UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended:
September 30, 2003
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ____ to ____
Commission File Number: 0-32617
Horizon Telcom, Inc.
(Exact name of registrant as specified in its charter)
Ohio 31-1449037
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
68 East Main Street, Chillicothe, OH 45601-0480
(Address of principal executive offices) (Zip Code)
(740) 772-8200
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicated by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of November 13, 2003, there were 90,561 shares of class A common stock and
271,926 shares of class B common stock outstanding.
HORIZON TELCOM, INC.
FORM 10-Q
THIRD QUARTER REPORT
TABLE OF CONTENTS
Page No.
--------
PART I FINANCIAL INFORMATION
Item 1. Financial Statements...............................................3
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.........................................20
Item 3. Quantitative and Qualitative Disclosures About Market Risk........31
Item 4. Controls and Procedures...........................................31
PART II OTHER INFORMATION
Item 1. Legal Proceedings.................................................33
Item 2. Changes in Securities and Use of Proceeds.........................33
Item 3. Defaults Upon Senior Securities...................................33
Item 4. Submission of Matters to a Vote of Security Holders...............33
Item 5. Other Information.................................................33
Item 6. Exhibits and Reports on Form 8-K..................................37
As used herein and except as the context may otherwise require, "the
Company," "we," "us," "our" or "Horizon Telcom" means, collectively, Horizon
Telcom, Inc., and its subsidiaries: The Chillicothe Telephone Company
("Chillicothe Telephone"), Horizon Technology, Inc. ("Horizon Technology"), and
Horizon Services, Inc. ("Horizon Services"). References to "Horizon PCS" refer
to Horizon PCS, Inc., and its subsidiaries: Horizon Personal Communications,
Inc. ("HPC"), and Bright Personal Communications Services, LLC ("Bright PCS").
On August 15, 2003, Horizon PCS, Inc. filed for bankruptcy protection
under Chapter 11 of the United States Bankruptcy Code. Therefore, the results
herein include the operations of Horizon PCS through August 14, 2003. The
Company will no longer include the results of Horizon PCS in its consolidated
results. See Note 2 to the Consolidated Financial Statements.
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
HORIZON TELCOM, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
As of September 30, 2003 and December 31, 2002
- --------------------------------------------------------------------------------
September 30, December 31,
2003 2002
------------- ------------
ASSETS (unaudited)
CURRENT ASSETS:
Cash and cash equivalents ($55,000,000 on
deposit at December 31, 2002, in
accordance with covenant amendment in 2002).. $ 12,989,775 $ 94,948,351
Restricted cash ............................... -- 24,063,259
Accounts receivable - subscriber, less
allowance for doubtful accounts of
approximately $363,000 and $2,654,000
at September 30, 2003 and
December 31, 2002, respectively ............. 1,000,318 20,560,658
Accounts receivable - interexchange carriers,
access charge pools and other,
less allowance for doubtful accounts
of approximately $170,000 as of
September 30, 2003 and $71,000 as
of December 31, 2002 ........................ 4,666,440 5,045,930
Inventories ................................... 2,130,678 6,336,877
Investments, available-for-sale,
at fair value ............................... 1,251,780 745,860
Prepaid expenses and other current assets ..... 2,041,986 5,926,816
------------ ------------
Total current assets .................... 24,080,977 157,627,751
------------ ------------
OTHER ASSETS:
Intangible assets - Sprint PCS licenses,
net of amortization ......................... -- 40,381,201
Debt issuance costs, net ...................... 345,146 20,365,415
Deferred PCS activation expense ............... -- 6,092,645
Prepaid pension costs and other ............... 4,202,931 5,361,994
------------ ------------
Total other assets ...................... 4,548,077 72,201,255
------------ ------------
PROPERTY, PLANT AND EQUIPMENT, NET ............... 75,809,174 315,921,107
------------ ------------
Total assets ....................... $104,438,228 $545,750,113
============ ============
(Continued on next page)
The accompanying notes are an integral part of these
consolidated financial statements.
3
HORIZON TELCOM, INC. AND SUBSIDIARIES
Consolidated Balance Sheets (Continued)
As of September 30, 2003 and December 31, 2002
- --------------------------------------------------------------------------------
September 30, December 31,
2003 2002
------------- --------------
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable ........................... $ 1,536,627 $ 24,827,065
Payable to Sprint .......................... -- 9,910,262
Deferred PCS revenue ....................... -- 5,308,457
Accrued personal property, real estate
and other taxes .......................... 1,817,136 6,514,707
Accrued interest, payroll and other
accrued liabilities ...................... 3,596,809 10,237,300
Lines of credit ............................ 1,000,000 --
------------- -------------
Total current liabilities ............ 7,950,572 56,797,791
------------- -------------
LONG-TERM DEBT AND OTHER LIABILITIES:
Long-term debt ............................. 42,000,000 558,284,349
Deferred income taxes, net ................. 9,905,703 15,234,409
Postretirement benefit obligation .......... 7,462,844 6,526,991
Deferred PCS activation revenue ............ -- 6,092,645
Investment in Horizon PCS .................. 483,488,553 --
Other long-term liabilities ................ 2,469,682 11,075,183
------------- -------------
Total long-term debt and
other liabilities .................. 545,326,782 597,213,577
------------- -------------
Total liabilities .................. 553,277,354 654,011,368
------------- -------------
CONVERTIBLE PREFERRED STOCK OF SUBSIDIARY ..... -- 157,105,236
COMMITMENTS AND CONTINGENCIES (Note 11)
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock - class A, no par value,
200,000 shares authorized, 99,726
shares issued and 90,561 shares
outstanding, stated at $4.25 per share ... 423,836 423,836
Common stock - class B, no par value,
500,000 shares authorized, 299,450
shares issued and 271,926 shares
outstanding, stated at $4.25 per share ... 1,272,662 1,272,662
Treasury stock - 36,689 shares, at cost .... (5,504,700) (5,504,700)
Accumulated other comprehensive income
(loss), net .............................. 661,175 (67,307)
Additional paid-in capital ................. 61,358,833 72,197,212
Deferred stock compensation ................ -- (666,721)
Retained deficit ........................... (507,050,932) (333,021,473)
------------- -------------
Total stockholders' equity (deficit) (448,839,126) (265,366,491)
------------- -------------
Total liabilities and
stockholders' equity
(deficit) ..................... $ 104,438,228 $ 545,750,113
============= =============
The accompanying notes are in integral part of these
consolidated financial statements.
4
HORIZON TELCOM, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the Three and Nine Months Ended September 30, 2003 and 2002 (unaudited)
- --------------------------------------------------------------------------------
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
------------------------------- -------------------------------
2003 2002 2003 2002
------------- ------------- ------------- -------------
OPERATING REVENUES:
PCS subscriber and roaming ............................ $ 33,106,473 $ 54,212,134 $ 151,897,229 $ 150,069,815
PCS equipment ......................................... 518,841 1,787,076 4,408,297 5,760,004
Basic local and long-distance service ................. 4,567,747 4,737,885 13,652,690 14,089,158
Network access ........................................ 5,069,514 5,217,569 16,838,886 16,548,336
Equipment systems sales, information services,
Internet access and other ......................... 3,005,148 2,235,065 7,512,567 6,402,148
------------- ------------- ------------- -------------
Total operating revenues ........................ 46,267,723 68,189,729 194,309,669 192,869,461
------------- ------------- ------------- -------------
OPERATING EXPENSES:
Cost of goods sold .................................... 1,301,568 4,138,059 12,387,126 13,066,769
Cost of services (exclusive of items shown
separately below) ................................. 30,152,888 47,921,985 129,102,054 132,751,926
Selling and marketing ................................. 4,246,367 13,475,910 29,883,137 39,894,584
General and administrative (exclusive of items
shown separately below) ........................... 10,598,052 14,878,317 38,938,212 41,578,153
Non-cash compensation ................................. 81,256 120,031 274,474 309,667
(Gain) Loss on sale of property and equipment ......... -- (2,655) 216,312 638,349
Impairment of intangible assets and property
and equipment ..................................... -- -- 73,760,278 3,500,000
Depreciation and amortization ......................... 6,387,324 11,583,788 32,213,728 33,434,783
PCS restructuring charges ............................. 4,509,128 -- 4,509,128 --
------------- ------------- ------------- -------------
Total operating expenses ........................ 57,276,583 92,115,435 321,284,449 265,174,231
------------- ------------- ------------- -------------
OPERATING LOSS ............................................. (11,008,860) (23,925,706) (126,974,780) (72,304,770)
------------- ------------- ------------- -------------
NONOPERATING INCOME (EXPENSE):
Interest expense, net ................................. (8,973,846) (17,023,096) (43,667,308) (46,151,846)
Subsidiary preferred stock dividends .................. (1,594,948) (3,005,897) (7,815,505) (8,718,663)
Interest income and other, net ........................ 76,064 726,243 641,996 2,412,935
------------- ------------- ------------- -------------
Total nonoperating expense ...................... (10,492,730) (19,302,750) (50,840,817) (52,457,574)
------------- ------------- ------------- -------------
LOSS BEFORE INCOME TAX BENEFIT (EXPENSE) AND
MINORITY INTEREST ....................................... (21,501,590) (43,228,456) (177,815,597) (124,762,344)
INCOME TAX BENEFIT (EXPENSE) ............................... (18,861) 64,722 5,199,801 (1,115,349)
MINORITY INTEREST IN LOSS .................................. -- -- 24 --
------------- ------------- ------------- -------------
NET LOSS ................................................... $ (21,520,451) $ (43,163,734) $(172,615,772) $(125,877,693)
============= ============= ============= =============
Basic and diluted net loss per share ....................... $ (59.37) $ (119.08) $ (476.20) $ (347.33)
============= ============= ============= =============
Weighted-average common shares outstanding ................. 362,487 362,478 362,487 362,413
============= ============= ============= =============
The accompanying notes are in integral part of these
consolidated financial statements.
5
HORIZON TELCOM, INC. AND SUBSIDIARIES
Consolidated Statements of Other Comprehensive Income (Loss)
For the Three and Nine Months Ended September 30, 2003 and 2002 (unaudited)
- --------------------------------------------------------------------------------
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
------------------------------ ------------------------------
2003 2002 2003 2002
------------- ------------- ------------- -------------
NET LOSS ....................................................... $ (21,520,451) $ (43,163,734) $(172,615,772) $(125,877,693)
============= ============= ============= =============
OTHER COMPREHENSIVE INCOME (LOSS)
Net unrealized gain (loss) on hedging activities ............... -- 20,686 461,644 140,728
Net unrealized gain (loss) on securities available-for-sale
net of taxes of $10,434 and $172,013 for the three
and nine months ended September 30, 2003, respectively .... (20,254) (131,353) 333,907 (2,024,926)
------------- ------------- ------------- -------------
COMPREHENSIVE INCOME (LOSS) .................................... $ (21,540,705) $ (43,274,401) $(171,820,221) $(127,761,891)
============= ============= ============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
6
HORIZON TELCOM, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2003 and 2002 (unaudited)
- --------------------------------------------------------------------------------
Nine Months Ended September 30,
-------------------------------
2003 2002
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ...................................... $(172,615,772) $(125,877,693)
------------- -------------
Adjustments to reconcile net loss to net
cash provided by (used in)
operating activities:
Depreciation and amortization .............. 32,213,728 33,434,783
Impairment of intangible assets and
property and equipment ................... 73,760,278 3,500,000
Non-cash restructuring charges ............. 2,884,062 --
Deferred income tax benefit ................ (6,031,000) --
Non-cash compensation expense .............. 274,474 309,667
Non-cash interest expense .................. 20,381,687 20,252,352
Loss on disposal of property, plant
and equipment ............................ 216,312 638,349
Non-cash preferred stock dividend
of subsidiary ............................ 7,815,505 8,718,663
Minority interest in subsidiary ............ (24) --
Provision for bad debt expense ............. 5,197,879 12,189,333
Loss on hedging activities ................. -- 83,689
Decrease (Increase) in certain assets:
Accounts receivable ...................... (6,461,289) (18,301,998)
Inventories .............................. 2,291,411 1,447,779
Prepaid expenses and other current assets (407,551) (567,126)
Increase (Decrease) in certain liabilities:
Accounts payable ......................... (3,371,225) (8,781,795)
Payable to Sprint ........................ 7,290,020 4,621,053
Accrued liabilities and deferred
PCS service revenue .................... 15,150,260 16,729,817
Postretirement benefit obligation ........ 946,287 555,897
Other assets and liabilities, net ........ 1,046,141 (207,333)
------------- -------------
Total adjustments ...................... 153,196,955 74,623,130
------------- -------------
Net cash used in operating activities (19,418,817) (51,254,563)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net .................. (11,640,475) (66,084,898)
Proceeds from sale of property and equipment -- 1,563,970
Deconsolidation of Horizon PCS ............. (50,485,621) --
------------- -------------
Net cash used in investing activities (62,126,096) (64,520,928)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on line of credit ............... 1,000,000 --
Borrowings on long-term debt ............... -- 135,000,000
Repayments on long-term debt ............... -- (25,167,337)
Deferred financing fees .................... -- (2,841,511)
Exercise of subsidiary stock options ....... 24 --
Dividends paid ............................. (1,413,687) (1,359,106)
------------- -------------
Net cash provided by (used in)
financing activities ............... (413,663) 105,632,046
------------- -------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS
(81,958,576) (10,143,445)
CASH AND CASH EQUIVALENTS, beginning
of period ................................... 94,948,351 127,154,227
------------- -------------
CASH AND CASH EQUIVALENTS, end
of period ................................... $ 12,989,775 $ 117,010,782
============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
7
HORIZON TELCOM, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
As of September 30, 2003 and December 31, 2002
And for the Three and Nine Months Ended September 30, 2003 and 2002 (unaudited)
- --------------------------------------------------------------------------------
NOTE 1 - General
The results of operations for the periods shown are not necessarily
indicative of the results to be expected for the fiscal year (See Note 2,
Accounting Impact). In the opinion of management, the information contained
herein reflects all adjustments necessary to make a fair statement of the
periods presented. The financial information presented herein should be read in
conjunction with the Company's Form 10-K for the year ended December 31, 2002,
which includes information and disclosures not presented herein.
NOTE 2 - Bankruptcy of Horizon PCS and Liquidity
Voluntary Bankruptcy Filing
On August 15, 2003, Horizon PCS, Inc., a Delaware corporation and
majority-owned subsidiary of Horizon Telcom, HPC, an Ohio corporation and
wholly-owned subsidiary of Horizon PCS Inc., and Bright PCS, an Ohio limited
liability company and majority-owned subsidiary of Horizon PCS, Inc.
(collectively, the "Debtors"), filed voluntary petitions for relief under
Chapter 11 of Title 11 of the United States Code (the "Bankruptcy Code") in the
United States Bankruptcy Court for the Southern District of Ohio (the
"Bankruptcy Court"). The Debtors expect to continue to manage their properties
and operate their businesses in the ordinary course of business as
"debtors-in-possession" subject to the supervision and orders of the Bankruptcy
Court pursuant to Sections 1107(a) and 1108 of the Bankruptcy Code (the
"Bankruptcy Case"). In general, as debtors-in-possession, the Debtors are
authorized under Chapter 11 to continue to operate as an ongoing business, but
may not engage in transactions outside the ordinary course of business without
the prior approval of the Bankruptcy Court. Under Section 362 of the Bankruptcy
Code, the filing of a bankruptcy petition automatically stays most actions
against the Debtors, including most actions to collect pre-petition indebtedness
or to exercise control of the property of the Debtors' estate. Absent an order
of the Bankruptcy Court, substantially all pre-petition liabilities will be
subject to settlement under a plan of reorganization. Horizon Telcom, due to its
loan covenants, cannot provide capital or other financial support to the
Debtors. The Company believes Horizon Telcom operations will continue
independent of the outcome of the Bankruptcy Case. However, upon conclusion of
the Bankruptcy Case, the ownership interests of Horizon Telcom and the other
current stockholders in Horizon PCS may be reduced.
While the long-term effect of the Bankruptcy Case cannot be determined,
management believes the Bankruptcy Case will not have a material adverse effect
on the liquidity of Horizon Telcom.
Accounting Impact
In accordance with Statement of Financial Accounting Standards ("SFAS")
No. 94 "Consolidation of All Majority-Owned Subsidiaries" and Accounting
Research Bulletin ("ARB") No. 51 "Consolidated Financial Statements," when
control of a majority-owned subsidiary does not rest with the majority owners
(as, for instance, where the subsidiary is in legal reorganization or in
bankruptcy), ARB No. 51 precludes consolidation of the majority-owned
subsidiary. As a result, subsequent to August 14, 2003, Horizon Telcom no longer
consolidates the accounts and results of operations of Horizon PCS. Therefore,
Horizon Telcom's investment in Horizon PCS is the balance based on the
application of the equity method through August 14, 2003 and any cost based
activity subsequent to that date. Accordingly, the accompanying consolidated
balance sheet as of September 30, 2003 does not include the consolidated
accounts of Horizon PCS; it does however, include a negative investment of
approximately $483 million, related to the deconsolidation of Horizon PCS. In
addition, the accompanying consolidated statement of operations for the period
ended September 30, 2003 includes the consolidated results of operations of
Horizon PCS through August 14, 2003. Upon emergence of Horizon PCS from
bankruptcy, the negative investment will be reduced proportionately to the
remaining ownership percentage, if any, retained by Horizon Telcom.
8
HORIZON TELCOM, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
As of September 30, 2003 and December 31, 2002
And for the Three and Nine Months Ended September 30, 2003 and 2002 (unaudited)
- --------------------------------------------------------------------------------
NOTE 3 - Organization and Business Operations
The Company is a facilities-based telecommunications carrier that provides
a variety of voice and data services to commercial, residential/small business
and local market segments. The Company provides landline telephone service,
very-high digital subscriber line ("VDSL") television service and Internet
access services to the southern Ohio region, principally in and surrounding
Chillicothe, Ohio.
NOTE 4 - Summary of Significant Accounting Policies
Note 2 in the Notes to Consolidated Financial Statements in the Company's
Annual Report on Form 10-K for the year ended December 31, 2002, describes the
Company's significant accounting policies in greater detail than presented
herein.
Basis of Presentation
The accompanying consolidated financial statements reflect the operations
of Horizon Telcom, and its subsidiaries, Chillicothe Telephone, Horizon Services
and Horizon Technology, and have been prepared in accordance with the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles in the United States
have been condensed or omitted pursuant to such rules and regulations. All
material intercompany transactions and balances have been eliminated in
consolidation.
Inventories
Inventories consist of equipment held for resale, materials and supplies
and installation-related work in progress held by Chillicothe Telephone and
Horizon PCS. Chillicothe Telephone inventories include the cost (determined by
the first-in, first-out method) of equipment to be used in the installation of
telephone systems, as well as costs related to direct sales orders in process.
Horizon PCS' inventories consist of handsets and related accessories which are
carried at the lower of cost (determined by the weighted-average method) or
market (replacement cost).
Inventories consist of the following at September 30, 2003 and at December
31, 2002:
September 30, December 31,
2003 2002
---------- ----------
Equipment held for resale ................ $ 124,677 $ 121,501
Materials, supplies and work in progress . 2,006,001 2,132,581
PCS inventory ............................ -- 4,082,795
---------- ----------
Total inventories ................... $2,130,678 $6,336,877
========== ==========
Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ materially
from those estimates.
Accounting for Rate Regulation
Chillicothe Telephone is subject to rate regulation. SFAS No. 71
"Accounting for the Effects of Certain Types of Rate Regulation" provides that
rate-regulated public utilities account for revenues and expenses and report
assets and liabilities consistent with the economic effect of the way in which
regulators establish rates. Chillicothe
9
HORIZON TELCOM, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
As of September 30, 2003 and December 31, 2002
And for the Three and Nine Months Ended September 30, 2003 and 2002 (unaudited)
- --------------------------------------------------------------------------------
NOTE 4 - Summary of Significant Accounting Policies (Continued)
Telephone follows the accounting and reporting requirements of SFAS No. 71. As
of September 30, 2003, the Company has recorded regulatory liabilities of
approximately $1,003,000. As of December 31, 2002, regulatory assets and
liabilities were approximately $63,000 and $480,000, respectively.
Restricted Cash
In connection with Horizon PCS' December 2001 offering of $175,000,000 of
senior notes due in 2011 (Note 10), approximately $48,660,000 of the offering's
proceeds were placed in an escrow account to be used toward the first four
semi-annual interest payments due under the terms of the notes. Horizon PCS paid
approximately $24,596,000, during the year ended December 31, 2002 and
$12,031,000 during the period ended August 14, 2003.
Property, Plant and Equipment
Property, plant and equipment, including improvements that extend useful
lives, are stated at cost (Note 7), while maintenance and repairs are charged to
operations as incurred. Construction work in progress includes expenditures for
the purchase of capital equipment, construction and items such as direct payroll
and 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 $719,000
and $3,926,000 for the nine months ended September 30, 2003 and 2002,
respectively. In addition, the Company capitalized labor costs of approximately
$1,684,000 and $4,088,000 for the nine months ended September 30, 2003 and 2002,
respectively.
Derivative Financial Instruments
The Company's policies do not permit the use of derivative financial
instruments for speculative purposes. The Company uses interest rate swaps to
manage interest rate risk. The net amount paid or received on interest rate
swaps is recognized as an adjustment to interest income and other.
The Company has adopted SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," as amended by SFAS No. 138, "Accounting for Derivative
Instruments and Certain Hedging Activities." These statements require an entity
to recognize all derivative and hedging activities as an asset or liability
measured at fair value. Depending on the intended use of the derivative, changes
in its fair value will be reported in the period of change as either a component
of earnings or a component of other comprehensive income. The Company uses
interest rate swaps, designated as cash flow hedges, to manage interest rate
risk. Changes in the fair value of a derivative that is highly effective and
that is designated and qualifies as a cash-flow hedge are recorded in other
comprehensive income to the extent that the derivative is effective as a hedge,
until earnings are affected by the variability in cash flows of the designated
hedged item. The ineffective portion of the change in fair value of a derivative
instrument that qualifies as either a fair-value hedge or a cash-flow hedge is
reported in earnings. Changes in the fair value of derivative trading
instruments are reported in current period earnings. Outstanding temporary gains
and losses are netted together and shown as either a component of other assets
or accrued liabilities.
Revenue Recognition
The landline telephone services operating segment consists of basic local
and long-distance toll, network access services and other telephone service
revenue. All revenue is recognized monthly as service is provided.
10
HORIZON TELCOM, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
As of September 30, 2003 and December 31, 2002
And for the Three and Nine Months Ended September 30, 2003 and 2002 (unaudited)
- --------------------------------------------------------------------------------
NOTE 4 - Summary of Significant Accounting Policies (Continued)
Stock-Based Compensation
The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations including Financial
Accounting Standards Board ("FASB") Interpretation No. 44, "Accounting for
Certain Transactions involving Stock Compensation an interpretation of APB
Opinion No. 25", to account for its fixed plan stock options. Under this method,
compensation expense is recorded on the date of grant only if the current market
price of the underlying stock exceeds the exercise price. SFAS No. 148,
"Accounting for Stock-Based Compensation -Transition and Disclosure - an
amendment of FASB Statement No. 123" established accounting and disclosure
requirements using a fair value-based method of accounting for stock-based
employee compensation plans. As allowed by SFAS No. 148, the Company has elected
to continue to apply the intrinsic value-based method of accounting described
above, and has adopted the disclosure requirements of SFAS No. 148.
The following table illustrates the effect on net loss if the
fair-value-based method had been applied to all outstanding and unvested awards
in each of the three and nine month periods ended September 30:
Three Months Ended September 30, Nine Months Ended September 30,
---------------------------------- ----------------------------------
2003 2002 2003 2002
------------- ------------- ------------- -------------
Net loss
As reported .................................. $ (21,520,451) $ (43,163,734) $(172,615,772) $(125,877,693)
Add: Stock-based employee compensation
expense included in reported net loss ........ 81,256 120,031 274,474 309,667
Deduct: Total stock-based employee
compensation expense determined under
fair value base method for all awards ........ (99,676) (292,428) (496,812) (887,284)
------------- ------------- ------------- -------------
Pro Forma net loss ............................. $ (21,538,871) $ (43,336,131) $(172,838,110) $(126,455,310)
============= ============= ============= =============
Basic and diluted loss per share
As reported .................................... $ (59.37) $ (119.08) $ (476.20) $ (347.33)
Pro forma ...................................... $ (59.42) $ (119.56) $ (476.81) $ (348.93)
The Company accounts for equity instruments issued to non-employees in
accordance with the provisions of SFAS No. 148 and Emerging Issues Task Force
("EITF") Issue No. 96-18, "Accounting for Equity Instruments That Are Issued to
Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services." All transactions in which goods or services are the consideration
received for the issuance of equity instruments are accounted for based on the
fair value of the consideration received or the fair value of the equity
instrument issued, whichever is more reliably measurable. The measurement date
of the fair value of the equity instrument issued is the earlier of the date on
which the counter-party's performance is complete or the date on which it is
probable that performance will occur.
11
HORIZON TELCOM, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
As of September 30, 2003 and December 31, 2002
And for the Three and Nine Months Ended September 30, 2003 and 2002 (unaudited)
- --------------------------------------------------------------------------------
NOTE 4 - Summary of Significant Accounting Policies (Continued)
Net Loss per Share
The Company computes net loss per common share in accordance with SFAS No.
128, "Earnings per Share." Basic and diluted net loss per share is computed by
dividing net loss, for each period, by the weighted-average outstanding common
shares. No conversion of common stock equivalents (options, warrants or
convertible securities) has been assumed in the calculations since the effect
would be antidilutive. As a result, the number of weighted-average outstanding
common shares as well as the amount of net loss per share are the same for basic
and diluted net loss per share calculations for all periods presented. Stock
options could potentially dilute basic earnings per share in the future and will
be included in the diluted earnings per share calculation when dilutive.
Recent Accounting Pronouncements
In May 2003, the FASB issued SFAS No.150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." SFAS
No. 150 establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within the scope
of SFAS No. 150 as a liability (or an asset in some circumstances). Many of
those instruments were previously classified as equity. The application of SFAS
No. 150 is not expected to have a material effect on the Company's consolidated
financial statements. This Statement is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003.
In April 2003, the FASB issued SFAS No.149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amendments require
that contracts with comparable characteristics be accounted for similarly,
clarifies when a contract with an initial investment meets the characteristic of
a derivative and clarifies when a derivative requires special reporting in the
statement of cash flows. SFAS No. 149 is effective for hedging relationships
designated and for contracts entered into or modified after June 30, 2003,
except for provisions that relate to SFAS No. 133 Statement Implementation
Issues that have been effective for fiscal quarters prior to June 15, 2003,
which should be applied in accordance with their respective effective dates, and
certain provisions relating to forward purchases or sales of when-issued
securities or other securities that do not exist, which should be applied to
existing contracts, as well as new contracts entered into after June 30, 2003.
The application of SFAS No. 149 is not expected to have a material effect on the
Company's consolidated financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure - an amendment of FASB
Statement No. 123." This Statement provides alternative methods of transition
for a voluntary change to the fair value based method of accounting for
stock-based employee compensation. In addition, this Statement requires
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results. The Company adopted the disclosure requirements
of SFAS No. 148 as of December 31, 2002, but continues to account for stock
compensation costs in accordance with APB Opinion No. 25 (See Note 4,
Stock-Based Compensation).
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This Statement addresses financial
accounting and reporting for costs associated with exit or disposal activities
by requiring that expenses related to the exit of an activity or disposal of
long-lived assets be recorded when they are incurred and measurable. Prior to
SFAS No. 146, these charges were accrued at the time of commitment to exit or
dispose of an activity. The Company adopted SFAS No. 146 on January 1, 2003, and
it did not have a material effect on the Company's financial position, results
of operations or cash flows.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145 addresses the accounting for gains and
12
HORIZON TELCOM, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
As of September 30, 2003 and December 31, 2002
And for the Three and Nine Months Ended September 30, 2003 and 2002 (unaudited)
- --------------------------------------------------------------------------------
NOTE 4 - Summary of Significant Accounting Policies (Continued)
losses from the extinguishment of debt, economic effects and accounting
practices of sale-leaseback transactions and makes technical corrections to
existing pronouncements. The Company adopted SFAS No. 145 on January 1, 2003,
and it did not have a material effect on the Company's financial position,
results of operations or cash flows.
In 2002, the FASB's EITF, reached a consensus on Issue 00-21, "Revenue
Arrangements with Multiple Deliverables." Issue 00-21 provides guidance on how a
vendor should account for arrangements under which it will perform multiple
revenue-generating activities. The guidance in this Issue is effective for
revenue agreements entered into in fiscal periods beginning after June 15, 2003.
The Company adopted the guidance in Issue 00-21 as of July 1, 2003. This
adoption did not have a material impact on the financial position, results of
operations, or cash flows.
Reclassifications
Certain prior year amounts have been reclassified to conform with the 2003
presentation.
13
HORIZON TELCOM, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
As of September 30, 2003 and December 31, 2002
And for the Three and Nine Months Ended September 30, 2003 and 2002 (unaudited)
- --------------------------------------------------------------------------------
NOTE 5 - Segment Information
The Company (including Horizon PCS is organized around the differences in
products and services it offers. Under this organizational structure, the
Company operates in two reportable business segments as defined by SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." These
segments are landline telephone services and wireless personal communications
services. The landline telephone services segment includes four major revenue
streams: basic local service, long-distance service, network access and other
related telephone service. As discussed in Note 2, subsequent to August 14,
2003, Horizon Telcom no longer consolidates the accounts and results of
operations of Horizon PCS and the accounts of Horizon PCS will be recorded as an
investment using the cost method of accounting. Accordingly, the wireless
personal communications segment does not include activity after August 14, 2003.
Other business activities of the Company include Internet access services,
equipment systems sales, and other miscellaneous revenues, which do not meet the
definition of a reportable segment under SFAS No. 131. Amounts related to these
business activities are included below under the heading "All other."
Unallocated administrative expenses represent general and administrative
expenses incurred at a corporate level. All other assets represent common assets
not identified to an operating segment.
The Company evaluates the performance of the segments based on operating
earnings before the allocation of administrative expenses. Information about
interest income and expense and income taxes is not provided on a segment level.
The accounting policies of the segments are the same as described in the summary
of significant accounting policies.
The following table includes revenue, intercompany revenues, operating
earnings (loss), depreciation and amortization expense, and capital expenditures
for the quarters ended September 30, 2003 and 2002, and assets as of September
30, 2003 and December 31, 2002, for each segment and reconciling items necessary
to total to amounts reported in the financial statements:
Net Revenue
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2003 2002 2003 2002
-------------- -------------- ------------- --------------
Wireless personal communications services ...................... $ 33,625,314 $ 55,999,210 $ 156,305,526 $ 155,829,819
Landline telephone services .................................... 9,637,261 9,955,454 30,491,576 30,637,494
All other ...................................................... 3,005,148 2,235,065 7,512,567 6,402,148
------------- ------------- ------------- -------------
Total net revenues ......................................... $ 46,267,723 $ 68,189,729 $ 194,309,669 $ 192,869,461
============= ============= ============= =============
Intercompany Revenue
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2003 2002 2003 2002
-------------- -------------- ------------- --------------
Wireless personal communications services ...................... $ 28,341 $ 61,770 $ 50,871 $ 254,863
Landline telephone services .................................... 242,599 280,886 851,812 1,086,141
All other ...................................................... 168,423 99,738 467,968 318,477
------------- ------------- ------------- -------------
Total intercompany revenues ................................ $ 439,363 $ 442,394 $ 1,370,651 $ 1,659,481
============= ============= ============= =============
14
HORIZON TELCOM, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
As of September 30, 2003 and December 31, 2002
And for the Three and Nine Months Ended September 30, 2003 and 2002 (unaudited)
- --------------------------------------------------------------------------------
NOTE 5 - Segment Information (Continued)
Operating Earnings (Loss)
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2003 2002 2003 2002
-------------- -------------- ------------- --------------
Wireless personal communications services ...................... $ (11,075,250) $ (23,691,879) $(127,576,728) $ (73,435,201)
Landline telephone services .................................... 3,143,205 3,450,426 11,444,152 12,415,267
All other ...................................................... (965,454) (1,031,266) (2,870,837) (2,815,211)
Unallocated administrative expenses ............................ (2,111,361) (2,652,987) (7,971,367) (8,469,625)
------------- ------------- ------------- -------------
Total operating loss ....................................... $ (11,008,860) $ (23,925,706) $(126,974,780) $ (72,304,770)
============= ============= ============= =============
Depreciation and Amortization
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2003 2002 2003 2002
-------------- -------------- ------------- --------------
Wireless personal communications services ...................... $ 4,023,504 $ 9,302,721 $ 25,175,810 $ 26,732,128
Landline telephone services .................................... 1,715,478 1,711,465 5,149,727 5,114,793
All other ...................................................... 648,342 569,602 1,888,191 1,587,862
------------- ------------- ------------- -------------
Total depreciation and amortization ........................ $ 6,387,324 $ 11,583,788 $ 32,213,728 $ 33,434,783
============= ============= ============= =============
Capital Expenditures
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2003 2002 2003 2002
-------------- -------------- ------------- --------------
Wireless personal communications services ...................... $ 198,190 $ 8,507,660 $ 5,255,326 $ 57,620,672
Landline telephone services .................................... 1,753,193 2,014,624 5,375,638 5,868,406
All other ...................................................... 357,232 928,340 1,009,511 2,595,820
------------- ------------- ------------- -------------
Total capital expenditures ................................. $ 2,308,615 $ 11,450,624 $ 11,640,475 $ 66,084,898
============= ============= ============= =============
Assets
September 30, December 31,
2003 2002
-------------- ------------
Wireless personal communications services .... $ -- $443,116,762
Landline telephone services .................. 87,285,086 83,258,131
All other .................................... 17,153,142 19,375,220
------------ ------------
Total assets ............................. $104,438,228 $545,750,113
============ ============
15
HORIZON TELCOM, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
As of September 30, 2003 and December 31, 2002
And for the Three and Nine Months Ended September 30, 2003 and 2002 (unaudited)
- --------------------------------------------------------------------------------
NOTE 5 - Segment Information (Continued)
Net operating revenues by product and services were as follows for the three and
nine months ended September 30:
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2003 2002 2003 2002
-------------- -------------- ------------- --------------
Wireless personal communications services:
PCS subscriber revenue ......................................... $ 24,229,074 $ 39,219,056 $ 115,643,263 $ 111,141,497
PCS roaming revenue ............................................ 8,877,399 14,993,078 36,253,966 38,928,318
PCS equipment sales ............................................ 518,841 1,787,076 4,408,297 5,760,004
------------- ------------- ------------- -------------
Total personal communication services ........................ 33,625,314 55,999,210 156,305,526 155,829,819
------------- ------------- ------------- -------------
Landline telephone services:
Basic local service ............................................ 3,490,871 3,641,695 10,362,212 10,905,384
Long-distance service .......................................... 237,738 300,115 716,473 878,529
Network access ................................................. 5,069,514 5,217,569 16,838,886 16,548,336
Other related telephone service ................................ 839,138 796,075 2,574,005 2,305,245
------------- ------------- ------------- -------------
Total landline telephone services ............................ 9,637,261 9,955,454 30,491,576 30,637,494
------------- ------------- ------------- -------------
Other:
Internet access services ....................................... 661,918 760,057 2,033,961 2,385,462
Equipment system sales ......................................... 228,532 315,667 710,583 936,620
Other miscellaneous revenues ................................... 2,114,698 1,159,341 4,768,023 3,080,066
------------- ------------- ------------- -------------
Total other .................................................. 3,005,148 2,235,065 7,512,567 6,402,148
------------- ------------- ------------- -------------
Total operating revenues ................................. $ 46,267,723 $ 68,189,729 $ 194,309,669 $ 192,869,461
============= ============= ============= =============
16
HORIZON TELCOM, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
As of September 30, 2003 and December 31, 2002
And for the Three and Nine Months Ended September 30, 2003 and 2002 (unaudited)
- --------------------------------------------------------------------------------
NOTE 6 - Investments
The following summarizes unrealized gains and losses on investments at
September 30, 2003, and December 31, 2002:
2003:
Unrealized Unrealized Fair
Cost Gain Loss Value
---------- ---------- ---------- ----------
Equity securities
available-for-sale ...... $ 250,000 $1,001,780 $ -- $1,251,780
========== ========== ======= ==========
2002:
Unrealized Unrealized Fair
Cost Gain Loss Value
---------- ---------- ---------- ----------
Equity securities
available-for-sale ...... $ 250,000 $ 495,860 $ -- $ 745,860
========== ========== ======= ==========
NOTE 7 - Property, Plant and Equipment
Property, plant and equipment consists of the following:
September 30, December 31,
2003 2002
------------- -------------
Network assets ............................... $ 102,068,741 $ 92,276,815
Switching equipment .......................... -- --
Land and buildings ........................... 15,088,979 14,889,802
Computer and telecommunications equipment .... 11,391,390 10,716,345
Furniture, vehicles and office equipment ..... 4,958,911 4,823,818
PCS assets ................................... -- 271,157,682
------------- -------------
Property, plant and equipment
in-service, at cost ...................... 133,508,021 398,864,462
Accumulated depreciation ..................... (58,554,860) (53,100,188)
PCS accumulated depreciation ................. -- (46,273,707)
------------- -------------
Property, plant and equipment
in-service, net ....................... 74,953,161 299,487,567
Construction work in progress ................ 856,013 1,780,922
PCS construction work in progress ............ -- 14,652,618
------------- -------------
Total property, plant and
equipment, net ................... $ 75,809,174 $ 315,921,107
============= =============
During the first quarter of 2003, Horizon PCS recorded a liability of
$22,600 and a cumulative change in accounting principle of $9,570 related to the
adoption SFAS No. 143 for potential costs associated with certain asset
retirement obligations. The cumulative change in accounting principle is
included in "interest income and other, net" on the accompanying statement of
operations.
During the second quarter of 2003, Horizon PCS reduced the book value of
the network assets related to an impairment recorded on property and equipment
discussed below in Note 8.
NOTE 8 - Impairment of Horizon PCS Intangible Assets and Property and Equipment
Horizon PCS was not in compliance with certain covenants contained in its
financing documents as of June 30, 2003. This created the need for an impairment
assessment of its intangible assets and property and equipment as required by
SFAS No. 144. Therefore, Horizon PCS projected future undiscounted cash flows
and determined they were insufficient to recover the carrying amounts for the
intangible assets and property and equipment. This required Horizon PCS to
recognize an impairment loss for the excess of carrying value over fair value.
To determine fair value, Horizon PCS performed a valuation utilizing a cost
approach adjusted for items such as technological and functional obsolescence as
appropriate.
17
HORIZON TELCOM, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
As of September 30, 2003 and December 31, 2002
And for the Three and Nine Months Ended September 30, 2003 and 2002 (unaudited)
- --------------------------------------------------------------------------------
NOTE 8 - Impairment of Horizon PCS Intangible Assets and Property and Equipment
(Continued)
Horizon PCS determined the carrying value of the intangible assets
exceeded the fair value of the assets. As a result, Horizon PCS recorded
impairment on the intangible assets of approximately $39,152,000. As a result of
the impairment charge, Horizon PCS recorded a tax benefit of $6,031,000 due to
the reduction of a deferred tax liability related to the intangibles. As of
September 30, 2003, net deferred income taxes were zero.
Additionally, Horizon PCS determined the fair market value of the property
and equipment was less than the carrying value of the assets. As a result,
Horizon PCS recorded an impairment on property and equipment of approximately
$34,609,000.
During 2002, Horizon PCS launched switches in Tennessee and Pennsylvania
and disconnected some switching equipment in Chillicothe, Ohio. As a result,
approximately $6,200,000 of switching equipment was considered an impaired asset
as defined by SFAS No. 144. Accordingly, impairment expense for the nine months
ended September 30, 2002, includes approximately $3,500,000 of expense related
to the impaired assets. The total amount of depreciation recorded to date on
this equipment was approximately $5,600,000. This equipment was sold for book
value during 2003.
NOTE 9 - Lines of Credit
On December 15, 2002, Chillicothe Telephone entered into an agreement with
Huntington National Bank for a line of credit that provides maximum borrowings
of $15,000,000, payable on demand. Interest accrues on the outstanding balance
at a fluctuating rate tied to the London Interbank Offered Rate ("LIBOR") and is
due and payable monthly. At September 30, 2003, the interest rate on the line of
credit was 2.65%. As of September 30, 2003, Chillicothe Telephone had drawn
$1,000,000 under this line of credit. The line of credit contains several
covenants requiring minimum tangible net worth, a fixed charge coverage ratio, a
funded debt to consolidated total capitalization ratio and an interest coverage
ratio. As of September 30, 2003, Chillicothe Telephone was in compliance with
these covenants.
NOTE 10 - Long-Term Debt
The components of long-term debt outstanding are as follows:
Interest
Rate at
September 30, September 30, December 31,
2003 2003 2002
------------ ------------- -------------
Horizon PCS:
Discount notes .................... $ -- $ 295,000,000
Senior notes ...................... -- 175,000,000
Secured credit facility-term loan A -- 105,000,000
Secured credit facility-term loan B -- 50,000,000
Chillicothe Telephone:
2002 Senior Notes ................. 6.64% 30,000,000 30,000,000
1998 Senior Notes ................. 6.72% 12,000,000 12,000,000
------------- -------------
Long-term debt, par value ...... 42,000,000 667,000,000
Less: Unaccreted interest portion of
Horizon PCS discount notes ....... -- (108,715,651)
------------- -------------
Total long-term debt .......... $ 42,000,000 $ 558,284,349
------------- -------------
Subsequent to August 14, 2003, Horizon Telcom no longer consolidates the
accounts and results of operations of Horizon PCS. Accordingly, the schedule
above as of September 30, 2003 does not include the consolidated accounts of
Horizon PCS.
18
HORIZON TELCOM, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
As of September 30, 2003 and December 31, 2002
And for the Three and Nine Months Ended September 30, 2003 and 2002 (unaudited)
- --------------------------------------------------------------------------------
NOTE 11 - Commitments and Contingencies
Operating Leases
The Company leases office space and various equipment under several
operating leases.
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.
On August 21, 2003, HPC and Bright PCS, subsidiaries of Horizon PCS, Inc.,
filed a lawsuit in the United States District Court for the Southern District of
Ohio, Eastern Division, against Sprint Corporation, Sprint Spectrum, L.P.,
Wirelessco, L.P. and Sprintcom, Inc. (collectively, "Sprint"), alleging wrongful
conduct on the part of Sprint in its relationship and business dealings with
Horizon PCS. In the Complaint, HPC and Bright PCS assert claims under the
federal RICO laws and similar Ohio state laws, and also assert fraud, negligent
misrepresentation, conversion, breach of contract and breach of fiduciary
duties.
NOTE 12 - PCS Restructuring Costs
On July 28, 2003, Horizon PCS implemented a restructuring plan that
included a company-wide work force reduction in order to reduce costs that are
within Horizon PCS' control. The employment of approximately 300 employees has
been terminated, and Horizon PCS has closed approximately 19 of its 42
company-owned sales and service centers to reduce costs in areas where revenues
are not currently meeting criteria for return on investment. Horizon PCS also
converted approximately 13 of its other company-owned sales and service centers
to customer service centers. Horizon PCS' restructuring plan resulted in
restructuring charges of $4,509,128.
Cash Non-Cash
Charges Deductions Deductions
---------- ---------- ----------
Employee separations .................... $1,659,149 $1,625,066 $ 34,083
Lease commitments, net of sublease ...... 798,260 -- 798,260
Equipment disposals ..................... 2,051,719 -- 2,051,719
---------- ---------- ----------
$4,509,128 $1,625,066 $2,884,062
========== ========== ==========
19
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q includes forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), which can be identified by the use of
forward-looking terminology such as: "may", "might", "could", "would",
"believe", "expect", "intend", "plan", "seek", "anticipate", "estimate",
"project" or "continue" or the negative thereof or other variations thereon or
comparable terminology. All statements other than statements of historical fact
included in this quarterly report on Form 10-Q, including without limitation,
the statements under "ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations" regarding our financial position and
liquidity are forward-looking statements. These forward-looking statements also
include, but are not limited to:
o changes in industry conditions created by the Federal
Telecommunications Act of 1996 (the "Telecom Act") and related state
and federal legislation and regulations;
o recovery of the substantial costs which will result from the
implementation and expansion of our new businesses;
o retention of our existing customer base and our ability to attract
new customers;
o rapid changes in technology;
o our future compliance with debt covenants;
o actions of our competitors;
o estimates of current and future population for our markets;
o statements regarding the effects of, or the outcome of, Horizon PCS'
Bankruptcy Case;
o statements regarding our anticipated revenues, expense levels,
liquidity and capital resources and projections; and
o the anticipated impact of recent accounting pronouncements.
Although we believe the expectations reflected in such forward-looking
statements are reasonable, we can give no assurance such expectations will prove
to have been correct. Important factors with respect to any such forward-looking
statements, including certain risks and uncertainties that could cause actual
results to differ materially from our expectations ("Cautionary Statements"),
are disclosed in this quarterly report on Form 10-Q, including, without
limitation, in conjunction with the forward-looking statements included in this
quarterly report on Form 10-Q. Important factors that could cause actual results
to differ materially from those in the forward-looking statements included
herein include, but are not limited to:
o changes or advances in technology and the acceptance of new
technology in the marketplace;
o competition in the industry and markets in which we operate;
o changes in government regulation;
o general political economic and business conditions; and
o the impact and outcome of the Horizon PCS bankruptcy filing and
related proceedings.
20
These forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause our actual results, performance
or achievements to be materially different from any future results, performance
or achievements expressed or implied by such forward-looking statements. All
subsequent written and oral forward-looking statements attributable to us or
persons acting on our behalf are expressly qualified in their entirety by the
Cautionary Statements.
Overview
Horizon Telcom is a holding company, which, in addition to its majority
ownership of Horizon PCS, owns 100% of 1) Chillicothe Telephone, a local
telephone company, 2) Horizon Services, which provides administrative services
to other Horizon Telcom affiliates including Horizon PCS, and 3) Horizon
Technology, a long-distance and Internet services business.
Horizon Telcom provides a variety of voice and data services to
commercial, residential/small business and local market segments. Horizon Telcom
provides landline telephone service, VDSL television service and Internet access
services to the southern Ohio region, principally in and surrounding
Chillicothe, Ohio.
At September 30, 2003, Chillicothe Telephone serviced approximately 37,200
access lines in Chillicothe, Ohio and the surrounding area. Horizon Technology
provided Internet service to approximately 10,400 customers through its
bright.net Internet service
Critical Accounting Policies and Estimates
Allowance for Doubtful Accounts. With respect to our landline segments,
accounts receivable consists primarily of amounts billed to interexchange
carriers for allowing their customers to access our network when their customers
place a call. Accounts receivable also includes charges for advertising in
Chillicothe Telephone's yellow pages directory and amounts billed to customers
for monthly services. Our collection history with interexchange carriers has
been good. However, all pre-petition accounts receivables from WorldCom and
WorldCom's MCI division, which declared bankruptcy on July 21, 2002, were
written off at year-end 2002. Approximately $188,000 of this written off amount
was recovered in the second quarter of 2003.
Revenue Recognition. The landline telephone services operating segment
consists of basic local and long-distance toll, network access services and
other related telephone service revenue. Intra-LATA, (Local Access and Transport
Area) (i.e., the area of southern Ohio, including Columbus originally covered by
area code 614), basic local exchange and long-distance service revenue consists
of flat rate services and measured services billed to customers utilizing
Chillicothe Telephone's landline telephone network. Long distance
intraLATA/interstate revenue consists of message services that terminate beyond
the basic service area of the originating wire center. Network access revenue
consists of revenue derived by our landline telephone services segment from the
provision of exchange access services to an interexchange carrier or to an end
user beyond the exchange carrier's network. Other related telephone service
revenue includes directory advertising related to a telephone directory
published annually.
Other revenues include Internet access services, equipment systems sales
and information services. Internet access revenues for our bright.net services
are monthly service fees and other charges billed to our bright.net customers.
Service fees primarily consist of monthly recurring charges billed to customers.
Equipment system sales and other revenues consist of sales made by Chillicothe
Telephone to various businesses or other residential customers for equipment
used on the telephone system.
Chillicothe Telephone is an independent local exchange carrier that
provides local telephone service within ten local exchanges. Chillicothe
Telephone follows an access charge system as ordered by the Federal
Communications Commission ("FCC") and the PUCO ("Public Utilities Commission of
Ohio") in 1984. The access charge methodology provides a means whereby local
exchange carriers, including Chillicothe Telephone, provide their customers
access to the facilities of the long-distance carriers and charge long-distance
carriers for interconnection to local facilities.
21
The PUCO issued an Opinion and Order effective January 1, 1988, for
reporting intra-LATA (Local Access and Transport Area) toll revenues. This
methodology is defined as the Originating Responsibility Plan with a Secondary
Carrier Option (ORP-SCO). This plan calls for one or more primary carriers in
each LATA with other local exchange carriers acting as secondary carriers. The
secondary carriers provide the primary carrier with access to local facilities
and are compensated based upon applicable intra-LATA access charge tariffs.
Chillicothe Telephone is a primary carrier. Intra-LATA toll revenue is reflected
in basic and long-distance service revenue on the accompanying consolidated
statements of operations, and is recognized as such services are provided.
Estimated unbilled amounts are accrued at the end of each month.
Chillicothe Telephone recognizes revenue for billing and collection
services performed on behalf of certain interexchange carriers. Chillicothe
Telephone is reimbursed for this service based on the number of messages billed
on behalf of the interexchange carrier. The revenues from this service are
recognized in the same period the services are provided. Chillicothe Telephone
also recognizes advertising revenues from its telephone directory. Telephone
directory customers sign an annual contract, which is billed in twelve equal
installments. The revenue derived from directory advertising is recognized
equally over the twelve-month period of the directory, consistent with the
ratemaking treatment. These items are recorded in other revenues on the
accompanying consolidated statements of operations.
Chillicothe Telephone recognizes revenues on the completed contract basis
for the installation of telecommunication and other related equipment. These
revenues are reported as equipment system sales on the accompanying consolidated
statements of operations. Maintenance revenues are recognized over the life of
the contract, and recorded as other revenues on the accompanying consolidated
statements of operations.
Horizon Technology provides Internet access services and resells
long-distance service. Revenues on equipment sales were recognized at the time
of sale. Revenues for the Internet and long distance services are recognized
monthly as service is rendered.
22
Results of Operations for the Three Months Ended September 30, 2003 Compared to
the Three Months Ended September 30, 2002
This discussion and analysis is presented on an operating segment basis.
The following unaudited table details the consolidated statements of income by
operating segment for the three months ended September 30, 2003 and 2002:
For the Three Months Ended, September 30,
-----------------------------------------------------------------------------------
Wireless Personal
Communications
Services(1) Landline Telephone All Other Services
----------------------- ----------------------- -----------------------
(Dollars in thousands) 2003 2002 2003 2002 2003 2002
OPERATING REVENUES: -------- -------- -------- -------- -------- --------
PCS subscriber and roaming ............ $ 33,106 $ 54,212 $ -- $ -- $ -- $ --
PCS equipment ......................... 519 1,787 -- -- -- --
Basic local and
long-distance and other
landline ............................ -- -- 4,568 4,738 -- --
Network access ........................ -- -- 5,070 5,218 -- --
Equipment systems sales,
information services,
Internet access and other ........... -- -- -- -- 3,005 2,235
-------- -------- -------- -------- -------- --------
Total operating revenues ............ 33,625 55,999 9,638 9,956 3,005 2,235
-------- -------- -------- -------- -------- --------
OPERATING EXPENSES:
Cost of PCS and other
equipment sale ...................... 1,207 3,974 -- -- 95 164
Cost of services ...................... 25,852 43,761 2,471 2,379 1,830 1,782
Selling and marketing ................. 3,794 13,073 206 150 247 252
General and administrative ............ 5,237 9,490 2,102 2,263 3,259 3,125
Non-cash compensation ................. 77 99 1 1 3 20
Loss (Gain) on disposal
of assets ........................... -- (10) -- -- -- 7
Depreciation and
amortization ........................ 4,024 9,303 1,715 1,712 648 570
Impairment of Horizon PCS
Assets .............................. -- -- -- -- -- --
Restructuring charges ................. 4,509 -- -- -- -- --
-------- -------- -------- -------- -------- --------
Total operating expenses ............ 44,700 79,690 6,495 6,505 6,082 5,920
-------- -------- -------- -------- -------- --------
OPERATING INCOME (LOSS) .................. (11,075) (23,691) 3,143 3,451 (3,077) (3,685)
-------- -------- -------- -------- -------- --------
NONOPERATING INCOME (EXPENSE):
Interest expense, net ................. (8,269) (15,890) (705) (1,133) -- --
Subsidiary preferred stock
dividends ........................... (1,595) (3,006) -- -- -- --
Interest income and other,
net ............................. 70 720 5 5 2 1
-------- -------- -------- -------- -------- --------
Total nonoperating expense ............ (9,794) (18,176) (700) (1,128) 2 1
-------- -------- -------- -------- -------- --------
LOSS BEFORE INCOME TAX EXPENSE
AND MINORITY INTEREST ................. (20,869) (41,867) 2,443 2,323 (3,075) (3,684)
INCOME TAX (EXPENSE) BENEFIT ............. -- -- (226) (161) 207 225
MINORITY INTEREST IN LOSS ................ -- -- -- -- -- --
-------- -------- -------- -------- -------- --------
NET INCOME (LOSS) ........................ $(20,869) $(41,867) $ 2,217 $ 2,162 $ (2,868) $ (3,459)
======== ======== ======== ======== ======== ========
OTHER COMPREHENSIVE INCOME
(LOSS)
Net realized gain (loss) on
hedging activities ....................... -- 21 -- -- -- --
Net unrealized gain (loss) on
securities available-for-sale,
net of taxes ............................. -- -- (21) (131) -- --
-------- -------- -------- -------- -------- --------
COMPREHENSIVE INCOME (LOSS) .............. $(20,869) $(41,846) $ 2,196 $ 2,031 $ (2,868) $ (3,459)
======== ======== ======== ======== ======== ========
(1) Amounts in the wireless personal communication services column include the
results of Horizon PCS through August 14, 2003 (Note 2).
23
Wireless Personal Communications Services Segment
On August 15, 2003, Horizon PCS and its subsidiaries filed voluntary
petitions for reorganization under Chapter 11 of the United States Bankruptcy
Code. In accordance with SFAS No. 94 "Consolidation of All Majority-Owned
Subsidiaries" and ARB No. 51 "Consolidated Financial Statements," when control
of a majority-owned subsidiary does not rest with the majority owners (as, for
instance, where the subsidiary is in legal reorganization or in bankruptcy), ARB
No. 51 precludes consolidation of the majority-owned subsidiary. As a result,
subsequent to August 14, 2003, Horizon Telcom no longer consolidates the
accounts and results of operations of Horizon PCS and the accounts of Horizon
PCS will be recorded as an investment using the cost method of accounting.
Accordingly, the accompanying consolidated balance sheet as of September 30,
2003 does not include the consolidated accounts of Horizon PCS; it does however,
include Horizon Telcom's investment at cost in Horizon PCS as of August 14,
2003. The accompanying consolidated statement of operations for the period ended
September 30, 2003 includes the consolidated results of Horizon PCS' operations
through August 14, 2003. Since future results will not include the results of
Horizon PCS, this management discussion and analysis will focus only on the
results of the landline telephone and all other services segments.
Landline Telephone Services Segment and All Other Services
The following discussion details the results of operations of our landline
telephone services segment and all other services not assigned to a segment for
the last fiscal quarter.
Results of Operations
Revenues. Network access revenue was relatively flat decreasing by
approximately $100,000 for the three months ended September 30, 2003, to
approximately $5.1 million. Basic local and long distance revenues decreased
approximately $100,000 to approximately $4.6 million for the three months ended
September 30, 2003 as compared to September 30, 2002.
Internet access and other revenues increased by approximately $800,000 to
approximately $3.0 million for the three months ended September 30, 2003. Other
revenues were impacted by increased VDSL revenue as we continue to build our
customer base, which was offset slightly by lower bright.net dial-up Internet
service subscribers. We believe a number of these lost dial-up customers have
switched to high-speed VDSL service.
Cost of equipment sales. Cost of goods sold primarily consists of business
system sales and customer maintenance expenses. Cost of goods sold for all other
services was essentially flat for the three months ended September 30, 2003 as
compared to the same period in 2002.
Cost of services. Cost of services includes customer care support and
network-related costs, including switching, access and circuit expenses. Cost of
services also includes expenses related to the installation of our VDSL service.
Cost of services for the three months ended September 30, 2003 for the
landline telephone segment increased approximately $100,000 to approximately
$2.5 million as compared to the three months ended September 30, 2002. This
increase was due to increased payroll costs.
Cost of services for the three months ended September 30, 2003 for all
other services was essentially flat at approximately $1.8 million compared to
the same period in 2002.
Selling and marketing expenses. Selling and marketing expenses consist of
costs associated with local marketing and advertising programs including
marketing for VDSL. Selling and marketing expenses for the landline telephone
segment and all other services were essentially flat for the three months ended
September 30, 2003 compared to the same three months in 2002.
General and administrative expenses. General and administrative expenses
include the costs related to corporate support functions. These include finance
functions, billing and collections, accounting services, computer access and
administration, executive, supervisory, consulting, customer relations, human
24
resources and other administrative services. General and administrative expenses
for the landline telephone segment decreased by approximately $200,000 to
approximately $2.1 million for the three months ended September 30, 2003 as
compared to the same period in 2002. This decrease was the result of a reduction
in the amount of customer uncollectibles.
General and administrative expenses for all other services increased by
approximately $200,000 to approximately $3.3 million for the three months ended
September 30, 2003. This increase was due to higher professional fees in 2003.
Non-cash compensation expense. Non-cash compensation expense is the
amortization of the value of stock options granted in November 1999. Stock-based
compensation expense will continue to be recognized through the conclusion of
the vesting period for these options in 2005. Non-cash compensation expense for
the landline telephone segment and all other services was essentially flat for
the three months ended September 30, 2003 compared to the same three months in
2002.
Depreciation and amortization expense. Depreciation and amortization
expense for the landline telephone segment was essentially flat at approximately
$1.7 million for the three months ended September 30, 2003 and 2002.
Depreciation and amortization expense for all other services was also relatively
flat at approximately $600,000 for the three months ended September 30, 2003 and
2002.
Interest expense, net. Interest expense for the landline telephone
segement and all other services for the three months ended September 30, 2003,
was approximately $700,000, compared to approximately $1.1 million for the three
months ended September 30, 2002. The decrease in interest expense was the result
of a one-time increase in 2002 due to a $500,000 payment made in connection with
the early retirement of senior notes issued by Chillicothe Telephone. The
decrease was partially offset by an increase due to our additional debt
outstanding during the three months ended September 30, 2003, compared to the
same period in 2002. We expect further increases in interest expense in 2003 due
to anticipated higher average debt levels.
In August 2002, Chillicothe Telephone issued $30,000,000 of 6.64% senior
notes. A portion of the proceeds was used to retire a Chillicothe Telephone line
of credit on September 28, 2002. Interest expense on the aforesaid senior notes
was approximately $500,000 and $200,000 for the three months ended September 30,
2003 and 2002. Interest expense on the retired line of credit and the retired
senior notes was approximately $700,000 for the three months ended September 30,
2002. Interest expense on Chillicothe Telephone's senior notes issued in 1998
was approximately $200,000 in the third quarter of both 2003 and 2002.
Capitalized construction interest was approximately $9,000 and $24,000, for the
three months ended September 30, 2003 and 2002, respectively.
Interest income and other, net. The landline telephone service segment
recorded approximately $5,000 of other income in the three months ended
September 30, 2003 and 2002.
Income tax expense. Income tax expense for the three months ended
September 30, 2003 was flat at approximately $200,000 as compared to the same
period in 2002.
Other comprehensive income (loss). The Company recognized approximately
$21,000 of loss in the third quarter of 2003, compared to a loss of
approximately $131,000 for the same period in 2002, related to its investments
available-for-sale, net of tax benefit of approximately $10,000 and $68,000,
respectively.
25
Results of Operations for the Nine Months Ended September 30, 2003 Compared to
the Nine Months Ended September 30, 2002
This discussion and analysis is presented on an operating segment basis.
The following unaudited table details the consolidated statements of income by
operating segment for the nine months ended September 30, 2003 and 2002:
For the Nine Months Ended, September 30,
------------------------------------------------------------------------------------
Wireless Personal
Communications
Services(1) Landline Telephone All Other Services
------------------------ ------------------------ ------------------------
(Dollars in thousands) 2003 2002 2003 2002 2003 2002
OPERATING REVENUES: --------- --------- --------- --------- --------- ---------
PCS subscriber and roaming ............ $ 151,897 $ 150,070 $ -- $ -- $ -- $ --
PCS equipment ......................... 4,408 5,760 -- -- -- --
Basic local and long-distance
and other landline .................. -- -- 13,653 14,089 -- --
Network access ........................ -- -- 16,839 16,548 -- --
Equipment systems sales,
information services,
Internet access and other ........... -- -- -- -- 7,513 6,402
--------- --------- --------- --------- --------- ---------
Total operating revenues ............ 156,305 155,830 30,492 30,637 7,513 6,402
--------- --------- --------- --------- --------- ---------
OPERATING EXPENSES:
Cost of PCS and other
equipment sale ...................... 12,035 12,635 -- -- 352 432
Cost of services ...................... 116,490 120,946 7,343 7,058 5,269 4,748
Selling and marketing ................. 28,585 38,661 569 411 729 822
General and administrative ............ 22,848 25,862 5,982 5,634 10,108 10,082
Non-cash compensation ................. 263 298 4 4 8 8
Loss on disposal of assets ............ 216 631 -- -- -- 7
Depreciation and amortization ......... 25,176 26,732 5,150 5,115 1,888 1,588
Impairment of Horizon PCS
Assets .............................. 73,760 3,500 -- -- -- --
Restructuring charges ................. 4,509 -- -- -- -- --
--------- --------- --------- --------- --------- ---------
Total operating expenses ............ 283,882 229,265 19,048 18,222 18,354 17,687
--------- --------- --------- --------- --------- ---------
OPERATING INCOME (LOSS) .................. (127,577) (73,435) 11,444 12,415 (10,841) (11,285)
--------- --------- --------- --------- --------- ---------
NONOPERATING INCOME (EXPENSE):
Interest expense, net ................. (41,553) (44,084) (2,114) (2,067) -- (1)
Subsidiary preferred stock
dividends ........................... (7,816) (8,719) -- -- -- --
Interest income and other, net ........ 595 2,465 39 (65) 8 13
--------- --------- --------- --------- --------- ---------
Total nonoperating expense ............ (48,774) (50,338) (2,075) (2,132) 8 12
--------- --------- --------- --------- --------- ---------
LOSS BEFORE INCOME TAX EXPENSE
AND MINORITY INTEREST ................. (176,351) (123,773) 9,369 10,283 (10,833) (11,273)
INCOME TAX (EXPENSE) BENEFIT ............. 6,031 -- (1,388) (1,707) 556 592
MINORITY INTEREST IN LOSS ................ -- -- -- -- -- --
--------- --------- --------- --------- --------- ---------
NET INCOME (LOSS) ........................ $(170,320) $(123,773) $ 7,981 $ 8,576 $ (10,277) $ (10,681)
========= ========= ========= ========= ========= =========
OTHER COMPREHENSIVE INCOME (LOSS)
Net realized gain on hedging
activities ............................... 462 141 -- -- -- --
Net unrealized gain (loss) on
securities available-for-sale,
net of taxes ............................. -- -- 334 (2,025) -- --
--------- --------- --------- --------- --------- ---------
COMPREHENSIVE INCOME (LOSS) .............. $(169,858) $(123,632) $ 8,315 $ 6,551 $ (10,277) $ (10,681)
========= ========= ========= ========= ========= =========
(1) Amounts in the wireless personal communication services column include the
results of Horizon PCS through August 14, 2003 (Note 2).
26
Landline Telephone Services Segment and All Other Services
The following discussion details the results of operations of our landline
telephone services segment and all other services not assigned to a segment for
the past three fiscal quarters.
Results of Operations
Revenues. Network access revenues increased by approximately $300,000 for
the nine months ended September 30, 2003, to approximately $16.8 million. This
increase in access revenues was due to an increase in Universal Service Support
Fund ("USSF") revenues for the nine months ended September 30, 2003 compared to
the same period in 2002. USSF revenues have increased from an added element,
Interstate Safety Net Support, and we have also benefited from an increase in
loop costs. USSF revenues are provided by a federal fund and are used to
subsidize high cost carriers in rural markets. Basic local and long distance
revenues decreased by approximately $400,000 to approximately $13.7 million for
the nine months ended September 30, 2003.
Internet access and other revenues increased by approximately $1.1 million
to $7.5 million for the nine months ended September 30, 2003. Other revenues
were impacted by increased VDSL revenue as we continue to build our customer
base, which was offset slightly by lower bright.net dial-up Internet service
subscribers. We believe a number of these lost dial-up customers have switched
to high-speed VDSL service.
Cost of equipment sales. Cost of goods sold primarily consists of business
system sales and customer maintenance expenses. Cost of goods sold for corporate
and other services was essentially flat for the nine months ended September 30,
2003 as compared to the same period in 2002.
Cost of services. Cost of services includes customer care support, and
network-related costs, including switching, access and circuit expenses. Cost of
services also includes expenses related to the installation of our VDSL service.
Cost of services for the nine months ended September 30, 2003, was
approximately $7.3 million for the landline telephone segment, compared to
approximately $7.1 million for the nine months ended September 30, 2002, an
increase of approximately $200,000 due to increased personnel wages and other
related expenses.
Cost of services for the nine months ended September 30, 2003 for all
other services was approximately $5.3 million compared to approximately $4.7
million for the same period in 2002, an increase of approximately $600,000. The
increase is related to the continued installation and programming expenses
associated with our VDSL service.
Selling and marketing expenses. Selling and marketing expenses consist of
costs associated with local marketing and advertising programs including
marketing for VDSL. Selling and marketing expenses for the landline telephone
segment was approximately $600,000 for the nine months ended September 30, 2003,
compared to approximately $400,000 for the nine months ending September 30,
2002. The increase is related to additional payroll and related benefit
expenses.
Selling and marketing expenses for all other services for the nine months
ended September 30, 2003 was relatively flat at approximately $700,000 compared
to approximately $800,000 for the same period in 2002.
General and administrative expenses. General and administrative expenses
include the costs related to corporate support functions. These include finance
functions, billing and collections, accounting services, computer access and
administration, executive, supervisory, consulting, customer relations, human
resources and other administrative services. General and administrative expenses
for the landline telephone segment increased by approximately $400,000 to
approximately $6.0 million for the nine months ended September 30, 2003,
primarily due to an increase in the provision for uncollectibles.
General and administrative expenses for all other services was relatively
flat at approximately $10.1 million for the nine months ended September 30, 2003
and 2002.
27
Non-cash compensation expense. Non-cash compensation expense is the
amortization of the value of stock options granted in November 1999. Stock-based
compensation expense will continue to be recognized through the conclusion of
the vesting period for these options in 2005. Non-cash compensation expense for
the landline telephone segment and all other services was essentially flat for
the nine months ended September 30, 2003 compared to the same nine months in
2002.
Depreciation and amortization expense. Depreciation and amortization
expense for the landline telephone segment was essentially flat at approximately
$5.1 million for the nine months ended September 30, 2003 and 2002. Depreciation
and amortization expense for all other services increased by approximately
$300,000 to approximately $1.9 million for the nine months ended September 30,
2003. This increase was related to the additional VDSL assets that have been
added to our network.
Interest expense, net. Interest expense for the landline telephone segment
and all other services for the nine months ended September 30, 2003 and 2002
remained unchanged at approximately $2.1 million.
In August 2002, Chillicothe Telephone issued $30,000,000 of 6.64% senior
notes. A portion of the proceeds was used to retire a Chillicothe Telephone line
of credit on September 28, 2002. Interest expense on the aforesaid senior notes
was approximately $1.5 million and $200,000 for the nine months ended September
30, 2003 and 2002. Interest expense on the retired line of credit and the
retired senior notes of Chillicothe Telephone issued in 1993 was approximately
$1.3 million for the nine months ended September 30, 2002, including $500,000
paid to retire such senior notes ahead of schedule. Interest expense on
Chillicothe Telephone's senior notes issued in 1998 was approximately $600,000
for the third quarter ended 2003 and 2002. Capitalized construction interest was
approximately $24,000 and $83,000, for the nine months ended September 30, 2003
and 2002, respectively.
Interest income and other, net. The landline telephone service segment
recorded approximately $40,000 of other income in the nine months ended
September 30, 2003. In 2002, expense of approximately $70,000 was recorded
related to non-operating corporate activity.
Income tax expense. Income tax expense for the landline telephone service
segment was approximately $1.4 million for the nine months ended September 30,
2003, compared to approximately $1.7 million for the same period in 2002,
reflecting lower net income before tax in 2003. All other services was
essentially flat at an approximate benefit of $600,000 for the nine months ended
September 30, 2003 and 2002.
Other comprehensive income (loss). Chillicothe Telephone recognized
approximately $334,000 of income for the nine months ended September 30, 2003,
compared to a loss of approximately $2,025,000 for the same period in 2002,
related to its investments available-for-sale, net of tax expense of
approximately $172,000 and net of tax benefit of approximately $1.0 million,
respectively.
28
Liquidity and Capital Resources
The following table presents the estimated future outstanding long-term
debt at the end of each year and future required annual principal payments for
each year then ended associated with our financing based on our contractual
level of long-term indebtedness:
(Dollars in millions) Years Ending December 31,
----------------------------------------------------------------------------
2003 2004 2005 2006 2007 Thereafter
---- ---- ---- ---- ---- ----------
Chillicothe Telephone:
1998 Senior notes, due 2018 (1) ................ $ 12.0 $ 12.0 $ 12.0 $ 12.0 $ 12.0 $ --
Fixed interest rate ....................... 6.72% 6.72% 6.72% 6.72% 6.72% 6.72%
Principal payments ........................ $ -- $ -- $ -- $ -- $ -- $ 12.0
2002 Senior notes, due 2012 (2) ................ $ 30.0 $ 30.0 $ 30.0 $ 30.0 $ 30.0 $ --
Fixed interest rate ....................... 6.64% 6.64% 6.64% 6.64% 6.64% 6.64%
Principal payments ........................ $ -- $ -- $ -- $ -- $ -- $ 30.0
- ----------
(1) On November 12, 2002, Chillicothe Telephone amended and restated its 1998
$12,000,000 senior notes due 2018. The interest rate on the amended notes
is 6.72%, an increase of 10 basis points, with the same maturity date as
the 1998 Senior Notes.
(2) In August 2002, Chillicothe Telephone issued $30,000,000 of 6.64%, 10-year
Senior notes due July 1, 2012. The proceeds of the offering were used to
retire both the short-term line of credit and the non-current portion of
the senior notes issued by Chillicothe Telephone in 1993.
Horizon Telcom, Chillicothe Telephone, Horizon Technology, and Horizon
Services are not obligated to assist Horizon PCS. While Horizon PCS faces
several liquidity issues, the liquidity of Horizon Telcom independent of Horizon
PCS is believed to be more favorable. Cash and working capital for Horizon
Telcom, net of Horizon PCS, is approximately $13.0 million and approximately
$16.1 million, respectively. We feel that this level of working capital is
adequate to maintain Horizon Telcom's operations for the next twelve months.
Horizon Telcom, net of Horizon PCS, generated approximately $18.8 million of
cash flow from operations during 2003. Horizon Telcom, through its Horizon
Services subsidiary, recovered approximately $4.0 million from Horizon PCS for
the nine months ended September 30, 2003. Future liquidity of Horizon Services
will be impacted, perhaps materially, from the successful reorganization of
Horizon PCS.
Statement of Cash Flows. At September 30, 2003, we had cash and cash
equivalents of approximately $13.0 million, and working capital of approximately
$16.1 million. At December 31, 2002, we had cash and cash equivalents of
approximately $94.9 million and working capital of approximately $100.8 million.
Horizon PCS was also required to escrow funds sufficient to cover the first four
interest payments on certain senior notes issued by Horizon PCS. These funds are
presented as restricted cash on the consolidated balance sheet. The decrease in
cash and cash equivalents of approximately $82.0 million is primarily
attributable to the deconsolidation of Horizon PCS of approximately $50.5
million, funding of our loss from continuing operations of approximately $172.6
million (this loss also includes certain non-cash charges), and funding our
capital expenditures of approximately $11.6 million during the nine months ended
September 30, 2003.
Net cash used in operating activities for the nine months ended September
30, 2003, was approximately $19.4 million. This reflects the continuing use of
cash for our operations to build Horizon PCS' customer base, including but not
limited to providing service in their markets and the costs of acquiring new
customers. The net loss of approximately $172.6 million was partially offset by
increases to depreciation, increases in accrued liabilities, offset by increases
to accounts receivable. Horizon PCS is reviewing all phases of operations and
capital expenditures, to reduce the amount of cash needed for operations. We do
not expect to have significant uses of cash flow from operations in the future.
Net cash used in investing activities was approximately $62.1 million for
the nine months ended September 30, 2003, reflecting the deconsolidation of
Horizon PCS of $50.5 million and the upgrade of Horizon PCS' wireless network,
as well as the deployment of capital necessary to offer VDSL service. We expect
future capital expenditures to be much less than 2002 as we focus more on the
operation and maintenance of our network and less on build out and expansion.
29
Net cash used in financing activities for the nine months ended September
30, 2003, was approximately $414,000, reflecting Chillicothe Telephone's draw on
its line of credit for $1,000,000 somewhat offset by Horizon Telcom's payment of
dividends of approximately $1,414,000, during the first quarter of 2003.
Debt Covenants. As of September 30, 2003, Chillicothe Telephone was in
compliance with the covenants set forth by its senior notes.
Credit Ratings. At September 30, 2003, the Chillicothe Telephone senior
notes were rated by the NAIC as "1". A "1" rating by the NAIC is the equivalent
of an S&P rating of "A-" or better.
Funding Requirements. The terms of its credit agreement prohibits the
ability of Chillicothe Telephone to provide funds to Horizon PCS and its
affiliates in the event that Horizon PCS or one of its affiliates experiences a
shortfall. The actual funds required to fund operating losses, working capital
needs and other capital needs may vary materially from our estimates and
additional funds may be required because of unforeseen delays, cost overruns,
unanticipated expenses, regulatory changes, engineering design changes and
required technological upgrades and other technological risks.
Inflation
We believe that inflation has not had and will not have an adverse
material effect on our results of operations.
Recent Accounting Pronouncements
In May 2003, the FASB issued SFAS No.150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." SFAS
No. 150 establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within the scope
of SFAS No. 150 as a liability (or an asset in some circumstances). Many of
those instruments were previously classified as equity. The application of SFAS
No. 150 is not expected to have a material effect on the Company's consolidated
financial statements. This Statement is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003.
In April 2003, the FASB issued SFAS No.149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amendments require
that contracts with comparable characteristics be accounted for similarly,
clarifies when a contract with an initial investment meets the characteristic of
a derivative and clarifies when a derivative requires special reporting in the
statement of cash flows. SFAS No. 149 is effective for hedging relationships
designated and for contracts entered into or modified after June 30, 2003,
except for provisions that relate to SFAS No. 133 Statement Implementation
Issues that have been effective for fiscal quarters prior to June 15, 2003,
which should be applied in accordance with their respective effective dates, and
certain provisions relating to forward purchases or sales of when-issued
securities or other securities that do not exist, which should be applied to
existing contracts as well as new contracts entered into after June 30, 2003.
The application of SFAS No. 149 is not expected to have a material effect on the
Company's consolidated financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure - an amendment of FASB
Statement No. 123." This Statement provides alternative methods of transition
for a voluntary change to the fair value based method of accounting for
stock-based employee compensation. In addition, this Statement requires
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results. The Company adopted the disclosure requirements
of SFAS No. 148 as of December 31, 2002, but continues to account for stock
compensation costs in accordance with APB Opinion No. 25.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This Statement addresses financial
accounting and reporting for costs associated with exit or disposal activities
by requiring that expenses related to the exit of an activity or disposal of
long-lived assets be recorded when they are incurred and measurable. Prior to
SFAS No. 146, these charges were accrued at the time of
30
commitment to exit or dispose of an activity. The Company adopted SFAS No. 146
on January 1, 2003, and it did not have a material effect on the Company's
financial position, results of operations or cash flows.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145 addresses the accounting for gains and losses from
the extinguishment of debt, economic effects and accounting practices of
sale-leaseback transactions and makes technical corrections to existing
pronouncements. The Company adopted SFAS No. 145 on January 1, 2003, and it did
not have a material effect on the Company's financial position, results of
operations or cash flows.
In 2002, the FASB's EITF, reached a consensus on Issue 00-21, "Revenue
Arrangements with Multiple Deliverables." Issue 00-21 provides guidance on how a
vendor should account for arrangements under which it will perform multiple
revenue-generating activities. The guidance in this Issue is effective for
revenue agreements entered into in fiscal periods beginning after June 15, 2003.
The Company adopted the guidance in Issue 00-21 as of July 1, 2003. This
adoption did not have a material impact on the financial position, results of
operations, or cash flows.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
We do not engage in commodity futures trading activities and do not enter
into derivative financial instruments for trading purposes. We also do not
engage in transactions in foreign currencies that would expose us to market
risk.
In the normal course of business, our operations are exposed to interest
rate risk on our secured credit facility. Our primary interest rate risk
exposures relate to the impact of interest rate movements on our ability to meet
interest expense requirements and meet financial covenants under our debt
instruments.
While we cannot predict our ability to refinance existing debt, we
continue to evaluate our interest rate risk on an ongoing basis. As of September
30, 2003, $42,000,000 of our $43,000,000 total debt is at a fixed rate.
Currently, a 100 basis point increase in interest rates would increase our
interest expense approximately $10,000.
ITEM 4. Controls and Procedures
Our Chief Executive Officer and Chief Financial Officer are responsible
for establishing and maintaining "disclosure controls and procedures" (as
defined in Exchange Act Rules 13a-14(c) and 15d-14(c)) for the Company. With the
participation of management, the Company's Chief Executive Officer and Chief
Financial Officer evaluated the Company's disclosure controls and procedures as
of September 30, 2003.
Under Horizon PCS' agreements with Sprint, Sprint provides Horizon PCS
with billing, collections, customer care and other back office services. Horizon
PCS, as a result, necessarily relies on Sprint to provide accurate, timely and
sufficient data and information to properly record its revenues, expenses and
accounts receivable which underlie a substantial portion of its periodic
financial statements and other financial disclosures. The relationship with
Sprint is established by Horizon PCS' agreements and its flexibility to use a
service provider other than Sprint is limited.
Because of Horizon PCS' reliance on Sprint for financial information,
Horizon PCS must depend on Sprint to design adequate internal controls with
respect to the processes established to provide this data and information to
Horizon PCS and Sprint's other network partners. To address this issue, Sprint
engages its independent auditors to perform a periodic evaluation of these
controls and to provide a "Report on Controls Placed in Operation and Tests of
Operating Effectiveness for Affiliates" under guidance provided in Statement of
Auditing Standards No. 70. These reports are provided annually to Horizon PCS.
The Company's management, including the CEO and CFO, does not expect that
its disclosure controls and procedures will prevent all error and all fraud. A
control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system
are met. Further, the design of a control system must reflect the fact that
there are resource constraints, and the benefits of controls must be considered
relative to their costs. Because of the inherent limitations in all control
system, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within the Company have been
31
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdown can occur because of simple
error or mistake. The design of any system of controls also is based in part
upon certain assumptions about the likelihood of future events, and there can be
no assurance that any design will succeed in achieving its stated goals under
all potential future conditions.
Based upon the Company's disclosure controls and procedures evaluation,
the CEO and CFO have concluded that, subject to the limitations noted above, the
Company's disclosure controls and procedures are effective to give reasonable
assurance that the information required to be disclosed by the Company in its
periodic reports is accumulated and communicated to management, including the
CEO and CFO, as appropriate to allow timely decisions regarding disclosure and
is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's rules and forms.
There were no significant changes in the Company's internal controls or,
to the knowledge of the management of the Company, in other factors that could
significantly affect these controls during the quarter ended September 30, 2003.
32
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
On August 15, 2003, Horizon PCS and its subsidiaries filed voluntary
petitions for relief under Chapter 11 of the United States Bankruptcy Code. See
Note 2 to the Consolidated Financial Statements.
On August 21, 2003, HPC and Bright PCS, subsidiaries of Horizon PCS, Inc.,
filed a lawsuit in the United States District Court for the Southern District of
Ohio, Eastern Division, against Sprint Corporation, Sprint Spectrum, L.P.,
Wirelessco, L.P. and Sprintcom, Inc. (collectively, "Sprint"), alleging wrongful
conduct on the part of Sprint in its relationship and business dealings with
Horizon PCS. In the Complaint, HPC and Bright PCS assert claims under the
federal RICO laws and similar Ohio state laws, and also assert fraud, negligent
misrepresentation, conversion, breach of contract and breach of fiduciary
duties.
ITEM 2. Changes in Securities and Use of Proceeds
None.
ITEM 3. Defaults Upon Senior Securities
As of June 30, 2003, Horizon PCS was not in compliance with certain
covenants under its financing agreements. The failure to comply with these
covenants constitutes an event of default under Horizon PCS' secured credit
facility. On August 15, 2003, the secured credit facility lenders elected to
accelerate the amounts due to them. This acceleration also constitutes a default
under the indentures for Horizon PCS' senior notes and discount notes (see Note
10 to the Consolidated Financial Statements). In addition, Sprint has the right
to invoke certain remedies under Horizon PCS' Consent and Agreement with Sprint.
Horizon PCS does not have sufficient liquidity to repay all of the indebtedness
under these obligations.
ITEM 4. Submission of Matters to a Vote of Security Holders
None.
ITEM 5. Other Information
RISK FACTORS
You should carefully consider the risks described below in evaluating our
businesses.
RISKS RELATED TO CHILLICOTHE TELEPHONE, LONG DISTANCE AND INTERNET BUSINESSES
The information set forth under this heading describes risk factors
relating to the business of our wholly-owned subsidiaries the Chillicothe
Telephone Company, Horizon Technology and Horizon Services. References under
this heading to "we," "us" and "our" are to those subsidiaries.
Significant competition in telecommunications services in our markets may cause
us to lose customers, or incur lower network access service minutes of use.
We face, or will face, significant competition in the markets in which we
currently provide local telephone, long distance, data and Internet services.
Many of our competitors are substantially larger and have greater financial,
technical and marketing resources than we do. In particular, larger competitors
have certain advantages over us, which could cause us to lose customers and
impede our ability to attract new customers, including:
o long-standing relationships and greater name recognition with
customers;
o financial, technical, marketing, personnel and other resources
substantially greater than ours;
33
o more capital to deploy services; and
o potential to lower prices of competitive services.
These factors place us at a disadvantage when we respond to our
competitors' pricing strategies, technological advances and other initiatives.
Additionally, our competitors may develop services that are superior to ours or
that achieve greater market acceptance.
We face competition from other current and potential market entrants,
including:
o domestic and international long distance providers seeking to enter,
re-enter or expand entry into our local communications marketplace;
o other domestic and international competitive communications
providers, resellers, cable television companies and electric
utilities; and
o providers of broadband and Internet services.
A continuing trend toward combinations and strategic alliances in the
communications industry could give rise to significant new competitors. This
could cause us to lose customers and impede our ability to attract new
customers.
The restructuring of Horizon PCS may have adverse effects on Horizon Telcom.
Horizon Telcom has agreements and relationships with third parties,
including suppliers, subscribers and vendors that are integral to conducting its
day to day operations. A restructuring of Horizon PCS in or out of a bankruptcy
proceeding could have a material adverse affect on the perception of Horizon
Telcom and the Horizon Telcom business and its prospects in the eyes of
subscribers, employees, suppliers, creditors and vendors. These persons may
perceive that there is increased risk in doing business with Horizon Telcom as a
result of Horizon PCS' restructuring. Some of these persons may terminate their
relationships with Horizon Telcom which would make it more difficult for Horizon
Telcom to conduct is business.
In the event that the services agreement between Horizon Telcom and Horizon PCS
is terminated for any reason, Horizon Telcom may not be able to reduce its
general and administrative costs in an amount sufficient to subsidize the
portion of the combined Company's costs currently borne by Horizon PCS.
On a net basis, we estimate that Horizon PCS will incur approximately $5.5
million of charges from Horizon Services (a subsidiary of Horizon Telcom) in
fiscal 2003. If the services agreement between Horizon Telcom and Horizon PCS is
terminated for any reason, Horizon Telcom and its subsidiaries (excluding
Horizon PCS) will lose this source of revenue and will be required to lower its
costs and expenses to meet its business plan. Horizon Telcom may have little
notice of any such termination. A failure to reduce these expenses in a timely
manner could adversely affect Horizon Telcom's liquidity, financial condition
and results of operations.
We may not be able to successfully integrate new technologies or respond
effectively to customer requirements.
The communications industry is subject to rapid and significant changes in
technology, frequent new service introductions and evolving industry standards.
We cannot predict the effect of these changes on us or our industry.
Technological developments may reduce the competitiveness of our networks and
require unbudgeted upgrades or the procurement of additional products that could
be expensive and time consuming. If we fail to adapt successfully to
technological changes or obsolescence or fail to obtain access to important new
technologies, we could lose customers and be limited in our ability to attract
new customers.
If our back office and customer care systems are unable to meet the needs of our
customers, we may lose customers.
Sophisticated back office processes and information management systems are
vital to our anticipated growth and our ability to achieve operating
efficiencies. We cannot assure you that our systems will perform as expected as
we
34
increase our number of customers. If these systems fail to perform as expected,
we could lose customers. The following could prevent our back office and
customer care systems from meeting the needs of our customers:
o failure of third-party vendors to deliver products and services in a
timely manner at acceptable costs;
o our failure to identify key information and processing needs;
o our failure to integrate products or services effectively;
o our failure to upgrade systems as necessary; or
o our failure to attract and retain qualified systems support
personnel.
Furthermore, as our suppliers revise and upgrade their hardware, software
and equipment technology, we could encounter difficulties in affording and
integrating this new technology into our business or find that such new
hardware, software and technology is not appropriate for our business. In
addition, our right to use such hardware, software and technology depends upon
license agreements with third-party vendors. Vendors may cancel or elect not to
renew some of these agreements, which may adversely affect our business.
Because we operate in a heavily regulated industry, changes in regulation could
have a significant effect on our revenues and compliance costs.
We are subject to significant regulation that could change in a manner
adverse to us. We operate in a heavily regulated industry, and the
majority of our revenues generally have been supported by regulations,
including in the form of support for the provision of telephone services
in rural areas. Laws and regulations applicable to us and our competitors
may be, and have been, challenged in the courts, and could be changed by
Congress or regulators at any time. In addition, any of the following have
the potential to have a significant impact on us:
Risk of loss or reduction of network access charge revenues. Approximately
24% of Chillicothe Telephone's total revenues for the nine months ended
September 30, 2003 came from network access charges which are paid to us
by intrastate carriers and interstate long distance carriers for
originating and terminating calls in the regions we serve. The amount of
access charge revenues that we receive is calculated based on guidelines
set by federal and state regulatory bodies, and such guidelines could
change at any time. The FCC continues to reform the federal access charge
system. States often mirror these federal rules in establishing intrastate
access charges. It is unknown at this time how changes to the FCC's access
charge regime will affect us. Federal policies being implemented by the
FCC strongly favor access charge reform, and our revenues from this source
could be at risk. Regulatory developments of this type could adversely
affect our business.
Risk of loss or reduction of Universal Service Support Fund. We receive
USSF revenues to support the high cost of our operations in rural markets.
For the nine months ended September, 2003, USSF revenues accounted for
approximately 24% of the total revenues of Chillicothe Telephone. If we
were unable to receive support from the USSF, or if such support was
reduced, we would be unable to operate as profitably as before such
reduction.
In addition, potential competitors generally cannot, under current laws,
receive the same USSF support enjoyed by Chillicothe Telephone.
Chillicothe Telephone therefore enjoys a competitive advantage, which
could, however, be removed by regulators at any time. The Telecom Act
provides that competitors could obtain the same support as we do if the
PUCO determines that granting such support to competitors would be in the
public interest. If such USSF support were to become available to
potential competitors, we might not be able to compete as effectively or
otherwise continue to operate as profitably in our Chillicothe Telephone
markets. Any shift USSF regulation could, therefore, have an adverse
effect on our business.
The method for calculating the amount of USSF support could change in
2003. It is unclear whether the chosen methodology will accurately reflect
the costs incurred by Chillicothe Telephone, and whether it will provide
for the same amount of USSF support that Chillicothe Telephone enjoyed in
the past. The outcome of any of these proceedings or other legislative or
regulatory changes could affect the amount of USSF support that we
receive, and could have an adverse effect on our business.
35
Risk of loss of protected status under interconnection rules. Chillicothe
Telephone takes the position that it does not have to comply with more
burdensome requirements in the Telecom Act governing the rights of
competitors to interconnect to our traditional telephone companies'
networks due to our status as a rural telephone company. If state
regulators decide that it is in the public's interest to impose these
interconnection requirements on us, more competitors could enter our
traditional telephone markets than are currently expected and we could
incur additional administrative and regulatory expenses as a result of
such newly imposed interconnection requirements.
Risks posed by costs of regulatory compliance. Regulations create
significant compliance costs for us. Chillicothe Telephone provides
intrastate services is also generally subject to certification, tariff
filing and other ongoing regulatory requirements by state regulators.
Challenges to these tariffs by regulators or third parties could cause us
to incur substantial legal and administrative expenses.
Regulatory changes in the telecommunications industry involve uncertainties, and
the resolution of these uncertainties could adversely affect our business by
facilitating greater competition against us, reducing potential revenues or
raising our costs.
The Telecom Act provides for significant changes in the telecommunications
industry, including the local telecommunications and long distance industries.
This federal statute and the related regulations remain subject to judicial
review and additional rulemakings of the FCC, thus making it difficult to
predict what effect the legislation will have on us, our operations and our
competitors. Several regulatory and judicial proceedings have recently
concluded, are underway or may soon be commenced, that address issues affecting
our operations and those of our competitors, which may cause significant changes
to our industry. We cannot predict the outcome of these developments, nor can we
assure that these changes will not have a material adverse effect on us.
RISKS RELATED TO HORIZON PCS
Horizon PCS has declared bankruptcy, which may cause the value of Horizon
Telcom's ownership interest in Horizon PCS to be worthless. There is a
substantial risk that Horizon Telcom will lose all or a substantial portion of
the value of its investment in Horizon PCS in connection with the Bankruptcy
Case of Horizon PCS. Since the amount of Horizon PCS' obligations under its
credit facility and senior and discount notes was greater than its cash and
other assets at the time such payment obligations were accelerated, the
possibility exists that there will be no assets available for distribution to
Horizon Telcom and the other stockholders of Horizon PCS. While Horizon Telcom
may request an equity participation in the Horizon PCS Bankruptcy Case, there
can be no assurance that Horizon Telcom will receive an equity participation.
36
ITEM 6. Exhibits and Reports on Form 8-K
Exhibits and Reports on Form 8-K
(A) Exhibits
3.1(a) Articles of Incorporation of Horizon Telcom, Inc.
3.2(a) Bylaws of Incorporation of Horizon Telcom, Inc.
4.1(a) Form of Stock Certificate.
31.1(b) Certification of Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
31.2(b) Certification of Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32.1(b) Certification pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
32.2(b) Certification pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
----------
(a) Incorporated by reference to the exhibit with the same number
previously filed by the Registrant on Form 10 (Reg. No. 0-32617).
(b) Filed herewith.
(B) Reports on Form 8-K
On August 15, 2003, Horizon Telcom, Inc. filed a Current Report on
Form 8-K with the Securities and Exchange Commission under Item 9 -
Regulation FD Disclosure relating to the filing of a Chapter 11
bankruptcy petition in the United States Bankruptcy Court for the
Southern District of Ohio for the purpose of effecting a court
administered reorganization by its subsidiary, Horizon PCS, Inc. and
its subsidiaries, Horizon Personal Communications, Inc. and Bright
Personal Communications Services LLC.
On August 21, 2003, Horizon Personal Communications, Inc. and Bright
Personal Communications Services, LLC, subsidiaries of Horizon PCS,
Inc. (collectively, "Horizon"), which is majority owned by Horizon
Telcom, Inc., filed a Current Report on Form 8-K with the Securities
and Exchange Commission under Item 9 - Regulation FD Disclosure
relating to the filing of a lawsuit in the United States District
Court for the Southern District of Ohio, Eastern Division, against
Sprint Corporation, Sprint Spectrum, L.P., Wirelessco, L.P. and
Sprintcom, Inc. (collectively, "Sprint"), alleging wrongful conduct
on the part of Sprint in its relationship and business dealings with
Horizon.
37
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HORIZON TELCOM, INC.
(Registrant)
Date: November 14, 2003 By: /s/ Thomas McKell
----------------------------------
Thomas McKell
Chief Executive Officer
Date: November 14, 2003 By: /s/ Peter M. Holland
----------------------------------
Peter M. Holland
Chief Financial Officer
(Principal Financial and
Chief Accounting Officer)
38