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, 2002
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: 333-51240
HORIZON PCS, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 31-1707839
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
68 EAST MAIN STREET
CHILLICOTHE, OHIO 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[ ]
As of October 31, 2002, there were 26,646 shares of class A common stock
outstanding and 58,445,288 shares of class B common stock outstanding.
HORIZON PCS, INC.
FORM 10-Q
THIRD QUARTER REPORT
TABLE OF CONTENTS
Page
----
PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements...............................................1
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.........................................14
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk........33
ITEM 4. Controls and Procedures...........................................33
PART II OTHER INFORMATION
ITEM 1. Legal Proceedings.................................................34
ITEM 2. Changes in Securities and Use of Proceeds.........................34
ITEM 3. Defaults Upon Senior Securities...................................34
ITEM 4. Submission of Matters to a Vote of Security Holders...............34
ITEM 5. Other Information.................................................34
ITEM 6. Exhibits and Reports on Form 8-K..................................48
Horizon PCS, Inc. ("Horizon PCS"), is the issuer of 14.00% Senior Discount
Notes ("discount notes") due October 1, 2010, and 13.75% Senior Notes ("senior
notes") due June 15, 2011. The discount notes and senior notes were the subject
of exchange offers that were registered with the Securities and Exchange
Commission ("SEC") (Registration No. 333-51238 and 333-85626, respectively). The
Co-Registrants are Horizon Personal Communications, Inc. ("HPC"), and Bright
Personal Communications Services, LLC ("Bright PCS"), collectively, the
"Operating Companies," which are wholly-owned subsidiaries of Horizon PCS. Each
of the Operating Companies has provided a full, unconditional, joint and several
guaranty of Horizon PCS' obligations under the notes. Horizon PCS has no
operations separate from its investment in the Operating Companies. Pursuant to
Rule 12h-5 of the Securities Exchange Act of 1934, no separate financial
statements and other disclosures concerning the Operating Companies other than
narrative disclosures set forth in the Notes to the Consolidated Financial
Statements have been presented herein. Concurrent with the offering of the
discount notes discussed above, Horizon PCS issued 295,000 warrants to purchase
up to 3,805,000 shares of Horizon PCS' class A common stock. The warrants were
registered with the SEC (Registration No. 333-51240). As used herein and except
as the context otherwise may require, the "Company," "we," "us," "our" or
"Horizon PCS" means, collectively, Horizon PCS, Inc., and the Operating
Companies.
-i-
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HORIZON PCS, INC.
Consolidated Balance Sheets
As of September 30, 2002, and December 31, 2001
- --------------------------------------------------------------------------------
September 30, December 31,
2002 2001
------------- -------------
(unaudited)
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents (includes
$71,000,000 on deposit in accordance with
covenant amendment in 2002)................... $ 109,131,378 $ 123,775,562
Restricted cash................................. 24,062,500 24,597,222
Accounts receivable-- subscriber, less
allowance for doubtful accounts of
approximately $2,377,000 and $1,804,000 at
September 30, 2002, and December 31, 2001,
respectively................................... 22,118,741 14,293,771
Receivable from affiliates...................... 152,765 100,437
Receivable from Parent.......................... 2,105 483,785
Equipment inventory............................. 2,653,004 3,845,433
Prepaid expenses and other current assets....... 1,976,755 840,970
-------------- -------------
Total current assets........................ 160,097,248 167,937,180
-------------- -------------
OTHER ASSETS:
Restricted cash................................ 12,032,009 24,062,500
Intangible asset -- Sprint PCS licenses,
net of amortization........................... 40,996,035 42,840,534
Goodwill....................................... 7,191,180 7,191,180
Debt issuance costs, net of amortization....... 21,063,918 20,437,556
Deferred activation expense and other assets... 5,706,252 4,001,436
-------------- -------------
Total other assets.......................... 86,989,394 98,533,206
-------------- -------------
PROPERTY AND EQUIPMENT, NET 243,640,695 214,867,858
-------------- -------------
Total assets...........................$ 490,727,337 $ 481,338,244
============== =============
(Continued on next page)
1
HORIZON PCS, INC.
Consolidated Balance Sheets (continued)
As of September 30, 2002, and December 31, 2001
September 30, December 31,
2002 2001
------------- ------------
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
- ----------------------------------------------
CURRENT LIABILITIES:
Accounts payable................................ $ 19,132,000 $ 26,444,888
Accrued liabilities............................. 13,852,759 10,583,505
Payable to Sprint............................... 14,865,582 10,244,529
Deferred service revenue........................ 4,926,404 3,712,734
------------- -------------
Total current liabilities................. 52,776,745 50,985,656
------------- -------------
LONG-TERM LIABILITIES:
Long-term debt, net of discount................. 509,008,999 384,055,643
Other long-term liabilities..................... 9,155,832 9,106,625
Deferred activation revenue..................... 5,485,129 3,808,618
------------- -------------
Total long-term liabilities............... 523,649,960 396,970,886
------------- -------------
Total liabilities....................... 576,426,705 447,956,542
------------- -------------
COMMITMENTS AND CONTINGENCIES (Note 6)
CONVERTIBLE PREFERRED STOCK....................... 154,067,678 145,349,043
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, 10,000,000 shares
authorized, none issued or outstanding,
at $0.0001 par value........................... -- --
Common stock-- class A, 300,000,000 shares
authorized, 26,646 issued and outstanding,
at $0.0001 par value........................... 3 3
Common stock-- class B, 75,000,000 shares
authorized, 58,458,354 issued and 58,445,288
outstanding.................................... 5,846 5,846
Treasury stock-- class B, 13,066 shares,
at $8.50 per share............................. (111,061) (111,061)
Accumulated other comprehensive income (loss)... (697,123) (837,851)
Additional paid-in capital...................... 91,852,117 91,852,117
Deferred stock option compensation.............. (1,055,934) (1,566,496)
Retained deficit................................ (329,760,894) (201,309,899)
------------- -------------
Total stockholders' equity (deficit).... (239,767,046) (111,967,341)
------------- -------------
Total liabilities and
stockholders' equity (deficit)........ $ 490,727,337 $ 481,338,244
============= =============
The accompanying notes are an integral part of
these consolidated financial statements
2
HORIZON PCS, INC.
Consolidated Statements of Operations
For the Three and Nine Months Ended
September 30, 2002 and 2001 (unaudited)
- --------------------------------------------------------------------------------
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
----------------------------- -----------------------------
2002 2001 2002 2001
-------------- ------------- -------------- -------------
OPERATING REVENUES:
Subscriber revenues.................... $ 39,280,826 $ 21,390,868 $ 111,396,359 $ 48,988,849
Roaming revenue........................ 14,993,078 11,792,956 38,928,318 25,645,305
Equipment revenues..................... 1,787,076 2,020,282 5,760,004 4,595,019
-------------- ------------- -------------- -------------
Total operating revenues.......... 56,060,980 35,204,106 156,084,681 79,229,173
-------------- ------------- -------------- -------------
OPERATING EXPENSES:
Cost of service (exclusive of
items shown separately below)......... 43,849,786 29,186,623 120,896,437 68,263,060
Cost of equipment...................... 3,973,789 4,125,835 12,635,078 8,628,244
Selling and marketing.................. 13,027,292 12,636,251 38,958,652 30,038,584
General and administrative
(exclusive of items shown
separately below)..................... 10,889,063 7,190,155 30,333,438 19,265,873
Non-cash compensation ................. 170,188 177,237 510,562 1,256,611
Depreciation and amortization.......... 9,302,721 5,158,645 30,232,128 12,980,231
-------------- ------------- -------------- -------------
Total operating expenses............ 81,212,839 58,474,746 233,566,295 140,432,603
-------------- ------------- -------------- -------------
OPERATING LOSS.......................... (25,151,859) (23,270,640) (77,481,614) (61,203,430)
Gain (Loss) on disposal of
property and equipment 9,961 -- (631,042) --
Loss on exchange of stock............ -- -- -- (399,673)
Interest income and other, net....... 719,755 580,822 2,464,464 4,846,253
Interest expense, net of amounts
capitalized........................ (15,889,818) (5,996,762) (44,084,140) (18,674,198)
-------------- ------------- -------------- -------------
LOSS ON OPERATIONS BEFORE
INCOME TAXES........................ (40,311,961) (28,686,580) (119,732,332) (75,431,048)
-------------- ------------- -------------- -------------
INCOME TAX EXPENSE................... -- -- -- --
-------------- ------------- -------------- -------------
NET LOSS............................. (40,311,961) (28,686,580) (119,732,332) (75,431,048)
-------------- ------------- -------------- -------------
PREFERRED STOCK DIVIDENDS............ (3,005,897) (2,816,053) (8,718,663) (8,169,630)
-------------- ------------- -------------- -------------
NET LOSS AVAILABLE TO COMMON
STOCKHOLDERS........................ $ (43,317,858) $ (31,502,633) $ (128,450,995) $ (83,600,678)
============== ============= ============== =============
Basic and diluted net loss
per share available to common
stockholders..................... $ (0.74) $ (0.54) $ (2.20) $ (1.43)
============== ============= ============== =============
Basic and diluted weighted-average
common shares outstanding......... 58,471,934 58,471,934 58,471,934 58,471,934
============== ============= ============== =============
The accompanying notes are an integral part of these
consolidated financial statements
3
HORIZON PCS, INC.
Consolidated Statements of Comprehensive Income (Loss)
For the Three and Nine Months Ended
September 30, 2002 and 2001 (unaudited)
- --------------------------------------------------------------------------------
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
2002 2001 2002 2001
------------- ------------ ------------- ------------
NET LOSS............................. $(40,311,961) $(28,686,580) $(119,732,332) $ (75,431,048)
============= ============ ============== ==============
OTHER COMPREHENSIVE INCOME (LOSS):
Net unrealized gain (loss)
on hedging activities.............. 20,686 (326,108) 140,728 (679,181)
------------- ------------- -------------- --------------
COMPREHENSIVE INCOME (LOSS).......... $(40,291,275) $(29,012,688) $(119,591,604) $ (76,110,229)
============= ============= ============== ==============
The accompanying notes are an integral part of these
consolidated financial statements
4
HORIZON PCS, INC.
Consolidated Statements of Cash Flow
For the Nine Months Ended September 30, 2002 and 2001 (unaudited)
- --------------------------------------------------------------------------------
For the Nine Months Ended
September 30,
-----------------------------
2002 2001
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................... $ (119,732,332) $ (75,431,048)
-------------- -------------
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization............... 30,232,128 12,980,231
Non-cash interest expense................... 20,222,946 13,804,012
Non-cash compensation expense............... 510,562 1,256,611
Loss on exchange of stock................... -- 399,673
Loss on hedging activities.................. 48,536 83,689
Loss on disposal of property and equipment.. 631,042 --
Provision for doubtful accounts receivable.. 11,939,941 3,780,912
Change in:
Accounts receivable....................... (19,764,911) (10,663,771)
Equipment inventory....................... 1,192,429 280,913
Prepaid expenses and other................ (1,135,785) 2,838,615
Accounts payable.......................... (7,312,890) (21,034,492)
Accrued liabilities and deferred service
revenue................................. 17,048,138 2,562,621
Payable to Sprint......................... 4,621,053 3,783,467
Change in receivable/payable from
affiliates and Parent................... 429,352 1,278,441
Change in other assets and liabilities, net 104,401 (405,671)
------------ -------------
Total adjustments....................... 58,766,942 10,945,251
------------ -------------
Net cash used in operating activities... (60,965,390) 64,485,797)
------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures........................ (57,620,672) (90,350,650)
Dividends received.......................... -- (4,311)
Proceeds from the sale of property and
equipment................................. 1,563,970 --
Proceeds from redemption of RTFC
capital certificates...................... -- 2,895,646
------------ -------------
Net cash used in investing activities... (56,056,702) (87,459,315)
------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Deferred financing fees..................... (2,622,092) (1,267,278)
Borrowings on long-term debt................ 105,000,000 --
------------ ------------
Net cash provided by financing activities 102,377,908 (1,267,278)
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS..................................... (14,644,184) (153,212,390)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD... 123,775,562 191,417,394
------------ -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD......... $109,131,378 $ 38,205,004
============ =============
The accompanying notes are an integral part of these
consolidated financial statements
5
HORIZON PCS, INC.
Notes to Consolidated Financial Statements
As of September 30, 2002, and December 31, 2001,
And for the Three and Nine Months Ended September 30, 2002 and 2001 (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. In the opinion of
management, the information contained herein reflects all adjustments necessary
to make a fair statement of the results for the periods presented. All such
adjustments are of a normal recurring nature. The financial information
presented herein should be read in conjunction with the Company's Form 10-K for
the year ended December 31, 2001, which includes information and disclosures not
presented herein.
NOTE 2 - ORGANIZATION AND BUSINESS OPERATIONS
On April 26, 2000, Horizon Telcom, Inc. ("Parent" or "Horizon Telcom"),
formed Horizon PCS, Inc. The Company provides wireless personal communications
services ("PCS") as a PCS affiliate of Sprint Corporation ("Sprint"). The
Company entered into management agreements with Sprint during 1998 and 1999.
These agreements, as amended, provide the Company with the exclusive right to
build, own, and manage a wireless voice and data services network in markets
located in Ohio, West Virginia, Kentucky, Virginia, Tennessee, Maryland,
Pennsylvania, New York, New Jersey, Michigan, North Carolina and Indiana under
the Sprint PCS brand. The Company is required to build the wireless network
according to Sprint's specifications. The term of the agreements is twenty years
with three successive ten-year renewal periods unless terminated by either party
under provisions outlined in the management agreements. The management
agreements include indemnification clauses between the Company and Sprint to
indemnify each party against claims arising from violations of laws or the
management agreements, other than liabilities resulting from negligence or
willful misconduct of the party seeking to be indemnified.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Note 3 in the Notes to Consolidated Financial Statements in the Company's
Annual Report on Form 10-K for the year ended December 31, 2001, describes the
Company's significant accounting policies in greater detail than the disclosures
presented herein.
BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the rules and regulations of the SEC. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles in the
United States have been condensed or omitted pursuant to such rules and
regulations. The statements herein include the accounts of the Company and its
wholly-owned subsidiaries, HPC and Bright PCS. All material intercompany
transactions and balances have been eliminated.
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ materially from those
estimates. See "Critical Accounting Policies" under "Item 2. Management's
Discussion and Analysis of Financial Results and Operations" of this Form 10-Q
for further information regarding estimates.
6
HORIZON PCS, INC.
Notes to Consolidated Financial Statements
As of September 30, 2002, and December 31, 2001,
And for the Three and Nine Months Ended September 30, 2002 and 2001 (unaudited)
- --------------------------------------------------------------------------------
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RESTRICTED CASH
In connection with the Company's December 2001 offering of $175,000,000 of
senior notes, the first four semi-annual interest payments due under the terms
of the notes were placed in escrow. Amounts to be paid toward interest payments
due within twelve months of the balance sheet date have been classified as short
term. The first interest payment on the senior notes was made in June 2002.
PROPERTY AND EQUIPMENT
Property and equipment, including improvements that extend useful lives,
are stated at original cost, while maintenance and repairs are charged to
operations as incurred. Construction work in progress includes expenditures for
the purchase of capital equipment, construction and items such as direct
payroll-related benefits and interest capitalized during construction. The
Company capitalizes interest pursuant to Statement of Financial Accounting
Standards ("SFAS") No. 34, "Capitalization of Interest Cost."
The Company accounts for long-lived assets in accordance with the
provisions SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets." SFAS No. 144 requires long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future undiscounted net cash
flows expected to be generated by the asset. If assets are impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value, less costs to
sell.
DERIVATIVE FINANCIAL INSTRUMENTS
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 recognize all derivatives 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. The net amount paid or received on interest rate swaps is
recognized as an adjustment to interest expense. Outstanding temporary gains and
losses are netted together and shown as either a component of other assets or
other long-term liabilities.
REVENUE RECOGNITION
The Company sells handsets and accessories which are recorded at the time
of the sale as equipment revenue. After the handset has been purchased, the
subscriber purchases a service package which is recognized monthly as service is
provided and is included as subscriber revenue. The Company defers monthly
service revenue billed in advance. Roaming revenue is recorded when Sprint PCS
subscribers not based in the Company's network area and non-Sprint PCS
subscribers roam onto the Company's network. The roaming rate with Sprint PCS is
determined between the Company and Sprint, while the roaming rate charged to
other wireless carriers is negotiated by Sprint on the Company's behalf.
The Company accounts for the recognition of activation fee revenue in
accordance with the current interpretations of SEC Staff Accounting Bulletin
("SAB") No. 101, "Revenue Recognition in Financial Statements." Accordingly,
activation fee revenue and direct activation-related expense are deferred and
will be recorded as subscriber revenues and selling and marketing expense over
the average life for those customers assessed an activation fee, currently 30
months.
7
HORIZON PCS, INC.
Notes to Consolidated Financial Statements
As of September 30, 2002, and December 31, 2001,
And for the Three and Nine Months Ended September 30, 2002 and 2001 (unaudited)
- --------------------------------------------------------------------------------
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company records 100% of PCS subscriber revenues from our customers,
roaming revenues from Sprint PCS subscribers based outside our markets and
non-Sprint PCS roaming revenues. Sprint retains 8% of all collected service
revenue as a management fee. Collected service revenues include PCS subscriber
revenues and non-Sprint PCS roaming revenues, but exclude Sprint PCS roaming
revenues, roaming charges billed to our customers for roaming onto a non-Sprint
PCS network and revenues from sales of equipment. The amounts retained by Sprint
are reported as general and administrative expense.
NET LOSS PER SHARE
The Company computes net loss per common share in accordance with SFAS No.
128, "Earnings per Share" and SAB No. 98. Basic and diluted net loss per share
available to common stockholders is computed by dividing net loss available to
common stockholders for each period by the weighted-average outstanding common
shares. No conversion of common stock equivalents has been assumed in the
calculations since the effect would be antidilutive. As a result, the number of
weighted-average outstanding common shares as well as the amount of net loss per
share is the same for basic and diluted net loss per share calculations for all
periods presented. There are three items that could potentially dilute basic
earnings per share in the future. These items include common stock options,
stock purchase warrants and convertible preferred stock. These items will be
included in the diluted earnings per share calculation when dilutive.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2002 the Financial Accounting Standards Board ("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 will 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 will adopt
SFAS 146 on January 1, 2003, and it is not expected to 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 July 1, 2002, and it has not
had a material effect on the Company's financial position, results of operations
or cash flows.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses financial
accounting and reporting for the impairment of long-lived assets. The statement
supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of," and the accounting and reporting
provisions of APB Opinion No. 30. SFAS No. 144 removes goodwill from its scope,
as goodwill is addressed in the impairment test described under SFAS No. 142.
The Company adopted SFAS No. 144 on January 1, 2002. See Note 4 for discussion
on the impact of the adoption of this statement.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." This statement addresses financial accounting and
reporting for obligations associated with the retirements of tangible long-lived
assets and the associated asset retirement costs. It applies to legal
obligations associated with the retirement of long- lived assets that result
from the acquisition, construction, development and the normal operation of a
long-lived asset. The Company will adopt this statement effective January 1,
2003, and it is not expected to have a material effect on the Company's
financial position, results of operations or cash flows.
8
HORIZON PCS, INC.
Notes to Consolidated Financial Statements
As of September 30, 2002, and December 31, 2001,
And for the Three and Nine Months Ended September 30, 2002 and 2001 (unaudited)
- --------------------------------------------------------------------------------
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company adopted SFAS No. 141, "Business Combinations" and SFAS No. 142,
"Goodwill and Other Intangible Assets" on January 1, 2002. As a result of the
adoption, goodwill amortization ceased as of December 31, 2001, and the Company
is required to complete an impairment test of its remaining goodwill balance
annually (or more frequently if impairment indicators arise). As of September
30, 2002, the Company has goodwill of approximately $7,191,000, related to the
acquisition of Bright PCS. See Note 8 herein for additional information.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the 2002
presentation. Management believes the reclassifications are immaterial to
previously reported financial statements.
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
September 30, December 31,
2002 2001
------------- -------------
Network assets........................... $ 187,626,930 $134,257,788
Switching equipment...................... 67,151,493 35,253,986
Furniture, vehicles and
office equipment....................... 9,803,635 10,137,175
Land..................................... 966,689 966,689
------------- -------------
Property and equipment in
service, cost.......................... 265,548,747 180,615,638
Accumulated depreciation................. (42,597,495) (22,478,697)
------------- -------------
Property and equipment in service, net... 222,951,252 158,136,941
Construction work in progress............ 20,689,443 56,730,917
------------- -------------
Total property and equipment, net.... $ 243,640,695 $214,867,858
============= =============
The Company capitalized interest and labor-related expenses of
approximately $6,148,000 and $7,207,000 for the nine months ended September 30,
2002 and 2001, respectively.
During 2002, the Company launched switches in Tennessee and Pennsylvania
and disconnected some switching equipment in Chillicothe, Ohio. As a result,
approximately $6.2 million of switching equipment is considered an impaired
asset as defined by SFAS No. 144. Accordingly, depreciation and amortization
expense for the nine months ended September 30, 2002, includes approximately
$3.5 million related to accelerated depreciation on the impaired asset. The
total amount of depreciation recorded to date on this equipment is approximately
$5.8 million. The residual book value of $400,000 approximates fair market value
at September 30, 2002, based on quoted market prices.
9
HORIZON PCS, INC.
Notes to Consolidated Financial Statements
As of September 30, 2002, and December 31, 2001,
And for the Three and Nine Months Ended September 30, 2002 and 2001 (unaudited)
- --------------------------------------------------------------------------------
NOTE 5 - LONG-TERM DEBT
The components of long-term debt outstanding are as follows:
Interest Rate at September 30, December 31,
September 30, 2002 2002 2001
------------------ ------------- -------------
Discount notes.................... 14.00% $295,000,000 $295,000,000
Senior notes...................... 13.75% 175,000,000 175,000,000
Secured credit facility -
term loan A..................... 5.80% 105,000,000 --
Secured credit facility -
term loan B..................... 6.32% 50,000,000 50,000,000
------------- -------------
Long-term debt, face value........ 625,000,000 520,000,000
Less: unaccreted interest
portion of discount notes....... (115,991,001) (135,944,357)
------------- -------------
Total long-term debt, net..... $ 509,008,999 $ 384,055,643
============= =============
As of September 30, 2002, Horizon PCS had $95.0 million committed under the
Company's secured credit facility in the form of a line of credit at a variable
interest rate equal to the London Interbank Offered Rate ("LIBOR") plus 400
basis points.
Horizon PCS' secured credit facility includes financial covenants that must
be met each quarter. The Company did not meet the covenant for earnings before
interest, taxes, depreciation and amortization ("EBITDA") for the first quarter
of 2002. As a result of higher than expected gross and net additions to Horizon
PCS subscribers for that quarter, the Company incurred additional expenses to
add those customers. Although the Company ultimately benefits from the revenues
generated by new subscribers, the Company incurs one-time expenses associated
with new subscribers, including commissions, handset subsidies, set up costs for
the network and marketing expenses. As a result, these new subscriber costs
negatively affect EBITDA in the short-term during the period of the addition of
new subscribers, which led to non-compliance with the EBITDA covenant for the
first quarter of 2002.
On June 27, 2002, the Company obtained a waiver of the non-compliance with
the EBITDA covenant for the first quarter of 2002 and entered into an amendment
of the secured credit facility. The amended facility primarily adjusts certain
financial covenants and increases the margin on the base interest rate by 25
basis points, while also providing for the payment of fees to the banking group,
an increase in post-default interest rates, a new financial covenant regarding
minimum available cash, additional prepayment requirements, restrictions on the
Company's borrowings committed under the remaining $95.0 million revolving
credit facility and deposit requirements on the use of the $105.0 million
borrowed under the secured credit facility in March 2002. This amendment and its
requirements are described in detail in the Form 8-K filed by the Company on
June 27, 2002 (See also "Liquidity and Capital Resources" under "ITEM 2.
Management's Discussion and Analysis of Financial Condition and Results or
Operations" included in this Form 10-Q).
NOTE 6 - COMMITMENTS AND CONTINGENCIES
SPRINT 3G DEVELOPMENT FEES
Recently, Sprint has sought to increase service fees during the remainder
of 2002 and beyond in connection with its development of 3G-related back-office
systems and platforms. The Company, along with other PCS affiliates of Sprint,
is currently disputing the validity of Sprint's right to pass through this fee
to the affiliates. If this dispute is resolved unfavorably to the Company, then
Horizon PCS will incur additional expenses.
10
HORIZON PCS, INC.
Notes to Consolidated Financial Statements
As of September 30, 2002, and December 31, 2001,
And for the Three and Nine Months Ended September 30, 2002 and 2001 (unaudited)
- --------------------------------------------------------------------------------
NOTE 6 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
OPERATING LEASES
The Company leases office space and various equipment under several
operating leases. In addition, the Company has tower lease agreements with third
parties whereby the Company leases towers for substantially all of the Company's
cell sites. The tower leases are operating leases with a term of five to ten
years with three consecutive five-year renewal option periods.
The Company also leases space for its retail stores. At September 30, 2002,
the Company leased 39 of its 40 retail stores operating throughout its
territories.
The following table summarizes the annual lease payments required under the
Company's existing lease agreements at September 30, 2002.
Period ending
Year December 31
---- -------------
Fourth quarter of 2002........................ $ 2,688,000
2003........................................... 15,674,000
2004........................................... 14,862,000
2005........................................... 12,158,000
2006........................................... 7,338,000
April 2004..................................... 10,016,000
------------
Future operating lease obligation............. $ 62,736,000
============
CONSTRUCTION EXPENDITURES
Construction expenditures for the year ended December 31, 2002, are
estimated to be between approximately $60,000,000 and $70,000,000. The majority
of the estimated expenditures are for the build-out and upgrade of the Company's
PCS network.
LEGAL MATTERS
The Company is party to legal claims arising in the normal course of
business. Although the ultimate outcome of the claims cannot be ascertained at
this time, it is the opinion of management that none of these matters, when
resolved, will have a material adverse impact on the Company's results of
operations, cash flows or financial condition.
GUARANTEES
The discount notes and the senior notes are guaranteed by the Company's
existing subsidiaries, HPC and Bright PCS, and will be guaranteed by the
Company's future domestic restricted subsidiaries. The Company has no
independent assets or operations apart from its subsidiaries. The guarantees are
general unsecured obligations. Each guarantor unconditionally guarantees,
jointly and severally, on a senior subordinated basis, the full and punctual
payment of principal premium and liquidated damages, if any, and interest on the
discount notes and senior notes when due. If the Company creates or acquires
unrestricted subsidiaries and foreign restricted subsidiaries, these
subsidiaries need not be guarantors.
11
HORIZON PCS, INC.
Notes to Consolidated Financial Statements
As of September 30, 2002, and December 31, 2001,
And for the Three and Nine Months Ended September 30, 2002 and 2001 (unaudited)
- --------------------------------------------------------------------------------
NOTE 6 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
ALLIANCES NETWORK AGREEMENT
The Alliances are two independent PCS providers offering service under the
NTELOS brand name. In August 1999, the Company entered into a network services
agreement with the Alliances for 13 of its markets in Virginia and West
Virginia. The initial term is through June 8, 2008, with four automatic ten-year
renewals. This agreement was amended in the third quarter of 2001. Under the
amended agreement, Horizon PCS is obligated to pay fixed minimum monthly fees
until December 2003, at a lower rate per minute than the prior agreement. Usage
in excess of the monthly minute allowance is charged at a set rate per minute.
The following table summarizes the minimum amounts required to be paid
under the network services agreement.
Period ending
Year December 31
---- ------------
Fourth quarter of 2002.......................... $ 7,900,000
2003............................................ 38,600,000
------------
Future operating lease obligation............... $ 46,500,000
============
LONG-TERM DEBT COVENANTS
As discussed in Note 5 above, the Company entered into a covenant amendment
under its secured credit facility in June 2002. In addition to a number of
changes to the secured credit facility, including an increase in the margin on
the base interest rate, this amendment placed restrictions on the Company's
ability to draw on the $95.0 million line of credit and deposit requirements on
the $105.0 million term loan A borrowed under the secured credit facility in
March 2002. These amounts are summarized below.
The following table details the maximum amount available to be borrowed on
the line of credit for the period then ended:
Maximum amount
available to be
borrowed
---------------
September 30, 2002............................... $ --
December 31, 2002................................ --
March 31, 2003................................... --
June 30, 2003.................................... 16,000,000
September 30, 2003............................... 26,000,000
December 31, 2003................................ 33,000,000
March 31, 2004................................... 52,000,000
Thereafter....................................... 95,000,000
The following table details the minimum balance requirements placed on cash
and cash equivalents under the amended terms of the secured credit facility:
Deposit balance
requirement
---------------
At September 30, 2002................................. .... $ 71,000,000
October 1, 2002, through November 15, 2002................. 63,000,000
November 16, 2002, through December 31, 2002............... 55,000,000
January 1, 2003, through February 15, 2003................. 33,000,000
February 16, 2003, through March 31, 2003.................. 11,000,000
April 1, 2003, through May 15, 2003........................ 5,500,000
12
HORIZON PCS, INC.
Notes to Consolidated Financial Statements
As of September 30, 2002, and December 31, 2001,
And for the Three and Nine Months Ended September 30, 2002 and 2001 (unaudited)
- --------------------------------------------------------------------------------
NOTE 7 - RELATED PARTIES
The Company has non-interest-bearing receivables from affiliated companies
(other subsidiaries of the Parent) related to advances made to and services
received from these affiliated companies. At December 31, 2001, the Company had
a receivable from the Parent related to Federal income taxes. The balances due
to and due from related parties as of September 30, 2002, and December 31, 2001,
are as follows:
September 30, December 31,
2002 2001
------------- ------------
Receivable from affiliates....................... $ 152,765 $ 100,437
Receivable from Parent........................... 2,105 483,785
During the nine months ended September 30, 2002 and 2001, a subsidiary of
the Parent provided the Company with administrative services including
financial, regulatory, human resource and other administrative and support
services. The cost of the administrative services for the nine months ended
September 30, 2002 and 2001, was approximately $3,944,000 and $4,735,000,
respectively.
NOTE 8 - GOODWILL AND INTANGIBLE ASSETS
During 1999 the Company entered into a joint venture agreement through the
purchase of 25.6% of Bright PCS. On June 27, 2000, the Company acquired the
remaining 74.4% of Bright PCS. The total purchase price was approximately
$49,300,000 and was treated as a purchase method acquisition for accounting
purposes. The purchase price exceeded the fair market value of the net assets
acquired by approximately $7,778,000. The resulting goodwill was amortized on a
straight-line basis over 20 years until December 31, 2001. At September 30,
2002, the remaining unamortized balance of goodwill was approximately
$7,191,000.
The Company adopted SFAS No. 142 on January 1, 2002 (See Note 3). As a
result of the adoption, goodwill amortization ceased as of December 31, 2001,
and the Company was required to complete an impairment test on its remaining
goodwill balance as of the date of adoption. The Company completed the first
step required by SFAS No. 142 and determined the goodwill remaining at January
1, 2002, was not impaired. The Company will complete an impairment test of the
remaining goodwill balance annually, or more frequently if impairment indicators
arise.
The following pro forma disclosure reconciles net loss available to common
stockholders, as presented on the accompanying consolidated statements of
operations, excluding the effect of goodwill amortization:
Three Months Ended September 30, Nine Months Ended September 30,
2002 2001 2002 2001
-------------- -------------- -------------- -------------
Reported net loss............... $ (40,311,961) $ (28,686,580) $(119,732,332) $(75,431,048)
Goodwill amortization........... -- 97,222 -- 291,666
-------------- --------------- -------------- -------------
Adjusted net loss............ (40,311,961) (28,589,358) (119,732,332) (75,139,382)
Preferred stock dividend........ (3,005,897) (2,816,053) (8,718,663) (8,169,630)
-------------- --------------- -------------- -------------
Adjusted net loss available
to common stockholders..... (43,317,858) $ (31,405,411) $(128,450,995) $(83,309,012)
============== =============== ============== =============
Basic and diluted net loss per
share available to
common stockholders.......... $ (0.74) $ (0.54) $ (2.20) $ (1.43)
Goodwill amortization........... -- -- -- --
-------------- --------------- -------------- -------------
Adjusted basic and diluted
net loss per share
available to common
stockholders.............. $ (0.74) $ (0.54) $ (2.20) $ (1.43)
============== =============== ============== =============
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OR OPERATIONS
The following discussion and analysis should be read in conjunction with
the consolidated financial statements and the related notes.
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" and under "ITEM 5. Other Information" and
elsewhere herein regarding our financial position and liquidity are
forward-looking statements. These forward-looking statements also include, but
are not limited to:
o estimates of current and future population for our markets;
o forecasts of growth in the number of consumers and businesses using
personal communication services;
o estimates for churn and ARPU (defined below);
o statements regarding our plans for and costs of the build-out of our
PCS network;
o statements regarding our anticipated revenues, expense levels,
liquidity and capital resources and projections of when we will launch
commercial PCS and achieve break-even or positive EBITDA and operating
cash flow; 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 our potential need for additional capital or the need for refinancing
existing indebtedness;
o our dependence on our affiliation with Sprint and our dependence on
Sprint's back office services;
o our future compliance with debt covenants;
o the need to successfully complete the build-out of our portion of the
Sprint PCS network;
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 and the
creditworthiness of new customers;
o our lack of operating history and anticipation of future losses;
o potential fluctuations in our operating results;
o our potential inability to expand our services and related products in
the event of a substantial increase in demand for these services and
related products;
14
o our ability to attract and retain skilled personal;
o changes in government regulation; and
o general political, economic and business conditions.
These forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause our actual results, performance
or achievements to be materially different from any future results, performance
or achievements expressed or implied by such forward-looking statements. All
subsequent written and oral forward-looking statements attributable to us or
persons acting on our behalf are expressly qualified in their entirety by the
Cautionary Statements. See "ITEM 5. Other Information" for further information
regarding several of these risks and uncertainties.
HISTORY AND BACKGROUND
Under our agreements with Sprint, we manage our network on Sprint's
licensed spectrum and have the right to use the Sprint and Sprint PCS brand
names. As of September 30, 2002, we had launched service covering approximately
7.4 million residents, or approximately 73% of the total population in our
territory, and served approximately 241,900 customers.
Horizon PCS is a majority-owned subsidiary of Horizon Telcom. Horizon
Telcom is a holding company which, in addition to its common stock ownership of
Horizon PCS, owns 100% of: 1) The Chillicothe Telephone Company, a local
telephone company; 2) Horizon Services, Inc. ("Horizon Services"), which
provides administrative services to Horizon PCS and other Horizon Telcom
affiliates; and 3) Horizon Technology, Inc. ("Horizon Technology"), a separate
long distance and Internet services business.
The following are key milestones in our business:
In November 1996, we acquired PCS licenses in the Federal Communications
Commissions' ("FCC") C-Block auction giving us the right to provide service to
five markets in Ohio, West Virginia and Kentucky with a total population of
approximately 1.0 million residents. In August 1997, approximately ten months
after receiving our licenses, we launched PCS service as an independent service
provider operating under the "Horizon Personal Communications" brand name. We
were the third C-Block licensee to launch PCS service in the United States and
the first to use CDMA technology.
In June 1998, we returned all of our FCC licenses except for a portion of
the license covering our Chillicothe, Ohio, market in exchange for the
forgiveness of our FCC debt. In connection with the return of our FCC licenses,
we agreed to become one of five charter PCS affiliates of Sprint. Our initial
grant of markets from Sprint consisted of seven markets in Ohio, West Virginia
and Kentucky with a total population of approximately 1.6 million residents.
This grant included the five markets for which we originally held licenses. In
November 1998, we began offering PCS service under the Sprint licenses. However,
we continued to use "Horizon Personal Communications" as the primary brand for
marketing our PCS service.
In August 1999, Sprint granted us 17 additional markets in Virginia, West
Virginia, Tennessee, Maryland, Kentucky, North Carolina and Ohio with a total
population of approximately 3.3 million residents. In conjunction with this
second grant, we also entered into a network services agreement with the West
Virginia PCS Alliance and Virginia PCS Alliance, which we refer to as the
Alliances. The Alliances are two related, independent PCS providers offering
services under the NTELOS brand. Under this agreement, we obtained the right to
use their wireless network to provide Sprint PCS services to our customers in
most of these new markets. Within two months of receiving our second license
grant from Sprint, we were offering PCS service in 16 of our markets including
eleven markets served under this agreement. The Alliances' network provides
coverage to 1.8 million residents, or 55% of the total population.
In September 1999, Horizon Telcom sold its interest in the towers it owned
to SBA Communications, Corp. ("SBA"), and invested the net proceeds in Horizon
PCS. Prior to the sale, we had been leasing the towers from Horizon Telcom. We
15
now lease those towers from SBA. Concurrently with the tower sale, we entered
into a build-to-suit agreement with SBA for the construction of new towers as
part of our network build-out. Under the terms of the agreement, we received
site development fees, reduced lease rates, and construction discounts for
specified towers constructed by SBA and leased to us as an anchor tenant.
In September 1999, we became one of the founders of Bright PCS, receiving a
26% equity interest in exchange for an equity contribution of approximately $3.1
million. Shortly after our investment, Bright PCS became the exclusive PCS
affiliate of Sprint for 13 markets in Indiana, Ohio and Michigan, with a total
population of approximately 2.4 million residents. At that time, we also entered
into a management agreement with Bright PCS under which we agreed to manage
Bright PCS' network build-out and operations. We launched service in
substantially all of the Bright PCS markets in October 2000.
In December 1999, we completed a two-month transition from a co-branded
marketing strategy to marketing and selling all of our products and services
exclusively under the "Sprint PCS" brand name, which gave us full access to
Sprint PCS' major national retailers. Since that transition, we have experienced
an accelerated growth in our customer base.
In May 2000, Sprint granted us an additional 17 markets in Pennsylvania,
New York, Ohio and New Jersey with a total population of approximately 2.9
million residents.
In June 2000, we acquired the remaining 74% of Bright PCS that we did not
already own to become a 100% owner. As consideration for the outstanding Bright
PCS equity, we exchanged 4.7 million shares of our class B common stock, equal
to 8% of our outstanding shares of all classes of our common stock prior to the
acquisition, and 31,912 shares of Horizon Telcom common stock, equal to 8% of
the outstanding shares of Horizon Telcom, which we acquired in February 2000.
On September 26, 2000, an investor group led by Apollo Management purchased
$126.5 million of our convertible preferred stock in a private placement.
Concurrently, holders of a $14.1 million short-term convertible note (including
accrued interest of $1.1 million) converted it into the same convertible
preferred stock purchased by the investor group. The Company received $149.7
million from the issuance of $295.0 million of 14% discount notes and negotiated
a $225.0 million secured credit facility (later increased to a $250.0 million
facility) with a bank group. The discount notes were subject to an exchange
offer filed with the SEC in late 2001.
In December 2001, we received $175.0 million from our offering of 13.75%
senior notes. The senior notes were subject to an exchange offer filed with the
SEC in the second quarter of 2002 and completed in July 2002.
CRITICAL ACCOUNTING POLICIES
Allowance for Doubtful Accounts. Estimates are used in determining our
allowance for doubtful accounts receivable, which are based on a percentage of
our accounts receivables by aging category. The percentage is derived by
considering our historical collections and write-off experience, current aging
of our accounts receivable and credit quality trends, as well as Sprint's credit
policy. However, our historical write-off and receivables trends are limited due
to our strong subscriber growth and the recent launch of new markets.
Under Sprint's service plans, customers who do not meet certain credit
criteria can select any plan offered subject to an account spending limit,
referred to as ASL, to control credit risk exposure. Account spending limits
range from $125 to $200 depending on the credit quality of the customer. Prior
to May 2001, all of these customers were required to make a deposit that could
be credited against future billings. In May 2001, the deposit requirement was
eliminated on certain, but not all, credit classes ("No Deposit ASL" or
"NDASL"). As a result, a significant amount of our new customer additions
(approximately 59% between May 1, 2001, and March 31, 2002) were under the NDASL
program.
This increase in sub-prime credit customers under the NDASL program has led
to higher churn rates (defined below) and an increase in account write-offs.
While the average balance written-off for an NDASL customer is lower than the
average write-off balances of non-account spending limit customers, the number
of NDASL write-offs has caused an increase in the total amount written-off each
16
quarter, resulting in the need for a higher allowance and provision for doubtful
accounts receivable.
Beginning in November 2001, the NDASL program was replaced by "Clear Pay",
which had tightened credit criteria. In April 2002, we replaced Clear Pay with
"Clear Pay II," which re-instated the deposit requirement for most credit
classes with account spending limits and featured increased back-office controls
with respect to credit qualification and account collections. We anticipate the
implementation of the Clear Pay II program will reduce our future bad debt
exposure. If the deposit requirement is later removed or if these allowances for
doubtful accounts receivable estimates are insufficient for any reason, our
operating income, EBITDA and available cash could be reduced. At September 30,
2002, the allowance for doubtful accounts was $2,377,000, which represents
approximately10% of accounts receivable. At September 30, 2002, approximately
33% of the subscribers in our markets were account spending limit customers with
no deposit paid.
Revenue Recognition. The Company sells handsets and accessories, which are
recorded at the time of the sale as equipment revenue. After the handset has
been purchased, the subscriber purchases a service package that is recognized
monthly as service is provided and is included as subscriber revenue. The
Company defers a portion of the monthly service revenue that is billed in
advance.
Service revenues consist of PCS subscriber revenues and roaming revenues.
PCS subscriber revenues consist primarily of monthly service fees and other
charges billed to customers for Sprint PCS service in our territory under a
variety of service plans. Roaming revenues consist of Sprint PCS and non-Sprint
PCS roaming. We receive Sprint PCS roaming revenues at a per minute rate when
Sprint PCS subscribers based outside of our territory use our portion of the
Sprint PCS network. Non-Sprint PCS roaming revenues include charges to wireless
service providers, other than Sprint, when those providers' subscribers roam on
our network. The Sprint PCS roaming rate is negotiated between the Company and
Sprint. The roaming rate charged to other wireless carriers for their use of our
network is negotiated by Sprint with the carrier on our behalf.
We record 100% of PCS subscriber revenues from our customers, Sprint PCS
roaming revenues and non-Sprint PCS roaming revenues. Sprint retains 8% of all
collected service revenue as a management fee. Collected service revenues
include PCS subscriber revenues and non-Sprint PCS roaming revenues, but exclude
Sprint PCS roaming revenues, roaming charges billed to our customers for roaming
onto a non-Sprint PCS network and revenues from sales of equipment. We report
the amounts retained by Sprint as general and administrative expense.
The Company's accounting policy for the recognition of activation fee
revenue is to record the revenue over the periods such revenue is earned in
accordance with the current interpretations of SAB No. 101, "Revenue Recognition
in Financial Statements." Accordingly, activation fee revenue and direct
customer activation expense are deferred and will be recorded over the average
life for those customers, currently estimated to be 30 months, that are assessed
an activation fee. Prior to January 1, 2002, we estimated the average life of a
customer to be 36 months. We reduced this estimate to 30 months in consideration
of an increase in churn (defined below) resulting from the NDASL program
discussed earlier.
17
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO
THREE MONTHS ENDED SEPTEMBER 30, 2001
OVERVIEW
We have focused a significant amount of our operational efforts over the
past twelve months on upgrading our wireless network to be able to provide the
first level of third generation ("3G") network services marketed by Sprint
nationally as "PCS Vision." In conjunction with Sprint's nationwide launch of
PCS Vision, we began providing 3G services across our network in mid-August
2002. This upgrade provides users of 3G service a new experience with wireless
devices. Subscribers are now able to surf the Internet with their handsets,
PDA's, and laptops at speeds of up to 144 kilobits per second ("kbps"). The
average user will experience peak rates of 75-80 kbps, which is two to three
times faster than historical dial-up speeds. We can now offer a host of new
products and services to our subscribers and we believe PCS Vision will entice
subscribers of other wireless carriers to move to our robust offerings.
However, the positive momentum generated by 3G was offset by a larger than
anticipated number of NDASL customers being involuntarily disconnected. During
the second half of 2001 and first half of 2002, a significant number of our
customer additions were under the NDASL program. These lower credit quality
customers activated under the NDASL program led to higher churn rates and an
increased amount of bad debt during the third quarter of 2002 as a significant
number of these customers were disconnected and written-off.
Sprint has discontinued the NDASL program and replaced it with Clear Pay,
which tightened credit restrictions, and Clear Pay II, which re-instituted
deposit requirements for most lower credit quality customers and introduces
additional controls on loss exposure. In addition, we've focused our marketing
efforts into recruiting higher quality customers. As a result, our percentage of
prime credit customers in our subscriber portfolio increased to 70% at September
30, 2002, from 65% at March 31, 2002. We expect our churn rate to be consistent
to slightly lower in the fourth quarter of 2002 than the 3.9% we experienced in
the third quarter.
In response to increased competition from other carriers and to improve
focus on penetrating our markets with PCS Vision, we took an operational
reorganization on October 1, 2002. We realigned our internal geographic markets
and added a vice president to oversee our marketing and retail operations teams.
We look forward to the benefits of this new organizational alignment and believe
it will result in higher gross additions and a better retention effort.
KEY METRICS
The following discussion details key operating metrics and focuses on the
details of our financial performance over the last quarter and current fiscal
year.
Customer Additions. As of September 30, 2002, we provided personal
communication service directly to approximately 241,900 customers. For the three
months ended September 30, 2002 and 2001, Horizon PCS net subscribers increased
by approximately 6,800 and 40,300 customers, respectively. Gross activations
during the third quarter of 2002 were 21% lower than the same period in 2001 due
in part to changes in deposit requirements for new low credit quality
subscribers. Additionally, an increase in the churn of NDASL and Clear Pay
subscribers resulted in overall lower net customer additions for the three
months ended September 30, 2002, compared to the three months ended September
30, 2001.
Cost Per Gross Addition. CPGA summarizes the average cost to acquire new
customers during the period. CPGA is computed by adding the income statement
components of selling and marketing, cost of equipment and activation costs
(which are included as a component of cost of service) and reducing that amount
by the equipment revenue recorded. That net amount is then divided by the total
new customers acquired during the period. CPGA was $365 for the three months
ended September 30, 2002, compared to $307 for the three months ended September
30, 2001. This increase is primarily the result of lower gross activations in
2002 compared to 2001.
Churn. Churn is the monthly rate of customer turnover that both voluntarily
and involuntarily discontinued service during the month. Churn is computed by
dividing the number of customers that discontinued service during the month, net
18
of 30-day returns, by the beginning customer base for the period. Quarterly
churn is an average of the three months in the quarter. Churn for the three
months ended September 30, 2002, was 3.9 % compared to 2.1% for the three months
ended September 30, 2001. This increase in churn is a result of an increase in
the amount of sub-prime credit quality customers the Company added whose service
was involuntarily discontinued during the period.
Average Revenue Per Unit. ARPU summarizes the average monthly revenue per
customer. ARPU is computed by dividing service revenue and roaming revenues for
the period by the average subscribers for the period.
The following summarizes ARPU for the three months ended September 30:
2002 2001
------------- -----------
Service revenues
Recurring........................... $ 40 $ 45
Minute sensitive.................... 12 14
Features and other.................. 3 (2)
------------- -----------
Total service revenues............ 55 57
------------- -----------
Roaming revenues....................... 21 31
------------- -----------
ARPU............................ $ 76 $ 88
------------- -----------
Recurring service ARPU has declined as more customers activated or migrated
to service plans in the $29.99 to $39.99 monthly recurring charge range.
Additionally, recent service plans are offering more minutes at a lower monthly
charge due to increased competition in the wireless industry. These additional
minutes have driven down the ARPU received when customers use more minutes than
their plan allows. We anticipate this trend to continue on voice-only service
plans, but we anticipate higher service ARPU in the future as subscribers
activate on data and voice plans, which offer more features, but at a higher
monthly charge. ARPU from features and other has increased as we are offering
fewer promotional credits and have charged more contract termination fees in
2002 as a result of higher deactivation and churn rates.
On April 27, 2001, Sprint and its affiliates announced an agreement on a
new Sprint PCS roaming rate; the receivable and payable roaming rate decreased
from $0.20 per minute to $0.15 per minute effective June 1, 2001, and decreased
further to $0.12 per minute effective October 1, 2001. The Sprint PCS roaming
rate changed to $0.10 per minute on January 1, 2002. After 2002, the rate will
be changed to "a fair and reasonable return" which has not yet been determined.
However, based on preliminary discussions with Sprint, we anticipate a
significant additional reduction in the rate. The decreases in the rate will
reduce our revenue and expense per minute, but we anticipate this rate reduction
will be offset by volume increases from the continued build-out of our network
and subscriber growth, resulting in greater overall roaming revenue and expense
in the future. Somewhat offsetting that rate reduction in Sprint PCS roaming
revenue was an increase in non-Sprint PCS revenue as a result of expanding
roaming agreements with other wireless carriers.
Earnings Before Interest, Taxes, Depreciation and Amortization. EBITDA is a
financial metric used to estimate cash flow available to service debt. EBITDA
can be calculated from our income statement as follows:
Three Months Ended
September 30,
-------------------------------
2002 2001
--------------- -------------
Operating Loss......................... $ (25,151,859) $ (23,270,641)
Plus: Depreciation and amortization.... 9,302,721 5,158,646
Non-cash compensation............ 170,188 177,237
--------------- -------------
EBITDA......................... $ (15,678,950) $ (17,934,758)
=============== =============
19
EBITDA is not a measure of financial performance presented under generally
accepted accounting principals in the United States of America and should not be
considered an alternative to net income (loss) as a measure of performance or to
cash flow as a measure of liquidity. However, the Company's secured credit
facility has a covenant requiring EBITDA to be controlled to a certain
threshold. During the third quarters of 2002, and 2001, the Company's covenant
requirements, as they pertain to EBITDA losses, were ($21,400,00) and
($25,135,000), respectively.
RESULTS OF OPERATIONS
Revenues. The following table sets forth a breakdown of our revenues by
type for the three months ended September 30:
(Dollars in thousands) 2002 2001
------------------- -------------------
Amount % Amount %
---------- ------- ---------- -------
Subscriber revenues $ 39,281 70% $ 21,391 61%
Roaming revenues 14,993 27% 11,793 33%
Equipment revenues 1,787 3% 2,020 6%
---------- ------- ---------- -------
Total revenues $ 56,061 100% $ 35,204 100%
========== ======= ========== =======
Subscriber revenues for the three months ended September 30, 2002, were
approximately $39.3 million, compared to approximately $21.4 million for the
three months ended September 30, 2001, an increase of approximately $17.9
million. The growth in subscriber revenues is primarily the result of the growth
in our customer base. We managed approximately 241,900 customers at September
30, 2002, compared to approximately 146,600 at September 30, 2001. Our customer
base has grown because we have launched additional markets and increased our
sales force.
Roaming revenues increased from approximately $11.8 million during the
three months ended September 30, 2001, to approximately $15.0 million for the
three months ended September 30, 2002, an increase of approximately $3.2
million. This increase resulted from expanding roaming agreements with wireless
carriers and from launching additional markets over the past year, including
markets covering major interstate highways. This increase was offset somewhat by
the decrease in the Sprint PCS roaming rate discussed above.
Equipment revenues for the three months ended September 30, 2002, were
approximately $1.8 million, compared to approximately $2.0 million for the three
months ended September 30, 2001, representing a decrease of approximately
$200,000. This decrease is attributable to a decline in the sales price of the
handset as the average sales price, net of discounts and rebates, decreased to
$85 for the three months ended September 30, 2002, from $114 for the same period
in 2001.
Cost of service. Cost of service includes costs associated with operating
our network, including site rent, utilities, engineering personnel and other
expenses related to operations. Cost of service also includes interconnection
expenses, customer care, Sprint back office and customer care charges, and
roaming fees. We pay roaming fees to Sprint when our customers use Sprint PCS'
network outside of our territory. We pay non-Sprint PCS roaming fees to other
wireless service providers when our customers use their networks.
Also included in cost of service are costs incurred under our network
services agreement with the Alliances. In the third quarter of 2001, Horizon PCS
negotiated an amendment to its agreement with the Alliances and a related
amendment to its Sprint agreements. Under the Alliances amendment, Horizon PCS
is obligated to pay a minimum monthly fee for a stated minimum period. Horizon
PCS expects to incur lower overall fees under this new arrangement at expected
usage levels as compared to the previous agreement that was based on a per
minute fee. The Alliances are also obligated to upgrade their networks to
provide 3G technology.
20
Sprint provides back-office and other services to the Company. Recently,
Sprint has sought to increase service fees during the remainder of 2002 and
beyond in connection with its development of 3G-related back-office systems and
platforms. The Company, along with the other Sprint affiliates, is currently
disputing the validity of Sprint's right to pass through this fee to the
affiliates. If this dispute is resolved unfavorably to the Company, then Horizon
PCS will incur additional expenses which could have a material adverse impact on
our liquidity and financial results.
Cost of service for the three months ended September 30, 2002, was
approximately $43.8 million, compared to approximately $29.2 million for the
three months ended September 30, 2001, an increase of approximately $14.6
million. This increase reflects an increase in roaming expense and long distance
charges of approximately $3.7 million and the increase in costs incurred under
our network services agreement with the Alliances of approximately $3.8 million,
both as a result of our subscriber growth during 2001 and 2002. Additionally, at
September 30, 2002, our network covered approximately 7.4 million people versus
approximately 6.6 million residents at September 30, 2001. As a result, cost of
service in 2002 was higher than 2001 due to the increase in network operations
expense, including tower lease expense, circuit costs and payroll expense, of
approximately $5.2 million. Growth in our customer base resulted in increased
customer care, activations, and billing expense of approximately $1.7 million
and other variable expenses, including interconnection and national platform
expenses, of approximately $200,000. Overall, the average cost of providing
service per the average subscriber on our network decreased from $77 to $61 for
the three months ended September 30, 2001 and 2002, respectively, as we have
increased our subscriber base.
Cost of equipment. Cost of equipment includes the cost of handsets and
accessories sold by our stores and direct sales force to our customers. Cost of
equipment for the three months ended September 30, 2002, was approximately $4.0
million, compared to approximately $4.1 million for the three months ended
September 30, 2001, a decrease of approximately $100,000. The decrease in the
cost of equipment is the result of the lower growth in our wireless customers.
For competitive and marketing reasons, we have sold handsets to our customers
below our cost and expect to continue to sell handsets at a price below our cost
for the foreseeable future. Additionally, we expect to incur additional expense
as existing customers upgrade their handsets to newer models to take advantage
of new services that may be available with 3G, including high-speed data
applications.
Selling and marketing expenses. Selling and marketing expenses consist of
costs associated with operating our retail stores, including marketing,
advertising, payroll and sales commissions. Selling and marketing expense also
includes commissions paid to national and local third party distribution
channels and subsidies on handsets sold by third parties for which we do not
record revenue. Selling and marketing expenses rose to approximately $13.0
million for the three months ended September 30, 2002, compared to approximately
$12.6 million for the three months ended September 30, 2001, an increase of
approximately $400,000. This includes a decrease in commissions paid to third
parties of approximately $300,000, a decrease in subsidies on handsets sold by
third parties of approximately $1.2 million and an increase in marketing and
advertising in our sales territory of approximately $1.9 million. We expect
selling and marketing expense to increase in the aggregate as we expand our
coverage, launch additional stores and add customers.
General and administrative expenses. General and administrative costs
include the Sprint management fee (which is 8% of "collected revenues" defined
above), a provision for doubtful accounts receivable and costs related to
corporate support functions including costs associated with functions performed
for us by Horizon Services under our services agreement. These services include
finance and accounting functions, computer access and administration,
consulting, human resources and other administrative services. Horizon Services'
costs for these functions are charged to us using a standard FCC cost allocation
methodology. Under this methodology, all costs that can be specifically
identified to us are directly charged to us, and all costs that are specifically
identified to other subsidiaries of Horizon Telcom are charged to them. Costs
incurred by Horizon Services that cannot be specifically identified to a company
for which Horizon Services provides service are apportioned among the Horizon
Telcom subsidiaries based on appropriate measures. Because of the economies of
scale inherent in a centralized service company, we believe we are able to
receive these services less expensively through this arrangement than if we
provided them ourselves.
General and administrative expenses for the three months ended September
30, 2002, were approximately $10.9 million compared to approximately $7.2
million in 2001, an increase of approximately $3.7 million. The increase
reflects an increase in the provision for doubtful accounts of approximately
$2.8 million, primarily due to the write-off of NDASL and ClearPay customers,
21
and an increase in the Sprint management fee of approximately $1.4 million, as a
result of higher subscriber revenues in 2002, offset by a decrease in other
general expenses of approximately $500,000.
Non-cash compensation expense. For both the three months ended September
30, 2002 and 2001, we recorded stock-based compensation expense of approximately
$200,000 and $200,000, respectively. Stock-based compensation expense will
continue to be recognized through the conclusion of the vesting period for these
options in 2005. The annual non-cash compensation expense expected to be
recognized for these stock options is approximately $681,000 in 2002, $622,000
in 2003, $193,000 in 2004, and $71,000 in 2005.
Depreciation and amortization expense. Depreciation and amortization
expenses increased by approximately $4.1 million to a total of approximately
$9.3 million during the three months ended September 30, 2002. The increase
reflects the continuing construction of our network as we funded approximately
$57.6 million of capital expenditures during the nine months ended September 30,
2002.
Since our acquisition of Bright PCS was accounted for as a purchase
transaction, we recorded purchase method goodwill and recorded intangible assets
related to the acquisition of Bright PCS' license agreement with Sprint.
Amortization expense of the intangible asset was approximately $400,000 during
the three months ended September 30, 2002 and 2001. Goodwill amortization was
approximately $100,000 during the three months ended September 30, 2001.
Goodwill amortization ceased as of December 31, 2001, with the adoption of SFAS
No. 142.
Amortization expense also includes amortization of an intangible asset
recorded in September 2000 related to the grant of new markets to us by Sprint
in September 2000. We agreed to grant warrants to Sprint in exchange for the
right to provide service in these additional markets. The warrants will be
issued to Sprint at the earlier of an initial public offering of the Company's
common stock or July 31, 2003. The intangible asset is being amortized over the
remaining term of the Sprint management agreement, resulting in approximately
$800,000 of amortization expense per year. Accordingly, amortization expense
related to this intangible asset was approximately $200,000 for the three months
ended September 30, 2002 and 2001.
Gain on sale of property and equipment. During the three months ended
September 30, 2002, we realized a gain of approximately $10,000 related to the
sale of miscellaneous equipment. The sale resulted in proceeds of approximately
$20,000.
Interest income and other, net. Interest income and other income for the
three months ended September 30, 2002, was approximately $700,000 compared to
approximately $600,000 in 2001 and consisted primarily of interest income.
Interest expense, net. Interest expense for the three months ended
September 30, 2002, was approximately $15.9 million, compared to approximately
$6.0 million in 2001. The increase in interest expense was a result of our
additional indebtedness. Interest on the outstanding balance of our secured
credit facility accrues at LIBOR plus a specified margin. On June 29, 2001, we
agreed to several changes in the secured credit facility including a 25 basis
point increase in the margin on the annual interest rate. At September 30, 2002,
the interest rate on the $105.0 million term loan A borrowed under our secured
credit facility was 5.80%, while the interest rate on the $50.0 million term
loan B was 6.32%. Interest expense on the secured credit facility was
approximately $2.7 million and $1.1 million during the three months ended
September 30, 2002 and 2001, respectively.
We accrue interest at a rate of 14.00% annually on our discount notes
issued in September 2000 and will begin paying interest semi-annually in cash
beginning in October 2005. Unaccreted interest expense on the discount notes was
approximately $116.0 million at September 30, 2002. Interest expense on the
discount notes was approximately $6.8 million and $5.9 million during the three
months ended September 30, 2002 and 2001, respectively.
On June 15, 2002, we began making semi-annual interest payments on our
senior notes issued in December 2001, at an annual rate of 13.75%. Interest
expense accrued on the senior notes was approximately $6.0 million during the
three months ended September 30, 2002. Under the terms of the senior notes, cash
to cover the first four semi-annual interest payments was placed in an escrow
account.
22
Interest expense also includes approximately $800,000 and $200,000 during
the three months ended September 30, 2002 and 2001, respectively, of
amortization from the deferred financing fees related to our secured credit
facility, our discount notes and our senior notes. Additionally interest expense
includes, approximately $300,000 and $800,000 in commitment fees paid on the
unused portion of our secured credit facility during the three months ended
September 30, 2002 and 2001, respectively.
Capitalized interest reduced interest expense during the three months ended
September 30, 2002 and 2001, by approximately $700,000 and $2.0 million,
respectively. We expect our interest expense to increase in the future as we
borrow under our secured credit facility to fund our network build-out and
operating losses.
Income taxes. Until September 26, 2000, we were included in the
consolidated Federal income tax return of Horizon Telcom. We provided for
Federal income taxes on a pro rata basis, consistent with a consolidated
tax-sharing agreement. As a result of the sale of the convertible preferred
stock on September 26, 2000, we are not able to participate in the tax-sharing
agreement. Additionally, we are not able to recognize any net operating loss
benefits until we generate taxable income. We did not record any income tax
benefit for the three months ended September 30, 2002 or 2001, because of the
uncertainty of generating future taxable income to be able to utilize current
net operating loss carryforwards.
Net loss. Our net loss for the three months ended September 30, 2002, was
approximately $40.3 million compared to approximately $28.7 million for the
three months ended September 30, 2001. The increase in our loss reflects the
continued expenses related to launching our markets and building our customer
base. We expect to incur significant operating losses and to generate
significant negative cash flow from operating activities while we continue to
construct our network and increase our customer base.
Preferred stock dividend. Our convertible preferred stock pays a stock
dividend at the rate of 7.5% per annum, payable semi-annually, commencing May 1,
2001. The dividends are paid with additional shares of convertible preferred
stock. Through September 30, 2002, we have issued an additional 3,245,134 shares
of convertible preferred stock in payment of dividends, including 1,060,201
shares on May 1, 2002. An additional 1,099,958 were issued on November 1, 2002,
and are not included in the total above.
Other comprehensive income (loss). During 2001, we entered into two,
two-year interest rate swaps which effectively fix $50.0 million of term loan B
borrowed under the secured credit facility. We do not expect the effect of these
swaps to have a material impact to interest expense for the remainder of their
lives. We recorded an unrealized gain of $21,000 in other comprehensive income
during the second quarter of 2002 related to the change in market value of the
derivate instrument.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO
NINE MONTHS ENDED SEPTEMBER 30, 2002
KEY METRICS
Customer Additions. During the nine months ended September 30, 2002 and
2001, Horizon PCS net subscribers increased by approximately 47,800 and 80,200
customers, respectively. Gross activations during the first nine months of 2002
and 2001 were 132,900 and 108,800, respectively. The increase in gross
activations was offset by an increase in the churn of NDASL and Clear Pay
subscribers during the first nine months of 2002 resulting in lower net customer
additions for the nine months ended September 30, 2002, compared to the prior
year period.
Cost Per Gross Addition. Cost per gross addition for the nine months ended
September 30, 2002, was $356, compared to $337 for the nine months ended
September 30, 2001. This increase reflects slightly higher costs offset by an
increase in the number of activations.
Churn. Churn for the nine months ended September 30, 2002, was 3.5%
compared to 2.1% for the nine months ended September 30, 2001. This increase is
due to an increase in the churn of NDASL and Clear Pay customers.
23
Average Revenue Per Unit. The following summarizes ARPU for the nine months
ended September 30:
2002 2001
------------ ------------
Service revenues
Recurring............................ $ 40 $ 44
Minute sensitive..................... 12 15
Features and other*.................. 4 (4)
------------ ------------
Total service revenues............. 56 55
------------ ------------
Roaming revenues........................ 19 29
------------ ------------
ARPU............................. $ 75 $ 84
------------ ------------
* Excludes impact of a non-recurring adjustment to access revenue
Recurring service ARPU has declined as more customers activated or migrated
to service plans in the $29.99 to $39.99 monthly recurring charge range.
Additionally, recent service plans are offering more minutes at a lower monthly
charge due to increased competition in the wireless industry. These additional
minutes have driven down the ARPU received when customers use more minutes than
their plan allows. We anticipate this trend to continue on voice-only service
plans, but we anticipate higher service ARPU in the future as subscribers
activate on data and voice plans, which offer more features, but at a higher
monthly charge. ARPU from features and other has increased as we are offering
fewer promotional credits and have charged more contract termination fees in
2002 as a result of higher deactivation and churn rates.
On April 27, 2001, Sprint and its affiliates announced an agreement on a
new Sprint PCS roaming rate; the receivable and payable roaming rate decreased
from $0.20 per minute to $0.15 per minute effective June 1, 2001, and decreased
further to $0.12 per minute effective October 1, 2001. The Sprint PCS roaming
rate changed to $0.10 per minute on January 1, 2002. After 2002, the rate will
be changed to "a fair and reasonable return" which has not yet been determined.
However, based on preliminary discussions with Sprint, we anticipate a
significant additional reduction in the rate. The decreases in the rate will
reduce our revenue and expense per minute, but we anticipate this rate reduction
will be offset by volume increases from the continued build-out of our network
and subscriber growth, resulting in greater overall roaming revenue and expense
in the future. Somewhat offsetting that rate reduction in Sprint PCS roaming
revenue was an increase in non-Sprint PCS revenue as a result of expanding
roaming agreements with other wireless carriers.
Earnings Before Interest, Taxes, Depreciation and Amortization. EBITDA is a
financial metric used to estimate cash flow available to service debt. EBITDA
can be calculated from our income statement as follows:
Nine Months Ended
September 30,
-------------------------------
2002 2001
------------- ---------------
Operating Loss.......................... $(77,481,614) $ (61,203,431)
Less: Depreciation and amortization..... 30,232,128 12,980,232
Non-cash compensation............. 510,562 1,256,611
------------- --------------
EBITDA......................... $(46,738,924) $ (46,966,588)
============= ==============
EBITDA is not a measure of financial performance presented under generally
accepted accounting principals in the United States of America and should not be
considered an alternative to net income (loss) as a measure of performance or to
cash flow as a measure of liquidity. However, the Company's secured credit
facility has a covenant requiring EBITDA to be controlled to a certain
threshold. During the third quarters of 2002, and 2001, the Company's covenant
requirements, as they pertain to EBITDA losses, were ($21,400,00) and
($25,135,000), respectively.
24
RESULTS OF OPERATIONS
Revenues. The following table sets forth a breakdown of our revenues by type:
(Dollars in thousands) 2002 2001
------------------- ------------------
Amount % Amount %
---------- ------- ---------- ------
Subscriber revenues $ 111,397 71% $ 48,989 62%
Roaming revenues 38,928 25% 25,645 32%
Equipment revenues 5,760 4% 4,595 6%
---------- ------- ---------- -------
Total revenues $ 156,085 100% $ 79,229 100%
========== ======= ========== =======
Subscriber revenues for the nine months ended September 30, 2002, were
approximately $111.4 million, compared to approximately $49.0 million for the
nine months ended September 30, 2001, an increase of approximately $62.4
million. The growth in subscriber revenues is primarily the result of the growth
in our customer base. We managed approximately 241,900 customers at September
30, 2002, compared to approximately 146,600 at September 30, 2001. Our customer
base has grown because we have launched additional markets and increased our
sales force.
Sprint assesses access charges to long distance carriers on Horizon PCS'
behalf for the termination of landline-originated calls in our markets. Though
regulations generally entitle a carrier that terminates a call on the behalf of
another to be compensated for providing that service, these regulations were
developed in a period where services of this nature were provided exclusively by
local exchange carriers. Certain long distance carriers, including AT&T, have
disputed Sprint's assessment of these charges as well as the corresponding rate
at which the charges were determined. In July 2002, the FCC ruled that AT&T was
not required to pay these charges unless AT&T had agreed to do so in its
contract with Sprint and remanded the case to a U.S. District Court for further
proceedings. Because the case is still pending we cannot predict, with
certainty, the final outcome of this action. As a result, we recorded a
reduction in revenue in the second quarter of 2002 of approximately $1.3 million
representing previously billed and recognized access revenue. The Company plans
to cease recognition of this type of revenue in future quarters, unless there is
ultimately a favorable ruling by the courts or the FCC on this issue. Sprint has
asserted the right to recover from us amounts previously billed on our behalf
and remitted to us by Sprint. We will continue to assess the ability of Sprint
or other carriers to recover these charges. We are also continuing to review the
availability of defenses we may have against Sprint's claim to recover these
revenues from us.
Roaming revenues increased from approximately $25.6 million for the nine
months ended September 30, 2001, to approximately $38.9 million for the nine
months ended September 30, 2002, an increase of approximately $13.3 million.
This increase resulted from expanding roaming agreements with other wireless
carriers and from launching additional markets over the past year, including
markets covering major interstate highways. This increase was offset somewhat by
the decrease in the Sprint PCS roaming rate discussed above.
Equipment revenues for the nine months ended September 30, 2002, were
approximately $5.8 million, compared to approximately $4.6 million for the nine
months ended September 30, 2001, an increase of approximately $1.2 million. The
increase in equipment revenues is the result of an increase in the number of
handsets sold, offset by a decline in the sales price of the handset as the
average sales price, net of discounts and rebates, decreased to $99 for the nine
months ended September 30, 2002, from $119 for the same period in 2001.
Cost of service. Cost of service for the nine months ended September 30,
2002, was approximately $120.9 million, compared to approximately $68.3 million
for the nine months ended September 30, 2001, an increase of approximately $52.6
million. This increase reflects the increase in roaming expense and long
distance charges, of approximately $15.4 million; the increase in costs incurred
under our network services agreement with the Alliances of approximately $9.8
million; the increase in network operations, including tower lease expense,
circuit costs and payroll expense, of approximately $16.7 million; increased
customer care, activations, and billing expense of approximately $8.9 million;
and the increase in other variable expenses, including interconnection and
national platform expenses, of approximately $1.8 million. Overall, the average
cost of providing service per the average subscriber on our network decreased
from $77 to $60 for the nine months ended September 30, 2001 and 2002,
respectively, as we have increased our subscriber base.
25
Cost of equipment. Cost of equipment for the nine months ended September
30, 2002, was approximately $12.6 million, compared to approximately $8.6
million for the nine months ended September 30, 2001, an increase of
approximately $4.0 million. The increase in the cost of equipment is the result
of the growth in our wireless customers, partially offset by the decreasing unit
cost of the handsets. For competitive and marketing reasons, we have sold
handsets to our customers below our cost and expect to continue to sell handsets
at a price below our cost for the foreseeable future. Additionally, we expect to
incur additional expense as existing customers upgrade their handsets to newer
models and to take advantage of new services that may be available with 3G,
including high-speed data applications.
Selling and marketing expenses. Selling and marketing expenses rose to
approximately $39.0 million for the nine months ended September 30, 2002,
compared to approximately $30.0 million for the same period in 2001, an increase
of approximately $9.0 million. This increase reflects the increase in the costs
of operating our 40 retail stores, including marketing and advertising in our
sales territory, of approximately $6.6 million, the increase in subsidies on
handsets sold by third parties of approximately $900,000, and the increase in
commissions paid to third parties of approximately $1.5 million.
General and administrative expenses. General and administrative expenses
for the nine months ended September 30, 2002 were approximately $30.3 million
compared to approximately $19.3 million in 2001, an increase of approximately
$11.0 million. The increase reflects an increase in the provision for doubtful
accounts of approximately $8.2 million primarily due to the write off of NDASL
and Clear Pay customers and an increase in the Sprint management fee of
approximately $4.6 million as a result of higher subscriber revenues in 2002,
offset by a decrease in other general expenses of approximately $1.8 million.
During the nine months ended September 30, 2001, we recognized approximately
$1.3 million of legal and consulting expenses related to the exploration of
strategic business alternatives.
Non-cash compensation expense. For the nine months ended September 30, 2002
and 2001, we recorded stock-based compensation expense of approximately $500,000
and $1.3 million respectively. The expense recorded in 2001 includes
approximately $700,000 related to the distribution of 7,249 shares of Horizon
Telcom stock to employees of Horizon PCS and approximately $600,000 for stock
options granted.
Depreciation and amortization expense. Depreciation and amortization
expenses increased by approximately $17.2 million to a total of approximately
$30.2 million in 2002. The increase reflects the continuing construction of our
network as we funded approximately $57.6 million of capital expenditures during
the nine months ended September 30, 2002.
During 2002, the Company launched switches in Tennessee and Pennsylvania
and disconnected some switching equipment in Chillicothe, Ohio. As a result,
approximately $6.2 million of switching equipment is considered an impaired
asset as defined by SFAS No. 144. Accordingly, depreciation and amortization
expense for the nine months ended September 30, 2002, includes approximately
$3.5 million of expense related to accelerated depreciation on the impaired
assets.
Amortization expense of the intangible asset related to the Bright PCS'
acquisition was approximately $1.3 million during the nine months ended
September 30, 2002 and 2001. Goodwill amortization was approximately $300,000
during the nine months ended September 30, 2001. Goodwill amortization ceased as
of December 31, 2001, with the adoption of SFAS No. 142.
Amortization expense also includes amortization of an intangible asset
recorded in September 2000 related to the grant of new markets to us by Sprint
in September 2000. Amortization expense related to this intangible asset was
approximately $600,000 for the nine months ended September 30, 2002 and 2001.
Loss on sale of property and equipment. During the nine months ended
September 30, 2002, we incurred a loss of approximately $600,000 related to the
sale of network equipment and corporate-owned vehicles. The sale resulted in
proceeds of approximately $1.5 million. The vehicles were subsequently leased
back from the purchaser.
Loss on exchange of stock. On April 2, 2001, the Company distributed 7,249
shares of Horizon Telcom stock to employees of Horizon PCS. In conjunction with
this transaction, the Company recognized a non-operating loss of approximately
26
$400,000 representing the reduced fair market value of the stock at the time of
the transaction compared to the original holding value of the investment
Interest income and other, net. Interest income and other income for the
nine months ended September 30, 2002, was approximately $2.5 million compared to
approximately $4.8 million in 2001 and consisted primarily of interest income.
This decrease was due primarily to a lower average balance of cash investments
during 2002, as compared to the same period in 2001 and due to a lower
short-term interest rate environment in 2002.
Interest expense, net. Interest expense for the nine months ended September
30, 2002, was approximately $44.1 million, compared to approximately $18.7
million in 2001. The increase in interest expense was a result of our additional
indebtedness. Interest on the outstanding balance of our secured credit facility
accrues at LIBOR plus a specified margin. On June 29, 2001, we agreed to several
changes in the secured credit facility including a 25 basis point increase in
the margin on the annual interest rate. At September 30, 2002, the interest rate
on the $105.0 million term loan A borrowed under our secured credit facility was
5.80%, while the interest rate on the $50.0 million term loan B was 6.32%.
Interest expense on the secured credit facility was $6.6 million and $3.6
million during the nine months ended September 30, 2002 and 2001, respectively.
We accrue interest at a rate of 14.00% annually on our discount notes
issued in September 2000 and will pay interest semi-annually in cash beginning
in October 2005. Unaccreted interest expense on the discount notes was
approximately $116.0 million at September 30, 2002. Interest expense on the
discount notes was approximately $20.0 million and $17.4 million during the nine
months ended September 30, 2002 and 2001, respectively.
On June 15, 2002, we began making semi-annual interest payments on our
senior notes issued in December 2001 at an annual rate of 13.75%. Interest
expense accrued on the senior notes was approximately $18.0 million during the
nine months ended September 30, 2002. Under the terms of the senior notes, cash
to cover the first four semi-annual interest payments was placed in an escrow
account.
Interest expense also includes approximately $2.0 million and $600,000
during the nine months ended September 30, 2002 and 2001, respectively, of
amortization from the deferred financing fees related to our secured credit
facility, our discount notes and our senior notes. Also contributing to interest
expense was approximately $1.3 million and 2.2 million during the nine months
ended September 2002 and 2001, respectively, in commitment fees paid on the
unused portion of our secured credit facility.
Capitalized interest during the nine months ended September 30, 2002 and
2001, was approximately $3.8 million and 5.1 million, respectively.
Income taxes. Until September 26, 2000, we were included in the
consolidated federal income tax return of Horizon Telcom. We provided for
federal income taxes on a pro-rata basis, consistent with a consolidated
tax-sharing agreement. As a result of the sale of the convertible preferred
stock on September 26, 2000, we will not be able to participate in the tax
sharing agreement nor will we be able to utilize any net operating loss benefits
until we start to generate taxable income. We did not record any income tax
benefit for the nine months ended September 30, 2002 because of the uncertainty
of generating future taxable income to be able to recognize current net
operating losses.
Net loss. Our net loss for the nine months ended September 30, 2002, was
approximately $119.7 million compared to approximately $75.4 million for the
nine months ended September 30, 2001. The increase in our loss reflects the
continued expenses related to launching our markets and building our customer
base. We expect to incur significant operating losses and to generate
significant negative cash flow from operating activities while we continue to
construct our network and increase our customer base.
Preferred stock dividend. Our convertible preferred stock pays a stock
dividend at the rate of 7.5% per annum, payable semi-annually commencing May 1,
2001. The dividends are paid with additional shares of convertible preferred
stock. Through September 30, 2002, we have issued an additional 3,245,134 shares
of convertible preferred stock in payment of dividends, including 1,060,201
shares on May 1, 2002. An additional 1,099,958 were issued on November 1, 2002,
and are not included in the total above.
27
Other comprehensive income (loss). During 2001, we entered into two
two-year interest rate swaps, effectively fixing $50.0 million of the term loan
B borrowed under the secured credit facility. We do not expect the effect of
these swaps to have a material impact to interest expense for the remainder of
their lives. We recovered approximately $141,000 of previously unrealized losses
in other comprehensive income during the first nine months of 2002.
LIQUIDITY AND CAPITAL RESOURCES
Through September 26, 2000, we financed our operations through equity
contributions from Horizon Telcom and through debt financing provided by the
Rural Telephone Finance Cooperative (RTFC). On September 26, 2000, an investor
group led by Apollo Management purchased $126.5 million of our convertible
preferred stock in a private placement. Concurrent with the closing, holders of
our $14.1 million short-term convertible note (including accrued interest of
$1.1 million) converted it into the same convertible preferred stock purchased
by the investor group.
Also on September 26, 2000, the Company received $149.7 million from the
issuance of $295.0 million of discount notes. The discount notes accrete in
value at a rate of 14% compounded semi-annually. The Company will begin making
semi-annual cash interest payments on the discount notes on October 1, 2005. The
discount notes were subject to an exchange offer that was completed in 2001. At
September 30, 2002, the discount notes were rated by Standard and Poors ("S&P")
as "B-", which means a company's obligation is vulnerable to non-payment under
adverse business, financial or economic conditions, but the obligor of an issue
currently has the capacity to meet its financial commitment on its obligation.
On October 29, 2002, S&P downgraded our corporate debt rating to "CCC+" with a
negative outlook, which means an obligation "is currently vulnerable to
nonpayment and is dependent upon favorable business, financial, and economic
conditions for the obligor to meet its financial commitment on the obligation.
In the event of adverse business, financial, or economic conditions, the obligor
is not likely to have the capacity to meet its financial commitment on the
obligation." At September 30, 2002, Moody's Investors Services ("Moody's") rated
the notes as "Caa1", which means an issue is in "poor standing." On October 28,
2002, Moody's downgraded it's rating on our discount notes to "C," which is
Moody's lowest bond rating. The CUSIP on the discount notes is 44043UAC4.
Also on September 26, 2000, we negotiated a $225.0 million secured credit
facility led by Wachovia (formerly First Union National Bank). The amount of the
secured credit facility was increased to $250.0 million in November 2000. We
drew a $50.0 million term loan under the facility on September 26, 2000, and a
$105.0 million term loan on March 22, 2002. A $95.0 million line of credit
remains committed to us under the facility at September 30, 2002, with
restrictions.
Horizon PCS' secured credit facility includes financial covenants that must
be met each quarter. The Company did not meet the covenant for EBITDA for the
first quarter of 2002. As a result of higher than expected gross and net
additions to Horizon PCS subscribers for that quarter, the Company incurred
additional expenses to add those customers. Although the Company ultimately
benefits from the revenues generated by new subscribers, the Company incurs
one-time expenses associated with new subscribers, including commissions,
handset subsidies, set up costs for the network and marketing expenses. As a
result, these new subscriber costs negatively affect EBITDA in the short-term
during the period of the addition of new subscribers, which led to
non-compliance with the EBITDA covenant for the first quarter of 2002.
On June 27, 2002, the Company entered into a fourth amendment to its
secured credit agreement with the bank group. The amendment adjusts certain
financial covenants and increases the margin on the base interest rate by 25
basis points to LIBOR plus 400 to 450 basis points, while also providing for the
payment of fees to the banking group, an increase in post-default interest
rates, a new financial covenant regarding minimum available cash, additional
prepayment requirements, restrictions on Horizon PCS' borrowings under the
remaining $95.0 million line of credit and deposit requirements on the $105.0
million we borrowed under the secured credit facility in March 2002. The
amendment, and details on the requirements and restrictions, was filed with the
Company's Form 8-K on June 27, 2002.
28
The following table details the maximum amount available to be borrowed on
the line of credit for the period then ended:
Maximum amount
available to be
borrowed
---------------
September 30, 2002................................ $ --
December 31, 2002................................. --
March 31, 2003.................................... --
June 30, 2003..................................... 16,000,000
September 30, 2003................................ 26,000,000
December 31, 2003................................. 33,000,000
March 31, 2004.................................... 52,000,000
Thereafter........................................ 95,000,000
The following table details the minimum balance requirements placed on cash
and cash equivalents under the amended terms of the secured credit facility:
Deposit balance
requirement
-----------------
At September 30, 2002............................... $ 71,000,000
October 1, 2002, through November 15, 2002.......... 63,000,000
November 16, 2002, through December 31, 2002........ 55,000,000
January 1, 2003, through February 15, 2003.......... 33,000,000
February 16, 2003, through March 31, 2003........... 11,000,000
April 1, 2003, through May 15, 2003................. 5,500,000
As of September 30, 2002, the Company is in compliance with all of the
applicable covenants, as amended.
On December 7, 2001, the Company received $175.0 million from the issuance
of unsecured senior notes. Cash interest payments on the senior notes are made
semi-annually at an annual rate of 13.75%. A portion of the offering proceeds
was placed in an escrow account to fund the first four semi-annual interest
payments and is classified as restricted cash. The first interest payment was
made on June 15, 2002. The senior notes were subject to an exchange offer that
was completed in 2002. At September 30, 2002, the senior notes were rated by S&P
as "B-." On October 29, 2002, S&P downgraded our corporate debt rating to "CCC+"
with a negative outlook. Moody's rated the senior notes as "Caa1", which is a
bond in "poor standing." On October 28, 2002, Moody's downgraded its rating on
our senior notes to "C," which is Moody's lowest bond rating. The CUSIP on the
senior notes is 44043UAH3.
The following table summarizes our long-term debt principal repayment
requirements for the next five years:
(Dollars in millions) Years Ending December 31,
------------------------------------------------------------
2002 2003 2004 2005 2006 Thereafter
--------- --------- --------- ------- -------- ----------
Secured credit facility,
due 2008..................... $ 155.0 $ 155.0 $146.5 $126.5 $ 99.7 $ 99.7
Variable interest rate (1) 5.97% 5.97% 5.97% 5.97% 5.97% 5.97%
Principal payments........ $ -- $ -- $ 8.3 $ 20.2 $ 26.8 $ 99.7
Discount notes, due 2010 (2)... $ 186.3 $ 217.5 $253.1 $283.7 $ 286.1 $295.0
Fixed interest rate....... 14.00% 14.00% 14.00% 14.00% 14.00% 14.00%
Principal payments........ $ -- $ -- $ -- $ -- $ -- $295.0
Senior notes, due 2011......... $ 175.0 $ 175.0 $175.0 $175.0 $ 175.0 $175.0
Fixed interest rate....... 13.75% 13.75% 13.75% 13.75% 13.75% 13.75%
Principal payments........ $ -- $ -- $ -- $ -- $ -- $175.0
- ----------------
(1) Interest rate on the secured credit facility equals LIBOR plus a margin
that varies from 400 to 450 basis points. At September 30, 2002, $50.0
million was effectively fixed at 8.53% through two interest rate swaps
discussed in "ITEM 3. Quantitative and Qualitative Disclosures About Market
Risk". The nominal interest rate is assumed to equal 5.97% for all periods
($50.0 million at 6.32% and $105.0 million at 5.80%).
29
(2) Face value of the discount notes is $295.0 million. End of year balances
presented herein are net of the discount and assume accretion of the
discount as interest expense at an annual rate of 14.00%.
At September 30, 2002, we had cash and cash equivalents of approximately
$109.1 million and working capital of approximately $107.3 million. At December
31, 2001, we had cash and cash equivalents of approximately $123.8 million and
working capital of approximately $117.0 million. The decrease in cash and cash
equivalents of approximately $14.7 million is primarily attributable to the
funding of our loss from continuing operations of approximately $119.7 million
(this loss includes certain non-cash charges) and funding our capital
expenditures of approximately $57.6 million during the first nine months of
2002, offset by the $105.0 million draw on the secured credit facility.
The Company was also required to escrow funds sufficient to cover the first
four interest payments on the senior notes. These funds are presented as
restricted cash on the consolidated balance sheet. Net cash used in operating
activities for the nine months ended September 30, 2002, was approximately $61.0
million. This reflects the continuing use of cash for our operations to build
our customer base, including but not limited to providing service in our markets
and the costs of acquiring new customers. The net loss of approximately $119.7
million was partially offset by increases to depreciation, increases in accrued
liabilities, including the payable to Sprint, offset by increases to accounts
receivable.
Net cash used in investing activities for the nine months ended September
30, 2002, was approximately $56.1 million. Our capital expenditures for that
period were approximately $57.6 million, reflecting the continuing build-out and
upgrade of our network. At September 30, 2002, we operated approximately 791
cell sites in our network (an additional 507 cell sites were operated by the
Alliances in our territories). This represents an addition of approximately 187
sites during the nine months ended September 30, 2002. In addition to the sites,
we have increased the number of switching stations in our territory and have
increased our number of retail stores from 38 at the end of 2001 to 40 at
September 30, 2002. We will incur additional capital expenditures as we complete
the build-out of our network, including the launch of additional retail stores,
completing additional cell sites for 3G compatibility and expanding capacity at
our switches as needed, but anticipate future expenditures to be less than
historical levels.
Net cash provided by financing activities for the nine months ended
September 30, 2002, was $102.4 million consisting mostly of the March 2002 draw
on the term loan A required under our secured credit facility of $105.0 million.
We incurred $2.6 million of deferred financing fees related to the amendment of
our covenants under the secured credit facility discussed above.
At September 30, 2002, we had a $95.0 million line of credit committed
under our secured credit facility. We believe the available borrowings under our
secured credit facility will be adequate to fund our network build-out,
anticipated operating losses and working capital requirements until we achieve
positive EBITDA, which we expect to occur during 2004. We believe the increase
in churn and subsequent write-offs of involuntary NDASL deactivations combined
with a slow down in activation growth during the second and third quarters of
2002 has extended the time it will take to reach positive EBITDA.
Income from ongoing operations and EBITDA are not measures of financial
performance under generally accepted accounting principles and should not be
considered alternatives to net income (loss) as measures of performance or to
cash flows as a measure of liquidity.
For the year ended December 31, 2002, we anticipate our funding needs will
be between $150.0 million and $160.0 million, of which approximately $60.0
million to $70.0 million will be used for capital expenditures with the
remainder utilized to fund working capital and operating losses. The actual
funds required to build-out and upgrade our network and to fund operating
losses, working capital needs and other capital needs may vary materially from
these estimates and additional funds may be required because of unforeseen
delays, cost overruns, unanticipated expenses, regulatory changes, engineering
design changes and required technological upgrades and other technological
risks. Additionally, Sprint is planning to continually upgrade their nationwide
network to deploy higher data rate speeds that may require us to outlay
additional capital expenditures in future years that have not been determined at
this point. Should the Company be required to upgrade its network to provide 3G
services that meet Sprint's standards, we may need to obtain additional
financing to fund those capital expenditures.
30
Other future cash expenditures that may require additional borrowings
include:
o expanding the coverage within our existing operating markets or
improving call quality with fill-in coverage;
o opening additional retail stores, beyond our current plan of 50
stores;
o mergers or acquisitions of other PCS affiliates of Sprint or other
compatible PCS carriers;
o the grant to us by Sprint of additional markets under our Sprint
agreements; and/or
o expanding our network, if economically justifiable, by exercising our
right to build our own network in our markets which are covered by our
network services agreement with the Alliances under the terms of that
amended agreement.
If we are unable to obtain any necessary additional financing or if we
incur further restrictions on the availability of our current funding and we are
unable to complete our network upgrades and build-out as required by the
management agreements, Sprint may terminate our agreements; we will no longer be
able to offer Sprint PCS products and services. In this event, Sprint may
purchase our operating assets or capital stock under terms defined in our
agreements with Sprint. Also, any delays in our build-out may result in
penalties under our Sprint agreements, as amended.
Other risk factors that may impact liquidity are:
o We may not be able to sustain our growth or obtain sufficient revenue
to achieve and sustain positive cash flow from operations or
profitability;
o We may experience a higher churn rate, which could result in lower
revenue;
o New customers may be of lower credit quality, which may require a
higher provision for doubtful accounts;
o Increased competition causing declines in ARPU;
o Our failure to comply with restrictive financial and operational
covenants under the secured credit facility; and
o Our upgrade to 3G services, due to which we have incurred significant
capital expenditures, may not be successful in the marketplace and may
not result in incremental revenue.
SEASONALITY
Our business is subject to seasonality because the wireless industry has
historically been heavily dependent on calendar fourth quarter results. Among
other things, the industry relies on significantly higher customer additions and
handset sales in the calendar fourth quarter as compared to the other three
calendar quarters. A number of factors contribute to this trend, including:
o the increasing use of retail distribution, which is more dependent
upon the year-end holiday shopping season;
o the timing of new product and service announcements and introductions;
o competitive pricing pressures; and
o aggressive marketing and promotions.
31
INFLATION
We believe that inflation has not had a material adverse effect on our
results of operation.
RECENT ACCOUNTING PRONOUNCEMENTS
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 will 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 will adopt SFAS 146 on January 1, 2003, and it is not
expected to 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 July 1, 2002, and it has not
had a material effect on the Company's financial position, results of operations
or cash flows.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses financial
accounting and reporting for the impairment of long-lived assets. The statement
supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of," and the accounting and reporting
provisions of APB Opinion No. 30. SFAS No. 144 removes goodwill from its scope,
as goodwill is addressed in the impairment test described above under SFAS No.
142. The Company adopted SFAS No. 144 on January 1, 2002. See Note 4 in the
"Notes to Consolidated Financial State" for discussion on the impact of the
adoption of this statement.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." This statement addresses financial accounting and
reporting for obligations associated with the retirements of tangible long-lived
assets and the associated asset retirement costs. It applies to legal
obligations associated with the retirement of long- lived assets that result
from the acquisition, construction, development and the normal operation of a
long-lived asset. The Company will adopt this statement effective January 1,
2003, and it is not expected to have a material effect on the Company's
financial position, results of operations or cash flows.
The Company adopted SFAS No. 141, "Business Combinations" and SFAS No. 142,
"Goodwill and Other Intangible Assets" on January 1, 2002. As a result of the
adoption, goodwill amortization ceased as of December 31, 2001, and the Company
is required to complete an impairment test of its remaining goodwill balance
annually (or more frequently if impairment indicators arise). As of September
30, 2002, the Company has goodwill of approximately $7,191,000, net of
accumulated amortization, related to the acquisition of Bright PCS. See Note 8
in the "Notes to Consolidated Financial Statements." .
32
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 speculative trading purposes. We also
do not engage in transactions in foreign currencies that would expose us to
additional market risk. We manage the interest rate risk on our outstanding
long-term debt through the use of fixed and variable-rate debt and interest rate
swaps.
In the normal course of business, our operations are exposed to interest
rate risk. Our primary interest rate risk exposure relates to (i) the
variable-rate secured credit facility, (ii) our ability to refinance our
fixed-rate discount and senior notes at maturity at market rates, and (iii) the
impact of interest rate movements on our ability to meet interest expense
requirements and meet financial covenants under our debt instruments.
In the first quarter of 2001, we entered into a two-year interest rate
swap, effectively fixing $25.0 million of term loan B borrowed under the secured
credit facility. In the third quarter of 2001, we entered into another two-year
interest rate swap, effectively fixing the remaining $25.0 million of term loan
B. The table below compares current market rates on the balances subject to the
swap agreements:
(Dollars in millions) At September 30, 2002
-----------------------------------
Balance Market rate Swap rate
Swap 1..................... $25.0 6.32% 9.40%
Swap 2..................... $25.0 6.32% 7.65%
Since our swap interest rates are currently greater than the market
interest rates on our underlying debt, our results from operations currently
reflect a higher interest expense than had we not hedged our position. Since
inception and through September 30, 2002, we have recognized approximately
$200,000 in losses due to the ineffectiveness of these swaps in the consolidated
statement of operations. At September 30, 2002, the Company recognized
approximately $700,000 in other comprehensive losses on the balance sheet.
While we cannot predict our ability to refinance existing debt, we continue
to evaluate our interest rate risk on an ongoing basis. If we do not renew our
swaps, or, if we do not hedge incremental variable-rate borrowings under our
secured credit facility, we will increase our interest rate risk, which could
have a material impact on our future earnings. As of September 30, 2002,
approximately 83% of our long-term debt is fixed rate or is variable rate that
has been swapped under fixed-rate hedges, thus reducing our exposure to interest
rate risk. Currently, a 100 basis point increase in interest rates would
increase our interest expense approximately $1.1 million.
ITEM 4. CONTROLS AND PROCEDURES
With the participation of management, the Company's chief executive officer
and chief financial officer evaluated the Company's disclosure controls and
procedures within the 90 days preceding the filing date of this quarterly
report. Based upon this evaluation, the chief executive officer and chief
financial officer concluded that the Company's disclosure controls and
procedures are effective in ensuring that material information required to be
disclosed is included in the reports that it files with the Securities and
Exchange Commission.
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 subsequent to the evaluation date.
33
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
RISK FACTORS
WE HAVE NOT HAD ANY PROFITABLE YEARS IN THE PAST FIVE YEARS, AND WE MAY NOT
ACHIEVE OR SUSTAIN OPERATING PROFITABILITY OR POSITIVE CASH FLOW FROM OPERATING
ACTIVITIES.
We expect to incur significant operating losses and to generate significant
negative cash flow from operating activities until 2004 while we continue to
construct our network and grow our customer base. Our operating profitability
will depend upon many factors, including our ability to market our services,
achieve our projected market penetration and manage customer turnover rates. If
we do not achieve and maintain operating profitability and positive cash flow
from operating activities on a timely basis, we may not be able to meet our debt
service requirements.
IF WE FAIL TO COMPLETE THE BUILD-OUT OF OUR NETWORK, SPRINT MAY TERMINATE THE
SPRINT PCS AGREEMENTS AND WE WOULD NO LONGER BE ABLE TO OFFER SPRINT PCS
PRODUCTS AND SERVICES FROM WHICH WE GENERATE SUBSTANTIALLY ALL OUR REVENUES.
Our long-term affiliation agreements with Sprint, which we refer to as the
Sprint PCS agreements, require us to build and operate the portion of the Sprint
PCS network located in our territory in accordance with Sprint's technical
specifications and coverage requirements. The agreements also require us to
provide minimum network coverage to the population within each of the markets
that make up our territory by specified dates.
Under our original Sprint PCS agreements, we were required to complete the
build-out in several of our markets in Pennsylvania and New York by December 31,
2000. Sprint and HPC agreed to an amendment of the build-out requirements, which
extended the dates by which we were to launch coverage in several markets. The
amended Sprint PCS agreement provides for monetary penalties to be paid by us if
coverage is not launched by these extended contract dates. The amounts of the
penalties depends on the market and length of delay in launch, and in some
cases, whether the shortfall relates to an initial launch in the market or
completion of the remaining build-out. The penalties must be paid in cash or, if
both Horizon PCS and Sprint agree, in shares of Horizon PCS stock.
Under the amended Sprint PCS agreement, portions of the New York, Sunbury,
Williamsport, Oil City, Dubois, Erie, Meadville, Sharon, Olean, Jamestown,
Scranton, State College, Stroudsburg, Allentown and Pottsville markets were
required to be completed and launched by October 31, 2001. Although we launched
service in portions of each of these markets, we did not complete all of the
build-out requirements. We notified Sprint PCS in November 2001 that it was our
position that the reasons for the delay constitutes events of "force majeure" as
described in the Sprint PCS agreements and that, consequently, no monetary
penalties or other remedies were applicable. The delay was primarily caused due
to delays in obtaining the required backhaul services from local exchange
carriers and zoning and other approvals from governmental authorities. On
34
January 30, 2002, Sprint notified us that, as a result of these force majeure
events, it does not consider our build-out delay to be a breach of the Sprint
PCS agreement. We agreed to use commercially reasonable efforts to complete the
build-out by June 30, 2002. We have not been able to complete some of the sites
in some markets due to continuing force majeure issues.
We will require additional expenditures of significant funds for the
continued development, construction, testing, deployment and operation of our
network. These activities are expected to place significant demands on our
managerial, operational and financial resources. A failure to meet our build-out
requirements for any of our markets, or to meet Sprint's technical requirements,
would constitute a breach of the Sprint PCS agreements that could lead to their
termination if not cured. If Sprint terminates these agreements, we will no
longer be able to offer Sprint PCS products and services.
OUR SUBSTANTIAL INDEBTEDNESS COULD ADVERSELY AFFECT OUR FINANCIAL HEALTH AND
PREVENT US FROM FULFILLING OUR LONG-TERM DEBT OBLIGATIONS.
As of September 30, 2002, our total debt outstanding was $625.0 million,
comprised of $155.0 million borrowed under our secured credit facility, $175.0
million due under our senior notes issued in December 2001 and $295.0 million
represented by our discount notes (which are reported on our balance sheet at
September 30, 2002, net of a discount of approximately $116.0 million).
Our substantial debt will have a number of important consequences,
including the following:
o we may not have sufficient funds to pay interest on, and principal of,
our debt;
o we have to dedicate a substantial portion of any positive cash flow
from operations to the payment of interest on, and principal of, our
debt, which will reduce funds available for other purposes;
o we may not be able to obtain additional financing for currently
unanticipated capital requirements, capital expenditures, working
capital requirements and other corporate purposes;
o some borrowings likely will be at variable rates of interest, which
will result in higher interest expense in the event of increases in
market interest rates;
o due to the liens on substantially all of our assets and the pledges of
equity ownership of our subsidiaries that secure our secured credit
facility, our lenders may control our assets upon a default;
o our debt increases our vulnerability to general adverse economic and
industry conditions;
o our debt limits our flexibility in planning for, or reacting to,
changes in our business and the industry in which we operate; and
o our debt places us at a competitive disadvantage compared to our
competitors that have less debt.
TO SERVICE OUR INDEBTEDNESS, WE WILL REQUIRE A SIGNIFICANT AMOUNT OF CASH. OUR
ABILITY TO GENERATE CASH DEPENDS ON MANY FACTORS BEYOND OUR CONTROL.
Our ability to make payments on and to refinance our indebtedness, and to
fund our network build-out, anticipated operating losses and working capital
requirements will depend on our ability to generate cash in the future. This, to
a certain extent, is subject to general economic, financial, competitive,
legislative, regulatory and other factors that are beyond our control.
We cannot be certain that our business will generate sufficient cash flow
from operations or that future borrowings will be available to us under our
secured credit facility in an amount sufficient to enable us to pay our
indebtedness or to fund our other liquidity needs. We may need to refinance all
or a portion of our indebtedness, including the notes, on or before maturity. We
may not be able to refinance any of our indebtedness on commercially reasonable
terms, or at all.
35
IF WE FAIL TO PAY OUR DEBT, OUR LENDERS MAY SELL OUR LOANS TO SPRINT GIVING
SPRINT THE RIGHTS OF A CREDITOR TO FORECLOSE ON OUR ASSETS.
If the lenders accelerate the amounts due under our secured credit
facility, Sprint has the right to purchase our obligations under that facility
and become a senior lender. To the extent Sprint purchases these obligations,
Sprint's interests as a creditor could conflict with ours. Sprint's rights as a
senior lender would enable it to exercise rights with respect to our assets and
Sprint's continuing relationship in a manner not otherwise permitted under the
Sprint PCS agreements.
IF SPRINT TERMINATES THE SPRINT PCS AGREEMENTS, THE BUY-OUT PROVISIONS OF THOSE
AGREEMENTS MAY DIMINISH THE VALUATION OF OUR COMPANY.
Provisions of the Sprint PCS agreements could affect our valuation and
decrease our ability to raise additional capital. If Sprint terminates these
agreements, Sprint may purchase our operating assets or capital stock for 80% of
the "Entire Business Value" as defined by the agreement. If the termination is
due to our breach of the Sprint PCS agreements, the percent is reduced to 72%
instead of 80%. Under our Sprint PCS agreements, the Entire Business Value is
generally the fair market value of our wireless business valued on a going
concern basis as determined by an independent appraiser and assumes that we own
the FCC licenses in our territory. In addition, Sprint must approve any change
of control of our ownership and consent to any assignment of the Sprint PCS
agreements. Sprint also has a right of first refusal if we decide to sell our
operating assets in our Bright PCS markets. We are also subject to a number of
restrictions on the transfer of our business including a prohibition on selling
our company or our operating assets to a number of identified and yet to be
identified competitors of Sprint. These and other restrictions in the Sprint PCS
agreements may limit the marketability of and reduce the price a buyer may be
willing to pay for the Company and may operate to reduce the Entire Business
Value of the Company.
THE TERMINATION OF OUR STRATEGIC AFFILIATION WITH SPRINT OR SPRINT'S FAILURE TO
PERFORM ITS OBLIGATIONS UNDER THE SPRINT PCS AGREEMENTS WOULD SEVERELY RESTRICT
OUR ABILITY TO CONDUCT OUR BUSINESS.
Because Sprint owns the FCC licenses that we use in our territory, our
ability to offer Sprint PCS products and services on our network is dependent on
the Sprint PCS agreements remaining in effect and not being terminated. Sprint
may terminate the Sprint PCS agreements for breach by us of any material terms.
We also depend on Sprint's ability to perform its obligations under the Sprint
PCS agreements. The termination of the Sprint PCS agreements or the failure of
Sprint to perform its obligations under the Sprint PCS agreements would severely
restrict our ability to conduct our wireless digital communications business.
IF SPRINT DOES NOT COMPLETE THE CONSTRUCTION OF ITS NATIONWIDE PCS NETWORK, WE
MAY NOT BE ABLE TO ATTRACT AND RETAIN CUSTOMERS, WHICH WOULD ADVERSELY AFFECT
OUR REVENUES.
Sprint's PCS network may not provide nationwide coverage to the same extent
as its competitors' networks, which could adversely affect our ability to
attract and retain customers. Sprint is creating a nationwide PCS network
through its own construction efforts and those of its affiliates. Today, neither
Sprint nor any other PCS provider offers service in every area of the United
States. Sprint has entered into affiliation agreements similar to ours with
companies in other territories pursuant to its nationwide PCS build-out
strategy. Our business and results of operations depend on Sprint's national PCS
network and, to a lesser extent, on the networks of its other affiliates. Sprint
and its affiliate program are subject, in varying degrees, to the economic,
administrative, logistical, regulatory and other risks described in this
document. Sprint's and its other affiliates' PCS operations may not be
successful, which in turn could adversely affect our ability to generate
revenues.
36
WE ARE DEPENDENT UPON SPRINT'S BACK OFFICE SERVICES AND ITS THIRD-PARTY VENDORS'
BACK OFFICE SYSTEMS. PROBLEMS WITH THESE SYSTEMS, OR TERMINATION OF THESE
ARRANGEMENTS, COULD DISRUPT OUR BUSINESS AND POSSIBLY INCREASE OUR COSTS.
Because Sprint provides our back office systems such as billing, customer
care and collections, our operations could be disrupted if Sprint is unable to
maintain and expand its back office services, or to efficiently outsource those
services and systems through third-party vendors. The rapid expansion of
Sprint's business will continue to pose a significant challenge to its internal
support systems. Additionally, Sprint has relied on third-party vendors for a
significant number of important functions and components of its internal support
systems and may continue to rely on these vendors in the future. We depend on
Sprint's willingness to continue to offer these services to us and to provide
these services at competitive costs. The Sprint PCS agreements provide that,
upon nine months' prior written notice, Sprint may elect to terminate any of
these services. If Sprint terminates a service for which we have not developed a
cost-effective alternative, our operating costs may increase beyond our
expectations and restrict our ability to operate successfully.
WE DEPEND ON OTHER TELECOMMUNICATIONS COMPANIES FOR SOME SERVICES THAT, IF
DELAYED, COULD DELAY OUR PLANNED NETWORK BUILD-OUT AND DELAY OUR EXPECTED
INCREASES IN CUSTOMERS AND REVENUES.
We depend on other telecommunications companies to provide facilities and
transport to interconnect portions of our network and to connect our network
with the landline telephone system. American Electric Power, Ameritech, AT&T,
Verizon and Sprint (long distance) are our primary suppliers of facilities and
transport. Without these services, we could not offer Sprint PCS services to our
customers in some areas. From time to time, we have experienced delays in
obtaining facilities and transport from some of these companies, and in
obtaining local telephone numbers for use by our customers, which are sometimes
in short supply, and we may continue to experience delays and interruptions in
the future. Delays in obtaining facilities and transport could delay our
build-out and capacity plans and our business may suffer. Delays could also
result in a breach of our Sprint PCS agreements, subjecting these agreements to
potential termination by Sprint.
IF WE DO NOT MEET ALL OF THE CONDITIONS UNDER OUR SECURED CREDIT FACILITY, WE
MAY NOT BE ABLE TO DRAW DOWN ALL OF THE FUNDS UNDER THE FACILITY AND, AS A
RESULT, WE MAY NOT BE ABLE TO COMPLETE THE BUILD-OUT OF OUR NETWORK, WHICH MAY
RESULT IN THE TERMINATION OF THE SPRINT PCS AGREEMENTS.
Our secured credit facility provides for aggregate borrowings of $250.0
million of which $155.0 million was borrowed as of September 30, 2002.
Availability of future borrowings will be subject to customary credit conditions
at each funding date, including the following:
o the absence of any default or event of default;
o the continuing accuracy of all representations and warranties; and
o no material adverse change.
If we do not meet these conditions at each funding date, our secured
lenders may choose not to lend any or all of the remaining amounts, and if other
sources of funds are not available, we may not be in a position to complete the
build-out of our network. If we do not have sufficient funds to complete our
network build-out, we may be in breach of the Sprint PCS agreements and in
default under our senior secured credit facility.
Horizon PCS' secured credit facility includes financial covenants that must
be met each quarter. We did not meet the covenant for EBITDA for the first
quarter of 2002. As a result of higher than expected gross and net additions to
Horizon PCS subscribers for the quarter, we incurred additional expenses to add
those customers. Although we ultimately benefit from the revenues generated by
new subscribers, we incur one-time expenses associated with new subscribers,
including commissions, handset subsidies, set up costs for the network and
marketing expenses. As a result, these new subscriber costs negatively affect
EBITDA in the short-term during the period of the addition of new subscribers
which led to non-compliance with the EBITDA covenant for the first quarter of
2002.
37
On June 27, 2002, Horizon PCS obtained a waiver of the non-compliance with
the EBITDA covenant for the first quarter of 2002 and entered into an amendment
of the secured credit facility. The amended facility primarily adjusts certain
financial covenants and increases the margin on the base interest by 25 basis
points, while also providing for the payment of fees to the banking group, an
increase in post-default interest rates, a new financial covenant regarding
minimum available cash, additional prepayment requirements, restrictions on
Horizon PCS' borrowings under the remaining $95.0 million revolving credit
facility and deposit requirements on the $105.0 million borrowed under the
secured credit facility in March 2002.
Although under its most recent forecast, Horizon PCS currently expects to
remain in compliance with the covenants as amended, there can be no assurance
that its financial results will not be lower than expected in future quarters,
causing another non-compliance to occur, which could have a material adverse
effect on Horizon PCS' financial condition and results of operations.
MATERIAL RESTRICTIONS IN OUR DEBT INSTRUMENTS MAY MAKE IT DIFFICULT TO OBTAIN
ADDITIONAL FINANCING OR TAKE OTHER NECESSARY ACTIONS TO REACT TO CHANGES IN OUR
BUSINESS.
The indenture governing the senior notes contains various covenants that
limit our ability to engage in a variety of transactions. In addition, the
indenture governing our discount notes and the secured credit agreement both
impose additional material operating and financial restrictions on us. These
restrictions, subject to ordinary course of business exceptions, limit our
ability to engage in some transactions, including the following:
o designated types of mergers or consolidations;
o paying dividends or other distributions to our stockholders;
o making investments;
o selling assets;
o repurchasing our common stock;
o changing lines of business;
o borrowing additional money; and
o transactions with affiliates.
In addition, our secured credit facility requires us to maintain certain
ratios, including:
o leverage ratios;
o an interest coverage ratio; and
o a fixed charges ratio,
and to satisfy certain tests, including tests relating to:
o minimum covered population;
o minimum number of PCS subscribers in our territory;
o minimum total revenues; and
o minimum EBITDA.
38
These restrictions could limit our ability to obtain debt financing,
repurchase stock, refinance or pay principal or interest on our outstanding
debt, consummate acquisitions for cash or debt or react to changes in our
operating environment. An event of default under the secured credit facility may
prevent the Company and the guarantors of the senior notes and the discount
notes from paying those notes or the guarantees of those notes.
THE TERMS OF THE CONVERTIBLE PREFERRED STOCK MAY AFFECT OUR FINANCIAL RESULTS.
The terms of the convertible preferred stock give the holders of the
preferred stock the following principal rights:
o to initially designate two members of our board of directors, subject
to reduction based on future percentage ownership;
o to approve or disapprove fundamental corporate actions and
transactions;
o to receive dividends in the form of additional shares of our
convertible preferred stock, which may increase and accelerate upon a
change in control; and
o to require us to redeem the convertible preferred stock in 2005.
If we become subject to the repurchase right or change of control
redemption requirements under the convertible preferred stock while our secured
credit facility, our discount notes or the senior notes are outstanding, we will
be required to seek the consent of the lenders under our secured credit
facility, the holders of the discount notes and the holders of the senior notes
to repurchase or redeem the convertible preferred stock, or attempt to refinance
the secured credit facility, the discount notes and the senior notes. If we fail
to obtain these consents, there will be an event of default under the terms
governing our secured credit facility. In addition, if we do not repurchase or
redeem the convertible preferred stock and the holders of the convertible
preferred stock obtain a judgment against us, any judgment in excess of $5.0
million would constitute an event of default under the indentures governing the
discount notes and the senior notes.
IF WE BREACH OUR AGREEMENT WITH SBA COMMUNICATIONS CORP. ("SBA"), OR IT
OTHERWISE TERMINATES ITS AGREEMENT WITH US, OUR RIGHT TO PROVIDE WIRELESS
SERVICE FROM MOST OF OUR CELL SITES WILL BE LOST.
We lease cell sites from SBA. We rely on our contract with SBA to provide
us with access to most of our cell sites and to the towers located on these
sites. If SBA were to lose its underlying rights to these sites, our ability to
provide wireless service from these sites would end, subject to our right to
cure defaults by SBA. If SBA terminates our agreement as a result of our breach,
we will lose our right to provide wireless services from most of our cell sites.
WE MAY HAVE DIFFICULTY OBTAINING INFRASTRUCTURE EQUIPMENT AND HANDSETS, WHICH
COULD RESULT IN DELAYS IN OUR NETWORK BUILD-OUT, DISRUPTION OF SERVICE OR LOSS
OF CUSTOMERS.
If we cannot acquire the equipment required to build or upgrade our network
in a timely manner, we may be unable to provide wireless communications services
comparable to those of our competitors or to meet the requirements of the Sprint
PCS agreements. Manufacturers of this equipment could have substantial order
backlogs. Accordingly, the lead-time for the delivery of this equipment may be
longer than anticipated. In addition, the manufacturers of specific types
handsets may have to distribute their limited supply of products among their
numerous customers. Some of our competitors purchase large quantities of
communications equipment and may have established relationships with the
manufacturers of this equipment. Consequently, they may receive priority in the
delivery of this equipment. If we do not obtain equipment or handsets in a
timely manner, we could suffer delays in the build-out of our network,
disruptions in service and a reduction in customers.
39
IF THE WEST VIRGINIA PCS ALLIANCE AND VIRGINIA PCS ALLIANCE FAIL TO PROVIDE
THEIR NETWORK TO US IN THEIR MARKETS, OR IF OUR NETWORK SERVICES AGREEMENT WITH
THE ALLIANCES IS OTHERWISE TERMINATED, WE WILL LOSE THE ABILITY TO USE THE
ALLIANCES' NETWORKS.
West Virginia PCS Alliance and Virginia PCS Alliance, which we refer to as
the Alliances, are two related, independent PCS providers whose network is
managed by NTELOS. Under our network services agreement, the Alliances provide
us with the use of and access to key components of their network in most of our
markets in Virginia and West Virginia. We directly compete with the Alliances in
the markets where we use their network. If the Alliances fail to maintain the
standards for their network as set forth in our network services agreement with
them or otherwise fail to provide their network for our use, our ability to
provide wireless services in these markets may be adversely affected, and we may
not be able to provide seamless service for our customers. If we breach our
obligations to the Alliances, or if the Alliances otherwise terminate the
network services agreement, we will lose our right to use the Alliances' network
to provide service in these markets. In that event, it is likely that we will be
required to build our own network in those markets and incur the substantial
costs associated with doing so.
SPRINT'S VENDOR DISCOUNTS MAY BE DISCONTINUED, WHICH COULD INCREASE OUR
EQUIPMENT COSTS AND REQUIRE MORE CAPITAL THAN WE HAD PROJECTED TO BUILD-OUT OR
UPGRADE OUR NETWORK.
We intend to continue to purchase our infrastructure equipment under
Sprint's vendor agreements that include significant volume discounts. If Sprint
were unable to continue to obtain vendor discounts for its affiliates, the loss
of vendor discounts could increase our equipment costs for our network
build-out.
CONFLICTS WITH SPRINT MAY NOT BE RESOLVED IN OUR FAVOR, WHICH COULD RESTRICT OUR
ABILITY TO MANAGE OUR BUSINESS AND PROVIDE SPRINT PCS PRODUCTS AND SERVICES,
ADVERSELY AFFECTING OUR RELATIONSHIPS WITH OUR CUSTOMERS, INCREASE OUR EXPENSES
OR DECREASE OUR REVENUES.
Under the Sprint PCS agreements, Sprint has a substantial amount of control
over the conduct of our business. Conflicts between us may arise, and as Sprint
owes us no duties except as set forth in the Sprint PCS agreements, these
conflicts may not be resolved in our favor. The conflicts and their resolution
may harm our business. For example:
o Sprint may price its national plans based on its own objectives and
may set price levels and customer credit policies that may not be
economically sufficient for our business;
o Sprint may increase the prices we pay for our back office services;
and
o Sprint may make decisions that adversely affect our use of the Sprint
and Sprint PCS brand names, products or services.
WE MAY NOT BE ABLE TO COMPETE WITH LARGER, MORE ESTABLISHED WIRELESS PROVIDERS
WHO HAVE RESOURCES TO COMPETITIVELY PRICE THEIR PRODUCTS AND SERVICES, WHICH
COULD IMPAIR OUR ABILITY TO ATTRACT AND RETAIN CUSTOMERS.
Our ability to compete will depend in part on our ability to anticipate and
respond to various competitive factors affecting the telecommunications
industry, including new services that may be introduced, changes in consumer
preferences, demographic trends, economic conditions and discount pricing
strategies by competitors. In each market, we compete with at least two cellular
providers that have had their infrastructure in place and have been operational
for a number of years. They may have significantly greater financial and
technical resources than we do, they could offer attractive pricing options and
they may have a wider variety of handset options. We expect existing cellular
providers will continue to upgrade their systems and provide expanded digital
services to compete with the Sprint PCS products and services we offer. Many of
these wireless providers generally require their customers to enter into
long-term contracts, which may make it more difficult for us to attract
customers away from them.
We will also compete with several PCS providers and other existing
communications companies in our markets and expect to compete with new entrants
as the FCC licenses additional spectrum to mobile services providers. A number
of our cellular, PCS and other wireless competitors have access to more licensed
spectrum than the amount licensed to Sprint in most of our territory and
therefore will be able to provide greater network call volume capacity than our
40
network to the extent that network usage begins to reach or exceed the capacity
of our licensed spectrum. Our inability to accommodate increases in call volume
could result in more dropped or disconnected calls. In addition, any competitive
difficulties that Sprint may experience could also harm our competitive position
and success.
We anticipate that market prices for two-way wireless voice services and
products generally will continue to decline as a result of increased
competition. Consequently we may be forced to increase spending for advertising
and promotions. Increased competition also may lead to continued increases in
customer churn. Those trends could cause further delays in our expected dates to
achieve positive EBITDA.
WE MAY NOT BE ABLE TO OFFER COMPETITIVE ROAMING CAPABILITY, WHICH COULD IMPAIR
OUR ABILITY TO ATTRACT AND RETAIN CUSTOMERS.
We rely on agreements with competitors to provide automatic roaming
capability to our PCS customers in many of the areas of the United States not
covered by the Sprint PCS network, which primarily serves metropolitan areas.
Some competitors may be able to offer coverage in areas not served by the Sprint
PCS network or may be able to offer roaming rates that are lower than those
offered by Sprint and its affiliates. Some of our competitors are seeking to
reduce access to their networks through actions pending with the FCC. Moreover,
the engineering standard for the dominant air interface upon which PCS customers
roam is currently being considered for elimination by the FCC as part of a
streamlining proceeding. If the FCC eliminates this standard, our Sprint PCS
customers may have difficulty roaming in some markets.
THERE IS NO UNIFORM SIGNAL TRANSMISSION TECHNOLOGY AND IF WE DECIDE TO USE OTHER
TECHNOLOGIES IN THE FUTURE, THIS DECISION COULD SUBSTANTIALLY INCREASE OUR
EQUIPMENT EXPENDITURES TO REPLACE THE TECHNOLOGY USED ON OUR NETWORK.
The wireless telecommunications industry is experiencing evolving industry
standards. We have employed code division multiple access (CDMA) technology,
which is the digital wireless communications technology selected by Sprint for
its network. CDMA may not provide the advantages expected by us and by Sprint.
In addition to CDMA, there are two other principal signal transmission
technologies, time division multiple access, or TDMA, and global systems for
mobile communications, or GSM. These three signal transmission technologies are
not compatible with each other. If one of these technologies or another
technology becomes the preferred industry standard, we may be at a competitive
disadvantage and competitive pressures may require Sprint to change its digital
technology which, in turn, may require us to make changes at substantially
increased costs.
WE MAY NOT RECEIVE AS MUCH SPRINT PCS ROAMING REVENUE AS WE ANTICIPATE AND OUR
NON-SPRINT PCS ROAMING REVENUE IS LIKELY TO BE LOW.
We are paid a fee from Sprint or a Sprint PCS affiliate for every minute
that a Sprint PCS subscriber based outside of our territory uses our network.
Similarly, we pay a fee to Sprint PCS or a Sprint PCS affiliate for every minute
that our customers use the Sprint PCS network outside our territory. Our
customers may use the Sprint PCS network outside our territory more frequently
than we anticipate, and Sprint PCS subscribers based outside our territory may
use our network less frequently than we anticipate. The fee for each Sprint PCS
roaming minute used was decreased from $0.20 per minute before June 1, 2001, to
$0.15 per minute effective June 1, 2001, and further decreased to $0.12 per
minute effective October 1, 2001. The Sprint PCS roaming rate was changed to
$0.10 per minute in 2002. After 2002, the rate will be changed to "a fair and
reasonable return," which has not yet been determined. However, based on
preliminary discussions with Sprint, we anticipate a significant additional
reduction in the rate. As a result, we may receive less Sprint PCS roaming
revenue in the aggregate, than we previously anticipated or we may have to pay
more Sprint PCS roaming fees in the aggregate than we anticipate. Furthermore,
we do not expect to receive substantial non-Sprint PCS roaming revenue.
41
IF SPRINT PCS CUSTOMERS ARE NOT ABLE TO ROAM INSTANTANEOUSLY OR EFFICIENTLY ONTO
OTHER WIRELESS NETWORKS, WE MAY SUFFER A REDUCTION IN OUR REVENUES AND NUMBER OF
CUSTOMERS.
The Sprint PCS network operates at a different frequency and uses or may
use a different signal transmission technology than many analog cellular and
other digital systems. To access another provider's analog cellular, TDMA or GSM
digital system when outside the territory served by the Sprint PCS network, a
Sprint PCS customer is required to utilize a dual-band/dual-mode handset
compatible with that provider's system. Generally, because dual-band/dual-mode
handsets incorporate two radios rather than one, they are more expensive, larger
and heavier than single-band/single-mode handsets. The Sprint PCS network does
not allow for call hand-off between the Sprint PCS network and another wireless
network, so a customer must end a call in progress on the Sprint PCS network and
initiate a new call when outside the territory served by the Sprint PCS network.
In addition, the quality of the service provided by a network provider during a
roaming call may not approximate the quality of the service provided by Sprint
PCS. The price of a roaming call may not be competitive with prices of other
wireless companies for roaming calls, and Sprint customers may not be able to
use Sprint PCS advanced features, such as voicemail notification, while roaming.
These roaming issues may cause us to suffer a reduction in our revenues and
number of customers.
PARTS OF OUR TERRITORIES HAVE LIMITED LICENSED SPECTRUM, WHICH MAY ADVERSELY
AFFECT THE QUALITY OF OUR SERVICE.
In the majority of our markets, Sprint has licenses covering 20 MHz or 30
MHz of spectrum. However, Sprint has licenses covering only 10 MHz in parts of
our territory covering approximately 3.8 million residents out of a total
population of over 10.2 million residents. In the future, as our customers in
those areas increase in number, this limited licensed spectrum may not be able
to accommodate increases in call volume and may lead to increased dropped calls
and may limit our ability to offer enhanced services.
NON-RENEWAL OR REVOCATION BY THE FCC OF THE SPRINT PCS LICENSES WOULD
SIGNIFICANTLY HARM OUR BUSINESS BECAUSE WE WOULD NO LONGER HAVE THE RIGHT TO
OFFER WIRELESS SERVICE THROUGH OUR NETWORK.
We are dependent on Sprint's PCS licenses, which are subject to renewal and
revocation by the FCC. Sprint's PCS licenses in many of our territories will
expire as early as 2005 but may be renewed for additional ten-year terms. There
may be opposition to renewal of Sprint's PCS licenses upon their expiration and
the Sprint PCS licenses may not be renewed. The FCC has adopted specific
standards to apply to PCS license renewals. For example, if Sprint does not
demonstrate to the FCC that Sprint has met the five-year construction
requirements for each of its PCS licenses, it can lose those licenses. Failure
to comply with these standards in our territory could cause the imposition of
fines on Sprint by the FCC or the revocation or forfeiture of the Sprint PCS
licenses for our territory, which would prohibit us from providing service in
our markets.
IF THE SPRINT PCS AGREEMENTS DO NOT COMPLY WITH FCC REQUIREMENTS, SPRINT MAY
TERMINATE THE SPRINT PCS AGREEMENTS, WHICH COULD RESULT IN OUR INABILITY TO
PROVIDE SERVICE.
The FCC requires that licensees like Sprint maintain control of their
licensed spectrum and not delegate control to third-party operators or managers
like us. Although the Sprint PCS agreements reflect an arrangement that the
parties believe meets the FCC requirements for licensee control of licensed
spectrum, we cannot be certain the FCC will agree with us. If the FCC determines
that the Sprint PCS agreements need to be modified to increase the level of
licensee control, we have agreed with Sprint to use our best efforts to modify
the Sprint PCS agreements to comply with applicable law. If we cannot agree with
Sprint to modify the Sprint PCS agreements, they may be terminated. If the
Sprint PCS agreements are terminated, we would no longer be a part of the Sprint
PCS network and we would have extreme difficulty in conducting our business.
42
WE MAY NEED MORE CAPITAL THAN WE CURRENTLY ANTICIPATE TO COMPLETE THE BUILD-OUT
AND UPGRADE OF OUR NETWORK, AND A DELAY OR FAILURE TO OBTAIN ADDITIONAL CAPITAL
COULD DECREASE OUR REVENUES.
The completion of our network build-out will require substantial capital.
Additional funds would be required in the event of:
o significant departures from our current business plan;
o unforeseen delays, cost overruns, unanticipated expenses; or
o regulatory, engineering design and other technological changes.
For example, it is possible that we will need substantial funds if we find
it necessary or desirable to overbuild the territory currently served through
our arrangements with the Alliances. Due to our highly leveraged capital
structure, additional financing may not be available or, if available, may not
be obtained on a timely basis or on terms acceptable to us or within limitations
permitted under our existing debt covenants. Failure to obtain additional
financing, should the need for it develop, could result in the delay or
abandonment of our development and expansion plans, and we may be unable to fund
our ongoing operations.
BECAUSE SPRINT HAS RECENTLY REQUIRED US TO UPGRADE OUR NETWORK TO PROVIDE "THIRD
GENERATION" TECHNOLOGY, WE WILL FACE ADDITIONAL CAPITAL EXPENSES.
The wireless industry is seeking to implement new "third generations," or
"3G", technology. Sprint has selected a version of 3G technology (1XRTT) for its
own networks and required us to upgrade our network to provide those services.
We currently estimate the network upgrade to 1XRTT will cost approximately $35
million, but actual costs could exceed this estimate. Sprint launched the new 3G
technology in August 2002. We participated in that launch along with other
Sprint PCS affiliates. We still have additional expenditures pending to complete
the full implementation of 3G in all of our markets. If other wireless carriers
implement their 3G upgrades on a more rapid timetable, or on a more cost
efficient basis, or on a more advanced technology basis, we will likely suffer
competitive disadvantages in our markets. While there are potential advantages
with 3G technology, such as increased network capacity and additional
capabilities for wireless data applications, the technology has not been proven
in the marketplace and has the risks inherent in other technological
innovations.
Recently, Sprint has sought to increase service fees during the remainder
of 2002 and beyond in connection with its development of 3G-related back-office
systems and platforms. The Company, along with other PCS affiliates of Sprint,
is currently disputing the validity of Sprint's right to pass through this fee
to the affiliates. If this dispute is resolved unfavorably to the Company, then
Horizon PCS will incur significant additional expenses.
UNAUTHORIZED USE OF OUR NETWORK AND OTHER TYPES OF FRAUD COULD DISRUPT OUR
BUSINESS AND INCREASE OUR COSTS.
We will likely incur costs associated with the unauthorized use of our
network, including administrative and capital costs associated with detecting,
monitoring and reducing the incidence of fraud. Fraud impacts interconnection
costs, capacity costs, administrative costs, fraud prevention costs and payments
to other carriers for unbillable fraudulent roaming. Although we believe that
Sprint has implemented appropriate controls to minimize the effect to us of
fraudulent usage, our efforts may not be successful.
EXPANDING OUR TERRITORY MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS.
As part of our business strategy, we may expand our territory through the
grant of additional markets from Sprint or through acquisitions of other Sprint
PCS affiliates. We will evaluate strategic acquisitions and alliances
principally relating to our current operations. These transactions may require
the approval of Sprint and commonly involve a number of risks, including:
o difficulty assimilating acquired operations and personnel;
o diversion of management attention;
43
o disruption of ongoing business;
o inability to retain key personnel;
o inability to successfully incorporate acquired assets and rights into
our service offerings;
o inability to maintain uniform standards, controls, procedures and
policies; and
o impairment of relationships with employees, customers or vendors.
Failure to overcome these risks or any other problems encountered in these
transactions could have a material adverse effect on our business. In connection
with these transactions, we may also issue additional equity securities and
incur additional debt.
THE SPRINT PCS AGREEMENTS AND OUR RESTATED CERTIFICATE OF INCORPORATION INCLUDE
PROVISIONS THAT MAY DISCOURAGE, DELAY OR RESTRICT ANY SALE OF OUR OPERATING
ASSETS OR COMMON STOCK TO THE POSSIBLE DETRIMENT OF OUR NOTEHOLDERS.
The Sprint PCS agreements restrict our ability to sell our operating assets
and common stock. Generally, Sprint must approve a change of control of our
ownership and consent to any assignment of the Sprint PCS agreements. The Sprint
PCS agreements also give Sprint a right of first refusal if we decide to sell
the operating assets of our Bright PCS markets to a third party. In addition,
provisions of our restated certificate of incorporation could also operate to
discourage, delay or make more difficult a change in control of our company. For
example, our restated certificate of incorporation provides for:
o two classes of common stock, with our class B common stock having ten
votes per share;
o the issuance of preferred stock without stockholder approval; and
o a classified board, with each board member serving a three-year term.
The restrictions in the Sprint PCS agreements and the provisions of our
restated certificate of incorporation could discourage any sale of our operating
assets or common stock.
HORIZON TELCOM WILL BE ABLE TO CONTROL THE OUTCOME OF SIGNIFICANT MATTERS
PRESENTED TO STOCKHOLDERS AS A RESULT OF ITS OWNERSHIP POSITION, WHICH COULD
POTENTIALLY IMPAIR OUR ATTRACTIVENESS AS A TAKEOVER TARGET.
Horizon Telcom beneficially owns approximately 54.7% of our outstanding
common stock on fully diluted basis as of September 30, 2002. In addition, the
shares held by Horizon Telcom are class B shares, which have ten votes per
share. The class A shares have only one vote per share. As a result, Horizon
Telcom holds approximately 81.2% of the voting power on a fully diluted basis at
September 30, 2002. Horizon Telcom will have the voting power to control the
election of our board of directors and it will be able to cause amendments to
our restated certificate of incorporation or our restated bylaws. Horizon Telcom
also may be able to cause changes in our business without seeking the approval
of any other party. These changes may not be to the advantage of our company or
in the best interest of our other stockholders or the holders of our notes. For
example, Horizon Telcom will have the power to prevent, delay or cause a change
in control of our company and could take other actions that might be favorable
to Horizon Telcom, but not necessarily to other stockholders. This may have the
effect of delaying or preventing a change in control. In addition, Horizon
Telcom is controlled by members of the McKell family, who collectively own
approximately 60.6% of the voting interests of Horizon Telcom. Therefore, the
McKell family, acting as a group, may be able to exercise indirect control over
us.
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WE MAY FACE CONFLICTS OF INTEREST WITH HORIZON TELCOM, WHICH MAY HARM OUR
BUSINESS.
Conflicts of interest may arise between Horizon Telcom, and us or its other
affiliates, in areas relating to past, ongoing and future relationships,
including:
o corporate opportunities;
o tax and intellectual property matters;
o potential acquisitions;
o financing transactions, sales or other dispositions by Horizon Telcom
of shares of our common stock held by it; and
o the exercise by Horizon Telcom of its ability to control our
management and affairs.
Horizon Telcom controls approximately 81.2% of the voting power of our
shares on a fully diluted basis. Horizon Telcom is engaged in a diverse range of
telecommunications-related businesses, such as local telephone services and
Internet services, and these businesses may have interests that conflict or
compete in some manner with our business. Horizon Telcom is under no obligation
to share any future business opportunities available to it with us, unless
Delaware law requires it to do so. Any conflicts that may arise between us and
Horizon Telcom or any of its affiliates or any loss of corporate opportunity to
Horizon Telcom that may otherwise be available to us may impact our financial
condition or results of operations because these conflicts of interest or losses
of corporate opportunities could result in a loss of customers and, therefore,
business. Because Horizon Telcom will be able to control the outcome of most
conflicts upon which stockholders could vote and because it will have the voting
power to control our board of directors, conflicts may not be resolved in our
favor.
PRESENT AND FUTURE TRANSACTIONS WITH HORIZON TELCOM MAY BE ON TERMS THAT ARE NOT
AS FAVORABLE AS COULD BE OBTAINED FROM THIRD PARTIES.
In the past, we have entered into transactions with Horizon Telcom
including the leasing of towers by Horizon Telcom to us and the advancing of
cash to us to finance our operations. In addition, Horizon Services, a
subsidiary of Horizon Telcom provides administrative services to us including
finance and accounting services, computer access and human resources. Although
these transactions were on terms that we believe are fair, because Horizon
Telcom currently owns 54.7% of our outstanding common stock on a fully diluted
basis, third parties with whom we wish to enter into agreements or the
marketplace in general may not perceive these transactions with Horizon Telcom
to be fair. In addition, because Horizon Telcom has the power to control our
board of directors, we may not be able to renew these agreements on terms
favorable to us.
WE MAY EXPERIENCE A HIGH RATE OF CUSTOMER TURNOVER, WHICH WOULD INCREASE OUR
COSTS OF OPERATIONS AND REDUCE OUR REVENUE AND POTENTIALLY CAUSE A VIOLATION OF
OUR COVENANTS UNDER OUR SECURED CREDIT FACILITY.
Our strategy to minimize customer turnover, commonly known as churn, may
not be successful. As a result of customer turnover, we lose the revenue
attributable to these customers and increase the costs of establishing and
growing our customer base. The PCS industry has experienced a higher rate of
customer turnover as compared to cellular industry averages. We have experienced
an increase in churn during 2002, primarily caused by NDASL customers' inability
to pay for services billed. Current and future strategies to reduce customer
churn may not be successful.
The rate of customer turnover is affected by the following factors, several
of which are not within our ability to address:
o credit worthiness of customers;
o extent of network coverage;
45
o reliability issues such as blocked calls, dropped calls and handset
problems;
o non-use of phones;
o change of employment;
o a lack of affordability;
o price competition;
o Sprint PCS' customer credit policies;
o customer care concerns; and
o other competitive factors.
A high rate of customer turnover could adversely affect our competitive
position, results of operations and our costs of, or losses incurred in,
obtaining new customers, especially because we subsidize some of the cost of the
handsets purchased by our customers.
OUR ALLOWANCE FOR DOUBTFUL ACCOUNTS MAY NOT BE SUFFICIENT TO COVER UNCOLLECTIBLE
ACCOUNTS.
On an ongoing basis, we estimate the amount of customer receivables that we
may not collect to reflect the expected loss on such accounts in the current
period. However, our allowance for doubtful accounts may underestimate actual
unpaid receivables for various reasons, including:
o adverse changes in our churn rate exceeding our estimates;
o adverse changes in the economy generally exceeding our expectations;
or
o unanticipated changes in Sprint PCS' products and services.
If our allowance for doubtful accounts is insufficient to cover losses on
our receivables, our business, financial position or results of operations could
be materially adversely affected.
BECAUSE THE WIRELESS INDUSTRY HAS EXPERIENCED HIGHER CUSTOMER ADDITIONS AND
HANDSET SALES IN THE FOURTH CALENDAR QUARTER AS COMPARED TO THE OTHER THREE
CALENDAR QUARTERS, A FAILURE BY US TO ACQUIRE SIGNIFICANTLY MORE CUSTOMERS IN
THE FOURTH QUARTER COULD HAVE A DISPROPORTIONATE NEGATIVE EFFECT ON OUR RESULTS
OF OPERATIONS.
The wireless industry is historically dependent on fourth calendar quarter
results. Our overall results of operations could be significantly reduced if we
have a worse than expected fourth calendar quarter for any reason, including the
following:
o our inability to match or beat pricing plans offered by competitors;
o our failure to adequately promote Sprint PCS' products, services and
pricing plans;
o our inability to obtain an adequate supply or selection of handsets;
o a downturn in the economy of some or all of the markets in our
territory; or
o a generally poor holiday shopping season.
46
REGULATION BY GOVERNMENT AGENCIES MAY INCREASE OUR COSTS OF PROVIDING SERVICE OR
REQUIRE US TO CHANGE OUR SERVICES, WHICH COULD IMPAIR OUR FINANCIAL PERFORMANCE.
The licensing, construction, use, operation, sale and interconnection
arrangements of wireless telecommunications systems are regulated to varying
degrees by the FCC, the Federal Aviation Administration and, depending on the
jurisdiction, state and local regulatory agencies and legislative bodies.
Adverse decisions regarding these regulatory requirements could negatively
impact our operations and our cost of doing business.
USE OF HAND-HELD PHONES MAY POSE HEALTH RISKS, REAL OR PERCEIVED, WHICH COULD
RESULT IN THE REDUCED USE OF OUR SERVICES OR LIABILITY FOR PERSONAL INJURY
CLAIMS.
Media reports have suggested that radio frequency emissions from wireless
handsets may be linked to various health problems, including cancer, and may
interfere with various electronic medical devices, including hearing aids and
pacemakers. Concerns over radio frequency emissions may discourage use of
wireless handsets or expose us to potential litigation. Any resulting decrease
in demand for our services, or costs of litigation and damage awards, could
impair our ability to profitably operate our business
47
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
Exhibit Number Description
- -------------- -----------
3.1* Amended and Restated Certificate of Incorporation of Horizon PCS.
3.2* Bylaws of Horizon PCS.
* Incorporated by reference to the exhibit with the same number previously
filed by the Registrant on Form S-4 (Reg. No. 333-51238).
+ The Registrant has requested confidential treatment for certain portions of
this exhibit pursuant to Rule 24b-2 of the Securities Exchange Act of 1934.
(B) REPORTS ON FORM 8-K
1. On August 14, 2002, we filed a Current Report on Form 8-K with
the SEC that provided information under "ITEM 5 - Other Event"
disclosing we issued a press release announcing our financial
results for the second quarter of the fiscal year ending December
31, 2002.
48
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
undersign thereunto duly authorized
HORIZON PCS, INC.
-----------------------------------
Registrant
Date: November 12, 2002 By: /s William A. McKell
------------------ -------------------------------
William A. McKell
Chief Executive Officer
Date: November 12, 2002 By: /s Peter M. Holland
----------------- -------------------------------
Peter M. Holland
Chief Financial Officer
(Principal Financial and
Chief Accounting Officer)
49
Horizon PCS, Inc., Certification for Quarterly Report on Form 10-Q
------------------------------------------------------------------
I, William A. McKell, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Horizon PCS, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 12, 2002
------------------------------
/s/ William A McKell
-----------------------------------
William A. McKell
Chairman of the Board, President
and Chief Executive Officer
Horizon PCS, Inc., Certification for Quarterly Report on Form 10-Q
------------------------------------------------------------------
I, Peter M. Holland, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Horizon PCS, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 12, 2002
------------------------------
/s/ Peter M. Holland
-----------------------------------
Peter M. Holland
Chief Financial Officer
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