem a portion of the convertible
preferred stock and provide additional liquidity.
BUSINESS STRATEGY
We believe that the following elements of our business strategy will enable
us to rapidly complete our network, distinguish our wireless service offerings
from those of our competitors and compete successfully in the wireless
communications marketplace:
TAKING FULL ADVANTAGE OF THE BENEFITS OF OUR AFFILIATION WITH SPRINT
PCS. The benefits of our affiliation with Sprint PCS include:
- Sprint PCS brand awareness and national marketing programs;
- access to established Sprint PCS distribution channels and outlets,
national marketing plans and marketing strategies;
- Sprint PCS nationwide coverage;
- availability of discount prices for network and subscriber equipment
under Sprint PCS' vendor contracts;
- revenues from Sprint PCS subscribers traveling onto our network;
- use of Sprint PCS' back office services including customer activation,
billing and customer care; and
- 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 BUILD-OUT AND LAUNCH OF OUR NETWORK. We plan to
offer coverage to 6.9 million residents, or approximately 68% by September 30,
2001. 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. 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. For our Virginia and West Virginia
markets, we use our network services agreement with the Alliances to increase
our coverage to our markets with a total population of 3.3 million. For our new
markets in Pennsylvania, New York, Ohio and New Jersey, we are purchasing
network assets currently 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.
DEPLOYING A HIGH-CAPACITY NETWORK. We have built an all-digital PCS
network that we believe is state-of-the-art and 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
52
<PAGE> 57
the adjacent major markets owned and operated by Sprint PCS. We believe that our
network design, together with the use of digital CDMA technology, will allow our
network to handle more customers with fewer dropped calls and better clarity
than our competitors. In addition, our network will have sufficient capacity to
provide services beyond traditional voice transmissions.
EXECUTING AN INTEGRATED LOCAL MARKETING STRATEGY. Our marketing strategy
is to take full advantage of Sprint's and Sprint PCS' nationwide presence and
brand names while at the same time establishing a strong local presence in each
of our markets. We emphasize the improved clarity and quality, enhanced features
and favorable pricing of Sprint PCS products and services and replicate the
marketing strategies that have resulted in Sprint PCS becoming the fastest
growing wireless service providers in the country. In addition, on the local
level, we are or soon will be:
- establishing 40 Sprint PCS stores within our territory;
- establishing local third-party sales and distribution relationships on an
as-needed basis;
- directing our media efforts at the community level by advertising in
local publications and radio;
- sponsoring local and regional events; and
- using the local telephone offices of Sprint and the former owners of
Bright PCS which are located in our markets to offer our products and
services.
CONTINUING TO EXPLORE OPPORTUNITIES TO EXPAND OUR TERRITORY AND PROVIDE
COMPLEMENTARY PRODUCTS AND SERVICES. Since the initial grant of our markets, we
have significantly expanded the geographic scope of our territory through three
separate transactions. We expect to continually evaluate ways to strategically
expand our territory. Similarly, we expect to consider offering complementary
products and services.
MARKETS
Our territory covers 54 markets in parts of Indiana, Kentucky, Maryland,
Michigan, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Tennessee,
Virginia, and West Virginia. Sprint PCS has launched service in 15 major
metropolitan areas that are adjacent to our markets and have a combined total
population of approximately 59 million. We believe that connecting or being
adjacent to existing Sprint PCS markets is important to Sprint PCS' strategy to
provide seamless, nationwide PCS service.
Our territory, with a total population of approximately 10.2 million, has
the following market characteristics:
- 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.
- 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 have a higher wireless usage rate than the
general population.
- POPULAR RESORTS AND DAY-TRIP DESTINATIONS. In our territory there are
more than 25 ski resorts, three major NASCAR speedways, popular resorts
and day trip destinations, including the Greenbrier and Homestead
resorts, numerous state parks, and many other tourist destinations.
53
<PAGE> 58
The following chart identifies our markets and key phases of our build-out
plan:
<TABLE>
<CAPTION>
COVERED
SPRINT ESTIMATED ESTIMATED POPULATION AS A
PCS MHZ OF TOTAL COVERED PERCENTAGE OF
MARKET(1) GRANT(2) SPECTRUM POPULATION(3) POPULATION(4) TOTAL POPULATION
--------- -------- -------- ------------- ------------- -----------------
<S> <C> <C> <C> <C> <C>
Charleston, WV............................ 1st 20 492,700 232,048 47.1%
Huntington, WV............................ 1st 20 369,700 246,993 66.8%
Zanesville, OH............................ 1st 20 187,200 105,808 56.5%
Parkersburg, WV........................... 1st 20 182,000 109,442 60.1%
Athens, OH................................ 1st 20 132,100 62,446 47.3%
Chillicothe, OH........................... 1st 35 (7) 104,700 84,065 80.3%
Portsmouth, OH............................ 1st 20 93,800 45,736 48.8%
Roanoke, VA............................... 2nd 10 645,200 361,628 56.0%
Charlottesville, VA....................... 2nd 30 218,600 147,442 67.4%
Clarksburg, WV............................ 2nd 30 195,600 64,254 32.8%
Danville, VA.............................. 2nd 10 168,600 85,971 51.0%
Lynchburg, VA............................. 2nd 10 160,100 127,929 79.9%
Morgantown, WV............................ 2nd 30 107,800 70,727 65.6%
Staunton, VA.............................. 2nd 10 107,600 85,315 79.3%
Martinsville, VA.......................... 2nd 10 90,400 49,532 54.8%
Fairmont, WV.............................. 2nd 30 56,800 41,896 73.8%
---------- ---------
COVERAGE AT DECEMBER 31, 1999 3,312,900 1,921,232 58.0%
---------- ---------
Kingsport (Tri-Cities), TN................ 2nd 20 689,100 488,119 70.8%
Beckley, WV............................... 2nd 20 169,500 37,723 22.3%
Cincinnati, OH (Partial)(5)............... 2nd 10 127,400 5,398 4.2%
Knoxville, TN (Partial)(5)................ 3rd 10 54,201 23,601 43.5%
Erie, PA.................................. 3rd 10 280,200 227,103 81.1%
Jamestown, NY............................. 3rd 30 180,100 42,830 23.8%
Sharon, PA................................ 3rd 10 122,300 25,180 20.6%
Ashtabula, OH............................. 3rd 10 103,500 43,599 42.1%
Meadville, PA............................. 3rd 10 90,000 10,775 12.0%
Fort Wayne, IN............................ Bright 10 689,200 689,200 100.0%
South Bend, IN............................ Bright 10 348,800 348,800 100.0%
Elkhart, IN............................... Bright 10 256,900 233,086 90.7%
Lima, OH.................................. Bright 30 251,800 212,350 84.3%
Kokomo,IN................................. Bright 30 186,000 157,268 84.6%
Benton Harbor, MI......................... Bright 10 160,100 44,471 27.8%
Findlay, OH............................... Bright 30 152,900 105,084 68.7%
Michigan City, IN (Partial)(5)............ Bright 10 109,900 46,938 42.7%
Marion, IN................................ Bright 30 108,600 104,808 96.5%
Dayton, OH (Partial)(5)................... Bright 10 41,065 3,170 7.7%
Toledo, OH (Partial)(5)................... Bright 30 30,066 30,066 100.0%
Kalamazoo, MI (Partial)(5)................ Bright 30 20,009 17,975 89.8%
Battle Creek, MI (Partial)(5)............. Bright 30 8,980 7,003 78.0%
Launched Markets (Incremental)(6)......... -- 120,968 1.6%
---------- ---------
COVERAGE AT OCTOBER 31, 2000 7,493,521 4,946,747 66.0%
---------- ---------
Williamson, WV............................ 2nd 20 183,900 56,064 30.5%
Bluefield, WV............................. 2nd 20 176,200 88,000 49.9%
Cumberland, MD............................ 2nd 10 159,000 40,558 25.5%
Logan, WV................................. 2nd 10 40,900 15,978 39.1%
Canton, OH (Partial)(5)................... 2nd 10 36,215 5,342 14.8%
Scranton, PA.............................. 3rd 30 664,700 492,385 74.1%
Olean, NY................................. 3rd 30 240,200 81,259 33.8%
Sunbury, PA............................... 3rd 30 194,300 120,829 62.2%
</TABLE>
54
<PAGE> 59
<TABLE>
<CAPTION>
COVERED
SPRINT ESTIMATED ESTIMATED POPULATION AS A
PCS MHZ OF TOTAL COVERED PERCENTAGE OF
MARKET(1) GRANT(2) SPECTRUM POPULATION(3) POPULATION(4) TOTAL POPULATION
--------- -------- -------- ------------- ------------- -----------------
<S> <C> <C> <C> <C> <C>
Williamsport, PA.......................... 3rd 30 161,200 115,000 71.3%
New York, NY (Partial)(5)................. 3rd 30 169,673 101,017 59.5%
Pottsville, PA............................ 3rd 30 151,000 90,422 59.9%
State College, PA......................... 3rd 30 134,900 103,624 76.8%
Stroudsburg, PA........................... 3rd 30 128,100 45,978 35.9%
Du Bois, PA............................... 3rd 30 127,900 76,026 59.4%
Oil City, PA.............................. 3rd 30 104,500 41,582 39.8%
Allentown, PA (Partial)(5)................ 3rd 30 59,094 31,113 52.7%
Launched Markets (Incremental)(6)......... -- -- -- 473,360 4.6%
---------- --------- -----
PLANNED COVERAGE AT SEPTEMBER 30, 2001 10,225,303 6,925,284 67.7%
========== ========= =====
</TABLE>
---------------
(1) Expected commercial launch dates for these markets may change based on a
number of factors, including availability of local telephone numbers; shifts
in populations, target markets or network focus; changes or advances in
technology; acquisition of other markets; and delays in market build-out due
to reasons identified in "Risk Factors -- Risks Particular to Horizon PCS."
(2) 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:
<TABLE>
<S> <C>
1st: June 1998
2nd: August 1999
3rd: May 2000
</TABLE>
(3) Estimated total population is based on January 1, 1999 estimates compiled by
Rand McNally Commercial Atlas & Marketing Guide, 2000 Edition.
(4) Estimated covered population reflects only those residents in our market
which we expect will be able to receive our service.
(5) 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.
(6) "Incremental" indicates fill-in coverage in markets already launched.
(7) Includes 15 MHz of spectrum owned directly by Horizon.
By the third quarter of 2001, we are required to provide aggregate coverage
of 65% in the markets granted to us in our third grant from Sprint PCS. Sprint
PCS has reviewed our build-out plans, as set forth above, and has agreed in
writing that, if we meet those plans, we will be fully compliant with their
build-out requirements.
NETWORK BUILD-OUT PLAN
Overview
Our network build-out strategy is to provide service to the largest
communities in our markets and to cover interstates and primary roads connecting
these communities to each other, and to the adjacent major markets owned and
operated by Sprint PCS. We believe that our schedule for completing the
build-out is achievable based on our prior experience in network build-out, the
digital
55
<PAGE> 60
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 and, as
of October 31, 2000, we covered approximately 4.9 million residents or 48% of
the total population. When complete, the build-out of our 54 markets will
consist of approximately 1,230 sites. Approximately 597 sites are currently
operational. As of October 31, 2000, we have site lease options for an
additional 381 sites. Of these 381 sites, 381 have been approved for
construction, 361 have received zoning approval, 346 leases have been executed,
343 building permits have been approved, construction has begun on 215 sites and
188 sites are complete. We plan to cover approximately 6.9 million residents or
68% by September 30, 2001. The following details the current status of each of
our market grants.
First Horizon PCS Grant (June 1998)
In June 1998, we became one of five charter Sprint PCS affiliates,
receiving an initial grant of seven markets in Ohio, West Virginia and Kentucky
with a total population of approximately 1.6 million. These markets included the
five original markets for which we had obtained C Block licenses. We had
previously launched service in three of the original markets as an independent
service provider and we continued to provide service in those markets through
our network after becoming a Sprint PCS affiliate. We launched service in three
additional markets by the end of 1998, including two markets which were served
through an interim network services agreement with the Alliances. We launched
service in the seventh market in January 1999 at which time we covered
approximately 887,000 residents, or 57% of the total population of our initial
seven markets.
We are currently extending the coverage in these markets along connecting
highways and to smaller communities. Engineering design is complete and we
expect to add 29 additional sites. We have site lease options for these 29 site
locations. Of these 29 sites, 29 have been approved for construction, 29 have
received zoning approval, 28 leases have been executed, 26 building permits have
been approved, construction has begun on 25 sites and 18 sites have been
completed. We expect completion of the project by November 30, 2000. We also
expect the Alliances to fill in coverage in the two initial markets that are
being served under our network services agreement. As of October 31, 2000, we
cover approximately 913,000 residents, or 58% of the total population of our
initial seven markets by October 31, 2000, and we plan to cover approximately
985,000 residents, or 63% by September 30, 2001.
Second Horizon PCS Grant (August 1999)
In August 1999, Sprint PCS granted us 17 additional markets in Virginia,
West Virginia, Tennessee, Maryland, Kentucky and Ohio with a total population of
approximately 3.3 million. Within two months of this second grant, we launched
service in nine of these markets, providing coverage to 1.0 million residents,
or 31% of the total population in these markets through our network services
agreement with the Alliances.
In August 2000, we launched service in our Kingsport, Tennessee market,
which has a total population of 689,000. We plan to cover approximately 488,000
residents, or 71% of the total population in this market. The build-out in this
market consists of approximately 99 sites. We have site lease options for all 99
of the site locations. Of these 99 sites, 99 have been approved for
construction, 97 have received zoning approval, 90 leases have been executed, 93
building permits have been approved, construction has begun on 80 sites and 72
sites are complete, 62 of which are operational.
The seven remaining markets received in the second grant will be launched
by September 30, 2001, at which time we plan to cover approximately 2.0 million
residents, or 61% of the total population in these 17 markets.
56
<PAGE> 61
Bright PCS Grant (October 1999)
In September 1999, we formed Bright PCS with a group of independent
telephone companies. In October 1999, Sprint PCS granted Bright PCS 13 markets
in Indiana, Ohio and Michigan with a total population of approximately 2.4
million. Concurrent with the formation of Bright PCS, we entered into a services
agreement to manage all aspects of Bright PCS' operations and network build-
out.
The build-out in these markets will consist of approximately 141 sites. We
have site lease options for 140 of the site locations. Of these 140 sites, 140
have been approved for construction, 134 have received zoning approval, 115
leases have been executed, 130 building permits have been approved, construction
has begun on 115 sites and 105 sites are complete, 92 of which are operational.
In September 2000 we launched service in our Bright PCS markets and expect to
offer service in all of the Bright PCS markets by December 31, 2000, at which
time we plan to cover approximately 2.0 million residents, or 85% of the total
population of these 13 markets.
Third Horizon PCS Grant (May 2000)
In May 2000, Sprint PCS granted us 17 additional markets in Pennsylvania,
New York, Ohio and New Jersey with a total population of approximately 2.9
million. In conjunction with the grant, we agreed to purchase from Sprint PCS
154 sites in various stages of construction. We have completed our engineering
design for these markets and the build-out is expected to consist of
approximately 410 sites, including the 154 being purchased from Sprint PCS. We
have site lease options for 113 of the 410 site locations. Of these 410 sites,
113 have been approved for construction, 101 have received zoning approval, 113
leases have been executed, 94 building permits have been approved, construction
has begun on 51 sites and 31 sites are complete.
The 29 sites that were operational at October 31, 2000 are located in the
Erie, Jamestown, Sharon, Ashtabula and Meadville markets, which have a total
population of approximately 776,000.
The remaining sites being purchased from Sprint PCS are located in the
Scranton, Pottsville, Stroudsburg, New York and Allentown markets, which have a
total population of approximately 1.2 million. We will assume responsibility for
construction in these markets as clusters of sites are transferred to us. We
expect to launch service in these markets by the end of the fourth quarter of
2000.
The remaining markets to be launched are Williamsport, Sunbury, State
College, Oil City, Olean and Du Bois, which have a total population of
approximately 963,000. We expect to launch service in these markets by the end
of the third quarter of 2001. At that time, we plan to cover approximately 1.9
million residents, or 65% of the total population of the 17 markets received in
our third grant.
NETWORK BUILD-OUT ELEMENTS
As part of our network build-out strategy, we entered into certain
outsourcing relationships with third parties 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. Build-to-suit arrangements are contractual
relationships whereby a tower company constructs and owns a cell tower
57
<PAGE> 62
at a location which we approve and leases the cell tower to us for use in our
network. Co-location is an arrangement whereby a wireless service provider, like
us, is allowed to use another party's cell tower as part of its network.
Generally we prefer build-to-suit opportunities because of the favorable
development fees and leasing terms associated with our arrangement with SBA.
Under our build-to-suit agreement, SBA acquires the site, builds the tower and
leases it to us. We consider this arrangement to be preferable to building our
own towers.
In situations where we determine that build-to-suit is not appropriate, we
use a co-location strategy. For sites where co-location leases are utilized,
zoning, permitting and surveying approvals and licenses have already been
secured, which minimizes our start-up costs and accelerates access to the
markets.
We expect that approximately 1,230 sites will be required to achieve our
planned coverage of the residents in our territory, including those provided to
us through our network services agreement. Of those sites, we believe that
approximately 345 will be build-to-suit towers.
MICROWAVE RELOCATION. At the time of the FCC's auction of PCS licenses,
other third parties were using portions of the same frequency bandwidths for the
operation of microwave facilities. The FCC has 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 completed necessary relocation for all
microwave paths in all of our markets that are operational or scheduled to be
operational before December 31, 2000. We estimate our future costs associated
with relocation to be approximately $3.0 million.
SWITCHING. We currently use one switching center in Chillicothe, Ohio to
provide services to our network. We also utilize the Alliance's two switching
centers under our network services agreement, and intend to use a Sprint PCS
switching center on an interim basis to more rapidly launch our markets in
western Pennsylvania. A switching center serves several purposes, including
routing calls, managing call handoff, managing access to the public telephone
network and providing access to voice mail. We believe the capacity of these
switching centers is adequate to accommodate our planned growth until 2001. We
plan to install additional switching centers prior to that time.
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.
LONG DISTANCE AND BACK HAUL. We use Sprint and other third party providers
for long distance services and for back haul services. Back haul services are
the telecommunications services which other carriers provide to carry our voice
traffic from our cell towers to our switching facilities. When we use Sprint, we
receive the same preferred rates made available to Sprint PCS.
NETWORK MONITORING. We currently operate our own network monitoring system
for continuous network monitoring. For new markets launched after July 31, 2000,
we will use Sprint PCS' Network Operations Control Center for continuous network
monitoring. We began converting our existing markets to Sprint PCS' Network
Operation Control Center beginning in the third quarter of 2000.
SBA AGREEMENT
Prior to August 1999, Horizon Telcom owned the cell site towers we used in
our network. In August 1999, Horizon Telcom sold to SBA the towers we used in
our network, and we subsequently entered into a long-term lease arrangement with
SBA. We now pay a fixed amount per month, per cell site, to SBA for the right to
use their towers in our markets. This fixed fee is subject to an
58
<PAGE> 63
annual percentage increase for each site beginning on the third anniversary of
the date we began using the site. We believe that the rates we pay under this
agreement are generally more favorable than average co-location rates available
in our markets.
In August 1999, we also entered into a build-to-suit agreement with SBA.
Under this agreement, SBA acquires and develops the sites and installs the
towers at locations approved by us. We receive a site development fee from SBA
for tower sites which SBA constructs on our behalf. We have agreed to lease
space on certain existing SBA towers for which we pay a fixed amount per month,
per cell site. For certain of the leases, we receive a one year rent abatement
on these sites. Rent expense for the leases which include abatement will be
recognized on a straight-line basis over the life of the lease.
MOTOROLA PRODUCT SUPPLY AGREEMENT
In December 1999, we entered into a product supply agreement with Motorola
for the purchase of the telecommunications products and services for our
network. Motorola also provides installation services for our network equipment.
We intend to use Motorola equipment for the build out of our new markets in
Pennsylvania, New York, Ohio and New Jersey and the Bright PCS markets. Since
entering the Sprint PCS agreements in June 1998, we have benefited from Sprint
PCS' volume pricing arrangements with Motorola on our equipment purchases and
expect to continue to benefit going forward.
ALLIANCES NETWORK SERVICES AGREEMENT
The Alliances are two related independent PCS providers offering service
under the Intelos brand name. The Alliances' network is managed by CFW
Communications. In August 1999, we entered into a network services agreement
with the Alliances for 16 of our markets in Virginia and West Virginia. Under
this agreement, we are entitled to use the Alliances' wireless network and
equipment to provide services to our customers in these markets. The Alliances
are required to maintain their network to Sprint PCS technical standards. We pay
the Alliances a per minute of use charge for use of their network whenever
Sprint PCS subscribers use their network.
We believe this arrangement eliminates or defers capital costs, and reduces
network expenses while permitting a faster launch of service and preserving our
capital for other uses. In addition, this arrangement gives us access to
additional spectrum in markets where Sprint PCS has limited bandwidth and
reduces our risk of technological obsolescence in these markets.
As of June 30, 2000, the Alliances had deployed 333 cell sites within our
markets in West Virginia and Virginia and had complied with their contractual
build-out requirements to date. The Alliances have also committed to build out
the Beckley, West Virginia market by September 30, 2000 and the Bluefield,
Virginia market by September 30, 2001. If the Alliances fail to build out these
markets by these dates, we have at least 12 additional months to complete the
build-out. The Beckley build-out was not completed by the September 2000 date
due to delays in obtaining required backhaul services from local exchange
carriers. This delay does not cause the Alliances to be in violation of the
build-out requirements. The Alliances provide coverage to 56% of the total
population of 3.3 million in the markets covered by our network services
agreement as of October 31, 2000, and 64% by September 2001.
The three remaining markets, which the Alliances have not yet committed to
build out, are the Williamson and Logan, West Virginia and Cumberland, Maryland
markets. We have the option to either allow the Alliances to build out these
markets, or to build them ourselves. Under the terms of our Sprint PCS
agreements, these markets must be built out by February 2002.
59
<PAGE> 64
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 such termination at rates which
reflect a significant discount from the standard pricing terms under our
agreement. This is intended to enable us to continue to provide services to our
customers while we build out our own network. In addition, under all
circumstances, we have the right to overbuild the Alliances' markets, on a
market-by-market basis, at any time for any reason.
PRODUCTS AND SERVICES
We will offer established Sprint PCS products and services throughout our
territory. Our products and services mirror the service offerings of Sprint PCS
and are designed to integrate seamlessly with the Sprint PCS nationwide network.
Sprint PCS Wireless Services currently serve the majority of the nation's
metropolitan areas, including more than 4,000 cities and communities, providing
customers with affordable, reliable 100% digital, 100% PCS services. The Sprint
PCS service package we offer includes the following:
100% DIGITAL WIRELESS MOBILITY. Our primary service is wireless mobility
coverage. Our PCS network is part of the largest 100% digital, 100% PCS network
in the nation. We offer customers in our territory enhanced voice clarity,
advanced features, and simple, affordable Sprint PCS Free and Clear pricing
plans. These plans include free long distance and wireless airtime minutes for
use throughout the Sprint PCS network at no additional charge. Our basic
wireless service includes voice mail, caller ID, enhanced call waiting,
three-way calling, call forwarding, distinctive ringing and call blocking.
NATIONWIDE SERVICE. Our customers are able to use Sprint PCS services in
our markets and seamlessly throughout the Sprint PCS network.
Dual-band/dual-mode handsets allow roaming on wireless networks where Sprint PCS
is not available and with which Sprint PCS has roaming agreements. These
handsets are designed to operate on analog and digital cellular networks, as
well as on Sprint PCS' digital PCS networks.
ADVANCED HANDSETS. CDMA handsets weighing approximately five to seven
ounces offer up to three to five days of standby time and approximately two to
four hours of talk time. We also offer dual-band/dual-mode handsets that allow
customers to make and receive calls on both PCS and cellular frequency bands and
both digital or analog technology. These handsets allow roaming on cellular
networks where Sprint PCS digital service is not available. All handsets are
equipped with preprogrammed features such as speed dial and last number redial,
and are sold under the Sprint and Sprint PCS brand names.
EXTENDED BATTERY LIFE. CDMA handsets offer significantly extended battery
life relative to earlier technologies, providing up to three to five days of
standby battery life. Handsets operating on a digital system are capable of
saving battery life while turned on but not in use, improving efficiency and
extending the handset's use.
IMPROVED VOICE QUALITY. We believe the Sprint PCS CDMA technology offers
significantly improved voice quality compared to existing analog and TDMA
networks, more powerful error correction, less susceptibility to call fading and
enhanced interference rejection, all of which result in fewer dropped calls. See
"-- CDMA Technology" for a discussion of the reasons CDMA technology offers
improved voice quality.
PRIVACY AND SECURITY. Sprint PCS provides secure voice transmissions
encoded into a digital format to prevent eavesdropping and unauthorized cloning
of subscriber identification numbers.
EASY ACTIVATION. Customers can purchase a Sprint PCS handset off the shelf
at a retail location and activate their service by calling customer service,
which can program the handset over the air.
60
<PAGE> 65
We believe over-the-air activation will reduce the training requirements for
salespersons at the retail locations.
CUSTOMER CARE. When we initially launched our independent PCS operations,
we provided our own "back office" services, such as customer services and
billing services. In May 2000, we amended our Sprint PCS agreements so that
Sprint PCS will provide the back office services to us. We anticipate that our
existing customers will be transitioned to these services by the end of the
first quarter of 2001. By using Sprint PCS' established back office services, we
believe that our operating costs will be reduced. By using Sprint PCS' services,
we expect to more rapidly implement new products and services offered by Sprint
PCS. Sprint PCS offers customer care 24 hours a day, seven days a week. Our
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 will soon be able to 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 Internet providers including AOL, Yahoo!, Amazon.com,
Bloomberg.com, CNN Interactive, MapQuest.com, Fox Sports, Ameritrade,
InfoSpace.com and Weather.com to provide services for the Sprint PCS Wireless
Web. Sprint PCS offers Sprint PCS Wireless Web as an add-on to existing Sprint
PCS' Free and Clear pricing plans. We plan to begin offering wireless web
service in some of our markets by the end of 2000.
OTHER SERVICES. In addition to these services, we may also offer wireless
local loop services in our territory. Wireless local loop refers to the use of a
wireless network to provide a substitute for the portion of traditional
telephone companies' networks which extends from homes and businesses to the
traditional telephone companies' switching facilities. We also believe that new
features and services will be developed on the Sprint PCS nationwide network to
take advantage of CDMA technology. As a leading wireless provider, Sprint PCS
conducts ongoing research and development to produce innovative services that
give Sprint PCS a competitive advantage. We intend to offer a portfolio of
products and services developed by Sprint PCS to accommodate the growth in, and
the unique requirements of, high speed data traffic and demand for video
services. We plan to provide, when available, a number of applications for
wireless data services including facsimile, Internet access, wireless local area
networks and point-of-sale terminal connections.
MARKETING STRATEGY
Our marketing and sales strategy uses Sprint PCS' strategies and developed
national distribution channels that have helped Sprint PCS generate rapid
customer growth. We plan to enhance Sprint PCS' strategies with strategies
tailored to our specific territory.
USE OF SPRINT PCS' BRAND EQUITY AND MARKETING. We will feature exclusively
and prominently the nationally recognized Sprint and Sprint PCS brand names in
our marketing effort. From the customers' point of view, they will use our PCS
network and the Sprint PCS national network seamlessly as a unified national
network. We will build on Sprint PCS' national distribution channels and
advertising programs.
PRICING. We believe that our use of the Sprint PCS pricing strategy will
offer customers in our territory simple, easy-to-understand service plans.
Sprint PCS' consumer pricing plans are typically structured with what we believe
to be competitive monthly recurring charges and large local calling areas,
service features such as voicemail, enhanced caller ID, call waiting and
three-way calling and
61
<PAGE> 66
what we believe to be competitive per-minute rates. Lower per-minute rates
relative to analog cellular providers are possible in part because the CDMA
system that both we and Sprint PCS employ has greater capacity than current
analog cellular systems, which we believe will enable us to market high usage
customer plans at lower prices. All of Sprint PCS' current national plans:
- include minutes in any Sprint PCS market with no roaming charges;
- include several features that we believe are advantageous and convenient
to customers and generally require no annual contracts or hidden charges;
- offer what we believe to be a wide selection of phones to meet the needs
of consumers and businesses; and
- provide a limited-time money back guarantee on Sprint PCS phones.
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 its nationwide
network, a package of off-peak minutes or 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 enhance our distribution
and using local radio and newspaper advertising to sell our products and
services in each of our launched markets. We have established a local sales
force to execute our marketing strategy through company-owned Sprint PCS stores,
and also employ a direct sales force targeted to business sales. In addition,
Sprint PCS' existing agreements with national retailers provide us with
immediate access to over 481 retail locations in our territory. We also expect
the former owners of Bright PCS to offer Sprint PCS products in their local
telephone offices in northwestern Ohio. Sprint-owned local exchange carriers
provide local telephone service to approximately 20% of the total population in
our territory, which will provide us with an additional distribution channel
through which we can market to an established base of Sprint customers. Some of
the Sprint local exchange markets have a store for Sprint customers to pay their
bills, which we expect to use to sell Sprint PCS products and services.
ADVERTISING AND PROMOTIONS. Sprint PCS uses national as well as regional
television, radio, print, outdoor and other advertising campaigns to promote its
products. We benefit from this national advertising in our territory at no
additional cost to us. Sprint PCS also runs numerous promotional campaigns which
provide customers with benefits such as additional features at the same rate or
free minutes of use for limited time periods. We are able to purchase
promotional materials related to these programs from Sprint PCS at their cost.
SPONSORSHIPS. Sprint PCS is a sponsor of numerous selected, broad-based
national and regional events. These sponsorships provide Sprint PCS with brand
name and product recognition in high profile events, provide a forum for sales
and promotional events and enhance our promotional efforts in our territory.
BUNDLING OF SERVICES. We intend to take advantage of the complete array of
communications services offered by bundling Sprint PCS services with other
Sprint products, such as long distance and Internet access.
SALES AND DISTRIBUTION
Our sales and distribution plan mirrors Sprint PCS' multiple channel sales
and distribution plan. Key elements of our sales and distribution plan consist
of the following:
SPRINT STORE WITHIN A RADIOSHACK STORE. Sprint has an exclusive
arrangement with RadioShack to install a "store within a store," making Sprint
PCS the exclusive brand of PCS sold through RadioShack stores. RadioShack has
approximately 142 stores in our territory.
62
<PAGE> 67
OTHER NATIONAL AND REGIONAL THIRD PARTY RETAIL STORES. We also will
benefit from the distribution agreements established by Sprint PCS with other
national and regional retailers which currently include Best Buy, Circuit City,
Office Depot, The Good Guys, Dillards, The Sharper Image, Montgomery Ward,
OfficeMax, Ritz Camera, Staples, Cord Camera, The Wiz and certain May Company
department stores. At present, these retailers operate approximately 339 retail
stores in our territory. We also believe that we benefit from stores located in
major Sprint PCS markets near our markets because residents of our territory who
buy PCS handsets at those stores become our subscribers.
SPRINT PCS STORES. We currently own and operate eleven Sprint PCS stores.
We plan to have a total of 16 Sprint PCS stores in our territory by the end of
2000, and 40 by the end of 2003. These stores will be located in larger markets
within our territory, which we believe provides us with strong local presence
and a high degree of visibility. Following the Sprint PCS model, these stores
will be designed to facilitate retail sales, bill collection and customer
service. We train our sales representatives to be informed and persuasive
advocates for Sprint PCS' services.
LOCAL TELEPHONE STORES. We also plan to offer Sprint PCS products and
services through the Sprint Local Telephone Division retail centers in our
service area and through at least thirteen local telephone service centers of
the former owners of Bright PCS and their affiliates located in our markets. We
also expect former Bright PCS members and local Sprint service providers to
offer Sprint PCS products and services.
NATIONAL ACCOUNTS AND DIRECT SELLING. We participate in Sprint PCS'
national accounts program. Sprint PCS has a national accounts team which focuses
on the corporate headquarters of Fortune 500 companies. Once a representative
reaches an agreement with the corporate headquarters, we service the offices of
that corporation located in our territory. Our direct sales force will target
the employees of these corporations in our territory and cultivate other local
business clients. At present, we employ 26 direct sales representatives, and
plan to hire approximately 29 more over the next 24 months.
INBOUND TELEMARKETING. Sprint PCS provides inbound telemarketing sales
when customers call from our territory. As the exclusive provider of Sprint PCS
products and services in our market, we use the national Sprint 1-800-480-4PCS
number campaigns that generate call-in leads. These leads are then handled by
Sprint PCS' inbound telemarketing group.
ELECTRONIC COMMERCE. Sprint PCS launched an Internet site in December 1998
which contains information on Sprint PCS products and services. A visitor to
Sprint PCS' Internet site can order and pay for a handset and select a rate
plan. Customers visiting the site can review the status of their account,
including the number of minutes used in the current billing cycle. Customers in
our territory who purchase products and services over the Sprint PCS Internet
site will be our customers.
CDMA TECHNOLOGY
SPRINT PCS' NATIONWIDE NETWORK AND ITS AFFILIATES' NETWORKS ALL USE DIGITAL
CDMA TECHNOLOGY. CDMA technology is fundamental to accomplishing our business
objective of providing high-volume, high-quality airtime at a low cost. We
believe that CDMA provides important system performance benefits.
VOICE QUALITY. We believe that CDMA systems offer less interference, more
powerful error correction and less susceptibility to fading than analog systems.
Using enhanced voice coding techniques, CDMA systems achieve voice quality that
is comparable to that of the typical wireline telephone. This CDMA voice coding
technology also filters out annoying background noise more effectively than
existing wireline, analog cellular or other digital PCS phones.
CAPACITY. CDMA technology allows a greater number of calls within one
specific frequency and reuses the entire frequency spectrum in each cell. CDMA
systems provide capacity gains of up to seven times over current analog systems
and up to three times greater than TDMA and GSM
63
<PAGE> 68
systems. In the first half of 2000, Sprint PCS began to deploy a new voice
coding technology for CDMA networks which is expected to increase the capacity
of the system by approximately 100%. This new voice coding standard, referred to
as Enhanced Variable Rate Coding, will allow the network to support additional
capacity while maintaining the high level of voice quality associated with
digital networks. We expect to begin using the Enhanced Variable Rate Coding
technology in our PCS network to increase its capacity. Additional capacity
improvements are expected for CDMA networks over the next two years as new third
generation standards are approved and implemented that will allow for high-speed
data and an even greater increase in the voice traffic capacity.
CDMA technology is designed to provide flexible or "soft" capacity that
permits networks like ours to temporarily increase the number of telephone calls
that can be handled within a cell. When capacity limitations in analog, TDMA and
GSM systems are reached, additional callers in a given cell must be given a busy
signal. Using CDMA technology, networks like ours can allow a small reduction in
voice quality to provide temporary increases in capacity. This reduces blocked
calls and increases the probability of a successful cell-to-cell hand-off.
SOFT HAND-OFF. As a subscriber travels from one cell site to another cell
site, the call must be "handed off" to the second site. CDMA systems transfer
calls throughout the network using a technique referred to as a soft hand-off,
which connects a mobile customer's call with a new cell site while maintaining a
connection with the cell site currently in use. CDMA networks monitor the
quality of the transmission received by both cell sites simultaneously to select
a better transmission path and to ensure that the network does not disconnect
the call in one cell until it is clearly established in a new one. As a result,
fewer calls are dropped compared to analog, TDMA and GSM networks which use a
"hard hand-off" and disconnect the call from the current cell site as it
connects with a new one.
INTEGRATED SERVICES. CDMA systems permit us to offer advanced features,
including voice mail, caller ID, enhanced call waiting, three-way calling, call
forwarding and paging and text-messaging. These advanced features may also be
offered by companies utilizing competing technologies.
PRIVACY AND SECURITY. One of the benefits of CDMA technology is that it
combines a constantly changing coding scheme with a low power signal to enhance
security and privacy. Vendors are currently developing additional encryption
capabilities which we believe will further enhance overall network security.
FREQUENCY PLANNING. Frequency planning is the process used to analyze and
test alternative patterns of frequency use within a wireless network to minimize
interference between one call and another call and to maximize capacity.
Currently, cellular service providers spend considerable money and time on
frequency planning. Because TDMA and GSM based systems have frequency reuse
constraints similar to present analog systems, frequency reuse planning for TDMA
and GSM based systems is expected to be comparable to planning for the current
analog systems. With CDMA technology, however, the same group of frequencies can
be reused in every cell, substantially reducing the need for costly frequency
reuse patterning and constant frequency plan management.
BATTERY LIFE. Due to their greater efficiency in power consumption, CDMA
handsets will provide up to three to five days of standby time and approximately
two to four hours of talk time availability. We believe this generally exceeds
the battery life of handsets using alternative digital or analog technologies.
BENEFITS OF OTHER TECHNOLOGIES. While CDMA has the benefits discussed
above, TDMA networks are generally less expensive when overlaying existing
analog systems. In addition, the GSM technology standard, unlike CDMA, supports
a more robust interoperability standard which more easily allows a network
operator to use equipment from several different vendors in the same network.
This, along with the fact that the GSM technology is currently more widely
deployed throughout the
64
<PAGE> 69
world than CDMA, provides economies of scale for handset and equipment
purchases. A standards process is also underway which will allow wireless
handsets to support analog, TDMA and GSM technologies in a single unit.
Currently, there are no plans to have CDMA handsets that support either the TDMA
or GSM technologies.
COMPETITION
Given the broad geographic coverage of our territory, the competition that
we face from other wireless providers is fragmented. We compete, to varying
degrees, with regional and national cellular, PCS and other wireless service
providers, although today no competing provider offers complete coverage of our
territory. Currently, we believe that our strongest competition is from cellular
providers, many of which have been operating in our markets and building their
customer base for a number of years. We believe however, that our competition
from other PCS providers is limited. Many are in the preliminary stages of
building their networks and customer bases and currently offer less consistent
coverage than the cellular providers.
Our largest single cellular competitor is Verizon Wireless, which offers
service in markets covering 60% of our planned covered residents. However,
Verizon is a newly formed company, and we believe it lacks the well established
national brand name and fully integrated service platform that we enjoy as a
Sprint PCS affiliate. Furthermore, Verizon does not hold licenses for 40% of our
territory. In addition, we believe that a significant portion of Verizon's
network in our markets is analog. While the recently formed national cellular
alliance between BellSouth and SBC, now called Cingular, competes with us in
certain markets, those markets represent only 9% of our planned covered
residents. AT&T, which has licenses to provide service to all markets in our
territory, currently provides service to only 27% of our planned covered
residents. ALLTEL, a large regional provider and our most significant competitor
to date, competes with us in markets representing 41% of our planned covered
residents. Small regional cellular providers, such as US Cellular and Dobson
Cellular, which offers service under the Cellular One brand, also operate in our
territory, though none competes with us in markets representing more than 25% of
our planned covered residents.
Our primary PCS competition is from PCS providers whose coverage is
regional. Omnipoint, including its affiliate Aerial, is the largest, and offers
service in markets covering 36% of our planned covered residents. The Alliances,
which offer service under the Intelos brand, provide service in markets covering
30% of our planned covered residents. SunCom, an AT&T affiliate, currently
offers service in markets covering 22% of our planned covered residents. As a
Sprint PCS affiliate, we believe we are positioned to successfully compete with
all of these PCS providers due to the strength of the Sprint PCS brand name,
distribution channels, and CDMA network. More importantly, we will be the first
PCS provider to market in 32 of our 54 markets, representing over 43% of our
planned covered residents and the first or second PCS provider to market in 49
of our 54 markets, representing 82% of our planned covered residents.
Nextel, together with Nextel Partners, which we believe has licenses to
offer service in the vast majority of our markets, currently offers service to
only 34% of our planned covered residents. Nextel's coverage in many of these
markets is focused primarily on highway coverage as opposed to community
coverage.
65
<PAGE> 70
The following table lists the primary operational competitors known to us
within our various geographic areas:
<TABLE>
<CAPTION>
PRIMARY OPERATING TYPE OF
GEOGRAPHIC AREA COMPETITORS SERVICE
<S> <C> <C>
Ohio markets................................................ ALLTEL Cellular
AT&T Cellular
Verizon Wireless Cellular
Nextel ESMR
Indiana markets............................................. Centennial Cellular
Century Cellular
Verizon Wireless Cellular
Omnipoint PCS
Nextel ESMR
Pennsylvania and New York markets........................... AT&T Cellular
Verizon Wireless Cellular
Omnipoint PCS
Nextel ESMR
Virginia and West Virginia markets.......................... ALLTEL Cellular
AT&T Cellular
Verizon Wireless Cellular
Intelos PCS
Suncom PCS
Tennessee markets........................................... ALLTEL Cellular
Verizon Wireless Cellular
Cingular PCS
Suncom PCS
Nextel ESMR
</TABLE>
Most of these primary competitors offer a wireless service that is
generally comparable to our PCS service. However, we believe that most do not
offer the full range of products, services and features that we offer. For
instance, we believe that Verizon, Cingular, AT&T, ALLTEL and most regional
cellular providers do not offer 100% digital technology. Similarly, Cingular,
ALLTEL, and regional cellular providers do not offer nationwide service. In
addition, most of our competitors do not offer full wireless Internet
connectivity in all of our markets. We plan to begin offering wireless Internet
connectivity in some of our markets by the end of 2000. Some of our competitors
may also offer wireless Internet connectivity in some of our markets by the end
of 2000.
Our ability to compete effectively with these other providers will depend
on a number of factors, including the continued success of CDMA technology in
providing better call clarity and quality as compared to analog cellular
systems, Sprint PCS' competitive pricing with various options suiting individual
customer's calling needs, the continued expansion and improvement of the Sprint
PCS nationwide network, our extensive direct and indirect sales channels, our
centralized Sprint PCS customer care systems, and our selection of handset
options.
Some of our competitors have access to more licensed spectrum than the 10
or 20MHz licensed to Sprint PCS in certain of our markets. Some of our
competitors also have established infrastructures, marketing programs and brand
names. Certain 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
66
<PAGE> 71
expect that existing cellular providers will continue to upgrade their systems
to provide digital wireless communication services competitive with Sprint PCS.
We also face limited competition from "resellers" which provide wireless
service to customers but do not hold FCC licenses or own facilities. Instead,
the reseller buys blocks of wireless telephone numbers and capacity from a
licensed carrier and resells service through its own distribution network to the
public. Thus, a reseller is both a customer of a wireless licensee's services
and also a competitor of that and other licensees. The FCC requires all cellular
and PCS licensees to permit resale of carrier service to resellers. Although
Sprint PCS is required to resell PCS in our markets, currently there is no
reseller of Sprint PCS in our markets. Any reseller of Sprint PCS in our markets
would be required to pay us for the use of our capacity and their use of the
Sprint PCS service marks in our markets would be restricted to describing their
handsets as operational on the Sprint PCS network.
In addition, we compete with paging, dispatch and other mobile
telecommunications companies in our markets. Potential users of PCS systems may
find their communications needs satisfied by other current and developing
technologies. One or two-way paging or beeper services that feature voice
messaging and data display as well as tone-only service may be adequate for
potential customers who do not need immediate two-way voice communications.
In the future, we expect to face increased competition from entities
providing similar services using other communications technologies, including
satellite-based telecommunications and wireless cable systems. While few of
these technologies and services are currently operational, others are being
developed or may be developed in the future.
Over the past several years the Federal Communications Commissions 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:
- the strength of the Sprint and Sprint PCS brand names, services and
features;
- the location of our markets;
- the size of our territory;
- national network coverage and reliability;
- customer care; and
- pricing.
REORGANIZATION; PURCHASE OF BRIGHT PCS
On April 26, 2000, we were incorporated to become the holding company for
Horizon Personal Communications and to facilitate a business combination with
Bright PCS.
On May 5, 2000, we agreed to exchange shares of our class B common stock
and shares of Horizon Telcom common stock for all the ownership interests held
by the other owners of Bright PCS. This transaction was completed on June 27,
2000. The other Bright PCS owners received 4.7 million newly issued shares of
class B common stock from us, equal to 8% of our outstanding shares of common
stock before this offering. In addition, Horizon Personal Communications
transferred to them 7,978 shares of the class A common stock and 23,933 shares
of the class B common stock of Horizon Telcom, equal to 8% of the outstanding
shares of Horizon Telcom.
67
<PAGE> 72
In September 2000, we distributed substantially all of the remaining
Horizon Telcom common stock owned by us to our stockholders as a dividend. We
retained approximately 2.0% of the outstanding shares of Horizon Telcom.
As a result of these transactions and prior to this offering, our ownership
structure is as follows:
[FLOW CHART]
-------------------------
(1) The shareholders of Horizon Telcom include the members of the McKell family
(60.6%); Horizon Personal Communications (2.0%); the former owners of Bright
PCS (9.7%); other individuals and trusts (27.7%).
(2) The ownership percentages for Horizon PCS exclude options granted under our
2000 Stock Option Plan, the warrants issued to the initial purchasers of the
senior discount notes and shares subject to the Sprint PCS warrants.
(3) This percentage includes the 48% of Bright PCS which we own indirectly
through Horizon Personal Communications.
INTELLECTUAL PROPERTY
"Sprint," the Sprint diamond design logo, "Sprint PCS," "Sprint Personal
Communications Services," "The Clear Alternative to Cellular" and "Experience
the Clear Alternative to Cellular Today" are service marks registered with the
United States Patent and Trademark Office. These service marks are owned by
Sprint. Pursuant to the trademark and service mark license agreements, we have
the right to use, royalty-free, the Sprint and Sprint PCS brand names and the
Sprint diamond design logo and certain 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 certain instances, Sprint PCS has agreed not to grant to any
other person a right or license to provide or resell, or act as agent for any
person offering, licensed services under the licensed marks in our market areas
except as to Sprint PCS' marketing to national accounts and the limited right of
resellers of Sprint PCS to inform their customers of handset operation on the
Sprint PCS network. In all other instances, Sprint PCS reserves for itself and
its affiliates the right to use
68
<PAGE> 73
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 prospectus includes product names, trade names and trademarks of other
companies. We do not have any rights with respect to these product names, trade
names and trademarks.
EMPLOYEES
As of September 30, 2000, we employed 230 full-time employees. None of our
employees are represented by a labor union. We believe we have good relations
with our employees.
PROPERTIES
Our principal executive offices are leased from a subsidiary of Horizon
Telcom and are located at 68 E. Main Street, Chillicothe, Ohio 45601-0480, which
is also the location of our first PCS store. We also lease three other retail
stores and have signed leases for three more retail stores. We believe our
property is in good operating condition and is currently suitable and adequate
for our business operations.
LEGAL PROCEEDINGS
We are not aware of any pending legal proceedings against us which,
individually or in the aggregate, if adversely determined, would have a material
adverse effect on our financial condition or results of operations.
THE SPRINT PCS AGREEMENTS
The following is a summary of the material terms and provisions of the
Sprint PCS agreements. The summary applies to the Sprint PCS agreements for both
Horizon Personal Communications and Bright PCS except where otherwise indicated.
We have filed the Sprint PCS agreements as exhibits to the registration
statement of which this prospectus is a part and urge you to review them
carefully.
OVERVIEW OF SPRINT PCS RELATIONSHIP AND AGREEMENTS
Under the Sprint PCS agreements, we exclusively market PCS services under
the Sprint and Sprint PCS brand names in our markets. The Sprint PCS agreements
require us to interface with the Sprint PCS wireless network by building our
network to operate on PCS frequencies licensed to Sprint PCS in the 1900 MHz
range. The Sprint PCS agreements also give us access to Sprint PCS' equipment
discounts, roaming revenue from Sprint PCS customers traveling into our
territory, and various other back office services. The Sprint PCS agreements
provide strategic advantages, including avoiding the need to fund up-front
spectrum acquisition costs and the costs of maintaining billing and other
customer services infrastructure. The Sprint PCS agreements have initial terms
of 20 years with three 10-year renewals which would lengthen the contracts to a
total of 50 years. The Sprint PCS agreements will automatically renew for each
additional 10-year term unless we or Sprint PCS provide the other with two
years' prior written notice to terminate the Sprint PCS agreements.
69
<PAGE> 74
We have eight major agreements with Sprint and Sprint PCS (collectively,
the "Sprint PCS agreements"), consisting of one of each of the following for
Horizon Personal Communications and one for Bright PCS:
- the management agreement;
- the services agreement;
- the trademark and service mark license agreement with Sprint; and
- the trademark and service mark license agreement with Sprint PCS.
THE MANAGEMENT AGREEMENT
Under our Sprint PCS agreements, we have agreed to:
- construct and manage a network in our territory in compliance with Sprint
PCS' PCS licenses and the terms of the management agreement;
- distribute, during the term of the management agreement, Sprint PCS
products and services;
- conduct advertising and promotion activities in our territory; and
- 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. As of June 30,
2000, we had not yet met the minimum covered population requirements under the
Sprint PCS agreements for Roanoke, Fairmont, Martinsville, Lynchburg,
Staunton-Waynesboro, and Danville. Sprint PCS has agreed that the shortfalls
were not material and agreed that if we met our build-out requirement by
December 31, 2000, we would not be in breach of our management agreement. We
have subsequently extended our coverage in these markets.
We did not launch certain of our Bright PCS markets by the date set forth
in the Sprint PCS agreements. We were unable to obtain the required backhaul
from local exchange carriers by that date, despite using commercially reasonable
efforts. Sprint PCS agreed in writing that we are in compliance with the
build-out requirements in these markets. We have subsequently obtained the
required backhaul services and launched these markets.
By the third quarter of 2001, we are required to provide aggregate coverage
of 65% in our new Pennsylvania, New York, Ohio, and New Jersey markets. Sprint
PCS has reviewed our build-out plans, and has agreed in writing that if we meet
those plans, we will be fully compliant with their build-out requirements.
Under our Sprint PCS agreements for Horizon Personal Communications, Sprint
PCS can decide to expand the coverage requirements of our territory by providing
us with written notice. We have 90 days after receiving notice from Sprint PCS
to determine whether we will build out the
70
<PAGE> 75
proposed area. If we decline to exercise our right to build out the proposed
area, Sprint PCS may construct the new area itself or allow a Sprint PCS
affiliate or other manager to construct the new area.
Under our Sprint PCS agreements for Bright PCS, Sprint PCS can decide to
expand the coverage requirements of our Bright PCS territory by providing us
with written notice, provided that Sprint PCS may not give us notice until
October 12, 2001, which is the second anniversary of the signing of our Sprint
PCS agreement. If we decline or fail to comply with Sprint PCS' expanded
coverage requirements, Sprint PCS will have the right to terminate our Sprint
PCS agreement for our Bright PCS markets. We believe it is unlikely that Sprint
PCS will request additional coverage beyond the 85% coverage we plan to achieve
for these markets. There is no cross default provision between our Sprint PCS
agreement for Horizon Personal Communications and the Sprint PCS agreements for
Bright PCS.
Our Sprint PCS management agreements require us to complete specified
portions of our markets by certain dates. Future build-out dates are summarized
below:
<TABLE>
<CAPTION>
ESTIMATED COVERED
TOTAL POPULATION POPULATION REQUIREMENT
---------------- ----------------------
<S> <C> <C>
October 2000....................................... 3,084,254 2,063,977
December 2000...................................... 182,301 65,538
October 2001....................................... 2,590,067 1,722,718
February 2002...................................... 560,000 147,365
</TABLE>
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
distributor or Sprint PCS approves the terms and conditions. Subject to
agreements existing before we became a Sprint PCS affiliate, we are required to
use Sprint's long distance service which we can buy at wholesale rates.
NATIONAL SALES PROGRAMS. We will participate in the Sprint PCS sales
programs for national sales to customers, and will pay the expenses and receive
the compensation from national accounts located in our territory.
SERVICE PRICING. We must offer Sprint PCS subscriber pricing plans
designated for regional or national offerings, including Sprint PCS' Free and
Clear plans. We are permitted to establish our own local price plans for Sprint
PCS' products and services offered only in our territory, subject to the terms
of the agreement, consistency with Sprint PCS' regional and national pricing
plans, regulatory requirements, capability and cost of implementing rate plans
in Sprint PCS systems and Sprint PCS' approval.
FEES. We are entitled to receive from Sprint PCS an amount equal to 92% of
collected revenues under the Sprint PCS agreements. Collected revenues include
revenue from Sprint PCS subscribers based in our territory, excluding outbound
roaming, and inbound non-Sprint PCS
71
<PAGE> 76
roaming. Except in the case of taxes, we are entitled to 100% of the following
revenues that are not considered collected revenues:
- outbound non-Sprint PCS roaming revenue;
- inbound and outbound Sprint PCS roaming fees;
- proceeds from the sales of handsets and accessories through our
distribution channels;
- proceeds from sales not in the ordinary course of business; and
- 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 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 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.
INABILITY TO USE NON-SPRINT PCS BRANDS. We may not market, promote,
advertise, distribute, lease or sell any of the Sprint PCS products and services
on a non-branded, "private label" basis or under any brand, trademark or trade
name other than the Sprint PCS brand, except for sales to resellers or as
otherwise permitted under the trademark and service mark license agreements.
72
<PAGE> 77
TERMINATION OF MANAGEMENT AGREEMENT. The management agreement can be
terminated as a result of:
- termination of Sprint PCS' PCS licenses;
- an uncured breach under the management agreement;
- bankruptcy of a party to the management agreement;
- the management agreement not complying with any applicable law in any
material respect;
- the termination of either of the trademark and service mark license
agreements; or
- 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 certain of our rights and those of Sprint PCS.
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:
- 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;
- 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
- 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:
- require us to sell our operating assets to Sprint PCS for an amount equal
to 72% of our Entire Business Value;
- 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;
- 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
- 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:
- 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
- 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
73
<PAGE> 78
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:
- purchase all of our operating assets for an amount equal to 80% of our
Entire Business Value; or
- require us to purchase, subject to governmental approval, the licensed
spectrum for an amount equal to the greater of (1) the original cost to
Sprint PCS of the license plus any microwave relocation costs paid by
Sprint PCS or (2) 10% of our Entire Business Value.
DETERMINATION OF ENTIRE BUSINESS VALUE. If the Entire Business Value is to
be determined, we and Sprint PCS will each select one independent appraiser and
the two appraisers will select a third appraiser. The three appraisers will
determine the Entire Business Value on a going concern basis using the following
guidelines:
- the Entire Business Value is based on the price a willing buyer would pay
a willing seller for the entire on-going business;
- then-current customary means of valuing a wireless telecommunications
business will be used;
- the business is conducted under the Sprint and Sprint PCS brands and the
Sprint PCS agreements;
- that we own the spectrum and frequencies presently owned by Sprint PCS
that we use and are subject to the Sprint PCS agreements; and
- the valuation will not include any value for businesses not directly
related to the Sprint PCS products and services, and such businesses will
not be included in the sale.
INSURANCE. We are required to obtain and maintain workers' compensation
insurance, commercial general liability insurance, business automobile
insurance, umbrella excess liability insurance and "all risk" property insurance
with financially reputable insurers who are licensed to do business in all
jurisdictions where any work is performed under the management agreement and who
are reasonably acceptable to Sprint PCS.
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 the foregoing
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 this agreement, except we will not indemnify
Sprint PCS for any claims arising solely from the negligence or willful
misconduct of Sprint PCS. Sprint PCS has agreed to indemnify us and our
directors, employees and agents against all claims against any of the foregoing
arising from Sprint PCS' violation of any law, from Sprint PCS' breach of any
representation, warranty or covenant contained in this agreement or any other
agreement between Sprint PCS and us, or the actions or the failure to act of
anyone who is employed or hired by Sprint PCS in the performance of any work
under this agreement except Sprint PCS will not indemnify us for any claims
arising solely from our negligence or willful misconduct.
THE SERVICES AGREEMENTS
The services agreements outline various 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
74
<PAGE> 79
each twelve month period. Some of the available services include: billing,
customer care, activation, credit checks, handset logistics, home locator
record, voice mail, prepaid services, directory assistance, operator services,
roaming fees, roaming clearinghouse fees, interconnect fees and inter-service
area fees. Sprint PCS offers three packages of available services. Each package
identifies which services must be purchased from Sprint PCS and which may be
purchased from a vendor or provided in-house. Essentially, services such as
billing, activation and customer care must either all be purchased from Sprint
PCS or we may provide those services ourselves. When we signed our original
Sprint PCS agreements, we elected to provide billing, activation and customer
care services on our own. In connection with the May 2000 grant by Sprint PCS of
additional markets to us, we agreed to change our arrangement under the services
agreement, so that Sprint PCS will provide activation, billing and customer
care. For our Bright PCS markets and our new markets in Pennsylvania, New York
and New Jersey, we intend to launch these markets using Sprint PCS billing and
customer care services. Sprint PCS may contract with third parties to provide
expertise and services identical or similar to those to be made available or
provided to us. We have agreed not to use the services received under the
services agreement in connection with any other business or outside our
territory. We may discontinue use of any service upon three months' prior
written notice. Sprint PCS may discontinue a service provided that Sprint PCS
provides us with nine months' prior notice.
We have agreed with Sprint PCS to indemnify each other as well as officers,
directors, employees and certain 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 certain
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'
75
<PAGE> 80
abandonment of the licensed marks or if Sprint or Sprint PCS files for
bankruptcy, or the management agreement is terminated.
CONSENT AND AGREEMENT FOR THE BENEFIT OF THE HOLDERS OF THE SENIOR SECURED
CREDIT FACILITY
Sprint PCS entered into a consent and agreement for the benefit of the
holders of the indebtedness under the senior secured credit facility. This
agreement was acknowledged by us, and modified Sprint PCS' rights and remedies
under our management agreement, for the benefit of the existing and future
holders of indebtedness under our senior secured credit facility and any
refinancing thereof, which was a condition to the funding of any amounts under
our senior secured credit facility.
The senior secured consent provides for, among other things, the following:
- Sprint PCS' consent to the pledge of substantially all of our assets,
including our rights in the Sprint PCS agreements;
- 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;
- for redirection of payments due to us under the management agreement from
Sprint PCS to the administrative agent during the continuation of our
default under our senior secured credit facility;
- 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;
- for Sprint PCS and the administrative agent to provide to each other
notices of default by us under the Sprint PCS management agreement and the
senior secured credit facility, respectively; and
- 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:
- Sprint PCS elects to make such a purchase of our operating assets within
a specified period;
- 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;
- 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 specified period
after the acceleration or until Sprint PCS rescinds its intention to
purchase; and
- if we receive a written offer after a specified 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.
76
<PAGE> 81
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:
- to sell the assets to an entity that meets the requirements to be our
successor under the Sprint PCS agreements; or
- to sell the assets to any third-party, subject to specified conditions.
77
<PAGE> 82
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following are our directors and executive officers as of the date of
this prospectus.
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
William A. McKell....................... 40 Chairman of the Board, President and
Chief Executive Officer
Peter M. Holland........................ 35 Director, Chief Financial Officer
Joseph E. Corbin........................ 45 Vice President, Technology
Joseph J. Watson........................ 35 Vice President, Sales and Marketing
Monesa S. Skocik........................ 38 Vice President, Customer Operations
Robert A. Katz.......................... 32 Director
Thomas McKell........................... 64 Director
Phoebe H. McKell........................ 53 Director
Lonnie D. Pedersen...................... 44 Director
Marc J. Rowan........................... 37 Director
</TABLE>
WILLIAM A. MCKELL has served as Chairman of the Board, President and Chief
Executive Officer of Horizon PCS since its inception in April 2000 and has
served as President, Chief Executive Officer and Chairman of the Board of
Horizon Personal Communications since May 1996 and as President of Bright PCS
since its formation in September 1999. Mr. McKell has 13 years of
telecommunications experience. Mr. McKell served as Vice President of Network
Services from January 1996 to April 1996 and Director of Network Services from
August 1994 to December 1995 for The Chillicothe Telephone Company, a
traditional local telephone company. Mr. McKell 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 13 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.
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 seven years including various management
positions at The Chillicothe Telephone Company and sales positions at Cincinnati
Bell Long Distance.
78
<PAGE> 83
JOSEPH E. CORBIN has served as Vice President of Technology of Horizon PCS
since 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 22 years
including various management and technical positions at The Chillicothe
Telephone Company.
MONESA S. SKOCIK has served as Vice President of Customer Operations of
Horizon PCS since its inception in April 2000 and of Horizon Personal
Communications since August 1999. Ms. Skocik has over three 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.
ROBERT A. KATZ was appointed a director of Horizon PCS in September 2000.
Mr. Katz is a senior principal of Apollo Advisors, with which he has been
associated since 1990, and which, together with affiliated investment managers,
manages the Apollo investment funds, including Apollo Investment Fund IV, L.P.
Mr. Katz is also a director of Aris Industries, Inc., Clark Retail Group, Inc.,
Quality Distribution, Inc., Vail Resorts, Inc. and Vinciv Corporation. Mr. Katz
was appointed to the board pursuant to the terms of the Investors Rights and
Voting Agreement entered into in connection with the sale of convertible
preferred stock in September 2000. See "Certain Transactions -- Issuance of
Convertible Preferred Stock."
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 45 years of telecommunications experience. 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 22 years of telecommunications experience.
From 1989 to 1996, she was Director of Administration for The Chillicothe
Telephone Company.
LONNIE D. PEDERSEN has served as President of Telephone Service Company
since 1993. Mr. Pedersen has 22 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.
MARC J. ROWAN was appointed a director of Horizon PCS in September 2000.
Mr. Rowan is one of the founding principals of Apollo Advisors, L.P. which,
together with affiliated investment managers, manages the Apollo investment
funds, including Apollo Investment Fund IV, L.P. Mr. Rowan is also a director of
Vail Resorts, Inc., Quality Distribution, Inc., National Financial Partners,
Inc., NRT Incorporated, Rare Medium Group, Inc. and Wyndham International, Inc.
Mr. Rowan is also a founding member and serves on the executive committee of the
Youth Renewal Fund and is a member of the board of directors of National Jewish
Outreach Program and the
79
<PAGE> 84
Undergraduate Executive Board of The Wharton School. Mr. Rowan was appointed to
the board pursuant to the terms of the Investors Rights and Voting Agreement
entered into in connection with the sale of convertible preferred stock in
September 2000. See "Certain Transactions -- Issuance of Convertible Preferred
Stock."
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 Marc J. Rowan will serve as Class I directors, and will stand for
election at the annual meeting of stockholders to be held in 2001. Peter M.
Holland and Thomas McKell will serve as Class II directors and will stand for
election at the annual meeting of stockholders to be held in 2002. Robert A.
Katz, William A. McKell and Lonnie Pedersen will serve as Class III directors
and will stand for election at the annual meeting of stockholders to be held in
2003. Following these elections, directors in each class will serve for a term
of three years, or until their successors have been elected and qualified, and
will 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
We will have an audit committee which will be 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. Lonnie Pedersen has been appointed to serve on the audit
committee. The board of directors has not designated the other members of the
committee, but intends to do so promptly after this offering.
We will have a compensation committee which will be responsible for
reviewing and approving all compensation arrangements for our officers, and will
also be responsible for administering the stock option plan. The board of
directors has not designated the members of the committee, but intends to do so
promptly after this offering.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
For the year ended December 31, 1999, 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.
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 his or her actions in such capacity.
We intend to enter into agreements to indemnify our directors and officers
in addition to indemnification provided for in our certificate of incorporation.
These agreements will indemnify our directors and officers for certain expenses,
including attorneys' fees, judgments, fines and settlement
80
<PAGE> 85
amounts incurred by any such person in any action or proceeding, including any
action by us or in our right, arising out of such 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
intend to obtain directors' and officers' insurance providing indemnification
for certain of our directors, officers and employees for certain 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 such indemnification.
DIRECTOR COMPENSATION
Currently, we do not compensate our directors. We do reimburse directors
for their expenses incurred in connection with attending board meetings.
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 $100,000 during the year ended December
31, 1999.
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
--------------------- SECURITIES ALL OTHER
NAME AND PRINCIPAL POSITION SALARY($) BONUS($) UNDERLYING OPTIONS(#) COMPENSATION($)
<S> <C> <C> <C> <C>
William A. McKell........... $107,125 $9,641 1,614,186 $8,934(1)
Chairman of the Board,
President and Chief
Executive Officer
Peter M. Holland............ -- -- 1,614,186 --
Chief Financial Officer(2)
</TABLE>
-------------------------
(1) Includes a yearly car allowance of $7,428 and a 401(k) contribution of
$1,506.
(2) Mr. Holland became Chief Financial Officer on November 17, 1999, but did not
receive any compensation in 1999. Mr. Holland will receive a salary of
$150,000 during 2000. See "Certain 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 $419,000 in 1997.
The following table presents information with respect to the options to
purchase class B common stock granted to directors and executive officers in
1999.
OPTION GRANTS IN FISCAL YEAR 1999
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES OF
APPRECIATION FOR OPTION TERM
NUMBER OF % OF TOTAL -----------------------------------------------------
SECURITIES OPTIONS BASED ON BASED ON INITIAL
UNDERLYING GRANTED TO EXERCISE EXERCISE PRICE PUBLIC OFFERING PRICE(4)
OPTIONS EMPLOYEES IN PRICE EXPIRATION --------------------- -----------------------------
NAME GRANTED(#)(1) FISCAL YEAR ($/SH)(2) DATE(3) 5%($) 10%($) 5%($) 10%($)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
William A. McKell.... 1,614,186 38.46% $0.1209 12/1/09 $122,634 $310,780 $31,356,912 $50,046,238
Peter M. Holland..... 1,614,186 38.46% $0.1209 12/1/09 $122,634 $310,780 $31,356,912 $50,046,238
</TABLE>
-------------------------
81
<PAGE> 86
(1) The options vest and become exercisable in six annual installments and have
a term which expires ten years from the date of grant. In 1999, we granted
options to purchase a total of 4,196,884 shares of class B common stock.
(2) The exercise price was fixed at the fair market value as determined by the
board of directors on the date of grant.
(3) Options are subject to earlier termination in the event of death,
disability, retirement, or termination of employment.
(4) This information is based on an assumed initial public offering price of
$12.00 per share, the mid-point of the proposed offering price range.
None of our named executive officers exercised stock options in the fiscal
year ended December 31, 1999. 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, 1999. There was no public market for our
common stock as of December 31, 1999. Accordingly, the fair market value on
December 31, 1999 is based on an assumed initial public offering price of $12.00
per share, the mid-point of the proposed offering price range. This valuation at
December 31, 1999 does not represent the actual value of our stock at December
31, 1999.
AGGREGATED OPTION EXERCISES IN FISCAL YEAR 1999
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT YEAR END(#) OPTIONS AT YEAR END($)
---------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
<S> <C> <C> <C> <C>
William A. McKell................... 134,516 1,479,670 $1,614,192 $17,756,040
Peter M. Holland.................... 134,516 1,479,670 $1,614,192 $17,756,040
</TABLE>
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 $175,000 to Mr.
McKell and $150,000 to Mr. Holland. In addition to their base salary, Mr. McKell
and Mr. Holland are eligible to receive an annual bonus up to 40% of their base
salary. In addition, Mr. McKell and Mr. Holland are eligible to participate in
all of our employee benefit plans and policies.
The employment agreements provide that Mr. McKell or Mr. Holland's
employment may be terminated with or without cause, as defined in the agreement.
If either Mr. McKell or Mr. Holland is terminated without cause, he is entitled
to receive 24 months base salary, the vesting of all of his stock options on the
date of termination, and 24 months of health and dental benefits. Under the
employment agreements, both Mr. McKell and Mr. Holland have agreed to a
restriction on their present and future employment. They have agreed not to
compete in the business of wireless telecommunications either directly or
indirectly within our markets while employed by us and for a period of twelve
months after termination of employment.
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
82
<PAGE> 87
granted under the option plan is 7.5 million 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 at an exercise price of $0.1209.
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 certain other limitations which
allow the option holder to qualify for favorable tax treatment. Nonqualified
options may have an exercise price of less than, equal to or greater than the
fair market value of the underlying common stock on the date of grant but are
limited to an exercise period of no longer than ten years.
The board of directors or the compensation committee will determine the
persons to whom options will be granted and the terms, provisions, limitations
and performance requirements of each option granted, and the exercise price of
an option.
An option will not be not transferable except by will or by the laws of
descent or distribution or unless determined otherwise by our board of directors
or the compensation committee.
Unless previously exercised, a vested option granted under the option plan
will terminate automatically:
- twelve months after the employee's termination of employment by reason of
disability or death; and
- 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 certain action if Horizon PCS is acquired, unless the individual option
grants provide otherwise. Those actions can include the authorization to
purchase option grants from plan participants, or make adjustments or
modifications to outstanding options granted to protect and maintain the rights
and interests of the plan participants or accelerate the vesting of outstanding
options. To date, all individual option grants have provided that the options
will accelerate and become fully exercisable upon an acquisition of the company.
83
<PAGE> 88
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of our voting securities, and as adjusted to reflect the sale of the
shares of class A common stock in this offering, the redemption of 15,834,998
shares of the convertible preferred stock and the conversion of the remaining
shares of convertible preferred stock into common stock, as of September 30,
2000 by:
- each person who, to our knowledge, is the beneficial owner of 5% or more
of a class of our outstanding common stock;
- each of our directors;
- each of the executive officers; and
- 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 such person has or shares voting power or investment
power with respect to such 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.
<TABLE>
<CAPTION>
CLASS A CLASS B PERCENTAGE OF TOTAL VOTING
COMMON STOCK COMMON STOCK POWER (ALL CLASSES)(2)
----------------------- -------------------- --------------------------------
NAME AND ADDRESS(1) NUMBER PERCENT NUMBER PERCENT BEFORE OFFERING AFTER OFFERING
<S> <C> <C> <C> <C> <C> <C>
Horizon Telcom....... -- -- 53,806,200 92.0% 88.1% 89.0%
Apollo Management VI,
L.P.(3)............ 21,096,559 80.9% -- -- 3.5% 1.4%
Ares Management II
L.P.(4)............ 2,380,124 9.1% -- -- * *
First Union(5)....... 2,610,554 10.0% -- -- * *
William A.
McKell(6).......... -- -- 269,031 * * *
Peter M.
Holland(6)......... -- -- 269,031 * * *
Joseph E.
Corbin(6).......... -- -- 94,161 * * *
Joseph J.
Watson(6).......... -- -- 94,161 * * *
Monesa S.
Skocik(6).......... -- -- 94,161 * * *
Thomas McKell(7)..... -- -- 53,806,200 92.0% 88.1% 89.0%
Phoebe H. McKell(6).. -- -- 26,903 * * *
Lonnie D.
Pedersen(8)........ -- -- 1,519,907 2.6% 2.5% 2.5%
Robert A. Katz(9).... -- -- -- -- -- --
Marc J. Rowan(9)..... -- -- -- -- -- --
All Executive
Officers and
Directors as a
Group (10
persons)(9)(10).... -- -- 56,173,555 94.7% 90.7% 91.6%
</TABLE>
-------------------------
* 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
84
<PAGE> 89
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 21,096,559 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 19,986,880 shares of common stock
beneficially owned by Apollo Investment Fund IV, L.P., and 1,109,769 shares
of common stock beneficially owned by Apollo Overseas Partners IV, L.P.
Apollo Management IV, L.P. manages these two Apollo funds. Upon the
completion of this offering, 12,805,743 of these shares will be redeemed at
$5.42 per share, and the remainder will be converted to class A common
stock. The holders of the convertible preferred stock are entitled to one
vote per share of convertible preferred stock. Messrs. Katz and Rowan,
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, NY 10019.
(4) Represents 2,380,124 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 1,190,062 shares of common stock beneficially owned by
Ares Leveraged Investment Fund, L.P., and 1,190,062 shares of common stock
beneficially owned by Ares Leveraged Investment Fund II, L.P. Upon the
completion of this offering, 1,444,750 of these shares will be redeemed at
$5.42 per share, and the remainder will be converted to class A common
stock. 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. The address for the Apollo stockholders is 1999
Avenue of the Stars, Suite 1900, Los Angeles, California 90067.
(5) Represents shares issuable upon the assumed conversion of the convertible
preferred stock. First Union received 2,610,554 shares of convertible
preferred stock upon conversion of the $13.4 million short-term convertible
note plus accrued interest. Each share of convertible preferred stock is
convertible into one share of class A common stock. Each holder of
convertible preferred stock is entitled to one vote per share. Upon
completion of this offering, 1,584,505 of these shares will be redeemed at
$5.42 per share, and the remainder will be converted into class A common
stock. See "Description of Capital Stock -- Convertible Preferred Stock."
(6) Reflects shares of class B common stock issuable upon exercise of stock
options that are presently exercisable or exercisable within 60 days of the
date of this prospectus.
(7) Includes 53,806,200 shares held by Horizon Telcom. Thomas McKell is the
President of Horizon Telcom, and shares voting and investment power with
regard to these shares. Mr. McKell disclaims beneficial ownership of these
shares.
(8) Includes 1,455,678 shares of class B common stock held by Telephone Service
Company. Mr. Pedersen is the President of Telephone Service Company and
shares voting and investment power with regard to these shares. Mr.
Pedersen disclaims beneficial ownership of these shares.
(9) Does not include shares held by Apollo. Each of Messrs. Katz and Rowan,
directors of Horizon PCS and principals of Apollo Advisors, L.P., disclaims
beneficial ownership of the securities held by Apollo.
(10) Includes 847,448 shares of class B common stock issuable upon exercise of
stock options that are presently exercisable or exercisable within 60 days
of the date of this prospectus.
85
<PAGE> 90
CERTAIN 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 United Communications, Inc. Horizon Services and United
Communications 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:
- direct labor charges at cost; and
- 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 $960,000 in 1999, $330,000 in 1998, $319,000 in 1997 and $1.8
million for the six months ended June 30, 2000. The payable to Horizon Services
for these services as of December 31, 1999 and June 30, 2000 was $499,000 and
$1.3 million, respectively. Horizon Services also provides administrative
services to Bright PCS.
Horizon Personal Communications, our subsidiary, has entered into a
services agreement with United Communications, Inc., a wholly-owned subsidiary
of Horizon Telcom. Under the services agreement, Horizon Personal Communications
provides services to United Communications including customer activation and
deactivation, customer care support and other administrative services that
United Communications would otherwise be required to undertake on its own. This
arrangement has a term of one year, with the right to renew the agreement for
additional terms of three months thereafter. Either party has the right to
terminate the agreement during its term by providing 30 days written notice to
the other party. Horizon Personal Communications is entitled to the following
compensation from United Communications for services provided:
- direct labor charges at cost; and
- expenses and costs which are directly attributable to the activities
covered by the agreement on a direct allocations basis.
In addition, United Communications must pay Horizon Personal Communications
$4,000 each month of the term of the services agreement.
86
<PAGE> 91
Horizon Personal Communications, upon request, is required to provide
United Communications with access to Horizon Personal Communications' records
with respect to the provision of services, and Horizon Personal Communications
is also required to provide regular reports to United Communications, as it may
request.
CONSULTING AGREEMENT
Mr. Holland, the Chief Financial Officer of Horizon PCS, was a principal
and 50% owner of The Pinnacle Group which provided strategic, business planning
and regulatory consulting services to Horizon Personal Communications. Pinnacle
received consulting fees of approximately $267,000 in 1999, $204,000 in 1998 and
$419,000 in 1997. Mr. Holland joined Horizon PCS in November 1999. Horizon PCS
believes that the consulting fees paid to Pinnacle were on terms no less
favorable to Horizon PCS than would have been obtained from a non-affiliate.
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
wireless operations to United Communications, a subsidiary of Horizon Telcom,
for a purchase price of approximately $708,000. United Communications paid the
purchase price by delivering a promissory note with an interest rate equal to
the applicable federal rate, which was 6.0%. Principal and interest on the note
are payable in one payment due one year after the date of the purchase.
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. The monthly
rental payments under the lease are $10,000. Prior to signing the lease
agreement in May 2000, Horizon PCS rented the office space from The Chillicothe
Telephone Company under a month-to-month rental arrangement. Under this lease,
Horizon PCS paid The Chillicothe Telephone Company $22,300, $22,300 and $37,500
in 1998, 1999, and for the six months ended June 30, 2000. We believe that the
lease was made on terms no less favorable to Horizon PCS than would have been
obtained from a non-affiliated third party. The lease term expires in May 2005.
Horizon PCS has the option to renew the lease for an additional two year period.
It is the expectation of management that the lease will be renewed.
LEASE OF CELL SITES
Prior to October 1999, we leased most of our cell sites from Horizon
Telcom. In 1998 and 1999, we paid $1.3 million and $2.0 million, respectively,
to Horizon Telcom under this lease. The lease was terminated in October 1999
when the leased assets were sold by Horizon Telcom to SBA.
STOCK DIVIDEND
Prior to September 2000, we owned 46,989 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.
TAX SHARING AGREEMENT
In 1997, Horizon Personal Communications entered into a tax-sharing
agreement with Horizon Telcom. This agreement provides that Horizon Telcom and
its subsidiaries will file a consolidated tax
87
<PAGE> 92
return as long as they are eligible to do so, and that Horizon PCS will be paid
for the amount of its taxable net operating losses used by Horizon Telcom to
offset taxable income. For 1997, 1998 and 1999, Horizon Personal Communications
had taxable net operating losses of $5.9 million, $12.6 million and $16.5
million, respectively. For the years ended December 31, 1999, and the six months
ended June 30, 2000, Horizon Telcom paid an aggregate of $5.2 million and $1.2
million, respectively, to Horizon PCS under the agreement. As of December 31,
1999 and June 30, 2000, we had a receivable from Horizon Telcom for federal
income taxes attributable to the benefit to be received by Horizon Telcom due to
Horizon PCS' net losses of $2.6 million and $3.4 million, respectively. Due to
the sale of the convertible preferred stock in September 2000, we 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.
PAYABLE TO HORIZON TELCOM
At June 30, 2000, we had a payable to Horizon Telcom relating to cash
advances received from Horizon Telcom's line of credit and the associated
interest. The cash advances related to this payable were used to finance
operations. The outstanding balance as of December 31, 1999 and June 30, 2000
was $4.4 million and $8.5 million, respectively. Subsequent to June 30, 2000,
this balance was repaid with proceeds from the RTFC financing.
POLICY REGARDING RELATED PARTY TRANSACTIONS
We have established a policy that all related party transactions (including
transactions with Horizon Telcom and its affiliates) will be reviewed by the
audit committee of our board of directors. Our policy is that all related party
transactions will be on terms at least as favorable to Horizon PCS as a similar
transaction with unrelated parties.
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. 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. On or before April 30, 2001, we have the right, under certain
circumstances, including certain initial public offerings and certain business
combination transactions, to repurchase all of the Series A-1 Convertible
Preferred Stock for 107% of its issue price, or $5.42 per share. Subject to
certain restrictions, the convertible preferred stock is convertible into shares
of our class A common stock (on a share-for-share basis) at any time by holders
thereof and upon the occurrence of certain events. See "Description of Capital
Stock." Assuming full conversion of the $126.5 million of convertible preferred
stock, the investor group (or successors thereto) will beneficially own
approximately 27.7% of our outstanding class A and class B common stock on a
combined, as-converted basis based on the number of outstanding shares of our
common stock as of the closing of this offering (representing 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 senior discount note offering and the options
which have been granted under the 2000 stock option plan. For more information
relating to the terms of the convertible preferred stock, including redemption
rights and approval rights, see "Description of Capital Stock."
88
<PAGE> 93
SECURITIES PURCHASE AGREEMENT. In the Securities Purchase Agreement
between us and the investor group, we agreed that we will not take specified
actions relating to our business, our capital stock and other aspects of our
operations without the prior approval of the investor group. Among those actions
are the following:
- the declaration or payment of certain dividends or distributions;
- entering into certain business combination transactions, including
certain mergers or consolidations;
- amend 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;
- engaging in any business other than the business we currently engage in;
- subject to certain exceptions, enter into affiliate transactions or remit
payments in excess of specified amounts to related parties under existing
services agreements;
- subject to certain exceptions, acquiring or disposing of assets or a
business with an aggregate value in excess of $5.0 million;
- adopting a new employee option or incentive plan;
- subject to certain exceptions, the issuance or sale of any 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 with respect to certain mergers and acquisitions;
- subject to certain exceptions, increasing the size of our board of
directors;
- subject to certain exceptions, the incurrence of any indebtedness for
borrowed money;
- subject to fiduciary duties, retaining or terminating certain senior
executive officers including the chief executive officer and the chief
financial officer; and
- making capital expenditures, other than as permitted by the senior
secured credit facility and in certain other limited circumstances.
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 the fifth anniversary of the date of
the issuance of the convertible preferred stock, 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 such an auction, the repurchase right of the investor group
expires. If, however, a bona fide offer is received upon such an auction,
Horizon PCS must be sold 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. Our new
senior secured credit facility and the senior discount notes prohibit us from
repurchasing any convertible preferred stock.
Until we have completed a public offering of our class A stock in which we
receive at least $30.0 million and subject to certain exceptions, the investors
in the investor group led by Apollo Management have a preemptive right to
purchase their portion of any future issuances of equity or equity-linked
securities of Horizon PCS so as to maintain their as-converted ownership
percentage.
The approval rights of the investor group and most of the other rights
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
89
<PAGE> 94
proceeds of at least $65.0 million and in which we receive a per share price
that exceeds a certain threshold 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 which
provides for, among other things, the matters described below:
- co-sale rights in favor of the investor group allowing it to participate
in certain sales of our capital stock by Horizon Telcom;
- bring-along rights in favor of Horizon Telcom requiring the investor
group to sell all of our capital stock owned by it if Horizon Telcom
accepts an offer meeting certain criteria to sell all of our capital
stock owned by it;
- subject to certain requirements regarding the investor group's ownership
of our capital stock, the right of the investor group to designate up to
two members of our Board of Directors; and
- subject to certain requirements regarding the investor group's ownership
of our capital 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 Marc Rowan
as Apollo's designees to our board of directors. See "Management."
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:
- demand registration rights that entitle them to require us to register,
at our expense, the resale of their shares under the Securities Act; and
- 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.
These registration rights extend to all of the class A common stock that
the investor group or its successors may acquire upon the conversion of their
convertible preferred stock. These registration rights are subject to the right
of the underwriters of any underwritten offering to limit the number of shares
included in the registration.
90
<PAGE> 95
CONVERSION OF SHORT-TERM CONVERTIBLE NOTE
In connection with the sale of the convertible preferred stock, the holder
of our $13.4 million short-term convertible note converted the note plus accrued
interest into the same convertible preferred stock purchased by the investor
group led by Apollo Management. For more information relating to the terms of
the convertible preferred stock, including redemption rights and approval
rights, see "Description of Capital Stock."
91
<PAGE> 96
REGULATION OF THE WIRELESS TELECOMMUNICATIONS INDUSTRY
The FCC regulates the licensing, construction, operation, acquisition and
interconnection arrangements of wireless telecommunications systems in the
United States.
The FCC has adopted, and is in the process of adopting, a series of rules,
regulations and policies to, among other things:
- grant or deny licenses for PCS frequencies;
- grant or deny PCS license renewals;
- rule on assignments and/or transfers of control of PCS licenses;
- govern the interconnection of PCS networks with the networks of other
wireless and wireline carriers;
- 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;
- 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;
- possibly permit commercial mobile radio service spectrum to be used for
transmission of programming material targeted to a limited audience;
- impose fines and forfeitures for violations of any of the FCC's rules;
and
- regulate the technical standards of PCS networks.
The FCC currently prohibits a single entity from having a combined
attributable interest of 20% or greater interest in broadband PCS, cellular, and
specialized mobile radio service licenses totaling more than 45 MHz in any urban
areas or 55 MHz in rural areas. Interests held by passive institutional
investors, small companies and rural telephone companies are not usually deemed
attributable for purposes of this prohibition if these interests do not exceed
40%.
TRANSFERS AND ASSIGNMENTS OF PCS LICENSES
The FCC must give prior approval to the assignment of, or transfers
involving, substantial changes in ownership or control of a PCS license.
Non-controlling interests in an entity that holds a PCS license or operates PCS
networks generally may be bought or sold without prior FCC approval. In
addition, a recent FCC order requires only post-consummation notification of
certain pro forma assignments or transfers of control.
CONDITIONS OF PCS LICENSES
All PCS licenses are granted for ten-year terms conditioned upon timely
compliance with the FCC's build-out requirements. Pursuant to the FCC's
build-out requirements, all 30 MHz broadband PCS licensees must construct
facilities that offer coverage to one-third of the population within five years
and to two-thirds of the population within ten years, and all ten MHz broadband
PCS licensees must construct facilities that offer coverage to at least
one-quarter of the population within five years or make a showing of
"substantial service" within that five-year period. Rule violations could result
in license revocations. The FCC also requires licensees to maintain a certain
degree of control over their licenses. The Sprint PCS agreements reflect an
arrangement that the parties believe meets the FCC requirements for licensee
control of licensed spectrum. If the FCC were to determine that our agreements
with Sprint PCS need to be modified to increase the level of licensee control,
the Sprint PCS agreements may be modified to cure any purported deficiency
regarding licensee control of the licensed spectrum.
92
<PAGE> 97
PCS LICENSE RENEWAL
PCS licensees can renew their licenses for additional ten-year terms. PCS
renewal applications are not subject to auctions. However, under the FCC's
rules, third parties may oppose renewal applications and/or file competing
applications. If one or more competing applications are filed, a renewal
application will be subject to a comparative renewal hearing. The FCC's rules
afford PCS renewal applicants involved in comparative renewal hearings with a
"renewal expectancy." The renewal expectancy is the most important comparative
factor in a comparative renewal hearing and is applicable if the PCS renewal
applicant has: (1) provided "substantial service" during its license term; and
(2) substantially complied with all applicable laws and FCC rules and policies.
The FCC's rules define "substantial service" in this context as service that is
sound, favorable and substantially above the level of mediocre service that
might minimally warrant renewal.
INTERCONNECTION
The FCC has the authority to order interconnection between commercial
mobile radio providers and any other common carrier. The FCC has ordered
traditional telephone companies to provide compensation to commercial mobile
radio providers for the termination of traffic. Using these new rules, we will
negotiate interconnection agreements for the Sprint PCS network in our market
area with the major regional Bell operating companies, GTE, Sprint and several
smaller independent local exchange carriers. Interconnection agreements are
negotiated on a state-wide basis. If an agreement cannot be reached, parties to
interconnection negotiations can submit outstanding disputes to state
authorities for arbitration. Negotiated interconnection agreements are subject
to state approval. On July 18, 2000, the FCC adopted an order denying requests
for mandatory interconnection between resellers' switches and commercial mobile
radio providers' networks, and declining to impose general interconnection
obligations between such networks.
OTHER FCC REQUIREMENTS
In June 1996, the FCC adopted rules that prohibit broadband PCS providers
from unreasonably restricting or disallowing resale of their services or
unreasonably discriminating against resellers. Resale obligations will
automatically expire on November 24, 2002. The FCC recently decided that these
prohibitions apply to services and not to equipment such as handsets, whether
alone or in bundled packages.
The FCC also adopted rules in June 1996 that require local exchange and
most commercial mobile radio carriers, to program their networks to allow
customers to change service providers without changing telephone numbers, which
is referred to as service provider number portability. The FCC currently
requires most commercial mobile radio carriers to implement nationwide roaming.
Most commercial mobile radio carriers are required to implement nationwide
roaming by November 24, 2002 as well. The FCC currently requires most commercial
mobile radio providers to be able to deliver calls from their networks to
numbers anywhere in the country, and to contribute to the Local Number
Portability Fund.
The FCC has adopted rules permitting broadband PCS and other commercial
mobile radio providers to provide wireless local loop and other fixed services
that would directly compete with the wireline services of local telephone
companies. In June 1996, the FCC adopted rules requiring broadband PCS and other
commercial mobile radio providers to implement enhanced emergency 911
capabilities within 18 months after the effective date of the FCC's rules. Full
compliance with these rules must occur by October 1, 2001.
93
<PAGE> 98
On June 10, 1999, the FCC initiated a regulatory proceeding seeking comment
from the public on a number of issues related to competitive access to
multiple-tenant buildings, including the following:
- 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
- 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.
This proceeding could affect the availability and pricing of sites for our
antennae and those of our competitors.
COMMUNICATIONS ASSISTANCE FOR LAW ENFORCEMENT ACT
The Communications Assistance for Law Enforcement Act was enacted in 1994
to preserve electronic surveillance capabilities by law enforcement officials in
the face of rapidly changing telecommunications technology. The Communications
Assistance Act requires telecommunications carriers, including us, to modify
their equipment, facilities, and services to allow for authorized electronic
surveillance based on either industry or FCC standards. In 1997, industry
standard-setting organizations developed interim standards for wireline,
cellular and broadband PCS carriers to comply with the Communications Assistance
Act. In August 1999, the FCC supplemented the interim industry standards with
additional standards. For interim industry standards, the deadline for
compliance is June 30, 2000, and for the additional standards established by the
FCC, the deadline is September 30, 2001. Although we will be able to offer
traditional electronic surveillance capabilities to law enforcement agencies, we
may not meet the compliance deadlines of either June 30, 2000 or September 30,
2001, due to required hardware changes that have not yet been developed and
implemented by switch manufacturers. We may be granted extensions for
compliance, or we may be subject to penalties if we fail to comply, including
being assessed fines or having conditions put on our licenses.
OTHER FEDERAL REGULATIONS
Wireless systems must comply with certain FCC and FAA regulations regarding
the siting, lighting and construction of transmitter towers and antennas. In
addition, FCC environmental regulations may cause some cell site locations to
become subject to regulation under the National Environmental Policy Act. The
FCC is required to implement this Act by requiring carriers to meet land use and
radio frequency standards.
REVIEW OF UNIVERSAL SERVICE REQUIREMENTS
The FCC and the states are required to establish a universal service
program to ensure that affordable, quality telecommunications services are
available to all Americans. Sprint PCS is required to contribute to the federal
universal service program as well as existing state programs. The FCC has
determined that Sprint PCS' contribution to the federal universal service
program is a variable percentage of "end-user telecommunications revenues."
Although many states are likely to adopt a similar assessment methodology, the
states are free to calculate telecommunications service provider contributions
in any manner they choose as long as the process is not inconsistent with the
FCC's rules. At the present time it is not possible to predict the extent of the
Sprint PCS total federal and state universal service assessments or its ability
to recover from the universal service fund.
94
<PAGE> 99
WIRELESS FACILITIES SITING
States and localities are not permitted to regulate the placement of
wireless facilities so as to prohibit the provision of wireless services or to
discriminate among providers of such services. In addition, so long as a
wireless system complies with the FCC's rules, states and localities are
prohibited from using radio frequency health effects as a basis to regulate the
placement, construction or operation of wireless facilities. The FCC is
considering numerous requests for preemption of local actions affecting wireless
facilities siting.
STATE REGULATION OF WIRELESS SERVICE
Section 332 of the Communications Act preempts states from regulating the
rates and entry of commercial mobile radio providers, like us. However, states
may petition the FCC to regulate such providers and the FCC may grant such
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 such petition. To the extent we provide fixed wireless service,
we may be subject to additional state regulation.
DESCRIPTION OF CAPITAL STOCK
GENERAL
The following summarizes all of the material terms and provisions of our
capital stock. We have 560.0 million shares of authorized capital stock,
including 300.0 million shares of class A common stock, par value $0.0001 per
share, 75.0 million shares of class B common stock, par value $0.0001 per share,
and 185.0 million shares of preferred stock. As of September 30, 2000, there
were no shares of class A common stock, 58.5 million shares of class B common
stock and 26.1 million shares of convertible preferred stock issued and
outstanding, and an additional 148.0 million shares of preferred stock are
reserved for issuance as dividends on the convertible preferred stock, if
necessary.
COMMON STOCK
The holders of class A common stock are entitled to one vote for each share
held of record on all matters submitted to a vote of stockholders and do not
have any cumulative rights. The holders of class B common stock are entitled to
ten votes for each share held of record on all matters submitted to a vote of
stockholders and do not have any cumulative rights. All shares of class B common
stock are convertible into class A common stock at any time, at the election of
the holder. In addition, in the event that a holder of class B common stock
attempts to transfer such stock in violation of the certificate of
incorporation, such class B common stock will automatically convert into class A
common stock. We will reserve and keep available out of our authorized but
unissued shares of class A common stock the number of shares of class A common
stock necessary to effect the conversion of all outstanding shares of class B
common stock.
Subject to the rights of the holders of any series of preferred stock,
holders of common stock are entitled to receive dividends out of assets legally
available therefore as may be declared by the board of directors. Other than the
conversion rights of class B common stockholders described above, holders of
shares of common stock have no preemptive, conversion, redemption, subscription
or similar rights. If we liquidate, dissolve or wind up, the holders of shares
of common stock are entitled to share ratably in proportion to the number of
shares of common stock held in the assets which are legally available for
distribution, if any, remaining after the payment or provisions for the payment
of all debts and other liabilities and the payment and setting aside for payment
of any preferential
95
<PAGE> 100
amount due to the holders of shares of any series of preferred stock. A
consolidation, merger or reorganization of Horizon PCS with any other
corporation, or a sale of all or substantially all of the assets of Horizon PCS
is not considered a dissolution, liquidation or winding up of Horizon PCS.
CONVERTIBLE PREFERRED STOCK
In September 2000, we sold $126.5 million of convertible preferred stock to
an investor group led by Apollo Management. For a description of the terms of
the documents governing the purchase of the convertible preferred stock, see
"Certain Transactions -- Issuance of Convertible Preferred Stock." We also
issued units of convertible preferred stock upon conversion of the $13.4 million
short-term convertible note. The convertible preferred stock was issued as units
consisting of 1.0000 share of Series A Convertible Preferred Stock and 1.5446
shares of Series A-1 Convertible Preferred Stock. Unless otherwise indicated,
the summary of anticipated terms and provisions of the convertible preferred
stock set forth below applies to both the Series A Convertible Preferred Stock
and the Series A-1 Convertible Preferred Stock.
Each series of the units has a term of eleven years from the initial
closing date and will accrue dividends at a rate of 7.5% per annum (or 18.0% per
annum, if Horizon PCS is in default under certain terms and provisions of the
convertible preferred stock), paid in additional shares of convertible preferred
stock. These dividends will accrue daily whether or not we have earnings or
profit, whether or not there are funds legally available for payment of such
dividends and whether or not dividends are declared. Dividends shall accumulate
and compound semi-annually. In addition to the 7.5% dividend, when and if our
board of directors declares a dividend payable with respect to the then
outstanding shares of our common stock, the holders of the convertible preferred
stock shall be entitled to the amount of dividends per share as would be payable
on the number of shares of our common stock into which such share of convertible
preferred stock could then be converted. The convertible preferred stock ranks
senior to both our class A and class B common stock with respect to dividends
and distributions upon our liquidation, winding-up and dissolution. Each share
of convertible preferred stock is convertible at the option of the holder at any
time into one share of class A common stock, subject to anti-dilution
adjustments. Each share of convertible preferred stock will be automatically
converted into one share of class A common stock, subject to anti-dilution
adjustments, upon the earliest to occur of:
(a) a public offering of our common stock with aggregate gross proceeds
of at least $65.0 million in which we receive a per share price that
exceeds a certain threshold; and
(b) the consummation of certain merger, consolidation, sale of assets or
other similar business combination transactions.
The holders of the convertible preferred stock may redeem their shares (the
holders' "put" right) upon certain changes of control, including a transaction
pursuant to which Mr. William McKell ceases to hold his current position and a
change in control of Horizon Telcom but excluding certain transactions with
certain Sprint PCS affiliates, at 101% of their accrued liquidation preference,
plus the unpaid dividends that would have been payable from the date of the
change of control through September 26, 2005.
If certain business combination transactions occur prior to September 26,
2005, and a portion of the consideration received by our shareholders in such a
transaction is consideration other than equity in the surviving entity, we will
be obligated to pay a special dividend in shares of additional convertible
preferred stock to holders of our convertible preferred stock.
Holders of our convertible preferred stock are entitled to vote on all
matters on an as-converted basis. In addition, the vote of at least a majority
of the outstanding shares of convertible preferred
96
<PAGE> 101
stock, voting as a single class, shall be necessary for effecting or validating
certain significant corporate actions.
The convertible preferred stock will be subject to optional redemption by
us after the fifth year at its liquidation value plus accrued but unpaid
dividends, plus a premium of 4.0%. On or before April 30, 2001, we have the
right, under certain circumstances, including certain initial public offerings
and certain business combination transactions, to repurchase all of the Series
A-1 Convertible Preferred Stock for 107% of its issue price.
Upon completion of this offering, we will redeem all of the Series A-1
Convertible Preferred Stock, and the Series A Convertible Preferred Stock will
be converted into class A common stock.
PREFERRED STOCK
Under our certificate of incorporation, the board of directors is
authorized, subject to certain limitations prescribed by law, without further
stockholder approval, from time to time to issue up to an aggregate of 10.0
million additional shares of preferred stock. The preferred stock may be issued
in one or more series. Each series may have different rights, preferences and
designations and qualifications, limitations and restrictions that may be
established by our board of directors without approval from the stockholders.
These rights, designations and preferences include:
- number of shares to be issued;
- dividend rights;
- dividend rates;
- right to convert the preferred shares into a different type of security;
- voting rights attributable to the preferred shares;
- right to set aside a certain amount of assets for payment relating to the
preferred shares; and
- prices to be paid upon redemption of the preferred shares or a bankruptcy
type event.
If our board of directors decides to issue any preferred stock, it could
have the effect of delaying or preventing another party from taking control of
Horizon PCS which could have a depressive effect on the market price of Horizon
PCS' common stock. This is because the terms could make it prohibitively
expensive for any unwanted third party to make a bid for our shares. In
addition, the issue of preferred stock could adversely affect the voting power
of holders of common stock and the likelihood that such holders will receive
dividend payments and payments upon liquidation. We have no present plans to
issue any additional shares of preferred stock.
SPRINT PCS WARRANTS
In connection with Sprint PCS' grant to us of our new markets in
Pennsylvania, New York, Ohio and New Jersey, we agreed to grant to Sprint PCS
warrants to acquire shares of class A common stock at the earlier of (i) the
date on which the Company closes its initial public offering ("IPO"), or (ii)
July 31, 2003. These warrants become exercisable on January 1, 2003 in the case
of an IPO. If these warrants are granted on July 31, 2003, they will be
immediately exercisable. Under the terms of the warrant agreement, in the case
of an IPO, Sprint PCS is entitled to receive 2,510,460 shares, which number
shall be no more than 4.2% and no less than 3.0% of our equity securities
outstanding immediately after the offering. The number of shares subject to the
warrants will be adjusted, if necessary, to reflect these limits. The exercise
price will be equal to the initial public offering price per share. If there has
not been an IPO on or before July 31, 2003, the number of shares of common stock
subject to the warrant will represent 3.0% of the "Private Valuation" of Horizon
PCS (as determined by the appraisal process set forth in the agreement) and the
exercise
97
<PAGE> 102
price will be the lower of per share private valuation as of July 31, 2003, or
the price per share of the most recent negotiated private placement of our
equity securities within the last twelve months. In either case, the exercise
price is subject to anti-dilution adjustments after the issuance of the warrant.
Sprint PCS will have registration rights for the shares subject to the warrants.
UNIT WARRANTS
As part of our units offering, we issued warrants to purchase a total of
3,805,500 shares of class A common stock pursuant to a warrant agreement by and
among Horizon PCS and Wells Fargo Bank Minnesota, National Association, as
warrant agent.
GENERAL. Each warrant, when exercised, will entitle the holder to receive
12.90 fully paid and non-assessable shares of Horizon PCS' class A common stock,
at an exercise price of $5.88 per share, subject to adjustment. The number of
warrant shares is subject to adjustment in the cases referred to below. The
holders of the warrants would be entitled, in the aggregate, to purchase shares
of Horizon PCS' class A common stock representing approximately 4% of the issued
and outstanding shares of our class A and class B common stock on a fully
diluted basis on the date hereof, assuming exercise of all outstanding warrants.
The warrants will be exercisable at any time on or after October 1, 2001. Unless
exercised, the warrants will automatically expire at 5:00 p.m. New York City
time on October 1, 2010.
The warrants may be exercised by surrendering the warrant certificates
evidencing the warrants to be exercised with the accompanying form of election
to purchase that is properly completed and executed, together with payment of
the exercise price. Payment of the exercise price may be made at the holder's
election:
- by tendering notes having an aggregate accreted value, plus accrued and
unpaid interest, if any, thereon, to the date of exercise equal to the
exercise price; and
- in cash in United States dollars by wire transfer or by certified or
official bank check to the order of Horizon PCS.
Upon surrender of the warrant certificate and payment of the exercise
price, Horizon PCS will deliver or cause to be delivered, to or upon the written
order of such holder, stock certificates representing the number of whole
warrant shares to which the holder is entitled. If less than all of the warrants
evidenced by a warrant certificate are to be exercised, a new warrant
certificate will be issued for the remaining number of warrants. Holders of
warrants will be able to exercise their warrants only if a registration
statement relating to the warrant shares underlying the warrants is then in
effect, or the exercise of such warrants is exempt from the registration
requirements of the Securities Act, and such securities are qualified for sale
or exempt from qualification under securities laws of the states in which the
various holders of warrants or other persons to whom it is proposed that warrant
shares be issued on exercise of the warrants reside.
ADJUSTMENTS. The number of warrant shares purchasable upon exercise of
warrants will be subject to adjustment in several circumstances including the
following:
- the payment by us of dividends and other distributions on our class A
common stock in shares of our class A common stock or otherwise;
- subdivision, combinations and reclassifications of our class A common
stock;
- the issuance to all holders of class A common stock of rights, options or
warrants entitling them to subscribe for our class A common stock or
securities convertible into, or exchangeable or exercisable for, our
class A common stock at a price which is less than the then fair market
value per share of our class A common stock;
98
<PAGE> 103
- certain distributions to all holders of our class A common stock of any
of our assets or debt securities or any rights or warrants to purchase
any such securities, excluding those rights and warrants referred to in
the preceding bullet point;
- the issuance of shares of our class A common stock for consideration per
share less than the then fair market value per share of our class A
common stock at the time of issuance, excluding securities issued in
transactions referred to in the first four bullet points above, or the
bullet point below and subject to certain exceptions;
- the issuance of securities convertible into or exchangeable for our class
A common stock for a conversion or exchange price plus consideration
received upon issuance less than the then fair market value per share of
our class A common stock at the time of issuance of such convertible or
exchangeable security, excluding securities issued in transactions
referred to in the first four bullet points above; and
- other events that could have the effect of depriving holders of the
warrants of the benefit of all or a portion of the purchase rights
evidenced by the warrants.
No adjustment need be made for any of the foregoing transactions if holders of
warrants are to participate in the transaction on a basis and with notice that
the board of directors is determined to be fair and appropriate in light of the
basis and notice and on which other holders of the class A common stock
participate in the transaction. In addition, no adjustment need be made for the
adoption of a plan being referred to as a shareholder's rights plan or the
issuance of rights under such a plan.
In the case of certain consolidations or mergers of Horizon PCS, or the
sale of all or substantially all of the assets of Horizon PCS to another
corporation, (1) each warrant will thereafter be exercisable for the right to
receive the kind and amount of shares of stock or other securities or property
to which such holder would have been entitled as a result of such consolidation,
merger or sale had the warrants been exercised immediately prior thereto and (2)
the person formed by or surviving any such consolidation or merger, (if other
than Horizon PCS) or to which such sale shall have been made will assume the
obligations of Horizon PCS under the warrant agreement.
REGISTRATION OF THE WARRANT SHARES. We also are required, under the terms
of the warrant agreement, to:
- file a shelf registration statement by December 24, 2000 covering
the resale of the warrants, the issuance of the class A common stock
issuable upon exercise of the warrants and the resale of the class A
common stock issuable upon exercise of the warrants;
- use our reasonable best efforts to cause the shelf registration
statement to be declared effective under the Securities Act by March
24, 2000; and
- keep the shelf registration statement continuously effective until
the date on which all of the warrants or shares of class A common
stock issuable thereunder have been sold pursuant to the shelf
registration statement or the warrants have expired.
LIQUIDATED DAMAGES. The warrant agreement provides that if we fail to:
- file a shelf registration statement with respect to the class A
common stock underlying the warrants by December 24, 2000,
- use our reasonable best efforts to have the Securities and Exchange
Commission declare the shelf registration statement effective by
March 24, 2001, or
- keep the shelf registration statement continuously effective until
the date on which all of the warrants or shares of class A common
stock issuable thereunder have been sold pursuant to the shelf
registration statement or the warrants have expired,
then Horizon PCS will be required to pay liquidated damages to each holder of a
warrant.
99
<PAGE> 104
The liquidated damages paid to each holder of a warrant will be in an
amount equal to $0.03 per week per warrant held by such holder for each week or
portion thereof that the warrant registration default continues for the first
90-day period immediately following the occurrence of such warrant registration
default. This amount will increase by an additional $0.02 per week per warrant
with respect to each subsequent 90-day period, up to a maximum amount equal to
$0.07 per week per warrant. The provision for liquidated damages will continue
until such warrant registration default has been cured. Horizon PCS will not be
required to pay liquidated damages for more than one warrant registration
default at any given time.
DELAWARE LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law. Subject to certain exceptions, Section 203 prohibits a publicly
held Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a certain period of time. That period is three
years after the date of the transaction in which the person became an interested
stockholder, unless the interested stockholder attained that status with the
approval of the board of directors or unless the business combination is
approved in a prescribed manner. A "business combination" includes certain
mergers, asset sales and other transactions resulting in a financial benefit to
the interested stockholder. Subject to certain exceptions, an "interested
stockholder" is a person who, together with his or her affiliates and
associates, owns, or owned within three years prior, 15% or more of the
corporation's voting stock.
Pursuant to our certificate of incorporation, the board of directors is
divided into three classes of directors. See "Management -- Board of Directors."
Directors within each class are elected to serve three-year terms and
approximately one-third of the directors stand for election at each annual
meeting of Horizon PCS' stockholders. A classified board of directors may have
the effect of deterring or delaying any attempt by any group to obtain control
of Horizon PCS by a proxy contest since a third party would be required to have
its nominees elected at two separate meetings of the board of directors in order
to elect a majority of the members of the board.
In addition, the certificate of incorporation also provides that Horizon
PCS' bylaws may not be amended by the stockholders unless approved by the
stockholders by a vote of at least two-thirds of the shares entitled to vote for
the election of directors. This supermajority restriction makes it more
difficult for stockholders to require the company to amend the bylaws and
enhances the board's power with respect to matters of corporate governance that
are governed by the bylaws.
In addition, under our bylaws, special meetings of the stockholders may be
called only by Horizon PCS' chairman of the board, by a majority of the
directors then in office or by the chief executive officer, president or
secretary at the request of a majority of the voting power of the stock
outstanding and entitled to vote at the meeting. This provision makes it more
difficult for stockholders to require the company to call a special meeting of
stockholders to consider any proposed corporate action, including any sale of
Horizon PCS even if beneficial to stockholders.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is First Union
National Bank, Charlotte, North Carolina.
LISTING
We have applied to list our class A common stock for quotation on the
Nasdaq National Market under the symbol "HPCS."
100
<PAGE> 105
DESCRIPTION OF CERTAIN INDEBTEDNESS
SENIOR SECURED CREDIT FACILITY
Our wholly owned subsidiaries, Horizon Personal Communications, Inc. and
Bright Personal Communications Services, LLC, entered into a senior secured
credit facility with a syndicate of banks led by First Union National Bank for a
$225.0 million senior secured facility. This facility constitutes senior debt
secured by a first priority security interest in substantially all of our
assets. The senior secured credit agreement provides that we and all of our
current and future subsidiaries will guarantee this new senior secured facility.
AMOUNT AND PURPOSE. The senior secured credit facility provides for a:
- $75.0 million revolving credit commitment; and
- $150.0 million term loan commitment to consist of a $100.0 million Term
Loan A and $50.0 million Term Loan B in amounts to be determined.
We may borrow up to an additional $50.0 million upon approval of the
lenders so long as:
- the additional facility has a final maturity date no earlier than March
31, 2009;
- each lender under the credit agreement is offered the opportunity (but is
not obligated) to issue a commitment for its pro rata share of the
additional facility; and
- the additional facility will constitute obligations under the senior
secured loan agreement and will rank pari passu with the other
obligations under the senior secured credit agreement.
The proceeds of term loan will be used to help finance:
- the direct cost of the construction and operation of a regional digital
wireless telecommunications network on the Sprint PCS system;
- repayment of some existing indebtedness;
- transaction costs and expenses; and
- working capital and other general corporate purposes.
CONDITIONS TO BORROWING. Each borrowing under the senior secured credit
facility is subject to the conditions that the representations and warranties
continue to be true and correct, and that there is no default or event of
default under the loan documents and that the most current officer's compliance
certificate shall have been delivered.
INTEREST. Interest on the term loans accrues, at our option, either at:
- a rate based on London Interbank Offered Rate (LIBOR); or
- an alternative base rate, which is the greatest of the prime rate as
specified in the senior secured credit facility, or the federal funds
rate plus 1/2%, plus the following margin percentages:
<TABLE>
<CAPTION>
LIBOR BASED ALTERNATE BASE RATE
LOANS LOANS
----------- -------------------
<S> <C> <C>
Term loan A....................................... 3.50% 2.50%
Term loan B....................................... 4.00% 3.00%
Revolving credit loans............................ 3.50% 2.50%
</TABLE>
101
<PAGE> 106
After Horizon PCS achieves two consecutive quarters of positive earnings
before interest, taxes, depreciation, amortization plus other adjustments
(EBITDA), the margin percentage will be reduced to vary between 1.00% and 3.00%
for alternate base rate loans and 2.00% and 4.00% for LIBOR-based loans
depending on our ratio of debt to EBITDA.
If an event of default under the loan documents exists, interest on any
amounts accrues at a rate per annum equal to 2.0% above the rate otherwise
applicable.
COMMITMENT FEES. The senior secured credit facility requires us to pay a
quarterly commitment fee for the unused portion of the facility. The commitment
fee varies between an annual rate of 0.75% and 1.375% of the unused commitments.
We are also required to pay a separate agent's fee to the administrative agent.
SCHEDULED PAYMENTS AND COMMITMENT REDUCTIONS. The revolving commitment
shall expire and all unpaid revolving loans shall become due on or about
September 30, 2008. Generally, amounts repaid under the revolving credit
facility may be reborrowed until expiration of the revolving credit commitment;
provided that the revolving commitment shall be permanently reduced in eighteen
quarterly installments commencing on June 30, 2004 as follows:
- for the four quarters commencing with the fiscal quarter ending June 30,
2004, $1,875,000;
- for the following quarters five and six, $3,750,000;
- for the following quarters seven through fourteen, $4,687,500; and
- for the last four quarters, $5,625,000.
The Term Loan A shall amortize in eighteen quarterly installments
commencing on June 30, 2004 with the final installment due on or about September
30, 2008 as follows:
- for the four quarters commencing with the calendar quarter ending June
30, 2004, $2,500,000;
- for the following quarters five and six, $5,000,000;
- for the following quarters seven through fourteen, $6,250,000; and
- for the last four quarters, $7,500,000.
The Term Loan B shall amortize in twenty quarterly installments commencing
on June 30, 2004 with the final installment due on or about March 31, 2009 as
follows:
- for the eighteen quarters commencing with the calendar quarter ending
June 30, 2004, $125,000; and
- for the last two quarters, $23,875,000.
OPTIONAL PREPAYMENTS. We may voluntarily prepay any of the loans at any
time. Generally, amounts repaid under the revolving credit facility may be
reborrowed until expiration or reduction of the reducing credit facility as
described above.
MANDATORY PREPAYMENTS. We must make mandatory prepayments on the term
loans and the revolving credit loans, and the loan commitments will be reduced,
in an aggregate amount equal to:
- 50.0% of excess cash flow in each fiscal year beginning in 2003;
- 100.0% of the net proceeds of asset sales other than in the ordinary
course of business, except if no event of default under the senior
secured credit facility exists to the extent not otherwise reinvested in
telecommunications assets within 180 days of the receipt of such
proceeds;
- 100.0% of the net cash proceeds of debt issuances except the notes up to
proceeds of $125.0 million and other permitted debt;
102
<PAGE> 107
- 50.0% of the net cash proceeds of specified issuances of equity
securities, other than proceeds from the exercise of warrants issued in
connection with this offering, proceeds from an initial public offering
of our common stock and proceeds used to acquire additional
telecommunications assets within 18 months of the receipt of such
proceeds or used to redeem up to 35.0% of the outstanding principal
amount of the notes in each case if no event of default under the senior
secured credit facility exists; and
- 100.0% of insurance proceeds not reinvested within 180 days.
COLLATERAL AND GUARANTORS. The senior secured credit facility is
collateralized by a perfected security interest in substantially all of our and
our subsidiaries' tangible and intangible current and future assets, including
an assignment of our affiliate agreements with Sprint PCS and a pledge of all of
the capital stock of our subsidiaries. We will guarantee the obligations under
the senior secured credit facility and pledge the stock of Horizon Personal
Communications, Inc.
COVENANTS. The senior secured credit facility contains customary
covenants, including covenants limiting indebtedness, liens, dividends and
distributions on, and redemptions and repurchases of, capital stock and other
similar payments with respect to capital stock, prepayments of and amendments to
these high yield notes, and the acquisition and disposition of assets. The
senior secured credit facility also requires that we comply with specified
financial covenants during the term of the senior secured credit facility as
follows:
- For the period commencing with the date of closing of the senior secured
credit facilities through March 31, 2004, a maximum ratio of total
indebtedness to total capital, a maximum ratio of total senior
indebtedness to total capital, minimum EBITDA (as defined in the senior
secured credit facility), minimum total revenue, maximum capital
expenditures, minimum number of subscribers, and coverage of a specified
percentage of the population in our market areas.
- For the period commencing with April 1, 2004, until termination of the
senior secured credit facilities, a maximum total debt to EBITDA, a
maximum senior debt to EBITDA, a minimum interest coverage ratio, a
minimum fixed charge coverage ratio and maximum capital expenditures.
EVENTS OF DEFAULT. Our senior secured credit facility provides for
customary events of default, including non-payment, judgment defaults, breaches
of covenants, making misleading or inaccurate representations and warranties,
cross-defaults with certain other debt, changes in control, default under
material contracts and certain affiliate agreements with Sprint PCS, and events
of bankruptcy. Upon the existence of an event of default, our lenders may, among
other things, declare our obligations due and payable and terminate the
revolving loan commitment.
DIVIDENDS AND DISTRIBUTIONS. The senior secured credit facility, subject
to certain exceptions, restricts our ability to pay dividends and make other
cash distributions. The foregoing restriction will not prevent Horizon Personal
Communications, Inc. or Bright Personal Communications Services, LLC from making
dividends to us to service scheduled cash interest payments on the notes
provided no event of default or event which, with the passage of time or the
giving of notice or both, would constitute an event of default under the senior
secured credit facility at the time of any such dividend or would result from
any such dividend.
CONSENT AND AGREEMENT. Sprint PCS entered into a consent and agreement for
the benefit of the senior secured lenders. The terms of such consent and
agreement are described under "The Sprint PCS Agreements."
103
<PAGE> 108
SENIOR DISCOUNT NOTES
On September 26, 2000, we issued 295,000 units consisting of senior
discount notes due October 1, 2010 and warrants to purchase 3,805,500 shares of
our class A common stock, which yielded gross proceeds of $149.7 million. The
senior discount notes were issued under an indenture, dated as of September 26,
2000, by and among us, Horizon Personal Communications, Inc. and Bright Personal
Communications Services, LLC and Wells Fargo Bank Minnesota, National
Association, as trustee. The senior discount notes:
- mature on October 1, 2010 and are limited to an aggregate principal
amount at maturity of $295.0 million;
- are general, unsecured obligations of us, equal in right of payment to
all of our senior debt and senior in right of payment to all of our
subordinated debt;
- accrue interest at a rate of 14% per annum, computed on a semiannual
basis, calculated from September 26, 2000, will not bear interest
payable in cash prior to April 1, 2006, and will bear interest payable
semiannually in cash on each April 1 and October 1, beginning April 1,
2006; and
- are guaranteed by all of our current and future domestic subsidiaries on
a senior subordinated basis.
We may elect to redeem all or part of the senior discount notes at any time
on or after October 1, 2005 and before maturity, at the following redemption
prices:
<TABLE>
<CAPTION>
REDEMPTION PRICE
PER $1,000 OF
YEAR BEGINNING PRINCIPAL AMOUNT
-------------- -----------------
<S> <C>
October 1, 2005............................................. $1,070.00
October 1, 2006............................................. 1,046.67
October 1, 2007............................................. 1,023.33
October 1, 2008 and thereafter.............................. 1,000.00
</TABLE>
In addition, on or before September 26, 2003, we may redeem up to 35% of
the principal amount at maturity of senior discount notes issued under the
indenture, at a redemption price equal to $1,140 for each $1,000 of accreted
value of a senior discount note to the redemption date, with the net proceeds of
one or more equity offerings. However, at least 65% of the aggregate principal
amount at maturity of senior discount notes issued under the indenture must
remain outstanding immediately after giving effect to the redemption.
Our senior secured credit facility prohibits the purchase of outstanding
notes before repayment of the borrowings under the credit facility.
We paid fees to our initial purchasers of the senior discount notes and
warrants of approximately $6.1 million which will be amortized as interest
expense over the term of the financing using the effective interest method.
The senior discount notes are guaranteed by our existing subsidiaries,
Horizon Personal Communications, Inc. and Bright Personal Communications
Services, LLC, and will be guaranteed by all of our future domestic restricted
subsidiaries. The guarantees are general unsecured obligations. Each guarantor
unconditionally guarantees, jointly and severally, on a senior subordinated
basis, the full and punctual payment of principal of, and premium and liquidated
damages, if any, and interest on the senior discount notes when due. All of our
current subsidiaries are guarantors. If we create or acquire unrestricted
subsidiaries and foreign restricted subsidiaries, such subsidiaries need not be
guarantors. The ability of holders of our senior discount notes to receive
payment on the guarantees is
104
<PAGE> 109
subordinated in right of payment to all senior debt, including all obligations
under our new senior secured credit facility.
Holders of the senior discount notes have the right to require us to
repurchase all or part of the senior discount notes at a premium upon the
occurrence of events constituting a change in control of Horizon. Any such
repurchases would be for cash at an aggregate price of 101% of the accreted
value of the senior discount notes to be repurchased, if the repurchase were
prior to October 1, 2005 or, if the repurchase were on or after October 1, 2005,
at an aggregate price of 101% of the aggregate principal amount thereof plus
accrued and unpaid interest thereon. Under the indenture governing the senior
discount notes, a change of control includes:
- sale or other disposition of substantially all of our and our
subsidiaries' assets;
- our adoption of a plan of liquidation or dissolution;
- consummation of a transaction in which any person or group, other than
certain current stockholders or their affiliates, become the beneficial
owner of more than 50% of our voting stock;
- continuing directors ceasing to comprise a majority of our board of
directors; and
- a merger or consolidation of Horizon in which our voting stock is
converted into or exchanged for cash, securities or other property,
unless our voting stock is converted into or exchanged for a majority of
the outstanding shares of one of the other parties to the merger or
consolidation.
The indenture governing the senior discount notes will contain covenants
that, among other things, will limit our ability and the ability of our
subsidiary and future subsidiaries to:
- pay dividends, redeem capital stock or make other restricted payments or
investments;
- incur additional indebtedness or issue preferred stock;
- create liens on assets;
- merge, consolidate or dispose of assets;
- dispose of less than all of the equity in a wholly owned subsidiary;
- engage in any business other than PCS telecommunications and related or
ancillary businesses;
- enter into transactions with affiliates; and
- enter into sale and leaseback transactions.
Events of default under the senior discount notes include, among other
things:
- default in the payment when due of interest on the senior discount notes;
- default in payment when due of the principal of or premium, if any, on
the senior discount notes;
- our failure, or the failure of any of our subsidiaries, to comply with
provisions of the senior discount notes indenture relating to change of
control and with limitations on asset sales;
- our failure, or the failure of any of our subsidiaries, to comply with
any other provisions of the indenture or the pledge agreement relating to
the senior discount notes;
- our default, or default by any of our subsidiaries, with respect to other
debt of $5.0 million or more, which default either is caused by failure
to pay the principal or premium thereof or results in acceleration of the
other debt;
105
<PAGE> 110
- our failure, or failure of any of our subsidiaries, to pay within 60 days
a final judgment exceeding $5.0 million;
- a judicial determination rendering any of the guarantees unenforceable or
a guarantor's denial or disaffirmance of its obligations under the
guarantee;
- bankruptcy or insolvency of Horizon or any of our subsidiaries; and
- the occurrence of any event that causes, subject to any applicable grace
period, an event of termination under the Sprint PCS Agreements.
In the case of an event of default arising from certain events of
bankruptcy or insolvency, all outstanding senior discount notes would become due
and payable immediately. If any other event of default occurs and is continuing,
the trustee for the senior subordinated discount note holders or the holders of
at least 25% in accreted value or principal amount, as the case may be, of the
then outstanding senior discount notes may declare the notes to be due and
payable immediately.
We are required, under the terms of a registration rights agreement, to:
- file an exchange offer registration statement on or before December 24,
2000 covering the exchange of the senior discount notes for registered
notes;
- use our best efforts to cause the exchange offer registration statement
to be declared effective under the Securities Act on or before March 24,
2001;
- use our best efforts to cause the exchange after registration statement
to be effective continuously;
- keep the exchange offer open for a period of not less than 20 business
days; and
- cause the exchange offer to be consummated no later than the 30 business
day after it is declared effective.
We may also be required to file a shelf registration statement to register
for public resale the notes held by any holder who may not otherwise participate
in the exchange offer.
If we fail to file the exchange offer or shelf registration statement, or
fail to cause the exchange offer or shelf registration statement to become
effective, or fail to consummate the exchange offer, in each case by the
deadlines as specified above, a registration default shall be deemed to have
occurred and we will be required to pay liquidated damages to each holder of the
senior discount notes. The liquidated damages payable to each holder of the
senior discount notes will be in an amount equal to $0.05 per week per $1,000 in
principal amount of the senior discount notes held by such holder for each week
or portion thereof that the registration default continues for the first 90-day
period immediately following the occurrence of such registration default. This
amount will increase by an additional $0.05 per week per $1,000 in principal
amount of the notes with respect to each subsequent 90-day period, up to a
maximum amount equal to $0.50 per $1,000 in principal amount of the senior
discount notes. The provision for liquidated damages will continue until such
registration default has been cured. We will not be required to pay liquidated
damages for more than one registration default at any given time.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for the class A common
stock. Future sales of substantial amounts of class A common stock in the public
market could adversely affect market prices of the class A common stock
prevailing from time to time. Furthermore, because only a limited number of
shares will be available for sale shortly after the consummation of our
concurrent offerings due to certain contractual and legal restrictions on
resale, as described below, sales of
106
<PAGE> 111
substantial amounts of class A common stock in the public market after the
restrictions lapse could adversely affect the prevailing market price of the
common stock and our ability to raise equity capital in the future.
Upon completion of our offering, conversion of the Series A convertible
preferred stock, and repurchase of the Series A-1 convertible preferred stock,
we will have outstanding an aggregate of 19,902,239 shares of class A common
stock, assuming no exercise of the underwriters' over-allotment option. Shares
of class B common stock, however, are convertible for shares of class A common
stock on a share-for-share basis at the election of the holder. Of the shares of
class A common stock expected to be outstanding after this offering, plus any
additional shares sold upon exercise of the Underwriters' overallotment option,
all of the shares sold in this offering will be freely transferable without
restriction under the Securities Act. All shares of our class A common stock
held by our affiliates are control securities. The shares of our class A common
stock issued upon conversion of the Series A convertible preferred stock or
issuable upon conversion of the class B common stock and all of the outstanding
shares of our class B common stock owned by Horizon Telcom also will be
"restricted shares," as that term is defined in Rule 144 of the Securities Act.
Restricted and control securities may not be sold in the public market unless
they qualify for an exemption from registration under Rule 144 or Rule 701 or
another exemption under the Securities Act.
SALES OF RESTRICTED SHARES; OPTIONS; WARRANTS
All of the shares of common stock sold in the common stock offering will be
freely tradable under the Securities Act, unless purchased by our "affiliates,"
as the Securities Act defines that term. In general, under Rule 144 as currently
in effect, a person or persons whose shares are aggregated, including an
affiliate, who has beneficially owned restricted stock for at least one year is
entitled to sell, within any three-month period, a number of such shares that
does not exceed the greater of:
- 1% of the then outstanding shares of common stock, or
- the average weekly trading volume in the common stock during the four
calendar weeks preceding the date on which notice of such sale is filed.
In addition, under Rule 144(k), a person who is not an affiliate and has
not been an affiliate for at least three months prior to the sale and who has
beneficially owned shares of restricted stock for at least two years may resell
such shares without compliance with the foregoing requirements. In meeting the
one and two year holding periods described above, a holder of restricted stock
can include the holding periods of a prior owner who was not an affiliate.
Additional shares of common stock are available for future grants under our
stock option plan. See "Management -- 2000 Stock Option Plan." We intend to file
one or more registration statements on Form S-8 under the Securities Act to
register all shares of common stock subject to outstanding stock options and
common stock issuable pursuant to our stock option plans that do not qualify for
an exemption under Rule 701 from the registration requirements of the Securities
Act. We expect to file these registration statements as soon as practicable
following the closing of our concurrent offerings, and such registration
statements are expected to become effective upon filing. Shares covered by these
registration statements will thereupon be eligible for sale in the public
markets subject to the lock-up agreements, to the extent applicable.
In connection with Sprint PCS' grant to us of our new markets in
Pennsylvania, New York, Ohio and New Jersey, we granted warrants to Sprint PCS
to acquire 2,510,460 shares of class A common stock at an exercise price equal
to the initial public offering price per share. These warrants become
exercisable on January 1, 2003. Under the terms of the warrant agreement Sprint
PCS is entitled to receive no more than 4.2% and no less than 3.0% of our equity
securities outstanding
107
<PAGE> 112
immediately after the offering. The number of shares subject to the warrants
will be adjusted if necessary to reflect these limits.
LOCK-UP AGREEMENTS
We and Horizon Telcom, First Union, Sprint PCS, the former owners of Bright
PCS, the holders of the convertible preferred stock, members of our senior
management and our directors have agreed, pursuant to lock-up agreements that,
during the period beginning from the date of this prospectus and continuing and
including the date 180 days after the date of this prospectus, they will not,
directly or indirectly offer, pledge, sell, contract to sell, grant any option,
right or warrant to purchase, or otherwise dispose of any shares of common
stock, including but not limited to any common stock or securities convertible
into or exercisable or exchangeable for common stock which may be deemed to be
beneficially owned in accordance with the rules and regulations of the
Securities and Exchange Commission or enter into any swap or other agreement
that transfers, in whole or in part, the economic consequence of ownership of
common stock, or make any demand for, or exercise and right with respect to, the
registration of common stock or any securities convertible into or exercisable
or exchangeable for common stock, without the prior written consent of
Donaldson, Lufkin & Jenrette Securities Corporation.
Following the 180 day lock-up period, 59.5 million shares of common stock
will become potentially eligible for sale, subject to compliance with Rule 144
of the Securities Act as described above. This includes outstanding shares of
class B common stock that could be converted into class A common stock and
would, upon such conversion, also be eligible for sale subject to compliance to
Rule 144, including holding period requirements and volume and other
restrictions under federal securities laws.
REGISTRATION RIGHTS
At the completion of our offering, Sprint PCS and the former owners of
Bright PCS will be entitled to several types of registration rights with respect
to the shares which they own or which are issued upon exercise of warrants as
provided under the terms of registration rights agreements. These agreements
provide for demand registration rights and, subject to a number of limitations,
for inclusion of the shares on future registration statements that we file.
Registration of shares of class A common stock pursuant to these registration
rights agreements will result in those shares becoming freely tradable without
restriction under the Securities Act. We will bear registration expenses
incurred in connection with the above registrations except that, in some
circumstances, Sprint PCS and the former owners of Bright PCS will bear the
registration expenses if the registration statement does not become effective as
a result of the withdrawal of the request for registration by Sprint PCS or the
former owners of Bright PCS.
Under the terms of the warrant registration rights agreement with the
initial purchasers of the senior discount notes, we are required to file a shelf
registration statement for the 3,805,500 shares to be issuable upon exercise of
the warrants. See "Description of Capital Stock -- Unit Warrants."
The holders of the convertible preferred stock are entitled to demand and
piggyback registration rights with respect to their class A common stock issued
upon conversion. See "Certain Transactions -- Issuance of Convertible Preferred
Stock."
U.S. FEDERAL TAX CONSEQUENCES OF HOLDING
OUR COMMON STOCK TO NON-U.S. HOLDERS
This is a general discussion of certain United States federal tax
consequences of the acquisition, ownership, and disposition of our common stock
by a holder that, for U.S. federal income tax purposes, is not a U.S. person as
defined below. A holder of our common stock who is not a U.S.
108
<PAGE> 113
person is a non-U.S. holder. We assume in this discussion unless otherwise
indicated that you will hold our common stock issued pursuant to the offering as
a capital asset (generally, property held for investment). We do not discuss all
aspects of U.S. federal taxation that may be important to you in light of your
individual investment circumstances, such as special tax rules that would apply
to you, for example, if you are a dealer in securities, financial institution,
bank, insurance company, tax-exempt organization, partnership or owner of more
than 5% of our common stock. Our discussion is based on current provisions of
the Internal Revenue Code of 1986, as amended, Treasury regulations, judicial
opinions, published positions of the U.S. Internal Revenue Service and other
applicable authorities, all as in effect on the date of this prospectus and all
of which are subject to differing interpretations or to changes, possibly with
retroactive effect. We have not sought, and will not seek, any ruling from the
IRS with respect to the tax consequences discussed in this prospectus, and there
can be no assurance that the IRS will not take a position contrary to the tax
consequences discussed below or that any such position taken by the IRS would
not be sustained. We urge you to consult your tax advisor about the U.S. federal
tax consequences of acquiring, holding, and disposing of our common stock, as
well as any tax consequences that may arise under the laws of any foreign,
state, local, or other taxing jurisdiction.
For purposes of this discussion, a U.S. person means any one of the
following:
- a citizen or resident of the U.S.;
- a corporation, partnership, or other entity created or organized in the
U.S. or under the laws of the U.S. or of any political subdivision of the
U.S.;
- an estate, the income of which is includible in gross income for U.S.
federal income tax purposes regardless of its source; or
- a trust, the administration of which is subject to the primary
supervision of a U.S. court and that has one or more U.S. persons who
have the authority to control all substantial decisions of the trust.
DIVIDENDS
Dividends paid to a non-U.S. holder out of our earnings and profits will
generally be subject to withholding of U.S. federal income tax at the rate of
30%. If, however, the dividend is effectively connected with the conduct of a
trade or business in the U.S. by the non-U.S. holder, the dividend will be
subject to U.S. federal income tax imposed on net income on the same basis that
applies to U.S. persons generally, and, for corporate holders under certain
circumstances, the branch profits tax. Non-U.S. holders should consult any
applicable income tax treaties that may provide for a reduction of, or exemption
from withholding taxes. For purposes of determining whether tax is to be
withheld at a reduced rate as specified by a treaty, we generally will presume
that dividends we pay on or before December 31, 2000, to an address in a foreign
country are paid to a resident of that country.
Under recently finalized U.S. Treasury Department regulations, which in
general apply to dividends that we pay after December 31, 2000, to obtain a
reduced rate of withholding under a treaty, a non-U.S. holder generally will be
required to provide certification as to that non-U.S. holder's entitlement to
treaty benefits. These regulations also provide special rules to determine
whether, for purposes of applying a treaty, dividends that we pay to a non-U.S.
holder that is an entity should be treated as paid to holders of interests in
that entity.
109
<PAGE> 114
GAIN ON DISPOSITION
A non-U.S. holder will generally not be subject to United States federal
income tax, including by way of withholding, on gain recognized on a sale or
other disposition of our common stock unless any one of the following is true:
- the gain is effectively connected with the conduct of a trade or business
in the U.S. by the non-U.S. holder;
- the non-U.S. holder is a nonresident alien individual present in the U.S.
for 183 or more days in the taxable year of the disposition and certain
other requirements are met;
- the non-U.S. holder is subject to tax pursuant to provisions of the U.S.
federal income tax law applicable to certain U.S. expatriates; and
- we are or have been during certain periods a "United States real property
holding corporation" for U.S. federal income tax purposes.
If we are or have been a United States real property holding corporation, a
non-U.S. holder will generally not be subject to U.S. federal income tax on gain
recognized on a sale or other disposition of our common stock provided that:
- the non-U.S. holder does not hold, and has not held during certain
periods, directly or indirectly, more than 5% of our outstanding common
stock; and
- our common stock is and continues to be traded on an established
securities market for U.S. federal income tax purposes.
We believe that our common stock will be traded on an established
securities market for this purpose in any quarter during which it is listed on
the Nasdaq National Market.
If we are or have been during certain periods a U.S. real property holding
corporation and the above exception does not apply, a non-U.S. holder will be
subject to U.S. federal income tax with respect to gain realized on any sale or
other disposition of our common stock as well as to a withholding tax, generally
at a rate of 10% of the proceeds. Any amount withheld pursuant to a withholding
tax will be creditable against a non-U.S. holder's U.S. federal income tax
liability.
Gain that is effectively connected with the conduct of a trade or business
in the U.S. by the non-U.S. holder will be subject to the U.S. federal income
tax imposed on net income on the same basis that applies to U.S. persons
generally, and, for corporate holders under certain circumstances, the branch
profits tax, but will generally not be subject to withholding. Non-U.S. holders
should consult any applicable income tax treaties that may provide for different
rules.
UNITED STATES FEDERAL ESTATE TAXES
Our common stock that is owned or treated as owned by an individual who is
not a citizen or resident of the U.S., as specially defined for U.S. federal
estate tax purposes, on the date of that person's death will be included in his
or her estate for U.S. federal estate tax purposes, unless an applicable estate
tax treaty provides otherwise.
INFORMATION REPORTING AND BACKUP WITHHOLDING
Generally, we must report annually to the IRS and to each non-U.S. holder
the amount of dividends that we paid to a holder, and the amount of tax that we
withheld on those dividends. This information may also be made available to the
tax authorities of a country in which the non-U.S. holder resides.
110
<PAGE> 115
Under current U.S. Treasury Department regulations, U.S. information
reporting requirements and backup withholding tax will generally not apply to
dividends that we pay on our common stock to a non-U.S. holder at an address
outside the U.S. Payments of the proceeds of a sale or other taxable disposition
of our common stock by a U.S. office of a broker are subject to both backup
withholding at a rate of 31% and information reporting, unless the holder
certifies as to its non-U.S. holder status under penalties of perjury or
otherwise establishes an exemption. Information reporting requirements, but not
backup withholding tax, will also apply to payments of the proceeds of a sale or
other taxable disposition of our common stock by foreign offices of U.S. brokers
or foreign brokers with certain types of relationships to the U.S., unless the
broker has documentary evidence in its records that the holder is a non-U.S.
holder and certain other conditions are met or the holder otherwise established
an exemption.
Backup withholding is not an additional tax. Any amounts that we withhold
under the backup withholding rules will be refunded or credited against the
non-U.S. holder's U.S. federal income tax liability if certain required
information is furnished to the IRS.
The U.S. Treasury Department has promulgated final regulations regarding
the withholding and information reporting rules discussed above. In general,
those regulations do not significantly alter the substantive withholding and
information reporting requirements but unify current certification procedures
and forms and clarify reliance standards. The final regulations are generally
effective for payments made after December 31, 2000, subject to transition
rules.
111
<PAGE> 116
UNDERWRITING
We and the underwriters named below have entered into an underwriting
agreement covering the common stock to be offered in this offering. Donaldson,
Lufkin & Jenrette Securities Corporation, First Union Securities, Inc., The
Robinson-Humphrey Company, LLC and DLJdirect Inc. are acting as representatives
of the underwriters. Each underwriter has agreed to purchase the number of
shares of class A common stock set forth opposite its name in the following
table.
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation.....
First Union Securities, Inc. ...........................
The Robinson-Humphrey Company, LLC......................
DLJdirect Inc. .........................................
----------
Total.............................................. 9,650,000
==========
</TABLE>
The underwriting agreement provides that if the underwriters take any of
the shares set forth in the table above, then they must take all of these
shares. No underwriter is obligated to take any shares allocated to a defaulting
underwriter except under limited circumstances.
The underwriters are offering the shares of class A common stock, subject
to the prior sale of such shares, and when, as and if such shares are delivered
to and accepted by them. The underwriters will initially offer to sell shares to
the public at the initial public offering price set forth on the cover page of
this prospectus. The underwriters may also sell shares to securities dealers at
a discount of up to $ per share from the initial public offering price. Any
such securities dealers may resell shares to certain other brokers or dealers at
a further discount of up to $ per share. After the initial public offering,
the underwriters may change the public offering price and other selling terms.
The underwriters do not intend to confirm sales to any accounts over which they
exercise discretionary authority.
If the underwriters sell more shares than the total number set forth in the
table above, the underwriters have the option to buy up to an additional
1,447,500 shares of class A common stock from us to cover such sales. They may
exercise this option during the 30-day period from the date of this prospectus.
If any shares are purchased with this option, the underwriters will purchase
shares in approximately the same proportion as set forth in the table above.
An electronic prospectus will be available on the web site maintained by
DLJdirect Inc., an affiliate of Donaldson, Lufkin & Jenrette Securities
Corporation. No other information on this web site is part of this prospectus.
DLJdirect Inc. may be liable for the information on the web site to the same
extent as it may be liable for the information contained in this prospectus.
The following table shows the per share and total underwriting discounts
and commissions that we will pay to the underwriters. These amounts are shown
assuming both no exercise and full exercise of the underwriters' option to
purchase additional shares.
<TABLE>
<CAPTION>
PAID BY US
----------------------------
NO EXERCISE FULL EXERCISE
<S> <C> <C>
Per share.......................................
Total...........................................
</TABLE>
We estimate that the total expenses of this offering, excluding
underwriting discounts and commissions, will be $1.0 million.
112
<PAGE> 117
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act of 1933.
At our request, the underwriters have reserved shares of common stock for
sale at the initial public offering price to our directors, officers, and
employees who have expressed an interest in participating in the offering. We
expect these persons to purchase no more than 5% of the class A common stock
offered in the offering. The number of shares available for sale to the general
public will be reduced to the extent such persons purchase such reserved shares.
The underwriters will offer unpurchased reserved shares to the general public on
the same basis as the other offered shares.
We and Horizon Telcom, First Union, Sprint PCS, the former owners of Bright
PCS, members of our senior management and directors have agreed that, for a
period of 180 days from the date of this prospectus, we will not, without the
prior written consent of Donaldson, Lufkin & Jenrette Securities Corporation, do
either of the following:
- offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase or otherwise transfer or dispose of,
directly or indirectly, any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock; or
- enter into any swap or other arrangement that transfers all or a portion
of the economic consequences associated with the ownership of any common
stock.
In addition, during such period, except for the registration of shares
underlying options in our stock option plan we have also agreed not to file any
registration statement with respect to, and each of our executive officers and
directors and several of our stockholders have agreed not to make any demand
for, or exercise any right with respect to, the registration of any shares of
common stock or any securities convertible into or exercisable or exchangeable
for common stock without the prior written consent of Donaldson, Lufkin &
Jenrette Securities Corporation.
Either of the foregoing transaction restrictions will apply regardless of
whether a covered transaction is to be settled by the delivery of common stock
or such other securities, in cash or otherwise. Further, the shares of common
stock underlying the warrants issued in the units offering will become freely
tradable no later than 180 days after the closing of the units offering.
We have applied to list our class A common stock for quotation on the
Nasdaq National Market under the symbol "HPCS." In order to meet the
requirements for listing the common stock on the Nasdaq National Market, the
underwriters have undertaken to sell lots of 100 to a minimum of 400 beneficial
owners.
Other than in the United States, no action has been taken by Horizon PCS or
the underwriters that would permit a public offering of the shares of common
stock included in this offering in any jurisdiction where action for that
purpose is required. The shares included in this offering may not be offered or
sold, directly or indirectly, nor may this prospectus or any other offering
material or advertisement in connection with the offer and sale of any such
shares be distributed or published in any jurisdiction, except under
circumstances that will result in compliance with the applicable rules and
regulations of such jurisdiction. This prospectus is not an offer to sell or a
solicitation of an offer to buy any shares of common stock included in this
offering in any jurisdiction where that would not be permitted or legal.
We expect that delivery of the shares will be made to investors on or about
, 2000.
In connection with this offering, certain underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of our
common stock. Specifically, the underwriters may create a syndicate short
position by making short sales of our common stock and may purchase shares of
our common stock on the open market to cover syndicate short positions created
by short sales. Short
113
<PAGE> 118
sales involve the sale by the underwriters of a greater number of shares than
they are required to purchase in the offering. Short sales can be either
"covered" or "naked." "Covered" short sales are sales made in an amount not
greater than the underwriters' over-allotment option to purchase additional
shares in the offering. "Naked" short sales are sales in excess of the
over-allotment option. A naked short position is more likely to be created if
the underwriters are concerned that there may be downward pressure on the price
of the common stock in the open market after pricing that could adversely affect
investors who purchase in the offering. The underwriters may close out any
covered short position by either exercising their over-allotment option or
purchasing shares in the open market. The underwriters must close out any naked
short position by purchasing shares in the open market. In determining the
source of shares to close out the covered short position, the underwriters will
consider, among other things, the price of shares available for purchase in the
open market as compared to the price at which they may purchase shares through
the over-allotment option. The underwriting syndicate may reclaim selling
concessions if the syndicate repurchases previously distributed shares in
syndicate covering transactions, in stabilization transactions or in some other
way or if Donaldson, Lufkin & Jenrette Securities Corporation receives a report
that indicates clients of such syndicate members have "flipped" the shares.
These activities may have the effect of raising or maintaining the market price
of our common stock or preventing or retarding a decline in the market price of
our common stock. As a result, the price of our common stock may be higher than
the price that might otherwise exist in the open market. The underwriters are
not required to engage in these activities and may end any of these activities
at any time.
In September 2000, Donaldson, Lufkin & Jenrette Securities Corporation and
First Union Securities Corporation also acted as initial purchasers under our
sale of units, for which they received a fee customary for performing such
services. In September 2000, Donaldson, Lufkin & Jenrette Securities Corporation
also acted as placement agent under the sale of our convertible preferred stock,
for which they received a fee customary for performing such services.
PRICING OF THIS OFFERING
Prior to this offering, there has been no public market for our class A
common stock. Consequently, the initial public offering price for our class A
common stock was determined by negotiation among us and the representatives of
the underwriters. Among the factors considered in determining the public
offering price were:
- prevailing market conditions;
- our results of operations in recent periods;
- the present stage of our development;
- the market capitalization and stages of development of other companies
which the representatives of the underwriters believe to be comparable to
us; and
- estimates of our business potential.
LEGAL MATTERS
Certain legal matters in connection with the sale of the shares of common
stock offered hereby will be passed upon for Horizon PCS by Arnall Golden &
Gregory, LLP, Atlanta, Georgia and for the underwriters by Skadden, Arps, Slate,
Meagher & Flom (Illinois), Chicago, Illinois.
114
<PAGE> 119
EXPERTS
The financial statements and schedule of Horizon PCS, Inc. as of December
31, 1999 and 1998, and for each of the three years in the period ended December
31, 1999, included in this prospectus and elsewhere in this registration
statement, have been audited by Arthur Andersen, LLP, independent public
accountants, as indicated in their report with respect thereto, and is included
herein in reliance upon the authority of said firm as experts in giving said
reports.
The financial statements of Bright Personal Communications Services, LLC as
of December 31, 1999 and for the period from inception (October 12, 1999) to
December 31, 1999, included in this prospectus and elsewhere in this
registration statement, have been audited by Arthur Andersen, LLP, independent
public accountants, as indicated in their report with respect thereto, and is
included herein in reliance upon the authority of said firm as experts in giving
said reports.
AVAILABLE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 with respect to our offerings of class A common stock.
This prospectus does not contain all of the information set forth in the
registration statement. For further information about us and our securities, see
the registration statement and its exhibits. This prospectus contains a
description of the material terms and features of all material contracts,
reports or exhibits to the registration statement required to be disclosed.
However, as the descriptions are summaries of the contracts, reports or
exhibits, we urge you to refer to the copy of each material contract, report and
exhibit attached to the registration statement. Copies of the registration
statement, including exhibits, may be examined without charge in the Public
Reference Section of the Securities and Exchange Commission, 450 Fifth Street,
N.W. Room 1024, Washington, DC 20549, and the Securities and Exchange
Commission's Regional Offices located at 500 West Madison Street, Suite 1400,
Chicago, IL 60601, and 7 World Trade Center, 13th Floor, New York, NY 10048 or
on the Internet at http://www.sec.gov. You can get information about the
operation of the Public Reference Room by calling the Securities and Exchange
Commission at 1-800-SEC-0300. Copies of all or a portion of the registration
statement can be obtained from the Public Reference Section of the Securities
and Exchange Commission upon payment of prescribed fees.
As a result of this offering, we will become subject to the information and
reporting requirements of the Securities Exchange Act of 1934 and will be
required to file periodic reports, proxy statements and other information with
the Securities and Exchange Commission.
115
<PAGE> 120
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
HORIZON PCS, INC.
Report of Independent Public Accountants.................. F-2
Consolidated Balance Sheets as of December 31, 1999 and
1998................................................... F-3
Consolidated Statements of Income for the Years Ended
December 31, 1999, 1998 and 1997....................... F-4
Consolidated Statements of Changes in Stockholder's Equity
for the Years Ended December 31, 1999, 1998 and 1997... F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 1998 and 1997....................... F-6
Notes to Consolidated Financial Statements, December 31,
1999 and 1998 and for Each of the Three Years in the
Period Ended December 31, 1999......................... F-8
Financial Statement Schedule -- Valuation and Qualifying
Accounts for the Years Ended December 31, 1999, 1998
and 1997............................................... F-24
Condensed Consolidated Balance Sheets as of June 30, 2000
(unaudited) and December 31, 1999...................... F-25
Condensed Consolidated Statements of Income for the Six
Months Ended June 30, 2000 and 1999 (Unaudited)........ F-26
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 2000 and 1999 (Unaudited).... F-27
Notes to Interim Condensed Consolidated Financial
Statements June 30, 2000 (Unaudited)................... F-28
BRIGHT PERSONAL COMMUNICATIONS SERVICES, LLC
(A DEVELOPMENT-STAGE COMPANY)
Report of Independent Public Accountants.................. F-35
Balance Sheet as of December 31, 1999..................... F-36
Statement of Income for the Period from Inception (October
12, 1999) to December 31, 1999......................... F-37
Statement of Members' Capital for the Period from
Inception (October 12, 1999) to December 31, 1999...... F-38
Statement of Cash Flows for the Period from Inception
(October 12, 1999) to December 31, 1999................ F-39
Notes to Financial Statements December 31, 1999........... F-40
Condensed Balance Sheets as of March 31, 2000 (unaudited)
and December 31, 1999.................................. F-44
Condensed Statement of Income for the Three Months Ended
March 31, 2000 and for the Period from Inception
(October 12, 1999) to March 31, 2000 (Unaudited)....... F-45
Condensed Statement of Members' Capital for the Period
from Inception (October 12, 1999) to March 31, 2000
(Unaudited)............................................ F-46
Condensed Statement of Cash Flows for the Three Months
Ended March 31, 2000 and for the Period from Inception
(October 12, 1999) to March 31, 2000 (Unaudited)....... F-47
Notes to Interim Condensed Financial Statements March 31,
2000 (Unaudited)....................................... F-48
HORIZON PCS, INC.
Pro Forma Financial Statements............................ P-1
Pro Forma Balance Sheet as of June 30, 2000............... P-2
Pro Forma Statement of Income for the Year Ended December
31, 1999............................................... P-3
Pro Forma Statement of Income for the Six Months Ended
June 30, 2000.......................................... P-4
Footnotes to Pro Forma Financial Statements............... P-5
</TABLE>
F-1
<PAGE> 121
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholder of
HORIZON PCS, INC. AND SUBSIDIARY:
We have audited the accompanying consolidated balance sheets of HORIZON
PCS, INC. (a Delaware corporation) AND SUBSIDIARY as of December 31, 1999 and
1998, and the related consolidated statements of income, changes in
stockholder's equity and cash flows for each of the three years in the period
ended December 31, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Horizon PCS,
Inc. and subsidiary as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999 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
financial statements is presented for purposes of complying with the Securities
and Exchange Commission's rules and is not a 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.
Columbus, Ohio,
March 4, 2000 (except with respect to the matters
discussed in Note 15, as to which the date is
March 31, 2000, the matter discussed in Note 4, as to which
the date is May 31, 2000, and the matters discussed in Note 1,
as to which the date is September 8, 2000)
ARTHUR ANDERSEN LLP
F-2
<PAGE> 122
HORIZON PCS, INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 146,806 $ 26,515
Accounts receivable -- subscriber, less allowance for
doubtful accounts of $370,700 in 1999 and $33,200 in
1998.................................................... 416,131 291,734
Accounts receivable -- other.............................. 110,455 20,524
Receivable from Parent.................................... 2,630,335 6,435,432
Equipment inventory....................................... 2,137,337 884,129
Prepaid expenses and other................................ 46,103 6,687
------------ ------------
Total current assets............................... 5,487,167 7,665,021
------------ ------------
DEFERRED CHARGES AND OTHER ASSETS:
Unamortized debt expense.................................. 34,944 39,656
Investments............................................... 4,295,041 1,101,831
Personal Communications Services Licenses................. 69,336 80,892
Prepaid and deferred charges.............................. 98,035 95,310
------------ ------------
Total deferred charges and other assets............ 4,497,356 1,317,689
------------ ------------
PROPERTY AND EQUIPMENT:
In service................................................ 27,904,046 20,026,359
Less- Accumulated depreciation............................ (5,060,242) (2,454,791)
------------ ------------
Property and equipment in service, net............. 22,843,804 17,571,568
Construction work in progress............................. 50,429 308,103
------------ ------------
Total property and equipment, net.................. 22,894,233 17,879,671
------------ ------------
Total assets....................................... $ 32,878,756 $ 26,862,381
============ ============
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Notes payable............................................. $ 1,032,000 $ --
Accounts payable.......................................... 1,063,416 811,404
Accrued liabilities....................................... 2,616,224 1,160,487
Accrued taxes............................................. 561,901 392,452
Accrued interest.......................................... -- 5,185
Payable to Parent......................................... 4,355,292 --
------------ ------------
Total current liabilities.......................... 9,628,833 2,369,528
------------ ------------
DEFERRED CREDITS AND OTHER LONG-TERM LIABILITIES:
Deferred Federal income taxes, net........................ -- 739,016
Postretirement benefit obligation......................... 713,074 541,053
Long-term debt............................................ 23,557,965 21,180,442
Payable to affiliates..................................... 1,142,173 89,727
------------ ------------
Total deferred credits and other long-term
liabilities....................................... 25,413,212 22,550,238
------------ ------------
Total liabilities.................................. 35,042,045 24,919,766
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY:
Preferred stock, 10,000,000 shares authorized, none issued
or outstanding, at $0.0001 par value.................... -- --
Common stock -- class A, 125,000,000 shares authorized,
none issued or outstanding, at $0.0001 par value........ -- --
Common stock -- class B, 75,000,000 shares authorized,
53,806,200 issued and outstanding, at $0.0001 par
value................................................... 5,381 5,381
Additional paid-in capital................................ 21,916,312 13,550,822
Deferred stock compensation............................... (1,803,723) --
Retained deficit.......................................... (22,281,259) (11,613,588)
------------ ------------
Total stockholder's equity......................... (2,163,289) 1,942,615
------------ ------------
Total liabilities and stockholder's equity......... $ 32,878,756 $ 26,862,381
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
<PAGE> 123
HORIZON PCS, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
OPERATING REVENUES:
Service revenues................................ $ 3,902,789 $ 459,065 $ 26,229
Equipment revenues.............................. 600,451 308,933 137,926
------------ ------------ -----------
Total operating revenues................ 4,503,240 767,998 164,155
------------ ------------ -----------
OPERATING EXPENSES:
Cost of services................................ 7,045,361 3,911,584 518,690
Cost of equipment............................... 2,695,909 993,994 422,393
Selling, general, and administrative expenses
(exclusive of non-cash compensation expense
shown below)................................. 7,922,090 3,770,001 2,499,844
Non-cash compensation expense................... 291,345 -- --
Depreciation and amortization................... 2,684,644 1,748,209 419,463
------------ ------------ -----------
Total operating expenses................ 20,639,349 10,423,788 3,860,390
------------ ------------ -----------
OPERATING LOSS.................................... (16,136,109) (9,655,790) (3,696,235)
------------ ------------ -----------
OTHER INCOME (EXPENSE):
Loss on disposition on Personal Communication
Licenses (Note 2)............................ -- (1,716,535) --
Gain on sale of PCS assets (Note 8)............. 1,387,718 -- --
Other income, net............................... 52,421 26,761 99,904
------------ ------------ -----------
Total other income (expense), net....... 1,440,139 (1,689,774) 99,904
------------ ------------ -----------
INTEREST EXPENSE, NET............................. (1,529,157) (838,095) (264,023)
------------ ------------ -----------
LOSS ON CONTINUING OPERATIONS BEFORE INCOME TAX
BENEFIT......................................... (16,225,127) (12,183,659) (3,860,354)
------------ ------------ -----------
INCOME TAX BENEFIT................................ (5,275,125) (4,145,365) (1,307,936)
------------ ------------ -----------
LOSS ON CONTINUING OPERATIONS..................... (10,950,002) (8,038,294) (2,552,418)
------------ ------------ -----------
DISCONTINUED OPERATIONS
Income (loss) from discontinued operations, net
of tax expense (benefit) of $145,444, $27,111
and $(250,835) for 1999, 1998 and 1997,
respectively................................. 282,331 52,624 (486,915)
------------ ------------ -----------
NET LOSS.......................................... $(10,667,671) $ (7,985,670) $(3,039,333)
============ ============ ===========
Basic and diluted loss per share from continuing
operations...................................... $ (0.20) $ (0.15) $ (0.05)
Basic and diluted loss per share from discontinued
operations...................................... 0.00 0.00 (0.01)
------------ ------------ -----------
Basic and diluted loss per share.................. $ (0.20) $ (0.15) $ (0.06)
============ ============ ===========
Weighted average shares outstanding............... 53,806,200 53,806,200 53,806,200
============ ============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 124
HORIZON PCS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
CLASS A CLASS B ADDITIONAL DEFERRED TOTAL
PREFERRED COMMON COMMON PAID-IN STOCK RETAINED SHAREHOLDER'S
STOCK STOCK STOCK CAPITAL COMPENSATION DEFICIT EQUITY
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1996...................... $-- $-- $5,381 $ 640,867 $ -- $ (588,585) $ 57,663
Equity contribution....... -- -- -- 7,215,984 -- -- 7,215,984
Net loss.................. -- -- -- -- -- (3,039,333) (3,039,333)
-- -- ------ ----------- ----------- ------------ ------------
Balance, December 31,
1997...................... -- -- 5,381 7,856,851 -- (3,627,918) 4,234,314
Equity contribution....... -- -- -- 5,693,971 -- -- 5,693,971
Net loss.................. -- -- -- -- -- (7,985,670) (7,985,670)
-- -- ------ ----------- ----------- ------------ ------------
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
compensation............ -- -- -- 2,095,068 (2,095,068) -- --
Stock option compensation
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)
== == ====== =========== =========== ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 125
HORIZON PCS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................ $(10,667,671) $ (7,985,670) $ (3,039,333)
------------ ------------ ------------
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization..................... 2,911,258 1,929,650 546,895
Deferred Federal income taxes..................... (739,016) 202,914 875,249
Non-cash compensation expense..................... 291,345 -- --
Loss on disposition of Personal Communications
Licenses....................................... -- 1,716,535 --
Gain on sale of PCS assets........................ (1,387,718) -- --
(Gain)/Loss on disposal of fixed assets........... (1,470) 114,907 --
Uncollectible operating revenues.................. 487,595 38,423 3,450
(Increase) decrease in certain assets:
Accounts receivable............................ (701,923) (52,254) 397,648
Equipment Inventory............................ (1,253,208) (884,129) 70,730
Prepaid expense and other...................... (39,416) 3,000 3,000
Increase (decrease) in certain liabilities:
Accounts payable and accrued liabilities....... 1,707,749 (8,726,707) 9,799,334
Accrued taxes.................................. 169,449 241,735 60,731
Accrued interest............................... (5,185) (53,823) 531,070
Postretirement benefit obligation.............. 172,021 117,024 117,026
Change in intercompany payable (receivable)....... 4,857,543 898,771 (4,185,497)
Change in other assets and liabilities, net....... 11,261 442,601 (642,863)
------------ ------------ ------------
Total adjustments............................ 6,480,285 (4,011,353) 7,576,773
------------ ------------ ------------
Net cash used in operating activities........ (4,187,386) (11,997,023) 4,537,440
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net........................... (6,253,133) (7,823,722) (15,187,213)
Proceeds from the sale of fixed assets.............. 4,800,000 -- --
Investment in joint venture......................... (2,068,000) -- --
------------ ------------ ------------
Net cash used in investing activities........ (3,521,133) (7,823,722) (15,187,213)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Notes payable -- borrowings......................... 2,258,646 13,953,712 6,495,629
Capital contributions............................... 3,742,647 5,693,971 7,215,984
Intercompany advances (repayments).................. 1,827,517 -- (13,994,020)
------------ ------------ ------------
Net cash provided by financing activities.... 7,828,810 19,647,683 (282,407)
------------ ------------ ------------
NET INCREASE/(DECREASE) IN CASH AND
CASH EQUIVALENTS.................................... 120,291 (173,062) (10,932,180)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR.......... 26,515 199,577 11,131,757
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR................ $ 146,806 $ 26,515 $ 199,577
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest, net of amounts capitalized................ $ 1,529,631 $ 832,910 $ --
Income taxes........................................ -- -- 2,415,985
</TABLE>
F-6
<PAGE> 126
HORIZON PCS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(CONTINUED)
NONCASH TRANSACTIONS:
During 1999 and 1998, the Company incurred approximately $118,900 and $731,000,
respectively, of additional debt related to the purchase of Rural Telephone
Finance Cooperative subordinated capital certificates (see Note 6).
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.
During 1998, the Company returned the majority of its personal communications
licenses to the FCC which eliminated the associated debt of approximately
$10,116,000 (see Note 2).
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE> 127
HORIZON PCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998 AND FOR
EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1999
(1) REORGANIZATION
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 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 a pooling-of-interests in the 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 reflect the shares of
the Company outstanding after the reorganization.
(2) ORGANIZATION AND BUSINESS OPERATIONS
The Company provides primarily wireless personal communications services.
In October 1996, the 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 constructs and operates 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. As a result of
returning the spectrum to the FCC, the Company recognized a loss of
approximately $1,700,000. The loss primarily represents the write-off of
capitalized license bid costs and certain spectrum clearance costs, as well as
the write-down of the license retained by the Company to its recoverable value.
At December 31, 1999 and 1998, approximately $69,000 and $81,000, respectively,
of license costs and spectrum clearance costs are included on the balance sheet
relating to the spectrum license retained. Amortization expense on the license
retained was approximately $12,000 for the year ended December 31, 1999.
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,
F-8
<PAGE> 128
HORIZON PCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 10 years with four successive 10-year renewal periods unless
terminated by either party under provisions outlined in the management
agreements. The management agreements commenced 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.
Expense related to the management fees charged under the agreement was
approximately $130,000 for the period from October 1, 1999 to December 31, 1999.
The management fee is determined as 8% of certain collected personal
communications services revenues (see Note 3).
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers all
highly liquid investments with initial maturities of three months or less to be
cash equivalents.
EQUIPMENT INVENTORY
Inventories consist of handsets and related accessories. Cost is determined
by the first in, first out method.
PROPERTY AND EQUIPMENT
Property and equipment, including improvements that extend useful lives,
are stated at original cost, while maintenance and repairs are charged to
operations as incurred. Included in the cost of construction for the Company are
items such as direct payroll-related benefits and interest capitalized during
construction. The Company capitalizes interest pursuant to SFAS No. 34,
"Capitalization of Interest Cost." The Company capitalized interest of
approximately $21,000, $416,000 and $529,000 for the years ended December 31,
1999, 1998 and 1997 respectively.
The Company reviews its property and equipment and other long-lived assets
when events or changes in circumstances indicate the carrying amounts may not be
recoverable. When such conditions exist, management estimates the future cash
flows from operations . If the estimated undiscounted future cash flows are less
than the carrying amount of the asset, an impairment loss would be recognized.
The Company does not believe that there is an impairment of such assets at
December 31, 1999.
F-9
<PAGE> 129
HORIZON PCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DEPRECIATION
The Company provides for depreciation and amortization under the
straight-line method based on the estimated service lives of the various classes
of property. Estimated useful lives are as follows:
<TABLE>
<CAPTION>
YEARS
<S> <C>
Network Assets................................... 5-15
Furniture and office equipment................... 5
Computer equipment............................... 3-5
Vehicles......................................... 5
</TABLE>
INVESTMENT IN JOINT VENTURE
The Company accounts for joint ventures in which it has less than 51%
ownership under the equity method. The Company's share of net income (loss) is
recognized as income (expense) and as an increase (decrease) to the Company's
investment in the period incurred (Note 6).
REVENUE RECOGNITION
The Company sells handsets and accessories which are recorded at the time
of the sale as equipment revenue. After the handset has been purchased, the
subscriber purchases a service package which is recognized monthly as service is
provided and is included as service revenue. These two items are not commingled
and sold as one.
Under the management agreement, a management fee calculated as 8% of
collected personal communications service revenues from Sprint PCS subscribers
based in the Company's territory, excluding outbound roaming, and from
non-Sprint PCS subscribers who roam onto the Company's network, is accrued as
services are provided and remitted to Sprint PCS and recorded as selling,
general and administrative expense. The management fee is for the use of Sprint
PCS's licenses and trademarks. Revenues generated from the sale of handsets and
accessories, from inbound and outbound Sprint PCS roaming fees, and from roaming
services provided to Sprint PCS customers who are not based in the Company's
territory are not subject to the 8% management fee. We do not add additional
charges for the Sprint PCS management fee, and we are not billing any revenues
on behalf of Sprint PCS.
The Company recognizes revenues on personal communications handsets and
accessories at the time of the sale. Certain of the personal communications
equipment sales are made through independent distributors under agreements
allowing the right of return on merchandise not sold by the distributors. The
Company defers recognition of such sales until the merchandise is sold by the
distributors.
ADVERTISING COSTS
Costs related to advertising and other promotional expenditures are
expensed as incurred. Advertising costs totaled approximately $1,165,000,
$565,000, and $324,000 for the years ended December 31, 1999, 1998 and 1997,
respectively.
F-10
<PAGE> 130
HORIZON PCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DEBT ISSUANCE COSTS
In relation to the issuance of long-term debt discussed in Note 4, the
Company has incurred a total of $47,000 in deferred financing costs related to
the issuance of the financial institution credit facility. These debt issuance
costs are amortized over the 10 year term of the underlying obligation. For the
years ended December 31, 1999, 1998 and 1997, $4,712, $4,712 and $2,748 of
amortization on debt issuance costs were included in interest expense.
STOCK BASED COMPENSATION
As allowed by SFAS No. 123, "Accounting for Stock Based Compensation"
("SFAS 123"), the Company has chosen to account for compensation cost associated
with its stock compensation plans in accordance with APB Opinion No. 25,
"Accounting for Stock Issued to Employees" and related interpretations.
FEDERAL INCOME TAXES
The Company is included in the consolidated Federal income tax return of
the Parent. The Company provides for Federal income taxes on a pro-rata basis,
consistent with the consolidated tax-sharing agreement.
The Company accounts for income taxes pursuant to the requirements of
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("SFAS No. 109"). 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
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of accounts receivable. The
risk is limited due to the number of customers comprising the Company's customer
base. As of December 31, 1999 and 1998, the Company had no significant
concentrations of credit risk.
NET LOSS PER SHARE
In accordance with SFAS No. 128, "Computation of Earnings per Share," basic
earnings (loss) per share is computed by dividing net loss available to common
shareholders by the weighted average number of shares of common stock
outstanding during the year. Diluted earnings per share is computed by dividing
net loss available to common shareholders by the weighted average number of
common shares and common share equivalents outstanding during the year. Common
share equivalents consist of shares issuable upon the exercise of stock options
(using the treasury stock method). Common share equivalents are excluded from
the calculation if their effects are antidilutive. The Company has not had any
issuances or grants for nominal consideration. The Company issued options to
purchase 4,196,884 shares of class B common stock at $0.12 per share which were
outstanding at December 31, 1999. There were no options outstanding at December
31, 1998 or 1997. Because the Company had a net loss in 1999, 1998 and 1997, the
effect on loss per share of all options was antidilutive.
F-11
<PAGE> 131
HORIZON PCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"), which establishes accounting and reporting standards for derivative
instruments and for hedging activities by requiring that all derivatives be
recognized in the balance sheet and measured at fair value. SFAS 137, issued
August 1999, postpones the mandatory effective date of SFAS 133 for one year to
January 1, 2001. The Company has not determined the effects of this change on
its financial position or results of operations.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the 1999
presentation.
(4) LONG-TERM DEBT
Scheduled maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
<S> <C>
2000....................................................... $ --
2001....................................................... 588,949
2002....................................................... 2,650,271
2003....................................................... 3,533,695
2004....................................................... 3,828,169
Thereafter................................................. 12,956,881
-----------
23,557,965
Less: current maturities................................... --
-----------
$23,557,965
===========
</TABLE>
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 is collateralized by the same
equipment. The Parent has unconditionally guaranteed the debt and has pledged a
security interest in all of the outstanding shares of the Company. In addition,
certain obligations under this loan have been guaranteed by a third party
vendor. Maximum advances on the note total $23,557,965. As of December 31, 1999
and 1998, the total outstanding principal balance was $23,557,965 and
$21,180,442, respectively. Interest is at the financial institution's long-term
loan rate plus 250 basis points (6.9% to 8.45% at December 31, 1999) and is
payable quarterly. Quarterly principal payments begin in 2001 at a fixed
percentage of the outstanding balance and continue through 2007.
The loan contains various financial covenants, the most restrictive
covenants being the minimum annual cash flow requirement, the minimum net worth
requirement and the limitations on additional indebtedness. The covenant tests
are annual tests with exception to those that would need to be met before
incurring additional debt. The Company received waivers from the RTFC stating
that it will not exercise any of its rights or remedies that may exist as a
result of the Company's failure to meet any financial covenants at December 31,
1999 before January 2, 2001. On May 31, 2000, the Company obtained additional
long-term debt financing from the RTFC. The covenants under the new
F-12
<PAGE> 132
HORIZON PCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
loan agreement supersede the covenants under the existing loan agreement. The
Company expects to be able to meet all of the covenants under the new agreement.
In October 1996, the FCC granted the Company personal communications
services licenses. The licenses were financed through the FCC. The total amount
financed was $10,115,618 at December 31, 1997. The total debt was eliminated
during 1998 when the Company returned the licenses to the FCC (Note 2).
(5) FEDERAL INCOME TAXES
The Company's Federal income tax benefit is computed as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1999 1998 1997
<S> <C> <C> <C>
Tax at statutory rate applied to pretax
book loss............................ $(5,371,099) $(4,115,334) $(1,563,355)
Increase (decrease) in tax from:
Change in valuation allowance........ 237,519 -- --
Other, net........................... 3,899 (2,920) 4,584
----------- ----------- -----------
Total tax benefit............ $(5,129,681) $(4,118,254) $(1,558,771)
=========== =========== ===========
</TABLE>
The components of Federal income tax benefit consist of:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1999 1998 1997
<S> <C> <C> <C>
Current benefit........................ $(4,390,665) $(4,321,168) $(2,434,020)
Deferred taxes......................... (739,016) 202,914 875,249
----------- ----------- -----------
Total tax benefit............ $(5,129,681) $(4,118,254) $(1,558,771)
=========== =========== ===========
</TABLE>
F-13
<PAGE> 133
HORIZON PCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (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:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Deferred income tax assets:
Uncollectible accounts............................. $ 125,982 $ 11,201
Vacation........................................... 39,471 23,293
Stock option compensation expense.................. 99,057 --
Pensions and other retirement benefits............. 152,082 89,981
Net operating loss carryforward.................... 903,292 --
Personal Communication Services Licenses........... 381,276 476,387
----------- -----------
Total deferred income tax assets........... $ 1,701,160 $ 600,862
=========== ===========
Deferred income tax liabilities:
Property differences............................... $(1,211,132) $(1,060,200)
Other.............................................. (252,509) (279,678)
----------- -----------
Total deferred income tax liabilities...... $(1,463,641) $(1,339,878)
=========== ===========
Deferred income taxes, net........................... $ 237,519 $ (739,016)
Less: valuation allowance............................ (237,519) --
----------- -----------
Total deferred income taxes, net........... $ -- $ (739,016)
=========== ===========
</TABLE>
The Company has generated net operating losses (NOLs) that may be used to
offset future taxable income. Each year's NOL has a maximum twenty-year
carryforward period. The Company's ability to fully use its NOL carryforwards is
dependent on future taxable income. As of December 31, 1999, the Company has NOL
carryforwards of approximately $2,656,700, expiring in 2019. The future tax
benefit of these NOL carryforwards of $903,292 in 1999 has been recorded as a
deferred tax asset.
The Company provides for Federal income taxes on a pro-rata basis,
consistent with the consolidated tax-sharing agreement. Had the Company not been
eligible to be included in the consolidated Federal income tax return of the
Parent, the effect on income would be as follows:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Federal income tax benefit
As reported........................ $ (5,129,681) $ (4,118,254) $(1,558,771)
Pro Forma.......................... -- -- --
Net loss
As reported........................ $(10,667,671) $ (7,985,670) $(3,039,333)
Pro Forma.......................... (15,797,352) (12,103,924) (4,598,104)
</TABLE>
F-14
<PAGE> 134
HORIZON PCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(6) INVESTMENTS
The Company's long-term investments include the following:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Bright Personal Communications Services, LLC... $3,057,680 $ --
RTFC subordinated capital certificates......... 1,177,898 1,059,021
Other.......................................... 59,463 42,810
---------- ----------
$4,295,041 $1,101,831
========== ==========
</TABLE>
During 1999 the Company entered into a joint venture agreement through the
purchase of approximately 26% of Bright Personal Communications Services, LLC
("BPCS"). The investment is accounted for under the equity method. The joint
venture was established in October 1999 to provide personal communications
services in Ohio, Indiana, and Michigan. The Company has an interest-free note
payable to BPCS totaling $1,032,000 as of December 31, 1999 relating to the
initial capital contribution to the joint venture. Monthly principal payments
began in September 1999 and continue through February 2000. During 1999, the
Company recognized a loss of $42,320 associated with accounting for this
investment under the equity method.
As part of the term loan facility for the construction of the personal
communications network (Note 4), the Company is required to purchase Rural
Telephone Finance Cooperative's (the lender) subordinated capital certificates
with each draw on the loan. These certificates will be redeemed by the lender
when the loan has been repaid. The Company believes the carrying value of this
investment approximates fair market value.
(7) PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS
Certain employees of Horizon PCS, Inc. participate in Horizon Telcom's (the
Parent) pension and postretirement plans. The plans are maintained by the
Parent, and the Company is charged for each plan based on its employee
participation as a percentage of total participation in the plan. In December
1998, the Company adopted SFAS No. 132, "Employers' Disclosures about Pensions
and Other Postretirement Benefits." This Statement revises employers'
disclosures about pension and other postretirement benefit plans but does not
change the measurement or recognition of costs associated with those plans. It
standardizes the disclosure requirements, eliminates certain disclosures and
requires additional information on changes in the benefit obligations and fair
values of plan assets that will facilitate financial analysis. SFAS No. 132
supersedes the disclosure requirements of SFAS No. 87, "Employers' Accounting
for Pensions" and SFAS No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions."
Horizon Telcom, Inc. has two trusteed pension plans covering certain
salaried and hourly employees. Horizon Telcom, Inc.'s funding policy is to be in
compliance with the Employee Retirement Income Security Act guidelines. The
plans' assets consist primarily of investments in common stocks, bonds, notes,
cash equivalents and life insurance policies.
The prepaid pension cost recorded in the accompanying balance sheets was
$98,035 and $93,902 as of December 31, 1999 and 1998, respectively. The pension
credit recognized in the accompanying statements of income for 1999, 1998 and
1997 was approximately $18,000, $133,000 and $33,000, respectively.
F-15
<PAGE> 135
HORIZON PCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In addition, Horizon Telcom, Inc. provides coverage of postretirement
medical, prescription drug, telephone service, and life insurance benefits to
eligible retirees whose status, at retirement from active employment, qualifies
for postretirement benefits. Coverage of postretirement benefits is also
provided to totally and permanently disabled active employees whose status, at
disablement, qualified for postretirement benefits as a retiree from active
employment ("retired disabled"). Horizon Telcom, Inc. also provides coverage of
postretirement dental and vision benefits to certain "enhanced" retirees. No
future retirees will receive coverage of postretirement dental and vision
benefits.
Certain eligible retirees are required to contribute toward the cost of
coverage under the postretirement health care and telephone service benefits
plans. No contribution is required for coverage under the postretirement life
insurance benefits plan.
Effective January 1, 1995, Horizon Telcom, Inc. adopted Statement of
Financial Accounting Standards No. 106, "Accounting for Postretirement Benefits
Other than Pensions (OPEB)" (SFAS No. 106). SFAS No. 106 significantly changes
the accounting, measurement and disclosure practices with respect to OPEB's.
This standard requires that the expected cost of OPEB's be charged to expense
during the period of an employee's service rather than expensing costs as claims
are incurred. As permitted by SFAS No. 106, Horizon Telcom, Inc. has elected to
amortize the accumulated postretirement benefit obligation existing at the date
of adoption ("transition obligation") over a twenty year period.
Prior to fiscal 1995, Horizon Telcom, Inc. recognized postretirement health
care, life insurance and telephone service benefits in the year the benefits
were paid. The cost of retirees' benefits paid by the Company in 1999, 1998 and
1997 was approximately $35,000, $58,000 and $25,000, respectively. Retiree
benefits expense recognized by the Company pursuant to the requirements of SFAS
No. 106 was approximately $160,000, $166,000 and $178,000 in 1999, 1998 and
1997, respectively. The accrued postretirement benefit obligation recorded in
the accompanying balance sheets was $713,074 and $541,053 in 1999 and 1998,
respectively.
F-16
<PAGE> 136
HORIZON PCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The funding status of Horizon Telcom, Inc.'s consolidated Plans as of
December 31, 1999 and 1998 is as follows (in thousands):
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
------------------ ------------------
1999 1998 1999 1998
<S> <C> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation, beginning of year.......... $12,284 $10,922 $ 8,598 $ 8,426
Service cost................................. 346 317 234 259
Interest cost................................ 898 838 480 541
Actuarial (gain) or loss..................... (1,212) 773 (1,358) (255)
Benefits paid................................ (533) (566) (207) (373)
------- ------- ------- -------
Benefit obligation, end of year................ 11,783 12,284 7,747 8,598
------- ------- ------- -------
CHANGE IN PLAN ASSETS
Fair value of plan assets, beginning of year... 18,432 15,796 -- --
Actual return on plan assets................. 190 3,084 -- --
Employer contributions....................... 57 118 207 373
Benefits paid................................ (533) (566) (207) (373)
------- ------- ------- -------
Fair value of plan assets, end of year......... 18,146 18,432 -- --
------- ------- ------- -------
Funded status.................................. $ 6,363 $ 6,148 $(7,747) $(8,598)
Unrecognized transition obligation............. (35) (35) 3,455 3,685
Unrecognized prior service cost................ 921 995 -- --
Unrecognized actuarial (gain) or loss.......... (3,636) (4,216) 70 1,429
------- ------- ------- -------
Prepaid (accrued) benefit cost................. $ 3,613 $ 2,892 $(4,222) $(3,484)
======= ======= ======= =======
WEIGHTED AVERAGE ASSUMPTIONS AT DECEMBER 31:
Discount rate.................................. 8.0% 7.5% 6.75% 6.75%
Expected return on plan assets................. 10.0 10.0 -- --
Rate of compensation increase.................. 4.5 4.5 -- --
</TABLE>
The assumed medical benefit cost trend rate used in measuring the
accumulated postretirement benefit obligation was 7% in 1999 and 1998, declining
gradually to 5% for the under age 65 retirees and their spouses and 6.5% in 1999
and 1998, declining gradually to 5% for the over age 65 retirees and their
spouses. The assumed dental and vision benefit cost trend rates used in
measuring the accumulated postretirement benefit obligation were 6% in 1999 and
1998, declining gradually to 5% for retirees and their spouses. The telephone
service benefit cost trend rate for retirees and their spouses was estimated at
5% for all future years in 1999 and 1998.
F-17
<PAGE> 137
HORIZON PCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
------------------ --------------
1999 1998 1999 1998
<S> <C> <C> <C> <C>
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost....................................... $ 346 $ 317 $234 $ 259
Interest cost...................................... 898 838 480 541
Expected return on plan assets..................... (1,812) (1,560) -- --
Amortization of transition obligation.............. -- -- 230 230
Amortization of prior service cost................. 73 73 -- --
Recognized net actuarial gain (loss)............... (154) (132) -- 38
------- ------- ---- ------
Net periodic benefit cost.......................... $ (649) $ (464) $944 $1,068
======= ======= ==== ======
</TABLE>
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plans. A one-percentage-point change in
assumed health care cost trend rates would have the following effects (in
thousands):
<TABLE>
<CAPTION>
1-PERCENTAGE- 1-PERCENTAGE-
POINT INCREASE POINT DECREASE
<S> <C> <C>
Effect on total of service and interest cost
components................................ $ 150 $ (116)
Effect on postretirement benefit
obligation................................ 1,359 (1,081)
</TABLE>
Horizon Telcom, Inc. also has two defined contribution plans covering
certain eligible salaried and hourly employees. The plans provide for
participants to defer up to 19% of their annual compensation as contributions to
the plans. Horizon Telcom, Inc. matches a participant's contributions equal to
25% of each participant's salary deferral up to a maximum of 1% of a
participant's compensation.
The Parent's contributions to these plans that benefited the Company were
$3,282, $5,685 and $3,011 for 1999, 1998 and 1997, respectively 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. A matching contribution
of approximately $61,000 was made during 1999.
F-18
<PAGE> 138
HORIZON PCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(8) PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Network assets............................... $15,509,876 $12,750,886
Computer equipment........................... 10,626,566 6,341,605
Furniture and office equipment............... 1,377,693 656,914
Vehicles..................................... 389,911 276,954
----------- -----------
Total property and equipment....... $27,904,046 $20,026,359
=========== ===========
</TABLE>
During 1999, the Company sold certain PCS equipment, including ancillary
equipment and base stations, to an external third party. The sale resulted in a
gain of approximately $1,388,000, which is included in the Company's statement
of income, and represents the excess of cash proceeds over the historical net
book value of the assets sold.
(9) 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 will receive a site
development fee from the tower lessor for certain tower sites which the lessor
constructs on behalf of the Company.
Future minimum operating lease payments are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
<S> <C>
2000..................................................... $ 1,380,621
2001..................................................... 1,337,195
2002..................................................... 1,334,655
2003..................................................... 1,334,655
2004..................................................... 1,334,655
Thereafter............................................... 5,835,755
-----------
Future operating lease obligation $12,557,536
===========
</TABLE>
Rental expenses for all operating leases were $2,693,000, $1,774,000 and
$110,000 for the years ended December 31, 1999, 1998 and 1997, respectively.
Rental expense included above related to the PCS equipment leased from the
Parent totaled approximately $1,975,000 and $1,337,000 for 1999 and 1998
respectively.
F-19
<PAGE> 139
HORIZON PCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSTRUCTION EXPENDITURES
Construction expenditures in 2000 are estimated to be $25,000,000. The
majority of the estimated expenditures are for the build-out of the Personal
Communications Services Network. The Company expects to finance construction
primarily through external financing.
LEGAL MATTERS
The Company is party to legal claims arising in the normal course of
business. Although the ultimate outcome of the claims cannot be ascertained at
this time, it is the opinion of management that none of these matters, when
resolved, will have a material adverse impact on the Company's results of
operations or financial condition.
VENDOR AGREEMENTS
In August 1999, the Company entered into a wholesale network services
agreement with a third-party vendor. The initial term is through June 8, 2008
with four automatic ten-year renewals. The monthly billings under the agreement
are based on usage. No minimum usage is required under the agreement.
(10) COMMON STOCK
Due to the reorganization discussed in Note 1, the Company has authorized
125,000,000 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. Horizon Telcom Inc. contributed Horizon Personal Communications,
Inc.'s 100,000 outstanding shares of common stock to the Company, and in return
the Company issued 53,806,200 shares of its class B common stock to Horizon
Telcom Inc. The Company has authorized 10,000,000 shares of preferred stock at
$0.0001 par value. Prior year financial statements and loss per share have been
adjusted to reflect the above change in shares.
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.
(11) INCENTIVE STOCK PLANS
In November 1999, the Company adopted the 1999 Stock Option Plan (the
Plan). The Plan is intended to provide officers and other employees of the
Company and any of its related corporations with opportunities to purchase stock
pursuant to the grant of options (incentive stock options). Additionally, the
Plan is intended to provide directors, officers and employees of, and service
providers to, the Company and any of its related corporations with opportunities
to purchase stock pursuant to the grant of options (nonqualified stock options).
The Company may grant options for up to 2,300,000 shares of class A common
stock and 4,600,000 shares of class B common stock. On November 17, 1999 the
Company issued 4,196,884 options related to class B common stock at an exercise
price of $0.12 per share. 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
issuance.
The Company applies APB Opinion 25 and related Interpretations in
accounting for this plan. Pursuant to APB Opinion 25, the Company will recognize
approximately $2.1 million in
F-20
<PAGE> 140
HORIZON PCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
compensation expense over the period of the options (through 2005). The
accompanying financial statements reflect a noncash compensation charge of
$291,345.
Had compensation cost for the Company's Plan been determined based on the
fair value at the grant dates for awards under the plan consistent with the
method of SFAS 123, the Company's net loss and losses per share would have been
increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1999
<S> <C>
Net Loss
As reported............................................. $(10,667,671)
Pro Forma............................................... (10,692,055)
Basic loss per share
As reported............................................. $ (0.20)
Pro Forma............................................... (0.20)
Diluted loss per share
As reported............................................. $ (0.20)
Pro Forma............................................... (0.20)
</TABLE>
For the purpose of the SFAS 123 disclosure, the fair value of each option
grant is estimated on the date of grant using the Black-Scholes option pricing
model with an assumption of a risk-free interest rate of 6.5% and an expected
life equal to the term of the options. Volatility is deemed not to be applicable
as the Company is not publicly traded.
A summary of the status of the Company's Plan as of December 31, 1999 and
changes during the year ended on that date is presented below:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
SHARES EXERCISE PRICE
<S> <C> <C>
Outstanding at beginning of year.............. -- $ --
Granted..................................... 4,196,884 0.12
Exercised................................... -- --
Forfeited................................... -- --
---------- -----
Outstanding at end of year.................... 4,196,884 $0.12
Options exercisable at year-end............... 511,159 $0.12
Weighted-average fair value of options granted
during the year............................. $ 0.06
</TABLE>
(12) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 ("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
F-21
<PAGE> 141
HORIZON PCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
present value of estimated future cash flows using a discount rate commensurate
with the risks involved.
The estimates of fair value required under SFAS No. 107 require the
application of broad assumptions and estimates. Accordingly, any actual exchange
of such financial instruments could occur at values significantly different from
the amounts disclosed. As cash and temporary cash investments, current
receivables, current payables, and certain other short-term financial
instruments are all short term in nature, their carrying amount approximates
fair value. Long-term debt is repriced quarterly and based on market-driven
rates; therefore, its carrying value approximates fair value.
(13) DISCONTINUED OPERATIONS
Effective April 1, 2000, the Company transferred its Internet, long
distance and other businesses unrelated to its wireless operations to United
Communications, Inc., a wholly-owned subsidiary of the Parent at net book value.
In May 1997, the Company sold its Cincinnati branch of its telecommunication
systems sales division and transferred the remaining operations of this division
to the Chillicothe Telephone Company, a wholly-owned subsidiary of the Parent 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.
Operating results for 1999, 1998 and 1997 for these businesses are as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Total revenue................................. $3,463,566 $2,278,734 $1,349,763
Operating income (loss) before income taxes... 427,775 207,768 (738,385)
Earnings (loss) before income taxes........... 427,775 79,735 (737,750)
Income tax (expense) benefit.................. (145,444) (27,111) 250,835
---------- ---------- ----------
Income (loss) from discontinued operations.... $ 282,331 $ 52,624 $ (486,915)
========== ========== ==========
</TABLE>
Net assets of discontinued operations are as follows:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Current assets.................................... $222,881 $245,400
Property and equipment, net....................... 597,043 748,379
Current liabilities............................... (50,799) (67,387)
-------- --------
Net assets -- discontinued operations........... $769,125 $926,392
======== ========
</TABLE>
(14) RELATED PARTIES
The Company has non-interest bearing receivables from and payables to
affiliated companies (other subsidiaries of the Parent) related to advances made
to and received from these affiliated companies. The Company has a receivable
from the Parent for Federal income taxes attributable to the benefit to be
received by the Parent due to the Company's net loss. The Company also has a
payable to the Parent relating to cash advances received from the Parent's line
of credit and the associated interest. This payable is expected to be repaid
during 2000.
F-22
<PAGE> 142
HORIZON PCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The balances due to/from affiliates as of December 31, 1999 and 1998 are as
follows:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Receivable from Parent........................ $ 2,630,335 $6,435,432
Payable to Parent............................. (4,355,292) --
Payable to affiliates......................... (1,142,173) (89,727)
</TABLE>
During 1999, 1998 and 1997, an affiliated company provided the Company
management, supervision and administrative services including financial
services, regulatory services, human resource services and other administrative
and support services. The cost of these management services for the years ended
December 31, 1999, 1998 and 1997 was approximately $960,000, $330,000 and
$319,000, respectively.
(15) SUBSEQUENT EVENTS
In February 2000, the Company purchased 78,900 shares of common stock of
its parent, Horizon Telcom, Inc. from the Parent's main external shareholder for
approximately $11,835,000. This represents approximately a 19.78% interest in
Horizon Telcom, Inc. The purchase was financed through an unsecured 13% senior
subordinated promissory note to a third party lender. The term of the loan is
one year, with quarterly interest payments beginning in May 2000 and continuing
through February 2001. The lender has the right to convert 100% of the
outstanding principal and unpaid interest into the Company's common stock, based
on the fair value of the stock at the date of conversion.
In March 2000, the Company entered into a $5.0 million interim revolving
line of credit with a financial institution, the proceeds of which are to be
used for general working capital purposes. Interest is at the financial
institution's prevailing prime rate plus 150 basis points and is payable
quarterly, beginning in the first quarter after the initial advance. All
principal and unpaid interest is due in March 2001.
The Company is currently negotiating to expand its management agreement
with Sprint. This would allow 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. While the terms of this expansion
are not final, the terms and conditions are expected to be the same as the
current management agreement (Note 2).
The Company is currently negotiating with a financial institution to enter
into a $40.5 million term loan facility. The cash proceeds of $38.5 million will
be to purchase certain PCS equipment to construct the Company's personal
communications network. The remaining principal balance of $2.0 million will be
for the purchase of the lender's subordinated capital certificates, representing
the Company's required capital investment in the lender. The terms of this
agreement are not finalized.
The Company is currently negotiating a $5.0 million permanent revolving
line of credit with a financial institution, the proceeds of which are to be
used to fund the purchase of certain PCS equipment and for working capital
purposes. The terms of this agreement are not finalized.
See Note 1 for discussion of reorganization which occurred subsequent to
year-end.
F-23
<PAGE> 143
HORIZON PCS, INC.
FINANCIAL STATEMENT SCHEDULE
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT
BEGINNING CHARGED TO BALANCE AT
DESCRIPTION OF PERIOD EXPENSE DEDUCTIONS END OF PERIOD
<S> <C> <C> <C> <C>
Year Ended December 31, 1997:
Allowance for doubtful accounts
receivable............................ $108 $ 3 $ (91)(2) $ 20
==== ==== ===== ====
Year Ended December 31, 1998:
Allowance for doubtful accounts
receivable............................ $ 20 $ 38 $ (25)(1) $ 33
==== ==== ===== ====
Year Ended December 31, 1999:
Allowance for doubtful accounts
receivable............................ $ 33 $488 $(150)(1) $371
==== ==== ===== ====
</TABLE>
-------------------------
(1) Represent amounts written off during the period less recoveries of amounts
previously written off.
(2) Represents transfer of the reserve related to the telecommunication systems
sales division ($88) that was transferred to a wholly-owned subsidiary of
the Parent during 1997 and amounts written off during the period less
recoveries of amounts previously written off.
F-24
<PAGE> 144
HORIZON PCS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2000 AND DECEMBER 31, 1999
<TABLE>
<CAPTION>
JUNE 30,
2000 DECEMBER
(UNAUDITED) 31, 1999
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 5,313,253 $ 146,806
Accounts receivable -- subscriber, less allowance for
doubtful accounts of $462,000 at June 30, 2000 and
$370,700 at December 31, 1999........................... 793,301 416,131
Accounts receivable -- other.............................. 179,054 110,455
Receivable from Parent.................................... 3,355,078 2,630,335
Receivable from affiliate................................. 780,124 --
Equipment inventory....................................... 2,845,301 2,137,337
Prepayments and other..................................... 351,063 46,103
------------ -----------
Total current assets................................ 13,617,174 5,487,167
------------ -----------
INVESTMENTS AND OTHER ASSETS:
Investments............................................... 1,310,012 4,295,041
Investment in Parent...................................... 7,098,062 --
Intangible assets (Note 4)................................ 40,460,816 --
Other assets.............................................. 957,233 202,315
------------ -----------
Total investments and other assets.................. 49,826,123 4,497,356
------------ -----------
PROPERTY AND EQUIPMENT:
In service................................................ 27,583,123 27,904,046
Less -- Accumulated depreciation.......................... (6,148,392) (5,060,242)
------------ -----------
Property and equipment in service, net.................. 21,434,731 22,843,804
Construction work in progress............................. 16,713,268 50,429
------------ -----------
Total property and equipment........................ 38,147,999 22,894,233
------------ -----------
Total assets........................................ $101,591,296 $32,878,756
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable........................................... $ 21,938,877 $ 1,032,000
Accounts payable and accrued liabilities................ 12,580,167 4,241,541
Payable to Parent....................................... 8,473,246 4,355,292
------------ -----------
Total current liabilities........................... 42,992,290 9,628,833
------------ -----------
DEFERRED CREDITS AND OTHER LONG-TERM LIABILITIES:
Deferred gain on sale of towers........................... 222,553 --
Postretirement benefit obligation......................... 987,098 713,074
Long-term debt............................................ 23,557,965 23,557,965
Payable to affiliates..................................... 3,069,746 1,142,173
Other liabilities......................................... 32,012 --
------------ -----------
Total deferred credits and other long-term
liabilities......................................... 27,869,374 25,413,212
------------ -----------
Total liabilities................................... 70,861,664 35,042,045
------------ -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, 10,000,000 shares authorized, none issued
or outstanding, at $0.0001 par value.................... -- --
Common stock -- Class A, 125,000,000 shares authorized,
none issued or outstanding, at $0.0001 par value........ -- --
Common stock -- Class B, 75,000,000 shares authorized,
58,485,000 and 53,806,200 issued and outstanding at June
30, 2000 and December 31, 1999 respectively, at $0.0001
par value............................................... 5,849 5,381
Treasury stock............................................ (111,061) --
Additional paid-in capital................................ 56,565,025 21,916,312
Deferred stock compensation............................... (1,631,484) (1,803,723)
Retained deficit.......................................... (24,098,697) (22,281,259)
------------ -----------
Total stockholders' equity.......................... 30,729,632 (2,163,289)
------------ -----------
Total liabilities and stockholders' equity.......... $101,591,296 $32,878,756
============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-25
<PAGE> 145
HORIZON PCS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
JUNE 30,
--------------------------
2000 1999
<S> <C> <C>
OPERATING REVENUES:
Service revenues.......................................... $ 7,469,045 $ 1,317,472
Equipment revenues........................................ 1,095,245 244,262
------------ -----------
Total operating revenues.......................... 8,564,290 1,561,734
------------ -----------
OPERATING EXPENSES:
Cost of services.......................................... 7,386,262 2,697,929
Cost of equipment......................................... 4,143,851 1,206,785
Selling, general, and administrative expenses (exclusive
of non-cash compensation expense shown below).......... 8,377,511 3,239,172
Non-cash compensation expense............................. 172,239 --
Depreciation and amortization............................. 1,779,343 1,178,317
------------ -----------
Total operating expenses.......................... 21,859,206 8,322,203
------------ -----------
OPERATING LOSS.............................................. (13,294,916) (6,760,469)
GAIN ON EXCHANGE OF STOCK................................... 10,513,200 --
OTHER INCOME, NET........................................... 530,517 4,650
INTEREST EXPENSE, NET....................................... (1,738,119) (640,954)
------------ -----------
INCOME/(LOSS) ON CONTINUING OPERATIONS BEFORE INCOME TAX
BENEFIT................................................... (3,989,318) (7,396,773)
------------ -----------
INCOME TAX BENEFIT.......................................... (2,030,635) (2,448,784)
------------ -----------
INCOME/(LOSS) ON CONTINUING OPERATIONS...................... (1,958,683) (4,947,989)
------------ -----------
DISCONTINUED OPERATIONS
Income from discontinued operations, net of tax expense of
$24,768 for 1999....................................... 141,245 138,571
------------ -----------
NET INCOME/(LOSS)........................................... $ (1,817,438) $(4,809,418)
============ ===========
Basic earnings (loss) per share:
Income (loss) from continuing operations.................. $ (0.04) $ (0.09)
Income (loss) from discontinued operations................ 0.01 0.00
------------ -----------
Net income................................................ $ (0.03) $ (0.09)
============ ===========
Weighted average shares outstanding....................... 53,884,180 53,806,200
============ ===========
Diluted earnings (loss) per share:
Income (loss) from continuing operations.................. $ (0.04) $ (0.09)
Income (loss) from discontinued operations................ 0.01 0.00
------------ -----------
Net income................................................ $ (0.03) $ (0.09)
============ ===========
Weighted average shares outstanding....................... 53,884,180 53,806,200
============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-26
<PAGE> 146
HORIZON PCS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
---------------------------
2000 1999
<S> <C> <C>
NET CASH FLOWS USED IN OPERATING ACTIVITIES................. $ (3,490,166) $(2,041,658)
------------ -----------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Capital expenditures, net................................. (9,808,084) (3,098,085)
Proceeds from sale of fixed assets........................ 700,000 --
Notes payable for investment in joint
venture -- repayments.................................. (1,032,000) --
Equity loss in investments, net........................... 39,097 --
Cash acquired in acquisition of BPCS (Note 4)............. 4,926,803 --
Investment in Parent...................................... (11,835,000) --
------------ -----------
Net cash used in investing activities............. (17,009,184) (3,098,085)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Notes payable -- borrowings............................... 21,938,877 1,648,865
Capital contributions..................................... 1,060,462 1,300,000
Repurchase of class B common stock........................ (111,061) --
Intercompany advances..................................... 4,117,954 2,427,440
Stock issuance costs...................................... (474,523) --
Deferred financing fees................................... (865,912) --
------------ -----------
Net cash provided by financing activities......... 25,665,797 5,376,305
------------ -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 5,166,447 236,562
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 146,806 26,515
------------ -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 5,313,253 $ 263,077
============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-27
<PAGE> 147
HORIZON PCS, INC.
NOTES TO INTERIM CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(UNAUDITED)
(1) GENERAL
The results of operations for the interim periods shown are not necessarily
indicative of the results to be expected for the fiscal year. In the opinion of
Management, the information contained herein reflects all adjustments necessary
to make a fair statement of the results for the six months ended June 30, 2000
and 1999. All such adjustments are of a normal recurring nature.
(2) ORGANIZATION AND BUSINESS OPERATIONS
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 a pooling-of-interests in
the 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 condensed consolidated financial statements reflect the
shares of the Company outstanding after the reorganization and the issuance of
shares in conjunction with the acquisition discussed in Note 4.
The Company provides primarily wireless personal communications services.
The Company entered into management agreements with Sprint PCS, the PCS
group of Sprint Corporation, during 1998. These agreements, as amended, provide
the Company with the exclusive right to build, own, and manage a wireless voice
and data services network in markets located in Ohio, West Virginia, Kentucky,
Virginia, Tennessee, 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 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.
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.
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Note 2 to the Notes to Consolidated Financial Statements in the Company's
December 31, 1999 Financial Statements summarize the Company's significant
accounting policies.
F-28
<PAGE> 148
HORIZON PCS, INC.
NOTES TO INTERIM CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with the rules and regulations of the Securities and
Exchange Commission ("SEC"). Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations.
NET EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per common share is calculated as net income (loss)
(the numerator) divided by the weighted average number of common shares
outstanding during each period (the denominator). Diluted earnings (loss) per
common share is similar to the calculation for basic, except that the numerator
is increased by interest on the convertible debt, net of the tax effect and the
denominator is increased by the dilutive effect of stock options and convertible
debt outstanding, computed using the treasury stock method. Because the Company
had a net loss for the six months ended June 30, 2000 and 1999, the effect on
loss per share of all options and convertible debt for those periods was
anti-dilutive.
(4) ACQUISITIONS
During 1999 the Company entered into a joint venture agreement through the
purchase of 25.4% of Bright Personal Communications Services, LLC ("BPCS"). 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
Personal Communications Services, LLC (BPCS) in exchange for 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 (31,911
shares valued at $15,300,000) (Note 8). This acquisition was treated as a
purchase for accounting purposes. The consolidated statement of income included
the results of BPCS from June 28, 2000.
In conjunction with this transaction, the Company has also acquired BPCS'
management agreement with Sprint PCS and, with it, the right to operate using
Sprint PCS licenses in BPCS' markets. The Company has recognized an intangible
asset totaling $33,000,000 related to this licensing agreement which will be
amortized over 20 years, the initial term of the underlying management
agreement. Amortization commenced in June 2000. Expense included in the results
of operations for the six months ended June 30, 2000 is $13,750.
The purchase price, as preliminarily allocated, exceeds the fair market
value of the net assets acquired by approximately $7,476,000. The resulting
goodwill will be amortized on a straight-line basis over 20 years. Amortization
commenced in June 2000. Expense included in the results of operations for the
six months ended June 30, 2000 is $1,850.
F-29
<PAGE> 149
HORIZON PCS, INC.
NOTES TO INTERIM CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The preliminary purchase price allocation of the fair value of assets
acquired and liabilities assumed is summarized below:
<TABLE>
<S> <C>
Working capital............................................. $ 3,183,000
Property and equipment...................................... 8,505,209
Sprint PCS licenses......................................... 33,000,000
Goodwill.................................................... 7,476,000
Other assets................................................ 164,000
</TABLE>
The following unaudited pro forma summary presents the net revenues, net
income (loss) and earnings (loss) per share from the combination of the Company
and BPCS, as if the acquisition had occurred at the beginning of the 2000 and
1999 fiscal years. The pro forma information is provided for information
purposes only. It is based on historical information and does not necessarily
reflect the actual results that would have occurred nor is it necessarily
indicative of the future results of operations of the combined enterprise:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
2000 1999
<S> <C> <C>
Net revenue................................................. $ 8,057,173 $ 1,561,734
Net income (loss)........................................... (2,288,774) (4,809,418)
Basic earnings (loss) per share............................. (0.04) (0.09)
Diluted earnings (loss) per share........................... (0.04) (0.09)
</TABLE>
(5) LINES OF CREDIT
In March 2000, the Company entered into a $5 million interim revolving line
of credit with a bank, the proceeds of which are to be used for general working
capital purposes. Interest is at the bank's prevailing prime rate plus 150 basis
points and is payable quarterly, beginning in the first quarter after the
initial advance. All principal and unpaid interest is due in March 2001. At June
30, 2000 the Company had borrowed $4,870,610 on this line of credit.
In May 2000, the Company entered into a $5 million general corporate line
of credit with a bank, the proceeds of which are to be used for financing of
construction expenditures. Interest is at the bank's standard line of credit
rate plus 100 basis points and is payable quarterly beginning in the first
quarter after the initial advance. All principal and unpaid interest is due in
May 2005. At June 30, 2000 the Company had borrowed $3,650,410 on this line of
credit.
(6) SHORT-TERM NOTE PAYABLE
The purchase of Horizon Telcom, Inc. common stock (Note 6) was financed
through a $13,000,000 unsecured 13% senior subordinated promissory note to a
third party lender. The term of the loan is one year, with quarterly interest
payments beginning in May 2000 and continuing through February 2001. The lender
has the right to convert 100% of the outstanding principal and unpaid interest
into the Company's common stock, based on the fair value of the stock at the
date of conversion. As of June 30, 2000, the Company had converted $417,857 of
interest into additional debt. The total note payable as of June 30, 2000 is
$13,417,857.
F-30
<PAGE> 150
HORIZON PCS, INC.
NOTES TO INTERIM CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(7) LONG-TERM DEBT
In connection with the acquisition of BPCS, the Company has assumed a
ten-year secured term loan totaling $35,400,000. At the date of acquisition and
as of June 30, 2000, there was no outstanding balance. Interest is at the
financial institution's variable rate plus 100 basis points and will be payable
quarterly. Quarterly principal payments begin in 2004 at a fixed percentage of
the outstanding balance and continue through 2009. The note will be
collateralized by the equipment.
In May 2000, the Company entered into a $40,500,000 million 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 total $38,475,000 million. There was no outstanding balance as of June 30,
2000. Interest is either variable or fixed, at the Company's election, at the
time of each advance and will be payable quarterly after the initial advance of
funds. The rates are determined at the financial institution's applicable rate
plus 150 basis points. Quarterly principal payments begin in 2004 at a fixed
percentage of the outstanding balance and continue through 2009. This loan is
secured by equipment, collateral assignments of the Company's tower lease (Note
10), and pledges of HPC stock and ownership interests in BPCS. The loan contains
various financial covenants, the most restrictive covenants being the minimum
annual cash flow requirement, the debt service coverage ratio requirement, the
leverage ratio requirement and the limitations on other indebtedness.
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 is collateralized by the same
equipment. The Parent has unconditionally guaranteed the debt and has pledged a
security interest in all of the outstanding shares of the Company. In addition,
certain obligations under this loan have been guaranteed by a third party
vendor. Maximum advances on the note total $23,557,965. As of June 30, 2000 and
December 31, 1999, the total outstanding balance was $23,557,965. Interest is at
the financial institution's long-term loan rate plus 250 basis points (6.9% to
9.55% at June 30, 2000) and is payable quarterly. Quarterly principal payments
begin in 2001 at a fixed percentage of the outstanding balance and continue
through 2007.
The loan contains various financial covenants, the most restrictive
covenants being the minimum annual cash flow requirement, the debt service
coverage ratio requirement, the leverage ratio requirement and the limitations
on other indebtedness. The covenant tests are annual tests with exception to
those that would need to be met before incurring additional debt. The Company
received waivers from the financial institution stating that it will not
exercise any of its rights or remedies that may exist as a result of the
Company's failure to meet any financial covenants at December 31, 1999 before
January 2, 2001. On May 31, 2000, the Company obtained additional long-term debt
financing from the financial institution. The covenants under the new loan
agreement supersede the covenants under the existing loan agreement. The Company
expects to be able to meet all of the covenants under the new agreement.
(8) INVESTMENTS
In February 2000, the Company purchased 78,900 shares of common stock of
its parent, Horizon Telcom, Inc. from the Parent's main external shareholder for
approximately $11,835,000. This represents approximately a 19.78% interest in
Horizon Telcom, Inc. The Company transferred 40% of the shares owned (31,911
shares) to the former members as consideration for the acquisition of
F-31
<PAGE> 151
HORIZON PCS, INC.
NOTES TO INTERIM CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
BPCS (Note 4). This transaction resulted in a gain of $10,513,200 and reduced
the ownership in Horizon Telcom, Inc. to 11.78%. This investment is accounted
for under the cost method.
As part of the term loan facilities for the construction of the personal
communications network (Note 7), the Company is required to purchase Rural
Telephone Finance Cooperative's (the lender) subordinated capital certificates
with each draw on the loan. These certificates will be redeemed by the lender
when the note has been repaid.
(9) DISCONTINUED OPERATIONS
Effective April 1, 2000, the Company transferred its Internet, long
distance and other businesses unrelated to its wireless operations to United
Communications, Inc. (United), a wholly-owned subsidiary of the Parent, 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. As of
June 30, 2000, the Company had an interest bearing note receivable of
approximately $780,000 from United.
Operating results for the six months ended June 30, 2000 and 1999 for these
businesses are as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
2000 1999
<S> <C> <C>
Total revenue............................................... $1,046,313 $1,678,655
Operating income before income taxes........................ 214,008 209,956
Earnings before income taxes................................ 214,008 209,956
Income tax expense.......................................... (72,763) (71,385)
---------- ----------
Net income from discontinued operations..................... $ 141,245 $ 138,571
========== ==========
</TABLE>
Net assets of discontinued operations are as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
<S> <C> <C>
Current assets.............................................. $ -- $308,779
Property and equipment, net................................. -- 597,043
Current liabilities......................................... -- (81,799)
-------- --------
Net assets -- discontinued operations..................... $ -- $824,023
======== ========
</TABLE>
(10) 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 leases 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 will receive a site
development fee from the tower lessor for certain tower sites that the lessor
constructs on behalf of the Company.
F-32
<PAGE> 152
HORIZON PCS, INC.
NOTES TO INTERIM CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSTRUCTION EXPENDITURES
Construction expenditures in 2000 are estimated to be $107,000,000. The
majority of the estimated expenditures are for the build-out of the Personal
Communications Services Network. The Company expects to finance construction
primarily through external financing.
LEGAL MATTERS
The Company is party to legal claims arising in the normal course of
business. Although the ultimate outcome of the claims cannot be ascertained at
this time, it is the opinion of management that none of these matters, when
resolved, will have a material adverse impact on the Company's results of
operations or financial condition.
VENDOR AGREEMENTS
In August 1999, the Company entered into a wholesale network services
agreement with a third-party vendor. The initial term is through June 8, 2008
with four automatic ten-year renewals. The monthly billings under the agreement
are based on usage. No minimum usage is required under the agreement.
(11) RELATED PARTIES
The Company has non-interest bearing receivables from and payables to
affiliated companies (other subsidiaries of the Parent) related to advances made
to and received from these affiliated companies. The Company has a receivable
from the Parent for Federal income taxes attributable to the benefit to be
received by the Parent due to the Company's net loss. The Company also has a
payable to the Parent relating to cash advances received from the Parent's line
of credit and the associated interest. This payable is expected to be repaid
during 2000. The balances due to/from affiliates as of June 30, 2000 and
December 31, 1999 are as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
<S> <C> <C>
Receivable from Parent...................................... $ 3,355,078 $ 2,630,335
Receivable from affiliate................................... 780,124 --
Payable to Parent........................................... (8,473,246) (4,355,292)
Payable to affiliates....................................... (3,069,746) (1,142,173)
</TABLE>
During 2000 and 1999, an affiliated company provided the Company
management, supervision and administrative services including financial
services, regulatory services, human resource services and other administrative
and support services. The cost of these management services for the six months
ended June 30, 2000 and 1999 was approximately $1,792,000 and $325,000,
respectively.
(12) SUBSEQUENT EVENTS
The Company has filed with the Securities and Exchange Commission for an
initial public offering. The Company expects to raise approximately $115,800,000
from the offering of approximately 9,650,000 shares of class A common stock.
In connection with the Company expanding its management agreement with
Sprint PCS which 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 (Note 2), the
F-33
<PAGE> 153
HORIZON PCS, INC.
NOTES TO INTERIM CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company, concurrent with the initial public offering, will grant to Sprint PCS
warrants to acquire 2,510,460 shares of class A common stock.
The Company has a commitment from a financial institution for a $225
million senior secured credit facility consisting of a $75 million revolving
credit commitment and a $150 million term loan commitment (collectively, the
senior secured credit facility). The senior secured credit facility bears
interest of LIBOR plus 2.5% to 3.5%. The borrowings will be used to finance the
direct cost of the construction and operation of the Company's personal
communications network and for working capital purposes. This transaction closed
concurrently with the private placement of equity.
The Company, concurrent with the private placement of equity, issued $295
million aggregate principal amount of senior discount notes. The senior discount
notes are guaranteed by HPC and BPCS.
F-34
<PAGE> 154
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Managers and Members of
BRIGHT PERSONAL COMMUNICATIONS SERVICES, LLC:
We have audited the accompanying balance sheet of BRIGHT PERSONAL
COMMUNICATIONS SERVICES, LLC (an Ohio limited liability company in the
development stage) as of December 31, 1999 and the related statements of income,
members' capital and cash flows for the period from inception (October 12, 1999)
to December 31, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of BRIGHT PERSONAL
COMMUNICATIONS SERVICES, LLC as of December 31, 1999 and the results of its
operations and its cash flows for the period from inception (October 12, 1999)
to December 31, 1999 in conformity with accounting principles generally accepted
in the United States.
ARTHUR ANDERSEN LLP
Columbus, Ohio
March 2, 2000
F-35
<PAGE> 155
BRIGHT PERSONAL COMMUNICATIONS SERVICES, LLC
(A DEVELOPMENT-STAGE COMPANY)
BALANCE SHEET
AS OF DECEMBER 31, 1999
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................. $ 8,365,769
Receivables............................................... 61,949
Notes receivable from members............................. 2,958,665
Prepayments and other..................................... 34,902
-----------
Total current assets.............................. 11,421,285
-----------
DEFERRED CHARGES AND OTHER ASSETS
Deferred financing costs.................................. 77,880
-----------
Total deferred charges and other assets........... 77,880
-----------
PROPERTY AND EQUIPMENT
Construction work in progress............................. 511,415
-----------
Total property and equipment...................... 511,415
-----------
Total assets...................................... $12,010,580
===========
LIABILITIES AND MEMBERS' CAPITAL
Accounts payable.......................................... $ 46,150
-----------
Total liabilities................................. 46,150
-----------
Members' Capital
Capital contributions (12,130 voting units issued and
outstanding)........................................... 12,130,000
Deficit accumulated during the development stage.......... (165,570)
-----------
Total members' capital............................ 11,964,430
-----------
Total liabilities and members' capital............ $12,010,580
===========
</TABLE>
The accompanying notes to financial statements are an integral part of this
balance sheet.
F-36
<PAGE> 156
BRIGHT PERSONAL COMMUNICATIONS SERVICES, LLC
(A DEVELOPMENT-STAGE COMPANY)
STATEMENT OF INCOME
FOR THE PERIOD FROM INCEPTION (OCTOBER 12, 1999) TO DECEMBER 31, 1999
<TABLE>
<S> <C>
OPERATING REVENUES
Personal Communications Service revenue................... $ --
---------
Total operating revenues.......................... --
---------
PREOPERATING EXPENSES
Preoperating expenses..................................... 253,254
---------
Total preoperating expenses....................... 253,354
---------
PREOPERATING LOSS........................................... (253,254)
---------
NONOPERATING INCOME
Interest income........................................... 87,684
---------
Total nonoperating income......................... 87,684
---------
NET LOSS.................................................... $(165,570)
=========
</TABLE>
The accompanying notes to financial statements are an integral part of this
financial statement.
F-37
<PAGE> 157
BRIGHT PERSONAL COMMUNICATIONS SERVICES, LLC
(A DEVELOPMENT-STAGE COMPANY)
STATEMENT OF MEMBERS' CAPITAL
FOR THE PERIOD FROM INCEPTION (OCTOBER 12, 1999) TO DECEMBER 31, 1999
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
VOTING DURING THE
UNITS CAPITAL DEVELOPMENT
ISSUED CONTRIBUTIONS STAGE TOTAL
<S> <C> <C> <C> <C>
BALANCE, October 12, 1999.............. -- $ -- $ -- $ --
Units issued......................... 12,130 12,130,000 -- 12,130,000
Net loss............................. -- -- (165,570) (165,570)
------ ----------- --------- -----------
BALANCE, December 31, 1999............. 12,130 $12,130,000 $(165,570) $11,964,430
====== =========== ========= ===========
</TABLE>
The accompanying notes to financial statements are an integral part of this
financial statement.
F-38
<PAGE> 158
BRIGHT PERSONAL COMMUNICATIONS SERVICES, LLC
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM INCEPTION (OCTOBER 12, 1999) TO DECEMBER 31, 1999
<TABLE>
<S> <C>
CASH FLOWS FROM PREOPERATING ACTIVITIES:
Net loss.................................................. $ (165,570)
----------
Adjustments to reconcile net loss to net cash used in
preoperating activities:
Changes in certain assets and liabilities:
Increase in receivables.............................. (61,949)
Increase in prepayments and other.................... (34,902)
Increase in accounts payable......................... 46,150
----------
Cash flows used in preoperating activities........ (216,271)
----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net.................. (477,800)
----------
Cash flows used in investing activities........... (477,800)
----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Members' equity contributions............................. 9,137,720
Deferred financing fees................................... (77,880)
----------
Cash flows provided by financing activities....... 9,059,840
----------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 8,365,769
CASH AND CASH EQUIVALENTS, beginning of period.............. --
----------
CASH AND CASH EQUIVALENTS, end of period.................... $8,365,769
==========
</TABLE>
NONCASH TRANSACTIONS
A member received voting units in exchange for property purchased and
contributed to the Company totaling approximately $33,600.
As of December 31, 1999, the Company had outstanding notes receivable from
members totaling $2,958,665 relating to initial capital contributions.
The accompanying notes to financial statements are an integral part of this
financial statement.
F-39
<PAGE> 159
BRIGHT PERSONAL COMMUNICATIONS SERVICES, LLC
(A DEVELOPMENT-STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
(1) ORGANIZATION AND RISKS OF DEVELOPMENT-STAGE ENTERPRISES
Bright Personal Communications Services, LLC (the Company or BPCS) was
formed as an Ohio limited liability company on October 12, 1999. The Company is
in the development stage and its principal business activity will be to provide
personal communications services (PCS).
The Company has two classes of member units, voting and nonvoting. As of
December 31, 1999, 12,130 voting units at a stated value of $1,000 per unit were
issued to twenty-two members. Members holding nonvoting units have no rights to
vote or consent on any matter that requires a vote or consent by members. As of
December 31, 1999, no nonvoting units have been issued.
Profits, losses and cash flows are allocated to members based on ownership
percentage, as set forth in the Operating Agreement between the Company and its
members (the "Operating Agreement").
The Company entered into a Management Agreement with Sprint PCS, the PCS
group of Sprint Corporation (the "Management Agreement"). Under this agreement,
the Company will be given the exclusive right to build, own and manage a
wireless voice and data services network in markets located in Ohio, Michigan
and Indiana under the Sprint PCS brand. BPCS is required to build out the
wireless network according to Sprint PCS specifications. The Company will be
charged a fee under this agreement based on a percentage of collected revenue.
The term of the Management Agreement is 20 years with three successive 10-year
renewal periods. The Management Agreement is subject to a requirement that the
Company construct and operate facilities that offer coverage to a defined
population as well as maintain specific operational and performance standards.
The Company began the engineering and design phase in 1999 and expects to
complete the construction of the personal communications network in 2000.
The Company entered into a Services Agreement with Horizon Personal
Communications, Inc., one of its members, during 1999. Pursuant to the Services
Agreement, this member provides management and administrative services to the
Company for a fee of $25,000 per month plus a percentage of monthly gross
service revenue. The Company also agreed to compensate this member for certain
services provided in connection with the normal operations of the Company,
including use of the member's network, customer activation, customer care and
billing. Based on the Services Agreement, payment is to be made either in cash
or reflected as a capital contribution resulting in the issuance of additional
voting units.
The Company has yet to generate revenue from providing services and has no
assurance of future revenues. Further, during the period required to build its
network, the Company will require additional funds. The success of the Company's
future operations is primarily dependent upon its ability to obtain adequate
financing and secure appropriate tower sites and to build-out its PCS network
and conduct future operations. Thus, the inability to obtain adequate financing
or delays and unanticipated costs in obtaining sites and completing construction
could significantly affect the Company's ability to conduct future operations.
F-40
<PAGE> 160
BRIGHT PERSONAL COMMUNICATIONS SERVICES, LLC
(A DEVELOPMENT-STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND USE OF ESTIMATES
The Company uses the accrual basis of accounting. The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenue and expenses during the reporting period. Actual results could differ
from those estimates.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all
highly liquid investments with maturities of three months or less to be cash
equivalents. Included as a cash equivalent is $8,012,928 of commercial paper.
PROPERTY AND EQUIPMENT
Property and equipment is stated at original cost. Included in the cost of
construction for the Company will be items such as direct payroll-related
benefits and interest capitalized during construction.
DEPRECIATION
The Company will provide for depreciation under the straight-line method
using rates based on the estimated service lives of the various classes of
property.
Estimated useful lives will be as follows:
<TABLE>
<CAPTION>
YEARS
<S> <C>
Network assets................................... 5-15
Furniture and office equipment................... 5
Computer equipment............................... 3-5
Vehicles......................................... 5
</TABLE>
REVENUE RECOGNITION
The Company sells handsets and accessories which are recorded at the time
of the sale as equipment revenue. After the handset has been purchased, the
subscriber purchases a service package which is recognized monthly as service is
provided and is included as service revenue. These two items are not commingled
and sold as one.
Under the management agreement, a management fee calculated as 8% of
collected personal communications service revenues from Sprint PCS subscribers
based in the Company's territory, excluding outbound roaming, and from
non-Sprint PCS subscribers who roam onto the Company's network, will be accrued
as services are provided and remitted to Sprint PCS and recorded as selling,
general and administrative expense. The management fee is for the use of Sprint
PCS's licenses and trademarks. Revenues generated from the sale of handsets and
accessories, inbound and outbound Sprint PCS roaming fees, and from roaming
services provided to Sprint PCS customers who are not based in the Company's
territory are not subject to the 8% affiliation fee. The Company will
F-41
<PAGE> 161
BRIGHT PERSONAL COMMUNICATIONS SERVICES, LLC
(A DEVELOPMENT-STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
recognize revenues on personal communications handsets and accessories at the
time of the sale. We do not add additional charges for the Sprint management fee
and we are not billing any revenues on behalf of Sprint.
INCOME TAXES
The Company is organized as a limited partnership for Federal income tax
purposes. Consequently, the Company is not taxable as an entity under the
Internal Revenue Code. Therefore, no provision for Federal or State income taxes
has been provided. Revenues and expenses recognized by the Company for tax
reporting purposes are allocated to the individual equity members based on the
Operating Agreement, for inclusion in their individual income tax returns.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of notes receivable. All notes
receivable amounts were fully collected by February 2000.
ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"), which establishes accounting and reporting standards for derivative
instruments and for hedging activities by requiring that all derivatives be
recognized in the balance sheet and measured at fair value. SFAS 137, issued
August 1999, postpones the mandatory effective date of SFAS 133 for one year to
January 1, 2001. The Company has not determined the effects of this change on
its financial position or results of operations.
(3) OPERATING LEASES
The Company leases a storefront under an operating lease. Rental expense
for this operating lease was $4,214 for the period from inception (October 12,
1999) to December 31, 1999. Future minimum operating lease payments are as
follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
<S> <C>
2000........................................................ $ 39,589
2001........................................................ 44,484
2002........................................................ 45,818
2003........................................................ 47,193
2004........................................................ 44,558
Thereafter.................................................. --
--------
Future operating lease obligation........................... $221,642
========
</TABLE>
F-42
<PAGE> 162
BRIGHT PERSONAL COMMUNICATIONS SERVICES, LLC
(A DEVELOPMENT-STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(4) UNIT OPTION PLAN
The Operating Agreement provides for the issuance of nonvoting member units
pursuant to the Unit Option Plan (the Plan). The Plan provides for options to be
granted to any employee, member or manager of the Company as determined by the
Management Committee. The aggregate number of nonvoting units available for
issue under the Plan equals 10% of the total number of voting units committed as
of September 15, 1999 (1,198 units). If any option granted under the Plan
expires or is terminated for any reason without being exercised, the units
subject to the options will become available for granting under the Plan. As of
December 31, 1999, no options have been granted.
(5) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of current assets and current liabilities approximate
their fair market value because of the immediate or short-term maturity of these
financial instruments.
(6) CONSTRUCTION EXPENDITURES
Construction expenditures in 2000 are estimated to be $27,000,000. The
majority of the estimated expenditures are for the build-out of the personal
communications services network (Note 1). The Company expects to finance
construction primarily through the use of the members' equity contributions and
external financing.
(7) FINANCING ARRANGEMENTS
In December 1999, the Company signed a letter of commitment with a
financial institution to finance the purchase of certain equipment for the
construction the Company's personal communications network. The note is expected
to be a 10-year secured term loan in the amount of $35,400,000. The note will be
collateralized by the equipment. As of December 31, 1999, the Company had
incurred approximately $78,000 in financing fees, which are included in deferred
charges on the accompanying balance sheet.
(8) RELATED PARTIES
Expense related to management services provided pursuant to the Services
Agreement for the period from inception (October 12, 1999) to December 31, 1999
totaled $75,000.
The Company has non-interest bearing receivables from several members
relating to the initial capital contributions. The initial capital contribution,
based on the Operating Agreement, is payable in six equal monthly installments
beginning in September 1999 and ending in February 2000. At December 31, 1999,
the outstanding balance was $2,958,665. These amounts were fully collected in
February 2000.
(9) LIMITATION OF LIABILITY
Pursuant to the Operating Agreement, each member's liability is limited to
those liabilities attributable to such member's gross negligence, fraudulent
conduct, willful misconduct or bad faith or to a continuing material breach of
the Operating Agreement. In addition, members are not liable for the debts,
obligations or liabilities of the other members.
F-43
<PAGE> 163
BRIGHT PERSONAL COMMUNICATIONS SERVICES, LLC
(A DEVELOPMENT-STAGE COMPANY)
CONDENSED BALANCE SHEETS
AS OF MARCH 31, 2000 AND DECEMBER 31, 1999
<TABLE>
<CAPTION>
MARCH 31,
2000 DECEMBER 31,
(UNAUDITED) 1999
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................. $ 9,377,190 $ 8,365,769
Receivables............................................... 61,458 61,949
Notes receivable from members............................. -- 2,958,665
Prepayments and other..................................... 29,775 34,902
----------- -----------
Total current assets.............................. 9,468,423 11,421,285
----------- -----------
DEFERRED CHARGES AND OTHER ASSETS
Deferred financing costs.................................. 77,880 77,880
----------- -----------
Total deferred charges and other assets........... 77,880 77,880
----------- -----------
PROPERTY AND EQUIPMENT
In service................................................ 4,000 --
Less -- Accumulated depreciation.......................... (67) --
----------- -----------
Property and equipment, net............................ 3,933 --
Construction work in progress............................. 2,856,215 511,415
----------- -----------
Total property and equipment, net................. 2,860,148 511,415
----------- -----------
Total assets...................................... $12,406,451 $12,010,580
=========== ===========
LIABILITIES AND MEMBERS' CAPITAL
Accounts payable.......................................... $ 459,193 $ 46,150
----------- -----------
Total liabilities................................. 459,193 46,150
----------- -----------
Members' Capital
Capital contributions (12,130 voting units issued and
outstanding)........................................... 12,130,000 12,130,000
Deficit accumulated during the development stage.......... (182,742) (165,570)
----------- -----------
Total members' capital............................ 11,947,258 11,964,430
----------- -----------
Total liabilities and members' capital............ $12,406,451 $12,010,580
=========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
balance sheets.
F-44
<PAGE> 164
BRIGHT PERSONAL COMMUNICATIONS SERVICES, LLC
(A DEVELOPMENT-STAGE COMPANY)
CONDENSED STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND
FOR THE PERIOD FROM INCEPTION (OCTOBER 12, 1999) TO MARCH 31, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE THREE FROM INCEPTION
MONTHS ENDED (OCTOBER 12, 1999)
MARCH 31, 2000 TO MARCH 31, 2000
-------------- ------------------
<S> <C> <C>
OPERATING REVENUES
Personal Communications Service revenue................... $ -- $ --
--------- ---------
Total operating revenues.......................... -- --
--------- ---------
PREOPERATING EXPENSES
Preoperating expenses..................................... 161,795 415,049
--------- ---------
Total preoperating expenses....................... 161,795 415,049
--------- ---------
PREOPERATING LOSS........................................... (161,795) (415,049)
--------- ---------
NONOPERATING INCOME
Interest income........................................... 144,623 232,307
--------- ---------
Total nonoperating income......................... 144,623 232,307
--------- ---------
NET LOSS.................................................... $ (17,172) $(182,742)
========= =========
</TABLE>
The accompanying notes to financial statements are an integral part of this
financial statement.
F-45
<PAGE> 165
BRIGHT PERSONAL COMMUNICATIONS SERVICES, LLC
(A DEVELOPMENT-STAGE COMPANY)
CONDENSED STATEMENT OF MEMBERS' CAPITAL
FOR THE PERIOD FROM INCEPTION (OCTOBER 12, 1999) TO MARCH 31, 2000
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
VOTING DURING THE
UNITS CAPITAL DEVELOPMENT
ISSUED CONTRIBUTIONS STAGE TOTAL
------ ------------- ----------- -----------
<S> <C> <C> <C> <C>
BALANCE, October 12, 1999........................ -- $ -- $ -- $ --
Units issued................................... 12,130 12,130,000 -- 12,130,000
Net loss....................................... -- -- (165,570) (165,570)
------ ----------- --------- -----------
BALANCE, December 31, 1999....................... 12,130 $12,130,000 $(165,570) $11,964,430
Net loss (unaudited)........................... -- -- (17,172) (17,172)
------ ----------- --------- -----------
BALANCE, March 31, 2000 (unaudited).............. 12,130 $12,130,000 $(182,742) $11,947,258
====== =========== ========= ===========
</TABLE>
The accompanying notes to financial statements are an integral part of this
financial statement.
F-46
<PAGE> 166
BRIGHT PERSONAL COMMUNICATIONS SERVICES, LLC
(A DEVELOPMENT-STAGE COMPANY)
CONDENSED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND
FOR THE PERIOD FROM INCEPTION (OCTOBER 12, 1999) TO MARCH 31, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE THREE FROM INCEPTION
MONTHS ENDED (OCTOBER 12, 1999)
MARCH 31, 2000 TO MARCH 31, 2000
-------------- ------------------
<S> <C> <C>
NET CASH FLOWS PROVIDED BY PREOPERATING ACTIVITIES.... $ 401,556 $ 185,285
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net............ (2,348,800) (2,826,600)
----------- -----------
Cash flows used in investing activities..... (2,348,800) (2,826,600)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Members' equity contributions....................... -- 9,137,720
Collection of notes receivable relating to members'
equity contributions............................. 2,958,665 2,958,665
Deferred financing fees............................. -- (77,880)
----------- -----------
Cash flows provided by financing
activities............................... 2,958,665 12,018,505
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS............. 1,011,421 9,377,190
CASH AND CASH EQUIVALENTS, beginning of period........ 8,365,769 --
----------- -----------
CASH AND CASH EQUIVALENTS, end of period.............. $ 9,377,190 $ 9,377,190
=========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of this
financial statement.
F-47
<PAGE> 167
BRIGHT PERSONAL COMMUNICATIONS SERVICES, LLC
(A DEVELOPMENT-STAGE COMPANY)
NOTES TO INTERIM CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2000
(UNAUDITED)
(1) GENERAL
The results of operations for the interim period shown are not necessarily
indicative of the results to be expected for the fiscal year. In the opinion of
Management, the information contained herein reflects all adjustments necessary
to make a fair statement of the results for the three months ended March 31,
2000. All such adjustments are of a normal recurring nature. The financial
statements also reflect the results of operations, cash flows and members'
capital from inception (October 12, 1999) through March 31, 2000.
(2) ORGANIZATION AND RISKS OF DEVELOPMENT-STAGE ENTERPRISES
Bright Personal Communications Services, LLC (the "Company" or "BPCS") was
formed as an Ohio limited liability company on October 12, 1999. The Company is
in the development stage and its principal business activity will be to provide
personal communications services ("PCS").
The Company has two classes of member units, voting and nonvoting. As of
March 31, 2000 and December 31, 1999, 12,130 voting units at a stated value of
$1,000 per unit were issued to twenty-two members. Members holding nonvoting
units have no rights to vote or consent on any matter that requires a vote or
consent by members. As of March 31, 2000, no nonvoting units have been issued.
Profits, losses and cash flows are allocated to members based on ownership
percentage, as set forth in the Operating Agreement between the Company and its
members (the "Operating Agreement").
The Company entered into a Management Agreement with Sprint PCS, the PCS
group of Sprint Corporation (the "Management Agreement"). Under this agreement,
the Company will be given the exclusive right to build, own and manage a
wireless voice and data services network in markets located in Ohio, Michigan
and Indiana, under the Sprint PCS brand. BPCS is required to build out the
wireless network according to Sprint PCS specifications. The Company will be
charged a fee under this agreement based on a percentage of collected revenue.
The term of the Management Agreement is 20 years with three successive 10-year
renewal periods. The Management Agreement is subject to a requirement that the
Company construct and operate facilities that offer coverage to a defined
population as well as maintain specific operational and performance standards.
The Company began the engineering and design phase in 1999 and expects to
complete the construction of the personal communications network in 2000.
The Company entered into a Services Agreement with one of its members
during 1999. Pursuant to the Services Agreement, this member provides management
and administrative services to the Company for a fee of $25,000 per month plus a
percentage of monthly gross service revenue. The Company also agreed to
compensate this member for certain services provided in connection with the
normal operations of the Company, including use of the member's network,
customer activation, customer care and billing. Based on the Services Agreement,
payment is to be made either in cash or reflected as a capital contribution
resulting in the issuance of additional voting units.
The Company has yet to generate revenue from providing services and has no
assurance of future revenues. Further, during the period required to build its
network, the Company will require additional funds. The success of the Company's
future operations is primarily dependent upon its
F-48
<PAGE> 168
BRIGHT PERSONAL COMMUNICATIONS SERVICES, LLC
(A DEVELOPMENT-STAGE COMPANY)
NOTES TO INTERIM CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 2000
(UNAUDITED)
ability to obtain adequate financing and secure appropriate tower sites and to
build-out its PCS network and conduct future operations. Thus, the inability to
obtain adequate financing or delays and unanticipated costs in obtaining sites
and completing construction could significantly affect the Company's ability to
conduct future operations.
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Note 2 to the Notes to Financial Statements in the Company's December 31,
1999 Financial Statements summarize the Company's significant accounting
policies.
(4) INCOME TAXES
The Company is organized as a limited partnership for Federal income tax
purposes. Consequently, the Company is not taxable as an entity under the
Internal Revenue Code. Therefore, no provision for Federal or State income taxes
has been provided. Revenues and expenses recognized by the Company for tax
reporting purposes are allocated to the individual equity members based on the
Operating Agreement, for inclusion in their individual income tax returns.
(5) COMMITMENTS AND CONTINGENCIES
CONSTRUCTION EXPENDITURES
Construction expenditures in 2000 are estimated to be $35,400,000. The
majority of the estimated expenditures are for the build-out of the personal
communications services network. The Company expects to finance construction
primarily through the use of the members' equity contributions and external
financing.
(6) UNIT OPTION PLAN
The Operating Agreement provides for the issuance of nonvoting member units
pursuant to the Unit Option Plan (the Plan). The Plan provides for options to be
granted to any employee, member or manager of the Company as determined by the
Management Committee. The aggregate number of nonvoting units available for
issue under the Plan equals 10% of the total number of voting units committed as
of September 15, 1999 (1,198 units). If any option granted under the Plan
expires or is terminated for any reason without being exercised, the units
subject to the options will become available for granting under the Plan. As of
March 31, 2000, no options have been granted.
(7) FINANCING ARRANGEMENTS
In December 1999, the Company signed a letter of commitment with a
financial institution to finance the purchase of certain equipment for the
construction the Company's personal communications network. The note is expected
to be a 10-year secured term loan in the amount of $35,400,000. The note will be
collateralized by the equipment. As of December 31, 1999, the Company had
incurred approximately $78,000 in financing fees, which are included in deferred
charges on the accompanying balance sheet. As discussed in Note 10, the loan
agreement was finalized in May 2000.
F-49
<PAGE> 169
BRIGHT PERSONAL COMMUNICATIONS SERVICES, LLC
(A DEVELOPMENT-STAGE COMPANY)
NOTES TO INTERIM CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 2000
(UNAUDITED)
(8) RELATED PARTIES
Expense related to management services provided pursuant to the Services
Agreement for the three months ended March 31, 2000 totaled $75,000. In
addition, as of March 31, 2000, the Company paid approximately $179,000 to a
member related to its network build-out.
The Company had non-interest bearing receivables from several members
relating to the initial capital contributions. The initial capital contribution,
based on the Operating Agreement, was payable in six equal monthly installments
beginning in September 1999 and ending in February 2000. At December 31, 1999,
the outstanding balance was $2,958,665. These amounts were fully collected by
February 2000.
(9) LIMITATION OF LIABILITY
Pursuant to the Operating Agreement, each member's liability is limited to
those liabilities attributable to such member's gross negligence, fraudulent
conduct, willful misconduct or bad faith or to a continuing material breach of
the Operating Agreement. In addition, members are not liable for the debts,
obligations or liabilities of the other members.
(10) SUBSEQUENT EVENTS
In April 2000, certain of the members owning 74.4% of the Company entered
into an agreement to exchange their ownership of the Company for an 8% ownership
of Horizon PCS, Inc. ("HPCS") and an 8% ownership of Horizon Telcom, Inc. (HPCS'
parent). Prior to this transaction, Horizon PCS, through its wholly-owned
subsidiary Horizon Personal Communications, Inc., owned the remaining 25.6% of
the Company. After this transaction, HPCS, with Horizon Personal Communications,
Inc., owns 100% of the Company.
In May 2000, the Company finalized a loan agreement with a financial
institution for a 10-year secured term loan in the amount of $35,407,000.
Interest is at the financial institution's variable rate plus 100 basis points
and will be payable quarterly. Quarterly principal payments begin in 2004 at a
fixed percentage of the outstanding balance and continue through 2009.
F-50
<PAGE> 170
HORIZON PCS, INC.
PRO FORMA FINANCIAL STATEMENTS
The unaudited pro forma balance sheet of Horizon PCS, Inc. ("Horizon PCS")
as of June 30, 2000 (the "Pro Forma Balance Sheet") and the unaudited pro forma
statements of income of Horizon PCS for the year ended December 31, 1999 and the
six months ended June 30, 2000 (the "Pro Forma Statements of Income," together
with the Pro Forma Balance Sheet, the "Pro Forma Financial Statements") give
effect to the acquisition of the remaining 74% of the equity of Bright Personal
Communications Services, LLC ("Bright PCS") which is not already owned by
Horizon PCS' wholly-owned subsidiary, Horizon Personal Communications, Inc., the
acquisition of certain network assets under construction from Sprint PCS in
connection with its grant of our new markets in Pennsylvania, New York, Ohio and
New Jersey, the dividend of 10% of the 12% of the outstanding shares of Horizon
Telcom held by us to our stockholders, the completion of our $149.7 million
offering of senior discount notes and warrants, the completion of our $225
million senior secured credit facility, the conversion of our $13.4 million
short-term convertible note plus accrued interest into convertible preferred
stock, the sale of $126.5 million of convertible preferred stock to an investor
group led by Apollo Management and the issuance of warrants granted to Sprint to
acquire a number of shares of Class A common stock. The historical balance sheet
as of June 30, 2000 reflects our acquisition of Bright PCS.
The unaudited pro forma adjustments are based upon available information
and certain assumptions that management believes are reasonable. The pro forma
adjustments related to the purchase of Sprint PCS network assets and the
issuance of warrants to Sprint PCS are subject to further adjustment depending
on the final amount of assets purchased and the final valuation of the warrants.
The Company does not believe the adjustments will be significant. The Pro Forma
Financial Statements do not purport to be indicative of the results that would
have actually been obtained had such transactions been completed as of the
assumed dated and for the periods presented, or which may be obtained in the
future. The Pro Forma Financial Statements are presented on a consolidated
basis.
The Pro Forma Statement of Income for the year ended December 31, 1999 has
been derived from the audited consolidated financial statements of Horizon PCS
included elsewhere herein, adjusted to give effect to the items above as if they
had occurred on January 1, 1999. The Pro Forma Statement of Income for the six
months ended June 30, 2000 has been derived from the unaudited consolidated
financial statements of Horizon PCS included elsewhere herein, adjusted to give
effect to the items above as if they had occurred on January 1, 2000. The Pro
Forma Balance Sheet as of June 30, 2000 has been derived from the unaudited
consolidated financial statements of Horizon PCS included elsewhere herein,
adjusted to give effect to the items above as if they had occurred on June 30,
2000.
The Pro Forma Financial Statements and the accompanying notes should be
read in conjunction with the financial statements of Horizon PCS, together with
the related notes thereto, included elsewhere herein.
P-1
<PAGE> 171
HORIZON PCS, INC.
PRO FORMA BALANCE SHEET
AS OF JUNE 30, 2000
<TABLE>
<CAPTION>
HORIZON PCS PRO FORMA
(ACTUAL) ADJUSTMENTS COMBINED
----------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Cash........................................................ $ 5,313 $259,099(1) $264,412
Accounts receivable......................................... 972 -- 972
Other current assets........................................ 7,332 -- 7,332
-------- -------- --------
Total current assets...................................... 13,617 259,099 272,716
-------- -------- --------
Property and equipment, net................................. 38,148 15,000(2) 53,148
Goodwill and other intangibles.............................. 40,461 18,896(3) 59,357
Other non-current assets.................................... 9,365 (5,915)(5) 16,823
13,751(6)
(378)(8)
-------- -------- --------
Total assets.............................................. $101,591 $300,453 $402,044
======== ======== ========
LIABILITIES & STOCKHOLDERS' EQUITY
Notes payable............................................... $ 21,939 $(21,939)(4) $ --
Other current liabilities................................... 21,053 (198)(4) 20,855
Long-term debt.............................................. 23,558 155,877(6) 179,435
Other non-current liabilities............................... 4,311 11,500(5) 15,811
-------- -------- --------
Total liabilities......................................... 70,861 145,240 216,101
-------- -------- --------
Convertible preferred stock................................. -- 133,865(7) 133,865
Stockholders' equity........................................ 30,730 18,896(3) 52,078
(5,915)(5)
(11,500)(5)
20,245(6)
(378)(8)
-------- -------- --------
Total liabilities and stockholders' equity................ $101,591 $300,453 $402,044
======== ======== ========
</TABLE>
See Footnotes to Pro Forma Financial Statements
P-2
<PAGE> 172
HORIZON PCS, INC.
PRO FORMA STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
HISTORICAL HISTORICAL PRO FORMA
HORIZON PCS BRIGHT PCS ADJUSTMENTS COMBINED
----------- ---------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Service revenues.................................... $ 3,903 $ -- $ (75)(9) $ 3,828
Equipment revenues.................................. 600 -- -- 600
----------- ----- -------- -----------
4,503 -- (75) 4,428
----------- ----- -------- -----------
Operating expenses:
Cost of service and equipment..................... 9,741 -- -- 9,741
Selling, general and administrative............... 7,922 253 (75)(9) 8,100
Non-cash compensation expense..................... 291 -- -- 291
Depreciation and amortization..................... 2,685 -- 2,024(10) 4,709
----------- ----- -------- -----------
Total operating expenses........................ 20,639 253 1,949 22,841
----------- ----- -------- -----------
Operating loss.................................. (16,136) (253) (2,024) (18,413)
Interest expense, net............................... (1,529) -- (353)(13) (1,882)
Gain on sale of PCS assets.......................... 1,388 -- -- 1,388
Other income (expense).............................. 52 88 42(11) 182
Income tax benefit (expense)........................ 5,275 -- (5,275)(12) (11,500)
(11,500)(5)
----------- ----- -------- -----------
Loss from continuing operations................. $ (10,950) $(165) $(19,110) $ (30,225)
=========== ===== ======== ===========
Loss per share:
Basic and diluted loss per share from continuing
operations........................................ $ (0.20) $ (0.52)
=========== ===========
Weighted average shares outstanding................. 53,806,200 58,485,000
=========== ===========
</TABLE>
See Footnotes to Pro Forma Financial Statements
P-3
<PAGE> 173
HORIZON PCS, INC.
PRO FORMA STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 2000
<TABLE>
<CAPTION>
HISTORICAL HISTORICAL PRO FORMA
HORIZON PCS BRIGHT PCS ADJUSTMENTS COMBINED
----------- ---------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Service revenues.................................... $ 7,469 $ -- $ (508)(9) $ 6,961
Equipment revenues.................................. 1,095 -- -- 1,095
----------- ----- -------- -----------
8,564 -- (508) 8,056
----------- ----- -------- -----------
Operating expenses:
Cost of service and equipment..................... 11,530 8 (360)(9) 11,178
Selling, general and administrative............... 8,378 367 (148)(9) 8,597
Non-cash compensation expense..................... 172 -- -- 172
Depreciation and amortization..................... 1,779 2 996(10) 2,777
----------- ----- -------- -----------
Total operating expenses........................ 21,859 377 488 22,724
----------- ----- -------- -----------
Operating loss (13,295) (377) (996) (14,668)
Interest expense, net............................... (1,738) -- (481)(13) (2,219)
Other income (expense).............................. 11,044 265 29(11) 11,338
Income tax benefit (expense)........................ 2,031 -- (2,031)(12) 11,500
(11,500)(5)
----------- ----- -------- -----------
Loss from continuing operations..................... $ (1,958) $(112) $(14,979) $ (17,049)
=========== ===== ======== ===========
Loss per share:
Basic and diluted loss per share from continuing
operations........................................ $ (0.04) $ (0.29)
=========== ===========
Weighted average shares outstanding................. 53,884,180 58,485,000
=========== ===========
</TABLE>
See Footnotes to Pro Forma Financial Statements
P-4
<PAGE> 174
FOOTNOTES TO PRO FORMA FINANCIAL STATEMENTS
For the purposes of determining the pro forma effect of transactions
described above on our consolidated balance sheet as of June 30, 2000 and
consolidated statements of income for the year ended December 31, 1999 and the
six months ended June 30, 2000, the following adjustments have been made (in
thousands, except share and per share data):
1. Represents proceeds from the issuance of our senior discount notes,
borrowings under our new senior secured credit facility and proceeds from
the sale of our convertible preferred stock net of offering expenses and
debt repayment, as follows:
<TABLE>
<S> <C>
Proceeds from senior discount notes offering.......... $149,680
Borrowings under the senior secured credit facility... 50,000
Sale of convertible preferred stock................... 126,500
Less: offering expenses............................... (20,002)
Less: debt repayment.................................. (32,079)
Less: purchase of Sprint PCS assets................... (15,000)
--------
259,099
========
</TABLE>
2. Represents the purchase of the $15,000 of cell sites under
construction from Sprint PCS in connection with its grant of new markets.
3. Reflects the issuance of warrants granted to Sprint to acquire
2,510,460 shares of class A common stock at an exercise price equal to the
initial public offering price per share. The valuation of the warrants is
estimated to be $18,896 or $7.50 per share. The warrants are amortized over
a period of 20 years, which is the initial term of the management agreement
with Sprint PCS. The fair value of the warrants were estimated on the date
of the grant using the Black-Scholes pricing model with an assumption of a
risk-free interest rate of 6.5%, expected life equal to the term of the
warrants and a volatility of 95%.
4. Represents the conversion of our short-term convertible notes and
the debt repaid with proceeds from the issuance of our senior discount
notes, borrowings under our new senior secured credit facility and proceeds
from the sale of our convertible preferred stock.
5. Reflects the $7,900 tax liability arising from tax deconsolidation,
and the $5,915 dividend of Horizon Telcom stock, as well as the $3,600 tax
liability arising from the dividend.
6. Represents:
<TABLE>
<S> <C> <C>
Proceeds from senior secured debt
facility.................................. 50,000
Proceeds from senior discount notes......... 149,680
Less: unrecognized discount of warrants,
net....................................... 20,245
129,435
--------
179,435
Less: debt repayment........................ 23,558
--------
$155,877
========
</TABLE>
Approximately $13,751 of deferred financing fees were recognized in
connection with these two transactions.
P-5
<PAGE> 175
7. Reflects the sale of $126,500 of our convertible preferred stock
less offering expenses of $6,251 and the issuance of $13,616 of additional
convertible preferred stock upon conversion of our short-term convertible
note plus accrued interest.
8. Represents write-off of deferred financing fees related to
extinguishment of RTFC debt.
9. Represents the elimination of intercompany activity between Horizon
PCS and Bright PCS relating to the management fees and network usage costs
paid to Horizon PCS.
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1999 JUNE 30, 2000
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Management fees................ $75 $148
Network build-out fees......... -- 360
</TABLE>
10. Represents the amortization of goodwill and other intangible
assets recorded from the Bright PCS acquisition consisting of goodwill and
licenses in the amount of $40,476. The goodwill and other intangibles
acquired are amortized over a period of 20 years, which is the initial term
of Bright PCS' management agreement with Sprint PCS.
11. Represents the elimination of Horizon PCS' 25.6% of Bright PCS'
net loss for each period previously recorded as other income and expense.
12. After the closing of the private placement of equity, the Company
will no longer be included in Horizon Telcom's consolidated tax return and
therefore will not be able to recognize a tax benefit.
13. Represents incremental interest expense of existing debt as a
result of the refinancing.
14. Basic and diluted losses per share were calculated as net loss
divided by the weighted average number of common shares outstanding. The
pro forma combined weighted-average shares outstanding includes 4,678,800
shares issued in conjunction with the Bright PCS acquisition. Because the
Company had a net loss as of December 31, 1999 and June 30, 2000, the
effect on loss per share of all options, warrants and convertible debt was
antidilutive.
P-6
<PAGE> 176
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
, 2000
[HORIZON PCS LOGO]
HORIZON PCS, INC.
9,650,000 SHARES OF CLASS A COMMON STOCK
--------------------------------------------------------------------------------
-------------------------
PROSPECTUS
-------------------------
DONALDSON, LUFKIN & JENRETTE
FIRST UNION SECURITIES, INC.
THE ROBINSON-HUMPHREY COMPANY
DLJDIRECT INC.
We have not authorized any dealer, salesperson or other person to give you
written information other than this prospectus or to make representations as to
matters not stated in this prospectus. You must not rely on unauthorized
information. This prospectus is not an offer to sell these securities or our
solicitation of your offer to buy the securities in any jurisdiction where that
would not be permitted or legal. Neither the delivery of this prospectus nor any
of the sales made hereunder after the date of this prospectus shall create an
implication that the information contained herein or our affairs have not
changed since the date hereof.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Until , 2000 (25 days after the date of this prospectus), all
dealers that effect transactions in these securities may be required to deliver
a prospectus. This is in addition to the dealer's obligation to deliver a
prospectus when acting as an underwriter in this offering or when selling
previously unsold allotments or subscriptions.
--------------------------------------------------------------------------------
<PAGE> 177
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses and costs (other than
underwriting discounts and commissions) expected to be incurred in connection
with the issuance and distribution of the securities to be registered. All of
the amounts shown are estimated except for the Securities and Exchange
Commission registration fee, the NASD filing fee and the Nasdaq National Market
listing fee.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee......... $ 35,157
National Association of Securities Dealers, Inc. filing
fee....................................................... 13,000
Nasdaq National Market listing fees......................... 95,000
Printing and engraving expenses............................. 400,000
Legal fees and expenses..................................... 500,000
Accounting fees and expenses................................ 300,000
Transfer agent and registrar fees........................... 1,500
Miscellaneous expenses......................................
----------
Total..................................................... $ *
==========
</TABLE>
-------------------------
* To be supplied by amendment
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Certificate of Incorporation of Horizon PCS, Inc. ("Horizon PCS")
provides that the liability of the directors of Horizon PCS to Horizon PCS or
any of its stockholders for monetary damages arising from acts or omissions
occurring in their capacity as directors shall be limited to the fullest extent
permitted by the laws of Delaware or any other applicable law. This limitation
does not apply with respect to any action in which a director would be liable
under Section 174 of the General Corporation Law of the State of Delaware nor
does it apply with respect to any liability in which a director:
- breached his duty of loyalty to Horizon PCS or its stockholders;
- did not act in good faith or, in failing to act, did not act in good
faith;
- acted in a manner involving intentional misconduct or a knowing violation
of law or, in failing to act, shall have acted in a manner involving
intentional misconduct or a knowing violation of law; or
- derived an improper personal benefit.
Horizon PCS' Certificate of Incorporation provides that Horizon PCS shall
indemnify its directors, officers and employees and former directors, officers
and employees to the fullest extent permitted by the laws of Delaware or any
other applicable law. Pursuant to the provisions of Section 145 of the General
Corporation Law of the State of Delaware, Horizon PCS has the power to indemnify
any person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding (other than an
action by or in the right of Horizon PCS) by reason of the fact that he is or
was a director, officer, employee or agent of Horizon PCS, against any and all
expenses, judgments, fines and amounts paid in settlement actually and
reasonably incurred in connection with such action, suit or proceeding. The
power to indemnify applies only if such person acted in good faith and in a
manner he reasonably believed to be in the best interest, or
II-1
<PAGE> 178
not opposed to the best interest, of Horizon PCS and with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful.
The power to indemnify applies to actions brought by or in the right of
Horizon PCS as well, but only to the extent or defense and settlement expenses
and not to any satisfaction of a judgment or settlement of the claim itself and
with the further limitation that in such actions no indemnification shall be
made in the event of any adjudication of negligence or misconduct unless the
court, in its discretion, believes that in light of all the circumstances
indemnification should apply.
The statute further specifically provides that the indemnification
authorized thereby shall not be deemed exclusive of any other rights to which
any such officer or director may be entitled under any bylaws, agreements, vote
of stockholders or disinterested directors, or otherwise.
Reference is made to the Form of Underwriting Agreement, to be filed as
Exhibit 1.1 to this registration statement, which provides for indemnification
by the Underwriters under certain circumstances of the directors and officers of
Horizon PCS signing the registration statement and certain controlling persons
of Horizon PCS against certain liabilities, including those arising under the
Securities Act.
Horizon PCS intends to acquire directors' and officers' liability insurance
covering its directors and officers.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling Horizon PCS
pursuant to the foregoing provisions, Horizon PCS has been advised that in the
opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
During the last three years, the Registrant has sold or issued the
following unregistered securities:
(1) On April 25, 2000, in connection with the incorporation of the
Registrant, the Registrant 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 Registrant, the Registrant issued 53,806,200 shares of its class B
common stock to Horizon Telcom in return for Horizon Telcom's contribution
to the Registrant 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 Registrant, the Registrant 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 Registrant granted incentive stock options
to purchase 3,874,047 shares of the Registrant'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 Registrant as a holding company for
Horizon Personal Communications, Inc. and Bright PCS.
II-2
<PAGE> 179
(5) In connection with Sprint PCS' grant of the Registrant's new
markets on May 19, 2000, the Registrant agreed to grant a warrant to Sprint
PCS to acquire 2,510,460 shares of the Registrant's class A common stock at
an exercise price equal to the initial public offering price per share. The
warrant will expire on the 3rd anniversary of the completion of this
offering.
(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 Registrant and First Union Investors, Inc., agreed that,
upon the completion of this offering, the outstanding principal amount, and
accrued interest thereon, under the note to First Union Investors, Inc.
would be converted into shares of the Registrant's class A common stock at
a conversion price equal to the initial public offering price per share.
(7) On September 8, 2000, the Registrant 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 registrant 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.
<TABLE>
<CAPTION>
NAME OF PURCHASER NUMBER OF SHARES
<S> <C>
Apollo Investment Fund IV, L.P.............................. 19,986,880
Apollo Overseas Partners IV, L.P............................ 1,109,679
Ares Leveraged Investment Fund, L.P......................... 1,190,062
Ares Leveraged Investment Fund II, L.P...................... 1,190,062
First Union Capital Partners, L.P........................... 2,610,554
</TABLE>
(9) On September 26, 2000, the registrant issued 295,000 units
("Units") consisting of $295,000,000 principal amount of 14% Senior
Discount Notes due 2010 and warrants to purchase 3,805,500 shares of 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.
<TABLE>
<CAPTION>
NAME OF PURCHASER NUMBER OF UNITS
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation......... 206,500
First Union Securities, Inc................................. 88,500
</TABLE>
Exemption from the registration provisions of the Securities Act for the
transaction described in paragraph 7 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. Exemption
from the registration provisions of the Securities Act for the transactions
described in paragraphs 8 and 9 above was claimed under Rule 144A of the
Securities Act.
II-3
<PAGE> 180
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <C> <S>
1.1* -- Form of Underwriting Agreement.
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 Certificate of Incorporation of Horizon
PCS.
3.2** -- Bylaws of Horizon PCS.
4.1** -- Specimen Common Stock Certificate.
5.1** -- Opinion of Arnall Golden & Gregory, LLP regarding legality
of the common stock being issued.
10.1* -- Form of Employment Agreement, dated September , 2000, by
and between Registrant and William A. McKell
10.2* -- Form of Employment Agreement, dated September , 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.
10.4**+ -- Sprint PCS Services Agreement between Sprint Spectrum L.P.
and Horizon Personal Communications, Inc., dated June 8,
1998.
10.5** -- Sprint Trademark and Service Mark License Agreement between
Sprint Communications Company, L.P. and Horizon Personal
Communications, Inc., dated June 8, 1998.
10.6** -- Sprint Spectrum Trademark and Service Mark License Agreement
between Sprint Spectrum L.P. and Horizon Personal
Communications, Inc., dated June 8, 1998.
10.7**+ -- Sprint PCS Management Agreement between Wirelessco, L.P.,
SprintCom, Inc., Sprint Spectrum, L.P. and Bright Personal
Communications Services, LLC, dated October 13, 1999.
10.8**+ -- Sprint PCS Services Agreement between Sprint Spectrum, L.P.
and Bright Personal Communications Services, LLC, dated
October 13, 1999.
10.9** -- Sprint Trademark and Service Mark License Agreement between
Sprint Communications Company, L.P. and Bright Personal
Communications Services, LLC, dated October 13, 1999.
10.10** -- Sprint Spectrum Trademark and Service Mark License Agreement
between Sprint Spectrum, L.P. and Bright Personal
Communications Services, LLC, dated October 13, 1999.
10.11** -- Loan Agreement by and between Horizon Personal
Communications, Inc. and Rural Telephone Finance
Cooperative, dated August 29, 1997.
10.12** -- Horizon Telcom Guaranty, dated August 29, 1997.
10.13** -- Loan Agreement, by and between Bright Personal
Communications Services, LLC and Rural Telephone Finance
Corporation, dated April 28, 2000.
</TABLE>
II-4
<PAGE> 181
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <C> <S>
10.14** -- Loan Agreement dated May 31, 2000 by and between Horizon
Personal Communications, Inc. and Rural Telephone Finance
Cooperative.
10.15** -- Amendment to Loan Agreement dated June 27, 2000 by and
between Horizon Personal Communications, Inc. and Rural
Telephone Finance Cooperative.
10.16** -- Horizon Telcom Guaranty dated June 27, 2000.
10.17** -- Commitment letter from First Union National Bank with regard
to $225 million senior secured credit facility for the
Registrant.
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.
10.20** -- Assignment and Agreement by and between SprintCom, Inc.,
Horizon Personal Communications, Inc., West Virginia PCS
Alliance, L.C. and Virginia PCS Alliance, L.C., dated August
12, 1999.
10.21**+ -- PCS CDMA Product Supply Contract by and between Motorola,
Inc. and Horizon Personal Communications, Inc.
10.22** -- Bridge Note Purchase Agreement by and between Horizon
Personal Communications, Inc. and First Union Investors,
Inc., dated February 15, 2000.
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 The Chillicothe
Telephone Company and Horizon Personal Communications, Inc.
10.33** -- Services Agreement, dated May 1, 2000 between Horizon
Personal Communications, Inc. and United Communications,
Inc.
10.34** -- Form of Indemnification Agreement.
10.35** -- Amended and Restated Tax Allocation Agreement dated May 1,
2000 by and among Horizon Telcom, Inc., The Chillicothe
Telephone Company, Horizon Personal Communications, Inc.,
United Communications, Inc., Horizon Services, Inc., and
Horizon PCS, Inc.
10.36** -- Form of Lock-Up Agreement.
</TABLE>
II-5
<PAGE> 182
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <C> <S>
10.37* -- Securities Purchase Agreement dated September 26, 2000 by
and among Horizon PCS, Inc. Apollo Investment Fund IV, L.P.,
Apollo Overseas Partners IV, L.P., Ares Leveraged Investment
Fund, L.P., Ares Leveraged Investment Fund II, L.P. and
First Union Capital Partners, LLC.
10.38* -- Investors Rights and Voting Agreement dated September 26,
2000 by and among Horizon PCS, Inc. Apollo Investment Fund
IV, L.P., Apollo Overseas Partners IV, L.P., Ares Leveraged
Investment Fund, L.P., Ares Leveraged Investment Fund II,
L.P. and First Union Capital Partners, LLC.
10.39* -- Registration Rights Agreement dated September 26, 2000 by
and among Horizon PCS, Inc., Apollo Investment Fund IV,
L.P., Apollo Overseas Partners IV, L.P., Ares Leveraged
Investment Fund, L.P., Ares Leveraged Investment Fund II,
L.P. and First Union Capital Partners, LLC.
10.40* -- Credit Agreement, dated as of September 26, 2000, by and
among Horizon Personal Communications, Inc. and Bright
Personal Communications Services, LLC, Horizon PCS, Inc.
(the "Parent") and certain Subsidiaries of the Parent, the
several banks and other financial institutions as may from
time to time become parties to this Agreement, First Union
National Bank, as Administrative Agent, Westdeutsche
Landesbank Girozentrale, as Syndication Agent and Arranger,
and Fortis Capital Corp., as Documentation Agent.
10.41* -- 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.
21.1** -- Subsidiaries of Horizon
23.1 -- Consent of Arthur Andersen, LLP
23.2** -- Consent of Arnall Golden & Gregory, LLP (contained in legal
opinion to be filed as Exhibit 5.1)
24.1** -- Powers of Attorney (set forth on the signature page hereto)
27.1** -- Financial Data Schedule (for SEC use only)
27.2** -- Financial Data Schedule (for SEC use only)
</TABLE>
-------------------------
* to be filed by amendment.
** previously filed.
(1) In accordance with Item 601(b)(2) of Regulation S-K, the schedules have been
omitted and a list briefly describing the schedules is at the end of the
Exhibit. The Registrant will furnish supplementally a copy of any omitted
schedule to the Commission upon request.
+ The registrant has requested confidential treatment for certain portions of
this exhibit pursuant to Rule 406 of the Securities Act of 1933, as amended.
(b) Financial Statement Schedules:
The following is the schedule filed as a part of the registration
statement -- Schedule II -- Valuation and Qualifying Accounts.
II-6
<PAGE> 183
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in
a form of prospectus filed by Horizon pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new Registration Statement relating to
the securities offered therein and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities
Action 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it against public policy as expressed in the Act and will be
governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes to provide to the Underwriters
at the closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
II-7
<PAGE> 184
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 5 to Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Chillicothe, State of Ohio, on the 31st day of October, 2000.
HORIZON PCS, INC.
By: /s/ WILLIAM A. MCKELL
------------------------------------
William A. McKell
Chairman of the Board, President,
and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 5 to Registration Statement has been signed by the following person in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<C> <S> <C>
/s/ WILLIAM A. MCKELL Chairman of the Board, October 31, 2000
----------------------------------------------------- President and Chief
William A. McKell Executive Officer (Principal
Executive Officer)
/s/ PETER M. HOLLAND Chief Financial Officer; October 31, 2000
----------------------------------------------------- Director (Principal
Peter M. Holland Financial and Accounting
Officer)
/s/ THOMAS MCKELL* Director October 31, 2000
-----------------------------------------------------
Thomas McKell
/s/ PHOEBE H. MCKELL* Director October 31, 2000
-----------------------------------------------------
Phoebe H. McKell
/s/ LONNIE D. PEDERSEN* Director October 31, 2000
-----------------------------------------------------
Lonnie D. Pedersen
/s/ ROBERT A. KATZ Director October 31, 2000
-----------------------------------------------------
Robert A. Katz
/s/ MARC J. ROWAN Director October 31, 2000
-----------------------------------------------------
Marc J. Rowan
By: /s/ PETER M. HOLLAND
-------------------------------------------------
Peter M. Holland
Attorney-in-Fact
</TABLE>
II-8
<PAGE> 185
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each of Robert A. Katz and Marc J.
Rowan constitutes and appoints William A. McKell and Peter M. Holland and each
of them, as his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments (including post-
effective amendments) to this Registration Statement, any related registration
statement filed pursuant to Rule 462 promulgated pursuant to the Securities Act,
and to file the same with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or either of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed below by the following person in the capacity
and on the date indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<C> <S> <C>
/s/ ROBERT A. KATZ Director October 31, 2000
-----------------------------------------------------
Robert A. Katz
/s/ MARC J. ROWAN Director October 31, 2000
-----------------------------------------------------
Marc J. Rowan
</TABLE>
II-9
<PAGE> 186
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <C> <S>
1.1* -- Form of Underwriting Agreement.
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 Certificate of Incorporation of Horizon
PCS.
3.2** -- Bylaws of Horizon PCS.
4.1** -- Specimen Common Stock Certificate.
5.1** -- Opinion of Arnall Golden & Gregory, LLP regarding legality
of the common stock being issued.
10.1* -- Form of Employment Agreement, dated September , 2000, by
and between Registrant and William A. McKell
10.2* -- Form of Employment Agreement, dated September , 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.
10.4**+ -- Sprint PCS Services Agreement between Sprint Spectrum L.P.
and Horizon Personal Communications, Inc., dated June 8,
1998.
10.5** -- Sprint Trademark and Service Mark License Agreement between
Sprint Communications Company, L.P. and Horizon Personal
Communications, Inc., dated June 8, 1998.
10.6** -- Sprint Spectrum Trademark and Service Mark License Agreement
between Sprint Spectrum L.P. and Horizon Personal
Communications, Inc., dated June 8, 1998.
10.7**+ -- Sprint PCS Management Agreement between Wirelessco, L.P.,
SprintCom, Inc., Sprint Spectrum, L.P. and Bright Personal
Communications Services, LLC, dated October 13, 1999.
10.8**+ -- Sprint PCS Services Agreement between Sprint Spectrum, L.P.
and Bright Personal Communications Services, LLC, dated
October 13, 1999.
10.9** -- Sprint Trademark and Service Mark License Agreement between
Sprint Communications Company, L.P. and Bright Personal
Communications Services, LLC, dated October 13, 1999.
10.10** -- Sprint Spectrum Trademark and Service Mark License Agreement
between Sprint Spectrum, L.P. and Bright Personal
Communications Services, LLC, dated October 13, 1999.
10.11** -- Loan Agreement by and between Horizon Personal
Communications, Inc. and Rural Telephone Finance
Cooperative, dated August 29, 1997.
10.12** -- Horizon Telcom Guaranty, dated August 29, 1997.
10.13** -- Loan Agreement, by and between Bright Personal
Communications Services, LLC and Rural Telephone Finance
Corporation, dated April 28, 2000.
10.14** -- Loan Agreement dated May 31, 2000 by and between Horizon
Personal Communications, Inc. and Rural Telephone Finance
Cooperative.
</TABLE>
II-10
<PAGE> 187
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <C> <S>
10.15** -- Amendment to Loan Agreement dated June 27, 2000 by and
between Horizon Personal Communications, Inc. and Rural
Telephone Finance Cooperative.
10.16** -- Horizon Telcom Guaranty dated June 27, 2000.
10.17** -- Commitment letter from First Union National Bank with regard
to $225 million senior secured credit facility for the
Registrant
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.
10.20** -- Assignment and Agreement by and between SprintCom, Inc.,
Horizon Personal Communications, Inc., West Virginia PCS
Alliance, L.C. and Virginia PCS Alliance, L.C., dated August
12, 1999.
10.21**+ -- PCS CDMA Product Supply Contract by and between Motorola,
Inc. and Horizon Personal Communications, Inc.
10.22** -- Bridge Note Purchase Agreement by and between Horizon
Personal Communications, Inc. and First Union Investors,
Inc., dated February 15, 2000
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 The Chillicothe
Telephone Company and Horizon Personal Communications, Inc.
10.33** -- Services Agreement, dated May 1, 2000 between Horizon
Personal Communications, Inc. and United Communications,
Inc.
10.34** -- Form of Indemnification Agreement.
10.35** -- Amended and Restated Tax Allocation Agreement dated May 1,
2000 by and among Horizon Telecom, Inc., The Chillicothe
Telephone Company, Horizon Personal Communications, Inc.,
United Communications, Inc., Horizon Services, Inc., and
Horizon PCS, Inc.
10.36** -- Form of Lock-Up Agreement.
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.
</TABLE>
II-11
<PAGE> 188
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <C> <S>
10.38* -- Investors Rights and Voting Agreement dated September 26,
2000 by and among Horizon PCS, Inc. Apollo Investment Fund
IV, L.P., Apollo Overseas Partners IV, L.P., Ares Leveraged
Investment Fund, L.P., Ares Leveraged Investment Fund II,
L.P. and First Union Capital Partners, LLC.
10.39* -- Registration Rights Agreement dated September 26, 2000 by
and among Horizon PCS, Inc. Apollo Investment Fund IV, L.P.,
Apollo Overseas Partners IV, L.P., Ares Leveraged Investment
Fund, L.P., Ares Leveraged Investment Fund II, L.P. and
First Union Capital Partners, LLC.
10.40* -- Credit Agreement, dated as of September 26, 2000, by and
among Horizon Personal Communications, Inc., and Bright
Personal Communications Services, LLC, Horizon PCS, Inc.
(the "Parent") and certain Subsidiaries of the Parent, the
several banks and other financial institutions as may from
time to time become parties to this Agreement, First Union
National Bank, as Administrative Agent, Westdeutsche
Landesbank Girozentrale, as Syndication Agent and Arranger
and Fortis Capital Corp., as Documentation Agent.
10.41* -- 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.
21.1** -- Subsidiaries of Horizon
23.1 -- Consent of Arthur Andersen, LLP
23.2** -- Consent of Arnall Golden & Gregory, LLP (contained in legal
opinion to be filed as Exhibit 5.1)
24.1** -- Powers of Attorney (set forth on the signature page hereto)
27.1** -- Financial Data Schedule (for SEC use only)
27.2** -- Financial Data Schedule (for SEC use only)
</TABLE>
-------------------------
* to be filed by amendment.
** previously filed.
(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.
II-12
