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 MARCH 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
Commission file number: 333-51240
HORIZON PCS, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 31-1707839
(State or other jurisdiction (I.R.S. Employer Identification No.)
of 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[ ]
Indicated by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No[X]
As of April 30, 2003, there were 26,846 shares of class A common stock and
58,445,288 shares of class B common stock outstanding.
HORIZON PCS
FORM 10-Q
FIRST 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..................................25
ITEM 4. Controls and Procedures.....................................................................26
PART II OTHER INFORMATION
ITEM 1. Legal Proceedings...........................................................................27
ITEM 2. Changes in Securities and Use of Proceeds...................................................27
ITEM 3. Defaults Upon Senior Securities.............................................................27
ITEM 4. Submission of Matters to a Vote of Security Holders.........................................27
ITEM 5. Other Information...........................................................................27
ITEM 6. Exhibits and Reports on Form 8-K............................................................42
Horizon PCS, Inc. ("Horizon PCS") is the issuer of 14% Senior Discount
Notes due 2010 (the "discount notes"). In March 2001, the discount notes were
the subject of an exchange offer which was registered with the Securities and
Exchange Commission ("SEC") (Registration No. 333-51238). The Co-Registrants are
Horizon Personal Communications, Inc. ("HPC"), and Bright Personal
Communications Services, LLC ("Bright PCS"), collectively the "Operating
Companies," which are wholly-owned subsidiaries of Horizon PCS. Each of the
Operating Companies has provided a full, unconditional, joint and several
guaranty of Horizon PCS' obligations under the discount notes. Horizon PCS has
no operations separate from its investment in the Operating Companies. Pursuant
to Rule 12h-5 of the Securities Exchange Act 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 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HORIZON PCS, INC.
Consolidated Balance Sheets
As of March 31, 2003, and December 31, 2002
- --------------------------------------------------------------------------------
March 31, December 31,
2003 2002
--------------- ---------------
(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (includes $11,000,000 and $55,000,000
on deposit at March 31, 2003 and December 31, 2002, respectively,
in accordance with covenant amendment in 2002)............................ $ 69,317,934 $ 86,137,284
Restricted cash............................................................. 24,063,259 24,063,259
Accounts receivable-- subscriber, less allowance for doubtful accounts
of approximately $1,922,000 and $2,308,000 at March 31, 2003 and
December 31, 2002, respectively........................................... 21,173,469 19,524,527
Receivable from affiliate and Parent........................................ 806,284 8,497
Equipment inventory......................................................... 2,715,918 4,082,795
Prepaid expenses and other current assets................................... 4,232,465 2,671,458
--------------- ---------------
Total current assets.................................................. 122,309,329 136,487,820
--------------- ---------------
OTHER ASSETS:
Intangible asset-- Sprint PCS licenses, net of amortization................. 39,766,368 40,381,201
Debt issuance costs, net of amortization.................................... 19,255,638 19,995,818
Deferred activation expense and other assets................................ 6,228,967 6,723,827
--------------- ---------------
Total other assets.................................................... 65,250,973 67,100,846
--------------- ---------------
PROPERTY AND EQUIPMENT, NET................................................... 231,207,416 239,536,593
--------------- ---------------
Total assets...................................................... $ 418,767,718 $ 443,125,259
=============== ===============
(Continued on next page)
1
HORIZON PCS, INC.
Consolidated Balance Sheets (Continued)
As of March 31, 2003, and December 31, 2002
- --------------------------------------------------------------------------------
March 31, December 31,
2003 2002
---------------- ----------------
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable............................................................ $ 21,537,167 $ 23,280,465
Accrued liabilities......................................................... 12,036,260 6,903,055
Accrued real estate and personal property taxes............................. 3,604,348 3,438,037
Payable to Sprint PCS....................................................... 13,601,094 9,910,262
Deferred service revenue.................................................... 5,970,738 5,308,457
---------------- ----------------
Total current liabilities............................................. 56,749,607 48,840,276
---------------- ----------------
OTHER LONG-TERM LIABILITIES:
Long-term debt.............................................................. 523,559,698 516,284,349
Other long-term liabilities................................................. 8,229,202 8,319,206
Deferred activation revenue................................................. 5,350,674 6,092,645
Deferred taxes.............................................................. 6,030,935 6,030,935
---------------- ----------------
Total other long-term liabilities..................................... 543,170,509 536,727,135
---------------- ----------------
Total liabilities................................................... 599,920,116 585,567,411
---------------- ----------------
COMMITMENTS AND CONTINGENCIES (Note 7)
CONVERTIBLE PREFERRED STOCK................................................... 160,174,311 157,105,236
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,
26,846 issued and outstanding on March 31, 2003, and 26,646 issued
and outstanding on December 31, 2002, 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, at $0.0001 par value........ 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)............................... (60,668) (394,575)
Additional paid-in capital.................................................. 91,852,141 91,852,117
Deferred stock option compensation.......................................... (730,837) (885,747)
Retained deficit............................................................ (432,282,133) (390,013,971)
---------------- ----------------
Total stockholders' equity (deficit)................................ (341,326,709) (299,547,388)
---------------- ----------------
Total liabilities and stockholders' equity (deficit).............. $ 418,767,718 $ 443,125,259
================ ================
The accompanying notes are an integral part of these
condensed consolidated financial statements
2
HORIZON PCS, INC.
Consolidated Statements of Operations
For the Three Months Ended March 31, 2003 and 2002 (unaudited)
- --------------------------------------------------------------------------------
For the Three Months Ended
March 31,
2003 2002
---------------- ----------------
OPERATING REVENUES:
Subscriber revenues..................................................... $ 43,578,954 $ 35,015,205
Roaming revenues........................................................ 13,797,873 10,819,288
Equipment revenues...................................................... 1,818,096 2,375,289
---------------- ----------------
Total operating revenues......................................... 59,194,923 48,209,782
---------------- ----------------
OPERATING EXPENSES:
Cost of service (exclusive of items shown below)........................ 43,795,933 35,750,809
Cost of equipment....................................................... 5,754,769 4,919,595
Selling and marketing................................................... 12,440,784 14,707,221
General and administrative (exclusive of items shown below)............. 9,156,188 9,175,049
Non-cash compensation................................................... 154,910 177,237
Depreciation and amortization........................................... 10,860,686 7,949,631
Loss on disposal of property and equipment.............................. 257,376 285,738
---------------- ----------------
Total operating expenses......................................... 82,420,646 72,965,280
---------------- ----------------
OPERATING LOSS............................................................ (23,225,723) (24,755,498)
Interest income and other, net............................................ 300,112 743,636
Interest expense, net of capitalized interest............................. (16,273,442) (12,738,408)
---------------- ----------------
LOSS ON OPERATIONS BEFORE INCOME TAXES.................................... (39,199,053) (36,750,270)
INCOME TAX EXPENSE........................................................ -- --
---------------- ----------------
NET LOSS.................................................................. (39,199,053) (36,750,270)
PREFERRED STOCK DIVIDEND.................................................. (3,069,109) (2,856,369)
---------------- ----------------
NET LOSS AVAILABLE TO COMMON STOCKHOLDERS................................. $ (42,268,162) $ (39,606,639)
================ ================
Basic and diluted net loss per share available to common stockholders..... $ (0.72) $ (0.68)
================ ================
Weighted-average common shares outstanding................................ 58,472,055 58,471,934
================ ================
The accompanying notes are an integral part of these
condensed consolidated financial statements
3
HORIZON PCS, INC.
Consolidated Statements of Comprehensive Income (Loss)
For the Three Months Ended March 31, 2003 and 2002 (unaudited)
- --------------------------------------------------------------------------------
For the Three Months Ended
March 31,
2003 2002
---------------- ----------------
NET LOSS.................................................................. $ (39,199,053) $ (36,750,270)
OTHER COMPREHENSIVE INCOME (LOSS):
Net unrealized gain on hedging activities............................... 333,907 389,943
---------------- ----------------
COMPREHENSIVE INCOME (LOSS)............................................... $ (38,865,146) $ (36,360,327)
================ ================
The accompanying notes are an integral part of these
condensed consolidated financial statements
4
HORIZON PCS, INC.
Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 2003 and 2002 (unaudited)
- --------------------------------------------------------------------------------
For the Three Months Ended
March 31,
2003 2002
---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss................................................................ $ (39,199,053) $ (36,750,270)
---------------- ----------------
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization........................................... 10,860,686 7,949,631
Non-cash compensation expense........................................... 154,910 177,237
Non-cash interest expense............................................... 7,803,680 6,118,482
Bad debt expense........................................................ 1,423,331 3,511,642
Loss on hedging activities.............................................. -- 34,103
Loss on disposal of property and equipment.............................. 257,376 285,738
Change in:
Accounts receivable................................................... (3,072,273) (6,534,699)
Equipment inventory................................................... 1,366,877 2,043,052
Prepaid expenses and other current assets............................. (1,561,007) (1,830,524)
Accounts payable...................................................... (1,743,298) 2,966,259
Payable to Sprint..................................................... 3,690,832 6,648,003
Accrued liabilities and deferred service revenue...................... 5,961,797 4,046,988
Receivable/payable from affiliates and Parent......................... (797,787) 484,771
Other assets and liabilities, net..................................... 243,868 129,672
---------------- ----------------
Total adjustments..................................................... 24,588,992 26,030,355
---------------- ----------------
Net cash used in operating activities............................... (14,610,061) (10,719,915)
---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net............................................... (2,209,313) (23,438,012)
Proceeds from sale of property and equipment............................ -- 1,253,182
---------------- ----------------
Net cash used in investing activities............................... (2,209,313) (22,184,830)
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITES:
Exercise of stock options............................................... 24 --
Proceeds from borrowings on long-term debt.............................. -- 105,000,000
---------------- ----------------
Net cash provided by financing activities........................... 24 105,000,000
---------------- ----------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS...................... (16,819,350) 72,095,255
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD............................ 86,137,284 123,775,562
---------------- ----------------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................................. $ 69,317,934 $ 195,870,817
================ ================
5
HORIZON PCS, INC.
Notes to Consolidated Financial Statements
As of March 31, 2003, and December 31, 2002,
And for the Three Months Ended March 31, 2003 and 2002 (unaudited)
- --------------------------------------------------------------------------------
NOTE 1 - GENERAL
The results of operations for the periods shown are not necessarily
indicative of the results to be expected for the fiscal year. 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, 2002, which includes information and disclosures not
presented herein.
NOTE 2 - LIQUIDITY
As of March 31, 2003, the Company was in compliance with its covenants with
regard to all outstanding debt. However, the Company believes that it is
probable that it will violate one or more covenants under the secured credit
facility in 2003. The failure to comply with a covenant would be an event of
default under the secured credit facility, and would give the lenders the right
to pursue remedies. These remedies could include acceleration of amounts due
under the facility. If the lenders elected to accelerate the amounts due under
the facility, this would also represent a default under the indentures for the
senior notes and discount notes (Note 6). As noted in our 10-K filing dated
March 31, 2003, at December 31, 2002, our independent auditors' report states
these matters raise substantial doubt about the Company's ability to continue as
a going concern. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
NOTE 3 - ORGANIZATION AND BUSINESS OPERATIONS
On April 26, 2000, Horizon Telcom, Inc. ("Parent" or "Horizon Telcom")
formed Horizon PCS, Inc. The Company primarily provides wireless personal
communications services ("PCS") as a PCS affiliate of 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 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 4 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Note 4 in the Notes to Consolidated Financial Statements in the Company's
Annual Report on Form 10-K for the year ended December 31, 2002, describes the
Company's significant accounting policies in greater detail than presented
herein.
BASIS OF PRESENTATION
The accompanying unaudited quarterly 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 accounting principles generally accepted in the
United States of America have been condensed or omitted pursuant to such rules
and regulations. These statements include the accounts of the Company and its
wholly-owned subsidiaries, HPC and Bright PCS. All material intercompany
transactions and balances have been eliminated. These statements should be read
in conjunction with the audited consolidated financial statements and notes
thereto contained in the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 2002.
6
HORIZON PCS, INC.
Notes to Consolidated Financial Statements
As of March 31, 2003, and December 31, 2002,
And for the Three Months Ended March 31, 2003 and 2002 (unaudited)
- --------------------------------------------------------------------------------
NOTE 4 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ materially
from those estimates.
RESTRICTED CASH
In connection with the Company's December 2001 offering of $175,000,000 of
senior notes due in 2011 (Note 6), approximately $48,660,000 of the offering's
proceeds were placed in an escrow account to be used toward the first four
semi-annual interest payments due under the terms of the notes. During 2002, the
Company paid approximately $24,596,000 representing the first two installments.
The remaining two interest payments have been classified as short-term and are
scheduled to be paid in June and December of 2003.
EQUIPMENT INVENTORY
Equipment inventory consists of handsets and related accessories.
Inventories are carried at the lower of cost (determined by the weighted average
method) or market (replacement cost).
PROPERTY AND EQUIPMENT
Property and equipment, including improvements that extend useful lives,
are stated at cost (Note 5), while maintenance and repairs are charged to
operations as incurred. Construction work in progress includes expenditures for
the purchase of capital equipment, construction and items such as direct payroll
and related benefits and interest capitalized during construction.
The Company capitalizes interest pursuant to Statement of Financial
Accounting Standards ("SFAS") No. 34, "Capitalization of Interest Cost." The
Company capitalized interest of approximately $463,000 and $2,090,000 for the
three months ended March 31, 2003 and 2002, respectively. In addition, the
Company capitalized labor costs of approximately $33,000 and $1,282,000 for the
three months ended March 31, 2003 and 2002, respectively.
REVENUE RECOGNITION
The Company records equipment revenue from the sale of handsets and
accessories to subscribers in its retail stores and to local distributors in its
territories upon delivery. The Company does not record equipment revenue on
handsets and accessories sold by national third-party retailers or directly by
Sprint to subscribers in our territory. After the handset has been purchased,
the subscriber purchases a service package, revenue from which is recognized
monthly as service is provided and is included in subscriber revenue, net of
credits related to the billed revenue. The Company believes the equipment
revenue and related cost of equipment associated with the sale of wireless
handsets and accessories is a separate earnings process from the sale of
wireless services to subscribers. For industry competitive reasons, the Company
sells wireless handsets at a loss. Because such arrangements do not require a
customer to subscribe to the Company's wireless services and because the Company
sells wireless handsets to existing customers at a loss, the Company accounts
for these transactions separately from agreements to provide customers wireless
service.
7
HORIZON PCS, INC.
Notes to Consolidated Financial Statements
As of March 31, 2003, and December 31, 2002,
And for the Three Months Ended March 31, 2003 and 2002 (unaudited)
- --------------------------------------------------------------------------------
NOTE 4 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company recognizes revenues when persuasive evidence of an arrangement
exists, services have been rendered or products have been delivered, the price
to the buyer is fixed and determinable, and collectibility is reasonably
assured. The Company's revenue recognition policy is consistent with the current
interpretations of SEC Staff Accounting Bulletin ("SAB") No. 101, "Revenue
Recognition in Financial Statements." Accordingly, activation fee revenue and
direct customer activation expense is deferred and will be recorded over the
average life for those customers (currently estimated to be 24 months) that are
assessed an activation fee.
A management fee of 8% of collected PCS revenues from Sprint PCS subscribers
based in the Company's territory, is accrued as services are provided and
remitted to Sprint and recorded as general and administrative expense. Revenues
generated from the sale of handsets and accessories, inbound and outbound Sprint
PCS roaming fees, and roaming services provided to Sprint PCS customers who are
not based in the Company's territory are not subject to the 8% management fee.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company's policies do not permit the use of derivative financial
instruments for speculative purposes. The Company uses interest rate swaps to
manage interest rate risk. The net amount paid or received on interest rate
swaps is recognized as an adjustment to interest income and other.
The Company has adopted SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities," as amended by SFAS No. 138, "Accounting for Derivative
Instruments and Certain Hedging Activities." These statements require an entity
to recognize all derivative and hedging activities as an asset or liability
measured at fair value. Depending on the intended use of the derivative, changes
in its fair value will be reported in the period of change as either a component
of earnings or a component of other comprehensive income. The Company uses
interest rate swaps, designated as cash flow hedges, to manage interest rate
risk. The net amount paid or received on interest rate swaps is recognized as an
adjustment to interest income and other. Changes in the fair value of a
derivative that is highly effective and that is designated and qualifies as a
cash-flow hedge are recorded in other comprehensive income to the extent that
the derivative is effective as a hedge, until earnings are affected by the
variability in cash flows of the designated hedged item. The ineffective portion
of the change in fair value of a derivative instrument that qualifies as either
a fair-value hedge or a cash-flow hedge is reported in earnings. Changes in the
fair value of derivative trading instruments are reported in current period
earnings. Outstanding temporary gains and losses are netted together and shown
as either a component of other assets or accrued liabilities.
STOCK-BASED COMPENSATION
The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations including Financial
Accounting Standards Board ("FASB") Interpretation No. 44, "Accounting for
Certain Transactions involving Stock Compensation - an interpretation of APB
Opinion No. 25" issued in March 2000, to account for its fixed plan stock
options. Under this method, compensation expense is recorded on the date of
grant only if the current market price of the underlying stock exceeded the
exercise price. SFAS No. 123, "Accounting for Stock-Based Compensation,"
established accounting and disclosure requirements using a fair value-based
method of accounting for stock-based employee compensation plans. As allowed by
SFAS No. 123, the Company has elected to continue to apply the intrinsic
value-based method of accounting described above, and has adopted the disclosure
requirements of SFAS No. 148 "Accounting for Stock-Based Compensation -
Transition and Disclosure - an amendment of FASB Statement No. 123." The
following table illustrates the effect on net loss if the fair-value-based
method had been applied to all outstanding and unvested awards in each period.
8
HORIZON PCS, INC.
Notes to Consolidated Financial Statements
As of March 31, 2003, and December 31, 2002,
And for the Three Months Ended March 31, 2003 and 2002 (unaudited)
- --------------------------------------------------------------------------------
NOTE 4 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
2003 2002
------------------ -----------------
Net loss available to common stockholders, as reported............ $ (42,268,162) $ (39,606,639)
Add: Stock-based employee compensation expense included in
reported net loss............................................... 154,910 177,237
Deduct: Total stock-based employee compensation expense
determined under fair value base method for all awards,
net of related tax effects...................................... (197,258) (287,666)
------------------ -----------------
Pro Forma net loss available to common stockholders.............. $ (42,310,510) $ (39,717,068)
================== =================
Basic and diluted loss per share available to common
stockholders - as reported...................................... $ (0.72 $ (0.68)
================== =================
Basic and diluted loss per share available to common
stockholders - pro forma........................................ $ (0.72 $ (0.68)
================== =================
NET LOSS PER SHARE
The Company computes net loss per common share in accordance with SFAS No.
128, "Earnings per Share." Basic and diluted net loss per share 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 December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of FASB Statement No.
123." This Statement provides alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, this Statement requires prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The Company adopted the disclosure requirements of SFAS No. 148 as of
December 31, 2002, but continues to account for stock compensation costs in
accordance with APB Opinion No. 25.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This Statement addresses financial
accounting and reporting for costs associated with exit or disposal activities
by requiring that expenses related to the exit of an activity or disposal of
long-lived assets be recorded when they are incurred and measurable. Prior to
SFAS No. 146, these charges were accrued at the time of commitment to exit or
dispose of an activity. The Company adopted SFAS 146 on January 1, 2003, and it
did not have a material effect on the Company's financial position, results of
operations or cash flows.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
SFAS No. 145 addresses the accounting for gains and losses from the
extinguishment of debt, economic effects and accounting practices of
sale-leaseback transactions and makes technical corrections to existing
pronouncements. The Company adopted SFAS No. 145 on January 1, 2003, and it did
not have a material effect on the Company's financial position, results of
operations or cash flows.
9
HORIZON PCS, INC.
Notes to Consolidated Financial Statements
As of March 31, 2003, and December 31, 2002,
And for the Three Months Ended March 31, 2003 and 2002 (unaudited)
- --------------------------------------------------------------------------------
NOTE 4 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 adopted this statement effective January 1, 2003
(see Note 5).
In 2002, the FASB's Emerging Issues Task Force, ("EITF"), reached a
consensus on Issue 00-21, "Revenue Arrangements with Multiple Deliverables."
Issue 00-21 provides guidance on how a vendor should account for arrangements
under which it will perform multiple revenue-generating activities. The guidance
in this Issue is effective for revenue agreements entered into in fiscal periods
beginning after June 15, 2003. The Company is still evaluating the impact this
guidance might have on its financial position, results of operations and cash
flows. The Company will adopt the guidance in Issue 00-21 as of July 1, 2003.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the 2003
presentation.
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following at:
March 31, December 31,
2003 2002
---------------- ----------------
Network assets................................................... $ 208,364,586 $ 196,548,216
Switching equipment.............................................. 62,584,893 63,294,413
Furniture, vehicles and office equipment......................... 10,493,868 10,348,364
Land............................................................. 966,689 966,689
---------------- ----------------
Property and equipment in service, cost...................... 282,410,036 271,157,682
Accumulated depreciation......................................... (54,789,901) (46,273,707)
---------------- ----------------
Property and equipment in service, net................... 227,620,135 224,883,975
Construction work in progress.................................... 3,587,281 14,652,618
---------------- ----------------
Total property and equipment, net.................... $ 231,207,416 $ 239,536,593
================ ================
During the three months ended March 31, 2003, the Company incurred a loss
of approximately $257,000 related to closing of two of our retail stores and a
planned store that never opened. During the three months ended March 31, 2002,
the Company retired certain network assets and replaced them with equipment to
upgrade the network resulting in a loss of approximately $286,000.
During the three months ended March 31, 2003, the Company recorded a
liability of $22,600 and a cumulative change in accounting principle of $9,570
related to the adoption SFAS No. 143 for potential costs associated with certain
asset retirement obligations. The cumulative change in accounting principle is
included in "interest income and other, net" on the accompanying statement of
operations.
10
HORIZON PCS, INC.
Notes to Consolidated Financial Statements
As of March 31, 2003, and December 31, 2002,
And for the Three Months Ended March 31, 2003 and 2002 (unaudited)
- --------------------------------------------------------------------------------
NOTE 6 - LONG-TERM DEBT
The components of long-term debt outstanding are as follows:
Interest Rate at March 31, December 31,
March 31, 2003 2003 2002
---------------- ---------------- ----------------
Senior notes........................... 14.00% $ 295,000,000 $ 295,000,000
Discount notes ........................ 13.75% 175,000,000 175,000,000
Secured credit facility - term loan A.. 5.40% 105,000,000 105,000,000
Secured credit facility - term loan B.. 5.86% 50,000,000 50,000,000
---------------- ----------------
Long-term debt, face value............. 625,000,000 625,000,000
Less: unaccreted interest portion of
discount notes....................... (101,440,302) (108,715,651)
---------------- ----------------
Total long-term debt............... $ 523,559,698 $ 516,284,349
================ ================
Horizon PCS' secured credit facility includes financial covenants including
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. 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 (subject to other restrictions in
the secured credit facility):
Maximum amount
available to be
borrowed
---------------
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
April 1, 2004................................. 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
---------------
February 16, 2003, through March 31, 2003..... $ 11,000,000
April 1, 2003, through May 15, 2003........... 5,500,000
As of March 31, 2003, the Company was in compliance with the covenants
under the agreements for the senior credit facility, therefore, the Company's
indebtedness was classified as long-term. However as described in Note 2, the
Company believes it is probable that the Company will violate one or more of its
covenants during 2003. If the Company violates a covenant, is declared to be in
default of the credit agreement, then this indebtedness will be reclassified to
current liabilities. In addition, if the lenders accelerate the indebtedness
under the senior credit facility, this would cause a default under the Company's
other notes, in which case the balance of the notes would be reclassified as
short-term.
11
HORIZON PCS, INC.
Notes to Consolidated Financial Statements
As of March 31, 2003, and December 31, 2002,
And for the Three Months Ended March 31, 2003 and 2002 (unaudited)
- --------------------------------------------------------------------------------
NOTE 7 - COMMITMENTS AND CONTINGENCIES
SPRINT 3G DEVELOPMENT FEES
Recently, Sprint increased service fees 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. As
of March 31, 2003, the Company has not recorded or paid amounts billed by Sprint
for 3G development costs of approximately $813,000.
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. In addition, the
Company receives a site development fee from a tower lessor for certain tower
sites which the lessor constructs on behalf of the Company.
The Company also leases space for its retail stores. At March 31, 2003, the
Company leased 43 stores, operating throughout its territories.
LEGAL MATTERS
The Company is party to legal claims arising in the normal course of
business. Although the ultimate outcome of the claims cannot be ascertained at
this time, it is the opinion of management that none of these matters, when
resolved, will have a material adverse impact on the Company's results of
operations or financial condition.
GUARANTEES
The discount notes and 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 when due. If the Company creates or acquires unrestricted
subsidiaries and foreign restricted subsidiaries, these subsidiaries need not be
guarantors.
STORE CLOSINGS
During the first quarter of 2003 the Company closed two retail stores. In
conjunction with these closing, we recorded a liability and corresponding lease
expense of approximately $97,000 representing the net present value of the
remaining lease obligations, net of the anticipated sublease revenues.
NTELOS NETWORK AGREEMENT
In August 1999, the Company entered into a wholesale network services
agreement with the West Virginia PCS Alliance and the Virginia PCS Alliance (the
"Alliances"), two related, independent PCS providers whose network is managed by
NTELOS. Under the network services agreement, the Alliances provide the Company
with the use of and access to key components of their network in most of HPCS'
markets in Virginia and West Virginia. The initial term was through June 8,
2008, with four automatic ten-year renewals.
12
HORIZON PCS, INC.
Notes to Consolidated Financial Statements
As of March 31, 2003, and December 31, 2002,
And for the Three Months Ended March 31, 2003 and 2002 (unaudited)
- --------------------------------------------------------------------------------
NOTE 7 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
This agreement was amended in the third quarter of 2001 to provide for a
minimum monthly fee to be paid by the Company through December 31, 2003. The
minimum monthly fee includes a fixed number of minutes to be used by the
Company's subscribers. The Company incurs additional per minute charges for
minutes used in excess of the fixed number of minutes allotted each month. The
aggregate amount of future minimum payments for the full year ended December 31,
2003 is $38,600,000. Total costs recorded, for both fixed and variable charges
incurred by the NTELOS agreement, were approximately $9.7 million and $6.7
million for the three months ended March 31, 2003 and 2002, respectively and
approximately $33,036,000, for the year ended December 31, 2002.
On March 4, 2003, NTELOS and certain of its subsidiaries filed voluntarily
petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code in the
U.S. Bankruptcy Court for the Eastern District of Virginia. The results of
NTELOS' restructuring could have a material adverse impact on our operations.
Pursuant to bankruptcy law, the Alliances have the right to assume or reject the
network services agreement. If the Alliances reject the network services
agreement, we will lose the ability to provide service to our subscribers in
Virginia and West Virginia and will be in breach of our management agreements
with Sprint.
ASSET RETIREMENT OBLIGATION
The Company owns three of the towers within its wireless network. Under the
provisions of SFAS No. 143, which the Company adopted on January 1, 2003, a
liability and a corresponding asset in the amount of approximately $23,000 were
recorded on January 1, 2003 for the legal obligation the Company has to remove
these towers and make necessary improvements to bring the site to its original
condition at the end of the land lease term. A one-time charge of approximately
$10,000 for the cumulative change in accounting policy is included in "Interest
income and other, net" for the period ended March 31, 2003. The balance of the
asset will be depreciated over the remaining lives of the land leases associated
with the towers.
NOTE 8 - RELATED PARTIES
The Company has non-interest-bearing receivables from affiliate companies
(other subsidiaries of the Parent) related to advances made to and services
received from these affiliated companies. At March 31, 2003, the Company had a
receivable from the affiliates related to prepayments. The balances due from
related parties as of March 31, 2003, and December 31, 2002, are as follows:
March 31, December 31,
2003 2002
--------------- ----------------
Receivable from affiliates.............. $ 806,284 $ 8,497
During the three months ended March 31, 2003 and 2002, affiliated companies
provided the Company administrative services including financial, regulatory,
human resource and other support services. These services are provided under
agreements that have a term of three years, with the right to renew the
agreement for additional one-year terms each year thereafter. The cost of the
management services for the three months ended March 31, 2003 and 2002, were
approximately $1,397,000 and $1,420,000, respectively.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the consolidated financial statements and the related notes.
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 "ITEM 5. Other Information" and located
elsewhere herein regarding our financial position and liquidity are
forward-looking statements. These forward-looking statements also include, but
are not limited to:
o estimates of current and future population for our markets;
o forecasts of growth in the number of consumers and businesses using
personal communication services;
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
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 ability to continue as a going concern;
o our significant level of indebtedness;
o the likelihood that we will fail to comply with debt covenants in our
senior secured credit facility;
o the nature and amount of the fees that Sprint charges us for back
office services;
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 the need to successfully complete the build-out of our portion of the
Sprint PCS network on our anticipated schedule;
o changes or advances in technology and the acceptance of new technology
in the marketplace;
14
o competition in the industry and markets in which we operate;
o the potential to continue to experience a high rate of customer
turnover;
o our lack of operating history and anticipation of future losses;
o potential fluctuations in our operating results;
o our ability to attract and retain skilled personnel;
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 the risks and uncertainties.
KEY METRICS
The following discussion details key operating metrics and focuses on the
details of our financial performance over the three months ended March 31, 2003
compared to three months ended March 31, 2002.
The Company provides certain financial measures that are calculated in
accordance with accounting principles generally accepted in the Unites State
("GAAP") and adjustments to GAAP ("non-GAAP") to assess the company's financial
performance. In addition, the Company uses certain non-financial terms, such as
churn, which are metrics used in the wireless communications industry and are
not measures of financial performance under GAAP. The non-GAAP financial
measures reflect standard measures of liquidity, profitability or performance
and the non-financial metrics reflect industry conventions, both of which are
commonly used by the investment community for comparability purposes. The
non-GAAP financial measures should be considered in addition to, not as
substitutes for, the information prepared in accordance with GAAP.
Customer Additions. As of March 31, 2003, we provided personal
communication service directly to approximately 294,900 customers. For the three
months ended March 31, 2003 and 2002, Horizon PCS net subscribers increased by
approximately 24,000 and 28,600 customers, respectively. Gross activations
during the first quarter of 2003 were 2% higher than the same period in 2002 due
in part to launching of additional markets. Gross activations were offset by an
increase in the number of deactivations resulting in overall lower net customer
additions for the three months ended March 31, 2003, compared to the three
months ended March 31, 2002. Our subscriber base at March 31, 2003 consists of
approximately 73% prime credit class customers compared to approximately 74% at
December 31, 2002. We have focused our efforts on adding better quality
customers in an effort to reduce churn and lower our bad debt exposure.
Cost Per Gross Addition. CPGA summarizes the average cost to acquire new
subscribers during the period. CPGA is the income statement components of
selling and marketing and cost of equipment (net of equipment revenue), divided
by the total new subscribers acquired during the period. CPGA was $319 for the
three months ended March 31, 2003, compared to $342 for the three months ended
March 31, 2002. This decrease is primarily the result of reductions in marketing
and advertising expenditures in 2003 compared to 2002.
15
Cash Cost Per User CCPU is the cash costs per period to operate the
business on a per user basis consisting of cost of service and general and
administrative expenses, divided by the average subscribers for the period and
divided by the number of months in the period. CCPU was $63 for the three months
ended March 31, 2003, compared to $72 for the three months ended March 31, 2002.
This decrease is primarily the result of an increase in our subscriber base.
Churn. Churn is the monthly rate of customer turnover that results from
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 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 March 31, 2003, was 2.9% compared to 3.2% for the three
months ended March 31, 2002. This decrease in churn is a result of our efforts
to increase the credit quality of our subscriber base. We believe that it is
likely that churn will remain at or, should our churn reduction initiatives
prove successful, slightly below this level during 2003.
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, and dividing by the number
of months in the period.
The following summarizes the components of ARPU for the three months ended
March 31:
2003 2002
------------- -------------
Service revenues
Recurring............................ $ 39 $ 40
Minute sensitive..................... 9 12
Features and other................... 4 4
------------- -------------
Total service revenues............. 52 56
------------- -------------
Roaming revenues........................ 16 18
------------- -------------
ARPU............................. $ 68 $ 74
------------- -------------
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.
The reduction in the reciprocal roaming rate between Sprint and its PCS
affiliates has caused a decline in the roaming ARPU. The Sprint PCS reciprocal
roaming rate decreased to $0.058 per minute on January 1, 2003, compared to
$0.10 during the first quarter of 2002. This rate decrease lowered revenue from
the reciprocal roaming with Sprint and its PCS affiliates by approximately 32%
in 2003.
The following tables reconcile the non-GAAP financial measures discussed
above for the three months ended March 31.
Cost Per Gross Add (CPGA) 2003 2002
-------------- --------------
Selling and marketing.............. $ 12,440,784 $ 14,707,221
Cost of equipment.................. 5,754,769 4,919,595
Equipment revenues................. (1,818,096) (2,375,289)
-------------- --------------
Total cost of gross additions.... $ 16,377,457 $ 17,251,527
-------------- --------------
Gross additions....................... 51,290 50,373
CPGA............................... $ 319 $ 342
16
Cash Cost Per User (CCPU) 2003 2002
------------- --------------
Cost of service.................... $ 43,795,933 $ 35,750,809
General and administrative......... 9,156,189 9,175,049
------------- --------------
Total cash costs................. $ 52,952,122 $ 44,925,858
------------- --------------
Average subscribers................... 282,348 206,725
CCPU ............................ $ 63 $ 72
Average Revenue Per User (ARPU) 2003 2002
------------- --------------
Subscriber revenues................ $ 43,578,954 $ 35,015,205
Roaming revenues................... 13,797,873 10,819,288
------------- --------------
Total subscriber revenues........ $ 57,376,827 $ 45,834,493
------------- --------------
Average subscribers................... 282,348 206,725
ARPU $ 68 $ 74
RESULTS OF OPERATIONS
Revenues. The following table sets forth a breakdown of our revenues by
type for the three months ended March 31:
(Dollars in thousands) 2003 2002
------------------- -------------------
Amount % Amount %
---------- ------- ---------- -------
Subscriber revenues $ 43,579 74% $ 35,015 73%
Roaming revenues 13,798 23% 10,819 22%
Equipment revenues 1,818 3% 2,376 5%
---------- ------- ---------- -------
Total revenues $ 59,195 100% $ 48,210 100%
========== ======= ========== =======
Subscriber revenues. Subscriber revenues for the three months ended March
31, 2003, were approximately $43.6 million, compared to approximately $35.0
million for the three months ended March 31, 2002, an increase of approximately
$8.6 million. The growth in subscriber revenues is primarily the result of the
growth in our customer base. We managed approximately 294,900 customers at March
31, 2003, compared to approximately 222,700 at March 31, 2002. The growth in
subscriber revenue was reduced by decreases in ARPU resulting from lower minute
sensitive and monthly recurring fees.
Roaming revenues. Roaming revenues increased from approximately $10.8
million during the three months ended March 31, 2002, to approximately $13.8
million for the three months ended March 31, 2002, an increase of approximately
$3.0 million. This increase resulted from launching additional markets over the
past year as well as expanding roaming agreements with wireless carriers, offset
by the decrease in the reciprocal roaming rate described above.
Equipment revenues. Equipment revenues for the three months ended March 31,
2003, were approximately $1.8 million, compared to approximately $2.4 million
for the three months ended March 31, 2002, representing a decrease of
approximately $600,000. The decrease is attributable to a decline in the sales
price of handsets as the average sales price, net of discounts and rebates,
decreased to $59 for the three months ended March 31, 2003, from $129 for the
same period in 2002, partially offset by an increase in the number of handsets
sold.
Cost of service. Cost of service for the three months ended March 31, 2003,
was approximately $43.8 million, compared to approximately $35.8 million for the
three months ended March 31, 2002, an increase of approximately $8.0 million.
This increase reflects an increase in roaming expense and long distance charges
of approximately $1.7 million and the increase in costs incurred under our
network services agreement with the Alliances of approximately $3.0 million,
both as a result of our subscriber growth during 2002 and the first quarter of
2003. Additionally, at March 31, 2002, our network covered approximately 7.2
17
million people. At March 31, 2003, our network covered approximately 7.4 million
people. As a result, cost of service in 2003 was higher than 2002 due to the
increase in network operations, including tower lease expense, circuit costs and
payroll expense, of approximately $1.4 million. Growth in our customer base
resulted in increased customer care, activations, and billing expense of
approximately $1.2 million and other variable expenses, including increased
switching and national platform expenses of approximately $700,000.
Cost of equipment. Cost of equipment for the three months ended March 31,
2003, was approximately $5.8 million, compared to approximately $4.9 million for
the three months ended March 31, 2002, an increase of approximately $900,000.
The increase in the cost of equipment is the result of the growth in our
wireless customers. We sold approximately 31,000 handsets through our direct
sales channels during the three months ended March 31, 2003, compared to
approximately 18,000 during the same period in 2002. This was partially offset
by the decreasing unit cost of the handsets. For competitive and marketing
reasons, we have sold handsets to our customers below our cost and expect to
continue to sell handsets at a price below our cost for the foreseeable future.
Selling and marketing expenses. Selling and marketing expenses decreased to
approximately $12.4 million for the three months ended March 31, 2003, compared
to approximately $14.7 million for the three months ended March 31, 2002, a
decrease of approximately $2.3 million. This decrease includes a reduction to
marketing and advertising in our sales territory of approximately $600,000, the
decrease in subsidies and rebates on handsets sold by third parties of
approximately $1.0 million and the decrease in commissions paid to third parties
of approximately $700,000. Commissions and rebates related to third party
activations declined in the first quarter of 2003 due to less activations out of
those channels compared to the prior year. Sales out of our retail stores were
greater in 2003, thus offsetting the decline out of the other channels.
General and administrative expenses. General and administrative expenses
for the three months ended March 31, 2003, were essentially flat to the same
period in 2002 at approximately $9.2 million. A decrease in the provision for
doubtful accounts of approximately $2.1 million was offset by an increase in the
Sprint PCS management fee of approximately $900,000 and other general expenses
of approximately $1.2 million. The decrease in the provision for doubtful
accounts was partially due to an approximate $900,000 non-recurring credit
received from Sprint related to deposits that should have offset the write off
amounts provided by Sprint. We were notified of this error by Sprint during the
first quarter and the cash was received subsequently thereafter, reducing our
bad debt expense from 5% to approximately 3% of subscriber revenue. As we are
focusing our subscriber efforts on better credit quality customers, we
anticipate bad debt expense to remain at the 5% to 7% of revenue level for the
second quarter.
Non-cash compensation expense. We recorded approximately $200,000 and
$200,000 for the three months ended March 31, 2003 and 2002, respectively, for
certain stock options granted in November 1999. Stock-based compensation expense
will continue to be recognized through the conclusion of the vesting period for
these options in 2005. The annual non-cash compensation expense expected to be
recognized for these stock options is approximately $600,000 in 2003, $200,000
in 2004, and $100,000 in 2005.
Depreciation and amortization expense. Depreciation and amortization
expenses increased by approximately $3.0 million to a total of approximately
$10.9 million during the three months ended March 31, 2003. The increase
reflects the continuing construction of our network as we funded approximately
$63.1 million of capital expenditures during 2002.
Amortization expense includes amortization of an intangible asset recorded
in September 2000 related to the new markets granted to us by Sprint PCS in
September 2000. Amortization expense related to this intangible asset was
approximately $200,000 for the three months ended March 31, 2003 and 2002.
Loss on sale of property and equipment. During the three months ended March
31, 2003, we incurred a loss of approximately $300,000 related to closing of two
of our retail stores and a planned store that never opened.
Interest income and other, net. Interest income and other income for the
three months ended March 31, 2003, was approximately $300,000 compared to
approximately $700,000 in 2002 and consisted primarily of interest income. This
18
decrease was due primarily to a lower average balance of cash investments during
the first quarter of 2003 as compared to the same period in 2002 and a lower
short-term interest rates.
Interest expense, net. Interest expense for the three months ended March
31, 2003, was approximately $16.3 million, compared to approximately $12.7
million in 2002.
At March 31, 2003, the interest rate on the $105.0 million term loan A
borrowed under our secured credit facility was 5.40%, while the interest rate on
the $50.0 term loan B was 5.86%. Interest expense on the secured credit facility
was $2.4 million and $1.2 million during the three months ended March 31, 2003
and 2002, 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 $101.4 million at March 31, 2003. Interest expense on the discount
notes was approximately $7.3 million and $6.4 million during the three months
ended March 31, 2003 and 2002, 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
both three months ended March 31, 2003 and 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 $700,000 and $600,000 during
the three months ended March 31, 2003 and 2002, 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 $400,000 and $600,000 during the three months ended 2003 and 2002,
respectively, in commitment fees we paid on the unused portion of our secured
credit facility.
Capitalized interest during the three months ended March 31, 2003 and 2002,
was approximately $500,000 and $2.1 million, respectively.
Loss on continuing operations. Our loss on continuing operations for the
three months ended March 31, 2003, was approximately $39.2 million compared to
approximately $36.8 million for the three months ended March 31, 2002. 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
due to these factors.
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 May 1, 2003, we have issued an additional 5,486,298 shares of
convertible preferred stock in payments of all dividends through April 30, 2003,
including 1,141,206 shares on May 1, 2003.
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. The first swap expired on January
27, 2003, and the amounts effected remained unhedged. We do not expect the
effect of the remaining swap to have a material impact to interest expense for
the remainder of its life. Other comprehensive income of approximately $300,000
and $400,000 were recorded for the three months ended March 31, 2003 and 2002,
respectively.
19
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2003, the Company was in compliance with its covenants with
regards to its outstanding debt. However, we believe that it is probable that
the Company will violate one or more covenants under its secured credit facility
in 2003. The failure to comply with a covenant would be an event of default
under our secured credit facility, and would give the lenders the right to
pursue remedies. These remedies could include acceleration of amounts due under
the facility. If the lenders elected to accelerate the indebtedness under the
facility, this would also represent a default under the indentures for our
senior notes and discount notes (see "Note 6" in the "Notes to Consolidated
Financial Statements") and would give Sprint certain remedies under our Consent
and Agreement with Sprint. The Company does not have sufficient liquidity to
repay all of the indebtedness under these obligations. Horizon PCS's independent
auditors' report dated March 4, 2003 states that these matters raise substantial
doubt about the Company's ability to continue as a going concern.
In addition, without the additional borrowing capacity under the senior
credit facility, significant modifications in the amounts charged by Sprint
under the management agreements, significant modifications in the amounts
charged by the Alliances under the Network Service Agreement and/or a
restructuring of our capital structure, the Company likely does not have
sufficient liquidity to fund its operations so that it can pursue its desired
business plan and achieve positive cash flow from operations.
The Company plans to take the following steps (some of which it has begun)
within the next six months to achieve compliance under its debt facilities and
to fund its operations:
o Entering into negotiations with Sprint to adjust the amounts charged
by Sprint to the Company under the Sprint management agreements to
improve the Company's cash flow from operations.
o Entering into negotiations with the lenders under our senior credit
facility to modify our debt covenants and, if necessary, to obtain
waivers and/or a forbearance agreement with respect to defaults under
the senior credit facility.
o Entering into negotiations with the lenders under our senior credit
facility to obtain the right to borrow under the $95 million line of
credit and to modify the repayment terms of this facility.
o If the lenders under the senior credit facility accelerate the senior
secured debt, negotiating a waiver or forbearance agreement with
representatives of the holders of our senior notes and discount notes.
o Entering into negotiations or arbitration with the Alliances to reduce
the amounts charged by Alliances to the Company under the network
agreements to improve the Company's cash flow from operations.
o Pursuing means to reduce operating expenses by critically analyzing
all expenses and entering into pricing negotiations with key vendors.
o Consider closing or limiting service in our under performing markets.
The Company would need to be successful in these efforts to be in position
to execute its business plan and achieve positive cash flow. The Company can
give no assurance that it will be successful in these efforts. In its early
discussions with Sprint, Sprint has indicated reluctance in modifying the fee
structure as needed under the first item listed above.
The Company has engaged Berenson & Company, an investment banking firm, to
assist in its efforts to renegotiate or restructure its equity, debt and other
contractual obligations.
If the Company is unable to satisfactorily restructure its current debt and
other contractual obligations, it would need to:
o obtain financing to satisfy or refinance its current obligations;
20
o find a purchaser or strategic partner for the Company's business or
otherwise dispose of its assets; and/or
o seek bankruptcy protection.
During the first quarter of 2003, Horizon proposed a more favorable
financial arrangement with Sprint PCS relating to customer related support
charges and fees. After consideration, we were informed by Sprint PCS that they
were not willing to make any changes to the current Affiliate fee structure at
this time.
During the first quarter of 2003, we attempted to negotiate more reasonable
and favorable support charges from Sprint PCS. After consideration, we were
informed by Sprint that they were not willing to make any changes to the current
fee structure environment.
Financing Overview. The following table presents the estimated future
outstanding long-term debt at the end of each year and future required annual
principal payments for each year then ended associated with our financing based
on contractual level of long-term indebtedness:
(Dollars in millions) Years Ending December 31,
-------------------------------------------------------------------
2003 2004 2005 2006 2007 Thereafter
----------- ------------ ------------ ------------ ------------ ----------
Secured credit facility,
due 2008..................... $ 155.0 $ 146.7 $ 126.5 $ 99.7 $ 71.6 $ --
Variable interest rate (1) 5.55% 5.55% 5.55% 5.55% 5.55% 5.55%
Principal payments........ $ -- $ 8.3 $ 20.2 $ 26.8 $ 28.1 $ 71.6
Discount notes, due 2010 (2)... $ 217.5 $ 253.1 $ 283.7 $ 286.1 $ 288.5 $ --
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 $ --
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 March 31, 2003, $25.0 million
was effectively fixed at 7.65% through an interest rate swap discussed in
"ITEM 3. Quantitative and Qualitative Disclosures About Market Risk". The
nominal interest rate is assumed to equal 5.55% for all periods ($50.0
million at 5.86% and $105.0 million at 5.40%).
(2) Face value of the discount notes is $295.0 million. End of year balances
presented herein are net of the discount and net of the related warrant
value and assume accretion of the discount as interest expense at an annual
rate of 14.00%.
Statement of Cash Flows. At March 31, 2003, we had cash and cash
equivalents of approximately $69.3 million and working capital of approximately
$65.6 million. At December 31, 2002, we had cash and cash equivalents of
approximately $86.1 million and working capital of approximately $87.6 million.
The decrease in cash and cash equivalents of approximately $16.8 million is
primarily attributable to the funding of our loss from continuing operations of
approximately $39.2 million (this loss includes certain non-cash charges) and
funding our capital expenditures of approximately $2.2 million during the first
three months of 2003.
Net cash used in operating activities for the three months ended March 31,
2003, was approximately $14.6 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 $39.2 million was partially offset by increases to
depreciation, increases in accrued liabilities, offset by increases to accounts
receivable. The Company is taking additional steps, including reviewing all
phases of operations and capital expenditures, to reduce the amount of cash
needed for operations.
Net cash used in investing activities for the three months ended March 31,
2003, was approximately $2.2 million, consisting of capital expenditures to
upgrade our network. We expect future capital expenditures to be much less than
2002 and similar to the first quarter of 2003 level as we focus more on the
operation and maintenance of our network and less on build out and expansion.
Debt Covenants. As of March 31, 2003, the Company is in compliance with all
of the applicable covenants, as amended. However as described above, the Company
believes it is probable the Company will violate one or more of the covenants
during 2003.
21
The following table details the maximum amount available to be borrowed on
the line of credit for the period then ended (subject to other restrictions in
the secured credit facility):
Maximum amount
available to be
borrowed
----------------
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
April 1, 2004............................. 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
-----------------
February 16, 2003, through March 31, 2003............. $ 11,000,000
April 1, 2003, through May 15, 2003.................. 5,500,000
Credit Ratings. At March 31, 2003, the discount notes were rated by
Standard and Poors ("S&P") as "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 March 31, 2003,
Moody's Investors Services ("Moody's") rated the notes as "C", which is Moody's
lowest bond rating. The CUSIP on the discount notes is 44043UAC4.
At March 31, 2003, the senior notes were rated by S&P as "CCC+" with a
negative outlook. Moody's rated the senior notes as "C," which is Moody's lowest
bond rating. The CUSIP on the senior notes is 44043UAH3.
Funding Requirements. At March 31, 2003, we had a $95.0 million line of
credit, with certain restrictions discussed above, committed under our secured
credit facility. However, if we violate our debt covenants this line will not be
available.
For the year ended December 31, 2003, we anticipate our funding needs will
be between $80.0 and $90.0 million, including projected operating cash losses,
cash interest payments and capital expenditures. 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 additional 3G services
that meet Sprint's standards, we may need to obtain additional financing to fund
those capital expenditures.
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 include:
22
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 is
heavily dependent on calendar fourth quarter results. Among other things, the
industry relies on significantly higher customer additions and handset sales in
the calendar fourth quarter as compared to the other three calendar quarters. A
number of factors contribute to this trend, including:
o the increasing use of retail distribution, which is more dependent
upon the year-end holiday shopping season;
o the timing of new product and service announcements and introductions;
o competitive pricing pressures; and
o aggressive marketing and promotions.
INFLATION
We believe that inflation has not had a material adverse effect on our results
of operation.
CRITICAL ACCOUNTING POLICIES & ESTIMATES
Going Concern. The accounts have been prepared on the basis that the
company is a going concern. Due to continuing losses including the heavy losses
in 2002 and the first quarter of 2003, and the Company's deficiency in net
current assets and negative stockholders' equity, there are certain risks
regarding the Company's ability to continue to do business in a normal manner.
In the event that the Company was not able to continue as a going concern, the
asset values reflected in the balance sheet would likely have to be revised or
reclassified and additional liabilities could arise and the classification of
liabilities could be revised. Risks which exist for the Company's status as a
going concern are discussed at "Item 5 - Other Information - Risk Factors". In
addition, certain creditors of the Company have potential claims against the
Company. While these claims are not necessarily accepted by the Company and its
attorneys, successful legal action by any of these creditors would impose severe
cash requirements on the Company that could also place the Company's going
concern status at risk. Further, the Company is dependent upon Sprint, NTELOS,
and several other critical business partners. Should a disruption in the
relationship occur with any of these organizations, the Company would struggle
to replace them with alternate suppliers. Finally, due to the serious nature of
the losses, the lenders to the Company are constantly reviewing their ongoing
level of support to the Company. If any of the credit lines to the Company are
substantially reduced, the Company will face a liquidity shortfall.
Allowance for Doubtful Accounts. Estimates are used in determining our
allowance for doubtful accounts receivable, which are based on a percentage of
23
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 for our
wireless customers are limited due to the recent launch of new markets. The
following table provides certain statistics on our allowance for doubtful
accounts receivable for the three months ended March 31:
2003 2002
--------- --------
Provision as a % of subscriber revenue............ 3% 10%
Write-offs, net of recoveries as a % of subscriber
revenue......................................... 4% 10%
Allowance for doubtful accounts as a % of
accounts receivable............................. 8% 10%
During the second half of 2001 and first half of 2002, a significant number
of our customer additions were under the no deposit account spending limit
("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 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
73% at March 31, 2003, up from its lowest percentage of 65% at March 31, 2002.
The improvement of our subscriber base has reduced our exposure to write-offs.
In addition, during the first quarter of 2003, we received approximately
$900,000 for deposits Sprint had retained through August of 2002, that should
have been used to offset write-offs. We applied this refund as a reduction to
bad debt expense.
Revenue Recognition. The Company records equipment revenue from the sale of
handsets and accessories to subscribers in our retail stores and to local
distributors in our territories upon delivery. The Company does not record
equipment revenue on handsets and accessories purchased from national
third-party retailers or directly from Sprint by subscribers in our territory.
After the handset has been purchased, the subscriber purchases a service
package, revenue from which is recognized monthly as service is provided and is
included in subscriber revenue, net of credits related to the billed revenue.
The Company believes the equipment revenue and related cost of equipment
associated with the sale of wireless handsets and accessories is a separate
earnings process from the sale of wireless services to subscribers. For industry
competitive reasons, the Company sells wireless handsets at a loss. Because such
arrangements do not require a customer to subscribe to the Company's wireless
services and because the Company sells wireless handsets to existing customers
at a loss, the Company accounts for these transactions separately from
agreements to provide customers wireless service.
The Company recognizes revenues when persuasive evidence of an arrangement
exists, services have been rendered or products have been delivered, the price
to the buyer is fixed and determinable, and collectibility is reasonably
assured. The Company's revenue recognition policy is consistent with the current
interpretations of SEC SAB No. 101, "Revenue Recognition in Financial
Statements." Accordingly, activation fee revenue and direct customer activation
expense is deferred and will be recorded over the average life for those
customers (currently estimated to be 24 months) that are assessed an activation
fee.
A management fee of 8% of collected PCS revenues from Sprint PCS
subscribers based in the Company's territory, is accrued as services are
provided and remitted to Sprint and recorded as general and administrative.
Revenues generated from the sale of handsets and accessories, inbound and
outbound Sprint PCS roaming fees, and roaming services provided to Sprint PCS
customers who are not based in the Company's territory are not subject to the 8%
management fee.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of FASB Statement No.
123." This Statement provides alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
24
compensation. In addition, this Statement requires prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The Company adopted the disclosure requirements of SFAS No. 148 as of
December 31, 2002, but continues to account for stock compensation costs in
accordance with APB Opinion No. 25.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This Statement addresses financial
accounting and reporting for costs associated with exit or disposal activities
by requiring that expenses related to the exit of an activity or disposal of
long-lived assets be recorded when they are incurred and measurable. Prior to
SFAS No. 146, these charges were accrued at the time of commitment to exit or
dispose of an activity. The Company adopted SFAS 146 on January 1, 2003, and it
did not have a material effect on the Company's financial position, results of
operations or cash flows.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145 addresses the accounting for gains and losses from
the extinguishment of debt, economic effects and accounting practices of
sale-leaseback transactions and makes technical corrections to existing
pronouncements. The Company adopted SFAS No. 145 on January 1, 2003, and it did
not have a material effect on the Company's financial position, results of
operations or cash flows.
In 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 adopted this statement effective January 1, 2003.
In 2002, the FASB's EITF, reached a consensus on Issue 00-21, "Revenue
Arrangements with Multiple Deliverables." Issue 00-21 provides guidance on how a
vendor should account for arrangements under which it will perform multiple
revenue-generating activities. The guidance in this Issue is effective for
revenue agreements entered into in fiscal periods beginning after June 15, 2003.
The Company is still evaluating the impact this guidance might have on its
financial position, results of operations and cash flows. The Company will adopt
the guidance in Issue 00-21 as of July 1, 2003.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We do not engage in commodity futures trading activities and do not enter
into derivative financial instruments for 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. This swap expired on January 27, 2003, and the amounts affected
remained unhedged. 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 balance
subject to the swap agreement:
(Dollars in millions) At March 31, 2003
--------------------------------------
Balance Market rate Swap rate
Swap 2............... $25.0 5.86% 7.65%
25
Since our swap interest rate is currently greater than the market interest
rate on our underlying debt, our results from operations currently reflect a
higher interest expense than had we not hedged our position. At March 31, 2003,
the Company recorded approximately $100,000 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 March 31, 2003,
approximately 79% 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 $1.3 million annually.
ITEM 4. CONTROLS AND PROCEEDURES
Our Chief Executive Officer and Chief Financial Officer are responsible for
establishing and maintaining "disclosure controls and procedures" (as defined in
the Securities Exchange Act of 1934 Rules 13a-14(c) and 15d-14(c)) for the
Company. With the participation of management, the Company's Chief Executive
Officer and Chief Financial Officer evaluated the Company's disclosure controls
and procedures within 90 days preceding the filing date of this quartely 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.
Under our agreements with Sprint, Sprint provides us with billing,
collections, customer care and other back office services. The Company, as a
result, necessarily relies on Sprint to provide accurate, timely and sufficient
data and information to properly record our revenues, expenses and accounts
receivable which underlie a substantial portion of our periodic financial
statements and other financial disclosures. The relationship with Sprint is
established by our agreements and our flexibility to use a service provider
other than Sprint is limited.
Because of our reliance on Sprint for financial information, the Company
must depend on Sprint to design adequate internal controls with respect to the
processes established to provide this data and information to the Company and
Sprint's other network partners. To address this issue, Sprint engages its
independent auditors to perform a periodic evaluation of these controls and to
provide a "Report on Controls Placed in Operation and Tests of Operating
Effectiveness for Affiliates" under guidance provided in Statement of Auditing
Standards No. 70. These reports are provided annually to the Company and cover
the Company's entire fiscal year.
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.
26
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During February 2003, two people holding options to acquire Horizon PCS
class A common stock each exercised the vested portions of the options (100
shares each at $0.12 per share). Each was an executive officer or director.
Exemption from the registration provisions of the Securities Act for the
transactions was claimed under Section 4(2) of the Securities Act and the rules
and regulations promulgated thereunder on the basis that such transactions did
not involve any public offering, the purchasers were sophisticated with access
to the kind of information registration would provide and that such purchasers
acquired such securities without a view towards distribution thereof. In
addition, exemption form the registration provisions of the Securities Act for
the transactions was claimed under Section 3(b) of the Securities Act on the
basis that such securities were sold pursuant to a written compensatory benefit
plan or pursuant to a written contract relating to compensation and not for
capital raising purposes.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
RISK FACTORS
RISK FACTORS
WE DO NOT HAVE SUFFICIENT CASH AND CASH COMMITMENTS TO ENABLE US TO PURSUE
OUR DESIRED BUSINESS PLAN TO ACHIEVE POSITIVE CASH FLOW.
Our business and prospects have been significantly adversely affected by a
number of factors. These factors include the general economic recession in the
U.S., the significant slow down in subscriber acquisition over the past two
quarters throughout most of the wireless telecommunications industry, aggressive
pricing competition which has developed within the wireless telecommunications
industry, the greater than expected churn which we have suffered and several
factors which arise from our relationship with Sprint. As a result of these and
other factors, we likely will not have sufficient cash and cash commitments to
enable us to pursue our desired business plan to achieve positive cash flow.
As a result of this situation, we have embarked on a number of initiatives
to attempt to:
o reduce operating expenses;
o reduce churn;
o negotiate a modification in the fees we pay to Sprint;
o negotiate or otherwise achieve a reduction in the fees we pay to
NTELOS;
o negotiate modifications to the covenants and payment terms of our
senior secured facility; and
27
o negotiate the right to obtain funding under our $95 million revolving
line of credit under our senior secured facility.
There can be no assurance that we will achieve any of these goals or that
we will be able to develop a business plan which is reasonably designed to
achieve positive cash flow.
Because of the status of the financing market for telecommunications
companies, we believe that it is unlikely that we could raise a sufficient
amount of financing to cure our anticipated cash shortfall.
WE ANTICIPATE THAT DURING 2003 WE WILL BECOME IN NON-COMPLIANCE WITH ONE OR
MORE OF THE FINANCIAL COVENANTS UNDER OUR SENIOR SECURED FACILITY.
Our secured credit facility provides for aggregate borrowings of $250.0
million of which $155.0 million was borrowed as of March 31, 2003. Horizon PCS'
secured credit facility includes financial covenants that must be met each
quarter.
We anticipate that, during 2003, we will become non-compliant with one or
more of the financial covenants under our senior secured facility. If we do so,
we will not have the right to borrow under our revolving line of credit. In
addition, the banks would have the right to accelerate the indebtedness under
the senior secured facility and to pursue remedies. In the event that the
lenders under the senior secured facility accelerate our indebtedness, such an
acceleration would cause an event of default under the indentures for our senior
discount notes and our senior notes.
OUR SUBSTANTIAL INDEBTEDNESS COULD ADVERSELY AFFECT OUR FINANCIAL HEALTH
AND PREVENT US FROM FULFILLING OUR LONG-TERM DEBT OBLIGATIONS.
As of March 31, 2003, 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
March 31, 2003, net of a discount of approximately $101.4 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.
28
Our ability to make payments on and to refinance our indebtedness, and to
fund our network build-out, anticipated operating losses and working capital
requirements will depend on our ability to generate cash in the future. This, to
a certain extent, is subject to general economic, financial, competitive,
legislative, regulatory and other factors that are beyond our control.
We cannot be certain that our business will generate sufficient cash flow
from operations or that future borrowings will be available to us under our
secured credit facility in an amount sufficient to enable us to pay our
indebtedness or to fund our other liquidity needs. We may need to refinance all
or a portion of our indebtedness, including the notes, on or before maturity. We
may not be able to refinance any of our indebtedness on commercially reasonable
terms, or at all.
IF WE FAIL TO PAY OUR DEBT, OUR LENDERS MAY SELL OUR LOANS TO SPRINT 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 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 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
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. Although we have not been able to complete some of
the sites in some markets due to continuing force majeure issues, we believe
that we are in substantial compliance with our build-out requirements.
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
29
termination if not cured. If Sprint terminates these agreements, we will no
longer be able to offer Sprint PCS products and services.
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, the Sprint PCS agreements provide that 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, the Sprint PCS agreements provide that 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 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. On March 4, 2003, NTELOS and certain of its subsidiaries
filed voluntarily petitions for reorganization under Chapter 11 of the U.S.
Bankruptcy Code in the U.S. Bankruptcy Court for the Eastern District of
Virginia. The results of NTELOS' restructuring could have a material adverse
impact on our operations. Pursuant to bankruptcy law, the Alliances have the
right to assume or reject the network services agreement. If the Alliances
reject the network services agreement, we will lose the ability to provide
service to our subscribers in Virginia and West Virginia through the Alliances'
Network, and Sprint may take the position that we would be in breach of our
management agreements with Sprint.
Prior to the Alliances' bankruptcy filing, Horizon had asserted that the
Alliances had overcharged Horizon approximately $4,799,000 for charges that were
neither authorized nor contemplated by the network services agreement. As a
result of the Alliances' bankruptcy filing, Horizon was at risk that any
subsequent payments that it would make for services under the network services
agreement could impair its setoff or recoupment rights with respect to its claim
for a repayment of the unauthorized charges. Consequently, Horizon declined to
make a scheduled payment of $3 million to the Alliances on March 11, 2003 for
services rendered by the Alliances in January 2003 and, on that date, filed a
motion in the Alliances' bankruptcy case to protect its rights.
On March 12, 2003, the Alliances telecopied to Horizon a letter notifying
Horizon of the failure to make payment on the January 2003 invoice, which letter
purported to be a ten-business day notice under the network services agreement
that would give the Alliances the right to terminate the agreement at the
conclusion of such ten-day period.
30
On March 24, 2003, Horizon and the Alliances entered into a Stipulation
which provided that Horizon would pay the January 2003 and February 2003
invoices, the bankruptcy court would provide procedural protection of Horizon's
claim, the Alliances would withdraw the default notice and the parties would
move forward to settle or arbitrate the merits of Horizon's claim. On March 26,
2003, the Court in the NTELOS bankruptcy case approved the Stipulation.
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.
IF OTHER SPRINT NETWORK PARTNERS HAVE FINANCIAL DIFFICULTIES, THE SPRINT
PCS NETWORK COULD BE DISRUPTED.
Sprint's national network is a combination of networks. The large
metropolitan areas are owned and operated by Sprint, and the areas in between
them are owned and operated by Sprint network partners, all of which are
independent companies like we are. We believe that most, if not all, of these
companies have incurred substantial debt to pay the large cost of building out
their networks. If other network partners experience financial difficulties,
Sprint's PCS network could be disrupted. If Sprint's agreements with those
network partners are like ours, Sprint would have the right to exercise various
remedies in the event of such disruptions. In such event, there can be no
assurance that Sprint or the network partner could restore the disrupted service
in a timely and seamless manner.
One of the network partners, iPCS, Inc., recently filed a chapter 11
bankruptcy petition. In connection with its bankruptcy filing, iPCS filed a
Complaint against Sprint Corporation and Sprint PCS alleging that Sprint PCS
breached its management agreement and services agreement with iPCS, seeking an
equitable accounting of alleged overcharges and underpayments by Sprint PCS to
iPCS, and seeking specific performance of (i) Sprint PCS' obligation to purchase
the operating assets of iPCS by virtue of iPCS' purported exercise of its
contractual "put" right as a result of the alleged material breaches, and (ii)
Sprint's obligation to pay an increased share of Collected Revenue as a result
of iPCS' lenders issuing a notice of acceleration. Finally, iPCS alleges that
Sprint Corporation is liable on each of the claims because it allegedly
controls, authorizes, directs and/or ratifies the conduct of Sprint PCS under
the management agreement and services agreement. Because we believe that the
iPCS claims allege conduct under agreements which are similar to our Sprint
agreements, we are reviewing the iPCS lawsuit to determine the extent to which
the factual and legal assertions of iPCS have similarities to our relationship
with Sprint.
31
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 and its other affiliates' PCS operations may not be successful,
which in turn could adversely affect our ability to generate revenues.
OUR REVENUES MAY BE LESS THAN WE ANTICIPATE WHICH COULD MATERIALLY
ADVERSELY AFFECT OUR LIQUIDITY, FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Revenue growth is primarily dependent on the size of our subscriber base,
average monthly revenues per user and roaming revenue. During the year ended
December 31, 2002, we experienced slower net subscriber growth rates than
planned, which we believe is due in large part to increased churn, declining
rates of wireless subscriber growth in general, the re-imposition of deposits
for most sub-prime credit subscribers during the last half of the year, the
current economic slowdown and increased competition. Other carriers also have
reported slower subscriber growth rates compared to prior periods. We have seen
a continuation of competitive pressures in the wireless telecommunications
market causing some major carriers to offer plans with increasingly large
bundles of minutes of use at lower prices which may compete with the calling
plans we offer, including the Sprint calling plans we support. Increased price
competition may lead to lower average monthly revenues per user than we
anticipate. In addition, the lower reciprocal roaming rate that Sprint has
announced for 2003 will reduce our roaming revenue, which may not be offset by
the reduction in our roaming expense. If our revenues are less than we
anticipate, it could materially adversely affect our liquidity, financial
condition and results of operation
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. We paid Sprint approximately $20.6 million
for these services during 2002. 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.
Further, our ability to replace Sprint in providing back office services
may be limited. While the services agreements allow the Company to use
third-party vendors to provide certain of these services instead of Sprint, the
high startup costs and necessary cooperation associated with interfacing with
Sprint's system may significantly limit our ability to use back office services
provided by anyone other than Sprint. This could limit our ability to lower our
operating costs.
32
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.
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.
33
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 may 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.
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.
34
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
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
35
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 PCS affiliate of Sprint 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 PCS affiliate of Sprint 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. 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. 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." Sprint has reduced the
reciprocal roaming rate to $0.058 per minute of use as of January 1, 2003. As a
result, we may receive less Sprint PCS roaming revenue in the aggregate, than we
previously anticipated. Furthermore, we do not expect to receive substantial
non-Sprint PCS roaming revenue.
IF SPRINT PCS CUSTOMERS ARE NOT ABLE TO ROAM INSTANTANEOUSLY OR EFFICIENTLY
ONTO OTHER WIRELESS NETWORKS, WE MAY SUFFER A REDUCTION IN OUR REVENUES AND
NUMBER OF CUSTOMERS.
The Sprint PCS network operates at a different frequency and uses or may
use a different signal transmission technology than many analog cellular and
other digital systems. To access another provider's analog cellular, TDMA or GSM
digital system when outside the territory served by the Sprint PCS network, a
Sprint PCS customer is required to utilize a dual-band/dual-mode handset
compatible with that provider's system. Generally, because dual-band/dual-mode
handsets incorporate two radios rather than one, they are more expensive, larger
and heavier than single-band/single-mode handsets. The Sprint PCS network does
not allow for call hand-off between the Sprint PCS network and another wireless
network, so a customer must end a call in progress on the Sprint PCS network and
initiate a new call when outside the territory served by the Sprint PCS network.
In addition, the quality of the service provided by a network provider during a
roaming call may not approximate the quality of the service provided by Sprint.
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.
36
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.
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 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
37
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 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;
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
38
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 56.3% of our outstanding
common stock on fully diluted basis as of March 31, 2003. 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 83.1% of the voting power on a fully diluted basis at
March 31, 2003. 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 60.7% of the voting interests of Horizon Telcom. Therefore, the
McKell family, acting as a group, may be able to exercise indirect control over
us.
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 83.1% 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.
39
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 56.3% 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 PROSPECTS FOR GROWTH.
Our strategy to minimize customer turnover, commonly known as churn, may
not be successful. As a result of customer turnover, we lose the revenue
attributable to these customers and increase the costs of establishing and
growing our customer base. The PCS industry has experienced a higher rate of
customer turnover as compared to cellular industry averages. 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;
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's 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:
40
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's 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's PCS products, services and
pricing plans;
o our inability to obtain an adequate supply or selection of handsets;
o a downturn in the economy of some or all of the markets in our
territory; or
o a generally poor holiday shopping season.
REGULATION BY GOVERNMENT AGENCIES MAY INCREASE OUR COSTS OF PROVIDING
SERVICE OR REQUIRE US TO CHANGE OUR SERVICES, WHICH COULD IMPAIR OUR FINANCIAL
PERFORMANCE.
The licensing, construction, use, operation, sale and interconnection
arrangements of wireless telecommunications systems are regulated to varying
degrees by the FCC, the 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.
REGULATION BY GOVERNMENT OR POTENTIAL LITIGATION RELATING TO THE USE OF
WIRELESS PHONES WHILE DRIVING COULD ADVERSELY AFFECT OUR RESULTS OF OPERATIONS.
Some studies have indicated that some aspects of using wireless phones
while driving may impair drivers' attention in certain circumstances, making
accidents more likely. These concerns could lead to litigation relating to
accidents, deaths or serious bodily injuries, or to new restrictions or
regulations on wireless phone use, any of which also could have material adverse
effects on our results of operations. A number of U.S. states and local
governments are considering or have recently enacted legislation that would
restrict or prohibit the use of a wireless handset while driving a vehicle or,
alternatively, require the use of a hands-free telephone. Legislation of this
sort, if enacted, would require wireless service providers to provide hands-free
enhanced services, such as voice activated dialing and hands-free speaker phones
41
and headsets, so that they can keep generating revenue from their subscribers,
who make many of their calls while on the road. If we are unable to provide
hands-free services and products to our subscribers in a timely and adequate
fashion, the volume of wireless phone usage would likely decrease, and our
ability to generate revenues would suffer.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
Exhibit
No. Description
------- -----------
3.1* Amended and Restated Certificate of Incorporation of Horizon
PCS.
3.2* Bylaws of Horizon PCS.
99.1 Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
99.2 Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
- ----------------
* Incorporated by reference to the exhibit with the same number previously
filed by the Registrant on Form S-4 (Reg. No. 333- 51238).
(B) REPORTS ON FORM 8-K
1. On March 31, 2003, the Company filed a Current Report on Form 8-K
regarding its earnings press release for the quarter and year ended
December 31, 2002.
42
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: May 14, 2003 By: /s/ William A. McKell
-------------------------------
William A. McKell
Chief Executive Officer
Date: May 14, 2003 By: /s/ Peter M. Holland
-------------------------------
Peter M. Holland
Chief Financial Officer
(Principal Financial and Chief
Accounting Officer)
43
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 officer 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 officer 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: May 14, 2003 /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 officer 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 officer 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: May 14, 2003 /s/ Peter M. Holland
-------------------------------------
Peter M. Holland
Chief Financial Officer
1614127