<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 22, 2000
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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HORIZON PCS, INC.
(Exact name of registrant as specified in its charter)
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<TABLE>
<S> <C> <C>
DELAWARE 4812 31-1707839
(State of Incorporation) (Primary Standard Industrial (I.R.S. Employer Identification
Classification Code Number) No.)
</TABLE>
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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)
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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. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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PROPOSED
TITLE OF EACH CLASS OF MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE
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<S> <C> <C>
Class A Common Stock $0.0001 par value per share............ $125,000,000 $33,000
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</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o) under the Securities Act.
---------------------
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.
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<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 -- MAY , 2000
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PROSPECTUS
, 2000
[HORIZON PCS LOGO]
HORIZON PCS, INC.
SHARES OF CLASS A COMMON STOCK
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HORIZON PCS, INC.:
- We are the largest Sprint PCS affiliate based on our exclusive right to
market Sprint PCS products and services to a total population of over
10.2 million.
- As of March 31, 2000, we had launched Sprint PCS service in 16 markets
covering approximately 1.9 million residents and had over 19,800
customers.
PROPOSED SYMBOL & MARKET:
- HPCS/Nasdaq National Market
THE OFFERING:
- We are offering shares of our class A common stock.
- We have granted the underwriters an option to purchase up to
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 $ and $ per share.
- Closing: , 2000.
<TABLE>
<CAPTION>
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Per Share Total
<S> <C> <C>
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Public offering price: $ $
Underwriting fees: $ $
Proceeds to us: $ $
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</TABLE>
THIS INVESTMENT INVOLVES RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 9.
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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.
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DONALDSON, LUFKIN & JENRETTE FIRST UNION SECURITIES, INC.
THE ROBINSON-HUMPHREY COMPANY
DLJDIRECT INC.
<PAGE> 3
[Graphics/photographs to come]
- -- MAP OF NETWORK COVERAGE AREA
- -- NETWORK OPERATIONS CENTER
- -- CUSTOMERS USING SPRINT PCS PHONE
ii
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Prospectus Summary................ 1
Risk Factors...................... 9
Forward-Looking Statements........ 22
Use of Proceeds................... 23
Dividend Policy................... 23
Capitalization.................... 24
Dilution.......................... 25
Selected Consolidated Financial
Data............................ 27
Management's Discussion and
Analysis of Financial Condition
and
Results of Operations........... 29
Industry Background............... 40
Business.......................... 42
The Sprint PCS Agreements......... 64
Description of Certain
Indebtedness.................... 71
</TABLE>
<TABLE>
<CAPTION>
Page
<S> <C>
Management........................ 73
Principal Stockholders............ 79
Certain Transactions.............. 80
Regulation of The Wireless
Telecommunications Industry..... 82
Description of Capital Stock...... 85
Shares Eligible for Future Sale... 87
U.S. Federal Tax Consequences of
Holding Our Common Stock to
Non-U.S. Holders................ 89
Underwriting...................... 91
Legal Matters..................... 94
Experts........................... 94
Available Information............. 94
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 the largest Sprint PCS affiliate 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 attractively
located between Sprint PCS' Chicago, New York and Raleigh/Durham markets and
connect or are adjacent to 15 major Sprint PCS markets that have a total
population of over 59 million. As a Sprint PCS affiliate, we market digital
personal communications services, or PCS, under the Sprint and Sprint PCS brand
names. We offer the same national pricing plans and use the same sales and
marketing strategies and national distribution channels that have made Sprint
PCS the fastest growing wireless company in the country.
As of March 31, 2000, we had launched service in 16 markets covering
approximately 1.9 million residents and had more than 19,800 customers. We are
continuing to build out our network and expect to provide service in an
additional 22 markets by September 30, 2000, at which time we will cover
approximately 4.9 million residents, or 48% of the total population in our
territory. We expect to launch all of our markets and offer service to
approximately 6.9 million residents, or 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.
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 aggressively 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, 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; and
- 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.
Our territory represents a well-traveled footprint with 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.
Our territory contains over 2,700 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 29 major universities with a student population of
over 240,000, and a number of smaller colleges and universities. As a result, 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 675 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' significantly 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 proven 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 attractive operating characteristics,
including:
- substantial progress in completing our network build-out;
- the ability to execute our growth strategy;
- the potential for significant roaming revenue;
- fewer competitors and fragmented competition in our 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.
BUSINESS STRATEGY
We intend to become a leading PCS provider in our territory by successfully
executing our business strategy, which includes:
- fully leveraging 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;
2
<PAGE> 7
- 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 attractive opportunities to expand our territory
and provide complementary products and services.
The net proceeds of this offering, together with available borrowings under
our increased financing from the Rural Telephone Finance Cooperative, known as
the RTFC, are expected to total approximately $ million. We believe
this amount will be sufficient to fund our remaining network build-out,
anticipated operating losses, working capital requirements and other capital
needs through 2002, at which point we expect to have achieved break-even
operating cash flow.
3
<PAGE> 8
THE OFFERING
Class A Common Stock
Offered..................... shares
Common Stock to be Outstanding
after the Offering.......... shares of class A common stock
shares of class B common stock
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 46
million shares of our class B common stock.
Immediately after this offering, Horizon Telcom
will control approximately % of the total
voting power of our common 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, together with available
borrowings from our increased RTFC financing,
to fund the following:
- capital expenditures, including the remaining
build-out of our network;
- working capital requirements and operating
losses;
- the purchase of Sprint PCS' network assets
currently under construction in our new
markets in Pennsylvania, New York, Ohio and
New Jersey;
- debt service payments on our RTFC financing;
and
- general corporate purposes.
See "Use of Proceeds" for more detailed
information.
4
<PAGE> 9
The number of shares of our common stock to be outstanding after this
offering includes shares of class A common stock to be issued upon the
conversion concurrent with this offering of a $13.0 million short-term
convertible note, at a conversion price equal to the initial public offering
price per share. Based upon an assumed initial public offering price of
$ per share, the mid-point of the proposed offering price range,
shares class A common stock would be issued. See "Description of
Certain Indebtedness -- Short-Term Convertible Note."
Unless otherwise indicated, the share information in this prospectus
excludes:
- up to shares of class A common stock that we may issue to
the underwriters to cover over-allotments. See "Underwriting."
- shares of class A common stock reserved for issuance under our
2000 Stock Option Plan, including shares issuable upon the
exercise of options previously granted at an exercise price of $ per
share. See "Management -- 2000 Stock Option Plan."
- 3,588,000 shares of class B common stock issuable upon the exercise of
options granted under our 2000 Stock Option Plan at an exercise price of
$0.1414 per share.
- 2,510,460 shares of class A common stock issuable upon the exercise of
warrants granted to Sprint PCS at an exercise price equal to the initial
public offering price per share.
All references to shares of class A or class B common stock in this
prospectus reflect a -for-one split, effective on ,
2000.
------------------------
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 May , 2000
transferred its 100% ownership of Horizon Personal Communications, Inc. to
Horizon PCS in exchange for 46.0 million shares of Horizon PCS class B common
stock, representing 100% of the outstanding shares of Horizon PCS. This transfer
was accounted for in the financial statements as a reorganization of companies
under common control in a manner similar to a pooling-of-interests. We have
reflected the reorganization and the adjusted number of shares outstanding
retroactively for all periods and we have presented the prior financial
statements of Horizon Personal Communications, Inc. as those of Horizon PCS.
The following tables present summary consolidated historical financial 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 three months ended March 31, 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 three months ended March 31, 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 three months ended March 31, 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 4.0 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; and
- 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; and
- Pro forma, as adjusted to further reflect:
- the sale in this offering of shares of class A common stock at
an assumed initial public offering price of $ per share, less
underwriting discounts and commissions and estimated offering expenses
of $ million; and
- the issuance of approximately shares of class A common stock
upon conversion concurrent with this offering of a $13.0 million
short-term convertible note at the assumed initial public offering
price of $ per share.
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 three months ended March 31, 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
6
<PAGE> 11
what the results of operations or financial condition of Horizon PCS would have
actually been or what 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>
THREE MONTH PERIOD ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
----------------------------------------- -----------------------------
PRO FORMA PRO FORMA
1997 1998 1999 1999 1999 2000 2000
(IN THOUSANDS, EXCEPT SUBSCRIBERS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME DATA:
Operating revenues:
Service revenues.................... $ 26 $ 459 $ 3,903 $ 3,828 $ 536 $ 2,884 $ 2,630
Equipment revenues.................. 138 309 600 600 93 619 619
------- -------- -------- -------- ------- ------- -------
Total revenues................... 164 768 4,503 4,428 629 3,503 3,249
------- -------- -------- -------- ------- ------- -------
Operating expenses:
Cost of service and equipment....... 941 4,943 9,800 9,800 1,773 4,991 4,812
Selling, general and administrative
expenses......................... 2,500 3,732 7,863 8,041 1,613 3,334 3,421
Depreciation and amortization....... 419 1,748 2,685 4,690 556 879 1,380
Loss on disposition of PCS
licenses......................... -- 1,717 -- -- -- -- --
Gain on sale of PCS assets.......... -- -- (1,388) (1,388) -- -- --
------- -------- -------- -------- ------- ------- -------
Total operating expenses......... 3,860 12,140 18,960 21,143 3,942 9,204 9,613
------- -------- -------- -------- ------- ------- -------
Operating loss................... (3,696) (11,372) (14,457) (16,715) (3,313) (5,701) (6,364)
Interest expense, net............... (264) (838) (1,529) (3,329) (253) (715) (1,165)
Other income (expense), net......... 100 27 52 98 1 279 420
------- -------- -------- -------- ------- ------- -------
Loss from continuing operations
before income taxes............ (3,860) (12,183) (15,934) (19,946) (3,565) (6,137) (7,109)
Income tax benefit.................. 1,308 4,145 5,275 5,275 1,180 717 717
------- -------- -------- -------- ------- ------- -------
Loss from continuing
operations..................... $(2,552) $ (8,038) $(10,659) $(14,671) $(2,385) $(5,420) $(6,392)
======= ======== ======== ======== ======= ======= =======
OTHER DATA:
Number of PCS subscribers(1)........ 312 2,091 13,749 13,749 3,275 19,838 19,838
Total population in our markets..... 101 1,562 4,949 10,225 1,630 4,949 10,225
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31, 2000
-----------------------
PRO FORMA
PRO FORMA AS ADJUSTED
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................... $ 9,658
Total property and equipment, net................... 44,949
Total assets........................................ 110,974
Total debt.......................................... 56,558
Total liabilities................................... 76,801
Total stockholders' equity.......................... 34,173
</TABLE>
- -------------------------
(1) Represents the number of PCS subscribers at the end of each period.
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 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 2002 while we continue to
construct our network and grow our customer base. We have already incurred a
total of approximately $27.3 million in net losses through March 31, 2000. Our
operating profitability will depend upon many factors, including our ability to
market our services, achieve our projected market penetration and manage
customer turnover rates. If we do not achieve and maintain operating
profitability and positive cash flow from operating activities on a timely
basis, we may not be able to meet our debt service requirements, 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 and operate the portion of the
Sprint PCS network located within our territory, which we refer to 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 population within each of the markets which make up our
territory by specified dates. 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 Sprint PCS terminates these agreements, we will no longer be
able to offer Sprint PCS products and services.
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
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<PAGE> 14
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.
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 March 31, 2000, we had launched Sprint PCS service in 16
markets covering approximately 1.9 million residents and had over 19,800
customers. 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 USE OR SUCCESSFULLY CONVERT OVER TO SPRINT PCS' BACK
OFFICE SERVICES AND THIRD PARTY VENDORS' BACK OFFICE SYSTEMS COULD DISRUPT OUR
BUSINESS
Prior to May 2000, we provided our own back office services. We have
recently engaged Sprint PCS to provide back office systems, such as customer
support and billing, and we expect that these services will be transitioned to
Sprint PCS by the end 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
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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 CORRESPONDING EXPECTED
INCREASES IN CUSTOMERS AND REVENUES
We depend on other telecommunications companies to provide facilities and
transport to interconnect portions of our network and to connect our network
with the landline telephone system. American Electric Power, Ameritech, AT&T,
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 we may continue to experience
delays and interruptions in the future. If this happens, it could delay our
build-out plans and our business may suffer.
THE PROPOSED MERGER OF SPRINT AND WORLDCOM COULD AFFECT OUR RELATIONSHIP
WITH SPRINT
On October 5, 1999, Sprint and WorldCom announced a proposed merger.
Although the companies have approved the merger, the completion of the merger is
still subject to various conditions, including the approvals of the Federal
Communications Commission, the Justice Department, various state governmental
bodies and foreign regulatory and antitrust authorities. If the merger is not
consummated for these or other reasons, Sprint's business may be adversely
affected, which could have a negative impact on us as a Sprint PCS affiliate. If
the merger is successfully completed, we expect our relationship with Sprint and
Sprint PCS to continue. However, the merger could have a negative impact on us
as an affiliate of Sprint PCS, and WorldCom may not continue to manage the
Sprint PCS affiliate program in the same manner or with the same brand name as
Sprint PCS. Sprint anticipates that the merger will close in the second half of
2000.
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
As of March 31, 2000, our outstanding debt was $36.6 million. Since that
date, we have continued to borrow funds from the RTFC. Concurrent with this
offering, we will close an additional lending transaction with the RTFC which
will increase our total available borrowings from the RTFC to $235.0 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 from the RTFC 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
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- due to the liens on substantially all of our assets and the pledges of
equity ownership of our subsidiaries that secure our senior debt, the
RTFC may control our assets upon a default.
IF WE DO NOT MEET ALL OF THE CONDITIONS UNDER THE RTFC FINANCING DOCUMENTS,
WE MAY NOT BE ABLE TO COMPLETE OUR NETWORK BUILD-OUT
As of March 31, 2000, we have received $23.6 million from the RTFC.
Concurrent with this offering, we will close an additional lending transaction
with the RTFC which will increase our total available borrowings from the RTFC
to $235.0 million. We expect that we will need access to the remainder of the
$235.0 million to complete our network build-out. All conditions to initial
funding under the $235.0 million will be met prior to the closing of this
offering. At each subsequent funding date our ability to draw on this facility
will be subject to the following conditions:
- that the representations and warranties in the RTFC financing documents
are true and correct; and
- the absence of a default under our RTFC financing documents.
If we do not meet these conditions at each funding date, the RTFC may choose not
to lend any or all of the remaining amounts, and if other sources of funds are
not available, we may not be in a position to complete the build-out of our
network. If we do not have sufficient funds to complete our network build-out,
we may be in breach of the Sprint PCS agreements and in default under our RTFC
financing.
For the year ended December 31, 1999, we did not satisfy some of the
covenants of the RTFC credit facility. The RTFC waived these covenant
violations. Under the terms of our new $235.0 million RTFC financing, new
covenants will be in effect upon the closing of this offering. We believe that
we will satisfy these new covenants in the future. However, we could have future
violations and the RTFC could refuse to waive them.
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
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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. If the Alliances
fail to maintain the standards for their network as set forth in our network
services agreement with them or otherwise fail to provide their network for our
use, our ability to provide wireless services in these markets may be adversely
affected, and we may not be able to provide seamless service for our customers.
If we breach our obligations to the Alliances, or if the Alliances otherwise
terminate the network services agreement, we will lose our right to use the
Alliances network to provide service in these markets. In that event, it is
likely that we will be required to build our own network in those markets and
incur the costs associated with doing so.
SPRINT PCS' VENDOR DISCOUNTS MAY BE DISCONTINUED, WHICH COULD INCREASE OUR
EQUIPMENT COSTS AND REQUIRE MORE CAPITAL THAN WE PROJECT TO BUILD OUT OUR
NETWORK
We intend to continue to purchase our infrastructure equipment under Sprint
PCS' vendor agreements that include significant volume discounts. If Sprint PCS
were unable to continue to obtain vendor discounts for its affiliates, the loss
of vendor discounts could increase our equipment costs for our new markets.
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, which would not be in our best interest or the interest of
our stockholders;
- Sprint PCS could increase the prices we pay for our back office services;
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- 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 RTFC accelerates the amounts due under our RTFC financings, Sprint
PCS has the right to purchase our obligations under the RTFC financings and
become a senior lender. To the extent Sprint PCS purchases these obligations,
Sprint PCS' interests as a creditor could conflict with ours. Sprint PCS' rights
as a senior lender would enable it to exercise rights with respect to our assets
and Sprint PCS' continuing relationship in a manner not otherwise permitted
under the Sprint PCS agreements.
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. A number of our cellular and PCS 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 THE TECHNOLOGY USED
ON OUR NETWORK MAY BECOME OBSOLETE, WHICH COULD SUBSTANTIALLY INCREASE OUR
EQUIPMENT EXPENDITURES TO REPLACE IT
The wireless telecommunications industry is experiencing significant
technological change and 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
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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 be able to respond to
such pressures and implement new technology on a timely basis, or at an
acceptable cost. The 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.
WE MAY NOT RECEIVE AS MUCH SPRINT PCS ROAMING REVENUE AS WE ANTICIPATE AND
OUR NON-SPRINT PCS ROAMING REVENUE IS LIKELY TO BE LOW
We are paid a fee from Sprint PCS or a Sprint PCS affiliate for every
minute that a Sprint PCS subscriber based outside of our territory uses our
network. Similarly, we pay a fee to Sprint PCS or a Sprint PCS affiliate for
every minute that our customers use the Sprint PCS network outside our
territory. Our customers may use the Sprint PCS network outside our territory
more frequently than we anticipate, and Sprint PCS subscribers based outside our
territory may use our network less frequently than we anticipate. 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.
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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 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 implemented appropriate controls to minimize the effect to us of fraudulent
usage, we cannot assure you that we will be successful.
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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.
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.
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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 MAY NOT BE ABLE TO RECEIVE THE TAX BENEFIT OF OUR FUTURE LOSSES UNTIL WE
BEGIN TO GENERATE TAXABLE INCOME
Since inception, 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
record a tax benefit on our income statement related to the consolidated
tax-sharing agreement. If, at any time, Horizon Telcom fails to own more than
both 80% of the total votes applicable to our outstanding common stock and 80%
of the total value of our outstanding common stock, 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.
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 may not be successful. As a
result of customer turnover, we lose the revenue attributable to these customers
and increase the costs of establishing and growing our customer base. The PCS
industry has experienced a higher rate of customer turnover as compared to
cellular industry averages. The rate of customer turnover is affected by the
following factors, several of which are not within our ability to address:
- 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.
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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 MAY REDUCE DEMAND FOR PCS AND REDUCE OUR REVENUE
BECAUSE OF THEIR ABILITY TO PROVIDE SERVICES AT LOWER PRICES OR THEIR USE OF
MORE POPULAR TECHNOLOGIES
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. 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.
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.
19
<PAGE> 24
RISKS RELATING TO THE OFFERING
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, Horizon Telcom will beneficially own
approximately % of our outstanding common stock in total on a fully diluted
basis, or approximately % 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 % of the voting power upon completion of this offering, or
approximately % if the underwriters' over-allotment option is exercised in
full. 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 55% 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. Finally,
the RTFC financing documents require that Horizon Telcom retain 80% voting
control over Horizon PCS. A potential purchaser would likely be required to
repay the RTFC facility in full upon a change of control. 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;
20
<PAGE> 25
- 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.
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, on the one hand, and Horizon
Telcom and its other affiliates, on the other hand, 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 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.
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
$ less than the price you paid for the share, assuming an initial
public offering price of $ per share, the mid point of the range set forth
on the cover page of this prospectus. You will also experience dilution in the
event of the exercise of the stock options and warrants which we have granted.
See "Dilution."
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
21
<PAGE> 26
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 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 and the former owners of Bright
PCS 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.
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;
22
<PAGE> 27
- 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.
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 $ million, or
approximately $ million if the underwriters' over-allotment option is
exercised in full. Concurrent with this offering, we will close an additional
lending transaction with the RTFC which will increase our total available
borrowings from the RTFC to $235.0 million. We intend to use the net proceeds
from this offering, together with available borrowings under the RTFC financing,
to fund:
- capital expenditures, including the remaining build-out of our network,
of approximately $ million;
- working capital requirements and operating losses of approximately $
million;
- payment of approximately $ million to purchase Sprint PCS' network
assets currently under construction in our new markets in Pennsylvania,
New York, Ohio and New Jersey;
- debt service payments of approximately $ million on our RTFC
loans; 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 existing
indebtedness, including the RTFC financing, restricts, and we anticipate our
future indebtedness may restrict, our ability to pay dividends.
23
<PAGE> 28
CAPITALIZATION
The following table shows our cash and cash equivalents, short-term debt
and capitalization as of March 31, 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 4.0 million shares of our class B
common stock and 31,911 shares of Horizon Telecom common stock which
we acquired in February 2000; and
- our acquisition of Sprint PCS' network assets currently under
construction in our new markets in Pennsylvania, New York, Ohio and
New Jersey; and
- 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.
- Pro forma, as adjusted to further reflect:
- the sale in this offering of shares of class A common stock at
an assumed initial public offering price of $ per share, less
underwriting discounts and commissions and estimated offering expenses
of $ million; and
- the issuance of approximately shares of class A common stock
upon conversion of a $13.0 million short-term convertible note at the
assumed initial public offering price of per share.
<TABLE>
<CAPTION>
AS OF MARCH 31, 2000
---------------------------
PRO FORMA
PRO FORMA AS ADJUSTED
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents................................... $ 9,658 $
========
Short-term convertible note................................. $ 13,000 $
========
Long-term debt:
RTFC financing(1)......................................... $ 43,558 $
Stockholders' equity (deficit):
Preferred stock, 10,000,000 shares authorized; no shares
outstanding............................................ --
Class A common stock, no par value, 125,000,000 shares
authorized; no shares outstanding, pro forma;
shares outstanding, pro forma as adjusted.... --
Class B common stock, no par value, 75,000,000 shares
authorized; 50,000,000 shares outstanding, pro forma;
50,000,000 shares outstanding, pro forma as adjusted... 5
Additional paid-in capital................................ 54,695
Retained deficit.......................................... (20,527)
--------
Total stockholders' equity............................. 34,173
--------
Total capitalization.............................. $ 67,731 $
======== =======
</TABLE>
- -------------------------
(1) Reflects the $23.6 million outstanding at March 31, 2000, and an estimated
$20.0 million borrowed for the purchase of Sprint PCS' network assets
currently under construction in our new markets in Pennsylvania, New York,
Ohio and New Jersey. Concurrent with this offering, we will close an
additional lending transaction with the RTFC which will increase our total
available borrowings from the RTFC to $235.0 million. Our new RTFC financing
will include a $223.0 million term loan and a $12.0 million line of credit.
The $43.6 million outstanding as of March 31, 2000 will be repaid with
proceeds from the $223.0 million term loan.
24
<PAGE> 29
DILUTION
Our pro forma net tangible book value at March 31, 2000, was $(5.9) 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 shares of class A common
stock at an assumed initial public offering price of $ per share,
less underwriting discounts and commissions and estimated offering
expenses of $ million; and
- the issuance of approximately shares of class A common
stock concurrent with this offering upon the conversion of a $13.0
million short-term convertible note at the assumed initial public
offering price of $ per share,
our pro forma as-adjusted net tangible book value as of March 31, 2000 would
have been approximately $ million, or $ per share. This represents an
immediate dilution of $ 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 $ per share. The following table illustrates the
per share dilution:
<TABLE>
<S> <C>
Assumed initial public offering price per share.............
--------
Pro forma net tangible book value per share as of March 31,
2000......................................................
--------
Increase in net tangible book value per share attributable
to this offering and the conversion of a $13.0 million
short-term convertible note...............................
--------
Pro forma as adjusted net tangible book value per share
after this offering and conversion of a $13.0 million
short-term convertible note...............................
--------
Dilution per share to new purchasers of class A common
stock.....................................................
========
</TABLE>
The following table summarizes, on a pro forma, as adjusted, basis as of
March 31, 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 $ per share, before the
deduction of underwriting discounts and commissions and estimated offering
expenses of $ 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).......................... % $ % $
New purchasers of class A common
stock(2)........................... % $ % $
------- ----- -------- -----
Total...................... 100.0% 100.0%
======= ===== ======== =====
</TABLE>
- -------------------------
(1) Includes 4.0 million shares to be issued in connection with our acquisition
of the 74% of Bright PCS not already owned by us. See "Business -- The
Reorganization" and "Pro Forma Financial Statements."
(2) Includes shares to be issued upon conversion of a $13.0 million
short-term convertible note at the assumed initial public offering price of
$ per share.
25
<PAGE> 30
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." Except for options to purchase 437,000
shares of class B common stock, neither the stock options nor the Sprint PCS
warrants are currently exercisable. To the extent that any shares are issued in
connection with the underwriters' over-allotment option, any exercise of stock
options, or the Sprint PCS warrants, you will experience further dilution. See
"Management -- 2000 Stock Option Plan," and "Description of Capital
Stock -- Sprint PCS Warrants."
26
<PAGE> 31
SELECTED CONSOLIDATED FINANCIAL DATA
On April 26, 2000, Horizon Telcom, Inc. formed Horizon PCS and on May ,
2000 transferred its 100% ownership of Horizon Personal Communications, Inc. to
Horizon PCS in exchange for 46.0 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 three months
ended March 31, 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 three months ended March 31, 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.
27
<PAGE> 32
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
--------------------------------------------------------- -----------------
1995 1996 1997 1998 1999 1999 2000
(IN THOUSANDS, EXCEPT FOR PER SHARE AND SUBSCRIBER DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME DATA:
Operating revenues:
Service revenues......................... $ -- $ -- $ 26 $ 459 $ 3,903 $ 536 $ 2,884
Equipment revenues....................... -- -- 138 309 600 93 619
------- ------ ------- -------- -------- ------- -------
Total revenues......................... -- -- 164 768 4,503 629 3,503
------- ------ ------- -------- -------- ------- -------
Operating expenses:
Cost of service and equipment............ -- -- 941 4,943 9,800 1,773 4,991
Selling, general and administrative
expenses............................... 289 845 2,500 3,732 7,863 1,613 3,334
Depreciation and amortization............ 19 13 419 1,748 2,685 556 879
Loss on disposition of PCS licenses...... -- -- -- 1,717 -- -- --
Gain on sale of PCS assets............... -- -- -- -- (1,388) -- --
------- ------ ------- -------- -------- ------- -------
Total operating expenses............... 308 858 3,860 12,140 18,960 3,942 9,204
------- ------ ------- -------- -------- ------- -------
Operating loss......................... (308) (858) (3,696) (11,372) (14,457) (3,313) (5,701)
Interest expense, net.................... (24) -- (264) (838) (1,529) (253) (715)
Other income (expense), net.............. (9) 58 100 27 52 1 279
------- ------ ------- -------- -------- ------- -------
Loss from continuing operations before
income taxes......................... (341) (800) (3,860) (12,183) (15,934) (3,565) (6,137)
Income tax benefit....................... 116 262 1,308 4,145 5,275 1,180 717
------- ------ ------- -------- -------- ------- -------
Loss from continuing operations........ $ (225) $ (538) $(2,552) $ (8,038) $(10,659) $(2,385) $(5,420)
======= ====== ======= ======== ======== ======= =======
PER SHARE DATA:
Basic and diluted loss per share of common
stock from continuing operations......... $ (0.01) $(0.01) $ (0.06) $ (0.17) $ (0.23) $ (0.05) $ (0.12)
OTHER DATA:
Number of PCS subscribers (1).............. -- -- 312 2,091 13,749 3,275 19,838
Total population in our markets............ -- -- 101 1,562 4,949 1,630 4,949
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF MARCH 31,
----------------------------------------------- ---------------
1995 1996 1997 1998 1999 2000
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................... $ 185 $11,132 $ 200 $ 27 $ 147 $ 281
Total property and equipment, net................... 395 1,435 14,996 17,880 22,894 22,089
Total assets........................................ 4,979 25,102 33,328 26,862 32,879 46,302
Total debt.......................................... -- 10,116 16,611 21,180 24,590 36,558
Total liabilities................................... 9,432 25,045 29,094 24,919 35,042 52,870
Total stockholders' equity (deficit)................ (4,453) 57 4,234 1,943 (2,163) (6,568)
</TABLE>
- -------------------------
(1) Represents the number of PCS subscribers at the end of each period.
28
<PAGE> 33
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
We are the largest Sprint PCS affiliate based on our exclusive right to
market Sprint PCS products and services to a total population of approximately
10.2 million in portions of twelve contiguous states. Our markets are
attractively located between Sprint PCS' Chicago, New York and Raleigh/Durham
markets and connect or are adjacent to 15 major Sprint PCS markets that have a
total population of over 59 million. As a Sprint PCS affiliate, we market
digital personal communications services, or PCS, under the Sprint and Sprint
PCS brand names. We offer the same national pricing plans and use the same sales
and marketing strategies and national distribution channels that have made
Sprint PCS the fastest growing wireless company in the country.
As of March 31, 2000, we had launched service in 16 markets covering
approximately 1.9 million residents and had more than 19,800 customers. We
continue to build out our network and expect to be providing service in an
additional 22 markets by September 30, 2000, at which point we will cover
approximately 4.9 million residents, or 48% of the total population in our
territory. We expect to launch all of our markets and be offering service to
approximately 6.9 million residents, or 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 more than $57 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. We
also have access to Sprint PCS' national marketing support and distribution
programs and we buy our network equipment, handsets and accessories at the same
discounted rates offered by vendors to Sprint PCS based on its large volume
purchases.
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 at a substantial profit. 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.
29
<PAGE> 34
- 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.
- 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 attractive
lease rates for specified towers constructed by SBA and leased 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. At this time,
we have substantially completed all network engineering, radio frequency
design, and site selection and have begun construction of Bright PCS'
wireless network. We expect to launch service in all of the Bright PCS
markets by September 30, 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 February 2000, we acquired 19.78% of the outstanding shares of our
parent, Horizon Telcom.
- 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 May 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
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<PAGE> 35
4.0 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 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>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------------------ ----------------------------
1997 1998 1999 1999 2000
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Service revenues............ $ 26 16% $ 459 60% $3,903 87% $ 536 85% $2,884 82%
Equipment revenues.......... 138 84% 309 40% 600 13% 93 15% 619 18%
---- ------ ------ ------ ------
Total revenues.............. $164 $ 768 $4,503 $ 629 $3,503
==== ====== ====== ====== ======
</TABLE>
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999
SERVICE REVENUES. Service revenues for the three months ended March 31,
2000 were $2.9 million, compared to $536,000 for the three months ended March
31, 1999, an increase of $2.4 million. The growth in service revenues is
primarily the result of the growth in PCS subscriber revenues of $1.7 million
which reflects the growth in our customer base, offset in part by a decline in
average revenue per customer. We had 19,838 customers at March 31, 2000,
compared to 3,275 at March 31, 1999. We believe our customer base has grown
because we have launched additional markets, increased our sales force and are
now marketing under the Sprint PCS brand rather than our own. We forecast
accelerated growth as we cover more markets in our service area, we open more
Sprint PCS stores in existing launched markets and newly launched markets, and
our sales force matures. Our growth in revenues also reflects a significant
increase in Sprint PCS roaming revenues from a nominal amount in 1999 to
approximately $500,000 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 10%
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<PAGE> 36
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.
EQUIPMENT REVENUES. Equipment revenues consist of handsets and accessories
sold to customers. Equipment revenues for the three months ended March 31, 2000
were $619,000, compared to $93,000 for the three months ended March 31, 1999, an
increase of $526,000. 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 second quarter of 2000.
Cost of services for the three months ended March 31, 2000 was $2.9
million, compared to $1.3 million for the three months ended March 31, 1999, an
increase of $1.6 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 three months ended
March 31, 2000 was $2.0 million, compared to $500,000 for the three months ended
March 31, 1999, an increase of $1.5 million. The increase in the cost of
equipment is the result of the growth in our wireless customers, 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 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
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<PAGE> 37
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 will also 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 $3.3 million for the
three months ended March 31, 2000, compared to $1.6 million for the same period
in 1999, an increase of $1.7 million. This increase reflects the 8% fee paid to
Sprint PCS on our increased collected service revenues, the costs of additional
sales and marketing personnel, additional customer support personnel and
increased headcount at Horizon Services needed to support our growth. 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.
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization
expenses increased by $323,000 to a total of $879,000 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.
OTHER INCOME (EXPENSE). Other income (expense) in 2000 was $280,000 and
consisted primarily of interest and dividend income.
INTEREST EXPENSE, NET. Interest expense for the three months ended March
31, 2000 was $715,000, compared to $253,000 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 and the
short-term convertible note issued to obtain funds used to purchase common stock
of Horizon Telcom.
INCOME TAX BENEFIT. We are 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 three
months ended March 31, 2000, we recorded an income tax benefit of $717,000. A
valuation allowance of $1.5 million was recorded in 2000 for the amount of the
deferred tax assets that exceeded the deferred tax liabilities at December 31,
1999. If in future periods Horizon Telcom owns less than 80% of our outstanding
common stock and less than 80% of the value of our outstanding common stock, 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.
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
33
<PAGE> 38
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 in 2000 and $48,000 in 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
revenue of $400,000. 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.
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.
COST OF SERVICES. Cost of services related to service revenues for the
year ended December 31, 1999 was $7.1 million, compared to $3.9 million for the
year ended December 31, 1998, an increase of $3.2 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 $3.7 million for the same period in 1998, an increase of $4.2
million. This increase reflects the 8% fee paid to Sprint PCS on our increased
collected service revenues, the costs of additional sales and marketing
personnel, additional customer support personnel and increased headcount at
Horizon Services needed to support our growth. We expect selling, general and
administrative expenses to increase as we expand our coverage and add customers.
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 service 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.
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. We are 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-
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<PAGE> 39
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.
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.
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 at December 31, 1998, compared to 312 at 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 $3.7 million for the year ended December 31,
1998, compared to $2.5 million for the same period in 1997, an increase of $1.2
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.
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
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<PAGE> 40
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.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations through equity contributions from Horizon
Telcom and through debt financing provided by the RTFC. As of March 31, 2000, we
had received $20.0 million of equity contributions from Horizon Telcom. 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 during the first quarter of 2000 consisted of $810,000 in cash
contributions.
As of December 31, 1999 and March 31, 2000, we had a $23.6 million credit
facility with RTFC, all of which had been drawn. We have negotiated the
following additional credit agreements with RTFC to provide funds for the
build-out of our expansion markets:
- a $35.4 million term loan, effective in May 2000, under which Bright PCS
may borrow up to $33.6 million to finance the purchase of equipment and
various engineering services from Motorola and up to $1.8 million will be
used to purchase subordinated capital certificates issued by the RTFC. To
date, we have not borrowed under this facility.
- a $5.0 million permanent revolving line of credit, effective in May 2000,
the proceeds of which may be used to fund non-Motorola supplied PCS
equipment and working capital. To date, we have not borrowed under this
facility.
- a commitment for a $40.5 million term loan, effective in May 2000, under
which we may borrow up to $38.5 million to finance the purchase of
equipment and various engineering services from Motorola, and up to $2.0
million will be used to purchase RTFC subordinated capital certificates.
To date, we have not borrowed under this facility.
- a commitment for a new $235.0 million multi-facility loan, consisting of
a $223.0 million term loan and a $12.0 million revolving line of credit.
Of the $223.0 million term loan, up to $200.7 million will be used
primarily to finance costs related to the build-out of our network and to
repay our existing RTFC credit facilities, and up to $22.3 million will
be used to purchase RTFC subordinated capital certificates. The $12.0
million revolving line of credit may be used for equipment and related
services and for working capital. Among other things, this $235.0 million
loan is conditioned upon our raising a minimum of $100.0 million in
additional equity capital. This condition will be met upon the closing of
this offering. After this offering, our only remaining indebtedness will
be $ million of outstanding borrowings under this new $235.0
million RTFC financing.
Under the terms of the RTFC financings, we may apply loan proceeds to
approved uses only, which include purchasing equipment, paying interest and
covering approved working capital costs. For more information on the RTFC
facilities, see "Description of Certain Indebtedness -- The Rural Telephone
Finance Cooperative Facilities."
During the three months ended March 31, 2000, we borrowed $13.0 million in
the form of a short-term convertible note to purchase 19.78% of the outstanding
capital stock of Horizon Telcom. Concurrent with this offering, the $13.0
million short-term convertible note, including accrued interest, will be
converted into shares of class A common stock at the initial public offering
price. In May 2000, we exchanged 31,911 shares of Horizon Telcom common stock,
which we acquired in
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<PAGE> 41
February 2000, along with 4.0 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.
Net cash provided from operating activities was $30,000 for the three
months ended March 31, 2000. Net cash used in investing activities was $13.0
million for the three months ended March 31, 2000. The expenditures were related
primarily to the acquisition of 19.78% of the outstanding common stock of
Horizon Telcom. Our capital expenditures were $6.2 million in 1999 and $769,000
for the three months ended March 31, 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 three months ended
March 31, 2000 was $13.0 million consisting primarily of borrowings under our
short-term convertible note to finance the acquisition of 19.78% of the
outstanding common stock of Horizon Telcom.
During 1999 and the first quarter of 2000, Horizon Telcom paid an aggregate
of $5.2 million and $400,000, respectively, to us under our tax-sharing
agreement with Horizon Telcom. If in future periods Horizon Telcom owns less
than 80% of our outstanding common stock and less than 80% of the value of our
outstanding common stock, we will no longer be included in the consolidated tax
return. As a result, we would not be able to participate in the tax-sharing
agreement and would not receive further payments from Horizon Telcom.
We anticipate that the proceeds from this offering, when combined with our
existing equity, outstanding debt and additional financing from the RTFC which
we have already negotiated, will be adequate to fund our network build-out,
anticipated operating losses and working capital requirements through 2002, at
which point we expect to achieve break-even operating cash flow. The following
table sets forth our estimated sources and uses from March 31, 2000 through
December 31, 2002:
<TABLE>
<CAPTION>
AMOUNT
(IN THOUSANDS)
<S> <C>
SOURCES:
Cash on hand at March 31, 2000(1)......................... $ --
Gross proceeds of this offering...........................
Build-to-suit site development fees(2)....................
Proceeds from our RTFC financing..........................
------
Total sources........................................
------
USES:
Capital expenditures(3)...................................
Working capital and operating losses(4)...................
Debt service(5)...........................................
Fees and expenses(6)......................................
------
Total uses...........................................
------
Cash on hand at December 31, 2002....................
------
Total uses and cash on hand at December 31, 2002..... $
======
</TABLE>
- -------------------------
(1) Represents Horizon PCS and Bright PCS cash on hand at March 31, 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.
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<PAGE> 42
(3) Capital expenditures include the amounts related to the build-out of our
network, which includes the purchase of $ 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 outstanding RTFC
financing, net of interest income.
(6) Fees and expenses include estimated offering expenses and underwriting
discounts and commissions for this offering and origination and other fees
related to the increased RTFC financing.
The actual funds required to build out our network and to fund operating
losses and working capital needs may vary materially from these estimates, and
additional funds could be required. For information see "Risk Factors -- Risks
Particular to Horizon PCS -- 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."
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 are subject to interest rate risk on our financing from the RTFC 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 RTFC 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>
RTFC financing(1) $223.0
Variable interest rate(2)
Principal payment -- -- -- 22.3 33.5 167.2
</TABLE>
- -------------------------
(1) Assumes the entire $223.0 million of the RTFC term loan will be drawn by
December 31, 2000.
(2) The interest rate on the RTFC financing is equal to the RTFC's standard
monthly variable rate (floating rate) plus 250 basis points.
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.
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<PAGE> 43
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 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
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<PAGE> 44
January 1, 2001. We have not determined the effects of this change on its
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 will become 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. Broadly defined, the commercial wireless communication
industry includes one-way radio applications, such as paging or beeper services,
and two-way 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 $ 40.1
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.
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<PAGE> 45
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, representing a significant
increase from approximately 17.6% as of the end of 1999. 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.
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.
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<PAGE> 46
BUSINESS
OVERVIEW
We are the largest Sprint PCS affiliate 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 attractively
located between Sprint PCS' Chicago, New York and Raleigh/Durham markets and
connect or are adjacent to 15 major Sprint PCS markets that have a total
population of over 59 million. As a Sprint PCS affiliate, we market digital
personal communications services, or PCS, under the Sprint and Sprint PCS brand
names. We offer the same national pricing plans and use the same sales and
marketing strategies and national distribution channels that have made Sprint
PCS the fastest growing wireless company in the country.
As of March 31, 2000, we had launched service in 16 markets covering
approximately 1.9 million residents and had more than 19,800 customers. We are
continuing to build out our network and expect to provide service in an
additional 22 markets by September 30, 2000, at which time we will cover
approximately 4.9 million residents, or 48% of the total population in our
territory. We expect to launch all of our markets and offer service to
approximately 6.9 million residents, or 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.
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 aggressively 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, 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; and
- 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.
Our territory represents a well-traveled footprint with 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.
Our territory contains over 2,700 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 29 major universities with a student population of
over 240,000, and a number of smaller colleges and universities. As a result, we
expect to generate substantial roaming revenue from Sprint PCS subscribers based
outside our territory who visit or travel through our markets.
SPRINT PCS
Sprint PCS, a wholly-owned subsidiary of Sprint, operates the only 100%
digital, 100% PCS wireless network in the United States. Sprint PCS, which uses
CDMA technology nationwide, has
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<PAGE> 47
licenses to provide 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 6.5 million customers as of March 31, 2000. For
each of the six calendar quarters prior to and including the quarter ended March
31, 2000, Sprint PCS has recorded the largest number of new subscribers added by
a U.S. wireless services provider. In the fourth quarter of 1999, Sprint PCS
added approximately 1.0 million net new subscribers, the largest single quarter
of customer growth ever reported by a wireless provider in the United States.
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 first quarter of 2000.
<TABLE>
<CAPTION>
1997 1998 1999 2000
--------------------- ----------------------------- ----------------------------- -----
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1
(IN THOUSANDS)
<S> <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
</TABLE>
On October 5, 1999, Sprint and WorldCom announced that the boards of
directors of both companies had approved a definitive merger agreement. Although
the shareholders of both companies have approved the merger, the completion of
the merger is still subject to various conditions, including the approvals of
the Federal Communications Commission, the Justice Department, various state
governmental bodies and foreign regulatory and antitrust authorities.
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 million and has incurred additional
expenses for microwave clearing. As a Sprint PCS affiliate, we did not have to
fund the acquisition of these licenses, thereby reducing our start-up costs. The
Sprint PCS agreements are for a total of 50 years, including an initial term of
20 years and three 10-year renewal terms. These agreements will automatically
renew for the renewal period unless at least two years prior to the commencement
of any renewal period either party notifies the other party that it does not
wish to renew the agreement.
SPRINT PCS' NATIONWIDE DIGITAL PCS NETWORK. As of December 31, 1999,
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
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<PAGE> 48
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 over 180 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 over 495 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' PROVEN BACK OFFICE SERVICES. When we initially launched our
independent PCS operations, we provided our own back office services, such as
customer services and billing services. In May 2000, we amended the Sprint PCS
agreements so that Sprint PCS will provide these back office services to us.
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
44
<PAGE> 49
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 attractive operating characteristics:
SUBSTANTIAL PROGRESS IN COMPLETING OUR NETWORK BUILD-OUT. We expect to
have completed more than 71% of our planned build-out by September 30, 2000, at
which time we will be offering service to approximately 4.9 million residents,
or 48% of the total population of our territory. We already offer service to 1.9
million residents and are in the process of completing major build-out efforts
throughout our network. We are completing connecting coverage in our launched
markets, and expect to finish much of this work in the third quarter of 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. Furthermore we have utilized effective third party
relationships to quickly build out our network. For instance, we are using
co-location opportunities to build our Kingsport, Tennessee market, where over
85% of the needed sites already have significant development. We have also been
actively managing the Bright PCS build-out utilizing a cost effective
build-to-suit approach. We expect to launch all 13 Bright PCS markets in the
third quarter of 2000. 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.
PROVEN ABILITY TO EXECUTE OUR GROWTH STRATEGY. 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. We leveraged our success as an independent PCS provider 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
45
<PAGE> 50
the ten largest metropolitan areas in the United States, which have a total
population of approximately 59 million residents. Our territory also contains
over 2,700 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 793 464
I-90 Cleveland, OH to Buffalo, NY 194 120
I-77 Cleveland, OH to Charlotte, NC 515 296
I-79 Erie, PA to Charleston, WV 348 250
I-81 Syracuse, NY to Knoxville, TN 792 517
I-64 Lexington, KY to Richmond, VA 492 364
I-69 Indianapolis, IN to Lansing, MI 250 114
I-476 Scranton, PA to Philadelphia, PA 125 77
Other interstates -- 506
----- -----
Total 3,509 2,708
===== =====
</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 AND FRAGMENTED COMPETITION IN OUR 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. Despite the
recent creation of national cellular service providers, our most extensive
competition comes from ALLTEL, a regional provider. ALLTEL lacks the national
brand name and footprint that we enjoy as a Sprint PCS affiliate and does not
hold licenses for 42% of our territory. Verizon and the SBC/BellSouth alliance
offer service in portions of our territory. However, they currently operate in
markets representing only 42% and 9% of our planned covered residents,
respectively. Moreover, 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 26% of the planned covered
residents in our markets and only 48% 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 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 8% of total covered residents. The former owners of Bright PCS also
offer local telephone service
46
<PAGE> 51
in northwestern Ohio, and we expect to benefit positively from their long-term
relationships with their local telephone customers.
FULLY FINANCED BUSINESS PLAN. The net proceeds from this offering together
with available borrowings under our increased RTFC financing are expected to
total approximately $ million. We believe this amount will provide us
with sufficient funds to complete our PCS network build-out and to fund
anticipated operating losses and working capital requirements through 2002, at
which point we expect to have achieved break-even operating cash flow.
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:
FULLY LEVERAGING 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 4.9 million residents or 48% of the total population of our
territory by September 30, 2000, and to 6.9 million residents, or 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 a state-of-the-art,
high-quality, all digital PCS network. Our strategy is to provide service to the
largest communities in our markets and the interstates and primary roads
connecting these communities to one another and to the adjacent major markets
owned and operated by Sprint PCS. We believe that our network design, together
with the use of digital CDMA technology, will allow our network to handle more
customers with fewer
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<PAGE> 52
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
leverages Sprint 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 ATTRACTIVE 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
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 population of approximately 10.2 million, has
attractive market characteristics:
- HIGH VOLUME OF COMMUTER AND LONG DISTANCE TRAVEL. Our territories
include over 2,700 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
approximately 29 major 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, two major NASCAR speedways, popular resorts and
day trip destinations, including the Greenbrier and Homestead resorts,
numerous state parks, and many other tourist destinations.
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<PAGE> 53
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%
---------- ---------
CUMULATIVE 1999 COVERAGE 3,312,900 1,921,232 58.0%
---------- ---------
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%
---------- ---------
CUMULATIVE 2Q 2000 COVERAGE 4,089,000 2,270,719 55.5%
---------- ---------
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)................ 2nd 10 54,201 23,601 43.5%
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%
---------- ---------
CUMULATIVE 3Q 2000 COVERAGE 7,493,521 4,946,747 66.0%
---------- ---------
Williamson, WV............................ 2nd 20 183,900 56,064 30.5%
Cumberland, MD............................ 2nd 10 159,000 40,558 25.5%
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>
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<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%
Logan, WV................................. 2nd 10 40,900 15,978 39.1%
Bluefield, WV............................. 2nd 20 176,200 88,000 49.9%
Launched Markets (Incremental)(6)......... -- -- -- 473,360 4.6%
---------- --------- -----
CUMULATIVE 3Q 2001 COVERAGE 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 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 MHz of spectrum owned directly by Horizon.
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
proven digital PCS technology we will use to build our PCS network and the
established standards of Sprint PCS. We have designed our build-out to exceed
the requirements of the Sprint PCS agreements.
Our markets have a total population of approximately 10.2 million and, as
of March 31, 2000, we covered approximately 1.9 million residents. When
complete, the build-out of our 54 markets will consist of approximately 1,450
sites. Approximately 430 sites are currently operational. As of April 30, 2000,
we have site lease options for an additional 413 sites. Of these 413 sites, 393
have
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been approved for construction, 353 have received zoning approval, 303 leases
have been executed, 154 building permits have been approved and construction has
begun on 92 sites. We plan to cover 4.9 million residents or 48% of the total
population of all our markets by September 30, 2000 and 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 28 additional sites. We have site lease options for 27 of the 28
site locations. Of these 27 sites, 24 have been approved for construction, 23
have received zoning approval, and ten leases have been executed. We expect
completion of the project in the third quarter of 2000. We also expect the
Alliances to fill in coverage in the two initial markets that are being served
under our network services agreement. We plan to cover approximately 913,000
residents, or 58% of the total population of our initial seven markets by
September 30, 2000, and 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.
We are currently in the process of building out the Kingsport, Tennessee
market, which has a total population of 689,000. When complete, the build-out in
this market will consist of approximately 99 sites. We have site lease options
for 94 of the 99 site locations. Of these 94 sites, 90 have been approved for
construction, 80 have received zoning approval, 46 leases have been executed, 41
building permits have been approved and construction has begun on 21 sites. We
expect to launch service in this market in the third quarter of 2000, providing
coverage to approximately 488,000 residents, or 71% of the total population in
this market.
The seven remaining markets 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 of the 17 markets we received in our second grant.
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.
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The build-out in these markets will consist of approximately 140 sites. We
have site lease options for 138 of the 140 site locations. Of these 138 sites,
125 have been approved for construction, 96 have received zoning approval, 93
leases have been executed, 17 building permits have been approved and
construction has begun on 17 sites. We expect to launch service in all of the
Bright PCS markets in the third quarter of 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, including 29 sites scheduled for
launch in June 2000. 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.
The 29 sites scheduled for launch in June 2000 are located in the Erie,
Jamestown, Sharon, Ashtabula and Meadville markets, which have a total
population of approximately 776,000. We expect to launch service in these
markets by the end of the second quarter of 2000.
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. Metapath Systems International provides radio
frequency design, engineering and optimization services for our markets.
Metapath has performed radio frequency design services for Sprint PCS as well as
other Sprint PCS affiliates. Based upon its engineering designs, Metapath
assisted us in determining the required number of cell sites to operate the
network and identified the general geographic areas in which each of the
required cell sites would 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. 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.
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We expect that approximately 1,450 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 270 will be build-to-suit towers. As of March 31, 2000, we also
leased 72 sites from SBA.
MICROWAVE RELOCATION. Prior to the FCC's auction of PCS licenses in the
1850 to 1970MHz frequency bandwidths, various fixed microwave operators used
these frequencies. 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 and back haul services. 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 utilize Sprint PCS' Network Operations Control Center for continuous
network monitoring. Our existing markets will be converted 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 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 an attractive 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, but we receive a one year rent abatement on these
sites.
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MOTOROLA EQUIPMENT AGREEMENT
In May 1997, we entered into a master purchase and sale agreement with
Motorola for the purchase of the telecommunications equipment for our initial
network. Pursuant to the agreement, Motorola also provides installation services
for equipment and grants us a nonexclusive license to use the software
associated with the Motorola equipment. We have continued to purchase our
network equipment under this agreement for the markets which we obtained from
Sprint PCS since becoming an affiliate. 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 and Kingsport, Tennessee 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 March 31, 2000, the Alliances had deployed 360 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 Alliances plan to provide coverage to 56% of the total population
of 3.3 million in the markets covered by our network services agreement by
September 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.
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,
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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.
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. 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 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.
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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.
OTHER SERVICES. In addition to these services, we may also offer wireless
local loop services in our territory. Wireless local loop is a wireless
substitute for the landline-based telephones in homes and businesses. 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' proven strategies and
developed national distribution channels that have helped Sprint PCS generate
rapid customer growth. We plan to enhance Sprint PCS' proven 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. 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 competitive monthly recurring
charges, large local calling areas, service features such as voicemail, enhanced
caller ID, call waiting and three-way calling and 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, enabling 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;
- are feature-rich and generally require no annual contracts or hidden
charges;
- offer 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 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.
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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 675 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 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' proven 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
more than 180 stores in our territory.
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 more than 495 retail
stores in our territory.
SPRINT PCS STORES. We currently own and operate three Sprint PCS stores.
We plan to have a total of twelve 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, providing 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.
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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 twelve local telephone service centers of the
former owners of Bright PCS 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 18 direct sales representatives, and
plan to hire approximately 10 to 15 more by the end of 2000.
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. 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 vocoder technology also
employs adaptive equalization which filters out annoying background noise more
effectively than existing wireline, analog cellular or other digital PCS phones.
GREATER CAPACITY. CDMA technology allows a greater number of calls within
one allocated frequency and reuses the entire frequency spectrum in each cell.
CDMA systems provide capacity gains of up to seven times over the current analog
system and up to three times greater than TDMA and GSM systems. During the
second quarter of 2000, Sprint is expected 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, or EVRC, will allow the network to support
additional capacity while maintaining the high level of voice quality associated
with digital networks. We will utilize the EVRC technology throughout our PCS
network to gain the capacity increases. 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 a system operator 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, the system operator can allow a
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small degradation 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. 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 will further enhance overall network security.
SIMPLIFIED FREQUENCY PLANNING. Frequency planning is the process used to
analyze and test alternative patterns of frequency use within a wireless network
to minimize interference and 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 subset of allocated frequencies can be reused in every cell,
substantially reducing the need for costly frequency reuse patterning and
constant frequency plan management.
LONGER 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. This generally
exceeds the battery life of handsets using alternative digital or analog
technologies.
BENEFITS OF OTHER TECHNOLOGIES. While CDMA has the inherent benefits
discussed above, TDMA networks are generally less expensive when overlaying
existing analog systems since the TDMA spectrum usage is more compatible with
analog spectrum planning. In addition, the GSM technology standard, unlike CDMA,
supports a more robust interoperability standard which allows multi-vendor
equipment to be used in the same network. This, along with the fact that the GSM
technology is currently more widely deployed throughout the world than CDMA,
provides economies of scale for handset and equipment purchases. A standards
process is also underway which will allow wireless handsets to support analog,
TDMA and GSM technologies in a single unit. Currently, there are no plans to
have CDMA handsets that support either the TDMA or GSM technologies.
COMPETITION
Given the broad geographic coverage of our territory, the competition that
we face from other wireless providers is fragmented. We compete, to varying
degrees, with regional and national cellular, PCS and other wireless service
providers, 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.
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Our largest single cellular competitor is ALLTEL, which offers service in
markets covering 58% of our planned covered residents. However, ALLTEL is a
regional provider, and lacks the national brand name and footprint that we enjoy
as a Sprint PCS affiliate. Furthermore, ALLTEL does not hold licenses for 42% of
our territory and it does not cover many of the neighboring Sprint PCS
metropolitan areas where our customers visit regularly. While the recently
formed national cellular alliances Verizon and BellSouth/SBC compete with us in
certain markets, those markets represent only 42% and 9% of our planned covered
residents, respectively. In addition, neither of these providers has yet
established a national brand name, nor have they developed an integrated
operating platform. AT&T, which has licenses to provide service to all markets
in our territory, currently provides service to only 26% 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 20% 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.
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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 Cellular
Nextel ESMR
Indiana markets............................................. ALLTEL Cellular
Centennial Cellular
Century Cellular
GTE Wireless Cellular
Omnipoint PCS
Nextel ESMR
Pennsylvania and New York markets........................... ALLTEL Cellular
AT&T Cellular
Verizon Cellular
Omnipoint PCS
Nextel ESMR
Virginia and West Virginia markets.......................... ALLTEL Cellular
AT&T Cellular
GTE Wireless Cellular
Intelos PCS
Suncom PCS
Tennessee markets........................................... ALLTEL Cellular
GTE Wireless Cellular
BellSouth PCS
Suncom PCS
Nextel ESMR
</TABLE>
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 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
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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. The other Bright PCS owners will receive 4.0
million newly issued shares of class B common stock from us, which will equal 8%
of our outstanding shares of common stock before this offering. In addition,
Horizon Personal Communications will transfer to them 7,978 shares of the class
A common stock and 23,933 shares of the class B common stock of Horizon Telcom,
which will be equal to 8% of the outstanding shares of Horizon Telcom.
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As a result of these transactions and prior to this offering, our ownership
structure, including our indirect ownership of ourselves through our holdings of
Horizon Telcom is as follows:
[FLOW CHART]
- -------------------------
(1) The shareholders of Horizon Telcom include the members of the McKell family
(55%); Horizon Personal Communications (12%); the former owners of Bright
PCS (8%); other individuals and trusts (25%).
(2) The ownership percentages for Horizon PCS exclude options granted under our
2000 Stock Option Plan, shares to be issued upon conversion of the short
term convertible note 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.
(4) Through our 12% ownership of Horizon Telcom, we have an 11% indirect
ownership interest in ourselves, and a 12% indirect ownership interest in
The Chillicothe Telephone Company and United 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
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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 March 31, 2000, we employed 109 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 two other 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.
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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
met our build-out requirement in all 16 markets which have launched. By the end
of the third quarter 2000, we are required to provide aggregate coverage of 74%
in the Bright PCS markets and 47% in the Kingsport, Tennessee market. 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. We have agreed to
operate our network to provide for a seamless handoff of a call initiated in our
territory to a neighboring Sprint PCS network.
Under our Sprint PCS agreements for Horizon Personal Communications, Sprint
PCS can decide to expand the coverage requirements of our territory by providing
us with written notice. We have 90 days after receiving notice from Sprint PCS
to determine whether we will build out the proposed area. If we decline to
exercise our right to build out the proposed area, Sprint PCS may construct the
new area itself or allow a Sprint PCS affiliate or other manager to construct
the new area.
Under our Sprint PCS agreements for Bright PCS, Sprint PCS can decide to
expand the coverage requirements of our Bright PCS territory by providing us
with written notice, provided that Sprint PCS may not give us notice until
October 12, 2001, which is the second anniversary of the signing of our Sprint
PCS agreement. If we decline or fail to comply with Sprint PCS' expanded
coverage requirements, Sprint PCS will have the right to terminate our Sprint
PCS agreement for our Bright PCS markets. There is no cross default provision
between our Sprint PCS agreement for Horizon Personal Communications and the
Sprint PCS agreements for Bright PCS.
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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 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
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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.
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. The right of either
party to require the other to purchase or sell the operating assets, as
discussed below, may not be exercised, in the case of Sprint PCS, until June 8,
2000.
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;
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- 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 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;
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- 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.
We have an amendment to the Sprint PCS agreement with Horizon Personal
Communications which provides that, if Sprint PCS purchases our operating assets
pursuant to the Sprint PCS agreements, Sprint PCS will either repay the RTFC
financing or assume the RTFC financing.
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 each 12 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
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<PAGE> 74
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' abandonment of the licensed
marks or if Sprint or Sprint PCS files for bankruptcy, or the management
agreement is terminated.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
THE RURAL TELEPHONE FINANCE COOPERATIVE FACILITIES
Existing Financings
Currently, we have four separate loan agreements with the RTFC providing an
aggregate total borrowing capacity of $ million. As of March 31, 2000, we
had borrowed $23.6 million and at closing expect to have borrowed approximately
$ million. Interest on our borrowings is selected at our option as fixed
or variable on each advance. The loans are secured by liens on the equipment
located in our markets, collateral assignments of our SBA cell site agreements,
and the pledge of Horizon Personal Communications stock and the ownership
interests in Bright PCS. All of our existing RTFC loans will be repaid at the
closing of the offering with proceeds from our new $235.0 million RTFC facility.
New $235.0 Million RTFC Facility
AMOUNT AND PURPOSE. On May 8, 2000, we received a loan commitment from the
RTFC for a new $235.0 million loan. This loan will consist of a $223.0 million
term loan facility, and a $12.0 million revolving line of credit. Under the
expected terms of the loan, up to $200.7 million will be used to finance costs
related to the build-out of our network and to repay outstanding borrowings on
our existing RTFC credit facilities and up to $22.3 million (or 10% of the face
value of borrowings under the RTFC loan) will be used for the purchase of RTFC
subordinated capital certificates, representing our required capital investment
in the RTFC. Pursuant to the terms of the line of credit, we will be permitted
to borrow up to $12.0 million to fund equipment and related services and to
provide working capital for our business. It is a continuing condition to this
loan that Horizon Telcom have no less than 80% of the voting power of our stock.
PAYMENT. The $223.0 million term loan matures eight years from the date of
the loan agreement. Quarterly installments of principal and accrued interest
commence on the first day of the 17th quarter after the first full quarter
following the initial advance. The $12.0 million line of credit matures five
years from the date of the loan agreement.
INTEREST. We may elect interest at a variable or fixed interest rate on
each advance. The variable rate option accrues interest at a floating rate plus
250 basis points, which is equal to the RTFC's standard monthly variable rate
for similarly classified long-term loans. The RTFC's base variable interest rate
for long-term loans is determined by multiplying the standard monthly quoted
variable rate by 95% and rounding the result to the nearest five basis points.
Interest under the fixed rate option is equal to the RTFC's standard monthly
fixed rate for similarly classified long-term loans, plus 250 basis points. The
fixed rate option may be elected for up to 50% of the principal balance
outstanding, including conversions of existing indebtedness subject to a
variable rate. Conversions from a variable rate to a fixed rate are subject to a
make-whole premium.
Quarterly interest payments on the outstanding principal balance of the
$223.0 million term loan commence on the first quarterly payment date following
the initial advance of funds to us. Quarterly interest payments on the
outstanding principal balance of the line of credit commence on the first
quarterly payment date following the initial advance of funds to us.
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COLLATERAL AND GUARANTORS. We expect that the $223.0 million term loan
will be secured by substantially all of our assets and will be partially
guaranteed by Horizon Telcom and Motorola, our equipment vendor.
DIVIDENDS AND DISTRIBUTIONS. We expect that the $223.0 million term loan
will restrict our ability to pay dividends and make other cash distributions.
CONSENT AND AGREEMENT. We anticipate that Sprint PCS will enter into a
consent and agreement for the benefit of the RTFC. The terms of such consent and
agreement are still being negotiated.
SHORT-TERM CONVERTIBLE NOTE
AMOUNT AND PURPOSE. On February 15, 2000, we entered into a one-year term
unsecured loan in the amount of $13.0 million with First Union Investors, Inc.,
an affiliate of one of our underwriters. The proceeds of this loan were used to
acquire 19.78% of the outstanding capital stock of Horizon Telcom.
PAYMENT. The loan term is one year, with quarterly installments of
interest being payable until maturity.
INTEREST. The interest rate is fixed at 13% per annum.
CONVERSION. Upon the consummation of this offering, First Union will
convert 100% of the then outstanding principal and accrued but unpaid interest
into shares of our class A common stock at a conversion price equal to the
initial public offering price per share.
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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....................... 39 Chairman of the Board, President and
Chief Executive Officer
Peter M. Holland........................ 34 Director, Chief Financial Officer
Joseph E. Corbin........................ 45 Vice President, Technology
Joseph J. Watson........................ 34 Vice President, Business Development
Monesa S. Skocik........................ 38 Vice President, Customer Operations
Thomas McKell........................... 64 Director
Phoebe H. McKell........................ 53 Director
</TABLE>
- -------------------------
(1) Member of Audit Committee
(2) Member of Compensation Committee
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 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 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.
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
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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.
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.
BOARD OF DIRECTORS
There are presently four 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 will serve as a Class I director, 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. William A. McKell will serve
as a Class III director 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.
Currently, there are three vacancies on the board. Under the terms of the
agreement to purchase the remaining 74% of Bright PCS not already owned by us,
Horizon Telcom must appoint a director for Horizon PCS chosen from the members
of the Bright PCS Management Committee, but excluding the Horizon PCS
representatives. That person has not yet been identified, but will be identified
as soon as practicable. The remaining two vacancies will be filled as soon as
possible. We expect the outside directors to be experienced leaders in the
telecommunications and business communities.
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 Board of Directors has not designated
the 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
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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 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.
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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 1,380,000 $8,934(1)
Chairman of the Board,
President and Chief
Executive Officer
Peter M. Holland............ -- -- 1,380,000 --
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
$ 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.
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
NUMBER OF % OF TOTAL ANNUAL RATES OF
SECURITIES OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM
OPTIONS EMPLOYEES IN PRICE EXPIRATION ---------------------
NAME GRANTED(#)(1) FISCAL YEAR ($/SH)(2) DATE(3) 5%($) 10%($)
<S> <C> <C> <C> <C> <C> <C>
William A. McKell...... 1,380,000 38.46% $.1414 12/1/09 $122,717 $310,990
Peter M. Holland....... 1,380,000 38.46% $.1414 12/1/09 122,717 310,990
</TABLE>
- -------------------------
(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 3,588,000 shares of class B common stock.
(2) The exercise price was fixed at the fair market value on the date of grant.
(3) Options are subject to earlier termination in the event of death,
disability, retirement, or termination of employment.
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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 $
per share. 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................... 115,000 1,265,000
Peter M. Holland.................... 115,000 1,265,000
</TABLE>
EMPLOYMENT AGREEMENTS
We entered into employment agreements with Mr. McKell and Mr. Holland,
Horizon PCS' Chief Executive Officer and Chief Financial Officer. The employment
agreements are for a five-year term and provide for an annual base salary of
$ to Mr. McKell and $ to Mr. Holland, with a minimum
guaranteed annual increase of $ over the next four years, until May
2004. In addition to their base salary, Mr. McKell and Mr. Holland are eligible
to receive an annual bonus up to % 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,
at any time. If either Mr. McKell or Mr. Holland is terminated without cause, he
is entitled to receive months base salary, the vesting of all of his stock
options on the date of termination, and months of health and dental
benefits. Neither Mr. McKell nor Mr. Holland is entitled to any compensation or
benefits upon voluntary termination or termination for "cause". 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 12 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 granted under the
option plan is shares of class A common stock and 3,588,000 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, 3,588,000 substituted options were
issued at an exercise price of $0.1414. On , 2000, we
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made a new grant of incentive stock options to purchase shares of
class A common stock with an exercise price of $ per share to
employees.
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:
- 12 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.
Option grants under the plan may contain 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. 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. An acquisition of
Horizon PCS is deemed to occur for purposes of the plan upon any of the
following events:
- a consolidation or merger with another entity;
- a sale of all or substantially all of Horizon PCS' assets; or
- an acquisition of Horizon PCS by any other means.
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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, as of April 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.............. -- -- 46,000,000 92% 92% --
William A. McKell(3)........ -- -- 115,000 * * *
Peter M. Holland(3)......... -- -- 115,000 * * *
Joseph E. Corbin(3)......... -- -- 40,250 * * *
Joseph J. Watson(3)......... -- -- 40,250 * * *
Monesa S. Skocik(3)......... -- -- 40,250 * * *
Thomas McKell(4)............ -- -- 46,000,000 92% 92% --
Phoebe H. McKell(3)......... -- -- 11,500 * * *
All Executive Officers and
Directors as a Group (7
persons)(4)(5)............ -- -- 46,362,250 93% 93% *
</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 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) 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.
(4) Includes shares held by Horizon Telcom. Thomas McKell is the President of
Horizon Telcom, and shares voting and investment power with regard to these
shares.
(5) Includes 362,250 shares of class B common stock issuable upon exercise of
stock options that are presently exercisable or exercisable within 60 days
of the date of this prospectus.
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CERTAIN TRANSACTIONS
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 finance
functions, billing and collections, accounting services, computer access and
other administrative, executive, supervisory, consulting, 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 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 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 months 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;
- transportation costs; 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 $739,000
for the first quarter ended March 31, 2000. Horizon Services also provides
administrative services to Bright PCS. The payable to Horizon Services for these
services as of December 31, 1999 and March 31, 2000 was $499,000 and $277,000,
respectively.
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.
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.
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
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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 $7,500
in 1998, 1999, and for the three months ended March 31, 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 five year
period. It is the expectation of management that the lease will be renewed.
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.
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 return, 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
three months ended March 31, 2000, Horizon Telcom paid an aggregate of $5.2
million and $400,000, respectively, to Horizon PCS under the agreement. As of
December 31, 1999 and March 31, 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 $2.8 million,
respectively.
We have 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 March 31, 2000 was $4.4 million and $8.5 million,
respectively.
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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 promulgated, and is in the process of promulgating, 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 other wireless and
wireline carriers;
- possibly facilitate the offering of calling party pays as an optional
wireless service for consumers;
- establish access and universal service funding provisions;
- possibly permit commercial mobile radio service, commonly referred to as
CMRS, 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, or SMR, 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
alliance 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.
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PCS LICENSE RENEWAL
PCS licensees can renew their licenses for additional 10 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 CMRS providers
and any other common carrier. The FCC has ordered local exchange carriers to
provide reciprocal compensation to CMRS 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 all of 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.
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 CMRS 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 CMRS
carriers to implement nationwide roaming. Most CMRS carriers are required to
implement nationwide roaming by November 24, 2002 as well. The FCC currently
requires most CMRS providers to be able to deliver calls from their networks to
ported numbers anywhere in the country, and to contribute to the Local Number
Portability Fund.
The FCC has adopted rules permitting broadband PCS and other CMRS providers
to provide wireless local loop and other fixed services that would directly
compete with the wireline services of LECs. In June 1996, the FCC adopted rules
requiring broadband PCS and other CMRS providers to implement enhanced emergency
911 capabilities within 18 months after the effective date of the FCC's rules.
Full compliance with these rules must occur by October 1, 2001.
On June 10, 1999, the FCC initiated a regulatory proceeding 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
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- 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, certain FCC environmental regulations may cause certain 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 certain 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 the 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.
PARTITIONING; DISAGGREGATION
The FCC has modified its rules to allow broadband PCS licensees to
partition their market areas and/or to disaggregate their assigned spectrum and
to transfer partial market areas or spectrum assignments to eligible third
parties.
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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.
EQUAL ACCESS
Wireless providers are not required to provide equal access to common
carriers for toll services. However, the FCC is authorized to require unblocked
access to toll carriers subject to certain conditions.
STATE REGULATION OF WIRELESS SERVICE
Section 332 of the Communications Act preempts states from regulating the
rates and entry of CMRS providers. 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 CMRS 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 210 million shares of authorized capital stock, including
125 million shares of class A common stock, par value $0.0001 per share, 75
million shares of class B common stock, par value $0.0001 per share, and 10
million shares of preferred stock. As of April 30, 2000, there were no shares of
class A common stock, 50,000,000 shares of class B common stock and no shares of
preferred stock issued and outstanding.
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
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similar rights. If we liquidate, dissolve or wind up, the holders of shares of
common stock are entitled to share ratably in proportion to the number of shares
of common stock held in the assets which are legally available for distribution,
if any, remaining after the payment or provisions for the payment of all debts
and other liabilities and the payment and setting aside for payment of any
preferential amount due to the holders of shares of any series of preferred
stock. A consolidation, merger or reorganization of Horizon PCS with any other
corporation, or a sale of all or substantially all of the assets of Horizon PCS
is not considered a dissolution, liquidation or winding up of Horizon PCS. All
outstanding shares of common stock are, and all shares of common stock to be
outstanding upon completion of this offering will be, fully paid and non
assessable.
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
10,000,000 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 shares of preferred stock.
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
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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.
SPRINT PCS WARRANTS
In connection with Sprint PCS' grant to us of our new markets in
Pennsylvania, New York, Ohio and New Jersey, we granted to Sprint PCS warrants
to acquire a number of shares of class A common stock equal to 3% of the number
of shares sold in this offering, at an exercise price of $.01 per share, and an
additional 2% of the number of shares sold in this offering at an exercise price
equal to the initial public offering price per share.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is .
LISTING
We have applied to list our class A common stock for quotation on the
Nasdaq National Market under the symbol "HPCS."
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 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, we will have outstanding an aggregate of
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
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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 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:
- one percent 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% if 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.
LOCK-UP AGREEMENTS
We and Horizon Telcom, First Union, Sprint PCS, the former owners of Bright
PCS, 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
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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, shares of class A common
stock will become eligible for sale, subject to compliance with Rule 144 of the
Securities Act as described above. An additional shares of class B
common stock could be converted into class A common stock and would, upon such
conversion, also be eligible for sale subject to compliance to Rule 144.
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.
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. 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.
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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.
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
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<PAGE> 95
- 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.
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.
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<PAGE> 96
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..............................................
========
</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
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.
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 $ million.
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
92
<PAGE> 97
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 and the shelf registration statement
for shares underlying warrants issued in the units offering, 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.
The underwriters may purchase and sell shares of common stock in the open
market in connection with this offering. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the offering. Stabilizing
transactions consist of certain bids or purchases made for the purpose of
preventing or slowing a decline in the market price of the common stock while
the offering is in progress. The underwriters may also impose a penalty bid,
which means that an underwriter must repay to the other underwriters a portion
of the underwriting discount received by it. An underwriter may be subject to a
penalty bid if the
93
<PAGE> 98
representatives of the underwriters, while engaging in stabilizing or short
covering transactions, repurchase shares sold by or for the account of that
underwriter. These activities may stabilize, maintain or otherwise affect the
market price of the common stock. As a result, the price of the common stock may
be higher than the price that otherwise might exist in the open market. If the
underwriters commence these activities, they may discontinue them at any time.
The underwriters may carry out these transactions on the Nasdaq National Market,
in the over-the-counter market or otherwise.
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.
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
94
<PAGE> 99
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.
95
<PAGE> 100
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-23
Condensed Consolidated Balance Sheets as of March 31, 2000
(unaudited) and December 31, 1999...................... F-24
Condensed Consolidated Statements of Income for the Three
Months Ended March 31, 2000 and 1999 (Unaudited)....... F-25
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2000 and 1999
(Unaudited)............................................ F-26
Notes to Interim Condensed Consolidated Financial
Statements March 31, 2000 (Unaudited).................. F-27
Bright Personal Communications Services, LLC
(A Development-Stage Company)
Report of Independent Public Accountants.................. F-32
Balance Sheet As of December 31, 1999..................... F-33
Statement of Income for the Period from Inception (October
12, 1999) to December 31, 1999......................... F-34
Statement of Members' Capital for the Period from
Inception (October 12, 1999) to December 31, 1999...... F-35
Statement of Cash Flows for the Period from Inception
(October 12, 1999) to December 31, 1999................ F-36
Notes to Financial Statements December 31, 1999........... F-37
Condensed Balance Sheets as of March 31, 2000 (unaudited)
and December 31, 1999.................................. F-41
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-42
Condensed Statement of Members' Capital for the Period
from Inception (October 12, 1999) to March 31, 2000
(Unaudited)............................................ F-43
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-44
Notes to Interim Condensed Financial Statements March 31,
2000 (Unaudited)....................................... F-45
Horizon PCS, Inc.
Pro Forma Financial Statements............................ P-1
Pro Forma Balance Sheet as of March 31, 2000.............. P-2
Pro Forma Statement of Income for the Year Ended December
31, 1999............................................... P-3
Pro Forma Statement of Income for the Three Months Ended
March 31, 2000......................................... P-4
Footnotes to Pro Forma Financial Statements............... P-5
</TABLE>
F-1
<PAGE> 101
After the reorganization transaction discussed in Note 1 to Horizon PCS,
Inc's consolidated financial statements is effected, we expect to be in a
position to render the following audit report.
Columbus, Ohio,
March 4, 2000 (except with respect to the matters
discussed in Note 15, as to which the date is
March 31, 2000, and the matter discussed in Note 1,
as to which the date is May , 2000)
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.
F-2
<PAGE> 102
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,
46,000,000 issued and outstanding, at $0.0001 par
value................................................... 4,600 4,600
Additional paid-in capital................................ 19,822,025 13,551,603
Retained deficit.......................................... (21,989,914) (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> 103
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........................... 7,104,558 3,949,174 518,690
Cost of equipment.......................... 2,695,909 993,994 422,393
Selling, general, and administrative
expenses................................ 7,862,893 3,732,411 2,499,844
Depreciation and amortization.............. 2,684,644 1,748,209 419,463
Loss on disposition on Personal
Communication Licenses (Note 2)......... -- 1,716,535 --
Gain on sale of PCS assets (Note 8)........ (1,387,718) -- --
------------ ------------ -----------
Total operating expenses........... 18,960,286 12,140,323 3,860,390
------------ ------------ -----------
OPERATING LOSS............................... (14,457,046) (11,372,325) (3,696,235)
------------ ------------ -----------
OTHER INCOME (EXPENSE), NET.................. 52,421 26,761 99,904
------------ ------------ -----------
INTEREST EXPENSE, NET........................ (1,529,157) (838,095) (264,023)
------------ ------------ -----------
LOSS ON CONTINUING OPERATIONS BEFORE INCOME
TAX BENEFIT................................ (15,933,782) (12,183,659) (3,860,354)
------------ ------------ -----------
INCOME TAX BENEFIT........................... (5,275,125) (4,145,365) (1,307,936)
------------ ------------ -----------
LOSS ON CONTINUING OPERATIONS................ (10,658,657) (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..................................... $(10,376,326) $ (7,985,670) $(3,039,333)
============ ============ ===========
Basic and diluted loss per share from
Continuing Operations...................... $ (0.23) $ (0.17) $ (0.06)
Basic and diluted loss per share from
Discontinued Operations.................... 0.00 0.00 (0.01)
------------ ------------ -----------
Basic and diluted loss per share............. $ (0.23) $ (0.17) $ (0.07)
============ ============ ===========
Weighted average shares outstanding.......... 46,000,000 46,000,000 46,000,000
============ ============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 104
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 TOTAL
PREFERRED COMMON COMMON PAID-IN RETAINED SHAREHOLDER'S
STOCK STOCK STOCK CAPITAL DEFICIT EQUITY
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1996.................. $-- $-- $4,600 $ 641,648 $ (588,585) $ 57,663
Equity contribution... -- -- -- 7,215,984 -- 7,215,984
Net loss.............. -- -- -- -- (3,039,333) (3,039,333)
-- -- ------ ----------- ------------ ------------
Balance, December 31,
1997.................. -- -- 4,600 7,857,632 (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.................. -- -- 4,600 13,551,603 (11,613,588) 1,942,615
Equity contribution... -- -- -- 6,270,422 -- 6,270,422
Net loss.............. -- -- -- -- (10,376,326) (10,376,326)
-- -- ------ ----------- ------------ ------------
Balance, December 31,
1999.................. $-- $-- $4,600 $19,822,025 $(21,989,914) $ (2,163,289)
== == ====== =========== ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 105
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.............................................. $(10,376,326) $(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
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 --
Uncollectable 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)......... 6,685,060 898,771 (18,179,517)
Change in other assets and liabilities, net......... 11,261 442,601 (642,863)
------------ ----------- -----------
Total adjustments.............................. 8,016,457 (4,011,353) (6,417,247)
------------ ----------- -----------
Net cash used in operating activities.......... (2,359,869) (11,997,023) (9,456,580)
------------ ----------- -----------
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
------------ ----------- -----------
Net cash provided by financing activities...... 6,001,293 19,647,683 13,711,613
------------ ----------- -----------
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> 106
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> 107
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 May , 2000, Horizon Telcom, Inc. transferred
its 100% ownership of Horizon Personal Communications, Inc. (HPC) to HPCS in
exchange for 46,000,000 shares of HPCS. 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 and its wholly-owned subsidiary that will be 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, and
Maryland under the Sprint PCS brand. HPCS is required to build out the wireless
network
F-8
<PAGE> 108
HORIZON PCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
F-9
<PAGE> 109
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
Revenues for the personal communications service packages are recognized
monthly as service is provided. A management fee of 8% of collected personal
communications service revenues from Sprint PCS subscribers based in the
Company's territory, excluding outbound roaming, and from non-Sprint PCS
subscribers who roam onto the Company's network, is accrued as services are
provided and remitted to Sprint PCS and recorded as cost of service. Revenues
generated from the sale of handsets and accessories, 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.
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.
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.
F-10
<PAGE> 110
HORIZON PCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. Because the Company had a net
loss in 1999, 1998 and 1997, the effect on loss per share of all options was
antidilutive.
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.
F-11
<PAGE> 111
HORIZON PCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. As of December 31, 1999, the Company was
in compliance with such covenants or had obtained waivers.
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).
F-12
<PAGE> 112
HORIZON PCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(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............................ $(5,272,042) $(4,115,334) $(1,563,355)
Increase (decrease) in tax from:
Change in valuation allowance........ 138,462 -- --
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>
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:
Uncollectable accounts............................. $ 125,982 $ 11,201
Vacation........................................... 39,471 23,293
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........... $ 1,602,103 $ 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........................... $ 138,462 $ (739,016)
Less: valuation allowance............................ (138,462) --
----------- -----------
Total deferred income taxes, net........... $ -- $ (739,016)
=========== ===========
</TABLE>
F-13
<PAGE> 113
HORIZON PCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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......................... $(10,376,326) $(7,985,670) $(3,039,333)
Pro Forma........................... (15,506,007) (12,103,924) (4,598,104)
</TABLE>
(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.
F-14
<PAGE> 114
HORIZON PCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(7) PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS
In December 1998, the Company adopted SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits." This Statement revises
employers' disclosures about pension and other postretirement benefit plans but
does not change the measurement or recognition of costs associated with those
plans. It standardizes the disclosure requirements, eliminates certain
disclosures and requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis. SFAS No. 132 supersedes the disclosure requirements of SFAS No. 87,
"Employers' Accounting for Pensions" and SFAS No. 106, "Employers' Accounting
for Postretirement Benefits Other Than Pensions."
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.
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-15
<PAGE> 115
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-16
<PAGE> 116
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-17
<PAGE> 117
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.
(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-18
<PAGE> 118
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 46,000,000 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. The exercise price of each
option is not to be less than the market price of the Company's stock on the
date of grant and an option's maximum term is ten years. Options vest based on
the terms of each individual agreement over four to six years from issuance.
The Company applies APB Opinion 25 and related Interpretations in
accounting for this plan. Accordingly, no compensation cost has been recognized.
Had compensation cost for the Company's
F-19
<PAGE> 119
HORIZON PCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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............................................. $(10,376,326)
Pro Forma............................................... (10,400,710)
Basic loss per share
As reported............................................. $ (0.23)
Pro Forma............................................... (0.23)
Diluted loss per share
As reported............................................. $ (0.23)
Pro Forma............................................... (0.23)
</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..................................... 3,588,000 0.14
Exercised................................... -- --
Forfeited................................... -- --
---------- -----
Outstanding at end of year.................... 3,588,000 $0.14
Options exercisable at year-end............... 828,000 $0.14
Weighted-average fair value of options granted
during the year............................. $ 0.07
</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 present value of estimated future cash flows
using a discount rate commensurate with the risks involved.
F-20
<PAGE> 120
HORIZON PCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 related to advances made to and received from sister
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-21
<PAGE> 121
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, a sister 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-22
<PAGE> 122
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-23
<PAGE> 123
HORIZON PCS, INC.
CONDENSED CONSOLIDATED 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................................. $ 281,043 $ 146,806
Accounts receivable -- subscriber, less allowance for
doubtful accounts of $505,000 at March 31, 2000 and
$370,700 at December 31, 1999........................... 781,609 416,131
Accounts receivable -- other.............................. 119,765 110,455
Receivable from Parent.................................... 2,874,169 2,630,335
Equipment inventory....................................... 3,065,478 2,137,337
Prepayments and other..................................... 26,750 46,103
----------- -----------
Total current assets............................... 7,148,814 5,487,167
----------- -----------
INVESTMENTS AND OTHER ASSETS:
Investments............................................... 4,344,803 4,295,041
Investment in Parent...................................... 11,835,000 --
Other assets.............................................. 884,484 202,315
----------- -----------
Total investments and other assets................. 17,064,287 4,497,356
----------- -----------
PROPERTY AND EQUIPMENT:
In service................................................ 27,379,922 27,904,046
Less -- Accumulated depreciation.......................... (5,800,073) (5,060,242)
----------- -----------
Property and equipment in service, net............. 21,579,849 22,843,804
----------- -----------
Construction work in progress............................. 509,113 50,429
----------- -----------
Total property and equipment, net.................. 22,088,962 22,894,233
----------- -----------
Total assets....................................... $46,302,063 $32,878,756
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Notes payable............................................. $13,000,000 $ 1,032,000
Accounts payable and accrued liabilities.................. 4,998,075 4,241,541
Payable to Parent......................................... 8,548,602 4,355,292
----------- -----------
Total current liabilities.......................... 26,546,677 9,628,833
----------- -----------
DEFERRED CREDITS AND OTHER LONG-TERM LIABILITIES:
Deferred gain on sale of towers........................... 228,336 --
Postretirement benefit obligation......................... 930,347 713,074
Long-term debt............................................ 23,557,965 23,557,965
Payable to affiliates..................................... 1,607,221 1,142,173
----------- -----------
Total deferred credits and other long-term
liabilities...................................... 26,323,869 25,413,212
----------- -----------
Total liabilities.................................. 52,870,546 35,042,045
----------- -----------
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,
46,000,000 issued and outstanding, at $0.0001 par
value................................................... 4,600 4,600
Additional paid-in capital................................ 20,695,628 19,822,025
Retained deficit.......................................... (27,268,711) (21,989,914)
----------- -----------
Total stockholder's equity......................... (6,568,483) (2,163,289)
----------- -----------
Total liabilities and stockholder's equity......... $46,302,063 $32,878,756
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-24
<PAGE> 124
HORIZON PCS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31,
----------------------------
2000 1999
<S> <C> <C>
OPERATING REVENUES:
Service revenues......................................... $ 2,883,904 $ 535,811
Equipment revenues....................................... 618,628 93,297
------------ ------------
Total operating revenues......................... 3,502,532 629,108
------------ ------------
OPERATING EXPENSES:
Cost of services......................................... 2,945,362 1,280,195
Cost of equipment........................................ 2,045,534 492,973
Selling, general, and administrative expenses............ 3,333,633 1,612,765
Depreciation and amortization............................ 878,970 556,295
------------ ------------
Total operating expenses......................... 9,203,499 3,942,228
------------ ------------
OPERATING LOSS............................................. (5,700,967) (3,313,120)
------------ ------------
OTHER INCOME, NET.......................................... 279,723 892
------------ ------------
INTEREST EXPENSE, NET...................................... 715,422 252,899
------------ ------------
LOSS ON CONTINUING OPERATIONS BEFORE INCOME TAX BENEFIT.... (6,136,666) (3,565,127)
------------ ------------
INCOME TAX BENEFIT......................................... (716,624) (1,180,014)
------------ ------------
LOSS ON CONTINUING OPERATIONS.............................. (5,420,042) (2,385,113)
------------ ------------
DISCONTINUED OPERATIONS
Income from discontinued operations, net of tax expense
of $72,763 and $24,768 for 2000 and 1999,
respectively.......................................... 141,245 48,078
------------ ------------
NET LOSS................................................... $ (5,278,797) $ (2,337,035)
============ ============
Basic and diluted loss per share from Continuing
Operations............................................... $ (0.12) $ (0.05)
Basic and diluted loss per share from Discontinued
Operations............................................... 0.01 0.00
------------ ------------
Basic and diluted loss per share........................... $ (0.11) $ (0.05)
============ ============
Weighted average shares outstanding........................ 46,000,000 46,000,000
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-25
<PAGE> 125
HORIZON PCS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------
2000 1999
<S> <C> <C>
NET CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES... $ 29,556 $ (359,392)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net................................. (769,070) (1,867,201)
Proceeds from sale of fixed assets........................ 700,000 --
Notes payable for investment in joint
venture -- repayments.................................. (1,032,000) --
Equity in investments, net................................ 4,389 --
Investment in Parent...................................... (11,835,000) --
------------ -----------
Net cash used in investing activities............. (12,931,681) (1,867,201)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Notes payable -- borrowings............................... 13,000,000 1,196,070
Capital contributions..................................... 810,462 1,050,000
Deferred financing fees................................... (774,100) --
------------ -----------
Net cash provided by financing activities......... 13,036,362 2,246,070
------------ -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 134,237 19,477
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 146,806 26,515
------------ -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 281,043 $ 45,992
============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-26
<PAGE> 126
HORIZON PCS, INC.
NOTES TO INTERIM CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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 three months ended March 31,
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 May , 2000, Horizon Telcom, Inc. transferred
its 100% ownership of Horizon Personal Communications, Inc. (HPC) to HPCS in
exchange for 46,000,000 shares of HPCS. 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 and its wholly-owned subsidiary that were outstanding
after the reorganization.
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.
(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.
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.
F-27
<PAGE> 127
HORIZON PCS, INC.
NOTES TO INTERIM CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NET LOSS PER SHARE
Basic and diluted losses per share were calculated as net loss divided by
the weighted average number of common shares outstanding. Because the Company
had a net loss as of March 31, 1999 and 1998, the effect on loss per share of
all options and convertible debt was antidilutive.
(4) LINE OF CREDIT
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.
(5) DEBT
The purchase of Horizon Telcom, Inc. common stock (Note 6) was financed
through a $13.0 million 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 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 March 31, 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
8.95% at March 31, 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
minimum net worth requirement and the limitations on additional indebtedness.
(6) 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. This investment is accounted for under the cost method. In
conjunction with the acquisition of Bright PCS described in Note 10, the
Company's ownership interest in Horizon Telcom, Inc. was reduced to 11.78%.
During 1999 the Company entered into a joint venture agreement through the
purchase of approximately 25.6% 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 had an interest-free notes
payable to BPCS totaling $1,032,000 as of December 31, 1999 relating to the
initial capital contribution to the joint venture which was fully paid by March
31, 2000.
F-28
<PAGE> 128
HORIZON PCS, INC.
NOTES TO INTERIM CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As part of the term loan facility for the construction of the personal
communications network (Note 5), 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.
(7) 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. Accordingly, the results of operations for these business units have been
reported as discontinued operations in the current and prior periods.
Operating results for the three months ended March 31, 2000 and 1999 for
these businesses are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
2000 1999
<S> <C> <C>
Total revenue.................................... $1,046,313 $814,693
Operating income before income taxes............. 214,008 72,846
Earnings before income taxes..................... 214,008 72,846
Income tax expense............................... (72,763) (24,768)
---------- --------
Income from discontinued operations.............. $ 141,245 $ 48,078
========== ========
</TABLE>
Net assets of discontinued operations are as follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
<S> <C> <C>
Current assets.................................. $188,511 $308,779
Property and equipment, net..................... 609,251 597,043
Current liabilities............................. (81,479) (81,799)
-------- --------
Net assets -- discontinued
operations......................... $716,283 $824,023
======== ========
</TABLE>
(8) 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 which the lessor
constructs on behalf of the Company.
F-29
<PAGE> 129
HORIZON PCS, INC.
NOTES TO INTERIM CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSTRUCTION EXPENDITURES
Construction expenditures in 2000 are estimated to be $74,600,000. 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.
(9) RELATED PARTIES
The Company has non-interest bearing receivables from and payables to
affiliated companies related to advances made to and received from sister
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 March 31, 2000 and December 31, 1999 are as follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
<S> <C> <C>
Receivable from Parent....................... $ 2,874,169 $ 2,630,335
Payable to Parent............................ (8,548,602) (4,355,292)
Payable to affiliates........................ (1,607,221) (1,142,173)
</TABLE>
During 2000 and 1999, a sister 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 three months ended March 31, 2000
and 1999 was approximately $739,000 and $156,000, respectively.
(10) SUBSEQUENT EVENTS
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.
In May 2000, the Company entered 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
F-30
<PAGE> 130
HORIZON PCS, INC.
NOTES TO INTERIM CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. 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.
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.
In May 2000, the Company received a loan commitment from a financial
institution for a new multi-facility loan. The aggregate principal amount of the
loan commitment is $235.0 million, consisting of a $223.0 million term loan
facility and a $12.0 million revolving line of credit. Pursuant to the expected
terms of this agreement, $200.7 million of the term loan facility will be used
to refinance all of the outstanding principal balances of existing facilities
and finance additional infrastructure costs related to the build out of the
Company's PCS network. The remaining principal balance of the term loan facility
of $22.3 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.
Prior to April 2000, the Company owned approximately 25.6% of BPCS. In
April 2000, the Company entered into an agreement to purchase the remaining
74.4% of BPCS for 8% of the Company's class B common stock (4,000,000 shares)
and 8% of the shares of common stock of Horizon Telcom owned by the Company. The
acquisition will be accounted for under the purchase method.
F-31
<PAGE> 131
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.
Columbus, Ohio
March 2, 2000.
F-32
<PAGE> 132
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-33
<PAGE> 133
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-34
<PAGE> 134
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-35
<PAGE> 135
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-36
<PAGE> 136
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-37
<PAGE> 137
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
Revenues for the personal communications service packages will be
recognized monthly as service is provided. An affiliation fee of 8% of collected
personal communications service revenues from Sprint PCS subscribers based in
the Company's territory, excluding outbound roaming, and from non-Sprint PCS
subscribers who roam onto the Company's network, will be accrued as services are
provided and remitted to Sprint PCS and recorded as cost of service. Revenues
generated from the sale of handsets and accessories, inbound and outbound Sprint
PCS roaming fees, and from roaming services provided to Sprint PCS customers who
are not based in the Company's territory are not subject to the 8% affiliation
fee. The Company will recognize revenues on personal communications handsets and
accessories at the time of the sale.
F-38
<PAGE> 138
BRIGHT PERSONAL COMMUNICATIONS SERVICES, LLC
(A DEVELOPMENT-STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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>
(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
F-39
<PAGE> 139
BRIGHT PERSONAL COMMUNICATIONS SERVICES, LLC
(A DEVELOPMENT-STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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-40
<PAGE> 140
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-41
<PAGE> 141
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-42
<PAGE> 142
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....................................... -- -- (17,172) (17,172)
------ ----------- --------- -----------
BALANCE, March 31, 2000.......................... 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-43
<PAGE> 143
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....................... 2,958,665 12,096,385
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-44
<PAGE> 144
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-45
<PAGE> 145
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-46
<PAGE> 146
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-47
<PAGE> 147
HORIZON PCS, INC.
PRO FORMA FINANCIAL STATEMENTS
The unaudited pro forma balance sheet of Horizon PCS, Inc. ("Horizon PCS")
as of March 31, 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
three months ended March 31, 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 and the issuance of warrants granted to Sprint to acquire a number of
shares of Class A common stock.
The unaudited pro forma adjustments are based upon available information
and certain assumptions that management believes are reasonable. 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 three
months ended March 31, 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 March 31, 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 March 31,
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> 148
HORIZON PCS, INC.
PRO FORMA BALANCE SHEET
AS OF MARCH 31, 2000
<TABLE>
<CAPTION>
HISTORICAL HISTORICAL PRO FORMA
HORIZON PCS BRIGHT PCS ADJUSTMENTS COMBINED
----------- ---------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS
Cash.................................................. $ 281 $ 9,377 $ -- $ 9,658
Accounts receivable................................... 901 61 -- 962
Other current assets.................................. 5,967 30 -- 5,997
------- ------- ------- --------
Total current assets................................ 7,149 9,468 -- 16,617
------- ------- ------- --------
Property and equipment, net........................... 22,089 2,860 20,000(1) 44,949
Goodwill and other intangibles........................ -- -- 40,105(2) 40,105
--(8)
Other non-current assets.............................. 17,064 78 (7,839)(3) 9,303
------- ------- ------- --------
Total assets........................................ $46,302 $12,406 $52,266 $110,974
======= ======= ======= ========
LIABILITIES & STOCKHOLDERS' EQUITY
Notes payable......................................... $13,000 $ -- $ -- $ 13,000
Other current liabilities............................. 13,547 459 3,472(4) 17,478
Long-term debt........................................ 23,558 -- 20,000(1) 43,558
Other non-current liabilities......................... 2,765 -- -- 2,765
------- ------- ------- --------
Total liabilities................................... 52,870 459 23,472 76,801
------- ------- ------- --------
Stockholders' equity.................................. (6,568) 11,947 28,794 34,173
(8)
------- ------- ------- --------
Total liabilities and stockholders' equity.......... $46,302 $12,406 $52,266 $110,974
======= ======= ======= ========
</TABLE>
See Footnotes to Pro Forma Financial Statements
P-2
<PAGE> 149
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)(5) $ 3,828
Equipment Revenues.................................... 600 -- -- 600
----------- ----- ------- -----------
4,503 -- (75) 4,428
----------- ----- ------- -----------
Operating Expenses:
Cost of service and equipment....................... 9,800 -- -- 9,800
Selling, general and administrative................. 7,863 253 (75)(5) 8,041
Depreciation and amortization....................... 2,685 -- 2,005(6) 4,690
(8)
Gain on sale of PCS assets.......................... (1,388) -- -- (1,388)
----------- ----- ------- -----------
Total operating expenses.......................... 18,960 253 1,930 21,143
----------- ----- ------- -----------
Operating loss:....................................... (14,457) (253) (2,005) (16,715)
Interest Expense, net............................... (1,529) -- (1,800)(1) (3,329)
Other income (expense).............................. 52 88 (42)(7) 98
Income tax benefit.................................. 5,275 -- -- 5,275
----------- ----- ------- -----------
Loss from continuing operations................... $ (10,659) $(165) $(3,847) $ (14,671)
=========== ===== ======= ===========
Loss per share:
Basic and diluted loss per share from continuing
operations.......................................... $ (0.23) $ (0.29)
=========== ===========
Weighted average shares outstanding................... 46,000,000 50,000,000
=========== ===========
</TABLE>
See Footnotes to Pro Forma Financial Statements
P-3
<PAGE> 150
HORIZON PCS, INC.
PRO FORMA STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2000
<TABLE>
<CAPTION>
HISTORICAL HISTORICAL PRO FORMA
HORIZON PCS BRIGHT PCS ADJUSTMENTS COMBINED
----------- ---------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Service revenues.................................... $ 2,884 $ -- $ (254)(5) $ 2,630
Equipment revenues.................................. 619 -- -- 619
----------- ----- ------- -----------
3,503 -- (254) 3,249
----------- ----- ------- -----------
Operating Expenses:
Cost of service and equipment..................... 4,991 -- (179)(5) 4,812
Selling, general and administrative............... 3,334 162 (75)(5) 3,421
Depreciation and amortization..................... 879 -- 501(6) 1,380
(8)
----------- ----- ------- -----------
Total operating expenses........................ 9,204 162 247 9,613
----------- ----- ------- -----------
Operating loss: (5,701) (162) (501) (6,364)
Interest Expense, net............................. (715) -- (450)(1) (1,165)
Other income (expense)............................ 279 145 (4)(7) 420
Income tax benefit................................ 717 -- -- 717
----------- ----- ------- -----------
Loss from continuing operations..................... $ (5,420) $ (17) $ (955) $ (6,392)
=========== ===== ======= ===========
Loss per share:
Basic and diluted loss per share from continuing
operations........................................ $ (0.12) $ (0.13)
=========== ===========
Weighted average shares outstanding................. 46,000,000 50,000,000
=========== ===========
</TABLE>
See Footnotes to Pro Forma Financial Statements
P-4
<PAGE> 151
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 March 31, 2000 and
consolidated statements of income for the year ended December 31, 1999 and the
three months ended March 31, 2000, the following adjustments have been made:
1. Represents the purchase of the $20 million of cell sites under
construction from Sprint PCS in connection with its grant of new markets.
These assets are to be financed with additional debt at an interest rate of
9%.
2. The preliminary allocation of the purchase price for the
acquisition of Bright PCS, which is based on our initial determination of
relative values, is reflected as follows and is expected to be finalized in
2000 (in thousands):
<TABLE>
<S> <C> <C>
Bright PCS Purchase Price....................... $ 49,000
Net assets of Bright PCS........................ 11,947
Less: Horizon PCS ownership interest............ (3,052)
--------
8,895
--------
Goodwill and other intangibles.................. $ 40,105
========
Sprint Affiliation license...................... $ 33,000
Goodwill and other intangibles.................. 7,105
--------
$ 40,105
========
</TABLE>
The amortization period for the goodwill and other intangibles is 20 years
and is based on the initial term of Bright PCS' management agreement with
Sprint PCS.
3. Represents the elimination of Horizon PCS' original 25.6% ($3,052)
investment in Bright PCS, previously recorded under the equity method, and
8% of Horizon Telcom, Inc. common stock ($4,787) that was held as an
investment by Horizon PCS and issued as part of the consideration for the
acquisition of Bright PCS.
4. Represents the tax effect of a nonrecurring gain of $10,213
recognized as a result of Horizon PCS exchanging 8% of Horizon Telcom
common stock as part of the consideration in the acquisition of Bright PCS.
The $10,213 gain, net of the tax effect of $3,472, is included in
stockholders' equity (retained earnings).
5. 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 THREE MONTHS ENDED
DECEMBER 31, 1999 MARCH 31, 2000
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Management fees......................... $75 $ 75
Network build-out fees.................. -- 179
</TABLE>
6. Represents the amortization of goodwill and other intangible assets
recorded from the Bright PCS acquisition consisting of goodwill and
licenses in the amount of $40.1 million. 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.
7. Represents the elimination of Horizon PCS' 25.6% of Bright PCS' net
loss for each period previously recorded as other income and expense.
P-5
<PAGE> 152
8. 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 these shares has
not yet been determined and has not yet been reflected in the pro forma
financials.]
P-6
<PAGE> 153
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
, 2000
[HORIZON PCS LOGO]
HORIZON PCS, INC.
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> 154
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......... $ 33,000
National Association of Securities Dealers, Inc. filing
fee....................................................... 13,000
Nasdaq National Market listing fees......................... *
Printing and engraving expenses............................. *
Legal fees and expenses..................................... *
Accounting fees and expenses................................ *
Transfer agent and registrar fees........................... *
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> 155
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 May , 2000, in connection with the initial capitalization of
the Registrant, the Registrant issued 46,000,000 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 May , 2000, in connection with the initial capitalization of
the Registrant, the Registrant issued an aggregate of 4,000,000 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 May , 2000, the Registrant granted incentive stock options to
purchase 3,312,000 shares of the Registrant's class B common stock at an
exercise price of $0.1414 per share, and nonqualified options to purchase
276,000 shares of its class B common stock, at an exercise price of $0.1414
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> 156
(5) In connection with Sprint PCS' grant of the Registrant's new
markets on May , 2000, the Registrant agreed to grant a warrant
to Sprint PCS to purchase a number of shares of the Registrant's class A
common stock equal to 5% of the number of shares to be issued and sold in
this offering. The exercise price for 60% of the shares subject to the
warrant will be $0.01 per share. The exercise price for 40% of the shares
subject to this warrant will be 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 , 2000, the Registrant effected a for
stock dividend of its issued and outstanding Class B common stock
and made corresponding adjustments to the outstanding options and warrants.
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.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
1.1* -- Form of Underwriting Agreement.
3.1 -- Form of Certificate of Incorporation of Horizon PCS.
3.2 -- Bylaws of Horizon PCS.
4.1* -- Specimen Common Stock Certificate.
5.1* -- Form of opinion of Arnall Golden & Gregory, LLP regarding
legality of the common stock being issued.
10.1* -- Form of Employment Agreement, dated May , 2000, by and
between Registrant and William A. McKell
10.2* -- Form of Employment Agreement, dated May , 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.
</TABLE>
II-3
<PAGE> 157
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
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* -- Reimbursement and Security Agreement by and among Horizon
Telcom, Inc., Horizon Personal Communications, Inc. and
Motorola, Inc., dated August 29, 1997.
10.13* -- Rural Telephone Finance Cooperative Mortgage and Security
Agreement by and between Horizon Personal Communications,
Inc. and Rural Telephone Finance Cooperative, dated August
29, 1997.
10.14* -- Horizon Telcom Guaranty, dated August 29, 1997.
10.15* -- Loan Agreement, by and between Bright Personal
Communications Services, LLC and Rural Telephone Finance
Corporation, dated April 28, 2000.
10.16* -- Reimbursement and Security Agreement, by and between Bright
Personal Communications Services, LLC and Motorola, Inc.,
dated April 28, 2000.
10.17* -- Subordination Agreement, dated April 28, 2000, by and among
each of the members of Bright Personal Communications
Services, LLC and Motorola, Inc.
10.18* -- Assignment of Tower Agreements, dated April 28, 2000 by and
between Bright Personal Communications Services, LLC and
Rural Telephone Finance Cooperative.
10.19* -- Commitment Letter, dated April 19, 2000 from Rural Telephone
Finance Cooperative Mortgage to Horizon Personal
Communications, Inc. for a $40.5 million Senior Secured
Credit Facility.
10.20* -- Warrant Agreement in favor of Sprint PCS, Inc. dated May ,
2000
10.21* -- Asset Purchase Agreement, dated May , 2000, by and between
Sprint PCS, Inc. and Horizon Personal Communications, Inc.
10.22* -- Registration Rights Agreement, in favor of Sprint PCS, Inc.,
dated May , 2000.
10.23* -- Commitment letter from RTFC with regard to $130 million loan
to the Registrant.
10.24* -- Contribution and Exchange Agreement, 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 agreement.
10.25* -- Registration Rights Agreement, dated May , 2000, by and
among the Registrant and those persons listed on the
attachment to the agreement.
10.26* -- 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.
</TABLE>
II-4
<PAGE> 158
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
10.27* -- 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.
10.28* -- Purchase and Sale Agreement by and between Motorola, Inc.
and Horizon Personal Communications, Inc., dated May 2,
1997.
10.29* -- Bridge Note Purchase Agreement by and between Horizon
Personal Communications, Inc. and First Union Investors,
Inc., dated February 15, 2000.
10.30* -- 13% Senior Subordinated Promissory Note from Horizon
Personal Communications, Inc. to First Union Investors,
Inc., dated February 15, 2000.
10.31* -- Conversion Agreement, by and between Horizon Personal
Communications and First Union Investors, Inc., dated
,
10.32* -- Form of Horizon PCS, Inc. 2000 Stock Option Plan.
10.33* -- Site Development Agreement by and between Horizon Personal
Communications, Inc. and SBA Towers, Inc., dated August 17,
1999.
10.34* -- Master Site Agreement by and between SBA Towers, Inc. and
Horizon Personal Communications, Inc., dated July , 1999.
10.35* -- Master Design Build Agreement by and between Horizon
Personal Communications, Inc. and SBA Towers, Inc., dated
August 17, 1999.
10.36* -- Master Site Agreement by and between SBA Towers, Inc. and
Bright Personal Communications Services, LLC, dated October
1, 1999.
10.37* -- Master Design Build Agreement by and between Bright Personal
Communications Services, LLC and SBA Towers, Inc., dated
October 1, 1999.
10.38* -- Rebiller Service Agreement by and between Cincinnati Bell
Long Distance, Inc. and Horizon Personal Communications,
Inc., dated June 14, 1997.
10.39* -- Services Agreement, dated May , 2000, between Horizon
Personal Communication, Inc. and Horizon Services, Inc.
10.40* -- Lease Agreement, dated May , 2000 between The Chillicothe
Telephone Company and Horizon Personal Communications, 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 filed as Exhibit 5.1)
24.1 -- Powers of Attorney (set forth on the signature page hereto)
27.1* -- Financial Data Schedule
</TABLE>
- -------------------------
* to be filed by amendment.
(b) Financial Statement Schedules:
The following is the schedule filed as a part of the registration
statement -- Schedule II -- Valuation and Qualifying Accounts.
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
II-5
<PAGE> 159
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-6
<PAGE> 160
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Atlanta, State of
Georgia, on the nineteenth day of May, 2000.
HORIZON PCS, INC.
By: /s/ WILLIAM A. MCKELL
------------------------------------
Chairman of the Board, President,
and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL BY THESE PRESENTS, that each of the undersigned officers and
directors of Horizon PCS, Inc. hereby constitutes and appoints William A. McKell
and Peter M. Holland, his or her true and lawful attorney-in-fact and agent,
with full power of substitution, for him or her and on his or her behalf and in
his or her name, place and stead, in any and all capacities, to sign, execute
and file any and all documents relating to this Registration Statement,
including any and all amendments, exhibits and supplements thereto and including
any Registration Statement filed pursuant to Rule 462(b) of the Securities Act
of 1933, with any regulatory authority, granting unto said attorney 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 in order to effectuate the same
as fully to all intents and purposes as he himself or she herself might or could
do if personally present, hereby ratifying and confirming all that said
attorney-in-fact and agent, or his or her substitute, may lawfully do or cause
to be done.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following person in the capacities
and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<C> <S> <C>
/s/ WILLIAM A. MCKELL Chairman of the Board, President May 19, 2000
- ----------------------------------------------------- and Chief Executive Officer
William A. McKell (Principal Executive Officer)
/s/ PETER M. HOLLAND Chief Financial Officer; Director May 19, 2000
- ----------------------------------------------------- (Principal Financial and
Peter M. Holland Accounting Officer)
/s/ THOMAS MCKELL Director May 19, 2000
- -----------------------------------------------------
Thomas McKell
/s/ PHOEBE H. MCKELL Director May 19, 2000
- -----------------------------------------------------
Phoebe H. McKell
</TABLE>
II-7
<PAGE> 161
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
1.1* -- Form of Underwriting Agreement.
3.1 -- Form of Certificate of Incorporation of Horizon PCS.
3.2 -- Bylaws of Horizon PCS.
4.1* -- Specimen Common Stock Certificate.
5.1* -- Form of opinion of Arnall Golden & Gregory, LLP regarding
legality of the common stock being issued.
10.1* -- Form of Employment Agreement, dated May , 2000, by and
between Registrant and William A. McKell
10.2* -- Form of Employment Agreement, dated May , 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.
10.4* -- 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* -- Reimbursement and Security Agreement by and among Horizon
Telcom, Inc., Horizon Personal Communications, Inc. and
Motorola, Inc., dated August 29, 1997
10.13* -- Rural Telephone Finance Cooperative Mortgage and Security
Agreement by and between Horizon Personal Communications,
Inc. and Rural Telephone Finance Cooperative, dated August
29, 1997.
10.14* -- Horizon Telcom Guaranty, dated August 29, 1997.
10.15* -- Loan Agreement, by and between Bright Personal
Communications Services, LLC and Rural Telephone Finance
Corporation, dated April 28, 2000.
10.16* -- Reimbursement and Security Agreement, by and between Bright
Personal Communications Services, LLC and Motorola, Inc.,
dated April 28, 2000.
10.17* -- Subordination Agreement, dated April 28, 2000, by and among
each of the members of Bright Personal Communications
Services, LLC and Motorola, Inc.
10.18* -- Assignment of Tower Agreements, dated April 28, 2000 by and
between Bright Personal Communications Services, LLC and
Rural Telephone Finance Cooperative
10.19* -- Commitment Letter, dated April 19, 2000 from Rural Telephone
Finance Cooperative Mortgage to Horizon Personal
Communications, Inc. for a $40.5 million Senior Secured
Credit Facility.
10.20* -- Warrant Agreement in favor of Sprint PCS, Inc. dated May ,
2000
10.21* -- Asset Purchase Agreement, dated May , 2000, by and between
Sprint PCS, Inc. and Horizon Personal Communications, Inc.
10.22* -- Registration Rights Agreement, in favor of Sprint PCS, Inc.,
dated May , 2000.
10.23* -- Commitment letter from RTFC with regard to $130 million loan
to the Registrant
</TABLE>
II-8
<PAGE> 162
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
10.24* -- Contribution and Exchange Agreement, 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 agreement.
10.25* -- Registration Rights Agreement, dated May , 2000, by and
among the Registrant and those persons listed on the
attachment to the agreement.
10.26* -- 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.
10.27* -- 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.
10.28* -- Purchase and Sale Agreement by and between Motorola, Inc.
and Horizon Personal Communications, Inc., dated May 2,
1997.
10.29* -- Bridge Note Purchase Agreement by and between Horizon
Personal Communications, Inc. and First Union Investors,
Inc., dated February 15, 2000
10.30* -- 13% Senior Subordinated Promissory Note from Horizon
Personal Communications, Inc. to First Union Investors,
Inc., dated February 15, 2000.
10.31* -- Conversion Agreement, by and between Horizon Personal
Communications and First Union Investors, Inc., dated
,
10.32* -- Form of Horizon PCS, Inc. 2000 Stock Option Plan.
10.33* -- Site Development Agreement by and between Horizon Personal
Communications, Inc. and SBA Towers, Inc., dated August 17,
1999.
10.34* -- Master Site Agreement by and between SBA Towers, Inc. and
Horizon Personal Communications, Inc., dated July , 1999.
10.35* -- Master Design Build Agreement by and between Horizon
Personal Communications, Inc. and SBA Towers, Inc., dated
August 17, 1999.
10.36* -- Master Site Agreement by and between SBA Towers, Inc. and
Bright Personal Communications Services, LLC, dated October
1, 1999.
10.37* -- Master Design Build Agreement by and between Bright Personal
Communications Services, LLC and SBA Towers, Inc., dated
October 1, 1999.
10.38* -- Rebiller Service Agreement by and between Cincinnati Bell
Long Distance, Inc. and Horizon Personal Communications,
Inc., dated June 14, 1997.
10.39* -- Services Agreement, dated May , 2000, between Horizon
Personal Communication, Inc. and Horizon Services, Inc.
10.40* -- Lease Agreement, dated May , 2000 between The Chillicothe
Telephone Company and Horizon Personal Communications, 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 filed as Exhibit 5.1)
24.1 -- Powers of Attorney (set forth on the signature page hereto)
27.1* -- Financial Data Schedule
</TABLE>
- -------------------------
* to be filed by amendment.
II-9
<PAGE> 1
EXHIBIT 3.1
CERTIFICATE OF INCORPORATION
OF
HORIZON PCS, INC.
ARTICLE 1: NAME
The name of the Corporation is: Horizon PCS, Inc. (the "Corporation").
ARTICLE 2: REGISTERED AGENT AND OFFICE
The address of the Corporation's registered office in the State of
Delaware is Corporation Trust Center, 1209 Orange Street, in the City of
Wilmington, County of New Castle. The name of the Corporation's registered
agent at such address is The Corporation Trust Company.
ARTICLE 3: PURPOSE
The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the Delaware General
Corporation Law.
ARTICLE 4: CAPITALIZATION
A. AUTHORIZED SHARES
The aggregate number of shares of all classes which the corporation
has authority to issue is 210,000,000, of which 125,000,000 shares shall be
designated as Class A Common Stock, $.0001 par value (hereinafter referred to
as "Class A Common Stock"), 75,000,000 shares shall be designated as Class B
Common Stock, $.0001 par value (hereinafter referred to as "Class B Common
Stock") and 10,000,000 shares, $.0001 par value, shall be designated as
"Preferred Stock" (hereinafter referred to as "Preferred Stock"). The Class A
Common Stock and Class B Common Stock are referred to hereinafter,
collectively, as the "Common Stock".
The designations and the preferences, conversion and other rights,
voting powers, restrictions, limitations as to dividends, qualifications, and
terms and conditions of redemption of the shares of each class of stock are as
follows:
B. COMMON STOCK
a. Powers and Rights of Holders of Common Stock
1. Except as stated in paragraphs 3, 4, and
5 of this Subpart B of Article 4, the Class A Common Stock and Class B Common
Stock shall be identical in all
<PAGE> 2
respects and shall have equal powers, preferences, rights and privileges.
2. Except as may be otherwise required by law,
the holders of Class A Common Stock, Class B Common Stock and, if and to the
extent authorized in accordance with the provisions of Article 4C hereof,
Preferred Stock issued and outstanding shall have and possess the exclusive
voting rights and powers, whether at a meeting of stockholders or in connection
with any action taken by written consent.
3. Each holder of Class A Common Stock issued
and outstanding shall be entitled to one (1) vote for each share of Class A
Common Stock registered in such holder's name on the books of the Corporation,
including the election of directors, and each holder of Class B Common Stock
issued and outstanding shall be entitled to ten (10) votes for each share of
Class B Common Stock registered in such holder's name on the books of the
Corporation, including the election of directors. Except as may be otherwise
required by law, the holders of the Class A Common Stock and Class B Common
Stock shall vote together as a single class.
4. Subject to the following sentence, direct
transfer of issued and outstanding shares of Class B Common Stock shall result
in the automatic conversion of the shares of Class B Common Stock being
transferred to or held by such holder into a like number of shares of Class A
Common Stock. For purposes of this paragraph 4, the following transfers of
issued and outstanding shares of Class B Common Stock shall not result in such
automatic conversion: (i) the transfer of shares of Class B Common Stock to a
registered holder of Class B Common Stock; (ii) the pro-rata distribution by
Horizon Telcom, Inc. to its shareholders of shares of the Class B Common Stock,
in a transaction that qualifies as a "spin-off" under Section 355 of the
Internal Revenue Code of 1986, as amended; (iii) a bona fide gift of shares of
Class B Common Stock to a spouse or lineal descendent or to a trust for the
benefit of a spouse and/or one or more lineal descendents; or (iv) a transfer
upon the death of a holder of shares of Class B Common Stock pursuant to a last
will and testament or pursuant to the laws of intestate succession. No
purported transfer of shares of Class B Common Stock shall be effective unless
and until the transferor has surrendered to the Corporation, at its office or
agency maintained for that purpose, the certificates representing the shares of
Class B Common Stock to be transferred, which certificates shall be duly
endorsed or accompanied by executed stock powers, with the signatures
appropriately guaranteed. All such certificates shall be accompanied by written
notice of the holder's intention to transfer the shares, including a statement
of the number of shares of Class B Common Stock to be transferred and, if
applicable, converted and the name or names and address or addresses in which
the certificate or certificates for shares of Class A Common Stock or shares of
Class B Common Stock, as the case may be, issuable upon such transfer and
conversion shall be issued and, if required, funds for the payment of any
applicable transfer taxes. The Corporation, as soon as practicable thereafter,
will deliver at said office to the transferee of the transferred and, if
applicable, converted shares of Class B Common Stock, or to any nominee or
designee of such transferee, a certificate or certificates for the number of
full shares of Class A Common Stock or shares of Class B Common Stock, as the
case may be, issuable upon such transfer and, if applicable, conversion and, in
the event that the transferor is transferring less than the aggregate number of
shares represented by the certificates surrendered, a certificate or
certificates for the number of full shares of Class B Common Stock not being
-2-
<PAGE> 3
transferred. Shares of Class B Common Stock shall be deemed to have been
converted as of the date of the surrender of the shares for transfer and
conversion as hereinbefore provided and the person or persons in whose name
Class A Common Stock is issuable upon such transfer and conversion shall be
treated for all purposes as the record holder or holders of such Class A Common
Stock on such date.
The Corporation shall at all times reserve for issuance a number of shares of
Class A Common Stock (which may include Class A Common Stock held by the
Corporation as treasury stock) which shall be sufficient for issuance upon
transfer and conversion of all of the then outstanding Class B Common Stock
pursuant to this Article 4 or otherwise.
5. Each holder of Class B Common Stock issued
and outstanding shall be entitled, at such holder's option, to convert shares
of Class B Common Stock registered on the books of the Corporation in such
holder's name into a like number of shares of Class A Common Stock. The
Corporation, as soon as practicable after receipt of (i) written notice of
conversion from a holder and (ii) the certificate or certificate(s)
representing the Class B Common Stock to be converted, which certificate or
certificate(s) shall be duly endorsed, will deliver to such holder a
certificate or certificates for the Class A Common Stock. Pending delivery of
certificates for shares of Class A Common Stock after receipt of such notice
and such certificate or certificate(s), certificate(s) for shares of Class B
Common Stock so converted shall be deemed to be certificates for an equal
number of shares of Class A Common Stock as of the date of the surrender of the
shares for transfer and conversion as hereinbefore provided and the holder
shall be treated for all purposes as the record holder or holders of such Class
A Common Stock on such date.
The Corporation shall at all times reserve for issuance a number of shares of
Class A Common Stock (which may include Class A Common Stock held by the
Corporation as treasury stock) which shall be sufficient for issuance upon
transfer and conversion of all of the then outstanding Class B Common Stock
pursuant to this Article 4 or otherwise.
6. Subject to any prior rights of any
Preferred Stock issued by the Corporation, dividends may be paid to the holders
of the Class A Common Stock and Class B Common Stock, as and when declared by
the Board of Directors, out of any funds of the Corporation legally available
for the payment of such dividends. If and when dividends on the Class A Common
Stock and Class B Common Stock are declared from time to time by the Board of
Directors, whether payable in cash, in property or in shares of stock of the
Corporation, the holders of the Class A Common Stock and Class B Common Stock
shall be entitled to share equally, on a per share basis, in such dividends. If
shares of Class B Common Stock are paid as dividends on Class B Common Stock
and shares of Class A Common Stock are paid as dividends on Class A Common
Stock, in an equal amount per share of Class B Common Stock and Class A Common
Stock in proportionate amounts, such payment will be deemed to be a like
dividend or other distribution.
7. Upon liquidation, dissolution or winding up
of the Corporation, whether voluntary or involuntary, after all amounts due and
owing to the holders of any Preferred Stock of the Corporation have been paid
or the payment has been fully provided for,
-3-
<PAGE> 4
the net assets of the Corporation shall be distributed to the holders of the
Class A Common Stock and Class B Common Stock, on a pro rata basis, based on
the number of shares held by each such holder, without regard to class.
8. If the Corporation shall in any manner
split, subdivide, combine or reclassify any outstanding shares of Class A
Common Stock or Class B Common Stock, the outstanding shares of the other class
of Common Stock shall be proportionately split, subdivided, combined or
reclassified in the same manner and on the same basis as the outstanding shares
of the class of Common Stock that have been split, subdivided, combined or
reclassified.
C. Preferred Stock
The Board of Directors is hereby authorized as it may determine to
issue shares of Preferred Stock at any time and from time to time, in one or
more series, and to fix or alter the designations, preferences and relative,
participating, optional or other special rights and qualifications, limitations
or restrictions, of such shares of Preferred Stock, including without
limitation of the generality of the foregoing, dividend rights, dividend rates,
conversion rights, voting rights, rights and terms of redemption (including
sinking fund provisions), redemption price or prices and liquidation
preferences of any wholly unissued series of preferred shares and the number of
shares constituting any of such series and the designation thereof, or any of
them; and to increase or decrease the number of shares of that series, but not
below the number of shares of such series then outstanding. In case the number
of shares of any series shall be decreased by the Board of Directors, the
shares constituting such decrease shall resume the status which they had prior
to the adoption of the resolution originally fixing the number of shares of
such series.
ARTICLE 5: BOARD OF DIRECTORS
The initial Board of Directors of the Corporation shall be such number
as is determined in accordance with the Bylaws of the Corporation. The
directors of the Corporation shall be divided into three classes, designated as
Class I, Class II and Class III. In the event that the number of directors
shall not be evenly divisible by three, the Board of Directors shall determine
in which class or classes the remaining director or directors, as the case may
be, shall be included. No Class shall have more than one director more than any
other Class unless such disparity results from the death or resignation of a
director or the removal of a director by the stockholders, in which event the
remaining directors shall promptly fill such vacancy so that no Class has more
than one director more than any other Class. The term of office of each
director shall be three years; provided, however, that, the initial term of
office of filing of the directors in Class I shall expire at the first annual
meeting of the stockholders after the date of filing of this Certificate of
Incorporation, the initial term of office of the directors in Class II shall
expire at the second annual meeting after the date of filing of this
Certificate of Incorporation, and the initial term of office of the directors
in Class III shall expire at the third annual meeting after the date of filing
of this Certificate of Incorporation. At each annual meeting of stockholders,
directors shall be elected for a full term of three years to succeed those
whose terms expire.
-4-
<PAGE> 5
Notwithstanding any other provision of this Certificate of
Incorporation or the Bylaws of the Corporation (and notwithstanding the fact
that some lesser percentage may be specified by law), any removal of a director
shall be only for cause and shall be effected only by the affirmative vote of
the holders of two-thirds or more of the outstanding voting power of the
capital stock of the Corporation entitled to vote generally in the election of
directors cast at a meeting of the stockholders called for that purpose.
ARTICLE 6: LIMITATION OF DIRECTOR LIABILITY
A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i)for any breach of such director's
duty of loyalty to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the Delaware General
Corporation Law or (iv) for any transaction from which such director derived an
improper personal benefit. If the Delaware General Corporation Law is amended
to authorize corporate action further eliminating or limiting the personal
liability of directors, then the liability of a director of the Corporation
shall be eliminated or limited to the fullest extent permitted by the Delaware
General Corporation Law, as so amended. Any repeal or modification of this
Article 6 by the stockholders of the Corporation shall not adversely affect any
right or protection of a director of the Corporation existing at the time of
such repeal or modification.
ARTICLE 7: INDEMNIFICATION
The Corporation shall, to the fullest extent permitted by Section 145
of the Delaware General Corporation Law, indemnify any and all persons whom it
shall have the power to indemnify under said section from and against any and
all of the expenses, liabilities or other matters referred to in or covered by
said section, and the indemnification provided for herein shall not be deemed
exclusive of any other rights to which those indemnified may be entitled under
any Bylaw, agreement, vote of stockholders or disinterested directors or
otherwise, both as to action in their official capacities and as to action in
other capacities while holding such office, and shall continue as to a person
who has ceased to be a director, officer, employee or agent and shall inure to
the benefit of the heirs, executors and administrators of such a person.
The Corporation may purchase and maintain insurance, at its expense,
to protect itself and any and all directors, officers, employee or agent of the
Corporation or subsidiary or affiliate or another corporation, partnership,
joint venture, trust or other enterprise against any expense, liability or
loss, whether or not the Corporation would have the power to indemnify such
person against such expense, liability or loss under the Delaware General
Corporation Law.
The Corporation may, to the extent authorized from time to time by the
Board of Directors, grant rights to indemnification and to the advancement of
expenses to any director or officer of the Corporation to the fullest extent
permitted by the Delaware General Corporation Law and to employees and agents
to the same extent as any director or officer.
-5-
<PAGE> 6
ARTICLE 8: AMENDMENT OF CERTIFICATE OF INCORPORATION
AND BYLAWS
Notwithstanding any provision of this Certificate of Incorporation or
the Bylaws of the Corporation, no provision of Articles 5, 6, 7, 8 and 9 of
this Certificate of Incorporation shall be amended, modified or repealed, nor
shall any provision of this Certificate of Incorporation inconsistent with any
such provision be adopted, by the stockholders of the Corporation unless
approved by the unanimous written consent of the stockholders or by the
affirmative vote of at least two-thirds of the outstanding voting power of the
capital stock of the Corporation entitled to vote generally in the election of
directors cast at a meeting of the stockholders called for that purpose.
The Board of Directors shall have the power acting by simple majority
to adopt, amend or repeal any provision of the Bylaws of the Corporation.
Notwithstanding any other provision of this Certificate of Incorporation or the
Bylaws of the Corporation (and notwithstanding that some lesser percentage
which may be specified by law), no provision of the Bylaws of the Corporation
shall be amended, modified or repealed by the stockholders of the Corporation,
nor shall any provision of the Bylaws of the Corporation inconsistent with any
such provision be adopted by the stockholders of the Corporation, unless
approved by the unanimous written consent of the stockholders or by the
affirmative vote of at least two-thirds of the outstanding voting power of
capital stock of the Corporation entitled to vote generally in the election of
directors cast at a meeting of the stockholders called for that purpose.
ARTICLE 9: LIMITATION ON ACTION BY STOCKHOLDERS
Following the effective date of an initial public offering of Common
Stock of the Corporation registered with the Securities and Exchange
Commission, no action may be taken by the stockholders except at an annual or
special meeting of the stockholders.
ARTICLE 10. INCORPORATOR
The name and mailing address of the incorporator are as
follows:
Willam A. McKell
c/o Horizon Personal Communications, Inc.
68 E. Main Street
Chillicothe, OH 45601
[signature on following page]
-6-
<PAGE> 7
IN WITNESS WHEREOF, the undersigned has executed this Certificate of
Incorporation on this _____ day of April, 2000.
-----------------------------------
William A. McKell, Incorporator
-7-
<PAGE> 1
EXHIBIT 3.2
BYLAWS
OF
HORIZON PCS, INC.
(A DELAWARE CORPORATION)
PREAMBLE
These bylaws (the "Bylaws") are subject to, and governed by, the
General Corporation Law of the State of Delaware (the "Delaware Corporation
Law") and the Certificate of Incorporation ("Certificate of Incorporation") of
Horizon PCS, Inc., a Delaware corporation (the "Corporation"), as amended from
time to time (including any certificate establishing a series of Preferred
Stock). In the event of a direct conflict between the provisions of these Bylaws
and the mandatory provisions of the Delaware Corporation Law or the provisions
of the Certificate of Incorporation, such provisions of the Delaware Corporation
Law or the Certificate of Incorporation, as the case may be, will be
controlling.
ARTICLE I
OFFICES
SECTION 1. Registered Office and Agent. The registered office and
registered agent of the Corporation shall be as designated from time to time by
the appropriate filing by the Corporation in the office of the Secretary of
State of the State of Delaware.
SECTION 2. Other Offices. The Corporation may also have offices at such
other places, both within and without the State of Delaware, as the Board of
Directors of the Corporation (the "Board of Directors") may from time to time
determine or as the business of the Corporation may require.
ARTICLE II
STOCKHOLDERS
SECTION 1. Annual Meetings. The annual meeting of the stockholders of
the Corporation shall be held on such date, at such time and at such place
within or without the State of Delaware as may be designated by the Board of
Directors, for the purpose of electing Directors and for the transaction of such
other business as may be properly brought before the meeting.
SECTION 2. Special Meetings. Except as otherwise provided in the
Certificate of Incorporation, a special meeting of the stockholders of the
Corporation may be called at any time by a majority of the Directors then in
office or the Chairman of the Board and shall be called by the Chief Executive
Officer, President or the Secretary at the request in writing of stockholders
holding together at least a majority of the voting power of the stock
outstanding and entitled to vote at such meeting. Any special meeting of the
Stockholders shall be held on such date, at such time and at such place within
or without the State of Delaware as the Board of Directors or the officer
calling the meeting may designate. At a special meeting of the stockholders, no
business shall be transacted and no corporate action shall be taken other than
that stated in the notice of the meeting unless all of the stockholders are
present in person or by proxy, in which case any and all business may be
transacted at the meeting even though the meeting is held without notice.
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SECTION 3. Notice of Meetings. Except as otherwise provided in these
Bylaws or by law, a written notice of each meeting of the stockholders shall be
given not less than ten (10) nor more than sixty (60) days before the date of
the meeting to each stockholder of the Corporation entitled to vote at such
meeting at his address as it appears on the records of the Corporation. The
notice shall state the place, date and hour of the meeting and, in the case of a
special meeting, the purpose or purposes for which the meeting is called.
SECTION 4. Nomination of Directors. This Section 4 shall take effect
upon the effective date of an initial public offering of Common Stock of the
Corporation registered with the Securities and Exchange Commission.
Only persons who are nominated in accordance with the following
procedures shall be eligible for election as directors of the Corporation.
Nominations of persons for election to the Board of Directors may be made at any
annual meeting of stockholders, or at any special meeting of stockholders called
for the purpose of electing directors, (a) by or at the direction of the Board
of Directors (or any duly authorized committee thereof) or (b) by any
stockholder of the Corporation (i) who is a stockholder of record on the date of
the giving of the notice provided for in this Section 4 and on the record date
for the determination of stockholders entitled to vote at such meeting and (ii)
who complies with the notice procedures set forth in this Section 4.
In addition to any other applicable requirements, for a nomination to
be made by a stockholder such stockholder must have given timely notice thereof
in proper written form to the Secretary of the Corporation.
To be timely, a stockholder's notice to the Secretary must be delivered
to or mailed and received at the principal executive offices of the Corporation
(a) in the case of an annual meeting, not less than ninety (90) days nor more
than one hundred thirty (130) days prior to the date of the anniversary of the
previous year's annual meeting; provided, however, that in the event the annual
meeting is scheduled to be held on a date more than thirty (30) days prior to or
delayed by more than sixty (60) days after such anniversary date, notice by the
stockholder in order to be timely must be so received not later than the later
of the close of business ninety (90) days prior to such annual meeting or the
tenth (10th) day following the day on which such notice of the date of the
annual meeting was mailed or such public disclosure of the date of the annual
meeting was made and (b) in the case of a special meeting of stockholders called
for the purpose of electing directors, not later than the close of business on
the tenth (10th) day following the day on which notice of the date of the
special meeting was mailed or public disclosure of the date of the special
meeting was made, whichever first occurs (and in no event shall the public
announcement of an adjournment of the meeting commence a new time period for a
giving of a stockholder's notice under this Section).
To be in proper written form, a stockholder's notice to the Secretary
must set forth (a) as to each person whom the stockholder proposes to nominate
for election as a director (i) the name, age, business address and residence
address of the person, (ii) the principal occupation or employment of the
person, (iii) the class or series and number of shares of capital stock of the
Corporation which are owned beneficially or of record by the person and (iv) any
other information relating to the person that would be required to be disclosed
in a proxy statement or other filings required to be made in connection with
solicitations of proxies for election of
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directors pursuant to Section 14 of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and the rules and regulations promulgated
thereunder; and (b) as to the stockholder giving the notice (i) the name and
record address of such stockholder, (ii) the class or series and number of
shares of capital stock of the Corporation which are owned beneficially or of
record by such stockholder, (iii) a description of all arrangements or
understandings between such stockholder and each proposed nominee and any other
person or persons (including their names) pursuant to which the nomination(s)
are to be made by such stockholder, (iv) a representation that such stockholder
intends to appear in person or by proxy at the meeting to nominate the persons
named in its notice and (v) any other information relating to such stockholder
that would be required to be disclosed in a proxy statement or other filings
required to be made in connection with solicitations of proxies for election of
directors pursuant to Section 14 of the Exchange Act and the rules and
regulations promulgated thereunder. Such notice must be accompanied by a written
consent of each proposed nominee to being named as a nominee and to serve as a
director if elected.
No person shall be eligible for election as a director of the
Corporation unless nominated in accordance with the procedures set forth in this
Section 4. If the Chairman of the meeting determines that a nomination was not
made in accordance with the foregoing procedures, the Chairman shall declare to
the meeting that the nomination was defective and such defective nomination
shall be disregarded.
SECTION 5. Stockholder Proposals; Business To Be Transacted At
Meetings. This Section 5 shall take effect upon the effective date of an initial
public offering of Common Stock of the Corporation registered with the
Securities and Exchange Commission.
At any special meeting of the stockholders, only such business shall be
conducted as shall have been brought before the meeting by or at the direction
of the Board of Directors (or any duly authorized committee thereof). No
business may be transacted at an annual meeting of stockholders, other than
business that is either (a) specified in the notice of meeting (or any
supplement thereto) given by or at the direction of the Board of Directors (or
any duly authorized committee thereof), (b) otherwise properly brought before
the annual meeting by or at the direction of the Board of Directors (or any duly
authorized committee thereof) or (c) otherwise properly brought before the
annual meeting by any stockholder of the Corporation (i) who is a stockholder of
record on the date of the giving of the notice provided for in this Section 5
and on the record date for the determination of stockholders entitled to vote at
such annual meeting and (ii) who complies with the notice procedures set forth
in this Section 5.
In addition to any other applicable requirements (including, without
limitation, Securities and Exchange Commission rules and regulations with
respect to inclusion of stockholder proposals in the Corporation's annual Proxy
Statement), for business to be properly brought before an annual meeting by a
stockholder, such stockholder must have given timely notice thereof in proper
written form to the Secretary of the Corporation.
To be timely, a stockholder's notice to the Secretary must be delivered
to or mailed and received at the principal executive offices of the Corporation
not less than ninety (90) days nor more than one hundred thirty (130) days prior
to the date of the anniversary of the previous year's annual meeting; provided,
however, that in the event the annual meeting is scheduled to be
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held on a date more than thirty (30) days prior to or delayed by more than sixty
(60) days after such anniversary date, notice by the stockholder in order to be
timely must be so received not later than the later of the close of business
ninety (90) days prior to such annual meeting or the tenth (10th) day following
the day on which such notice of the date of the annual meeting was mailed or
such public disclosure of the date of the annual meeting was first made by the
Corporation. In no event shall the public announcement of an adjournment of an
annual meeting commence a new time period for a giving of a stockholder's notice
under this Section 5.
To be in proper written form, a stockholder's notice to the Secretary
must set forth as to each matter such stockholder proposes to bring before the
annual meeting (i) a brief description of the business desired to be brought
before the annual meeting and the reasons for conducting such business at the
annual meeting, (ii) the name and record address of such stockholder, (iii) the
class or series and number of shares of capital stock of the Corporation which
are owned beneficially or of record by such stockholder, (iv) a description of
all arrangements or understandings between such stockholder and any other person
or persons (including their names) in connection with the proposal of such
business by such stockholder and any material interest of such stockholder in
such business, (v) the names and addresses of other stockholders known by the
stockholder proposing such business to support the proposal, and the class and
number of shares of the Corporation's capital stock known to be beneficially
owned by such other stockholders, and (vi) a representation that such
stockholder intends to appear in person or by proxy at the annual meeting to
bring such business before the meeting.
No business shall be conducted at the annual meeting of stockholders
except business brought before the annual meeting in accordance with the
procedures set forth in this Section 5, provided, however, that, once business
has been properly brought before the annual meeting in accordance with such
procedures, nothing in this Section 5 shall be deemed to preclude discussion by
any stockholder of any such business. If the Chairman of an annual meeting
determines that business was not properly brought before the annual meeting in
accordance with the foregoing procedures, the Chairman shall declare to the
meeting that the business was not properly brought before the meeting and such
business shall not be transacted.
SECTION 6. Quorum. At any meeting of the stockholders, the holders of a
majority in number of the total outstanding voting power of stock of the
Corporation entitled to vote at such meeting, present in person or represented
by proxy, shall constitute a quorum of the stockholders for all purposes, unless
the representation of a larger number of shares shall be required by law, by the
Certificate of Incorporation or by these Bylaws, in which case the
representation of the number of voting power so required shall constitute a
quorum; provided that at any meeting of the stockholders at which the holders of
any class of stock of the Corporation shall be entitled to vote separately as a
class, the holders of a majority in number of the total outstanding shares of
such class, present in person or represented by proxy, shall constitute a quorum
for purposes of such class vote unless the representation of a larger number of
shares of such class shall be required by law, by the Certificate of
Incorporation or by these Bylaws.
SECTION 7. Adjourned Meetings. Whether or not a quorum shall be present
in person or represented at any meeting of the stockholders, the holders of a
majority in number of the voting power of stock of the Corporation present in
person or represented by proxy and entitled to vote at such meeting may adjourn
from time to time; provided, however, that if the holders of any class of
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stock of the Corporation are entitled to vote separately as a class upon any
matter at such meeting, any adjournment of the meeting in respect of action by
such class upon such matter shall be determined by the holders of a majority of
the shares of such class present in person or represented by proxy and entitled
to vote at such meeting. When a meeting is adjourned to another time or place,
notice need not be given of the adjourned meeting if the time and place thereof
are announced at the meeting at which the adjournment is taken. At the adjourned
meeting the stockholders, or the holder of any class of stock entitled to vote
separately as a class, as the case may be, may transact any business which might
have been transacted by them at the original meeting. If the adjournment is for
more than thirty days, or if after the adjournment a new record date is fixed
for the adjourned meeting, a notice of the adjourned meeting shall be given to
each stockholder of record entitled to vote at the adjourned meeting as if such
adjourned meeting was a newly called meeting.
SECTION 8. Organization. The Chief Executive Officer, or in his absence
the President or, in his absence, the Chairman of the Board or any Vice
President shall call all meetings of the stockholders to order, and shall act as
Chairman of such meetings. In the absence of such officers, the holders of a
majority in number of voting power of stock of the Corporation present in person
or represented by proxy and entitled to vote at such meeting shall elect a
Chairman.
The Secretary of the Corporation shall act as Secretary of all meetings
of the stockholders; but in the absence of the Secretary, the Chairman may
appoint any person to act as Secretary of the meeting. It shall be the duty of
the Secretary to prepare and make, at least ten days before every meeting of
stockholders, a complete list of stockholders entitled to vote at such meeting,
arranged in alphabetical order and showing the address of each stockholder and
the number of shares registered in the name of each stockholder. Such list shall
be open, either at the Corporation's headquarters or, if so specified, at the
place where the meeting is to be held, for the ten days next preceding the
meeting, to the examination of any stockholder, for any purpose germane to the
meeting, during ordinary business hours, and shall be produced and kept at the
time and place of the meeting during the whole time thereof and subject to the
inspection of any stockholder who may be present.
SECTION 9. Voting. Except as otherwise provided in the Certificate of
Incorporation, by law or, in the case of Preferred Stock, by the Board of
Directors, each stockholder shall be entitled to one vote for each share of the
capital stock of the Corporation registered in the name of such stockholder upon
the books of the Corporation. Each stockholder entitled to vote at a meeting of
stockholders or to express consent or dissent to corporate action in writing
without a meeting may authorize another person or persons to act for him by
proxy, but no such proxy shall be voted or acted upon after three years from its
date, unless the proxy provides for a longer period. When directed by the
presiding officer or upon the demand of any stockholder, the vote upon any
matter before a meeting of stockholders shall be by ballot. Except as otherwise
provided by law or by the Certificate of Incorporation, Directors shall be
elected by a plurality of the votes cast at a meeting of stockholders by the
stockholders entitled to vote in the election and other action shall be
authorized by a majority of the votes cast at a meeting of stockholders by the
stockholders entitled to vote thereon.
Shares of the capital stock of the Corporation belonging to the
Corporation or to another corporation, if a majority of the shares entitled to
vote in the election of directors of such other corporation is held, directly or
indirectly, by the Corporation, shall neither be entitled to vote nor be counted
for quorum purposes.
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SECTION 10. Action Without Meeting. Unless otherwise provided by the
Certificate of Incorporation, any action required to be taken at any annual or
special meeting of stockholders, or any action which may be taken at any annual
or special meeting, may be taken without a meeting, without prior notice and
without a vote, if a consent in writing, setting forth the action so taken,
shall be signed by the holders of outstanding stock having not less than a
majority of the voting power entitled to vote thereon. Prompt notice of the
taking of the corporate action without a meeting by less than unanimous written
consent shall be given to those stockholders who have not consented in writing.
SECTION 11. Inspectors. When required by law or directed by the
presiding officer, but not otherwise, the polls shall be opened and closed, the
proxies and ballots shall be received and taken in charge, and all questions
touching the qualification of voters, the validity of proxies and the acceptance
or rejection of votes shall be decided at any meeting of the stockholders by two
or more inspectors who may be appointed by the Board of Directors before the
meeting, or if not so appointed, shall be appointed by the presiding officer at
the meeting. If any person so appointed fails to appear or act, the vacancy may
be filled by appointment in like manner.
SECTION 12. Voting List. At least ten (10) days before each meeting of
stockholders, the Secretary or other officer of the Corporation who has charge
of the Corporation's stock ledger, either directly or through another officer
appointed by him or through a transfer agent appointed by the Board of
Directors, shall prepare a complete list of stockholders entitled to vote there
at, arranged in alphabetical order and showing the address of each stock holder
and number of shares of capital stock registered in the name of each
stockholder. For a period of ten (10) days prior to such meeting, such list
shall be kept on file at a place within the city where the meeting is to beheld,
which place shall be specified in the notice of meeting or a duly executed
waiver of notice of such meeting or, if not so specified, at the place where the
meeting is to be held and shall be open to examination by any stockholder, for
any purpose germane to the meeting, during ordinary business hours. Such list
shall be produced at such meeting and kept at the meeting at all times during
such meeting and may be inspected by any stockholder who is present.
ARTICLE III
BOARD OF DIRECTORS
SECTION 1. Number and Term of Office. The business and affairs of the
Corporation shall be managed by or under the direction of a Board of Directors,
none of whom need be stockholders of the Corporation. The number of Directors
constituting the Board of Directors and the expiration of their initial terms
shall be fixed from time to time by resolution passed by a majority of the Board
of Directors. The Directors shall, except as hereinafter otherwise provided for
filling vacancies, be elected at the annual meeting of stockholders, and shall
hold office until their respective successors are elected and qualified or until
their earlier resignation or removal.
SECTION 2. Removal, Vacancies and Additional Directors. Any Director
may resign at any time upon written notice to the Corporation. Removal of a
Director shall require the affirmative vote of the holders of at least
two-thirds of the voting power entitled to vote at an election of such Director
or Directors. Vacancies caused by any such removal and not filled by the
stockholders at
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the meeting at which such removal shall have been made, or any vacancy caused by
the death or resignation of any Director or for any other reason, and any newly
created directorship resulting from any increase in the authorized number of
Directors, may be filled by the affirmative vote of a majority of the Directors
then in office, although less than a quorum, and any Director so elected to fill
any such vacancy or newly created directorship shall hold office until his
successor is elected and qualified or until his earlier resignation or removal.
When one or more Directors shall resign effective at a future date, a majority
of the Directors then in office, including those who have so resigned, shall
have power to fill such vacancy or vacancies, the vote thereon to take effect
when such resignation or resignations shall become effective, and each Director
so chosen shall hold office as herein provided in connection with the filling of
other vacancies.
SECTION 3. Place of Meeting. The Board of Directors may hold its
meetings in such place or places in the State of Delaware or outside the State
of Delaware as the Board from time to time shall determine.
SECTION 4. Regular Meetings. Regular meetings of the Board of Directors
shall be held at such times and places as the Board from time to time by
resolution shall determine. No notice shall be required for any regular meeting
of the Board of Directors; but a copy of every resolution fixing or changing the
time or place of regular meetings shall be mailed to every Director at least
five days before the first meeting held in pursuance thereof.
SECTION 5. Special Meetings. Special meetings of the Board of Directors
shall be held whenever called by direction of the Chief Executive Officer, the
President, the Chairman of the Board or by any two of the Directors then in
office. Notice of the day, hour and place of holding of each special meeting
shall be given by sending the same by mail or overnight courier service at least
two days before the meeting or by causing the same to be transmitted by
telegraph, cable or wireless at least twenty-four hours before the meeting to
each Director. Unless otherwise indicated in the notice thereof, any and all
business other than an amendment of these Bylaws may be transacted at any
special meeting, and an amendment of these Bylaws may be acted upon if the
notice of the meeting shall have stated that the amendment of these Bylaws is
one of the purposes of the meeting. At any meeting at which every Director shall
be present, even though without any notice, any business may be transacted,
including the amendment of these Bylaws.
SECTION 6. Quorum. Subject to the provisions of Section 2 of this
Article III, a majority of the members of the Board of Directors in office (but
in no case less than two Directors) shall constitute a quorum for the
transaction of business and the vote of the majority of the Directors present at
any meeting of the Board of Directors at which a quorum is present shall be the
act of the Board of Directors. If at any meeting of the Board there is less than
a quorum present, a majority of those present may adjourn the meeting from time
to time.
SECTION 7. Organization. The Chairman of the Board shall preside at all
meetings of the Board of Directors. In the absence of the Chairman, an acting
Chairman shall be elected from the Directors present to preside at each meeting.
The Secretary of the Corporation shall act as Secretary of all meetings of the
Directors; but in the absence of the Secretary, the Chairman may appoint any
person to act as Secretary of the meeting.
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SECTION 8. Committees. The Board of Directors may, by resolution passed
by a majority of the whole Board, designate one or more committees, each
committee to consist of one or more of the Directors of the Corporation. The
Board may designate one or more Directors as alternate members of any committee,
who may replace any absent or disqualified member at any meeting of the
committee. In the absence or disqualification of a member of a committee, the
member or members thereof present at any meeting and not disqualified from
voting, whether or not he or they constitute a quorum, may unanimously appoint
another member of the Board of Directors to act at the meeting in the place of
any such absent or disqualified member. Any such committee, to the extent
provided by resolution passed by a majority of the whole Board, shall have and
may exercise all the powers and authority of the Board of Directors in the
management of the business and the affairs of the Corporation, and may authorize
the seal of the Corporation to be affixed to all papers which may require it;
but no such committee shall have the power or authority in reference to amending
the Certificate of Incorporation, adopting an agreement of merger or
consolidation, recommending to the stockholders the sale, lease or exchange of
all or substantially all of the Corporation's property and assets, recommending
to the stockholders a dissolution of the Corporation or a revocation of a
dissolution, or amending these Bylaws; and unless such resolution, these
By-laws, or the Certificate of Incorporation expressly so provide, no such
committee shall have the power or authority to declare a dividend or to
authorize the issuance of stock.
SECTION 9. Conference Telephone Meetings. Unless otherwise restricted
by the Certificate of Incorporation or by these Bylaws, the members of the Board
of Directors or any committee designated by the Board, may participate in a
meeting of the Board or such committee, as the case may be, by means of
conference telephone or similar communications equipment by means of which all
persons participating in the meeting can hear each other, and such participation
shall constitute presence in person at such meeting.
SECTION 10. Consent of Directors or Committee in Lieu of Meeting.
Unless otherwise restricted by the Certificate of Incorporation or by these
Bylaws, any action required or permitted to be-taken at any meeting of the Board
Directors, or of any committee thereof, may be taken without a meeting if all
members of the Board or committee, as the case may be, consent thereto in
writing and the writing or writings are filed with the minutes of proceedings of
the Board or committee, as the case may be.
SECTION 11. Presumption of Assent. A director of the Corporation who is
present at the meeting of the Board of Directors at which action on any
corporate matter is taken shall be presumed to have assented to the action,
unless his dissent is entered in the minutes of the meeting or unless he files
his written dissent to such action with the person acting as secretary of the
meeting before the adjournment thereof or forwards any dissent by certified or
registered mail to the Secretary of the Corporation immediately after the
adjournment of the meeting. Such right to dissent shall not apply to a director
who voted in favor of such action.
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ARTICLE IV
OFFICERS
SECTION 1. Officers. The officers of the Corporation may be a Chairman
of the Board, a Chief Executive Officer, a President, a Chief Financial Officer,
one or more Vice Presidents, a Secretary and a Treasurer, and such additional
officers, if any, as shall be elected by the Board of Directors pursuant to the
provisions of Section 8 of this Article IV.
All officers shall hold office at the pleasure of the Board of
Directors. Any officer may resign at any time upon written notice to the
Corporation. Officers may, but need not, be Directors. Any number of offices may
be held by the same person. The removal of an officer without cause shall be
without prejudice to his contract rights, if any. The election or appointment of
an officer shall not of itself create contract rights. Any vacancy caused by the
death of any officer, his resignation, his removal, or otherwise, may be filled
by the Board of Directors, and any officer so elected shall hold office at the
pleasure of the Board of Directors. In addition to the powers and duties of the
officers of the Corporation as set forth in these Bylaws, the officers shall
have such authority and shall perform such duties as from time to time may be
determined by the Board of Directors.
SECTION 2. Powers and Duties of the Chief Executive Officer. Subject to
the control of the Board of Directors, the Chief Executive Officer shall have
general charge and control of all of its business and affairs and shall have all
powers and shall perform all duties incident to the office of the Chief
Executive Officer. He shall preside at all meetings of the stockholders and at
all meetings of the Board of Directors and shall have such other powers and
perform such other duties as may from time to time be assigned to him by these
Bylaws or the Board of Directors.
SECTION 3. Powers and Duties of the President. Subject to the control
of the Board of Directors or the direction of the Chief Executive Officer, the
President shall have general charge and control of all its business and affairs
and shall have all powers and shall perform all duties incident to the office of
President. He shall have such other powers and perform such other duties as may
from time to time be assigned to him by these Bylaws, the Board of Directors or
the Chief Executive Officer.
SECTION 4. Power and Duties of the Chairman of the Board. If a Chairman
of the Board is elected by the directors, the Chairman shall preside at all
meetings of the directors. The Chairman shall have such other powers and duties
as the Board may prescribe from time to time.
SECTION 5. Powers and Duties of the Vice Presidents. Each Vice
President shall have all powers and shall perform all duties incident to the
office of Vice President and shall have such other powers and perform such other
duties as may from time to time be assigned to him by these Bylaws or by the
Board of Directors, the President or the Chief Executive Officer.
SECTION 6. Powers and Duties of the Secretary. The Secretary shall keep
the minutes of all meetings of the Board of Directors and the minutes of all
meetings of the stockholders in books provided for that purpose; he shall attend
to the giving or serving of all notices of the Corporation; he shall have
custody of the corporate seal of the Corporation and shall affix the same to
such documents and other papers as the Board of Directors, the President or the
Chief Executive Officer
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shall authorize and direct; he shall have charge of the stock certificate books,
transfer books and stock ledgers and such other books and papers as the Board of
Directors, the President or the Chief Executive Officer shall direct, all of
which shall at all reasonable times be open to the examination of any Director,
upon application, at the office of the Corporation during business hours; and he
shall have all powers and shall perform all duties incident to the office of
Secretary and shall also have such other powers and shall perform such other
duties as may from time to time be assigned to him by these Bylaws or by the
Board of Directors, the President or the Chief Executive Officer.
SECTION 7. Powers and Duties of the Chief Financial Officer. The Chief
Financial Officer shall have custody of, and when proper shall pay out, disburse
or otherwise dispose of, all funds and securities of the Corporation which may
have come into his hands; he may endorse on behalf of the Corporation for
collection checks, notes and other obligations and shall deposit the same to the
credit of the Corporation in such bank or banks or depositary or depositaries as
the Board of Directors may designate; he shall sign all receipts and vouchers
for payments made to the Corporation; he shall enter or cause to be entered
regularly in the books of the Corporation kept for the purpose full and accurate
accounts of all moneys received or paid or otherwise disposed of by him and
whenever required by the Board of Directors, the President or the Chief
Executive Officer shall render statements of such accounts; he shall, at all
reasonable times, exhibit his books and accounts to any Director of the
Corporation upon application at the office of the Corporation during business
hours; and he shall have all powers and shall perform all duties incident of the
office of Chief Financial Officer and shall also have such other powers and
shall perform such other duties as may from time to time be assigned to him by
these Bylaws or by the Board of Directors, the President or the Chief Executive
Officer.
SECTION 8. Additional Officers. The Board of Directors may from time to
time elect such other officers (who may but need not be Directors), including
Chief Operating Officers, a Treasurer, a Controller, Assistant Treasurers,
Assistant Secretaries and Assistant Controllers, as the Board may deem advisable
and such officers shall have such authority and shall perform such duties as may
from time to time be assigned to them by the Board of Directors, the President
or the Chief Executive Officer. The Board of Directors may from time to time by
resolution delegate to any Assistant Treasurer or Assistant Treasurers any of
the powers or duties herein assigned to the Treasurer; and may similarly
delegate to any Assistant Secretary or Assistant Secretaries any of the powers
or duties herein assigned to the Secretary. Each of the Board of Directors, the
President or Chief Executive Officer of the Company is hereby authorized to
appoint and remove from time to time such officers of the Company, who will hold
positions of vice president or assistant vice president and who will not be
corporate officers but shall be administrative officers of the Company, as the
Board of Directors, the President or the Chief Executive Officer of the Company
may deem advisable and such officers shall have such authority and shall perform
such duties as may from time to time be assigned to them by the Board of
Directors, the President or the Chief Executive Officer of the Company.
SECTION 9. Giving of Bond by Officers. All officers of the Corporation,
if required to do so by the Board of Directors, shall furnish bonds to the
Corporation for the faithful performance of their duties, in such penalties and
with such conditions and security as the Board shall require.
SECTION 10. Voting upon Stocks. Unless otherwise ordered by the Board
of Directors, the President or any Vice President shall have full power and
authority on behalf of the Corporation
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to attend and to act and to vote, or in the name of the Corporation to execute
proxies to vote, at any meeting of stockholders of any corporation in which the
Corporation may hold stock, and at any such meeting shall possess and may
exercise, in person or by proxy, any and all rights, powers and privileges
incident to the ownership of such stock. The Board of Directors may from time to
time, by resolution, confer like powers upon any other person or persons.
SECTION 11. Compensation of Officers. The officers of the Corporation
shall be entitled to receive such compensation for their services as shall from
time to time be determined by the Board of Directors.
ARTICLE V
INDEMNIFICATION
(a) The Corporation shall indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the Corporation) by
reason of the fact that the person is or was a director, officer, employee or
agent of the Corporation, or is or was serving at the request of the Corporation
as a director, officer, employee or agent of another Corporation, partnership,
joint venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by the person in connection with such action, suit, or proceeding if
the person acted in good faith and in a manner the person reasonably believed to
be in or not opposed to the best interests of the Corporation, and, with respect
to any criminal action or proceeding, had no reasonable cause to believe the
person's conduct was unlawful. The termination of any action, suit or proceeding
by judgment, order, settlement, conviction, or upon a plea of nolo contendere or
its equivalent, shall not, of itself, create a presumption that the person did
not act in good faith and in a manner which the person reasonably believed to be
in or not opposed to the best interests of the Corporation, and, with respect to
any criminal action or proceeding, had reasonable cause to believe that the
person's conduct was unlawful.
(b) The Corporation shall indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the Corporation to procure a
judgment in its favor by reason of the fact that the person is or was a
director, officer, employee or agent of the Corporation, or is or was serving at
the request of the Corporation as a director, officer, employee or agent of
another Corporation, partnership, joint venture, trust or other enterprise
against expenses (including attorneys' fees), actually and reasonably incurred
by the person in connection with the defense or settlement of such action or
suit if the person acted in good faith and in a manner the person reasonably
believed to be in or not opposed to the best interests of the Corporation and
except that no indemnification shall be made in respect of any claim, issue or
matter as to which such person shall have been adjudged to be liable to the
Corporation unless and only to the extent that the Court of Chancery or the
court in which such action or suit was brought shall determine upon application
that, despite the adjudication of liability but in view of all the circumstances
of the case, such person is fairly and reasonably entitled to indemnity for such
expenses which the Court of Chancery or such other court shall deem proper.
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<PAGE> 12
(c) To the extent that a present or former director or officer
of the Corporation has been successful on the merits or otherwise in defense of
any action, suit or proceeding referred to in subsections (a) and (b) of this
Article V, or in defense of any claim, issue or matter therein, such person
shall be indemnified against expenses (including attorneys' fees) actually and
reasonably incurred by such person in connection therewith.
(d) Any indemnification under subsections (a) and (b) of this
Article V (unless ordered by a court) shall be made by the Corporation only as
authorized in the specific case upon a determination that indemnification of the
present or former director, officer, employee or agent is proper in the
circumstances because the person has met the applicable standard of conduct set
forth in subsections (a) and (b) of this Article V. Such determination shall be
made, with respect to a person who is a director or officer at the time of such
determination, (1) by a majority vote of the directors who are not parties to
such action, suit or proceeding, even though less than a quorum, or (2) by a
committee of such directors designated by majority vote of such directors, even
though less than a quorum, or (3) if there are no such directors, or if such
directors so direct, by independent legal counsel in a written opinion, or (4)
by the stockholders.
(e) Expenses (including attorneys' fees) incurred by an
officer or director in defending any civil, criminal, administrative or
investigative action, suit or proceeding shall be paid by the Corporation in
advance of the final disposition of such action, suit or proceeding upon receipt
of an undertaking by or on behalf of such director of officer to repay such
amount if it shall ultimately be determined that such person is not entitled to
be indemnified by the Corporation as authorized in this Article V. Such expenses
(including attorneys' fees) incurred by former directors and officers or other
employees and agents may be so paid upon such terms and conditions, if any, as
the Corporation deems appropriate.
(f) The indemnification and advancement of expenses provided
by, or granted pursuant to, the other subsections of this Article V shall not be
deemed exclusive of any other rights to which those seeking indemnification or
advancement of expenses may be entitled under any bylaw, agreement, vote of
stockholders or disinterested directors or otherwise, both as to action in such
person's official capacity and as to action in another capacity while holding
such office.
(g) A Corporation shall have the power to purchase and
maintain insurance on behalf of any person who is or was a director, officer,
employee or agent of the Corporation, or is or was serving at the request of the
Corporation as a director, officer, employee or agent of another Corporation,
limited liability company, partnership, joint venture, trust or other enterprise
against any liability asserted against such person and incurred by such person
in any such capacity, or arising out of such person's status as such, whether or
not the Corporation would have the power to indemnify such person against such
liability under this Article V.
(h) For purposes of this Article V, references to "the
Corporation" shall include, in addition to the resulting corporation, any
constituent corporation (including any constituent of a constituent) absorbed in
a consolidation or merger which, if its separate existence had continued, would
have had power and authority to indemnify its directors, officers, and employees
or agents, so that any person who is or was a director, officer, employee or
agent
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<PAGE> 13
of of such constituent corporation, or is or was serving at the request of such
constituent corporation as a director, officer, employee or agent another
corporation, limited liability company, partnership, joint venture, trust or
other enterprise, shall stand in the same position under this Article V with
respect to the resulting or surviving corporation as such person would have with
respect to such constituent corporation if its separate existence had continued.
(i) For purposes of this Article V, references to "other
enterprises" shall include employee benefit plans; references to "fines" shall
include any excise taxes assessed on a person with respect to any employee
benefit plan; and references to "serving at the request of the Corporation"
shall include any service as a director, officer, employee or agent of the
Corporation which imposes duties on, or involves services by, such director,
officer, employee, or agent with respect to an employee benefit plan, its
participants or beneficiaries; and a person who acted in good faith and in a
manner such person reasonably believed to be in the interest of the participants
and beneficiaries of an employee benefit plan shall be deemed to have acted in a
manner "not opposed to the best interests of the Corporation" as referred to in
this Article V.
(j) The indemnification and advancement of expenses provided
by, or granted pursuant to, this Article V shall, unless otherwise provided when
authorized or ratified, continue as to a person who has ceased to be a director,
officer, employee or agent and shall inure to the benefit of the heirs,
executors and administrators of such a person.
(k) In the event of payment of indemnification to a person
described in this Article V, the Corporation shall be subrogated to the extent
of such payment to any right of recovery such person may have and such person,
as a condition of receiving indemnification from the Corporation, shall execute
all documents and do all things that the Corporation may deem necessary or
desirable to perfect such right of recovery, including the execution of such
documents necessary to enable the Corporation effectively to enforce any such
recovery.
(l) The Corporation shall not be liable under this Article V
to make any payment in connection with any claim made against a person described
in this Article V to the extent such person has otherwise received payment
(under any insurance policy, by-law or otherwise) of the amounts otherwise
indemnifiable hereunder.
(m) The foregoing indemnification provisions shall be deemed
to be a contract between the Corporation and each indemnified party. Such
contract right may not be modified retroactively in any material respect as to
the indemnified party without the consent of the indemnified party. The
Corporation and an indemnified party may enter into an agreement providing for
indemnification and advancement of expenses including attorneys fees, that may
change, enhance, qualify or limit any right to indemnification or advancement of
expenses created by this Article V.
ARTICLE VI
STOCK-SEAL-FISCAL YEAR
SECTION 1. Certificates For Shares of Stock. The certificates for
shares of stock of the Corporation shall be in such form, not inconsistent with
the Certificate of Incorporation, as shall be approved by the Board of
Directors. All certificates shall be signed by the President or a Vice
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<PAGE> 14
President and by the Secretary or an Assistant Secretary or the Treasurer or an
Assistant Treasurer, and shall not be valid unless so signed.
In case any officer or officers who shall have signed any such
certificate or certificates shall cease to be such officer or officers of the
Corporation, whether because of death, resignation or otherwise, before such
certificate or certificates shall have been delivered by the Corporation, such
certificate or certificates may nevertheless be issued and delivered as though
the person or persons who signed such certificate or certificates had not ceased
to be such officer or officers of the Corporation.
All certificates for shares of stock shall be consecutively numbered as
the same are issued. The name of the person owning the shares represented
thereby with the number of such shares and the date of issue thereof shall be
entered on the books of the Corporation.
Except as hereinafter provided, all certificates surrendered to the
Corporation for transfer shall be cancelled, and no new certificates shall be
issued until former certificates for the same number of shares have been
surrendered and cancelled.
SECTION 2. Lost, Stolen or Destroyed Certificates. Whenever a person
owning a certificate for shares of stock of the Corporation alleges that it has
been lost, stolen or destroyed, he shall file in the office of the Corporation
an affidavit setting forth, to the best of his knowledge and belief, the time,
place and circumstances of the loss, theft or destruction, and, if required by
the Board of Directors, a bond of indemnity or other indemnification sufficient
in the opinion of the Board of Directors to indemnify the Corporation and its
agents against any claim that may be made against it or them on account of the
alleged loss, theft or destruction of any such certificate or the issuance of a
new certificate in replacement therefor. Thereupon the Corporation may cause to
he issued to such person a new certificate in replacement for the certificate
alleged to have been lost, stolen or destroyed. Upon the stub of every new
certificate so issued shall be noted the fact of such issue and the number, date
and the name of the registered owner of the lost, stolen or destroyed
certificate in lieu of which the new certificate is issued.
SECTION 3. Transfer of Shares. Shares of stock of the Corporation shall
be transferred on the books of the Corporation by the holder thereof, in person
or by his attorney duly authorized in writing, upon surrender and cancellation
of certificates for the number of shares of stock to be transferred, except as
provided in Section 2 of this Article VI.
SECTION 4. Regulations. The Board of Directors shall have power and
authority to make such rules and regulations as it may deem expedient concerning
the issue, transfer and registration of certificates for shares of stock of the
Corporation.
SECTION 5. Record Date. In order that the Corporation may determine the
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof, or to express consent to corporate action in writing
without a meeting or to receive payment of any dividend or other distribution or
allotment of any rights, or to exercise any rights in respect of any change,
conversion or exchange of stock or for the purpose of any other lawful action,
as the case may be, the Board of Directors may fix, in advance, a record date,
which shall not be (i) more than sixty (60) nor less than ten (10) days before
the date of such meeting, or (ii) in the case of corporate
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<PAGE> 15
action to be taken by consent in writing without a meeting, prior to, or more
than ten (10) days after, the date upon which the resolution fixing the record
date is adopted by the Board of Directors, or (iii) more than sixty (60) days
prior to any other action.
If no record date is fixed, the record date for determining
stockholders entitled to notice of or to vote at a meeting of stockholders shall
be at the close of business on the day next preceding the day on which notice is
given or, if notice is waived, at the close of business on the day next
preceding the day on which the meeting is held; the record date for determining
stockholders entitled to express consent to corporate action in writing without
a meeting, when no prior action by the Board of Directors is necessary, shall be
the day on which the first written consent is delivered to the Corporation; and
the record date for determining stockholders for any other purpose shall be at
the close of business on the day on which the Board of Directors adopts the
resolution relating thereto. A determination of stockholders of record entitled
to notice of or to vote at a meeting of stockholders shall apply to any
adjournment of the meeting; provided, however, that the Board of Directors may
fix a new record date for the adjourned meeting.
SECTION 6. Dividends. Subject to the provisions of the Certificate of
Incorporation, the Board of Directors shall have power to declare and pay
dividends upon shares of stock of the Corporation, but only out of funds
available for the payment of dividends as provided by law. Subject to the
provisions of the Certificate of Incorporation, any dividends declared upon the
stock of the Corporation shall be payable on such date or dates as the Board of
Directors shall determine. If the date fixed for the payment of any dividend
shall in any year fall upon a legal holiday, then the dividend payable on such
date shall be paid on the next day not a legal holiday.
SECTION 7. Corporate Seal. The Board of Directors shall provide a
suitable seal, containing the name of the Corporation, which seal shall be kept
in the custody of the Secretary. A duplicate of the seal may be kept and be used
by any officer of the Corporation designated by the Board of Directors or the
President.
SECTION 8. Fiscal Year. The fiscal year of the Corporation shall be
such fiscal year as the Board of Directors from time to time by resolution shall
determine; provided that if such fiscal year is not fixed by the Board of
Directors, the Fiscal year shall be the calendar year.
ARTICLE VII
MISCELLANEOUS PROVISIONS
SECTION 1. Checks, Notes, Etc. All checks, drafts, bills of exchange,
acceptances, notes or other obligations or orders for the payment of money shall
be signed and, if so required by the Board of Directors, counter-signed by such
officers of the Corporation and/or other persons as the Board of Directors from
time to time shall designate. Checks, drafts, bills of exchange, acceptances,
notes, obligations and orders for the payment of money made payable to the
Corporation may be endorsed for deposit to the credit of the Corporation with a
duly authorized depository by the Chief Financial Officer and/or such other
officers or persons as the Board of Directors from time to time may designate.
SECTION 2. Method of Notice. Whenever by statute, the Certificate of
Incorporation, or these Bylaws, notice is required to be given to any committee
member, director, or
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<PAGE> 16
stockholder and no provision is made as to how such notice shall be given,
personal notice shall not be required and any such notice may be given (a) in
writing, by mail, postage prepaid, addressed to such committee member, director,
or stockholder at his address as it appears on the books or (in the case of a
stockholder) the stock transfer records of the Corporation, or (b) by any other
method permitted by law (including but not limited to overnight courier service,
telegram, telex, or telefax). Any notice required or permitted to be given by
mail shall be deemed to be delivered and given at the time when the same is
deposited in the United States mail as aforesaid. Any notice required or
permitted to be given by overnight courier service shall be deemed to be
delivered and given at the time delivered to such service with all charges
prepaid and addressed as aforesaid. Any notice required or permitted to be given
by telegram, telex, or telefax shall be deemed to be delivered and given at the
time transmitted with all charges prepaid and addressed as aforesaid.
SECTION 3. Waivers of Notice. Whenever any notice whatever is required
to be given by law, by the Certificate of Incorporation or by these Bylaws to
any person or persons a waiver thereof in writing, signed by the person or
persons entitled to the notice, whether before or after the time stated therein,
shall be deemed equivalent thereto.
SECTION 4. Offices Outside of Delaware. Except as otherwise required by
the laws of the State of Delaware, the Corporation may have an office or offices
and keep its books, documents and papers outside of the State of Delaware at
such place or places as from time to time may be determined by the Board of
Directors, the Chief Executive Officer or the President.
ARTICLE VIII
AMENDMENTS
These Bylaws may be altered, amended or repealed, except as specified
in the Certificate of Incorporation.
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<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF HORIZON PCS, INC
<TABLE>
<CAPTION>
SUBSIDIARY JURISDICTION
- ---------- ------------
<S> <C>
Horizon Personal Communications, Inc Ohio
Bright PCS, LLC Ohio
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
and references to our Firm included in Horizon PCS, Inc.'s registration
statement on Form S-1.
/s/ Arthur Andersen LLP
May 19, 2000
Columbus, Ohio
