**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION****WASHINGTON, D.C. 20549**

 

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**FORM 10-K**

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| **ý**                            | ** ** | **Annual Report pursuant to Section 13 or 15(d) of  the Securities Exchange Act of 1934 for the fiscal year ended December 31,  2004**                                                                                                                                                                                                                                                      |
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| **or**                                |       |                                                                                                                                                                                                                                                                                                                                                                                        |
|                                  |       |                                                                                                                                                                                                                                                                                                                                                                                        |
| **o**                                 | ** ** | **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** |

 

**HORIZONPCS, INC.**

(Exactname of registrant as specified in its charter)

 
| **Delaware**                                                    |   | **31-1707839**                          |
|-----------------------------------------------------------------|--------|-----------------------------------------|
| (State or other jurisdiction of incorporation or  organization) |   | (I.R.S. Employer Identification Number) |
|                                                            |   |                                    |
| **68 Main Street, Chillicothe, OH**                             |   | **45601-0480**                          | **(740) 772-8200** |
| (Address of Principal Executive offices)                        |   | (Zip Code)                              | (Phone Number) |

 

| Securities registered pursuant to  Section 12(b) of the Act: |
|------------------------------------------------------------------------|
|                                                                   |
| **NONE**                                                               |
|                                                                   |
| Securities registered pursuant to  Section 12(g) of the Act: |
|                                                                   |
| **NONE**                                                               |

 

Indicate by check mark whether the registrant: (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for such shorterperiod that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.  Yes o No ý

 

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the bestof registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K.  ý

 

Indicateby check mark whether the registrant is an accelerated filer (as defined inExchange Act Rule 12b-2).  Yes o No ý

 

As of June 30,2004, the last business day of the registrant’s most recently completed secondquarter, there was no established trading market for the registrant’s commonstock.

 

Indicateby check mark whether the registrant has filed all documents and reportsrequired to be filed by Section 12, 13 or 15(d) of the SecuritiesExchange Act of 1934 subsequent to the distribution of securities under a planconfirmed by a court. Yes ý No o

 

As of March 30, 2005, therewere 9,013,317 shares of the registrant’s common stock outstanding.  

** **

 

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**TABLEOF CONTENTS**

 

 
| Part I    |   |                                                                                                                |   |
|-----------|--------|---------------------------------------------------------------------------------------------------------------------|--------|
| Item 1.   |   | Business                                                                                                            |   |
| Item 2.   |   | Properties                                                                                                          |   |
| Item 3.   |   | Legal Proceedings                                                                                                   |   |
| Item  4.  |   | Submission  of Matters to a Vote of Security Holders                                                                |   |
|      |   |                                                                                                                |   |
| Part  II  |   |                                                                                                                |   |
| Item  5.  |   | Market  For Registrant’s Common Equity, Related Stockholder Matters and Issuer  Purchases of Equity Securities |   |
| Item 6.   |   | Selected Financial Data                                                                                             |   |
| Item  7.  |   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                         |   |
| Item  7A. |   | Quantitative  and Qualitative Disclosures About Market Risk                                                         |   |
| Item  8.  |   | Financial  Statements and Supplementary Data                                                                        |   |
| Item  9.  |   | Changes  In and Disagreements With Accountants On Accounting and Financial Disclosure                               |   |
| Item 9A.  |   | Controls and Procedures                                                                                             |   |
| Item 9B.  |   | Other Information                                                                                                   |   |
|      |   |                                                                                                                |   |
| Part  III |   |                                                                                                                |   |
| Item  10. |   | Directors  and Executive Officers of the Registrant                                                                 |   |
| Item 11.  |   | Executive Compensation                                                                                              |   |
| Item  12. |   | Security  Ownership of Certain Beneficial Owners and Management                                                     |   |
| Item  13. |   | Certain  Relationships and Related Transactions                                                                     |   |
| Item  14. |   | Principal  Accountant Fees and Services                                                                             |   |
|      |   |                                                                                                                |   |
| Part  IV  |   |                                                                                                                |   |
| Item  15. |   | Exhibits  and Financial Statement Schedules                                                                         |   |

 

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# **Part  I**

# ** **

**Forward-LookingStatements**

 

This annual report on Form 10-K containsstatements about future events and expectations that are “forward-lookingstatements.” These statements relate to future events or our future financialperformance, and involve known and unknown risks, uncertainties and otherfactors that may cause our actual results, levels of activity, performance orachievements to be materially different from any future results, levels ofactivity, performance or achievements expressed or implied by theseforward-looking statements.  In somecases, you can identify forward-looking statements by terminology such as “may,”“will,” “should,” “could,” “expects,” “intends,” “plans,” “anticipates,” “believes,”“estimates,” “predicts,” or the negative use of these terms or other comparableterminology.  Any statement in this annualreport on Form 10-K that is not a statement of historical fact may bedeemed to be a forward-looking statement. All statements other than statements of historical fact included in thisannual report on Form 10-K, including without limitation, the statementsunder “Item 1. Business” and “Item 7. Management’s Discussion and Analysis of FinancialCondition and Results of Operations” and located elsewhere herein regarding ourfinancial position and liquidity are forward-looking statements.  These forward-looking statements include, butare not limited to:

 

•                                          statements regarding our anticipated revenues, expense levels, liquidityand capital resources and operating losses;

 

•                                          statements regarding our business strategy; and

 

•                                          statements regarding expectations or projections about markets in ourterritory.

 

Althoughwe believe that the expectations reflected in such forward-looking statementsare based upon reasonable assumptions, we can give no assurance that suchexpectations will prove to be correct or that our goals will be achieved.  Given these uncertainties, you are cautionednot to place undue reliance on these forward-looking statements.  These forward-looking statements are made asof the date of this annual report on Form 10-K.  We assume no obligation to update or revisethem or provide reasons why actual results may differ.  Important factors that could cause actualresults to differ materially from those in the forward-looking statementsincluded herein include, but are not limited to:

 

•                                          the impact of our proposed merger with iPCS, Inc. and any effects ofa failure of the proposed merger to be consummated;

 

•                                          the impact of the proposed merger of Sprint and Nextel;

 

•                                          the impact of the recent modification of our affiliation agreements withSprint PCS;

 

•                                          the impact of our recently completed bankruptcy proceedings;

 

•                                          our dependence on our affiliation with Sprint PCS;

 

•                                          the ability of Sprint PCS to alter the terms of our affiliation agreementswith it, including fees paid or charged to us and other program requirements;

 

•                                          our dependence on back-office services, such as billing and customer care,provided by Sprint PCS;

 

•                                          changes or advances in technology;

 

•                                          competition in the industry and markets in which we operate;

 

•                                          our ability to attract and retain skilled personnel;

 

•                                          our potential need for additional capital or the need to refinance anyexisting indebtedness;

 

•                                          our potential inability to expand our services and related products in theevent of substantial increases in demand for these services and relatedproducts;

 

•                                          the potential impact of wireless local number portability;

 

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•                                          changes in government regulation;

 

•                                          future acquisitions;

 

•                                          the competitiveness and impact on us of Sprint PCS’ pricing plans andSprint PCS products and services;

 

•                                          our subscriber credit quality;

 

•                                          continued high rate of subscriber turnover;

 

•                                          the potential for inaccuracies in the financial information provided to usby Sprint PCS;

 

•                                          our rates of penetration in the wireless industry and in our markets;

 

•                                          our significant level of indebtedness;

 

•                                          the impact and outcome of legal proceedings between other Sprint PCSnetwork partners and Sprint PCS;

 

•                                          adequacy of bad debt and other reserves;

 

•                                          our anticipated future losses;

 

•                                          our subscriber purchasing patterns;

 

•                                          subscriber satisfaction with our network and operations;

 

•                                          risks related to future growth and expansion, including subscriber growth;

 

•                                          general economic and business conditions;

 

•                                          possible risksassociated with eventual compliance with section 404 of the Sarbanes Oxley Act;and

 

•                                          effects of mergers and consolidations within the wirelesstelecommunications industry, particularly business combinations involvingSprint or affiliates of Sprint, and unexpected announcements or developmentsfrom others in the wireless telecommunications industry.

 

These forward-looking statements involve known andunknown risks, uncertainties and other factors which may cause our actualresults, performance or achievements to be materially different from any futureresults, performance or achievements expressed or implied by suchforward-looking statements. All subsequent written and oral forward-lookingstatements attributable to us or persons acting on our behalf are expresslyqualified in their entirety by the Cautionary Statements.  See “Item 7. Management’s Discussion andAnalysis of Financial Condition and Results of Operations” for furtherinformation regarding several of the risks and uncertainties.  **We strongly urge you toreview and consider the risk factors set forth in Exhibit 99.1.**

 

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## **Item 1.            Business**

## ** **

Unless the context requires otherwise, referencesin this report to “the Company,” “we,” “our,” “us” and similar expressionsrefer to Horizon PCS, Inc. and its consolidated subsidiaries.  References in this annual report on Form 10-Kto us as a provider of digital wireless personal communications services (“PCS”)or similar phrases generally refer to our building, owning and managing our portionof the Sprint PCS wireless network pursuant to our PCS affiliation agreementswith Sprint.  Sprint holds the spectrumlicenses for our service territory.

 

As used herein, unless the context otherwiserequires: (i) “Sprint PCS” refers to Sprint Communications Company, L.P.,Sprint Spectrum L.P. and WirelessCo, L.P.; (ii) “Sprint” refers to SprintCorporation and its affiliates; (iii) a “PCS Affiliate of Sprint” is anentity whose sole or predominant business is operating (directly or through oneor more subsidiaries) a personal communications service business pursuant toaffiliation agreements with Sprint Spectrum L.P. and/or its affiliates or theirsuccessors; and (iv) “Sprint PCS products and services” refers to digitalwireless personal communications services, including wireless voice and dataservices, and related retail products, including handsets, offered under theSprint brand name.

 

Statements in this annual report on Form 10-Kregarding Sprint or Sprint PCS are derived from information contained in ouraffiliation agreements with Sprint PCS, periodic reports and other documentsfiled by Sprint with the SEC or press releases issued by Sprint or Sprint PCS.

 

Market data and other statistical information usedthroughout this annual report on Form 10-K are based on independentindustry publications, government publications, reports by market researchfirms and other published independent sources, as well as information providedto us by Sprint. Some data are also based on our good faith estimates, whichestimates are derived from our review of internal surveys and independentsources, including information provided to us by Sprint and the U.S. CensusBureau.  Although we believe thesesources are reliable, we have not independently verified the information.

 

This annual report on Form 10-K containstrademarks, service marks and trade names of companies and organizations otherthan us.  Other than with respect toSprint, our use or display of other parties’ trade names, trademarks orproducts is not intended to and does not imply a relationship with, or endorsementor sponsorship of us by, the trade name or trademark owners.

 

**Overview**

 

We are aPCS Affiliate of Sprint PCS with the exclusive right to provide digitalwireless personal communications services, or PCS, under the Sprint brand nameto a total population of approximately 7.4 million in our licensed territory.Our territory is generally located between Sprint PCS’ Chicago, New York andKnoxville markets and connects 12 major Sprint PCS markets.  We offer national and local calling plansdesigned by Sprint PCS.  As a PCSAffiliate of Sprint PCS, we market Sprint PCS products and services through anumber of distribution outlets located in our territory, including our ownretail stores, major national distributors such as RadioShack and Best Buy, andour local third-party distributors.  At December 31,2004, our licensed territory had a total population of approximately 7.4million residents, of which our wireless network covered approximately 5.4million residents.  This estimate isbased upon estimates of 2000 population counts compiled by the U.S. CensusBureau adjusted by population growth rates provided to us by Sprint.  At December 31, 2004, we hadapproximately 183,100 subscribers in all our markets.

 

We own and are responsible for building, operatingand managing our portion of the Sprint PCS network located in ourterritory.  Sprint PCS, along with thePCS Affiliates of Sprint, operates one of the largest 100% digital, nationwidewireless networks in the United States. Our portion of the Sprint PCS network is designed to offer a seamlessconnection with the rest of the nationwide wireless network of Sprint PCS.  Like Sprint PCS, we utilize code divisionmultiple access, or CDMA, technology across our territory.  We are in compliance with applicable SprintPCS build-out requirements for our networks. We do not own any of the FCC licenses that we use to operate ourwireless network and our operations and revenues are substantially dependent onthe continuation of our affiliation with Sprint PCS.  Additionally, our affiliation agreements withSprint PCS give Sprint PCS a substantial amount of control over factors thatsignificantly affect the conduct of our business.

 

Horizon PCS, Inc. was formed in 2000 as theholding company of Horizon Personal Communications, Inc. and BrightPersonal Communications Services, LLC, both of which are the parties to ouraffiliation agreements with Sprint PCS.

 

**RecentDevelopments**

 

*Merger Agreement with iPCS, Inc.*

 

On March 17,2005, we entered into an Agreement and Plan of Merger with iPCS, Inc. (“iPCS”),another PCS Affiliate of Sprint, pursuant to which we will be merged with andinto iPCS.  Pursuant to the merger, eachissued and outstanding share of

 

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ourcommon stock will be converted into 0.7725 shares of common stock of iPCS,subject to adjustments for subsequent issuances of warrants, stock dividendsand other similar transactions. Outstanding options to purchase our common stock will be converted intooptions to purchase common stock of iPCS. The new options will have the same terms and conditions as the oldoptions, except that the number of shares of iPCS common stock for which theoptions may be exercised and the exercise price of such options will beadjusted based upon the exchange ratio. For accounting purposes, iPCS will bethe acquirer.

 

If the merger is consummated, the board ofdirectors of iPCS will consist of three members of our board of directors,three members designated by iPCS and Timothy M. Yager, currently chiefexecutive officer of iPCS.

 

The merger is subject to approval by the holders ofa majority of the shares of our common stock and approval by the holders of amajority of the shares of  iPCS commonstock.   In addition, the merger issubject to the clearance or expiration of the waiting period under theHart-Scott-Rodino Antitrust Improvements Act of 1976, the approval of theFederal Communications Commission and the satisfaction of other customaryclosing conditions.

 

Themerger agreement may be terminated under certain circumstances, including if weor iPCS receive and decide to accept an unsolicited, superior offer.  The merger is expected to be consummated inthe second or third quarter of 2005.

 

If themerger is consummated, our 11 3/8% senior notes due 2012 (the “senior notes”)will become the direct obligations of iPCS. As of March 17, 2005, assuming the merger had been consummated onsuch date, iPCS, as the surviving company, would have had $290.0 million ofindebtedness for borrowed money on a pro forma basis.

 

*The Reorganization*

 

Wesustained a net loss of $176.9 million for the fiscal year ended December 31,2002, and, on August 15, 2003, we and our wholly owned subsidiaries,Horizon Personal Communications, Inc. and Bright Personal CommunicationsServices LLC, filed voluntary petitions with the United States Bankruptcy Courtfor the Southern District of Ohio seeking relief from our creditors pursuant toChapter 11 of the Bankruptcy Code.  Ourdecision to file was based on a combination of factors including weakness inthe wireless telecommunications industry and the economy generally andincreased operating losses that we believe were caused in part by actions ofSprint PCS.  We believe actions by SprintPCS made it difficult for us to comply with our debt service obligations, whichresulted in a covenant default under our senior secured credit facility and thesubsequent acceleration of the indebtedness under our senior secured creditfacility.  As a result, we filed forChapter 11 protection in order to preserve, protect and maximize assets whilerestructuring our business and financial obligations and addressing issues withSprint PCS.  In connection with ourbankruptcy filing, we filed a complaint against Sprint Corporation and certainof its affiliates alleging several claims, including a claim that Sprint PCSbreached its affiliation agreements with us.

 

On June 1,2004, the Bankruptcy Court authorized the offering of $125.0 million aggregateprincipal amount of our senior notes. Our subsidiary, Horizon PCS Escrow Company, completed the privateoffering of the senior notes on July 8, 2004.  Horizon PCS Escrow Company was a recentlyformed, wholly owned, indirect subsidiary of Horizon PCS, Inc., createdsolely to issue the senior notes and to merge with and into us uponconsummation of the transactions provided for in our confirmed Plan ofReorganization.  In connection with thereorganization, Horizon PCS Escrow Company was merged into Horizon PCS, Inc.,and the senior notes became our unsecured senior obligations and are guaranteedby all of our subsidiaries.

 

On June 27,2004, we filed our Plan of Reorganization with the Bankruptcy Court.  We amended our Plan of Reorganization on August 12,2004 and September 20, 2004.  The Planof Reorganization included a classification of claims against us and specifiedhow each class of claims would be treated upon confirmation of the Plan ofReorganization.

 

On September 21,2004, the Bankruptcy Court confirmed the amended Plan of Reorganization and itbecame effective on October 1, 2004.

 

Ourbankruptcy permitted us to implement a series of network cost savingsinitiatives.  We changed the architectureof our network to make our backhaul network more efficient; we consolidated ourtraffic onto fewer circuits and rejected unnecessary circuit leases; and werejected leases for on-site back-up generators and unlaunched tower sites thatwe believed were unnecessary.

 

*The Sprint Transaction*

 

Prior toJune 15, 2004, we provided service in most of our former Virginia and WestVirginia markets through a network services agreement with Virginia PCSAlliance, L.C. and West Virginia PCS Alliance, L.C. (collectively doingbusiness as “NTELOS”).  Under thisagreement, we were entitled to use NTELOS’ wireless network and equipment toprovide services to our subscribers in these markets.  We paid NTELOS usage charges based on oursubscribers’ use of the NTELOS network. The

 

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operationof our NTELOS markets in Virginia and West Virginia generated substantialoperating losses as a result of the amounts that we pay Sprint PCS under ouraffiliation agreements and the amounts that we paid NTELOS under our networkservices agreement.

 

On May 12,2004, we executed two related agreements with Sprint PCS, which pertained tothe sale of most of our assets in our NTELOS markets to Sprint PCS, thetermination of our contractual relationship with Sprint PCS in our NTELOSmarkets in Virginia and West Virginia and the settlement of existing litigationand billing disputes between Sprint PCS and us. On June 1, 2004, the Bankruptcy Court approved the transactions andthe related agreements, and on June 15, 2004, the parties closed theSprint Transaction.

 

Under anasset purchase agreement, Sprint PCS paid us approximately $33.0 million, netof our payment of $4.0 million to settle disputed charges, to acquire oureconomic interests in approximately 92,500 subscribers in our NTELOS markets inVirginia and West Virginia.  In addition,under the agreement we transferred to Sprint PCS seven retail store leases andrelated store assets in these markets, with a net book value of approximately$1.6 million.  At the closing, Sprint PCSassumed responsibility for the marketing, sales and distribution of Sprint PCSproducts and services in these areas. Pursuant to a motion we filed with the Bankruptcy Court, we rejected ournetwork service agreement with NTELOS, effective upon the closing of the SprintTransaction.

 

We alsosigned a related settlement agreement and mutual release with Sprint, whichresulted in a dismissal of the litigation brought by us against Sprint in August 2003and the settlement of a series of billing disputes raised by us since May 2003.  In our lawsuit against Sprint, we allegedthat Sprint PCS had breached our affiliation agreements, generally with respectto amounts billed to us under those agreements. We also alleged breaches of fiduciary duties, violations of federal andstate statutes and other claims.  Withrespect to our billing disputes, we had disputed charges for services renderedby Sprint PCS from May 2003 through the date of our settlementagreements.  Under the settlementagreement and mutual release, Sprint PCS released us from all of its claims forthese charges in return for the payment by us of $4.0 million, and we releasedSprint from all of our claims against it. The settlement also resulted in the forgiveness of $16.2 million ofamounts owed to Sprint, offset by our forgiveness of $5.5 million of receivablesfrom Sprint PCS.

 

*Fresh-Start Accounting*

 

Pursuantto American Institute of Certified Public Accountants, or “AICPA,” Statement ofPosition 90-7, “Financial Reporting by Entities in Reorganization under theBankruptcy Code,” or “SOP 90-7,” the accounting for the effects of thereorganization occurred once the confirmation of our Plan of Reorganization bythe Bankruptcy Court became effective. The fresh-start accounting principles pursuant to SOP 90-7 required,among other things, for us to determine the value assigned to the assets ofreorganized Horizon PCS, Inc. as of the effective date.

 

Underfresh-start accounting, our reorganization value was allocated to our assetsbased on their respective fair values in conformity with the purchase method ofaccounting for business combinations. For financial reporting purposes, we have applied fresh-start accountingas of October 1, 2004.

 

*Sprint/Nextel Merger*

 

On December 15,2004, Sprint Corporation and Nextel Communications, Inc. announced thatthey had signed a merger agreement, pursuant to which Sprint Corporation andNextel Communications, Inc. would merge and combine their operations.  Nextel Communications, Inc. and anaffiliated company, Nextel Partners, Inc., operate wirelesstelecommunications networks in portions of our service areas.  Pursuant to our affiliation agreements withSprint PCS, Sprint PCS has granted us certain exclusivity rights within ourservice areas.  We believe that,depending upon the actions of Sprint following the closing of the merger,Sprint would be in violation of the exclusivity provisions of our affiliationagreements with Sprint PCS.  Sprint hasannounced that it will pursue discussions with the PCS Affiliates toward amodification of our affiliation agreements as a result of the Sprint/Nextelmerger.  We do not know the terms ofSprint’s proposal, or whether we will ultimately reach agreement with Sprint onmutually satisfactory terms for a revised affiliation agreement.  It is likely that such a revised affiliationagreement would materially change our business and operations and may result inus making significant payments to acquire network assets and subscribers or tootherwise modify our network and marketing plans.  The announcement and closing of theSprint/Nextel merger may give rise to a negative reaction by our existing andpotential customers and a diminution in brand recognition or loyalty, which mayhave an adverse effect on our revenues. If necessary, we intend to enforce our rights, whether through seekinginjunctive relief or otherwise, to the extent that Sprint violates or threatensto violate the terms of our affiliation agreements with Sprint PCS.

 

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*New Addendum to AffiliationAgreements with Sprint PCS*

 

On March 16,2005, we entered into a new addendum to our affiliation agreements with SprintPCS.  This addendum implemented the “pricesimplification” provisions of similar addenda which Sprint PCS has entered intowith most of the other PCS affiliates of Sprint PCS.

 

Withrespect to service fees under our services agreement with Sprint PCS, the newaddendum consolidated support services relating to billing, customer care andother services into one back office service referred to as “CCPU Service” or “CashCost Per User Service,” all of which support services we had been purchasingprior to the addendum.  We have agreed tocontinue to purchase the CCPU Services from Sprint PCS through December 31,2006 at a monthly rate per subscriber of $7.00 for 2005 and $6.75 for2006.  Beginning on January 1, 2007,the monthly rate for the next three years for CCPU Service will be reset to amutually acceptable amount based on the amount necessary to recover Sprint PCS’reasonable costs for providing CCPU Services.

 

Theaddendum also consolidates services related to subscriber activation andrelated fees into one category referred to in the addendum as “CPGA Service” or“Cost Per Gross Addition Service,” all of which services or costs, prior to theaddendum, we have been purchasing in the case of services or bearing in thecase of costs.  We have agreed tocontinue to purchase the CPGA Services from Sprint PCS through December 31,2006 at a monthly rate of $22.00 per gross subscriber addition in ourmarkets.  Beginning on January 1,2007, the monthly rate for the next three years for CPGA Services will be resetto a mutually acceptable amount based on the amount necessary to recover SprintPCS’ reasonable costs for providing CPGA Services.

 

Withrespect to roaming charges, the addendum establishes a reciprocal roaming ratefor voice subscribers within the Sprint network of $0.058 per minute through December 31,2006.  Beginning on January 1, 2007,the reciprocal roaming rate will change annually to equal 90% of Sprint PCS’ retailyield for voice usage from the prior year. With respect to several of our markets in western Pennsylvania andeastern Pennsylvania, we receive the benefit of a special reciprocal rate of$0.10 per minute.  Under the addendum,this special $0.10 rate will terminate, with respect to each of these two setsof markets, on the earlier of December 31, 2011 or the first day of thecalendar month which follows the first calendar quarter during which we achievea subscriber penetration rate of at least 7% of our covered POPs.

 

Withrespect to the weekly fee we receive from Sprint PCS based on revenues from oursubscribers, the addendum changes the determination of this fee from a “collected”revenue basis to a “billed” revenue basis.

 

Inconnection with the execution of the new addendum, we entered into a settlementagreement and mutual release with Sprint PCS, pursuant to which we and Sprintreleased all claims which we had against one another through the effective dateof the settlement, with certain exceptions generally related to the payment ofcurrent fees by both parties under our affiliation agreements with SprintPCS.  As part of the settlement, we paidSprint PCS approximately $700,000 in settlement of billing disputes which wehad raised regarding services provided by Sprint PCS since July 2004.  In addition, Sprint PCS agreed to remove theLogan, West Virginia market and the Williamson, West Virginia/Pikeville,Kentucky market from our service territory under our affiliation agreementswith Sprint PCS.

 

**Markets**

 

Webelieve we operate in attractive markets with favorable roaming and travelcharacteristics.  Our territory isgenerally located between Sprint PCS’ Chicago, New York and Knoxville marketsand connects 13 major Sprint PCS markets. We have network coverage of the major and secondary highways in ourterritory, including 1,581 miles of interstate highways comprising theprincipal travel corridors between large urban centers.  As a result of our extensive network coverageof the major and secondary highways in our territory, we have consistentlyreceived significant roaming revenue from wireless subscribers using ourportion of the Sprint PCS network.  Inaddition, our markets include 18 colleges and universities with a totalenrollment of approximately 133,860 students. We believe that the colleges and universities in our markets result inadditional subscribers and increased roaming revenue from wireless subscribersusing our portion of the Sprint PCS network. These market characteristics have led to a favorable ratio of Sprint PCSsubscribers from outside our territory and subscribers of other wirelessservice providers using our portion of the Sprint PCS network as compared toour subscribers using wireless communications networks outside our territory.

 

Ourterritory covers 40 markets in parts of Indiana, Kentucky, Maryland, Michigan,New York, Ohio, Pennsylvania, Tennessee and West Virginia.  The following table lists the location, BTAnumber, megahertz of spectrum licensed and estimated total residents for eachof the markets that comprise our territory under our affiliation agreementswith Sprint PCS as of December 31, 2004:

 

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| **Location (1)**             | ** ** | **BTA No.(2)** | ** ** | **MHz of  Spectrum** | ** ** | **Estimated Total  Population(3)** | ** ** |
|------------------------------|------------|----------------|------------|----------------------|------------|------------------------------------|------------|
| Allentown, PA                |       | 10             |       | 30                   |       | 58,913                             |       |
| Ashtabula, OH                |       | 21             |       | 10                   |       | 102,625                            |       |
| Athens, OH                   |       | 23             |       | 20                   |       | 130,704                            |       |
| Battle Creek, MI             |       | 33             |       | 30                   |       | 45,782                             |       |
| Benton Harbor,  MI           |       | 39             |       | 10                   |       | 162,400                            |       |
| Canton/New  Philadelphia, OH |       | 65             |       | 10                   |       | 36,678                             |       |
| Chillicothe, OH              |       | 80             |       | 35                   |       | 101,018                            |       |
| Cincinnati, OH               |       | 81             |       | 10                   |       | 127289                             |       |
| Cumberland, MD               |       | 100            |       | 10                   |       | 163,341                            |       |
| Dayton/Springfield,  OH      |       | 106            |       | 10                   |       | 40,924                             |       |
| Dubois/Clearfield,  PA       |       | 117            |       | 30                   |       | 129,439                            |       |
| Elkhart, IN                  |       | 126            |       | 10                   |       | 268,906                            |       |
| Erie, PA                     |       | 131            |       | 10                   |       | 280,802                            |       |
| Findlay, OH                  |       | 143            |       | 30                   |       | 152,874                            |       |
| Fort Wayne, IN               |       | 155            |       | 10                   |       | 715,380                            |       |
| Huntington, WV               |       | 197            |       | 20                   |       | 30,967                             |       |
| Jamestown, NY                |       | 215            |       | 30                   |       | 183,601                            |       |
| Kalamazoo, MI                |       | 223            |       | 30                   |       | 62,441                             |       |
| Kingsport, TN                |       | 229            |       | 20                   |       | 707,933                            |       |
| Knoxville, TN                |       | 232            |       | 10                   |       | 102,420                            |       |
| Kokomo/Logansport,  IN       |       | 233            |       | 30                   |       | 192,314                            |       |
| Lima, OH                     |       | 255            |       | 30                   |       | 251,432                            |       |
| Marion, IN                   |       | 280            |       | 30                   |       | 108,378                            |       |
| Meadville, PA                |       | 287            |       | 10                   |       | 90,370                             |       |
| Michigan City,  IN           |       | 294            |       | 10                   |       | 110,107                            |       |
| New York, NY                 |       | 321            |       | 30                   |       | 190,559                            |       |
| Oil City, PA                 |       | 328            |       | 30                   |       | 104,312                            |       |
| Olean,  NY/Bradford, PA      |       | 330            |       | 30                   |       | 238,976                            |       |
| Parkersburg, WV              |       | 342            |       | 20                   |       | 182,552                            |       |
| Portsmouth, OH               |       | 359            |       | 20                   |       | 93,264                             |       |
| Pottsville, PA               |       | 360            |       | 30                   |       | 150,245                            |       |
| Scranton/Wilkes-Barre,  PA   |       | 412            |       | 30                   |       | 672,441                            |       |
| Sharon, PA                   |       | 416            |       | 10                   |       | 120,289                            |       |
| South Bend, IN               |       | 424            |       | 10                   |       | 354,746                            |       |
| State College,  PA           |       | 429            |       | 30                   |       | 135,711                            |       |
| Stroudsburg, PA              |       | 435            |       | 30                   |       | 138,600                            |       |
| Sunbury/Shamokin,  PA        |       | 437            |       | 30                   |       | 192,018                            |       |
| Toledo, OH                   |       | 444            |       | 30                   |       | 68,398                             |       |
| Williamsport, PA             |       | 475            |       | 30                   |       | 164,513                            |       |
| Zanesville, OH               |       | 487            |       | 20                   |       | 188,380                            |       |
| Total Population             |       |           |       |                 |       | 7,352,017                          |       |

 

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(1)        In connection with the modification ofour affiliation agreements with Sprint PCS in March, 2005, Sprint PCS agreed toremove the Logan, West Virginia market and the Williamson, WestVirginia/Pikeville, Kentucky market from our service territory.

 

(2)        BTA No. refers to the Basic TradingArea number assigned to that market by the FCC for the purposes of issuinglicenses for wireless services.

 

(3)        Estimated Total Population is based onestimates of 2000 population counts compiled by the U.S. Census Bureau adjustedby population growth rates provided to us by Sprint, and represents the totalpopulation in our licensed area within these markets.

 

**Network Operations**

 

Theeffective operation of our network requires:

 

•                                          public switched and long-distance interconnection;

 

•                                          the implementation of roaming arrangements; and

 

•                                          the development of network monitoring systems.

 

7

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Ournetwork connects to the public switched telephone network to facilitate theorigination and termination of traffic between the wireless network and bothlocal exchange and long-distance carriers. Through our arrangements with Sprint PCS and Sprint PCS’ arrangementswith other wireless service providers, our subscribers have roamingcapabilities on certain other PCS networks utilizing similar CDMAtechnology.  We monitor our networkduring normal business hours.  For after-hoursmonitoring, the PCS Network Operating Centers of Sprint PCS provide 24-hour,seven-day-a-week monitoring of the Sprint PCS network in our territory andreal-time notification to our designated personnel.

 

Weentered into an agreement to purchase certain telecommunication equipment fromNortel Networks. The equipment will replace our current equipment used in itswireless networks in Fort Wayne, Indiana, Chillicothe, Ohio, and Johnson City,Tennessee.  Some of the equipment whichis being replaced will be redeployed to some of our other markets.  This equipment program will increase ournetwork capacity and ability to provide data related services.

 

As of December 31,2004, our network included 792 base stations and five switching centers, threeof which have full switches and two of which have cell site controllers. Welease or license all of our tower sites.

 

**Products and Services**

 

We offerwireless voice and data products and services throughout our territory underthe Sprint brand name.  Our services aretypically designed to align with the service offerings of Sprint PCS and tointegrate with the PCS network of Sprint PCS. The PCS service packages we currently offer include the following:

 

*100% digitalwireless network with service across the country*.  We are part of one of the largest 100%digital, nationwide wireless networks in the United States. Our subscribers mayaccess PCS services from Sprint PCS throughout the PCS network of Sprint, whichincludes over 300 major metropolitan areas across the United States.  Dual-band/dual-mode or tri-mode handsetsallow roaming on other wireless networks where Sprint PCS has roamingagreements.

 

*Third-generationservices*.  We, along with Sprint PCS, launched 3Gcapability in our territory in the third quarter of 2002.  This capability allows more efficientutilization of our network when voice calls are made using 3G-enabledhandsets.  It also enables the provisionof enhanced data services.  PCS Visionallows our subscribers to use their PCS Vision-enabled devices to check e-mail,take, send and receive pictures, play games with full-color graphics andpolyphonic sounds and browse the Internet wirelessly with speeds of up to 144kilobits per second with average throughput speeds in the range of 50-70kilobits per second.

 

*Accountspending limits*.  Under the PCS service plans of Sprint PCS,subscribers who do not meet certain credit criteria can nevertheless select anyplan offered subject to an account spending limit to control creditexposure.  From May 2001 through April 2002,Sprint instituted a program (subsequently named “ClearPay”), which eliminatedthe prior deposit requirement on certain credit classes.  From May 2001 to April 2002, amajority of our subscriber additions were under the ClearPay/no depositprogram.  As a result of the ClearPay/nodeposit program, we experienced substantial churn and an increase in bad debtexpense.  Since the implementation ofClearPay II in April 2002, we experienced a decline in subscriberadditions, but the credit quality of those additions has improved, as we havecontinued to make our credit policy more restrictive.  In April 2002, along with certain otherPCS Affiliates of Sprint, we reinstated a deposit requirement for sub-primesubscribers in an effort to limit our exposure to bad debt relative to thesesubscribers.  Since fourth quarter 2003Horizon has continued to adjust its credit policy to control exposure.

 

*Fair &Flexible Plan*.  In May 2004, Sprint introduced a newtype of rate plan marketed as the “Fair & Flexible Plan.” This planprotects subscribers against significant overcharges caused by minutes of usein excess of bundled plan minutes.  Thesubscriber’s monthly recurring charge is adjusted each month based on actualusage from the most recent prior month. We believe that this plan is attractive in that it prevents accumulationof extra minutes or overcharging for unused minutes.  The plan is designed to eliminate guessworkfor new subscribers who traditionally have been required to estimate theirexpected monthly usage and choose a rate plan accordingly.  Sprint PCS expects the Fair &Flexible Plan to position Sprint PCS and its PCS Affiliates to obtain anincreased share of new subscribers relative to competitors.

 

*Otherservices*.  We may in the future offer wireless localloop services in our territory, but only where Sprint PCS is not a localexchange carrier.  Wireless local loopservice is a wireless substitute for the landline- based telephones in homesand businesses whereby subscribers are connected to the public switchedtelephone network using radio signals rather than copper wire for part or allof the connection between the subscriber and the switch.  We also believe that new features andservices will be developed on the PCS network of Sprint PCS to take advantageof CDMA technology.  Sprint PCS conductsongoing research and development to produce innovative services that areintended to give Sprint and PCS Affiliates of Sprint a competitiveadvantage.  We may incur additionalexpenses in modifying our technology to provide these additional features andservices.

 

8

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*AdditionalData Services*.  We may in the future take additional stepsbeyond 1xRTT, which could include enhancement to new EV-DO or EV-DV technology,as demand for more robust data services or need for additional capacitydevelops.

 

**Roaming**

 

*Sprint PCSroaming*.  Sprint PCSroaming includes both inbound roaming, when Sprint PCS wireless subscribersbased outside of our territory use our network, and outbound roaming, when oursubscribers use the PCS network of Sprint outside of our territory.  Under the recent addendum to our affiliationagreements with Sprint PCS, we agreed with Sprint PCS that the voice rate wouldbe $0.058 per minute until December 31, 2006, except with respect toseveral of our markets for which we have a special contract rate of $0.10 pervoice minute.  This special rate has beenbeneficial to us since Sprint PCS is a net payor to us in these markets.  For all of our markets, our ratio of inboundto outbound roaming with Sprint PCS was approximately 1.41 to 1 during thethree months ended December 31, 2004. Sprint PCS roaming revenue is not subject to the 8% affiliation fee.

 

Inaddition to the reciprocal per minute fee for the Sprint PCS roaming discussedabove, we also recognize roaming revenue and expense related to data usage fromPCS Vision services when wireless subscribers are using such services outsideof their home territory.  We recognizerevenue when a wireless subscriber based outside of our territory uses PCSVision data services in our territory and we recognize expense when oursubscribers use such services on the PCS network of Sprint outside of ourterritory.  This roaming activity issettled on a per kilobit (“Kb”) basis. For 2004, the rate was approximately $0.0020 per Kb, and will be thesame for 2005.

 

*Non-SprintPCS roaming*.  Non-Sprint PCS roaming includes both inboundnon-Sprint PCS roaming, when non-Sprint PCS subscribers use our network, andoutbound non-Sprint PCS roaming, when our subscribers use a non-Sprint PCS network.  Pursuant to roaming agreements between SprintPCS and other wireless service providers, when another wireless serviceprovider’s subscriber uses our network, we earn inbound non-Sprint PCS roamingrevenue.  These wireless serviceproviders must pay fees for their subscribers’ use of our network, and as partof our collected revenues, we are entitled to 92% of these fees.  Currently, pursuant to our servicesagreements with Sprint PCS, Sprint bills these wireless service providers forthese roaming fees and passes our portion of the fees to us.  When another wireless service providerprovides service to one of our subscribers, we pay outbound non-Sprint PCSroaming fees.  Sprint PCS then bills oursubscriber for use of that provider’s network at rates specified in theircontract and pays us 100% of this outbound non-Sprint PCS roaming revenuecollected from that subscriber on a monthly basis.  We bear the collection risk for all service.

 

*Reselleragreements*.  We also recognize higher margin revenue fromsubscribers of various wholesale resellers of wireless communications servicewhen those subscribers use our network. These reseller agreements are negotiated by Sprint PCS and, with someexceptions, we are required to participate in these agreements.  We receive a per minute rate for each minutethat the subscribers of these resellers use our network.  These subscribers may be based within oroutside our territory.

 

**Marketing Strategy**

 

Ourmarketing strategy is to complement Sprint’s national marketing strategies withtechniques tailored to each of the specific markets in our territory.

 

*Use ofSprint’s brand*.  We feature nationally recognized Sprint brandname in our marketing and sales efforts. From the subscribers’ point of view, they use our network and the restof the PCS network of Sprint as a unified network.

 

*Advertisingand promotions*.  Sprint promotes its products through the useof national as well as regional television, radio, print, outdoor and otheradvertising campaigns.  In addition to Sprint’snational advertising campaigns, we advertise and promote Sprint PCS productsand services on a local level in our markets at our cost.  We have the right to use any promotional oradvertising materials developed by Sprint and have to pay only the incrementalcost of using those materials, such as the cost of local radio and televisionadvertisement placements, and material costs and incremental printingcosts.  We also benefit from anyadvertising or promotion of Sprint PCS products and services by third-partyretailers in our territory, such as RadioShack and Best Buy.  We must pay the cost of specialized Sprintprint advertising by third-party retailers. Sprint also runs numerous promotional campaigns that provide subscriberswith benefits such as additional features at the same rate or free minutes orkilobits of use for limited time periods. We offer these promotional campaigns to potential subscribers in ourterritory.

 

*Sales forcewith local presence*.  We have established local sales forces toexecute our marketing strategy through our company-owned retail stores, localdistributors, direct business-to-business contacts and other channels.

 

9

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*Expectedchanges to our marketing strategy*.  We plan to spend fewer dollars per grosssubscriber on local marketing support, and we will continue to manage ourhandset assortment and upgrade policies to optimize subsidy costs.  We will also continue to receive the benefitof Sprint PCS’ national marketing support.

 

**Sales and Distribution**

 

Oursales and distribution plan is designed to mirror Sprint’s multiple channelsales and distribution plan and to enhance it through the development of localdistribution channels.  Key elements ofour sales and distribution plan consist of the following:

 

*Sprint PCSretail stores*.  As of December 31, 2004, we operated 10Sprint PCS stores, two of which have been converted to customer servicecenters, which do not activate new subscribers. Following the Sprint PCS model, these stores are designed to facilitateretail sales, bill collection and customer service.  Prior to our bankruptcy, we operated as manyas 42 retail stores.  In an effort toconserve cash during our bankruptcy, we closed many of our retail stores andconverted others to customer service centers. We will continue to operate a core group of retail stores which weexpect will support modest subscriber growth while maximizing the lifetimevalue of each subscriber.

 

*Nationalthird-party retail stores*.  Sprint PCS has national distributionagreements with various national retailers such as RadioShack and Best Buy forsuch retailers to sell Sprint PCS products. These national agreements cover retailers’ stores in our territory, andas of December 31, 2004, these retailers had 200 locations in ourterritory.

 

*Localthird-party distributors*.  We contract directly with local third-partydistributors in our territory.  Theseretailers are typically local businesses that have a presence in our markets.  Local third-party distributors purchasehandsets and other PCS retail equipment from us and market Sprint PCS serviceson our behalf.  We are responsible formanaging this distribution channel and as of December 31, 2004, theselocal third-party distributors had approximately 12 locations within ourlicensed territory.  We compensate localthird-party distributors through commissions for subscriber activations.

 

*Inboundtelemarketing*.  Sprint PCS provides inbound telemarketingsales when subscribers call from our territory. As the exclusive provider of Sprint PCS products and services in ourmarket, we use the national Sprint 1-800-480-4PCS number campaigns thatgenerate call-in leads.  These leads arethen handled by Sprint PCS’ inbound telemarketing group.

 

*Electroniccommerce*.  Sprint PCS maintains an Internet site,www.sprintpcs.com, which contains information on Sprint PCS products andservices.  A visitor to the Sprint PCSInternet site can order and pay for a handset and select a rate plan.  Sprint PCS wireless subscribers visiting thesite can review the status of their account, including the number of minutesused in the current billing cycle.  Werecognize the revenues generated by wireless subscribers in our territory whopurchase Sprint PCS products and services over the Sprint PCS Internet site.

 

*Distributionmix*.  During theyear ended December 31, 2004, the approximate percentage of our newsubscribers that originated from each of our distribution channels is asfollows:

 

| Sprint retail  stores               |   | 21  | % |
|-------------------------------------|--------|-----|---|
| RadioShack                          |   | 30  | % |
| National  third-party retail stores |   | 12  | % |
| Local  third-party distributors     |   | 8   | % |
| Other                               |   | 29  | % |
|                                |   | 100 | % |

 

*Expectedchanges to our sales and distribution*.  We intend to manage our distribution channelmix to sustain a favorable CPGA while supporting subscriber base growth throughthe acquisition of high-quality subscribers. Among our several distribution channels, our traditional, full-lineretail stores are the most costly on a CPGA basis and the national third-partyresellers are among the least costly. Accordingly, the performance of our retail store channel will becontinually scrutinized relative to CPGA targets, historical or expectedattainment of minimum sales productivity levels, and subscriber quality andlifetime value.   This ongoing evaluationof our retail store portfolio has resulted in the closure of certain locations,the relocation of others, and opening of incremental locations to addressmarket conditions and opportunities.  Wecurrently operate nine full-service stores, and two customer-service storesthat may be converted to full-service if economics warrant.  We plan to add additional satellite storelocations, which provide the same customer experience as full-line retailstores but are more economical due to reduced staffing and square footage.  In addition, we will further increasedistribution points through the addition of exclusively branded dealer (EBD)locations, which offer a customer experience comparable to a Sprint retailstore, in locations that could not support a company-owned satellite orfull-line store.  Our distribution mixwill be balanced between our retail stores, EBD locations, national third-partydistribution such as RadioShack, Best Buy and Wal-Mart, local third-party distributorsand through highly efficient Sprint-controlled channels, such as telesales ande-commerce.

 

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We planto supplement our existing portfolio of local third-party distributors with “exclusive”third-party distributors that will sell only Sprint products and services.  These exclusive third-party distributors willoperate stores patterned after, and offering the same products and services as,company-owned Sprint stores.  Thesestores will provide the brand presence and customer service benefits of acompany-owned store, without the fixed costs associated with a company-ownedstore.

 

We willcontinue to work with our third-party distributors, both local and national, tomotivate and train them to add high lifetime value customers.  Since filing for bankruptcy, we have pursuedthis strategy through a combination of: training; incentives focused on add-onsof value-added features like PCS Vision, Voice Command voice-activated dialing,equipment replacement insurance and two-year contracts; and commission plansthat create and compensate for a balance between sales quality and salesvolume.  We intend to continue and expandthese programs.

 

**Seasonality**

 

Ourbusiness is subject to seasonality because the wireless telecommunicationsindustry historically has been heavily dependent on fourth calendar quarterresults.  Among other things, theindustry relies on significantly higher subscriber additions and handset salesin the fourth calendar quarter as compared to the other three calendarquarters.  A number of factors contributeto this trend, including:

 

•                                          the use of retail distribution, which is more dependent upon the year-endholiday shopping season;

 

•                                          the timing of new product and service announcements and introductions;

 

•                                          competitive pricing pressures; and

 

•                                          aggressive marketing and promotions.

 

**Technology**

 

*General*.  In 1993, the FCC allocated the1900 MHz frequency block of the radio spectrum for wireless personalcommunications services, which differ from original analog cellular telephone serviceprincipally in that wireless personal communications services networks operateat a higher frequency and employ advanced digital technology.  Analog-based networks send signals in whichthe transmitted signal resembles the input signal, the caller’s voice.  Digital networks convert voice or datasignals into a stream of digits that permit a single radio channel to carrymultiple simultaneous transmissions. Digital networks also achieve greater frequency reuse than analognetworks, resulting in greater capacity. This enhanced capacity, along with enhancements in digital protocols,allows digital-based wireless technologies, whether using wireless personalcommunications services or cellular frequencies, to offer new and enhancedservices, including greater call privacy and more robust data transmission,such as facsimile, electronic mail and connecting notebook computers withcomputer/data networks.

 

Wirelessdigital signal transmission is accomplished through the use of various forms offrequency management technology or “air interface protocols.” The FCC has notmandated a universal air interface protocol for digital wireless personalcommunications services networks. Digital wireless personal communications networks operate under one ofthree principal air interface protocols: CDMA, time division multiple access (“TDMA”)or global system for mobile communication (“GSM”).  TDMA and GSM communications are both timedivision multiple access networks but are incompatible with each other.  CDMA is incompatible with both GSM and TDMAnetworks.  Accordingly, a subscriber of anetwork that utilizes CDMA technology is unable to use a CDMA handset whentraveling in an area not served by CDMA-based wireless personal communicationsservices operators unless he or she is carrying a dual-band/dual-mode handsetthat permits use of the analog cellular network in that area.  The same issue would apply to users of TDMAor GSM networks.  We believe that all ofthe wireless personal communications services operators now have dual-mode ortri-mode handsets available to their subscribers.  Because digital networks do not cover allareas in the country, these handsets will remain necessary for segments of thesubscriber base.

 

*Benefits ofCDMA technology*.  The Sprint PCS network and the networks ofPCS Affiliates of Sprint all use digital code division multiple access (CDMA)technology, which is a digital spread-spectrum wireless technology that allowsa large number of users to access a single frequency band by assigning a codeto all speech bits, sending a scrambled transmission of the encoded speech overthe air and reassembling the speech into its original format.  We believe that CDMA provides importantnetwork performance benefits such as:

 

•                                          Greater capacity.  We believe, basedon studies by CDMA manufacturers and our own experience that CDMA networks canprovide network capacity that is approximately 20 to 30 times greater than thatof

 

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analog technology and approximately ten timesgreater than TDMA and five times greater than GSM digital networks.

 

•                                          Privacy and security.  CDMAtechnology combines a constantly changing coding scheme with a low power signalto enhance call security and privacy.

 

•                                          Soft hand-off.  CDMA networkstransfer calls through the CDMA network using a technique referred to as a softhand-off, which connects a mobile subscriber’s call with a new base stationwhile maintaining a connection with the base station currently in use.  CDMA networks monitor the quality of thetransmission received by multiple base stations simultaneously to select abetter transmission path and to ensure that the network does not disconnect thecall in one cell unless replaced by a stronger signal from another base station.  Analog, TDMA and GSM networks use a “hardhand-off” and disconnect the call from the current base station as it connectswith a new one without any simultaneous connection to both base stations.

 

•                                          Simplified frequency planning. Frequency planning is the process used to analyze and test alternativepatterns of frequency used within a wireless network to minimize interferenceand maximize capacity.  Unlike TDMA- andGSM-based networks, CDMA-based networks can reuse the same subset of allocatedfrequencies in every cell, substantially reducing the need for costly frequencyreuse patterning and constant frequency plan management.

 

•                                          Longer battery life.  Due to theirgreater efficiency in power consumption, CDMA handsets can provide longerstandby time and more talk time availability when used in the digital mode thanhandsets using alternative digital or analog technologies.

 

•                                          Efficient migration path.  Webelieve that CDMA technology has an efficient and incremental migration path tonext generation voice and data services. Unlike technologies that require essentially a replacement investment toupgrade, CDMA upgrades can be completed incrementally.  As of December 31, 2004, we completedthe first step, which was a conversion to 1xRTT on over 90% of our coveredpopulation.  Additional steps beyond1xRTT, which could include enhancement to new EV-DO or EV-DV technology, may betaken as demand for more robust data services or need for additional capacitydevelops.

 

*Third-GenerationTechnology*.  The Sprint Nationwide PCS Network, whichreaches more than 250 million people, is 100% digital, wireless network thatoffers third generation, or 3G, technology services.  Sprint PCS and Horizon brand these 3Gservices as Sprint Vision.SM PCS Vision allows our subscribers to use their PCS Vision-enableddevices to check e-mail, take, send and receive pictures, play games withfull-color graphics and polyphonic sounds and browse the Internetwirelessly.  As of December 31,2004, we have upgraded our network to CDMA one times radio transmissiontechnology, or “1xRTT,” enabling us to offer PCS Vision in markets representingover 90% of our covered population in our territory.  We believe that PCS Vision provides us with adifferentiated product and a competitive advantage in many of our markets whereother carriers do not currently offer 3G technology-based services.  We also believe that our 1xRTT networkplatform is also more efficient in processing voice calls, which allows us to reducethe capital expenditures associated with maintaining our quality ofservice.   Our overall blocked call rateshave increased from approximately 2.1% for the twelve months ended December 31,2003 to 2.3% for the period ended December 31, 2004.  Our overall dropped call rates have declinedfrom approximately 2.2% for the twelve months ended December 31, 2003 to2.0% for the period ended December 31, 2004.

 

**Competition**

 

Competitionin the wireless telecommunications industry is intense.  We compete with a number of wireless serviceproviders in our markets.  Because wegenerally operate in less populated markets, we believe that we face fewercompetitors in most of our markets than wireless providers operating in moreurban areas typically face.  We believethat our primary competition is with national and regional wireless serviceproviders such as ALLTEL, SunCom, Cingular Wireless, U.S. Cellular, NextelCommunications, Nextel Partners, T-Mobile and Verizon Wireless.  The number of competitors in certain of ourmarkets was recently reduced by the combination of Cingular and AT&TWireless.  The announced merger betweenSprint and Nextel is expected to eliminate another competitor, although theexact impact of the merger on Sprint Affiliates is unknown at this time.  Additional industry consolidation maycontinue to reduce the number of competitors in our markets.  While we compete with one or more wirelesscarriers in each of the markets in our territory, none of these wirelessservice providers provide services in all of the markets in our territory.

 

On December 15,2004, Sprint Corporation and Nextel Communications, Inc. announced thatthey had signed a merger agreement, pursuant to which Sprint Corporation andNextel Communications, Inc. would merge and combine their operations.  Nextel Communications, Inc. operates awireless telecommunications network in portions of our service areas.  In addition,

 

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NextelPartners, Inc., a company which is affiliated with Nextel Communications, Inc.,operates a wireless communications network in portions of our serviceareas.  Pursuant to our affiliationagreements with Sprint PCS, Sprint PCS has granted us certain exclusivityrights within our service areas.  Webelieve that, depending upon the actions of Sprint following the closing of themerger, Sprint would be in violation of the exclusivity provisions of ouraffiliation agreements with Sprint PCS. Sprint has announced that it will pursue discussions with the PCS Affiliatestoward a modification of our affiliation agreements as a result of theSprint/Nextel merger.  We do not know theterms of Sprint’s proposal, or whether we and Sprint will ultimately agree onmutually satisfactory terms for a revised affiliation agreement.  It is likely that such a revised affiliationagreement will make material changes to our business and operations and mayresult in us making significant payments to acquire network assets andsubscribers or to otherwise modify our network and marketing plans.  The announcement and closing of theSprint/Nextel merger may give rise to a negative reaction by our existing andpotential customers and a diminution in brand recognition or loyalty, which mayhave an adverse effect on our revenues. If necessary, we intend to enforce our rights, whether through seekinginjunctive relief or otherwise, to the extent that Sprint violates or threatensto violate the terms of our affiliation agreements with Sprint PCS.

 

We alsoface competition from resellers that provide wireless services to subscribersbut do not hold FCC licenses or own facilities. Instead, the resellers buy blocks of wireless telephone numbers andcapacity from a licensed carrier and resell services through their owndistribution network to the public.

 

Inaddition, we compete with providers of existing communications technologies,such as paging, enhanced specialized mobile radio service dispatch andconventional landline telephone companies, in our markets.  Potential users of wireless personalcommunications services networks may find their communications needs satisfiedby other current and developing technologies. One- or two-way paging or beeper services that feature voice messagingand data display as well as tone-only service may be adequate for potentialsubscribers who do not need to speak to the caller.

 

In thefuture, we expect to face increased competition from entities providing similarservices using other communications technologies, including satellite-basedtelecommunications and wireless cable networks. While some of these technologies and services are currently operational,others are being developed or may be developed in the future.

 

Many ofour competitors have significantly greater financial and technical resourcesand larger subscriber bases than we do. In addition, some of our competitors may be able to offer regionalcoverage in areas not served by Sprint PCS’ nationwide network, or, because oftheir calling volumes or relationships with other wireless providers, may beable to offer regional roaming rates that are lower than those that weoffer.  Wireless personal communicationsservice operators will likely compete with us in providing some or all of theservices available through our network and may provide services that we donot.  Additionally, we expect thatexisting cellular providers will continue to upgrade their networks to providedigital wireless communication services competitive with Sprint.  Currently, there are five national wirelessproviders (other than Sprint PCS) who are generally all present in majormarkets across the country.  In January 2003,the FCC rule imposing limits on the amount of spectrum that can be held byone provider in a specific market was lifted, which may facilitate theconsolidation of some national providers.

 

The FCC’smandate that wireless carriers provide for wireless local number portability (“WLNP”)went into effect on November 24, 2003. WLNP allows subscribers to keep their wireless phone numbers whenswitching to a different service provider, which could make it easier forcompeting providers to market their services to our existing users.  WLNP makes subscriber churn more likely, andwe may be required to increase subsidies for product upgrades and/or reducepricing to match competitors’ initiatives in an effort to retain subscribers orreplace those who switch to other carriers.

 

Over thepast several years, the FCC has auctioned and will continue to auction largeamounts of wireless spectrum that could be used to compete with PCS servicesfrom Sprint PCS.  Based upon increasedcompetition, we anticipate that market prices for two-way wireless servicesgenerally will decline in the future.  Wewill compete to attract and retain subscribers principally on the basis of:

 

•                                          the strength of the Sprint brand name, services and features;

 

•                                          Sprint PCS’ nationwide network;

 

•                                          our network coverage and reliability; and

 

•                                          the benefits of CDMA technology.

 

Ourability to compete successfully will also depend, in part, on our ability toanticipate and respond to various competitive factors affecting the industry,including:

 

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•                                          new services and technologies that may be introduced;

 

•                                          changes in consumer preferences;

 

•                                          demographic trends;

 

•                                          economic conditions; and

 

•                                          discount pricing strategies by competitors.

 

**Intellectual Property**

 

TheSprint diamond design logo is a service mark registered with the United StatesPatent and Trademark Office. The service mark is owned by Sprint.  Pursuant to our affiliation agreements withSprint PCS, we use the Sprint brand name, the Sprint diamond design logo andother service marks of Sprint in connection with marketing and providingwireless services within our territory.

 

Exceptin certain instances and other than in connection with the nationaldistribution agreements, Sprint has agreed not to grant to any other person aright or license to use the licensed marks in our territory.  In all other instances, Sprint reserves theright to use the licensed marks in providing its services within or outside ourterritory.

 

Ourtrademark license and service mark agreements with Sprint PCS contain numerousrestrictions with respect to the use and modification of any of the licensedmarks.  See “— The Sprint PCS Agreements— The Trademark and Service Mark License Agreements” for more information onthis topic.

 

**Environmental Compliance**

 

Ourenvironmental compliance expenditures primarily result from the operation ofstandby power generators for our telecommunications equipment and compliancewith various environmental rules during network build-out andoperations.   The expenditures arise inconnection with standards compliance or permits that are usually related togenerators, batteries or fuel storage.  Our environmental compliance expenditures have not been material to ourfinancial statements or to our operations and are not expected to be materialin the future.

 

**Employees**

 

As of December 31,2004, we employed 181 full-time employees.  None of our employees are subject to a collective bargainingagreement.  We believe that ourrelationship with our employees is good.

 

**The Sprint PCS Agreements**

 

Thefollowing is a summary of the material terms and provisions of the Sprint PCSagreements.   The summary applies to theSprint PCS agreements for both Horizon Personal Communications and Bright PCSexcept where otherwise indicated.  Seealso “— Recent Developments — The Sprint Transaction.”

 

*ModifiedAffiliation Agreements*

 

Since September 2003,Sprint PCS has embarked on a program of executing modified affiliationagreements with the PCS Affiliates of Sprint. We believe that Sprint PCS has entered into such modified agreementswith a number of PCS Affiliates.  On March 16,2005, we entered into modified affiliation agreements with Sprint PCS, which agreementswere deemed effective as of January 1, 2005.  The summary set forth below reflects theterms of the modified affiliation agreements with Sprint PCS.

 

*Overview ofSprint Relationship and PCS Agreements*

 

We haveeight major agreements with Sprint (collectively, the “Sprint PCS Agreements”).  Under the Sprint PCS Agreements, weexclusively market PCS products and services under the Sprint and Sprint PCSbrand names in our markets.  The SprintPCS Agreements require us to interface with the Sprint PCS wireless network bybuilding our network to operate on PCS 

 

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frequencieslicensed to Sprint PCS in the 1900 MHz range. The Sprint PCS Agreements also give us access to Sprint’s equipmentdiscounts, roaming revenue from Sprint PCS subscribers traveling into ourterritory, and various other back-office services.  The Sprint PCS Agreements have initial termsof 20 years with three ten-year renewals that would lengthen the contracts to atotal of 50 years.  The Sprint PCSAgreements will automatically renew for each additional ten-year term unlessSprint PCS or we provide the other with notice of non-renewal at least twoyears prior to the start of any renewal term. The initial term of the agreements will expire in 2018 for HorizonPersonal Communications and in 2019 for Bright PCS.

 

TheSprint PCS Agreements consist of one of each of the following for HorizonPersonal Communications and one of each for Bright PCS:

 

•                                          management agreement;

 

•                                          services agreement; and

 

•                                          trademark and service mark license agreements with Sprint and Sprint PCS.

 

*TheManagement Agreement*

 

Underour Sprint PCS Agreements, we have agreed to:

 

•                                          construct and manage a network in our territory in compliance with Sprint’sPCS licenses and the terms of the management agreement;

 

•                                          distribute, during the term of the management agreement, Sprint PCSproducts and services; and

 

•                                          conduct advertising and promotional activities in our territory.

 

•                                          Sprint will monitor our network operations and has unconditional access toour network.

 

*Exclusivity.*  The management agreement provides that wewill be the only person or entity that is a manager or operator for Sprint inour territory.  Sprint is prohibited fromowning, operating, building or managing another wireless mobilitycommunications network using the 1900 MHz frequency range in our territorywhile our management agreement is in place and no event has occurred that wouldpermit the agreement to terminate.  Thepending merger between Sprint and Nextel and the operation of the combinedcompanies after the merger may result in a breach of the exclusivity provision.

 

*Network build-out.*  The management agreement specifies the termsof the PCS affiliation with Sprint, including the required network build-outplan.  We have agreed to operate ournetwork to provide for a seamless handoff of a call initiated in our territoryto a neighboring Sprint PCS network.

 

TheSprint PCS Agreements require us to build and operate the portion of the SprintPCS network located in our territory in accordance with Sprint’s technicalspecifications and coverage requirements. The Agreements also require us to provide minimum network coverage tothe population within each of the markets that make up our territory by specifieddates.

 

Underour original Sprint PCS Agreements, we were required to complete the build-outin several of our markets in Pennsylvania and New York by December 31,2000.  Sprint and we agreed to anamendment of the build-out requirements, which extended the dates by which wewere to launch coverage in several markets. As of June 17, 2004, we and Sprint further modified our build-outrequirements, and we believe that we are in compliance with all applicablebuild-out requirements for our network.

 

*Products and services.*  The management agreement identifies theproducts and services that we can offer in our territory.  These services include Sprint PCS consumerand business products and services available as of the date of the agreements,or as modified by Sprint.  We are allowedto sell wireless products and services that are not Sprint PCS products andservices if the offer of those additional products and services does nototherwise violate the terms of the management agreement, cause distribution channelconflicts, materially impede the development of the Sprint PCS network, causeconsumer confusion with Sprint’s PCS products and services or violate thetrademark license agreements.  We maycross-sell services such as Internet access, customer premise equipment andprepaid phone cards with Sprint and other PCS Affiliates of Sprint.  If we decide to use third parties to providethese services, we must give Sprint an opportunity to provide the services onthe same terms and conditions.  We cannotoffer fixed wireless local loop services specifically designed for thecompetitive local exchange market in areas where Sprint owns the local exchangecarrier unless we name the Sprint-owned local exchange carrier as the exclusive

 

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distributoror Sprint approves the terms and conditions. We are also required to use Sprint’s long distance service for callsmade from within designated portions of our territory to areas outside thosedesignated portions and to connect our network to the national platforms SprintPCS uses to provide services under our management agreement and servicesagreement. Sprint PCS will purchase such long distance service from SprintCorporation on our behalf at a price and terms at least as favorable to SprintPCS as the best prices and terms Sprint Corporation offers to any similarlysituated wholesaler.

 

*Service pricing.*  We must offer Sprint PCS subscriber-pricingplans designated for regional or national offerings.  We are permitted to establish our own localprice plans for Sprint PCS’ products and services offered only in ourterritory, subject to the terms of the agreement, consistent with Sprint PCS’regional and national pricing plans, regulatory requirements, capability andcost of implementing the rate plans in Sprint’s systems and Sprint’s approval.

 

*Fees. *We are entitled to receive a weekly fee from Sprint PCS equal to 92% ofnet “billed revenues” related to subscriber activity less applicablewrite-offs, net of deposits applied and net of recoveries. Sprint PCSdetermines the write-offs for any given time period. Outbound non-Sprint PCSroaming billed to subscribers based in our territory, proceeds from the salesof handsets and accessories, amounts collected with respect to taxes andsurcharges for enhanced 911 and WLNP and universal service fund charges are notconsidered “billed revenues.” Billed revenues generally include all othersubscriber account activity for Sprint PCS products and services in ourterritory, which includes such activities billed to, attributed to or otherwisereflected in subscribers’ accounts. We are entitled to 100% of the proceedsfrom customers for equipment and accessories sold.  We also are entitled to 100% of the universalservice funds from the Universal Service Administrative Company associated withsubscribers in our markets.

 

ManySprint PCS wireless subscribers purchase bundled pricing plans that allowroaming anywhere on the PCS network of Sprint PCS without incremental PCSroaming charges.  However, we will earnSprint PCS roaming revenue for every minute that a Sprint PCS wirelesssubscriber from outside our territory enters our territory and uses ourservices, which is offset against amounts we owe as expenses for every minutethat our subscribers use services outside our territory.  The analog roaming rate for use on anon-Sprint PCS provider’s network is set under Sprint PCS’ third party roamingagreements.  The reciprocal roaming ratefor voice subscribers who roam into the other party’s or another PCS Affiliate’snetwork is fixed through December 31, 2006 at $0.058 per minute, plus theactual long distance charges incurred. Beginning on January 1, 2007, the reciprocal roaming rate willchange annually to equal 90% of Sprint PCS’ retail yield for voice usage fromthe prior year.  Sprint PCS’ retail yieldfor voice usage is defined as Sprint PCS’ average revenue per user for voiceservices divided by the average minutes of use per user.  With respect to several of our markets inwestern Pennsylvania and eastern Pennsylvania, we receive the benefit of aspecial reciprocal rate of $0.10 per minute. Under the Addendum, this special $0.10 rate will terminate, with respectto each of these two sets of markets, on the earlier of December 31, 2011 orthe first day of the calendar month which follows the first calendar quarterduring which we achieve a subscriber penetration rate of at least 7% of ourcovered POPs.

 

Inaddition to the reciprocal per minute fee for the Sprint PCS roaming discussedabove, we also recognize roaming revenue and expense related to data usage fromPCS Vision services, known as “3G data.” We recognize revenue when wirelesssubscribers using such services outside of our markets use PCS Vision dataservices on our network, and we recognize expense when our subscribers use suchservices on the Sprint PCS network or the network of another PCS Affiliate ofSprint outside of our markets.  Thereciprocal rate for this service is $0.0020 per kilobyte through December 31,2006.  Beginning on January 1, 2007,the rate for this service will change annually to equal 90% of Sprint PCS’retail yield for 3G data usage from the prior calendar year; provided that suchamount will not be less than our network costs (including a reasonable returnusing our weighted average cost of capital applied against our net investmentin our service area network) to provide such services.  Sprint PCS’ retail yield for 3G data usage isdefined as Sprint PCS’ average revenue per user for 3G data usage divided bythe average kilobytes of use per user.

 

*Resale of Products and Services*.    Sprint PCS may choose to offer a resale productunder which third party resellers will resell Sprint PCS products and servicesunder brand names other than “Sprint PCS.” Our management agreement providesthat we will participate in all resale arrangements between Sprint PCS andresellers that are entered into, renewed or extended by Sprint PCS prior to December 31,2006 provided the terms and conditions of such resale arrangement are at leastas favorable to us as the terms and conditions that governed the resalearrangement between AT&T and Sprint PCS at the time such arrangement wasterminated.  With respect to resalearrangements entered into prior to April 1, 2004, we will be paid thereciprocal roaming rate for voice and data usage of the Sprint PCS network inour territory by customers of such resellers, which rates are fixed until December 31,2006 at $0.058 per minute and $0.0020 per kilobyte, respectively. With respectto all resale arrangements entered into, renewed or extended by Sprint PCSbetween April 1, 2004 and December 31, 2006, we will receive theamount of fees collected by Sprint PCS from such resellers on a pass-throughbasis as payment for the use of the Sprint PCS network in our territory bycustomers of such resellers. We may elect to discontinue our participation inany resale arrangement on the later to occur of (1) December 31,2006, and (2) expiration of the then remaining term of such resalearrangement, giving effect to any renewals or extensions occurring prior to December 31,2006. For purposes of determining renewals and extensions of resalearrangements, if an arrangement does not expressly state an initial term, thenthe arrangement will be deemed to have a five-year

 

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initialterm, and if an arrangement states an initial term in excess of ten years, thenthe arrangement shall be deemed to have a ten-year initial term.

 

*Advertising and promotions.*  Sprint is responsible for all nationaladvertising and promotion of the Sprint PCS products and services.  We are responsible for advertising andpromotion in our territory, including the pro rata cost of any promotion oradvertising done by any third-party retailers in our territory pursuant to anational cooperative advertising agreement with Sprint.  Sprint PCS’ service area includes the urbanmarkets around our territory.  Sprintpays for advertising in these markets. Given the proximity of these markets to ours, we expect spill-over fromSprint PCS’ advertising in surrounding urban markets.

 

*Program requirements.*  We must comply with the Sprint PCS programrequirements for technical standards, customer service standards, roamingcoverage and national and regional distribution and national accounts programs.Some of the technical standards relate to network up-time, dropped calls,blocked call attempts and call origination and termination failures. Ourmanagement agreement provides that any change to the program requirements willbe in the best interests of Sprint PCS and us. Sprint PCS can change theprogram requirements at its discretion and we must implement such changeswithin a commercially reasonable period of time; provided, however, that we candecline to implement certain changes that we determine will exceed certainparameters.  We can decline to implementa “capital” program requirement change, defined as a change that would requireus to make a capital expenditure that is greater than 5% of our capital budget,if such change would either (i) have a negative net present value applyinga five-year discounted cash flow model or (ii) cause our combined peaknegative cash flow to be an amount greater than 3% of our “enterprise value”(defined as the combined book value of our outstanding debt and equity lesscash) when considered individually, or an amount greater than 5% of ourenterprise value when combined with all other program requirement changeswithin the prior twelve months. Additionally, we can decline to implement a “non-capital”program requirement change, defined as change that would not require us to makea capital expenditure in excess of 5% of our capital budget, if such changewould either (i) cause our combined peak negative cash flow to be anamount greater than 3% of our “enterprise value” when considered individually,or an amount greater than 5% of our enterprise value when combined with allother program requirement changes within the prior twelve months or (ii) causea decrease in our forecasted five-year discounted cash flow of more than 3% ona combined net present value basis when considered individually, or more than5% on a combined net present value basis when combined with all other programrequirement changes within the prior twelve months. Notwithstanding theforegoing, we are required to implement certain program requirement changes,regardless of whether we determine that such changes will exceed any of theabove-referenced parameters. We must implement a capital program requirementchange if the capital requirement associated with such change is necessary tocomply with the network performance standards required under our managementagreement. Additionally, we must implement any program requirement change ifthe change relates to a pricing plan or a roaming program and Sprint PCSreasonably determines that the change must be implemented immediately torespond to competitive market forces. Finally, Sprint PCS may require us toimplement any program requirement change if Sprint PCS compensates us theamount necessary to prevent us from exceeding all of the applicableabove-referenced parameters.

 

*Non-competition.*  We may not offer Sprint PCS products andservices outside our territory without the prior written approval of Sprint.  Within our territory we may offer, market orpromote telecommunications products and services only under the Sprint PCSbrands, our own brand, brands of related parties of ours or other products andservices approved under the management agreement, except that no brand of asignificant competitor of Sprint PCS or its related parties may be used forthose products and services.  To theextent we have or obtain licenses to provide PCS services outside ourterritory, we may not use the spectrum to offer Sprint PCS products andservices without prior written consent from Sprint.

 

*Termination of management agreement.*  The management agreement can beterminated as a result of:

 

•                                          termination of Sprint’s PCS licenses;

 

•                                          an uncured breach under the management agreement;

 

•                                          the management agreement not complying with any applicable law in anymaterial respect;

 

•                                          the termination of either of the trademark or service mark licenseagreements; or

 

•                                          our failure to obtain the financing necessary for the build-out of ournetwork and for our working capital needs.

 

•                                          The termination or non-renewal of either of the management agreementstriggers our rights and those of Sprint, as described below.

 

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If wehave the right to terminate the management agreement because of an event oftermination caused by a Sprint PCS breach under the management agreement, wemay generally:

 

•                                          require Sprint to purchase all of our operating assets used in connectionwith our network for an amount equal to 80% of our Entire Business Value asdefined below;

 

•                                          if Sprint was the licensee for 20 MHz or more of the spectrum in aparticular market on the date the management agreement was executed, requireSprint to sell to us, subject to governmental approval, up to 10 MHz oflicensed spectrum for an amount equal to the greater of (1) the originalcost to Sprint of the license plus any microwave relocation costs paid bySprint or (2) 9% of our Entire Business Value; or

 

•                                          sue Sprint for damages or submit the matter to arbitration and thereby notterminate the management agreement.

 

IfSprint has the right to terminate the management agreement because of an eventof termination caused by us, Sprint may generally:

 

•                                          require us to sell our operating assets to Sprint for an amount equal to72% of our Entire Business Value;

 

•                                          require us to purchase, subject to governmental approval, up to 10 MHz oflicensed spectrum for an amount equal to the greater of (1) the originalcost to Sprint of the license plus any microwave relocation costs paid bySprint or (2) 10% of our Entire Business Value;

 

•                                          take any action as Sprint deems necessary to cure our breach of themanagement agreement, including assuming responsibility for and operating ournetwork; or

 

•                                          sue us for damages or submit the matter to arbitration and thereby notterminate the management agreement.

 

*Non-renewal.*  If Sprint gives us timely notice that it doesnot intend to renew the management agreement, we may:

 

•                                          require Sprint to purchase all of our operating assets used in connectionwith our network for an amount equal to 80% of our Entire Business Value; or

 

•                                          if Sprint was the licensee for 20 MHz or more of the spectrum in aparticular market on the date the management agreement was executed, requireSprint to sell to us, subject to governmental approval, up to 10 MHz oflicensed spectrum for an amount equal to the greater of (1) the originalcost to Sprint of the license plus any microwave relocation costs paid bySprint or (2) 10% of our Entire Business Value.

 

If we give Sprint timely noticeof non-renewal, we both give notice of non-renewal, the agreement expires withneither party giving notice of non-renewal or the management agreement isterminated for failure to comply with legal requirements or regulatoryconsiderations, Sprint may, subject to certain limitations:

 

•                                          purchase all of our operating assets for an amount equal to 80% of ourEntire Business Value; or

 

•                                          require us to purchase, subject to governmental approval, up to 10 MHz oflicensed spectrum for an amount equal to the greater of (1) the originalcost to Sprint of the license plus any microwave relocation costs paid bySprint or (2) 10% of our Entire Business Value.

 

*Determination of Entire Business Value.*  If the Entire Business Value is tobe determined, we and Sprint will each select one independent appraiser and thetwo appraisers will select a third appraiser. The three appraisers will determine the Entire Business Value on a goingconcern basis using the following guidelines and assumptions:

 

•                                          the Entire Business Value is based on the price a willing buyer would paya willing seller for the entire on-going business;

 

•                                          then-current customary means of valuing a wireless telecommunicationsbusiness will be used;

 

•                                          the business is conducted under the Sprint and Sprint PCS brands and theSprint PCS Agreements;

 

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•                                          that we own the spectrum and frequencies presently owned by Sprint that weuse and that are subject to the Sprint PCS Agreements; and

 

•                                          the valuation will not include any value for businesses not directlyrelated to the Sprint PCS products and services, and these businesses will notbe included in the sale.

 

*Indemnification.*  We have agreed to indemnify Sprint and itsdirectors, officers, employees and agents and related parties of Sprint andtheir directors, officers, employees and agents against any and all claimsagainst any of these parties arising from our violation of any law, a breach byus of any representation, warranty or covenant contained in the managementagreement or any other agreement between us and Sprint, our ownership of theoperating assets or the actions or the failure to act of anyone who is employedor hired by us in the performance of any work under the management agreement,except we will not indemnify Sprint for any claims arising solely from theirnegligence or willful misconduct.  SprintPCS has agreed to indemnify us and our directors, officers, employees andagents against all claims against any of these parties arising from Sprint PCS’violation of any law, from Sprint PCS’ breach of any representation, warrantyor covenant contained in the management agreement or any other agreementbetween Sprint and us, or the actions or the failure to act of anyone who isemployed or hired by Sprint in the performance of any work under the managementagreement, except Sprint will not indemnify us for any claims arising solelyfrom our negligence or willful misconduct.

 

*The ServicesAgreements*

 

Pursuantto the most recent amendments to our services agreements, Sprint PCSconsolidated support services relating to billing, customer care, collections,network operations control center monitoring, national platform, informationtechnology, interconnectivity, voice mail, directory assistance, operatorservices and roaming clearinghouse services into one back office servicereferred to in the amendments as “Sprint CCPU service,” or “cash cost per userservice,” all of which support services we had been purchasing prior to theconsolidation. The term “Sprint CCPU service” refers to certain supportservices that we purchase from Sprint PCS. We have agreed to continue topurchase the Sprint CCPU service from Sprint PCS through December 31, 2006at a monthly rate per subscriber of $7.00 until December 31, 2005 and$6.75 from January 1, 2006 until December 31, 2006. Beginning in2007, the monthly rate for the next three years for Sprint CCPU service will bereset to a mutually acceptable amount based on the amount necessary to recoverSprint PCS’ reasonable costs for providing Sprint CCPU service; provided,however that the monthly rate will not exceed $8.50 per subscriber. If we andSprint PCS cannot agree to a new rate for any future three-year period beyond2006, we have the option to continue to purchase the Sprint CCPU service andhave an arbitrator determine the new rate or self-provision or procure thoseservices elsewhere, subject to certain rights and procedures relating to ourability to transition only customer care and collection services beginning in2008.

 

SprintPCS also consolidated services relating to subscriber activation, creditverification, handset logistics and handset carrying and obsolescence costsinto one category referred to in the amendments as “Sprint CPGA service” or “costper gross addition service,” all of which services and /or costs, prior to theconsolidation, we had been purchasing in the case of the services or bearing inthe case of the costs. The term “Sprint CPGA service” refers to certain supportservices that we purchase from Sprint PCS. We have agreed to continue to purchase the Sprint CPGA service fromSprint PCS through December 31, 2006 at a monthly rate of $22.00 per grosssubscriber addition in our service area. Beginning in 2007, the monthly ratefor the next three years for Sprint CPGA service will be reset to a mutuallyacceptable amount based on the amount necessary to recover Sprint PCS’reasonable costs for providing Sprint CPGA service. If we and Sprint PCS cannotagree to a new rate for any future three-year period beyond 2006, we have theoption to continue to purchase the Sprint CPGA service and have an arbitratordetermine the new rate or self-provision or procure those services elsewhere.

 

SprintPCS may contract with third parties to provide expertise and services identicalor similar to those to be made available or provided to us. We have agreed notto use the services performed by Sprint PCS in connection with any otherbusiness or outside our markets. Sprint PCS must give us nine months’ notice ifit discontinues a significant service, including customer service, billing orcollections.  If we wish to continue toreceive that service, Sprint PCS will use commercially reasonable efforts tohelp us provide the service ourselves or find another vendor to provide theservice and to facilitate any transition.

 

We mayelect to outsource all (but not less than all) of our customer care services,which consist primarily of call center support, by providing notice to SprintPCS during the six-month period beginning on January 1, 2006 and ending onJune 30, 2006, together with payment of a $3.0 million election fee.After making the election, Sprint PCS will continue to provide services to us,other than the customer care services that have been outsourced, and theservices agreement shall be amended to provide that the fees we pay to SprintPCS for the Sprint CCPU service and the Sprint CPGA service will be thethen-current cost to Sprint PCS of such services; provided, however, that thefee for the Sprint CPGA service through December 31, 2006, shall be $15.00multiplied by the number of gross customer additions in our territory.

 

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*TheTrademark and Service Mark License Agreements*

 

We havenon-transferable, royalty-free licenses to use the Sprint and Sprint PCS brandnames and “diamond” symbol, and several other U.S. trademarks and servicemarks. ** **Webelieve that the Sprint and Sprint PCS brand names and symbols enjoy a very highdegree of recognition, providing us an immediate benefit in themarketplace.  Our use of the licensedmarks is subject to our adherence to quality standards determined by Sprint anduse of the licensed marks in a manner that would not reflect adversely on theimage of quality symbolized by the licensed marks.  We have agreed to promptly notify Sprint ofany infringement of any of the licensed marks within our territory of which webecome aware and to provide assistance to Sprint in connection with Sprint’senforcement of its respective rights.  Wehave agreed with Sprint to indemnify each other for losses incurred inconnection with a material breach of the trademark license agreements.  In addition, we have agreed to indemnifySprint from any loss suffered by reason of a third party claim arising from ouruse of the licensed marks or marketing, promotion, advertisement, distribution,lease or sale of any Sprint products and services other than losses arisingsolely out of our use of the licensed marks in compliance with the contractualguidelines.

 

Sprintcan terminate the trademark and service mark license agreements if we file forbankruptcy, materially breach the agreement or our management agreement isterminated.  However, in connection withour bankruptcy filing, Sprint did not exercise its right to terminate theseagreements.  We can terminate thetrademark and service mark license agreements upon Sprint’s abandonment of thelicensed marks or if Sprint files for bankruptcy, or the management agreementis terminated.

 

**Regulatory Environment**

 

*Regulation of the WirelessTelecommunications Industry*

 

The FCCcan have a substantial impact upon entities that manage wireless personalcommunications service networks and/or provide wireless personal communicationsservices because the FCC regulates the licensing, construction, operation,acquisition and interconnection arrangements of wireless telecommunicationsnetworks in the United States.  Sprint,not us, owns the FCC licenses for the wireless services that we provide in ourservice territory.

 

The FCChas promulgated a series of rules, regulations and policies to, among otherthings:

 

•                                          grant or deny licenses for wireless personal communications servicefrequencies;

 

•                                          grant or deny wireless personal communications service license renewals;

 

•                                          rule on assignments and/or transfers of control of wireless personalcommunications service licenses;

 

•                                          govern the interconnection of wireless personal communications servicenetworks with other wireless and wireline service providers;

 

•                                          establish access and universal service funding provisions;

 

•                                          establish service requirements such as enhanced 911 service;

 

•                                          participate in number “pooling” programs and maintain detailed records ofnumbers used subject to audit;

 

•                                          offer number portability to subscribers;

 

•                                          impose fines and forfeitures for violations of any of the FCC’s rules;

 

•                                          regulate the technical standards of wireless personal communicationsservices networks; and

 

•                                          govern certain aspects of the relationships between carriers andsubscribers, such as the use of personal information and number portability.

 

Through rules thatbecame fully effective on January 1, 2003, the FCC eliminated its spectrumcap for Commercial Mobile Radio Service, or CMRS, which includes broadbandwireless personal communications services, cellular and SMR.  The cap previously had limited CMRS providersto 55 MHz in any geographic area.  TheFCC also eliminated its rule that prohibited a party from owning interestsin both cellular networks in the same Metropolitan Statistical Areas (“MSAs”),though it retained the cross-interest prohibition for less populous RuralService Areas (“RSAs”).  The FCC’s new rules blurthe “bright line” of spectrum caps, however, and require a case-by-case analysisto determine whether a proposed CMRS spectrum combination will not have ananticompetitive effect.

 

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*Transfers and Assignments ofWireless Personal Communications Services Licenses*

 

Althoughwe use Sprint PCS’ licenses to provide wireless service as a PCS Affiliate, weown one FCC license for PCS services for the Chillicothe, Ohio Basic TradingArea.  The FCC must give prior approvalto the assignment of, or transfers involving, substantial changes in ownershipor control of a wireless personal communications service license.  Non-controlling interests in an entity thatholds a wireless personal communications service license or operates wirelesspersonal communications service networks generally may be bought or soldwithout prior FCC approval.  In addition,the FCC requires only post-consummation notification of pro forma assignmentsor transfers of control of certain commercial mobile radio service licenses.

 

*Conditions of Wireless PersonalCommunications Services Licenses*

 

Wirelesspersonal communications service licenses are granted for ten-year termsconditioned upon timely compliance with the FCC’s build-out requirements.  Pursuant to the FCC’s build-out requirements,all 30 MHz broadband wireless personal communications service licensees mustconstruct facilities that offer coverage to one-third of the population intheir licensed areas within five years and to two-thirds of the population insuch areas within ten years, and all 10 MHz broadband wireless personalcommunications services licensees must construct facilities that offer coverageto at least one-quarter of the population in their licensed areas within fiveyears or make a showing of “substantial service” within that five-year period.

 

If thebuild-out requirements are not met, wireless personal communications servicelicenses could be forfeited.  The FCCalso requires licensees to maintain control over their licenses.  Our affiliation agreements with Sprint PCSreflect an arrangement that the parties believe meet the FCC requirements forlicensee control of licensed spectrum.

 

If theFCC were to determine that our affiliation agreements with Sprint PCS need tobe modified to increase the level of licensee control, the agreements may be modifiedto cure any purported deficiency regarding licensee control of the licensedspectrum.  However, the businessarrangement between the parties may have to be restructured.  The FCC could also impose monetary penaltieson Sprint, and possibly revoke one or more of the Sprint licenses.

 

*Wireless Personal CommunicationsServices License Renewal*

 

Wirelesspersonal communications service licensees can renew their licenses foradditional ten-year terms.  Wirelesspersonal communications service renewal applications are not subject toauctions.  However, under the FCC’srules, third parties may oppose renewal applications and/or file competingapplications.  If one or more competingapplications are filed, a renewal application will be subject to a comparativerenewal hearing.  The FCC’s rules affordwireless personal communications services renewal applicants involved incomparative renewal hearings with a “renewal expectancy.” The renewalexpectancy is the most important comparative factor in a comparative renewalhearing and is applicable if the wireless personal communications servicerenewal applicant has:

 

•                                          provided “substantial service” during its license term; and

 

•                                          substantially complied with all applicable laws and FCC rules andpolicies.

 

•                                          The FCC’s rules define “substantial service” in this context asservice that is sound, favorable and substantially above the level of mediocreservice that might minimally warrant renewal. The FCC’s renewal expectancy and procedures make it likely that Sprint willretain the wireless personal communications service licenses that we manage forthe foreseeable future.

 

*Interconnection*

 

The FCChas the authority to order interconnection between commercial mobile radioservices, commonly referred to as CMRS, providers and incumbent local exchangecarriers.  The FCC has ordered localexchange carriers to provide reciprocal compensation to CMRS providers for thetermination of traffic.  Interconnectionagreements are negotiated on a statewide basis and are subject to stateapproval.

 

The FCC rules andrulings, as well as state proceedings, and a review by courts of such rules andrulings directly impact the nature and cost of the facilities necessary forinterconnection of the PCS networks of Sprint with local, national andinternational telecommunications networks. They also determine the nature and amount of revenues that we and Sprintcan receive for terminating calls originating on the networks of local exchangeand other telecommunications carriers.

 

*Other FCC requirements.*  CMRS providers, including Sprint, arerequired to permit manual roaming on their networks.  With manual roaming, any user whose mobilephone is technically capable of connecting with a carrier’s network

 

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must beable to make a call by providing a credit card number or making some otherarrangement for payment.  Since October 2000,the FCC has been considering changes in its rules that may terminate themanual roaming requirement and may impose automatic roaming obligations, underwhich users with capable equipment would be permitted to originate or terminatecalls without taking action other than turning on the mobile phone.

 

FCC rules requirethat local exchange and most CMRS providers allow subscribers to change serviceproviders without changing telephone numbers, which, for wireless serviceproviders, is referred to as wireless local number portability, or WLNP.  FCC regulations requiring that most CMRS providersimplement WLNP in the 100 largest metropolitan areas in the United States wentinto effect on November 24, 2003, and FCC regulations requiring that CMRSproviders implement WLNP outside the 100 largest metropolitan areas in theUnited States went into effect on May 24, 2004.  FCC regulations require most CMRS providersto be able to deliver calls from their networks to ported numbers anywhere inthe country and contribute to the Local Number Portability Fund.  We may be liable to Sprint for any penaltiesthat Sprint may be subject to if we are unable to comply with the FCC’s WLNPregulations within a reasonable period of time. Implementation of WLNP has required wireless personal communicationsservice providers like us and Sprint to purchase more expensive switches andswitch upgrades.  However, it has alsoenabled existing cellular subscribers to change to wireless personalcommunications services without losing their existing wireless telephonenumbers, which has made it easier for wireless personal communications serviceproviders to market their services to existing cellular users.  The existence of WLNP could adversely impactour business since it makes subscribers defections more likely and we may notbe able to replace subscribers who have switched to other carriers.

 

FCC rules requirebroadband personal communications services and other commercial mobile radioservices providers to implement enhanced emergency 911 capabilities thatprovide the location of wireless 911 callers to “Public Safety AnsweringPoints.” The FCC has approved a plan proposed and amended by Sprint under whichSprint began selling specially equipped telephone handsets in 2001, with arollout of such handsets that continued until June 30, 2003, when all newhandsets activated nationwide were to be specially equipped.  Sprint’s plan requires that by December 31,2005, 95% of Sprint wireless subscriber handsets in service must be equippedfor the Sprint wireless enhanced 911 service. Moreover, Sprint completed its PCS network upgrade to support enhanced911 service by December 31, 2002 and began providing a specified level ofenhanced 911 service by June 30, 2002.

 

*Communications assistance for law enforcement.*  The Communications Assistance forLaw Enforcement Act (“CALEA”), enacted in 1994, requires wireless personalcommunications service and other telecommunications service providers to ensurethat their facilities, equipment and services are able to comply withauthorized electronic surveillance by federal, state and local law enforcementpersonnel.  Wireless personalcommunications service providers were generally required to comply with thecurrent industry CALEA capability standard, known as J-STD-025, by June 30,2000, for the electronic interception of voice communications, and with certainadditional standards by September 30, 2001.  Wireless personal communications serviceproviders are also required to implement “packet-mode” electronic interceptioncapabilities.  Wireless communicationsservice providers, including Sprint (on behalf of itself and the PCSAffiliates, including Horizon), filed for an extension of time to implement thepacket-mode interception capabilities until November 19, 2003.  The FCC extended the compliance date to January 30,2004 in the absence of an FBI program to develop agreed upon carrier deploymentdates.  On January 30, 2004, Sprint(on behalf of itself and the PCS Affiliates) filed a request for furtherextension to deploy packet-mode interception capabilities.  On June 21, 2004, the Department ofJustice opposed the request for additional time.  In December 2004, Sprint deployedpacket-mode CALEA electronic capabilities in its wireless IP network compliantwith industry standards, therefore negating the request for extension of timeas it applies to Sprint’s packet-mode ReadyLinkTM service.  Sprint’s request for extension of time withrespect to other packet-mode services remains pending.** **Most wireless personalcommunications service providers are ineligible for federal reimbursement forthe software and hardware upgrades necessary to comply with the CALEAcapability and capability requirements. In addition, the FCC is considering petitions from numerous parties toestablish and implement technical compliance standards pursuant to CALEA requirements.  In sum, CALEA capability and capabilityrequirements are likely to impose some additional switching and network costsupon Sprint and its PCS Affiliates and other wireless entities.

 

The USAPatriot Act of 2001 included certain provisions that enable law enforcementagencies and other branches of the government to more easily acquire recordsand information regarding certain uses of communications facilities fromtelecommunications carriers, including PCS carriers.

 

*Other federal regulations.*  Sprint and the PCS Affiliates of Sprint mustbear the expense of compliance with FCC and Federal Aviation Administrationregulations regarding the siting, lighting and construction of transmittertowers and antennas.  In addition, FCCenvironmental regulations may cause some of our base station locations tobecome subject to the additional expense of regulation under the NationalEnvironmental Policy Act.  The FCC isrequired to implement this Act by requiring service providers to meet land useand radio emissions standards.

 

*Review of universal service requirements.*  The FCC and certain states haveestablished “universal service” programs to ensure that affordable, qualitytelecommunications services are available to all Americans.  Sprint is required to contribute to the 

 

22

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federaluniversal service program as well as existing state programs.  The FCC has determined that Sprint’s “contribution”to the federal universal service program is a variable percentage of “end-usertelecommunications revenues.” Although many states have or are likely to adopta similar assessment methodology, the states are free to calculatetelecommunications service provider contributions in any manner they choose aslong as the process is not inconsistent with the FCC’s rules.  At the present time, it is not possible topredict the extent of the Sprint total federal and state universal serviceassessments or its ability to recover from the universal service fund.  However, some wireless entities are seekingstate commission designation as “eligible telecommunications carriers,”enabling them to receive federal and state universal service support.

 

*Wireless facilities siting.*  States and localities are not permitted toregulate the placement of wireless facilities so as to “prohibit” the provisionof wireless services or to “discriminate” among providers of thoseservices.  In addition, so long as awireless network complies with the FCC’s rules, states and localities areprohibited from using radio frequency health effects as a basis to regulate theplacement, construction or operation of wireless facilities.  These rules are designed to make itpossible for Sprint and its PCS Affiliates and other wireless entities toacquire necessary tower sites in the face of local zoning opposition anddelays.

 

*Equal access.*  Wireless providers are not required toprovide long-distance carriers with equal access to wireless subscribers forthe provision of toll services.  Thisenables us and Sprint to generate additional revenues by reselling the tollservices of Sprint PCS and other interexchange carriers from whom we can obtainfavorable volume discounts.  However, theFCC is authorized to require unblocked access to toll service providers subjectto certain conditions.

 

*State regulation of wireless service.*  With the rapid growth andpenetration of wireless services has come a commensurate surge of interest onthe part of some state legislatures and state public utility commissions inregulating our industry.  This interesthas taken the form of efforts to regulate customer billing, termination ofservice arrangements, advertising, filing of “informational” tariffs,certification of operation, service coverage and quality, drivers’ use ofhandsets, provision of emergency 911 service and many other areas.  We anticipate that this trend willcontinue.  It will require us to devoteresources to working with the states to respond to their concerns whileminimizing any new regulation that could increase our costs of doing business.

 

Section 332of the Communications Act preempts states from regulating the rates and entryof CMRS providers.  However, states maypetition the FCC to regulate the rates and entry of those providers and the FCCmay grant that petition if the state demonstrates that:

 

•                                          market conditions fail to protect subscribers from unjust and unreasonablerates or rates that are unjustly or unreasonably discriminatory; or

 

•                                          such market conditions exist and commercial mobile radio service is areplacement for a substantial portion of the landline telephone service withinthe state.

 

To date,the FCC has granted no such petition.

 

Section 332of the Communications Act does not prohibit a state from regulating the other “termsand conditions” of commercial mobile services, including consumer billinginformation and practices, billing disputes and other consumer protectionmatters.  Several states have invokedthis language to impose, or propose, various consumer-related regulations onthe wireless industry such as rules governing customer contracts andadvertising.  States also may imposetheir own universal service support regimes on wireless and othertelecommunications carriers, similar to the requirements that have beenestablished by the FCC.

 

To theextent Sprint and the PCS Affiliates provide fixed wireless service, we may besubject to additional state regulation. These standards and rulings have prevented states from delaying theentry of wireless personal communications services and other wireless carriersinto their jurisdictions via certification and similar requirements, and fromdelaying or inhibiting aggressive or flexible wireless price competition afterentry.

 

*Interference temperature.*  In November 2003, the FCC launched aninquiry aimed at establishing a new paradigm for the determination ofinterference to wireless services. Currently, interference measurements are based on transmitteroperations.  The proposed “interferencetemperature” would take into account interactions between transmitters andreceivers, as well as all other elements of the radio frequencyenvironment.  One goal of this proceedingis to create opportunities for other transmitters, whether licensed orunlicensed, to operate in bands that are now exclusively reserved forlicensees, such as the personal communications service frequencies used bySprint.  It is too early in thisproceeding to determine what effect, if any, this inquiry by the FCC will haveon our business.

 

23

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## **Item 2.            Properties**

## ** **

Our principalexecutive offices are leased from The Chillicothe Telephone Company, a formeraffiliate of ours prior to our emergence from bankruptcy and a wholly-owned subsidiaryof Horizon Telcom, Inc., and are located at 68 E. Main Street,Chillicothe, Ohio 45601-0480.  Wecurrently operate nine full-service stores, and two customer-service storesthat may be converted to full-service if economics warrant.  As of December 31,2004, the Company leased all of its stores operating throughout itsterritories.  As of December 31,2004, our network included 792 base stations and five switching centers, threeof which have full switches and two of which have cell site controllers.  We lease or license all of our towersites.  We believe our facilities areadequate for our current operations and are in good condition and additionalleased space can be obtained if needed on commercially reasonable terms.

 

## **Item 3.            Legal Proceedings**

## ** **

We areparty to various legal actions that are ordinary and incidental to ourbusiness.   While the outcome of legalactions cannot be predicted with certainty, our management believes the outcomeof these proceedings will not have a material adverse effect on our financialcondition or results of operations.

 

## **Item 4.            Submission of Matters to a Vote ofSecurity Holders**

## ** **

None.

 

# **Part  II**

# ** **

## **Item 5.            Market For Registrant’s CommonEquity, Related Stockholder Matters and Issuer Purchases of Equity Securities**

## ** **

Pursuantto our Plan of Reorganization that became effective on October 1, 2004,our previously outstanding common stock was cancelled and we issued, pursuantto an exemption provided by Section 1145 of the U.S. Bankruptcy Code, approximately9.0 million shares to holders of our former senior notes and senior discountnotes, which were cancelled, and to certain of our general unsecured creditorsin satisfaction and retirement of their respective claims.  In addition, 986,702 shares were reservedunder our 2004 Stock Incentive Plan for issuance to certain members of our management,directors and other employees post-Reorganization.  As a result of these issuances, certain ofour former noteholders became the principal equity holders of Horizon PCS, Inc.upon confirmation of the Plan of Reorganization.

 

**MarketInformation**

 

On October 15,2004, our common stock began trading on the Pink Sheets LLC’s Pink Sheets underthe symbol “HZPS.PK”  Prior to ourbankruptcy filing, there was no trading market for our common stock.  On March 29, 2005, the high bid pricefor our common stock was $26.00.

 

Thefollowing table sets forth on a per share basis the high and low closing bid****for our common stock as reported on the Pink Sheets LLC’sPink Sheets for the periods indicated: 

 
| ** **                                                             | ** ** | **Bid Price Range of Common Stock** | ** ** |
|------------------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                             | ** ** | **High**                            | ** ** | **Low** | ** ** |
| **Fiscal  Year Ended December 31, 2004**                          | ** ** | ** **                          | ** ** | ** ** | ** ** |
| Period beginning  October 15, 2004 through December 31, 2004 |       | $                                   | 24.25      |   | $ | 17.15 |   |
|                                                                   |       |                                |       |   |   |
| **Fiscal  Year Ended December 31, 2005**                          |       |                                |       |   |   |
| Period beginning  January 1, 2005 through March 29, 2005     |       | $                                   | 26.00      |   | $ | 23.50 |   |

 

PinkSheets LLC’s Pink Sheets reflect interdealer prices, without retail mark-up,mark down or commission and may not represent actual transactions.

 

**Holders**

 

As of March 29,2005, there were approximately 23 holders of record of our common stock,including record holders which hold shares on behalf of an indeterminate numberof beneficial owners.

 

24

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**Dividends**

 

Weintend to retain our future earnings, if any, to fund the development andgrowth of our business and, therefore, do not anticipate paying any cashdividends in the foreseeable future. Our future decisions concerning thepayment of dividends on the common stock will depend upon our results ofoperations, financial condition and capital expenditure plans and will besubject to limitations under the indenture governing our senior notes, as wellas such other factors that the board of directors, in its sole discretion, mayconsider relevant.

 

**EquityCompensation Plan Information**

 

Thefollowing table presents information with respect to our equity compensationplans as of December 31, 2004:  

 
| **Plan Category**                                               | ** ** | **Number of securities to be  issued upon exercise of  outstanding options,  warrants and rights  (a)** | ** ** | **Weighted-average exercise  price of outstanding  options, warrants and  rights  (b)** | ** ** | **Number of securities  remaining available for  future issuance under  equity compensation plans  (excluding securities  reflected in column (a))  (c)** | ** ** |
|-----------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
|                                                            |       |                                                                                                    |       |                                                                                    |       |                                                                                                                                                      |       |
| Equity  compensation plans approved by security holders         |       | —                                                                                                  |       | —                                                                                  |       | —                                                                                                                                                    |       |
|                                                            |       |                                                                                                    |       |                                                                                    |       |                                                                                                                                                      |       |
| Equity  compensation plans not approved by security holders (1) |       | 778,381                                                                                                 |       | $                                                                                       | 17.76      |                                                                                                                                                      | 208,321    |   |
|                                                            |       |                                                                                                    |       |                                                                                    |       |                                                                                                                                                      |       |
| **Total**                                                       |       | 778,381                                                                                                 |       | $                                                                                       | 17.76      |                                                                                                                                                      | 208,321    |   |

 

----

(1)     Our 2004 Stock Incentive Plan was approvedby the bankruptcy court as part of our Plan of Reorganization.  See “- 2004 Stock Incentive Plan.”

 

*2004 StockIncentive Plan*

 

HorizonPCS, Inc. established the 2004 Stock Incentive Plan, which was approved bythe bankruptcy court as a part of our Plan of Reorganization.  See “Item 1. Business – Recent Developments –The Reorganization.”  The plan providesfor incentive stock options, nonqualified stock options, stock appreciationrights, stock units, restricted stock, restricted stock units and performanceshares.  The plan is administered by acommittee, which also designates individuals eligible for participation in theplan.  Individuals eligible toparticipate in the plan are employees, consultants and directors of Horizon PCS, Inc.and its subsidiaries.  The total numberof shares reserved under the plan is 986,702.  Currently there are 778,381 shares to beissued upon exercise of outstanding options granted under the plan.   The exercise price of options granted underthe plan is determined by the committee, provided that, no incentive stockoption shall have an exercise price of less than 100% of the stock’s fairmarket value as of the date of grant. The plan provides that no individual may be issued any stock award underthe plan covering more than 500,000 shares of stock in one calendar year.  The committee may also establish anyconditions, restrictions and contingencies related to stock awards under theplan.  The plan provides that upon achange in control the committee may provide that all outstanding options andstock appreciation rights become fully exercisable and all stock units,restricted stock, restricted stock units and performance shares shall fullyvest.  The Board of Directors may amendor terminate the plan.  The term of theplan shall expire in ten years.

 

**Repurchases**

 

None.

 

## **Item 6.            Selected Financial Data**

## ** **

Wederived the following statement of operations and balance sheet data as of December 31,2004 and 2003 and for the period from January 1, 2004 through September 30,2004 and the period from October 1, 2004 through December 31, 2004and each of the years ended December 31, 2003 and 2002, from our auditedconsolidated financial statements, included elsewhere in this annual report on Form 10-K.  We derived the following statement ofoperations and balance sheet data as of December 31, 2001 and December 31,2000, and for the years then ended from our audited consolidated financialstatements, which are not included in this annual report on Form 10-K.

 

25

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Inaccordance with the American Institute of Certified Public AccountantsStatement of Position 90-7, “Financial Reporting by Entities in Reorganizationunder the Bankruptcy Code,” we adopted fresh start accounting as of October 1,2004, and our emergence from Chapter 11 resulted in a new reporting entity.  The periods as of and prior to September 30,2004 have been designated “Predecessor Company” and as of October 1, 2004and the periods subsequent to September 30, 2004 have been designated as “SuccessorCompany.”  Under fresh start accounting,our reorganization equity value was allocated to the assets based on theirrespective fair values and was in conformity with SFAS No. 141, BusinessCombinations.  As a result of theimplementation of fresh start accounting, our financial statements after theeffective date are not comparable to our financial statements for priorperiods.

 

Ourfinancial statements as of December 31, 2004 and 2003 and for the periodfrom January 1, 2004 through September 30, 2004 and the period from October 1,2004 through December 31, 2004, and the years ended December 31, 2003and 2002, were audited by KPMG LLP, independent registered public accountingfirm.

 

Ourhistorical financial statements for the periods prior to June 15, 2004reflect our financial position and results of operations inclusive of theoperation of our NTELOS markets in Virginia and West Virginia.  As a result of the June 15, 2004 closingof the Sprint Transaction, we no longer operate in, or own the assetsassociated with, those markets.  See “Business- The Sprint PCS Agreements.”** **Our historical financial statementsfor the periods ending prior to October 1, 2004 reflect our financialposition and results of operations prior to emergence from bankruptcy.  See “The Reorganization.”

 

Theselected historical financial information set forth below should be read inconjunction with our audited consolidated financial statements, “Management’sDiscussion and Analysis of Financial Condition and Results of Operations,” and “SelectedHistorical Financial Information” and, in each case, any related notes thereto,included elsewhere in this annual report on Form 10-K.

 

26

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The information set forth in the table below is unaudited:

 
| ** **                                                                    | ** ** | **Successor  Company**                              | ** **                       | **Predecessor  Company**    | ** **                       |
|-------------------------------------------------------------------------------|------------|-----------------------------------------------------|----------------------------------|-----------------------------|----------------------------------|
| ** **                                                                    | ** ** | **October 1, 2004  Through**                   | ** **                       | ** **                  |
| ** **                                                                    | ** ** | ** **                                          | **January 1, 2004 Through** | ** **                  | **Year Ended December 31,** | ** ** |
| ** **                                                                    | ** ** | **December 31, 2004**                          | ** **                       | **September 30, 2004** | ** **                       | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| ** **                                                                    | ** ** | **(In thousands, except per share and ratio data)** | ** **                       |
| Statements of  Operations Data:                                               |       |                                                |                             |                        |                             |   |   |   |   |   |   |   |   |
| Operating  revenues:                                                          |       |                                                |                             |                        |                             |   |   |   |   |   |   |   |   |
| Subscriber  revenues                                                          |       | $                                                   | 28,093                           |                        | $                                | 119,289 |   | $ | 188,672 |   | $ | 152,409 |   | $ | 77,658 |   | $ | 17,725 |   |
| Roaming revenues                                                              |       | 15,520                                              |                             | 49,243                      |                             | 61,728 |   | 55,782 |   | 38,540 |   | 8,408 |   |
| Equipment  revenues                                                           |       | 1,593                                               |                             | 4,036                       |                             | 5,166 |   | 7,847 |   | 7,106 |   | 3,061 |   |
| Total operating  revenues                                                     |       | 45,206                                              |                             | 172,568                     |                             | 255,566 |   | 216,038 |   | 123,304 |   | 29,194 |   |
| Operating  expenses:                                                          |       |                                                |                             |                        |                             |   |   |   |   |   |   |   |   |
| Cost of service                                                               |       | 23,812                                              |                             | 107,138                     |                             | 181,306 |   | 167,128 |   | 100,516 |   | 27,452 |   |
| Cost of  equipment                                                            |       | 2,261                                               |                             | 4,154                       |                             | 13,351 |   | 19,189 |   | 14,872 |   | 9,775 |   |
| Selling and  marketing                                                        |       | 5,767                                               |                             | 18,812                      |                             | 39,550 |   | 52,601 |   | 48,993 |   | 18,026 |   |
| General and  administrative                                                   |       | 7,887                                               |                             | 21,433                      |                             | 38,395 |   | 41,650 |   | 28,384 |   | 12,477 |   |
| Reorganization  (income) expenses(a)                                          |       | —                                              |                             | (74,613                     | )                                | 118,802 |   | — |   | — |   | — |   |
| Non-cash  compensation                                                        |       | 641                                                 |                             | 145                         |                             | 620 |   | 681 |   | 1,434 |   | 490 |   |
| Depreciation and  amortization                                                |       | 25,539                                              |                             | 24,568                      |                             | 111,310 |   | 40,271 |   | 18,519 |   | 6,135 |   |
| Loss (gain) on  sale of PCS assets                                            |       | —                                              |                             | (42,063                     | )                                | 216 |   | 632 |   | 1,297 |   | — |   |
| Impairment of  goodwill and impact of acquisition-related deferred taxes      |       | —                                              |                             | —                      |                             | — |   | 13,222 |   | — |   | — |   |
| Total operating  expenses                                                     |       | 65,907                                              |                             | 59,574                      |                             | 503,550 |   | 335,374 |   | 214,015 |   | 74,355 |   |
| Operating income  (loss)                                                      |       | (20,701                                             | )                                | 112,994                     |                             | (247,984 | ) | (119,336 | ) | (90,711 | ) | (45,161 | ) |
| Gain (loss) on  exchange of stock                                             |       | —                                              |                             | —                      |                             | — |   | — |   | (400 | ) | 11,551 |   |
| Interest income  and other, net                                               |       | 271                                                 |                             | 833                         |                             | 885 |   | 2,989 |   | 5,063 |   | 4,804 |   |
| Interest  expense, net of capitalized interest                                |       | (3,612                                              | )                                | (8,702                      | )                                | (44,718 | ) | (60,601 | ) | (27,434 | ) | (10,318 | ) |
| Cancellation of  debt                                                         |       | —                                              |                             | 321,944                     |                             | — |   | — |   | — |   | — |   |
| Income (loss)  from continuing operations before income tax (expense) benefit |       | (24,042                                             | )                                | 427,069                     |                             | (291,817 | ) | (176,948 | ) | (113,482 | ) | (39,124 | ) |
| Income tax  (expense) benefit                                                 |       | —                                              |                             | —                      |                             | 6,031 |   | — |   | — |   | (1,075 | ) |
| Income (loss) on  continuing operations                                       |       | (24,042                                             | )                                | 427,069                     |                             | (285,786 | ) | (176,948 | ) | (113,482 | ) | (40,199 | ) |
| Income (loss) on  discontinued operations                                     |       | —                                              |                             | —                      |                             | — |   | — |   | — |   | 141 |   |
| Income (loss)  before extraordinary item                                      |       | (24,042                                             | )                                | 427,069                     |                             | (285,786 | ) | (176,948 | ) | (113,482 | ) | (40,058 | ) |
| Extraordinary  loss, net of tax benefit of $262 in 2000                       |       | —                                              |                             | —                      |                             | — |   | — |   | — |   | (486 | ) |
| Net income  (loss)                                                            |       | (24,042                                             | )                                | 427,069                     |                             | (285,786 | ) | (176,948 | ) | (113,482 | ) | (40,544 | ) |
| Preferred stock  dividend                                                     |       | —                                              |                             | (10,135                     | )                                | (12,680 | ) | (11,756 | ) | (10,930 | ) | (2,782 | ) |
| Net income  (loss) attributable to common stockholders                        |       | $                                                   | (24,042                          | )                           | $                                | 416,934 |   | $ | (298,466 | ) | $ | (188,704 | ) | $ | (124,412 | ) | $ | (43,326 | ) |
|                                                                          |       |                                                |                             |                        |                             |   |   |   |   |   |   |   |   |
| Basic and  diluted loss per share attributable to common stockholders         |       | $                                                   | (2.70                            | )                           |                             |   |   |   |   |   |   |   |   |   |
|                                                                          |       |                                                |                             |                        |                             |   |   |   |   |   |   |   |   |
| Other Data:                                                                   |       |                                                |                             |                        |                             |   |   |   |   |   |   |   |   |
| Capital  expenditures                                                         |       | $                                                   | 2,619                            |                        | $                                | 1,641 |   | $ | 5,203 |   | $ | 63,083 |   | $ | 116,574 |   | $ | 83,630 |   |
| Deficiency of  earnings to fixed charges(b)                                   |       | $                                                   | 24,116                           |                        | n/a                              |   | $ | 290,994 |   | $ | 180,337 |   | $ | 119,777 |   | $ | 40,488 |   |
| Ratio of  earnings to fixed charges(b)                                        |       | n/a                                                 |                             | 2.1                         |                             | n/a |   | n/a |   | n/a |   | n/a |   |

 

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| ** **                                   | ** ** | **Successor**               | ** ** | **Predecessor** | ** ** |
|----------------------------------------------|------------|-----------------------------|------------|-----------------|------------|
| ** **                                   | ** ** | **As of December 31,** | ** ** |
| ** **                                   | ** ** | **2004**                    | ** ** | **2003**        | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| ** **                                   | ** ** | **(in thousands)**          | ** ** |
| Balance Sheet  Data:                         |       |                        |       |            |       |   |   |   |   |   |   |
| Cash and cash  equivalents(c)                |       | $                           | 55,541     |            | $          | 70,651 |   | $ | 86,137 |   | $ | 123,776 |   | $ | 191,417 |   |
| Property and  equipment, net                 |       | 106,258                     |       | 171,788         |       | 239,537 |   | 214,868 |   | 109,702 |   |
| Total assets                                 |       | 290,192                     |       | 283,524         |       | 443,125 |   | 481,338 |   | 385,295 |   |
| Total  liabilities not subject to compromise |       | 156,998                     |       | 40,005          |       | 585,567 |   | 447,956 |   | 238,300 |   |
| Liabilities  subject to compromise(d)        |       | —                      |       | 670,734         |       | — |   | — |   | — |   |
| Senior Notes due  2012                       |       | 125,000                     |       | —          |       | — |   | — |   | — |   |
| Redeemable  convertible preferred stock      |       | —                      |       | 169,785         |       | 157,105 |   | 145,349 |   | 134,422 |   |
| Stockholders’  equity (deficit)         |       | 133,194                     |       | (597,000        | )          | (299,547 | ) | (111,967 | ) | 12,573 |   |
|                                              |            |                             |            |                 |            |  |  |  |  |  |  |  |  |  |  |  |

 

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(a)                                  Reorganization (income) expenses relate to expenses incurred and amountsaccrued as a direct result of our Chapter 11 filing and include professionalfees, adjustments to carrying value of debt, employee severance payments,employee retention payments, lease termination accruals and other items.  Reorganization items also include fresh-startadjustments during the period January 1, 2004 through September 30,2004.  Reorganization items areseparately identified in the notes to our financial statements includedelsewhere in this annual report on Form 10-K.

 

(b)                                 For purposes of computing the deficiency of earnings (before taxes) tofixed charges, fixed charges consist of interest expense, capitalized interest,amortization of deferred financing costs and a portion of our rentalexpense.  We assumed that one-third ofour rental expense should be included in fixed charges.  The

 

deficiency of earnings beforefixed charges is the amount required for the ratio of earnings to fixed chargesto be one-to-one.

 

(c)                                  Excludes restricted cash of $48.7 million, $24.1 million, $12.0 millionand zero as of December 31, 2001, 2002, 2003 and 2004, respectively,relating to our former senior notes.

 

(d)                                 The 2003 amount includes approximately $625.0 million related to ourformer senior discount notes, former senior notes and former senior securedcredit facility.  See notes to ourconsolidated financial statements included elsewhere in this annual report on Form 10-Kfor further information.

 

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## **Item 7.            Management’s Discussion and Analysisof Financial Condition and Results of Operations**

## ** **

*Thediscussion in this section is based upon our historical financialstatements. The financial statements as of and for the periods ended December 31,2004 and September 30, 2004 reflect the effects of the Reorganization, theSprint Transaction, the termination of our operations in the NTELOS markets,and related transactions that were completed during the respective periods in  2004. The financial statements for priorperiods do not reflect these transactions, and therefore the 2004 financialresults are not comparable to results for 2003 and 2002.*

 

**Business Overview**

 

Webecame one of the five charter PCS Affiliates of Sprint in June 1998, whenwe were awarded our initial seven markets in Ohio, West Virginia and Kentuckywith a total population of approximately 1.6 million. Since then, we expandedour territory and our business and, as of December 31, 2004, we had atotal population of approximately 7.4 million and a covered population ofapproximately 5.4 million residents in our territory with approximately 183,100subscribers.

 

Weentered into affiliation agreements with Sprint PCS in June 1998 andlaunched Sprint PCS service in November 1998. As a PCS Affiliate ofSprint, the pricing of services and handsets to our subscribers is generallyestablished by Sprint PCS. In addition, the costs payable by us to Sprint PCSfor our subscriber processing, customer care and subscriber billing are alsoestablished by Sprint PCS. As a result, we attempt to manage our results ofoperations largely by determining within parameters established by Sprint PCSthe credit quality of the subscribers for whom we activate service and thenumber of our company-owned stores and local third-party distributors in ourterritory with which we enter into agreements to sell Sprint PCS products andservices. As our network build-out is complete, the amount of capitalexpenditures that Sprint PCS can require us to incur for network operationsrelates primarily to upgrading our network to new technologies in order tomaintain compatibility with Sprint PCS’ network and provide additional coveragewithin our territory at our discretion.

 

Asignificant part of our subscriber acquisition costs relates to costs that wepay, as allocated to us by Sprint PCS, to subsidize the cost of the handsetspurchased by our subscribers. As a result, we attempt to manage the rate atwhich we add new subscribers. We monitor the creditworthiness of oursubscribers, as we bear the risk of the collectibility of their bills forSprint PCS services and impose deposits where warranted by their creditprofiles. Our results of operations are based on the collectibility of oursubscribers’ monthly recurring charges, the charges for minutes of use on ournetwork by our subscribers who exceed the minutes in their plan and thepayments we receive from Sprint PCS for minutes of use on our network by SprintPCS subscribers and non-Sprint PCS subscribers who are not based in ourterritory.

 

On June 15,2004, we completed our settlement agreements with Sprint and exited the marketsin Virginia and West Virginia that were previously operated under a NetworkServices Agreement with NTELOS, Inc. The sale of our NTELOS markets included the economic interest inapproximately 92,500 subscribers and seven retail stores.

 

On March 17,2005, we entered into an Agreement and Plan of Merger with iPCS, another PCSAffiliate of Sprint.  If the merger isconsummated, we will be merged with and into iPCS and our results will becombined with those of iPCS.

 

**Reorganization**

 

On August 15,2003, we and our subsidiaries filed voluntary petitions for reorganizationunder Chapter 11 of the United States Bankruptcy Code.  In conjunction with the bankruptcy process, wereviewed all current contracts, rejected unfavorable agreements in accordancewith Section 365 of the Bankruptcy Code, and negotiated more favorableterms with vendors, where appropriate.  Wefiled an amended Plan of Reorganization on August 12, 2004, and theBankruptcy Court confirmed our Plan on September 21, 2004.  The Plan of Reorganization became effective onOctober 1, 2004.

 

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*MaterialTerms of the Plan of Reorganization*

 

Underthe Plan of Reorganization, the net proceeds from the senior notes were used tohelp fund, in full, the cash payment to the lenders under our senior securedcredit facility and to permanently retire the loans thereunder.  The remaining net proceeds, together withother available cash, were used by us to satisfy other secured claims,administrative and other priority claims and unsecured convenience claims, andto pay fees and expenses related to the Reorganization.  Additionally, all of our subordinated claimswere discharged and all of our existing capital stock was cancelled.

 

The Planof Reorganization authorizes us to issue 25 million shares of our common stockafter we emerge from bankruptcy.  Approximately9.0 million shares were issued, pursuant to an exemption provided by Section 1145of the U.S. Bankruptcy Code, to holders of our former senior notes and seniordiscount notes, which were cancelled, and to certain of our general unsecuredcreditors in satisfaction and retirement of their respective claims.  In addition, 986,702 shares were reservedunder our 2004 Stock Incentive Plan for issuance to certain members of ourmanagement, directors and other employees post-Reorganization.  As a result of these issuances, certain of ourformer noteholders became the principal equity holders of Horizon PCS, Inc.upon confirmation of the Plan of Reorganization.  See “Item 12. Security Ownership of Certain Beneficial Owners and Management andRelated Stockholder Matters.”

 

The Planof Reorganization also provided for various other matters relating to ouroperations post-Reorganization, including the following:

 

•     ourassumption of our affiliation agreements with Sprint PCS (as they existed afterthe Sprint Transaction);

 

•     ourassumption of all other contracts and leases that were not previously rejectedor rejected pursuant to the terms of the Plan of Reorganization;

 

•     theappointment of our existing executive officers as the executive officers of thereorganized Horizon PCS;

 

•     theappointment of five new directors to Horizon PCS, Inc.’s board ofdirectors, designated by the Official Bondholders Committee, pursuant to whichLawrence Askowitz, Timothy G. Biltz, Anthony Civale, Jeffrey W. Jones andRobert A. Katz were appointed in October 2004.  See “Item 10. Directors and Executive Officers of the Registrant,” and

 

•     our releaseof claims against (i) all of our officers, directors and employees, ineach case, as of the date of the commencement of the hearing on the disclosurestatement in their capacities as such; (ii) our Official Committee ofUnsecured Creditors and Official Bondholders Committee and all of theirrespective members, in their capacities as such; (iii) the trustees underthe indenture for our former senior discount notes and senior notes, in theirrespective capacities as such; (iv) the lenders under our former seniorsecured credit facility, in their capacities as such; (v) the agent forthe lenders under our former senior secured credit facility, in its capacity assuch; (vi) the holders of the senior notes, in their capacity as such; and(vii) with respect to each of the above-named persons, such person’spresent affiliates, principals, employees, agents, officers, directors,financial advisors, attorneys and other professionals, in their capacities assuch.

 

*Effect ofthe Reorganization*

 

As aresult of the consummation of the Reorganization, our former senior securedcredit facility was repaid in full and terminated, and the former seniordiscount notes and former senior notes were cancelled and holders thereofreceived shares of our new common stock.

 

Underthe Plan of Reorganization, all of our former equity securities, including ourold convertible preferred stock and the obligation to pay dividends thereon,were cancelled.

 

**Implementation of Fresh-StartAccounting**

 

Pursuantto American Institute of Certified Public Accountants, or “AICPA,” Statement ofPosition 90-7 “Financial Reporting by Entities in Reorganization under theBankruptcy Code,” or “SOP 90-7,” the accounting for the effects of theReorganization began once the Plan of Reorganization was confirmed by theBankruptcy Court, which became effective on October 1, 2004. Thefresh-start accounting principles pursuant to SOP 90-7 provide, among otherthings, for us to determine the value to be assigned to the assets ofreorganized Horizon PCS, Inc. as of the confirmation date.

 

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Weadopted fresh-start accounting as of October 1, 2004 and our emergencefrom Chapter 11 resulted in a new reporting entity. The periods as of September 30,2004 and prior to October 1, 2004 have been designated “PredecessorCompany” and the periods subsequent to September 30, 2004 have beendesignated “Successor Company”. Under fresh-start accounting, ourreorganization value was allocated to our assets based on their respective fairvalues in conformity with the purchase method of accounting for businesscombinations. Intangible assets were identified and valued accordingly inconformity with the purchase method. As a result of the implementation offresh-start accounting, our financial statements after the effective date arenot comparable to our financial statements for prior periods.

 

Forperiods prior to October 1, 2004, reported assets do not give effect tothe adjustments that resulted from the adoption of fresh-start accounting.Accordingly, our financial condition and results of operations from and afterthe effective date of the Plan of Reorganization are not comparable to thefinancial condition or results of operations reflected in our historicalfinancial statements included elsewhere in this annual report on Form 10-K.

 

Duringthis process, we identified three intangible assets to be reflected in ourfinancial statements: $1.2 million for licensed spectrum, $63.2 million for thesubscriber base and $56.0 million for the Sprint PCS affiliation agreement. Thelicensed spectrum has an indefinite life. The subscriber bases and Sprint PCSaffiliation agreements are to be amortized over their estimated remaininguseful lives of 24 months and 13.7 years, respectively.

 

***Successor Company for the Three Months Ended December 31, 2004Compared to the Predecessor Company Three Months Ended December 31, 2003***

 

**Key Metrics**

 

Thefollowing discussion details key operating metrics and financial performancefor the three months ended December 31, 2004 (“Successor Company”),compared to the three months ended December 31, 2003 (“Predecessor Company”).

 

Weprovide certain financial measures that are calculated in accordance withgenerally accepted accounting principles in the United States (“GAAP”) toassess our financial performance. In addition, we also use non-financial terms,such as churn, which are metrics used in the wireless communications industryand are not measures of financial performance under GAAP.

 

*SubscriberAdditions*.  For the three months ended December 31,2004, our net subscribers decreased by approximately 1,300 subscribers. Weexpect our subscriber additions to begin increasing in 2005 as we resumebuilding our subscriber base. Our subscriber base as of December 31, 2004consisted of approximately 81% prime credit subscribers compared toapproximately 79% as of December 31, 2003. Prime credit subscribers arethose customers with a favorable credit rating.

 

*Churn*. Churn is the monthly rate of subscriber turnover that results from bothvoluntarily and involuntarily discontinued service during the month. Churn iscomputed by dividing the number of subscribers that discontinued service duringthe month, net of 30-day returns, by the beginning subscriber base for theperiod. Churn for the three months ended December 31, 2004 was 3.5%compared to 3.3% for the three months ended December 31, 2003. We believechurn will increase in the first half of 2005, as our network is nearingcapacity.  In January 2005, wesigned an agreement with Nortel to replace approximately half of our basestations with Nortel equipment, specifically in Ohio, Indiana and Tennessee. Webelieve this replacement will improve the quality of our network and lead tolower churn and higher subscriber additions later in 2005.

 

**Results of Operations**

 

*Revenues*. The following table sets forth a breakdown of our revenues by type: 

 

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| ** **           | ** ** | **Successor Company**                           | ** ** | **Predecessor Company**                         | ** ** |
|----------------------|------------|-------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **           | ** ** | **Three Months Ended  December 31,  2004** | ** ** | **Three Months Ended  December 31,  2003** | ** ** |
| ** **           | ** ** | **Amount**                                      | ** ** | **%**                                           | ** ** | **Amount** | ** ** | **%** | ** ** |
| ** **           | ** ** | **(dollars in thousands)**                      | ** ** |
| Subscriber  revenues |       | $                                               | 28,093     |                                            | 62         | % | $ | 46,745 |   | 71 | % |
| Roaming revenues     |       | 15,520                                          |       | 34                                              | %          | 18,323 |   | 28 | % |
| Equipment  revenues  |       | 1,593                                           |       | 4                                               | %          | 644 |   | 1 | % |
| Total revenues       |       | $                                               | 45,206     |                                            | 100        | % | $ | 65,712 |   | 100 | % |

 

*Subscriberrevenues*.  Subscriber revenues for the three monthsended December 31, 2004 were approximately $28.1 million, compared toapproximately $46.7 million for the three months ended December 31, 2003,a decrease of approximately $18.6 million. Approximately $16.1 million of thedecline was due to the sale of the NTELOS markets in the Sprint Transaction.The balance of the decline, approximately $2.5 million, was in our basicservice and minute sensitive revenues due to the decline in our subscriberbase. We provided PCS service to approximately 183,100 subscribers at December 31,2004, compared to approximately 292,600 at December 31, 2003.

 

*Roamingrevenues*.  Roaming revenues decreased from approximately$18.3 million during the three months ended December 31, 2003, toapproximately $15.5 million for the three months ended December 31, 2004,a decline of approximately $2.8 million. This decrease reflected the loss ofroaming revenues of approximately $5.8 million from the sale of the NTELOSmarkets, and an increase of approximately $3.0 million from increased minutesof use, particularly in our $.10 markets.

 

*Equipmentrevenues*.  Equipment revenues for the three months endedDecember 31, 2004 were approximately $1.6 million, compared toapproximately $600,000 for the three months ended December 31, 2003,representing an increase of approximately $1.0 million. The increase wasattributable to selling a greater number of handsets at a higher sales priceduring the three months ended December 31, 2004 as compared to 2003. Wesold approximately 12,400 handsets at our retail stores during the three monthsended December 31, 2004 as compared to approximately 6,100 during thethree months ended December 31, 2003.

 

*Cost ofservice*.  Cost ofservice for the three months ended December 31, 2004 was approximately$23.8 million, compared to approximately $43.0 million for the three monthsended December 31, 2003, a decrease of approximately $19.2 million. Costof service declined approximately $17.5 million in 2004 as a result of the saleof the NTELOS markets. Network operating expenses also declined approximately$1.7 million, including payroll and other benefits.

 

*Cost ofequipment*.  Cost of equipment includes the cost ofhandsets and accessories sold to our subscribers by our stores and our directsales force. Cost of equipment for the three months ended December 31,2004 was approximately $2.3 million, compared to approximately $900,000 for thethree months ended December 31, 2003, an increase of approximately $1.4million. Cost of equipment increased as a result of more handsets andaccessories sold during 2004. We sold approximately 12,400 handsets at ourretail stores during the three months ended December 31, 2004 as comparedto approximately 6,100 sold during the three months ended December 31,2003.

 

*Selling andmarketing expenses*.  Selling and marketing expenses wereapproximately $5.8 million for the three months ended December 31, 2004compared to approximately $6.7 million for the three months ended December 31,2003, a decrease of approximately $900,000. The sale of the NTELOS marketsaccounted for approximately $1.9 million of the decrease, offset by an increaseof approximately $1.0 million attributable to increased spending on marketingand advertising since emerging from bankruptcy. Selling and marketing expenses includethe costs associated with operating our retail stores, including marketing,advertising, payroll and sales commissions. Selling and marketing expenses alsoinclude commissions paid to national and local third-party distributionchannels and subsidies on handsets sold by third parties for which we do notrecord revenue. We expect selling and marketing expenses to continue increasingas we resume building our subscriber base.

 

*General andadministrative expenses*.  General and administrative expenses for thethree months ended December 31, 2004 were approximately $7.9 millioncompared to approximately $7.9 million for the three months ended December 31,2003, essentially flat. The activity reflected a reduction in general andadministrative expenses of $1.7 million related to the sale of the NTELOSmarkets, offset by an increase of approximately $1.1 million in legal andfinancial consulting expenses and approximately $600,000 of other generalexpenses.

 

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*Reorganizationitems*. Reorganization expenses for the three months ended December 31,2003 were approximately $6.3 million consisting of approximately $5.7 millionof professional fees and $600,000 of key employee retention plan payments.

 

*Non-cashcompensation expense*.  We recorded approximately $641,000 and$155,000 for the three months ended December 31, 2004 and 2003,respectively, for stock options granted in October 2004 and November 1999,respectively. The increase was a result of the Predecessor’s options beingcancelled as a result of the reorganization on October 1, 2004 and newoptions being granted in October 2004.

 

*Depreciationand amortization expense*.  Depreciation and amortization expensesincreased by approximately $17.2 million to a total of approximately $25.5million for the three months ended December 31, 2004. The increase was theresult of revaluing the property, plant and equipment and intangible assetsduring the application of fresh-start accounting. The property, plant andequipment adjustments resulted in an increase of approximately $8.3 million forthe three months ended December 31, 2004 as compared to the same period in2003. Approximately $8.9 million of the increase was due to the revaluedintangible assets. Under fresh-start accounting, the remaining useful liveswere recasted, resulting in a shorter remaining life and thus greaterdepreciation expense. We expect the expense to continue at this pace in 2005.

 

*Interestincome and other, net*.  Interest income and other income for thethree months ended December 31, 2004 was approximately $300,000 comparedto approximately $200,000 in 2003 and consisted primarily of interest income.This increase was due to lowering the balance of cash on hand and increasingthe amount invested in corporate bonds and commercial paper.

 

*Interestexpense, net*.  Interest expense for the three months ended December 31,2004 was approximately $3.6 million, compared to approximately $2.1 million forthe same period in 2003.

 

Weaccrue interest at a rate of 11 3/8% annually on our $125.0 million seniornotes issued in July 2004 and began making semi-annual payments on January 15,2005. Interest expense on the $125.0 million senior notes was approximately$3.6 million for the three months ended December 31, 2004. For the threemonths ended December 31, 2003, interest expense on the $105.0 millionterm A and $50.0 term B loans was approximately $1.4 million and $700,000,respectively.

 

Interestexpense for the three months ended December 31, 2004 also includesapproximately $100,000 in amortization of deferred financing fees related toour $125.0 million senior notes, offset by approximately $100,000 ofcapitalized interest.

 

Preferredstock dividend.  We recorded preferredstock dividend expense of approximately $3.3 million for the three months endedDecember 31, 2003 and no expense for the comparable quarter in 2004 due tothe cancellation of our preferred stock as a result of our reorganization on October 1,2004.

 

**Results of Operations**

 

***For the Nine Months Ended September 30, 2004 Compared to the NineMonths Ended September 30, 2003***

 

*Revenues*. The following table sets forth a breakdown of our revenues by type: 

 
| ** **           | ** ** | **Predecessor Company**                         | ** ** |
|----------------------|------------|-------------------------------------------------|------------|
| ** **           | ** ** | **Nine Months Ended  September 30,  2004** | ** ** | **Nine Months Ended  September 30,  2003** | ** ** |
| ** **           | ** ** | **Amount**                                      | ** ** | **%** | ** ** | **Amount** | ** ** | **%** | ** ** |
| ** **           | ** ** | **(dollars in thousands)**                      | ** ** |
| Subscriber  revenues |       | $                                               | 119,289    |   | 69 | % | $ | 141,926 |   | 75 | % |
| Roaming revenues     |       | 49,243                                          |       | 29 | % | 43,406 |   | 23 | % |
| Equipment  revenues  |       | 4,036                                           |       | 2 | % | 4,522 |   | 2 | % |
| Total revenues       |       | $                                               | 172,568    |   | 100 | % | $ | 189,854 |   | 100 | % |

 

 

**Key Metrics**

 

Thefollowing discussion details key operating metrics and financial performance ofthe Predecessor Company for the nine months ended September 30, 2004,compared to the nine months ended September 30, 2003. This discussionincludes the

 

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fresh-startadjustments and cancellation of debt resulting from the application offresh-start accounting to the Predecessor Company.

 

*SubscriberAdditions*.  For the nine months ended September 30,2004, our net subscribers decreased by approximately 108,200 subscribers. Thisdecrease included approximately 92,500 subscribers related to the NTELOSmarkets that were sold in June 2004. Gross activations during the firstnine months of 2004 were 53% lower than the same period in 2003 due torestricted marketing activities in an effort to conserve cash during ourbankruptcy. Our subscriber base as of September 30, 2004 consisted ofapproximately 81% prime credit subscribers compared to approximately 77% as of September 30,2003.

 

*Churn*.  Churn for the nine months ended September 30,2004 was 3.1% compared to 3.2% for the nine months ended September 30,2003, essentially flat.

 

**Results of Operations**

 

*Subscriberrevenues*.  Subscriber revenues for the nine months endedSeptember 30, 2004 were approximately $119.3 million, compared toapproximately $141.9 million for the nine months ended September 30, 2003,a decrease of approximately $22.6 million. Approximately $19.1 million of thedecline in subscriber revenues was the result of the sale of the NTELOS marketsin the Sprint Transaction. We provided PCS service to approximately 184,500subscribers at September 30, 2004, compared to approximately 301,100 at September 30,2003.

 

*Roamingrevenues*.  Roaming revenues increased from approximately$43.4 million for the nine months ended September 30, 2003, toapproximately $49.2 million for the nine months ended September 30, 2004,an increase of approximately $5.8 million. This increase reflected increasedminutes of use, particularly in our $.10 markets.

 

*Equipmentrevenues*.  Equipment revenues for the nine months ended September 30,2004 were approximately $4.0 million, compared to approximately $4.5 millionfor the nine months ended September 30, 2003, a decrease of approximately$500,000. The decrease was attributable to selling a lower number of handsetsduring the nine months ended September 30, 2004 as compared to 2003,offset by a higher selling price per handset during 2004. We sold approximately24,200 handsets at our retail stores for the nine months ended September 30,2004 as compared to approximately 67,300 sold for the nine months ended September 30,2003.

 

*Cost ofservice*.  Cost ofservice for the nine months ended September 30, 2004 was approximately$107.1 million, compared to approximately $138.3 million for the nine monthsended September 30, 2003, a decrease of approximately $31.2 million. Costof service declined approximately $20.6 million due to the sale of the NTELOSmarkets. In addition, Sprint customer service expenses decreased by $4.5million due to a lower subscriber base and network operations and customer careexpenses decreased by $5.6 million and $500,000, respectively.

 

*Cost ofequipment*.  Cost of equipment for the nine months ended September 30,2004 was approximately $4.2 million, compared to approximately $12.4 millionfor the nine months ended September 30, 2003, a decrease of approximately$8.2 million. Cost of equipment declined primarily as a result of less handsetsand accessories sold during 2004. We sold approximately 24,200 handsets at ourretail stores during the nine months ended September 30, 2004 compared toapproximately 67,300 sold during the nine months ended September 30, 2003.

 

*Selling andmarketing expenses*.  Selling and marketing expenses decreased toapproximately $18.8 million for the nine months ended September 30, 2004,compared to approximately $32.9 million for the nine months ended September 30,2003, a decrease of approximately $14.1 million. This decrease was attributableto the workforce reduction and lower spending to conserve cash during ourreorganization. We expect selling and marketing expenses to increase as weresume building our subscriber base.

 

*General andadministrative expenses*.  General and administrative expenses for thenine months ended September 30, 2004 were approximately $21.4 millioncompared to approximately $30.5 million for the nine months ended September 30,2003, a decrease of approximately $9.1 million. The decrease reflected areduction of  $2.7 million in Sprintmanagement fees and bad debt expense resulting from the sale of our NTELOSmarkets. The decrease in 2004 general and administrative expenses also includedapproximately $3.9 million reduction in legal and financial consulting fees, a$400,000 decrease in the Sprint PCS management fees, a decrease ofapproximately $200,000 in the other general expenses and a decrease of $1.9million for our provision for doubtful accounts, reflecting the positiveeffects of the increased credit quality of our subscriber base.

 

*Reorganizationitems*. Reorganization income, net of expense, was approximately $74.6 millionfor the period from January 1, 2004 to October 1, 2004 consisting ofapproximately $92.4 million of income from fresh-start adjustments, andexpenses of $17.8 million, including: $15.1 million of professional fees,$300,000 of expenses related to store closings, $1.6

 

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millionof key employee retention plan payments and $800,000 of employee separationexpenses. Reorganization expenses for the nine months ended September 30,2003 were $112.5 million, consisting of $18.1 million of amortization of debtissuance fees, $16.1 million of amortization of warrants, $73.8 million ofaccelerated accretion of the senior notes, $2.8 million related to storeclosings and $1.7 million of employee separation expenses.

 

*Non-cashcompensation expense*.  We recorded non-cash compensation expense ofapproximately $145,000 and $465,000 for the nine months ended September 30,2004 and 2003, respectively, for stock options granted in November 1999.These options were cancelled as a result of the reorganization on October 1,2004.

 

*Depreciationand amortization expense*.  Depreciation and amortization expenses decreasedby approximately $4.7 million to a total of approximately $24.6 million for thenine months ended September 30, 2004. The decrease was the result of theimpairment of intangible assets and property and equipment recorded in June 2003.

 

*Impairment ofintangible assets and property and equipment*.  We were not in compliance with the loancovenants under our senior credit facility as of June 30, 2003. As aresult, we completed an impairment assessment of our intangible assets andproperty and equipment in accordance with SFAS No. 144. This assessmentresulted in the Company recording impairment charges of approximately $39.2million on its intangible assets and approximately $34.6 million on itsproperty and equipment in June 2003. We performed these valuationsutilizing the current market information available.

 

*Gain (loss)on sale of property and equipment*.  In June, 2004 we completed the sale of ourNTELOS markets to Sprint, which included the economic interest in approximately92,500 subscribers and seven retail stores. This transaction resulted in a gainof approximately $42.1 million. For the nine months ended September 30,2003, we incurred a loss of approximately $200,000 related to the disposal ofassets from two of our closed retail stores and a planned store that neveropened.

 

*Interestincome and other, net*.  Interest income and other income for the ninemonths ended September 30, 2004 was approximately $800,000 compared toapproximately $700,000 in 2003 and consisted primarily of interest income. Thisincrease was due primarily from income received on increased restricted cash.

 

*Interestexpense, net*.  Interest expense for the nine months ended September 30,2004 was approximately $8.7 million, compared to approximately $42.6 millionfor the same period in 2003.

 

At September 30,2004, the interest rate on the $105.0 million term loan A borrowed under oursecured credit facility was 5.64%, while the interest rate on the $50.0 millionterm loan B was 6.14%. Interest expense on the secured credit facility was $5.8million and $6.9 million for the nine months ended September 30, 2004 and2003, respectively.

 

Weaccrue interest at a rate of 11 3/8% annually on our $125.0 million seniornotes issued in July 2004 and began making semi-annual interest paymentson January 15, 2005. Interest expense on the $125.0 million senior noteswas $2.9 million for the nine months ended September 30, 2004.

 

Upon thebankruptcy filing, we fully accreted our 14.00% discount notes to their facevalue of $295.0 million. Interest expense on the 14.00% discount notes wasapproximately $18.8 million for the nine months ended September 30, 2003.In addition, interest expense for the $175.0 million senior notes wasapproximately $14.9 million during the nine months ended September 30,2003, compared to no accrual for the comparable period in 2004 due to thesuspension of interest on the notes as of our bankruptcy petition date.

 

Interestexpense for the nine months ended September 30, 2003 also includedapproximately $1.9 million in amortization of deferred financing fees relatedto our secured credit facility, our discount notes and our senior notes. Wealso recorded approximately $800,000 in interest expense in the 2003 nine monthperiod related to commitment fees we paid on the unused portion of our securedcredit facility.

 

Capitalizedinterest for the nine months ended September 30, 2003 was approximately$700,000.

 

*Cancellationof Debt*. Cancellation of debt consisted of approximately $321.9 million ofadjustments to liabilities subject to compromise and equity in conjunction withthe Plan of Reorganization on October 1, 2004.

 

*Income taxbenefit*.  As aresult of the impairment charge recorded in 2003, we recorded a tax benefit ofapproximately $6.0 million due to the reduction of a deferred tax liabilityrelated to intangible assets.

 

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*Preferredstock dividend*.  We recorded preferred stock dividend expenseof approximately $10.1 million for the nine months ended September 30,2004 compared to $9.4 million for the nine months ended September 30,2003. The preferred stock was cancelled as a result of our reorganization on October 1,2004.

 

*Othercomprehensive income (loss)*.  Other comprehensive income of approximately$400,000 was recorded in the nine months ended September 30, 2003,reflecting gains on interest rate swap contracts that expired in 2003. During2001, we entered into two separate two-year interest rate swap contracts,effectively fixing $50.0 million of the term loan B borrowed under the securedcredit facility. Both swaps expired in 2003, and were not renewed.

 

***Predecessor Company YearEnded December 31, 2003 Compared to Year Ended December 31, 2002***

 

*Revenues*.  The following table sets forth abreakdown of our revenues by type:

 
| ** **           | ** ** | **Predecessor Company  For the Year Ended December 31,** | ** ** |
|----------------------|------------|---------------------------------------------------------------|------------|
| ** **           | ** ** | **2003**                                                      | ** ** | **2002** | ** ** |
| ** **           | ** ** | **Amount**                                                    | ** ** | **%** | ** ** | **Amount** | ** ** | **%** | ** ** |
| ** **           | ** ** | **(dollars in thousands)**                                    | ** ** |
| Subscriber  revenues |       | $                                                             | 188,672    |   | 74 | % | $ | 152,409 |   | 71 | % |
| Roaming revenues     |       | 61,728                                                        |       | 24 | % | 55,782 |   | 26 | % |
| Equipment revenues   |       | 5,166                                                         |       | 2 | % | 7,847 |   | 3 | % |
| Total revenues       |       | $                                                             | 255,566    |   | 100 | % | $ | 216,038 |   | 100 | % |

 

**Key Metrics**

 

Thefollowing discussion details key operating metrics and focuses on the detailsof our financial performance for the 12 months ended December 31, 2003,compared to the 12 months ended December 31, 2002.

 

*Subscriberadditions*.  As of December 31, 2003, we providedpersonal communication service to approximately 292,600 subscribers, comparedto approximately 270,900 subscribers as of December 31, 2002. For the yearsended December 31, 2003 and 2002, our net subscribers increased byapproximately 21,700 and 78,600 subscribers, respectively. Gross activationsslowed considerably during 2003, as we closed 20 of our retail stores by late July toconserve cash during the reorganization period.

 

*Churn*.  Churn for the year ended December 31,2003 was 3.0% compared to 3.5% for the year ended December 31, 2002.During 2002, we experienced increased churn as a result of an increase in thenumber of sub-prime credit subscribers we added whose service was involuntarilydiscontinued during the period.

 

**Results of Operations**

 

*Subscriberrevenues*.  Subscriber revenues for the year ended December 31,2003 were $188.7 million, compared to $152.4 million for the year ended December 31,2002, an increase of $36.3 million. Of the $188.7 million in 2003 revenues,$64.6 million related to subscribers in the NTELOS markets we divested in June,2004. The growth in subscriber revenues was primarily the result of growth inour subscriber base.

 

*Roamingrevenues*.  Roaming revenues increased to $61.7 millionfor the year ended December 31, 2003 from $55.8 million for the year endedDecember 31, 2002, an increase of $5.9 million. This increase resultedfrom the continued expansion of our service territory as well as expandingroaming agreements with wireless carriers. $20.7 million of our roaming revenuerelated to revenue from the NTELOS markets we sold in June, 2004.

 

*Equipmentrevenues*.  Equipment revenues for the year ended December 31,2003 were $5.2 million, compared to $7.8 million for the year ended December 31,2002, a decrease of approximately $2.6 million. The decrease in equipmentrevenues was the result of our efforts to conserve cash during ourreorganization period. We activated approximately 51,207 handsets at our retailstores in 2003, compared to approximately 75,726 activations in 2002.

 

*Cost ofservice*.  Cost ofservice for the year ended December 31, 2003 was $181.3 million, comparedto $167.1 million for the year ended December 31, 2002, an increase of$14.2 million. This increase reflected an increase of $4.7 million in roamingexpense and long-distance charges and the increase of $8.6 million in costsincurred under our network services agreement with NTELOS, both the result ofour subscriber growth during 2003. Our cost of service expense related toNTELOS

 

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wasapproximately $41.6 million in 2003, compared to $33.0 million in 2002. Networkoperations payroll expense decreased by approximately $1.4 million in 2003 as aresult of the reduction in work force implemented in July 2003. Customercare, activation and billing expenses increased by approximately $2.2 millionin 2003 due to the increase in our subscriber base. Variable connectivityexpenses, including interconnection and national platform expenses, decreasedby approximately $400,000, reflecting our ongoing efforts to reduceinterconnection charges by negotiating more favorable terms with our vendors.Other costs of service expenses increased in the aggregate by approximately$500,000 in 2003.

 

*Cost ofequipment*.  Cost of equipment for the year ended December 31,2003 was $13.4 million, compared to $19.2 million for the year ended December 31,2002, a decrease of $5.8 million. As stated earlier, we activated fewerhandsets at our retail stores in 2003 to conserve cash during ourreorganization period.

 

*Selling andmarketing expenses*.  Selling and marketing expenses were $39.6million for the year ended December 31, 2003, compared to $52.6 millionfor the year ended December 31, 2002, a decrease of $13.0 million. Weclosed 20 of our retail stores by late July 2003, thus incurringapproximately $900,000 less in retail store costs during 2003. In addition, wedecreased our advertising in 2003, resulting in savings of approximately $7.0million. Commissions paid to third parties declined by approximately $1.8million in 2003, and subsidies on handsets sold by third parties decreased $3.3million.

 

*General andadministrative expenses*.  General and administrative expenses for theyear ended December 31, 2003 were approximately $38.4 million, compared toapproximately $41.7 million in 2002, a decrease of approximately $3.3 million.The decrease reflected an approximate $8.0 million reduction in our provisionfor doubtful accounts, due primarily to the write-off of ClearPay and certainother sub-prime subscribers (defined in “Business — Products and Services —Account spending limits”) in 2002; an approximate $3.0 million increase inSprint management fees, due to higher subscriber revenues in 2003; and anincrease of approximately $1.7 million in other general expenses due primarilyto higher professional fees.

 

*Reorganizationexpenses*.  We recorded approximately $118.8 million of reorganizationexpenses for the year ended December 31, 2003 related to both the closingof our retail stores and filing for bankruptcy protection on August 15,2003. These expenses include approximately $1.7 million for employeeseparations, $2.0 million related to the closing of our stores, $800,000 inlease commitments, $5.7 million of professional fees, $600,000 in payments toemployees under our key employee retention plan and $108.0 million related tothe write-off of our debt-related expenses, including $89.9 million inaccelerated accretion of the senior discount notes and $18.1 million of debtissuance costs.

 

*Non-cashcompensation expense*.  For the years ended December 31, 2003and 2002, we recorded stock-based compensation expense of approximately $600,000and $700,000, respectively. Prior to the bankruptcy filing, the scheduledannual non-cash compensation expense for these stock options was to beapproximately $620,000 in 2003, $193,000 in 2004 and $71,000 in 2005. However,under the Plan of Reorganization, the stock options were cancelled and underfresh-start accounting the recognition of the expense ceased.

 

*Depreciationand amortization expenses*.  For the years ended December 31, 2003and 2002, depreciation and amortization expenses were $111.3 million and $40.3million, respectively, or an increase of $71.0 million. The increase in 2003reflected approximately $34.6 million related to the impairment of property andequipment and $39.2 million related to the impairment of intangible assets. Thesecharges resulted from an asset impairment assessment in accordance with SFAS No. 144.

 

For theyear ended December 31, 2003, depreciation and amortization expensesincluded $900,000 of expense related to the intangible asset associated withthe Bright PCS acquisition, compared to $1.7 million recorded in the year endedDecember 31, 2002. Additionally, in accordance with the adoption of SFAS No. 144,the remaining intangible asset value of approximately $27.9 million associatedwith the Bright PCS acquisition was considered impaired and was written off in2003.

 

Depreciationand amortization expenses for the years ended December 31, 2003 and 2002also included approximately $400,000 and $800,000, respectively, related to amarketing agreement established between Sprint and us in 2000. In September,2000, we negotiated an agreement with Sprint that gave us the rights to provideservices in certain new markets in exchange for stock warrants, which were tobe issued by us to Sprint the earlier of an initial public offering or July 31,2003. As a result of this agreement, we established an intangible asset thatwas to be amortized over the life of the management agreement with Sprint,which represented approximately $800,000 in annual amortization expense.  The remaining intangible asset value of $11.3million was considered impaired in accordance with SFAS No. 144 andwritten off in 2003. As part of the Plan of Reorganization, the warrants werecancelled.

 

Depreciationand amortization expenses for 2002 included approximately $3.5 million ofexpenses related to accelerated depreciation on impaired assets. During 2002,we launched switches in Tennessee and Pennsylvania to replace certain switchingequipment in Chillicothe, Ohio, which was disconnected and taken out of serviceAs a result, the disconnected switching equipment was considered an impairedasset as defined by SFAS No. 144 and the non-depreciated portion of theasset value was written off in 2002.

 

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Depreciationand amortization expenses for 2002 also included goodwill amortization ofapproximately $13.2 million, which reflected the write off of the remaininggoodwill balance on the Company’s balance sheet as a result of the adoption ofSFAS No. 142 as of December 31, 2001.

 

Loss ondisposal of PCS assets.  For the yearsended December 31, 2003 and 2002, we incurred losses of approximately$200,000 and $600,000, respectively, related to the sale of network equipmentand corporate-owned vehicles.

 

Impairmentof goodwill and impact of acquisition-related deferred taxes.  On December 31, 2002, we performed theannual valuation assessment of goodwill in accordance with SFAS No. 142.As a result of this valuation, we recorded goodwill impairment of approximately$13.2 million, which eliminated the entire balance of goodwill as of December 31,2002. The fair value was measured based on projected discounted futureoperating cash flow using a discount rate reflecting our average cost of funds.

 

*Interestincome and other, net*.  Interest income and other for the year ended December 31,2003 was approximately $900,000, compared to approximately $3.0 million in2002. This decrease in 2003 was due primarily to a lower average balance ofshort-term investments during 2003 and lower short-term interest rates.

 

*Interestexpense, net*.  Interest expense for the year ended December 31,2003 was approximately $44.7 million, compared to approximately $60.6 millionin 2002. The decrease in interest expense was principally the result ofelimination of the annual accretion on our discount notes in 2003. Upon thebankruptcy filing, we fully accreted the discount notes to their face value of$295.0 million, accounting for this as reorganization expense, as describedabove. In addition, interest on the $175.0 million notes was also suspended asof the bankruptcy petition date, August 15, 2003.

 

Interestexpense on the senior secured credit facility was $9.0 million and $9.3 millionduring the years ended December 31, 2003 and 2002, respectively. Intereston the outstanding balance of our senior secured credit facility accrued atLIBOR plus a specified margin. On June 29, 2002, we agreed to severalchanges in the senior secured credit facility including a 25 basis pointincrease in the margin on the annual interest rate. As of December 31,2003, the interest rate on the $105.0 million term loan A borrowed under oursenior secured credit facility was 5.12%, while the interest rate on the $50.0million term loan B was 5.62%.

 

Interestexpense on the discount notes was approximately $18.8 million and $27.2 millionduring the years ended December 31, 2003 and 2002, respectively. Weaccrued interest at a rate of 14% annually on our senior discount notes issuedin September 2000 and, absent our bankruptcy filing, would have beenrequired to pay interest semi-annually in cash beginning in October 2005.Unaccreted interest expense on the discount notes was approximately $108.7million as of December 31, 2002. Unaccreted interest expense ofapproximately $89.9 million was expensed to reorganization expense at the timeof the bankruptcy filing.

 

Interestexpense on the 13.75% senior notes was approximately $14.9 million in 2003 andapproximately $24.1 million in 2002. On June 15, 2002, we began making semi-annualinterest payments on our senior notes issued in December 2001 at an annualrate of 13.75%. Under the terms of the senior notes, cash to cover the firstfour semi-annual interest payments was placed in an escrow account. The lastinterest payment was not paid from the escrow account in December 2003 asscheduled. Thus we retained $12.0 million of restricted cash on our balancesheet as of December 31, 2003. The $12.0 million of restricted cash wasdistributed to the bondholders in October 2004 as part of the Plan of Reorganization.

 

Interestexpense for the years ended December 31, 2003 and 2002, also includedapproximately $1.9 million and $2.8 million, respectively, in amortization ofdeferred financing fees related to our senior secured credit facility, oursenior discount notes and our senior notes. As a result of our bankruptcyfiling, we expensed the remaining balance of approximately $18.1 million indebt issuance costs, to reorganization expense, as described above. Interestexpense for 2003 and 2002 also included approximately $800,000 and $1.6million, respectively, in commitment fees paid on the unused portion of oursenior secured credit facility.

 

Capitalizedinterest for the years ended December 31, 2003 and 2002 was approximately$700,000 and $4.4 million, respectively.

 

*Income tax(expense) benefit*.  In 2003, we recorded an income tax benefit ofapproximately $6.0 million related to a deferred tax liability. In conjunctionwith the write off of the intangible assets in accordance with SFAS No. 144as describer earlier, the deferred tax liability created from the intangibleassets associated with the Bright acquisition was eliminated, resulting in thetax benefit. We did not record any income tax benefit for the year ended December 31,2002 because of the uncertainty of generating future taxable income to be ableto recognize current net operating loss carryforwards.

 

38

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*Net loss*.  Our net loss for the year ended December 31,2003 was $285.8 million, compared to $176.9 million for the year ended December 31,2002. The increase in our net loss reflected reorganization expenses and thewrite-off of impaired assets.

 

*Preferredstock dividend*.  Our convertible preferred stock paid a stockdividend at the rate of 7.5% per annum, payable semi-annually commencing May 1,2001. The dividends were to be paid with additional shares of convertiblepreferred stock. Through December 31, 2003, we paid a cumulative total of$35,941,922 of dividends in additional shares of convertible preferred stock.As of December 31, 2003, there were 32,757,537 shares of convertiblepreferred stock outstanding. Under our Plan of Reorganization, the convertiblepreferred stock was cancelled. During our bankruptcy proceedings, we continuedto accrue the dividend but did not pay the dividend.

 

O*ther comprehensive income (loss)*.  During 2001, we entered into two separatetwo-year interest rate swap contracts, effectively fixing $50.0 million of theterm loan B borrowed under the senior secured credit facility. The swapcontracts expired in 2003 and were not renewed. Other comprehensive income ofapproximately $395,000 and $443,000 was recorded for the years ended December 31,2003 and 2002, respectively.

 

**Liquidity and Capital Resources**

 

As of December 31,2004 (Successor Company), we had $55.5 million in cash and cash equivalentscompared to $70.7 million as of December 31, 2003 (Predecessor Company).

 

With thenet proceeds from the offering of the senior notes and subject to our abilityto manage subscriber growth and achieve operating efficiencies, cash and cashequivalents, combined with cash flows from operations, are expected to besufficient to fund any operating losses and working capital and to meet capitalexpenditure needs and debt service requirements for the next twelve months.

 

*Statement ofcash flow for the year ended December 31, 2004*.  Net cash used in operatingactivities for the period October 1, 2004 to December 31, 2004 wasapproximately $2.1 million. This reflects the continuing use of cash for ouroperations to enroll subscribers and operate our network. The net loss ofapproximately $24.0 million was offset by approximately $25.5 million indepreciation, offset by approximately $3.6 million in other working capitalchanges. Net cash used in operating activities for the nine month period ended September 30,2004 was approximately $7.6 million. This reflects the application offresh-start accounting, the gain from the sale of the NTELOS markets, and thecontinuing use of cash for our operations to enroll subscribers and operate ournetwork.  Net income of approximately$427.1 million, which included approximately $17.8 million of reorganizationexpenses related to the bankruptcy filing, was offset by approximately $321.9million from the cancellation of debt, $92.4 million from the gain onfresh-start adjustments, $42.1 million from the gain on Sprint Transaction andother working capital changes of approximately $2.9 million. These adjustmentswere offset by approximately $24.6 million in depreciation.

 

Net cashprovided by investing activities for the period October 1, 2004 to December 31,2004 was approximately $9.4 million, consisting of approximately $12.0 millionin restricted cash that was distributed according to the Plan of Reorganizationoffset by $2.6 million of capital expenditures to upgrade our network. Net cashprovided by investing activities for the nine month period ended September 30,2004 was approximately $31.5 million, consisting of approximately $33.0 millionof proceeds received from the Sprint Transaction and $100,000 of proceeds fromthe sale of property and equipment, offset by approximately $1.6 million ofcapital expenditures for network equipment. We expect capital expenditures toincrease in 2005 as we replace and upgrade equipment in our Ohio, Indiana andTennessee markets with Nortel equipment. This replacement should be completed during 2005 and is estimated tocost approximately $13.0 million, less approximately $4.5 million from the saleof old equipment.  Total capitalexpenditures anticipated during 2005 is estimated to be approximately $19.0million, less approximately $4.5 million from the sale of old equipment for anet expenditure of $14.5 million.

 

Net cashused by financing activities for the period October 1, 2004 to December 31,2004 was approximately $12.1 million consisting of restricted cash and accruedinterest that was distributed according to the Plan of Reorganization. Net cashused by financing activities for the period ended September 30, 2004 wasapproximately $34.2 million, consisting of $125.0 million of senior notes,offset by $155.0 million in repayments on the secured credit facilities andapproximately $4.2 million in deferred financing fees on the $125.0 millionsenior notes. At this time, we do not plan on any significant financingactivities in 2005.

 

*Statement ofcash flow for the year ended December 31, 2003*.  Net cash used in operatingactivities for the year ended December 31, 2003 was approximately $10.3 million.This reflects the continuing use of cash for our operations to develop oursubscriber base, including but not limited to providing service in our marketsand the costs of acquiring new subscribers. The net loss of approximately$285.8 million was partially offset by approximately $110.1 million of non-cashrestructuring charges,

 

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$37.5million of depreciation expense, $73.8 million write-off related to impairedassets, as well as increases in accrued liabilities and the payable to Sprint.

 

Net cashused in investing activities for the year ended December 31, 2003 wasapproximately $5.2 million and consisted entirely of capital expenditures fornetwork equipment.

 

Net cashprovided by financing activities for the year ended December 31, 2003 was$24 and consisted of 200 shares of stock options exercised.

 

*Debtcovenants*.  The indenture for the senior notesestablished new debt covenants. As of December 31, 2004, we were incompliance with such covenants.

 

**Contractual Obligations**

 

We areobligated to make future payments under various contracts we have entered into,including amounts pursuant to non-cancelable operating lease agreements foroffice space, cell sites, vehicles and office equipment.  Future minimum contractual cash obligationsfor the next five years and in the aggregate as of December 31, 2004, areas follows: 

 
| ** **            | ** ** | **Payments due by Period**       | ** ** |
|-----------------------|------------|----------------------------------|------------|
| ** **            | ** ** | **Year Ended December 31,** | ** ** |
| ** **            | ** ** | **(dollars in thousands)**       | ** ** |
| ** **            | ** ** | **Total**                        | ** ** | **2005** | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **Thereafter** | ** ** |
| Senior notes          |       | $                                | 125,000    |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | 125,000 |   |
| Purchase  Obligations |       | 14,000                           |       | 13,000 |   | 1,000 |   | — |   | — |   | — |   | — |   |
| Operating Leases      |       | 36,670                           |       | 14,022 |   | 9,438 |   | 4,667 |   | 3,391 |   | 2,990 |   | 2,162 |   |
| Total                 |       | $                                | 175,670    |   | $ | 27,022 |   | $ | 10,438 |   | $ | 4,667 |   | $ | 3,391 |   | $ | 2,990 |   | $ | 127,162 |   |

 

Ourtotal current liabilities were $27.8 million as of December 31, 2004.  Cash interest expense is expected to beapproximately $14.2 million per year during the term of the notes.

 

On March 17,2005, we entered into an Agreement and Plan of Merger with iPCS, another PCSAffiliate of Sprint.  If the merger isconsummated, we will be merged with and into iPCS and the senior notes willbecome the direct obligation of iPCS.  Asof March 17, 2005, assuming the merger had been consummated prior to suchdate, iPCS, as the surviving company, would have had $290.0 million ofindebtedness for borrowed money on a pro forma basis.

 

**Seasonality**

 

Ourbusiness is subject to seasonality because the wireless telecommunications industryhistorically has been heavily dependent on fourth calendar quarter results.Among other things, the industry relies on significantly higher subscriberadditions and handset sales in the fourth calendar quarter as compared to theother three calendar quarters.

 

**Inflation**

 

Webelieve that inflation has not had and will not have a material adverse effecton our results of operations.

 

**Critical Accounting Policies andEstimates**

 

*Allowancefor doubtful accounts*.  Estimates are used in determining our allowancefor doubtful accounts receivable, which are based on a percentage of ouraccounts receivables by aging category. The percentage is derived byconsidering our historical collections and write-off experience, and currentaging of our accounts receivable and credit-quality trends, as well as Sprint’scredit policy.  A change in the actualwrite-offs experienced could have a material impact on our financialstatements.  The following table providescertain statistics on our allowance for doubtful accounts receivable:

 
| ** **                                                    | ** ** | **Successor Company**               | ** ** | **Predecessor Company**              | ** ** |
|---------------------------------------------------------------|------------|-------------------------------------|------------|--------------------------------------|------------|
| ** **                                                    | ** ** | **Period Ended  December 31,** | ** ** | **Period Ended  September 30,** | ** ** | **Year Ended December 31,** | ** ** |
| ** **                                                    | ** ** | **2004**                            | ** ** | **2004**                             | ** ** | **2003** | ** ** | **2002** | ** ** |
| Provision as a%  of subscriber revenue                        |       | 6                                   | %          | 3                                    | %          | 4 | % | 10 | % |
| Write-offs, net  of recoveries as a% of subscriber revenue    |       | 6                                   | %          | 3                                    | %          | 4 | % | 10 | % |
| Allowance for  doubtful accounts as a% of accounts receivable |       | 9                                   | %          | 8                                    | %          | 8 | % | 11 | % |

 

 

*Reliance onthe timeliness and accuracy of data received from Sprint PCS*.  We place significant reliance onSprint PCS as a service provider in terms of the timeliness and accuracy offinancial and statistical data related to our subscribers that

 

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wereceive on a periodic basis from Sprint PCS and use in the preparation of ourfinancial statements. We make estimates in terms of cash flow, revenue, cost ofservice, selling and marketing costs and the adequacy of our allowance foruncollectible accounts based on this data we receive from Sprint PCS. We obtainassurance as to the accuracy of the data through analytical review and relianceon the service auditor’s report on Sprint PCS’ internal control processingprepared by Sprint PCS’ external service auditor. Inaccurate, incomplete oruntimely data from Sprint PCS could have a material adverse effect on ourresults of operations and cash flow, as well as on our ability to report ourresults.

 

*Revenuerecognition*.  We recognize revenues when persuasiveevidence of an arrangement exists, services have been rendered, the price tothe buyer is fixed or determinable, and collectibility is reasonably assured.We recognize service revenue from our subscribers as they use the service. Wepro-rate monthly subscriber revenue over the billing period and record airtimeusage in excess of the pre-subscribed usage plan. Our subscribers pay anactivation fee when they initiate service. We reduce recorded service revenuefor billing adjustments. Effective July 1, 2003, we adopted EITF No. 00-21,Accounting for Revenue Arrangements with Multiple Deliverables. This EITFguidance addresses accounting for arrangements that involve multiplerevenue-generating activities. In applying this guidance, separate contractswith the same party, entered into at or near the same time, will be presumed tobe a bundled transaction, and the consideration will be measured and allocatedto the separate units of the arrangement based on their relative fair values.The guidance in EITF 00-21 became effective for revenue arrangements enteredinto for quarters beginning after June 15, 2003. We elected to apply thisguidance prospectively from July 1, 2003. Prior to the adoption of EITF 00-21,under the provisions of SAB No. 101, we accounted for the sale of ourhandsets and our subsequent service to the customer as a single unit ofaccounting because our wireless service is essential to the functionality ofour handsets. Accordingly, we deferred all activation fee revenue and itsassociated direct costs and amortized these revenues and costs over the averagelife of our subscribers, which we estimate to be 24 months. Under EITF 00-21 weno longer need to consider whether customers can use their handsets without ourwireless service provided to them. Because we meet the criteria stipulated inEITF 00-21, the adoption of EITF 00-21 requires us to account for the sale ofthe handset as a separate unit of accounting from the subsequent service to thecustomer. With the adoption of EITF 00-21, we now recognize activation feerevenue generated from our retail stores as equipment revenue. In addition, werecognize the portion of the direct activation fee costs related to thehandsets sold in our retail stores. Subsequent to July 1, 2003, we havecontinued to apply the provisions of SAB No. 101 and have deferred andamortized activation fee revenue and costs generated by subscribers activatedother than through our retail stores.

 

Weparticipate in the Sprint PCS national and regional distribution program inwhich national retailers such as RadioShack and Best Buy sell Sprint PCSproducts and services. In order to facilitate the sale of Sprint PCS productsand services, national retailers purchase wireless handsets from Sprint forresale and receive compensation from Sprint PCS for products and services sold.For industry competitive reasons, Sprint PCS subsidizes the price of thesehandsets by selling the handsets at a price below cost. Under our affiliationagreements with Sprint PCS, when a national retailer sells a handset purchasedfrom Sprint PCS to a subscriber in our territory, we are obligated to reimburseSprint PCS for the handset subsidy that Sprint originally incurred. Thenational retailers sell Sprint wireless services under the Sprint and SprintPCS brands and marks. We do not receive any revenues from the sale of wirelesshandsets by national retailers. We classify these Sprint PCS wireless handsetsubsidy charges as a sales and marketing expense for a wireless handset sale toa new subscriber and classify these subsidies as a cost of service for awireless handset upgrade to an existing subscriber.

 

Werecognized approximately $19,000 for the period October 1, 2004 to December 31,2004, $2,560,000 for the period January 1, 2004 to September 30,2004, $5,182,000 in 2003 and $2,992,000 in 2002 of both activation fee revenueand customer activation expense, and had deferred approximately $279,000 and$3,749,000 of activation fee revenue and direct customer activation expense asof December 31, 2004 and 2003, respectively. In applying fresh-startreporting, the deferred activation revenue and expense were deemed to have azero value and were eliminated in the fresh-start adjustments.

 

Amanagement fee of 8% of collected PCS revenues from Sprint PCS subscribersbased in our territory is accrued as services are provided, remitted to SprintPCS and recorded as general and administrative expense. Revenues generated fromthe sale of handsets and accessories, inbound and outbound Sprint PCS roamingfees, and roaming services provided to Sprint PCS customers who are not basedin our territory are not subject to the 8% affiliation fee. Expense related tothe management fees charged under the agreement was approximately $2,421,000for the period October 1, 2004 to December 31, 2004, $9,559,000 forthe period January 1, 2004 to September 30, 2004, $15,020,000 for theyear ended December 31, 2003 and $12,027,000 for the year ended December 31,2002.

 

*Impairmentof long-lived assets and goodwill*.  We account for long-lived assets and goodwillin accordance with the provisions of SFAS No. 144, Accounting for theImpairment or Disposal of Long-Lived Assets and SFAS No. 142, Goodwill andOther Intangible Assets. SFAS No. 144 requires that long-lived assets andcertain identifiable intangibles be reviewed for impairment whenever events orchanges in circumstances indicate that the carrying amount of an asset may notbe recoverable. Recoverability of assets to be held and used is measured by acomparison of the carrying amount of an asset to future net cash flow expectedto be generated by the asset. If such assets are considered to be impaired, theimpairment to be recognized is measured by the amount by which the carryingamount of the assets exceeds the fair value of the assets. Assets to bedisposed of

 

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arereported at the lower of the carrying amount or fair value less costs to sell.At December 31, 2004, our assets were not deemed to be impaired. Werecorded approximately $3.5 million related to accelerated depreciation on animpaired asset for the year ended December 31, 2002. SFAS No. 142requires annual tests for impairment of goodwill and intangible assets thathave indefinite useful lives and interim tests when an event has occurred thatmore likely than not has reduced the fair value of such assets. We recorded agoodwill impairment of $13.2 million during the year ended December 31,2002.

 

We werenot in compliance with the loan covenants under our senior secured creditfacility as of June 30, 2003. This created the need for an impairmentassessment of our intangible assets and property and equipment as required bySFAS No. 144. Therefore, we projected future undiscounted cash flows anddetermined they were insufficient to recover the carrying amounts for theintangible assets and property and equipment. This required us to recognize animpairment loss for the excess of carrying value over fair value. To determinefair value, we performed a valuation utilizing a cost approach adjusted foritems such as technological and functional obsolescence as appropriate.

 

Wedetermined that the carrying value of the intangible assets exceeded the fairvalue of the assets. As a result, we recorded impairment on the intangibleassets of approximately $39.2 million. As a result of the impairment charge, werecorded a tax benefit of $6.0 million due to the reduction of a deferred taxliability related to the intangibles. As of June 30, 2003, net deferredincome taxes were zero.

 

Additionally,we determined that the fair market value of the property and equipment was lessthan the carrying value of the assets. As a result, we recorded an impairmenton property and equipment of approximately $34.6 million.

 

*Deferredtaxes*.  As part ofthe process of preparing our consolidated financial statements, we are requiredto estimate our taxes in each of the jurisdictions of our operations. Thisprocess involves management estimating the actual current tax expense togetherwith assessing temporary differences resulting from differing treatment ofitems for tax and accounting purposes. These differences result in deferred taxassets and liabilities, which are included within the consolidated balancesheets. We must then assess the likelihood that the deferred tax assets will bereceived from future taxable income and to the extent recovery is not likely,we must establish a valuation allowance. Future taxable income depends on theability to generate income in excess of allowable deductions. To the extent weestablish a valuation allowance or increase this allowance in a period, anexpense is recorded within the tax provision in the consolidated statement ofoperations. As of December 31, 2003 and December 31, 2004, we haverecognized a valuation allowance for the full amount of the net deferred taxasset, causing it to be reported with a net balance of zero. See Note 8 in theNotes to Consolidated Financial Statements for the year ended December 31,2004 included elsewhere in this annual report on Form 10-K. Significantmanagement judgment is required in determining our provision for income taxes,our deferred tax assets and liabilities and any valuation allowance recordedagainst net deferred tax assets. In the event that actual results differ fromthese estimates or we adjust these estimates in future periods, we may need toestablish an additional valuation allowance that could materially impact ourfinancial condition and results of operations. Income taxes are accounted forunder the asset and liability method. Deferred tax assets and liabilities arerecognized for the future tax consequences attributable to differences betweenthe financial statement carrying amounts of existing assets and liabilities andtheir respective tax bases and operating loss and tax credit carryforwards.Deferred tax assets and liabilities are measured using enacted tax ratesexpected to apply to taxable income in the years in which those temporarydifferences are expected to be recovered or settled.

 

**Recent Accounting Pronouncements**

 

In December 2004,the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment, whichreplaces SFAS No. 123, Accounting for Stock-Based Compensation andsupercedes APB Opinion No. 25, Accounting for Stock Issued toEmployees.  SFAS No. 123R requiresall share-based payments to employees, including grants of employee stockoptions, to be recognized in the financial statements based on their fairvalues.  Under SOP 90-7, pronouncementsrequired to be implemented within 12 months of adopting fresh-start accountingshould be implemented as of the fresh-start date.  Thus we adopted SFAS No. 123R.  We recorded approximately $641,000 incompensation expense and expect to record $3.3 million in each of 2005 and2006.  The pro forma disclosurespreviously permitted under SFAS No. 123 no longer will be an alternativeto financial statement recognition. SFAS No. 123R is discussed further inNote 3 and did not have a material effect on our consolidated financialstatements.

 

In November 2004,the FASB issued SFAS No. 151, Inventory Costs, an amendment of ARB No. 43,Chapter 4.  The amendments made by SFAS No. 151clarify that abnormal amounts of idle facility expense, freight, handlingcosts, and wasted materials (spoilage) should be recognized as current-periodcharges and require the allocation of fixed production overheads to inventorybased on the normal capacity of the production facilities. SFAS No. 151 iseffective for fiscal years beginning after June 15, 2005. The adoption ofSFAS No. 151 is not expected to have a material impact on the Company’sfinancial position and results of operations.

 

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**Off-Balance Sheet Arrangements**

 

Otherthan operating lease commitments discussed in the notes to our auditedconsolidated financial statements included elsewhere in this annual report on Form 10-K,we have no off-balance sheet arrangements that would have a current or futureeffect on the financial condition, changes in financial condition, revenues orexpenses, results or operations, liquidity, capital expenditures or capitalresources.

 

As partof our ongoing business, we do not participate in transactions that generaterelationships with unconsolidated entities or financial partnerships, such asentities often referred to as structured finance or special purpose entities (“SPEs”),which would have been established for the purpose of facilitating off-balancesheet arrangements or other contractually narrow or limited purposes. As of December 31,2004, we were not involved in any material unconsolidated SPE transaction.

 

### **Item 7A.**                          Quantitative andQualitative Disclosures About Market Risk

### ** **

We donot engage in commodity futures trading activities and do not enter intoderivative financial instruments for speculative trading purposes. We also donot engage in transactions in foreign currencies that would expose us toadditional market risk. Although in the past we have managed interest rate riskon our outstanding long-term debt through the use of fixed and variable-ratedebt and interest rate swaps, we currently have no outstanding swaps.

 

In thenormal course of business, our operations are exposed to interest rate risk.Our primary interest rate risk exposure relates to (i) our ability torefinance our fixed-rate notes at maturity at market rates, and (ii) theimpact of interest rate movements on our ability to meet interest expenserequirements and financial covenants under our debt instruments.

 

As of December 31,2004, we had outstanding borrowings of approximately $125.0 million under oursenior notes issued in 2004. The rate of interest on the senior notes is fixedat 11 3/8%. To the extent that we incur any floating rate financing in thefuture, we would be exposed to interest rate risk on such indebtedness, asvariable interest rates may increase substantially.

 

## **Item 8.            Financial Statements andSupplementary Data**

## ** **

Financialstatements and supplementary data required by this item are submitted as aseparate section of this annual report on Form 10-K. See “Index toConsolidated Financial Statements” commencing on page F-1 herein.

 

## **Item 9.            Changes In and Disagreements WithAccountants On Accounting and Financial Disclosure**

## ** **

None.

 

### **Item 9A.**                          Controls and Procedures

### ** **

**Disclosure Controls and InternalControls**

 

Ourdisclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) underthe Exchange Act) (“Disclosure Controls”) are controls and procedures that aredesigned with the objective of ensuring that information required to bedisclosed in our reports filed under the Exchange Act, such as this annualreport, is recorded, processed, summarized and reported within the time periodsspecified in the SEC’s rules and forms. Disclosure Controls are also designed with the objective of ensuringthat this information is accumulated and communicated to our management,including our Chief Executive Officer and our Chief Financial Officer, asappropriate to allow timely decisions regarding required disclosure.

 

**Limitations on the Effectivenessof Controls**

 

Ourmanagement, including our Chief Executive Officer and our Chief FinancialOfficer, does not expect that our Disclosure Controls will prevent all errorsand all fraud.  A control system, nomatter how well conceived and operated, can provide only reasonable, notabsolute, assurance that the objectives of the control system are met. Further,the design of a control system must reflect the fact that there are resourceconstraints, and the benefits of controls must be considered relative to theircosts.

 

Becauseof the inherent limitations in all control systems, no evaluation of controls canprovide absolute assurance that all control issues and instances of fraud, ifany, within our company have been detected. These inherent limitations include the realities that judgments indecision-making can be faulty and that breakdowns can occur because of a simpleerror or mistake.  Additionally, controlscan be circumvented by the individual acts of some persons, by collusion of twoor more people or by management override of the control.  Moreover, the design of any system ofcontrols is also based in part upon certain assumptions about the likelihood offuture events.

 

43

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Notwithstandingthe foregoing limitations, we believe that our Disclosure Controls providereasonable assurances that the objectives of our control system are met.

 

**Quarterly Evaluation of theCompany’s Disclosure Controls**

 

As of December 31,2004, the last day of the period covered by this report, an evaluation wascarried out under the supervision and with the participation of our management,including our Chief Executive Officer and our Chief Financial Officer, of theeffectiveness of the design and operation of our Disclosure Controls.  Based upon that evaluation, our ChiefExecutive Officer and our Chief Financial Officer concluded that the design andoperation of our Disclosure Controls were effective at the reasonable assurancelevel to ensure that material information related to our company which isrequired to be disclosed in reports filed under the Securities Exchange Act of1934 is recorded, processed, summarized and reported within the time periodsspecified in SEC rules and forms.

 

**Changesin Internal Controls Over Financial Reporting**

 

Therehave not been any changes in our internal controls over financial reporting (assuch term is defined in Rules 13a-15(f) and 15d-15(f) under theExchange Act) during our fiscal fourth quarter ended December 31, 2004that have materially affected, or are reasonably likely to materially affect,our internal controls over financial reporting.

 

We placereliance on Sprint PCS to adequately design its internal controls with respectto the processes established to provide financial information and otherinformation to us and the other PCS Affiliates of Sprint. To address thisissue, Sprint engages an independent registered public accounting firm toperform a periodic evaluation of these controls and to provide a “Report onControls Placed in Operation and Tests of Operating Effectiveness forAffiliates” under guidance provided in Statement of Auditing Standards No. 70.This report is provided bi-annually to us.

 

#### **Item 9B.         Other Information**

#### ** **

None.

 

# **Part  III**

# ** **

## **Item 10.         Directors and Executive Officers of theRegistrant**

## ** **

The following table representsinformation with respect to our directors and executive officers.

 
| **Name**              | ** ** | **Age** | ** ** | **Position**                                    | ** ** |
|-----------------------|------------|---------|------------|-------------------------------------------------|------------|
| William A.  McKell    |       | 44      |       | Director, President and Chief Executive Officer |       |
| Peter M. Holland      |       | 39      |       | Director, Chief Financial Officer               |       |
| Alan G. Morse         |       | 45      |       | Chief Operating Officer                         |       |
| Monesa S. Skocik      |       | 43      |       | Senior Vice President, Operations               |       |
| Lawrence J.  Askowitz |       | 39      |       | Director                                        |       |
| Timothy G. Biltz      |       | 46      |       | Director                                        |       |
| Anthony Civale        |       | 30      |       | Director                                        |       |
| Jeffrey W. Jones      |       | 43      |       | Director                                        |       |
| Robert A. Katz        |       | 38      |       | Director                                        |       |

 

 

*William A.McKell* has served as a director, President and ChiefExecutive Officer of Horizon PCS since its inception in April 2000 and hasserved as President, Chief Executive Officer and Chairman of the Board ofHorizon Personal Communications since May 1996.  Mr. McKell has been President of and amember of the Management Committee of Bright PCS since its formation in September 1999.  Mr. McKell served as Vice President ofNetwork Services from January 1996 to April 1996 and Director ofNetwork Services from August 1994 to December 1995 for TheChillicothe Telephone Company, a local telephone company. Mr. McKell waschairman of the board of directors, president and chief executive officer ofHorizon PCS at the time Horizon PCS filed voluntary petitions forreorganization under Chapter 11 of the United States Bankruptcy Code.

 

*Peter M.Holland* has served as the Chief Financial Officer ofHorizon PCS since its inception in April 2000 and has served as the ChiefFinancial Officer of Horizon Personal Communications since November 1999.  Mr. Holland has been a member of themanagement committee of Bright PCS since its formation in September 1999.  He served as Vice President of Finance andTreasurer of Horizon Telcom from November 1999 through September 2004.  From May 1996 to December 1999, Mr. Hollandwas a principal and owner of The Pinnacle Group located in Langley,Washington.  Mr. Holland started hiscareer in

 

44

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telecommunicationswith Ernst & Young’s telecommunications consulting group and was aCertified Public Accountant.  Mr. Hollandwas a director and chief financial officer of Horizon PCS at the time HorizonPCS filed voluntary petitions for reorganization under Chapter 11 of the UnitedStates Bankruptcy Code.

 

*Alan G.Morse* was appointed Chief Operating Officer of theCompany on March 1, 2002. Previously, Mr. Morse was chief operating officer of TelePacificCommunications, Inc., an integrated telecommunications provider operatingin California and Nevada from 2000 to 2001. From 1996 to 2000, he was area vice president for Sprint PCS, where hemanaged the build-out, launch and operation of Sprint PCS businesses inCleveland, Cincinnati, Columbus, Indianapolis and Pittsburgh.  He has held management positions with NextelCommunications Inc. and Cellular One of Ohio and Michigan.  Mr. Morse was chief operating officer ofHorizon PCS at the time Horizon PCS filed voluntary petitions forreorganization under Chapter 11 of the United States Bankruptcy Code.

 

*Monesa S.Skocik* has served as a Vice President of Horizon PCSsince its inception in April 2000 and of Horizon Personal Communicationssince August 1999.  Ms. Skocikhas over eight years of telecommunications experience.  Ms. Skocik is responsible for ourcoordination, management and implementation of Sprint PCS’ new productlaunches, compliance monitoring and other corporate customer servicefunctions.  Since March 1997, Ms. Skocikhas held various positions with Horizon Personal Communications, including VicePresident of Customer Operations, Director — Customer Service and Manager —Customer Care.  Ms. Skocik was vicepresident, external affairs of Horizon PCS at the time Horizon PCS filedvoluntary petitions for reorganization under Chapter 11 of the United StatesBankruptcy Code.

 

*Lawrence J.Askowitz* was appointed as a director ofHorizon PCS in September 2004 pursuant to our Plan of Reorganization.   Mr. Askowitz is a partner inZelnickMedia, a private equity firm that acquires and operates media andtelecom companies.  Prior to joiningZelnickMedia in 2004, Mr. Askowitz spent over sixteen years as aninvestment banker for Lazard, Credit Suisse First Boston and Deutsche Bank.

 

*Timothy G.Biltz* was appointed as a director of Horizon PCS in September 2004pursuant to our Plan of Reorganization.  Mr. Biltzis Chief Operating Officer and serves on the board of directors of SpectraSite, Inc.  Prior to joining SpectraSite in August 1999,Mr. Biltz spent 10 years at Vanguard Cellular Systems, Inc., mostrecently as Executive Vice President and Chief Operating Officer.  He joined Vanguard in 1989 as Vice Presidentof Marketing and Operations and was Executive Vice President and President ofU.S. Wireless Operations from November 1996 until May 1998 when hebecame Chief Operating Officer.  Mr. Biltzalso serves on the board of directors of one privately held company.  SpectraSite, Inc. filed for Chapter 11protection under the United States bankruptcy laws on November 15, 2002.

 

*AnthonyCivale* was appointed as a director of Horizon PCS in September 2004pursuant to our Plan of Reorganization.  Mr. Civaleis a Principal with Apollo Management, L.P., with which he has been associatedsince 1999, and which, together with affiliated investment managers, managesthe Apollo investment funds, including Apollo Investment Fund IV, L.P. andApollo Overseas Partners IV, L.P.  Mr. Civalealso serves on the board of directors of two privately held Apollo portfoliocompanies.

 

*Jeffrey W.Jones* was appointed as a director of Horizon PCS in September 2004pursuant to our Plan of Reorganization.  Mr. Jonescurrently serves as Senior Vice President and Chief Financial Officer of VailResorts, Inc.  He joined VailResorts, Inc. in September 2003, as Senior Vice President and ChiefFinancial Officer of Vail Resorts Development Company and served in thatcapacity until November 18, 2003. From 1999 to September 2003, Mr. Jones served as ExecutiveVice President and Chief Financial Officer of Clark Retail Enterprises, Inc.in Chicago, Illinois, a privately held multi-unit convenience, food andgasoline retailer.  Prior to 1999, Mr. Jonesspent a year as Chief Financial Officer and Treasurer of Lids Corporation inBoston, Massachusetts, a specialty retailer. From 1994 to 1998, Mr. Jones held the positions of Vice Presidentand Controller and then Vice President of Finance, Real Estate andAdministration for Clark Refining and Marketing, Inc. (now known asPremcor, Inc.) in St. Louis, Missouri. Prior to 1994, Mr. Jones worked in several corporate positions,including Controller, Treasurer and Vice President-Controller, at Dairy MartConvenience Stores, Inc., a publicly traded company.  Clark Retail Group and Clark RetailEnterprises, Inc. filed for Chapter 11 protection under the United Statesbankruptcy laws on October 14, 2002. Mr. Jones is a member of the American Institute of Certified PublicAccountants.

 

*Robert A.Katz* was appointed as a director of Horizon PCS in September 2004pursuant to our Plan of Reorganization.  Mr. Katzhas been associated with Apollo Management, L.P., an affiliate of ApolloInvestment Fund IV, L.P., in various capacities since 1990.  Mr. Katz is also a director of VailResorts, Inc. and United Agri Products, Inc.  Mr. Katz previously served on the boardof directors of Horizon PCS from September 2000 until August 15,2003.

 

**Board of Directors**

 

Thereare presently seven members of the board of directors.

 

45

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Themembers of the Board of Directors receive an annual retainer of $15,000.  The members of the audit committee receive anadditional annual retainer of $20,000. The chairman of the audit committee receives an additional annualretainer of $5,000.  Each member of theBoard of Directors receives a $1,000 fee for each Board or committee meetingattended (other than the executive committee) whether such person attends inperson or telephonically.

 

Eachnonemployee member of the Board of Directors received options to acquire 8,446shares of the common stock of Horizon PCS at an exercise price of $17.76 pershare.  Such options vest at the rate of16.667% every six months from October 21, 2004 and will become fullyvested three years after such date, provided that these options shall fullyvest upon a change of control of the Company or as may be otherwise specifiedin the option agreements which govern the option grant.

 

**Board Committees**

 

We havean executive committee that, except as prohibited by applicable law orexpressly delegated to another committee of the Board, has the right toexercise all of the powers and authority of the Board in the management of ourbusiness and affairs and to address such other matters as the Board maydelegate to the executive committee from time to time.  The members of the executive committee are Messrs. Civale,Katz and McKell.

 

We formedan audit committee in connection with our emergence from bankruptcy. The auditcommittee is responsible for the appointment and retention of our independentauditors, as well as oversight of (i) the integrity of our financialstatements, (ii) our compliance with legal and regulatory requirements, (iii)the independent auditor's qualification and independence and (iv) theperformance of our internal audit function and independent auditors. Themembers of the audit committee are Messrs. Askowitz, Biltz and Jones, and Mr. Jonesserves as the chairman of the audit committee. Our board of directors hasdetermined that Mr. Jones, the chairman of our audit committee, is an"audit committee financial expert," as defined by the SEC's rules.

 

We havea nominating and corporate governance committee that, except as prohibited byapplicable law or expressly delegated to another committee of the Board, hasthe authority to propose to the stockholders or to continuing directors, beforeany election of directors by stockholders of the filling of any vacancy by theBoard, a slate of director candidates equal in number to the vacancies to befilled, develop and recommend to the Board a set of corporate governanceprinciples applicable to us and oversee the evaluation of the Board andmanagement and to address such other matters as the Board may delegate to thenominating and corporate governance committee from time to time.  The members of the nominating and corporategovernance committee are Messrs. Askowitz, Civale and Jones, and Mr. Askowitzserves as the chairman of the nominating and corporate governance committee.

 

We havea compensation committee that, except as prohibited by applicable law orexpressly delegated to another committee of the Board, has the authority toreview and approve corporate goals and objectives relevant to the compensationof our chief executive officer, evaluate the chief executive officer’sperformance in light of these goals and objectives and, either as a committeeor together with the other members of the Board, determine and approve thechief executive officer’s compensation level based on this evaluation, makerecommendations to the Board with respect to compensation of other executiveofficers of the company, incentive compensation plans and equity compensationplans, otherwise establish and review the compensation policies and proceduresof the company, subject to approval by the Board, and make recommendations tothe Board in connection therewith and to address such other matters as the Boardmay delegate to the compensation committee from time to time.  The members of the compensation committee areMessrs. Biltz, Civale and Katz, and Mr. Katz serves as the chairmanof the compensation committee.

 

**Limitation on Liability andIndemnification**

 

Ourcertificate of incorporation limits the liability of directors to the maximumextent permitted by Delaware law.  Ourcertificate of incorporation provides that we shall indemnify our directors andexecutive officers and may indemnify our other officers and employees andagents and other agents to the fullest extent permitted by law.  Our certificate of incorporation also permitsus to secure insurance on behalf of any officer, director, employee or otheragent for any liability arising out of actions in his or her officialcapacity.  We have directors’ andofficers’ insurance providing indemnification for certain of our directors,officers and employees for these types of liabilities.  We believe that these provisions and theinsurance are necessary to attract and retain qualified directors and officers.

 

**Codeof Ethics**

 

TheCompany recently emerged from bankruptcy and in connection therewithreconfigured its board of directors. While the new board is committed to ethical conduct, it has not yetaddressed the issue of a formal code of ethics.

 

46

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**Compliancewith Section 16(a) of the Exchange Act**

 

We arenot subject to Section 16(a) of the Exchange Act.

 

## **Item 11.         Executive Compensation**

## ** **

Thefollowing table presents summary information with respect to the compensationpaid to our Chief Executive Officer and our three other highest paid executiveofficers and one former executive officer whose salary and bonus exceeded$100,000 during the year ended December 31, 2004.  

 
| ** **                      | ** ** | ** **              | ** ** | ** **     | ** ** | ** **    | ** ** | **Long-Term**             | ** ** | ** **          | ** ** |
|---------------------------------|------------|-------------------------|------------|----------------|------------|---------------|------------|---------------------------|------------|---------------------|------------|
| ** **                      | ** ** | ** **              | ** ** | ** **     | ** ** | ** **    | ** ** | **Compensation**          | ** ** | ** **          | ** ** |
| ** **                      | ** ** | **Annual Compensation** | ** ** | **Securities** | ** ** | **All Other** | ** ** |
| **Name and Principal Position** | ** ** | **Year**                | ** ** | **Salary($)**  | ** ** | **Bonus($)**  | ** ** | **Underlying Options(#)** | ** ** | **Compensation($)** | ** ** |
| William A.  McKell              |       | 2004                    |       | $              | 224,863    |          | $          | 237,264                   |       | 197,340             |       | $ | 19,581 | (1) |
| Chairman of the  Board,         |       | 2003                    |       | 213,150        |       | 124,479       |       | —                    |       | 20,451              | (2)        |
| President and  Chief            |       | 2002                    |       | 207,500        |       | 50,103        |       | —                    |       | 13,075              | (3)        |
| Executive  Officer              |       |                    |       |           |       |          |       |                      |       |                |       |
|                            |       |                    |       |           |       |          |       |                      |       |                |       |
| Peter M. Holland                |       | 2004                    |       | $              | 197,380    |          | 178,671    |                      | 148,005    |                | $          | 16,039 | (4) |
| Chief Financial  Officer        |       | 2003                    |       | 186,507        |       | 97,170        |       | —                    |       | 12,514              | (5)        |
|                            |       | 2002                    |       | 181,562        |       | 43,819        |       | —                    |       | 12,676              | (6)        |
|                            |       |                    |       |           |       |          |       |                      |       |                |       |
| Alan G. Morse                   |       | 2004                    |       | $              | 190,775    |          | $          | 174,174                   |       | 100,000             |       | $ | 630 | (7) |
| Chief Operating  Officer        |       | 2003                    |       | 182,700        |       | 95,187        |       | —                    |       | 6,600               | (8)        |
|                            |       | 2002                    |       | 150,000        |       | 36,627        |       | 200,000                   |       | 10,193              | (9)        |
|                            |       |                    |       |           |       |          |       |                      |       |                |       |
| Monesa S. Skocik                |       | 2004                    |       | $              | 136,164    |          | $          | 83,246                    |       | 59,202              |       | $ | 13,820 | (10) |
| Vice President,                 |       | 2003                    |       | 133,219        |       | 44,216        |       | —                    |       | 13,455              | (11)       |
| External Affairs                |       | 2002                    |       | 129,688        |       | 33,113        |       | —                    |       | 11,171              | (12)       |
|                            |       |                    |       |           |       |          |       |                      |       |                |       |
| Joseph J.  Watson(13)           |       | 2004                    |       | $              | 119,213    |          | $          | 44,684                    |       | —              |       | $ | 103,601 | (14) |
| Vice President,                 |       | 2003                    |       | 133,219        |       | 41,362        |       | —                    |       | 15,516              | (15)       |
| Sales and  Marketing            |       | 2002                    |       | 129,688        |       | 29,535        |       | —                    |       | 10,190              | (16)       |
|                                 |            |                         |            |                |            |               |            |                           |            |                     |            |  |  |  |  |  |

 

----

(1)                                  Includes a yearly car allowance of $10,877, other pension of $4,262, lifeinsurance premiums of $400, and a 401(k) contribution of $4,042.

 

(2)                                  Includes a yearly car allowance of $11,946, other pension of $4,828, lifeinsurance premiums of $401, and a 401(k) contribution of $3,276.

 

(3)                                  Includes a yearly car allowance of $9,368, and a 401(k) contribution of$3,707.

 

(4)                                  Includes a yearly car allowance of $9,729, life insurance premiums of$378, and a 401(k) contribution of $5,932.

 

(5)                                  Includes a yearly car allowance of $7,464 life insurance premiums of $378,and a 401(k) contribution of $4,672.

 

(6)                                  Includes a yearly car allowance of $8,103 and a 401(k) contribution of$4,573.

 

(7)                                  Includes life insurance premiums of $630.

 

(8)                                  Includes a yearly car allowance of $6,114 and life insurance premiums of$486.

 

(9)                                  Includes a yearly car allowance of $6,443 and a 401(k) contribution of$3,750.

 

(10)                            Includes a yearly car allowance of $7,086, other pension of $2,154, lifeinsurance premiums of $418, and a 401(k) contribution of $4,162.

 

(11)                            Includes a yearly car allowance of $6,969, other pension of $1,999, lifeinsurance premiums of $418, and a 401(k) contribution of $4,069.

 

47

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(12)                            Includes a yearly car allowance of $7,211 and a 401(k) contribution of$3,960.

 

(13)                            Mr. Watson terminated employment with the Company in October,  2004.

 

(14)                            Includes a yearly car allowance of $12,259, other pension of $2,529, andseverance of $88,813.

 

(15)                            Includes a yearly car allowance of $10,141, other pension of $2,738, lifeinsurance premiums of $374, and a 401(k) contribution of $2,263.

 

(16)                            Includes a yearly car allowance of $7,298, other pension of $1,634, lifeinsurance premiums of $415, and a 401(k) contribution of $843.

 

*Grant of Options.*  During 2004, the Board of Directors grantedoptions to executive officers.  We havenot granted any stock appreciation rights (SARs).  The following table sets forth informationregarding the grants of options in 2004:

 
| **Name**           | ** ** | **Number of  Securities  Underlying  Options/ SARs  Granted (#)** | ** ** | **% of Total  Options/SARs  Granted to  Employees in  Fiscal Year** | ** ** | **Exercise  Price  ($/Sh)** | ** ** | **Expiration  Date** | ** ** | **Potential Realizable Value at  Assumed Annual Rates of  Appreciation for Option Term** | ** ** |
|--------------------|------------|-------------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|-----------------------------|------------|----------------------|------------|------------------------------------------------------------------------------------------|------------|
| **5%($)**          | ** ** | **10%($)**                                                        | ** ** |
|               |       |                                                              |       |                                                                |       |                        |       |                 |       |                                                                                     |       |   |   |
| William A.  McKell |       | 197,340                                                           |       | 26.8                                                                | %          | 17.76                       |       | 10/21/2014           |       | $                                                                                        | 111,004    |   | $ | 283,183 |   |
| Peter M. Holland   |       | 148,005                                                           |       | 20.1                                                                |       | 17.76                       |       | 10/21/2014           |       | 83,253                                                                                   |       | 212,387 |   |
| Alan G. Morse      |       | 100,000                                                           |       | 13.6                                                                |       | 17.76                       |       | 10/21/2014           |       | 56,250                                                                                   |       | 143,500 |   |
| Monesa S. Skocik   |       | 59,202                                                            |       | 8.0                                                                 |       | 17.76                       |       | 10/21/2014           |       | 33,301                                                                                   |       | 89,955 |   |
| Joseph J. Watson   |       | —                                                            |       | —                                                              |       | —                      |       | —               |       | —                                                                                   |       | — |   |
|                    |            |                                                                   |            |                                                                     |            |                             |            |                      |            |                                                                                          |            |  |  |  |  |

 

**Stock Option Plans**

 

Inconnection with the Reorganization, we adopted the 2004 Stock Incentive Planwhich reserved 986,702 shares for issuance to officers, directors and keyemployees.  We expect that these shareswill be issued pursuant to the exercise of stock options.

 

Thefollowing table sets forth information concerning stock option exercises infiscal 2004, and the number and value of unexercised options held on December 31,2004, by each of our named executive officers.

 

**AggregatedOption Exercises in Fiscal Year 2004Fiscal Year-End Option Values**

** **
| ** **         | ** ** | **Number of Securities Underlying  Unexercised Options At Year End(#)** | ** ** | **Value of Unexercised In-The-  Money Options At Year End($)** | ** ** |
|--------------------|------------|-------------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **         | ** ** | **Exercisable**                                                         | ** ** | **Unexercisable**                                              | ** ** | **Exercisable** | ** ** | **Unexercisable(1)** | ** ** |
| William A.  McKell |       | 0                                                                       |       | 197,340                                                        |       | 0 |   | $ | 1,280,737 |   |
| Peter M. Holland   |       | 0                                                                       |       | 148,005                                                        |       | 0 |   | 960,552 |   |
| Alan G. Morse      |       | 0                                                                       |       | 100,000                                                        |       | 0 |   | 649,000 |   |
| Monesa S. Skocik   |       | 0                                                                       |       | 59,202                                                         |       | 0 |   | 384,221 |   |
| Joseph J. Watson   |       | —                                                                  |       | —                                                         |       | — |   | — |   |
|                    |            |                                                                         |            |                                                                |            |  |  |  |  |  |

 

----

(1)     Based on a closing bid price per share of $24.25 as quoted inthe pink sheets on December 30, 2004.

 

**Employment Agreements**

 

Inconnection with our emergence from Chapter 11 proceedings, we entered intoemployment agreements with Mr. McKell, Mr. Holland, Mr. Morseand Ms. Skocik.  The employmentagreements provide for an annual base salary of $260,000 to Mr. McKell,$230,000 to Mr. Holland, $215,000 to Mr. Morse and $145,000 to Ms. Skocik. In addition to their base salary, eachof these executives is eligible to receive an annual bonus up to 40% of his orher base salary and is eligible to participate in our employee benefit plans.  Each of these employment agreements, exceptwith respect to Mr. Morse, has a term of three years,

 

48

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commencingon October 1, 2004, and automatically renews for additional one-year termsunless either party gives written notice of non-renewal at least 9 months priorto the expiration for each term.  Mr. Morse’semployment agreement commenced on October 1, 2004 and the term ends on December 31,2005.  Mr. Morse’s employmentagreement does not automatically renew. In addition, under certain circumstances specified in Mr. Morse’semployment agreement, Mr. Morse may be entitled to a retention bonus equalto the amount of $161,250.

 

Theemployment agreements provide that the employment of Mr. McKell, Mr. Holland,Mr. Morse or Ms. Skocik may be terminated with or without cause, asdefined in the agreements.  If Mr. McKell,Mr. Holland or Ms. Skocik is terminated without cause, each executiveis entitled to receive continuing payments of base salary for 21 months for Mr. McKell,18 months for Mr. Holland, and 12 months for Ms. Skocik.  In the case of Mr. McKell, this isincreased to 33 months if the termination occurs within 6 months after a changein control of the company.  In the caseof Mr. Holland, this is increased to 27 months if the termination occurswithin 6 months after a change in control of the company.  If Mr. Morse is terminated withoutcause, he is entitled to receive continuing payments of 1.5 times his basesalary as in effect on June 15, 2003 for 18 months.  In addition, in the event of termination dueto death or disability, each executive or the executive’s estate will receivecontinuing payments of base salary for 12 months after termination plus a lumpsum payment equal to a target incentive bonus pro-rated for the years oftermination, and will pay the executive’s COBRA premium payments for theshorter of 12 months or the period of his or her eligibility under COBRA.  Under the employment agreements, eachexecutive has agreed to a restriction on their present and future employment.  Each of Mr. McKell, Mr. Holland andMs. Skocik have agreed not to compete in any business that competes withany aspect of our business either directly or indirectly while employed by usand for a period of 12 months after termination of employment.  Mr. Morse has agreed not to compete inany business that competes with any aspect of our business either directly orindirectly while employed by us and for a period of 3 months after terminationof employment.

 

**Compensation Committee Interlocksand Insider Participation**

 

Prior toOctober 2004, our entire board of directors determined executivecompensation.  In October 2004, theboard of directors established a compensation committee and appointed Messrs. Biltz,Civale and Katz to serve on the committee, and Mr. Katz serves as the chairmanof the compensation committee.  None ofour executive officers currently serves, or in the past year has served, as amember of the board of directors or compensation committee of any entity thathas one or more executive officers serving on our board of directors orcompensation committee.

 

## **Item 12.         Security Ownership of CertainBeneficial Owners and Management**

## ** **

Thefollowing table sets forth information regarding the beneficial ownership ofour voting securities, as of March 29, 2005 by:

 

•                                          each person who, to our knowledge, is the beneficial owner of 5% or moreof a class of our outstanding common stock;

 

•                                          each of our directors;

 

•                                          each of the named executive officers; and

 

•                                          all executive officers and directors as a group.

 

Beneficialownership is determined in accordance with Rule 13d-3 of the SecuritiesExchange Act.  A person is deemed to bethe beneficial owner of any shares of common stock if that person has or sharesvoting power or investment power with respect to the common stock, or has theright to acquire beneficial ownership at any time within 60 days of the date ofthe table.  “Voting power” is the powerto vote or direct the voting of shares and “investment power” is the power todispose or direct the disposition of shares. 

** **
| ** **                                                          | ** ** | **Beneficial Ownership of Common  Stock** | ** ** |
|---------------------------------------------------------------------|------------|-------------------------------------------|------------|
| **Name and Address (1)**                                            | ** ** | **Number**                                | ** ** | **Percent** | ** ** |
|                                                                |       |                                      |       |   |   |
| Apollo  Management IV, L.P. (2)                                     |       | 3,438,644                                 |       | 38.2 | % |
| Silver Point  Capital, L.P. (6)                                     |       | 770,147                                   |       | 8.5 | % |
| William A.  McKell (3)                                              |       | 32,897                                    |       |   | * |
| Peter M. Holland  (3)                                               |       | 24,672                                    |       |   | * |
| Alan G. Morse  (3)                                                  |       | 16,670                                    |       |   | * |
| Monesa S. Skocik  (3)                                               |       | 9,869                                     |       |   | * |
| Lawrence  Askowitz (3)                                              |       | 1,408                                     |       |   | * |
| Timothy G. Biltz  (3)                                               |       | 1,408                                     |       |   | * |
| Anthony Civale  (3) (4)                                        |       | 1,408                                     |       |   | * |
| Jeffrey W.  Jones(3)                                                |       | 1,408                                     |       |   | * |
| Robert A. Katz  (3) (4)                                        |       | 1,408                                     |       |   | * |
| All Executive Officers  and Directors as a Group (9 persons) (4)(5) |       | 91,148                                    |       | 1 | % |

 

----

* Less than one percent.

 

49

----

 

 

(1)                                  The address for Apollo Management IV, L.P. is set forth in footnote(2).  The address for Silver Point Capital,L.P. is set forth in footnote (6).  Theaddress for all executive officers and directors is 68 Main Street,Chillicothe, Ohio, 45601-0480.

 

(2)                                  Includes 3,256,401 shares of common stock beneficially owned by ApolloInvestment Fund IV, L.P., and 182,243 shares of common stock beneficially ownedby Apollo Overseas Partners IV, L.P. (collectively, “Apollo Funds”).  Apollo Management IV, L.P. manages the ApolloFunds.  The managing general partner ofthe Apollo Funds is Apollo Advisors, a Delaware limited partnership, thegeneral partner of which is Apollo Capital Management, Inc., a Delawarecorporation.  The address for the ApolloFunds is Two Manhattanville Road, Purchase, New York 10577.  These shares are subject to a registrationrights agreement described at “Certain Relationships and Transactions – CommonStock Registration Rights Agreement.”

 

(3)                                  Reflects shares of common stock issuable upon exercise of stock optionsthat are presently exercisable or exercisable within 60 days from March 29,2005.

 

(4)                                  Does not include shares held by the Apollo Funds.  Mr. Civale, a director of Horizon PCSand investment principal with Apollo Management, L.P., disclaims beneficialownership of the securities held by the Apollo Funds.  Mr. Katz, a director of Horizon PCS, hasbeen associated with Apollo Management, L.P. in various capacities since 1990and disclaims beneficial ownership of the securities held by the Apollo Funds.

 

(5)                                  Includes 91,148 shares of common stock issuable upon exercise of stockoptions that are presently exercisable or exercisable within 60 days from March 29,2005.

 

(6)                                  Silver Point Capital Offshore Fund, Ltd. and Silver Point Capital Fund,L.P. are each affiliates of Silver Point Capital, L.P.  Of the 770,147 shares, 517,363 shares are heldby Silver Point Capital Offshore Fund, Ltd. and 252,784 shares are held bySilver Point Capital Fund, L.P.  SilverPoint Capital, L.P. is headquartered at 2 Greenwich Plaza, Greenwich,Connecticut 06830.

 

## **Item 13.         Certain Relationships and Related Transactions**

## ** **

*Service Agreements*

 

HorizonPersonal Communications, one of our operating subsidiaries, has entered into aservice agreement with Horizon Services, Inc. and a separate servicesagreement with Horizon Technology, Inc. Horizon Services and Horizon Technologyare both wholly owned subsidiaries of Horizon Telcom, Inc., our largeststockholder prior to the Reorganization. Thomas McKell, a former director and the father of our CEO, is thePresident and a director and stockholder of Horizon Telcom.  Peter Holland, our Chief Financial Officerand director, served as Vice President of Finance and Treasurer of Horizon Telcomfrom November 1999 to October 2004. Prior to the effective date of our Plan of Reorganization on October 1,2004, Horizon Telcom was the majority stockholder of Horizon PCS, Inc.

 

HorizonServices provides services to Horizon Personal Communications and Bright PCSincluding insurance functions, accounting services, computer access and othercustomer relations, human resources, and other administrative services that wewould otherwise be required to undertake on our own.  These agreements have a term of three years,with the right to renew the agreement for additional one-year terms each yearthereafter.  We have the right toterminate each agreement during its term by providing 90 days’ written noticeto Horizon Services.  Horizon Servicesmay terminate the agreement prior to its expiration date only in the event thatwe breach our obligations under the services agreement and we do not cure thebreach within 90 days after we receive written notice of breach from HorizonServices.  Horizon Services is entitledto the following compensation from us for services provided:

 

•                                          direct labor charges at cost; and

 

50

----

 

•                                          expenses and costs that are directly attributable to the activitiescovered by the agreement on a direct allocation basis.

 

Theagreement provides that Horizon Services’ obligations do not relieve us of anyof our rights and obligations to our subscribers and to regulatory authoritieshaving jurisdiction over them.  HorizonServices received compensation from us of approximately $4.6 million, $5.4million and $5.2 million in the years ending December 31, 2004, 2003 and2002, respectively. As of December 31, 2004, we had a payable to HorizonServices of approximately $450,000.  Wehave initiated a process to seek competing proposals from other serviceproviders for most of these services and intend to explore modifications ofthis agreement with Horizon Services.

 

*Office Lease*

 

We leaseour principal office space and the space for certain equipment from TheChillicothe Telephone Company, a former affiliate of ours prior to ouremergence from bankruptcy and a wholly-owned subsidiary of Horizon Telecom.  Under the lease, we paid The ChillicotheTelephone Company $120,000 per year in 2004, 2003 and in 2002.  We believe the lease was made on terms noless favorable to us than would have been obtained from a non-affiliated thirdparty.  The lease term expires in May 2007.

 

*Common Stock Registration RightsAgreement*

 

  In connection with the Reorganization, theApollo Funds and their affiliates (collectively, “Apollo”) became beneficialowners of approximately 38% of the outstanding common stock of Horizon PCS, Inc.  Accordingly, we entered into a RegistrationRights Agreement with Apollo dated as of October 1, 2004.  The following summary of our common stockregistration rights agreement describes some of the more important provisionstherein.

 

Underthe terms of the agreement, Apollo has the following rights to require us tofile a registration statement for the resale of its common stock:

 

•                                          Demand registration rights:  Any time after October 1, 2004, Apollomay request us to file a registration statement and to maintain theeffectiveness of the registration statement for at least 90 days or until theregistered securities are sold.  Apollomay require us to file up to a total of four such registration statements.

 

•                                          Piggy-back registration rights:  If we file a registration statement (otherthan on Form S-4 or S-8) to sell our common stock, Apollo may require usto include their shares in that registration statement.

 

•                                          Shelf registration rights:  At any time, subsequent to our initial publicoffering of our common stock, that we are eligible to file a registrationstatement on Form S-3 (or any replacement form) for the resale of Apollo’sshares, Apollo may require us to file a shelf registration statement for suchresale and maintain its effectiveness for at least 90 days, provided that thereasonably anticipated gross proceeds of the sale are at least $1.0 million.

 

In thecase of a demand registration, subject to our right to postpone theregistration discussed below, we have a period of 75 days after the demand tofile the registration statement with the SEC, and 60 days thereafter, (120 daysif the SEC reviews it) to have it declared effective.  If we fail to meet these deadlines, we mustpay liquidated damages at a rate of $100,000 for every 30 days after suchfailure (pro rata for partial months). Similar penalties apply if there is a lapse in the effectiveness of ademand registration statement during the ninety day period we are required tokeep it effective, subject to our ability to postpone filing an amendment orsupplement discussed below.

 

We havethe right to postpone by not more than 60 days a demand registration, or thefiling of an amendment or supplement thereto, if we determine that the filingof the registration statement, amendment or supplement would, in our reasonablejudgment, be seriously detrimental to us or otherwise materially adverselyimpact a disposition, financing, acquisition, merger, or other materialtransaction; provided that this right may not be exercised more than once inany 12 month period and may not be exercised with respect to a demandregistration request prior to March 1, 2005.  With respect to any underwritten demandregistration, a majority in interest of the selling shareholders have the rightto select the managing underwriter to administer the offering, provided thatthe underwriter is reasonably acceptable to us.

 

Inconnection with any registration of our common stock pursuant to theregistration rights agreement, we have agreed, subject to certain exceptions,not to file a registration statement for the sale of our securities prior to180 days from the date of the effectiveness of the registration statement inthe case of an underwritten registration or 90 days in the case of a non-underwrittenregistration.

 

51

----

 

We willpay all customary costs and expenses associated with each registration,including for each registration statement prepared, the reasonable fees andexpenses of one counsel for the holders (such fees and expenses of counsel notto exceed $50,000 in the aggregate). Holders of our common stock will pay underwriting discounts, commissionsand applicable transfer taxes, if any, on any shares sold by them.

 

Ourobligation under the registration rights agreement to register common stock forsale under the Securities Act shall terminate on the earliest to occur of thedate on which all shares of common stock held by the holders party to suchagreement (a) have been distributed to the public pursuant to an offeringregistered under the Securities Act, (b) have been sold to the publicthrough a broker, dealer or market-maker in compliance with Rule 144 underthe Securities Act, (c) may be sold or transferred pursuant to Rule 144under the Securities Act without volume or manner of sale restrictions or (d) ceaseto be outstanding.

 

Eachholder of common stock who is a party to the registration rights agreement mayassign its rights under the registration rights agreement to a third party.

 

**Item 14.         PrincipalAccountant Fees and Services**

 

Thefollowing table summarizes fees billed to us by our independent registeredpublic accounting firm for the fiscal years ended 2004 and 2003 (in thousands):

 

| **Type of Fee**    | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------------|------------|----------|------------|----------|------------|
| Audit Fee(1)       |       | $        | 527        |     | $          | 239 |   |
| Tax Fees(2)        |       | 470      |       | 175      |       |
| Audit-Related Fees |       | —   |       | —   |       |
| All Other Fees(3)  |       | 11       |       | 242      |       |
| Total              |       | $        | 1,008      |     | $          | 656 |   |

----

(1)           Audit Fees include the aggregate fees billed forprofessional services rendered by KPMG LLP for the audit of the Company'sannual financial statements and quarterly reviews.

 

(2)           Fees to KPMG LLP for professional services rendered fortax compliance, tax advice and tax planning (for example, preparation andfiling of our Federal and state income tax returns)

 

(3)           Fees to KPMG LLP for all other services totaledapproximately $11,000 and $242,000 in 2004 and 2003, respectively. Feesconsisted of services rendered in connection with bankruptcy proceedings.

 

                During theperiod in which we were in bankruptcy, the bankruptcy court approved all auditand audit related fees. After our emergence from bankruptcy we formed thecurrent audit committee. The audit committee approved the independentregistered public accounting firm and approved all audit and non-audit servicessince our emergence from bankruptcy.  Thecommittee has not adopted a formal policy on the pre-approval of servicesprovided by the auditor, but it intends to pre-approve all such services.

 

# **Part  IV**

 

## **Item 15.         Exhibits and Financial StatementSchedules**

 

(a)(1)          FinancialStatements:

 
|   | Report  of Independent Registered Public Accounting Firm                                                                                                                                                                                                                                                      |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                          |
|   | Consolidated Balance Sheets  as of December 31, 2004 (Successor Company) and 2003 (Predecessor  Company)                                                                                                                                                                                                 |
|   |                                                                                                                                                                                                                                                                                                          |
|   | Consolidated  Statements of Operations for the period from October 1, 2004 to  December 31, 2004 (Successor Company), the period from January 1,  2004 to September 30, 2004, and the years ended December 31, 2003  and 2002 (Predecessor Company)                                  |
|   |                                                                                                                                                                                                                                                                                                          |
|   | Consolidated  Statements of Comprehensive Income (Loss) for the period from October 1,  2004 to December 31, 2004 (Successor Company), the period from  January 1, 2004 to September 30, 2004, and the years ended  December 31, 2003 and 2002 (Predecessor Company)                 |
|   |                                                                                                                                                                                                                                                                                                          |
|   | Consolidated  Statements of Stockholders’ Equity (Deficit) for the for the period from  October 1, 2004 to December 31, 2004 (Successor Company), the  period from January 1, 2004 to September 30, 2004, and the years  ended December 31, 2003 and 2002 (Predecessor Company) |
|   |                                                                                                                                                                                                                                                                                                          |
|   | Consolidated  Statements of Cash Flows for the period from October 1, 2004 to  December 31, 2004 (Successor Company), the period from January 1,  2004 to September 30, 2004, and the years ended December 31, 2003  and 2002 (Predecessor Company)                                  |
|   |                                                                                                                                                                                                                                                                                                          |
|   | Notes to  Consolidated Financial Statements                                                                                                                                                                                                                                                                   |

 

(a)(2) Financial StatementSchedules

 

None.

 

51

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(a)(3)       Exhibits

 

**Index to Exhibits**

 
| **Exhibit********Number** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                   |
|---------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.1***                    |       | Asset Purchase Agreement, dated as of May 12, 2004, by and  between Horizon PCS, Inc., Horizon Personal Communications, Inc.,  Bright Personal Communications Services, LLC and Sprint PCS, Inc.                                                                                                                                              |
| 2.2***                    |       | Joint Plan of Reorganization of Horizon PCS, Inc., Horizon  Personal Communications, Inc. and Bright Personal Communications  Services, LLC, dated as of September 20, 2004.                                                                                                                                                                       |
| 2.3****                   |       | Agreement and Plan of  Merger, dated as of March 17, 2005, by and between iPCS, Inc. and  Horizon PCS, Inc.                                                                                                                                                                                                                                        |
| 2.4****                   |       | Support Agreement, dated as of March 17, 2005, by and among iPCS, Inc., Apollo Investment Fund IV, L.P. and certain of its affiliates.                                                                                                                                                                                                                  |
| 2.5****                   |       | Support Agreement, dated as  of March 17, 2005, by and among Horizon PCS, Inc. and certain  affiliates of American International Group, Inc.                                                                                                                                                                                                       |
| 2.6****                   |       | Support Agreement, dated as  of March 17, 2005, by and among iPCS, Inc., Horizon PCS, Inc.  and certain affiliates of Silver Point Capital L.P.                                                                                                                                                                                                    |
| 2.7****                   |       | Ancillary Agreement, dated  as of March 17, 2005, by and among iPCS, Inc., certain affiliates  of American International Group, Inc., certain affiliates of Silver Point  Capital L.P, Apollo Investment Fund IV, L.P. and certain of its affiliates,  and the Timothy M. Yager 2001 Trust.                                                        |
| 3.1***                    |       | Amended and Restated Certificate of Incorporation of Horizon PCS.                                                                                                                                                                                                                                                                                                 |
| 3.2***                    |       | Amended and Restated Bylaws of Horizon PCS.                                                                                                                                                                                                                                                                                                                       |
| 4.1**                     |       | Specimen Common Stock Certificate.                                                                                                                                                                                                                                                                                                                                |
| 4.2***                    |       | Indenture, dated as of July 19, 2004, by and between Horizon  PCS, Inc., Horizon Personal Communications, Inc., Bright Personal  Communications Services, LLC and U.S. Bank National Association.                                                                                                                                                  |
| 4.3***                    |       | Registration Rights Agreement, dated as of July 19, 2004, by and  between Horizon PCS, Inc., Credit Suisse First Boston Corporation and  Lehman Brothers Inc.                                                                                                                                                                                           |
| 4.4***                    |       | Registration Rights Agreement, dated as of October 1, 2004, by  and between Horizon PCS, Inc., Apollo Investment Fund IV, L.P. and  Apollo Overseas Partners IV, L.P.                                                                                                                                                                                   |
| 4.5                       |       | Form of Registered Note (included in Exhibit 4.2).                                                                                                                                                                                                                                                                                                      |
| 10.1*** (2)               |       | Employment Agreement, dated as of October 1, 2004, by and between  Horizon PCS, Inc. and William A. McKell.                                                                                                                                                                                                                                             |
| 10.1.1++ (2)              |       | Nonqualified Stock Option Agreement, dated as of October 21,  2004, by and between Horizon PCS, Inc. and William A. McKell.                                                                                                                                                                                                                             |
| 10.2*** (2)               |       | Employment Agreement, dated as of October 1, 2004, by and between  Horizon PCS, Inc. and Peter Holland.                                                                                                                                                                                                                                                 |
| 10.2.1++ (2)              |       | Nonqualified Stock Option Agreement, dated as of October 21,  2004, by and between Horizon PCS, Inc. and Peter Holland.                                                                                                                                                                                                                                 |
| 10.3**+                   |       | Sprint PCS Management Agreement, dated June 8, 1998, by and  between Sprint Spectrum, L.P., SprintCom, Inc. and Horizon Personal Communications, Inc.  (includes Addenda I, II and III).                                                                                                                                                      |
| 10.3.2                    |       | Addendum VI to Sprint PCS Management Agreement, dated as of  August 20, 2001, by and between Sprint Spectrum, L.P.,  SprintCom, Inc. and Horizon Personal Communications, Inc.  (incorporated herein by reference to the Current Report on Form 8-K of  Horizon PCS, Inc. filed on August 24, 2001).                           |
| 10.3.3+                   |       | Addendum V to Sprint PCS Management Agreement, dated as of  June 1, 2001, by and between Sprint Spectrum, L.P., SprintCom, Inc.  and Horizon Personal Communications, Inc. (incorporated herein by  reference to Exhibit 10.3.1 to the Registration Statement on  Form 10-12G/A of Horizon Telcom, Inc. (File No. 000-32617)). |
| 10.3.4++                  |       | Addendum VII to Sprint PCS Management Agreement, dated as of  June 16, 2004, by and between Sprint Spectrum, L.P.,  SprintCom, Inc. and Horizon Personal Communications, Inc.                                                                                                                                                                      |
| 10.3.5***                 |       | Addendum VIII to Sprint PCS Management Agreement, dated as of  March 16, 2005, among Horizon Personal Communications, Inc.,  SprintCom, Inc., Sprint Spectrum L.P., WirelessCo, L.P., PhillieCo,  L.P., APC PCS, LLC and Sprint Communications Company, L.P.                                                                                       |

 

52

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| **Exhibit********Number** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                  |
|---------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.5**                    |       | Sprint Trademark and Service Mark License Agreement, dated as of June 8,  1998, by and between Sprint Communications Company, L.P. and Horizon Personal  Communications, Inc.                                                                                                                                                          |
| 10.6**                    |       | Sprint Spectrum Trademark and Service Mark License Agreement, dated as  of June 8, 1998, by and between Sprint Spectrum L.P. and Horizon  Personal Communications, Inc.                                                                                                                                                                |
| 10.7**+                   |       | Sprint PCS Management Agreement, dated as of October 13, 1999, by  and between Sprint Spectrum, L.P., SprintCom, Inc., Wirelessco, L.P. and  Bright Personal Communications Services, LLC.                                                                                                                                             |
| 10.7.1***                 |       | Addendum IV to Sprint PCS Management Agreement, dated as of  March 16, 2005, by and between Sprint Spectrum L.P., Sprint  Communications Company, L.P. and Bright Personal Communications Services,  LLC.                                                                                                                                   |
| 10.8**+                   |       | Sprint PCS Services Agreement, dated as of October 13, 1999, by  and between Sprint Spectrum, L.P. and Bright Personal Communications  Services, LLC.                                                                                                                                                                                       |
| 10.9**                    |       | Sprint Trademark and Service Mark License Agreement, dated as of  October 13, 1999, by and between Sprint Communications Company, L.P. and  Bright Personal Communications Services, LLC.                                                                                                                                                   |
| 10.10**                   |       | Sprint Spectrum Trademark and Service Mark License Agreement, dated as  of October 13, 1999, between Sprint Spectrum, L.P. and Bright Personal  Communications Services, LLC.                                                                                                                                                               |
| 10.11++ (2)               |       | Employment Agreement, dated as of October 1, 2004, by and between  Horizon PCS, Inc. and Alan G. Morse.                                                                                                                                                                                                                                |
| 10.11.1++ (2)             |       | Nonqualified Stock Option Agreement, dated as of October 21,  2004, by and between Horizon PCS, Inc. and Alan G. Morse.                                                                                                                                                                                                                |
| 10.12*** (2)              |       | Employment Agreement, dated as of October 1, 2004, by and between  Horizon PCS, Inc. and Monesa S. Skocik.                                                                                                                                                                                                                             |
| 10.12.1++ (2)             |       | Nonqualified Stock Option Agreement, dated as of October 21,  2004, by and between Horizon PCS, Inc. and Monesa Skocik.                                                                                                                                                                                                                |
| 10.13++ (2)               |       | Form of Nonqualified Stock Option Agreement for Non-Employee  Directors under the Horizon PCS, Inc. 2004 Stock Incentive Plan.                                                                                                                                                                                                         |
| 10.14***                  |       | Settlement Agreement and Mutual Release, dated as of March 16,  2005, by and between Sprint Spectrum L.P., SprintCom, Inc., WirelessCo,  L.P., PhillieCo, L.P., APC PCS, LLC, Sprint Communications Company L.P.,  Horizon Personal Communications, Inc. Bright Personal Communications  Services, LLC and Horizon PCS, Inc. |
| 10.16++ (2)               |       | Horizon PCS, Inc. 2004 Stock Incentive Plan.                                                                                                                                                                                                                                                                                                |
| 10.26**+                  |       | Site Development Agreement, dated as of August 17, 1999, by and  between Horizon Personal Communications, Inc. and SBA Towers, Inc.                                                                                                                                                                                               |
| 10.27**+                  |       | Master Site Agreement, dated as of July 1999, by and between SBA  Towers, Inc. and Horizon Personal Communications, Inc.                                                                                                                                                                                                          |
| 10.27.1***                |       | Settlement and Assumption Agreement and Release, dated as of  August 31, 2004, by and between Horizon PCS, Inc., Horizon Personal  Communications, Inc., Bright Personal Communications Services, LLC, SBA  Broadband, Inc., SBA Network Services, Inc., SBA Sites, Inc.  and SBA Towers, Inc.                |
| 10.28**+                  |       | Master Design Build Agreement, dated as of August 17, 1999, by  and between Horizon Personal Communications, Inc. and SBA  Towers, Inc.                                                                                                                                                                                           |
| 10.29**+                  |       | Master Site Agreement, dated as of October 1, 1999, by and  between SBA Towers, Inc. and Bright Personal Communications Services,  LLC.                                                                                                                                                                                                |
| 10.30**+                  |       | Master Design Build Agreement, dated as of October 1, 1999, by  and between Bright Personal Communications Services, LLC and SBA  Towers, Inc.                                                                                                                                                                                         |
| 10.31**                   |       | Services Agreement, dated as of May 1, 2000, by and between  Horizon Personal Communication, Inc. and Horizon Services, Inc.                                                                                                                                                                                                      |
| 10.32**                   |       | Lease Agreement, dated as of May 1, 2000, by and between  Chillicothe Telephone Company and Horizon Personal Communications, Inc.                                                                                                                                                                                                      |
| 10.33**                   |       | Services Agreement, dated as of May 1, 2000, by and between  Horizon Personal Communications, Inc. and United  Communications, Inc.                                                                                                                                                                                               |
| 10.34***                  |       | Settlement Agreement and Mutual Release, dated as of May 12,  2004, by and among Sprint PCS, Inc., Horizon PCS, Inc., Horizon  Personal Communications, Inc. and Bright Personal Communications  Services, LLC.                                                                                                              |
| 10.35***                  |       | Settlement Agreement, dated as of June 5, 2004, by and among  Horizon Personal Communications, Inc., Horizon PCS, Inc., Virginia  PCS Alliance, L.C. and West Virginia PCS Alliance, L.C.                                                                                                                                         |
| 10.36++ (2)               |       | Amendment to Employment Agreement, dated March 16, 2005, by and  between Horizon PCS, Inc. and William McKell.                                                                                                                                                                                                                         |

 

53

----

 
| **Exhibit********Number** | ** ** | **Description**                                                                                                                                                |
|---------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.37++ (2)               |       | Amendment to Employment Agreement, dated March 16, 2005, by and  between Horizon PCS, Inc. and Peter Holland.                                        |
| 10.38++ (2)               |       | Amendment to Employment Agreement, dated March 16, 2005, by and  between Horizon PCS, Inc. and Monesa Skocik.                                        |
| 21.1***                   |       | Subsidiaries of Horizon.                                                                                                                                       |
| 24.1++                    |       | Powers of Attorney (set forth on the signature page hereto).                                                                                              |
| 31.1(a)++                 |       | Certification of Principal Executive Officer Pursuant to  Rules 13a-14(a) and 15d-14(a) under the Securities Exchange  Act of 1934, as amended. |
| 31.1(b)++                 |       | Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and  15d-14(a) under the Securities Exchange Act of 1934, as amended.  |
| 32.1++                    |       | Certification Pursuant to 18 U.S.C. Section 1350.                                                                                                         |
| 99.1++                    |       | Risk Factors                                                                                                                                                   |

 

----

| *    | incorporated by reference to the same exhibit number previously filed  with the Registration Statement on Form S-1 of the Registrant (File  No. 333-51240).                                                                                                                 |
|------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **   | incorporated by reference to the same exhibit number previously filed  with the Registration Statement on Form S-4 of the Registrant (File  No. 333-51238).                                                                                                                 |
| ***  | incorporated by reference to the same exhibit number previously filed  with the Registration Statement on Form S-4 of the Registrant (File  No. 333-123383).                                                                                                                |
| **** | incorporated herein by reference to the Current Report on Form 8-K  of Horizon PCS, Inc. filed on March 18, 2005.                                                                                                                                                 |
| (1)  | In accordance with Item 601(b)(2) of Regulation S-K, the  schedules have been omitted and a list briefly describing the schedules is at  the end of the Exhibit. The Registrant will furnish supplementally a copy of  any omitted schedule to the commission upon request. |
| (2)  | This exhibit is a “management contract or compensatory plan or  arrangement” required to be filed as an exhibit to this Annual Report on  Form 10-K pursuant to Item 15 of Form 10-K.                                                                             |
| +    | The Registrant has been granted confidential treatment for certain  portions of this exhibit pursuant to Rule 406 of the Securities Act of  1933, as amended.                                                                                                                    |
| ++   | Filed herewith.                                                                                                                                                                                                                                                                       |

 

54

----

 

**SIGNATURES**

 

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.

 
|                       | **HORIZON  PCS, INC.** |
|----------------------------|------------------------|
|                       |                   |
|                       |                   |
|                       | By:                    |   | /s/  William A. McKell |
|                       |                   | William  A. McKell |
|                       |                   | President,  and Chief Executive Officer |
|                       |                   |
| Date:  March 31, 2005 |                   |

 

KNOWALL PERSONS BY THESE PRESENTS, that each person whose signature appears belowconstitutes and appoints William A. McKell and Peter M. Holland, and each ofthem, his or her true and lawful attorneys-in-fact, each with full power ofsubstitution, for him or her in any and all capacities, to sign any amendmentsto this report on Form 10-K and to file the same, with exhibits theretoand other documents in connection therewith, with the Securities and ExchangeCommission, hereby ratifying and confirming all that each of saidattorneys-in-fact or their substitute or substitutes may do or cause to be doneby virtue hereof.

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons on behalf of the registrant and inthe capacities and on the dates indicated.

 
| **Name**               | ** ** | **Title** | ** **                               | **Date** |
|------------------------|------------|-----------|------------------------------------------|----------|
|                   |       |      |                                     |     |
| /s/ William  A. McKell |       |      | Director,  President and Chief Executive |     |   | March 31,  2005 |
| William A.  McKell     |       |      | Officer  (Principal Executive Officer)   |     |   |   |
|                   |       |      |                                     |     |
| /s/ Peter M.  Holland  |       |      | Director and  Chief Financial Officer    |     |   | March 31,  2005 |
| Peter M.  Holland      |       |      | (Principal  Financial and Accounting     |     |   |   |
|                   |       | Officer)  |                                     |     |   |
|                   |       |      |                                     |     |
| /s/ Lawrence  Askowitz | ** ** |      | Director                                 |     | March 31,  2005 |
| Lawrence  Askowitz     |       |      |                                     |     |   |
|                   |       |      |                                     |     |
| /s/ Timothy  G. Biltz  |       |      | Director                                 |     | March 31,  2005 |
| Timothy G.  Biltz      |       |      |                                     |     |   |
|                   |       |      |                                     |     |
| /s/ Anthony  Civale    |       |      | Director                                 |     | March 31,  2005 |
| Anthony  Civale        |       |      |                                     |     |   |
|                   |       |      |                                     |     |
| /s/ Jeffrey  W. Jones  |       |      | Director                                 |     | March 31,  2005 |
| Jeffrey W.  Jones      |       |      |                                     |     |
|                   |       |      |                                     |     |
| /s/ Robert A. Katz     |       |      | Director                                 |     | March 31,  2005 |
| Robert A. Katz         |       |      |                                     |     |

 

55

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**Supplemental Information to be Furnished With Reports Filed Pursuant toSection 15(d) of the Act by Registrants Which Have Not RegisteredSecurities Pursuant to Section 12 of the Act**

 

We havenot sent either of the following to our security holders:

 

(1)                                  Any annual report covering our last fiscal year; or

 

(2)                                  Any proxy statement, form of proxy or other proxy soliciting material withrespect to any annual or other meeting of security holders.

 

56

----

 

**HORIZON PCS,INC. AND SUBSIDIARIES**

 

**INDEX TOCONSOLIDATED FINANCIAL STATEMENTS**

 
| Report  of Independent Registered Public Accounting Firm                                                                                                                                                                                                                                              |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                                                                                                                                                                                                  |   |
| Consolidated Balance Sheets  as of December 31, 2004 (Successor Company) and 2003 (Predecessor  Company)                                                                                                                                                                                         |   |
|                                                                                                                                                                                                                                                                                                  |   |
| Consolidated  Statements of Operations for the period from October 1, 2004 to  December 31, 2004 (Successor Company), the period from January 1,  2004 to September 30, 2004, and the years ended December 31, 2003  and 2002 (Predecessor Company)                          |   |
|                                                                                                                                                                                                                                                                                                  |   |
| Consolidated  Statements of Comprehensive Income (Loss) for the period from October 1,  2004 to December 31, 2004 (Successor Company), the period from  January 1, 2004 to September 30, 2004, and the years ended  December 31, 2003 and 2002 (Predecessor Company)         |   |
|                                                                                                                                                                                                                                                                                                  |   |
| Consolidated  Statements of Stockholders’ Equity (Deficit) for the period from  October 1, 2004 to December 31, 2004 (Successor Company), the  period from January 1, 2004 to September 30, 2004, and the years  ended December 31, 2003 and 2002 (Predecessor Company) |   |
|                                                                                                                                                                                                                                                                                                  |   |
| Consolidated  Statements of Cash Flows for the period from October 1, 2004 to  December 31, 2004 (Successor Company), the period from January 1,  2004 to September, 2004, and years ended December 31, 2003 and 2002  (Predecessor Company)                                      |   |
|                                                                                                                                                                                                                                                                                                  |   |
| Notes to  Consolidated Financial Statements                                                                                                                                                                                                                                                           |   |

 

F-1

----

 

**Report of Independent Registered Public Accounting Firm**

 

The Board of Directors andStockholdersHorizon PCS, Inc.:

 

We haveaudited the accompanying consolidated balance sheets of Horizon PCS, Inc.and subsidiaries as of December 31, 2004 (Successor Company) and 2003(Predecessor Company), and the related consolidated statements of operations,stockholders’ equity (deficit), comprehensive income (loss) and cash flows forthe period from October 1, 2004 through December 31, 2004(Successor Company), the period from January 1, 2004 through September 30, 2004(Predecessor Company), and the years ended December 31, 2003 and 2002(Predecessor Company). These financial statements are the responsibility of theCompany’s management. Our responsibility is to express an opinion on thesefinancial statements based on our audits.

 

Weconducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation. We believe that ouraudits provide a reasonable basis for our opinion.

 

In ouropinion, the consolidated financial statements referred to above presentfairly, in all material respects, the financial position of Horizon PCS, Inc.and subsidiaries at December 31, 2004 (Successor Company) and 2003(Predecessor Company), and the related consolidated statements of operations,stockholders’ equity (deficit), comprehensive income (loss) and cash flows forthe period from October 1, 2004 through December 31, 2004(Successor Company), the period from January 1, 2004 through September 30, 2004(Predecessor Company), and the years ended December 31, 2003 and 2002(Predecessor Company), in conformity with U.S. generally accepted accountingprinciples.

 

Asdiscussed in Note 1 to the consolidated financial statements, on September 21,2004, the Bankruptcy Court entered an order confirming the Plan ofReorganization, which became effective on October 1, 2004.Accordingly, the accompanying financial statements have been prepared inconformity with AICPA Statement of Position 90-7, “Financial Reporting forEntities in Reorganization Under the Bankruptcy Code,” for the SuccessorCompany as a new entity with assets, liabilities, and a capital structurehaving carrying values not comparable with prior periods as described inNote 1.

 

Columbus, Ohio March 17, 2005

 

F-2

----

 

**HORIZON PCS,INC.**

**CONSOLIDATEDBALANCE SHEETS**

**December 31,2004 and 2003**

 
| ** **                                                                                                                    | ** ** | **Successor  Company** | ** **  | **Predecessor  Company** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|-------------|--------------------------|------------|
| ** **                                                                                                                    | ** ** | **2004**               | ** **  | **2003**                 | ** ** |
| ASSETS                                                                                                                        |       |                   |        |                     |       |
| Current assets:                                                                                                               |       |                   |        |                     |       |
| Cash and cash equivalents                                                                                                     |       | $                      | 55,540,540  |                     | $          | 70,651,046 |   |
| Restricted cash                                                                                                               |       | —                 |        | 12,032,009               |       |
| Accounts receivable, net                                                                                                      |       | 10,353,496             |        | 20,985,060               |       |
| Equipment inventory                                                                                                           |       | 387,967                |        | 594,121                  |       |
| Prepaid expenses and other current assets                                                                                     |       | 1,703,024              |        | 3,519,032                |       |
| Total current assets                                                                                                          |       | 67,985,027             |        | 107,781,268              |       |
| Other assets:                                                                                                                 |       |                   |        |                     |       |
| Debt issuance costs, net of amortization                                                                                      |       | 4,071,734              |        | —                   |       |
| Deferred activation expense and other  assets                                                                                 |       | 443,914                |        | 3,955,252                |       |
| Intangible assets, net                                                                                                        |       | 111,432,516            |        | —                   |       |
| Total other assets                                                                                                            |       | 115,948,164            |        | 3,955,252                |       |
| Property and equipment, net                                                                                                   |       | 106,258,330            |        | 171,787,783              |       |
| Total assets                                                                                                                  |       | $                      | 290,191,521 |                     | $          | 283,524,303 |   |
|                                                                                                                          |       |                   |        |                     |       |
| LIABILITIES AND STOCKHOLDERS’ EQUITY  (DEFICIT)                                                                          |       |                   |        |                     |       |
| Current liabilities:                                                                                                          |       |                   |        |                     |       |
| Accounts payable                                                                                                              |       | $                      | 4,690,792   |                     | $          | 11,970,315 |   |
| Accrued liabilities                                                                                                           |       | 1,267,038              |        | 744,109                  |       |
| Accrued interest                                                                                                              |       | 6,437,934              |        | —                   |       |
| Accrued real estate, personal property and  other taxes                                                                       |       | 6,360,404              |        | 732,400                  |       |
| Payable to Sprint                                                                                                             |       | 5,063,351              |        | 14,817,567               |       |
| Liabilities subject to compromise                                                                                             |       | —                 |        | 670,734,149              |       |
| Deferred service revenue                                                                                                      |       | 3,938,128              |        | 6,255,748                |       |
| Total current liabilities                                                                                                     |       | 27,757,647             |        | 705,254,288              |       |
|                                                                                                                          |       |                   |        |                     |       |
| Long-term liabilities:                                                                                                        |       |                   |        |                     |       |
| Long-term debt                                                                                                                |       | 125,000,000            |        | —                   |       |
| Other long-term                                                                                                               |       | 3,961,136              |        | 1,735,670                |       |
| Deferred activation revenue                                                                                                   |       | 278,848                |        | 3,748,575                |       |
| Total long-term liabilities                                                                                                   |       | 129,239,984            |        | 5,484,245                |       |
| Total liabilities                                                                                                             |       | 156,997,631            |        | 710,738,533              |       |
|                                                                                                                          |       |                   |        |                     |       |
| Predecessor convertible preferred stock                                                                                       |       | —                 |        | 169,785,299              |       |
|                                                                                                                          |       |                   |        |                     |       |
| Stockholders’ equity (deficit):                                                                                          |       |                   |        |                     |       |
| Successor preferred stock, $0.0001 par value.  Authorized 10,000,000 shares, none issued or outstanding                       |       | —                 |        | —                   |       |
| Predecessor preferred stock, $0.0001 par  value. Authorized 10,000,000 shares, none issued or outstanding                     |       | —                 |        | —                   |       |
| Successor common stock, $0.0001 par value.  Authorized 25,000,000 shares, 8,909,568 issued and outstanding                    |       | 891                    |        | —                   |       |
| Predecessor common stock, $0.0001 par  value. Authorized 300,000 class A shares, 26,646 issued and outstanding                |       | —                 |        | 3                        |       |
| Predecessor common stock, $0.0001 par  value. Authorized 75,000 class B shares, 58,458,537 issued and 58,443,254  outstanding |       | —                 |        | 5,846                    |       |
| Treasury stock - class B, 15,283 shares, at  $7.267 per share                                                                 |       | —                 |        | (111,061                 | )          |
| Accumulated other comprehensive income  (loss)                                                                                |       | —                 |        | —                   |       |
| Additional paid-in capital                                                                                                    |       | 157,234,756            |        | 91,852,141               |       |
| Deferred stock option compensation                                                                                            |       | —                 |        | (266,107                 | )          |
| Accumulated deficit                                                                                                           |       | (24,041,757            | )           | (688,480,351             | )          |
| Total stockholders’ equity (deficit)                                                                                     |       | 133,193,890            |        | (596,999,529             | )          |
| Total liabilities and stockholders’ equity  (deficit)                                                                    |       | $                      | 290,191,521 |                     | $          | 283,524,303 |   |

 

See accompanying notes to consolidated financial statements.

 

F-3

----

 

**HORIZONPCS, INC.**

 

**CONSOLIDATED STATEMENTS OF OPERATIONS**

 
| ** **                                                                                                                                                                                                        | ** ** | **Successor   Company**    | ** **  | ** **                       | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|-------------|----------------------------------|------------|
| ** **                                                                                                                                                                                                        | ** ** | **October 1, 2004**   | ** **  | **Predecessor Company**          | ** ** |
| ** **                                                                                                                                                                                                        | ** ** | **Through**                | ** **  | **January 1, 2004 Through** | ** ** | **Year Ended December 31,** | ** ** |
| ** **                                                                                                                                                                                                        | ** ** | **December 31, 2004** | ** **  | **September 30, 2004**      | ** ** | **2003** | ** ** | **2002** | ** ** |
| Operating revenues:                                                                                                                                                                                               |       |                       |        |                             |       |   |   |   |   |
| Subscriber revenues                                                                                                                                                                                               |       | $                          | 28,092,554  |                             | $          | 119,289,682 |   | $ | 188,671,337 |   | $ | 152,409,453 |   |
| Roaming revenues                                                                                                                                                                                                  |       | 15,520,188                 |        | 49,242,731                       |       | 61,728,304 |   | 55,781,574 |   |
| Equipment revenues                                                                                                                                                                                                |       | 1,593,598                  |        | 4,036,015                        |       | 5,166,272 |   | 7,846,573 |   |
| Total operating revenues                                                                                                                                                                                          |       | 45,206,340                 |        | 172,568,428                      |       | 255,565,913 |   | 216,037,600 |   |
|                                                                                                                                                                                                              |       |                       |        |                             |       |   |   |   |   |
| Operating expenses:                                                                                                                                                                                               |       |                       |        |                             |       |   |   |   |   |
| Cost of service (exclusive of items shown below)                                                                                                                                                                  |       | 23,812,073                 |        | 107,137,621                      |       | 181,305,674 |   | 167,128,087 |   |
| Cost of equipment                                                                                                                                                                                                 |       | 2,261,185                  |        | 4,154,198                        |       | 13,351,419 |   | 19,188,975 |   |
| Selling and marketing                                                                                                                                                                                             |       | 5,767,208                  |        | 18,812,525                       |       | 39,549,966 |   | 52,601,068 |   |
| General and administrative (exclusive of  items shown below)                                                                                                                                                 |       | 7,886,968                  |        | 21,432,925                       |       | 38,394,994 |   | 41,650,367 |   |
| Reorganization (income) expense                                                                                                                                                                                   |       | —                     |        | (74,613,444                      | )          | 118,801,844 |   | — |   |
| Non-cash compensation (For the period Oct  2, 2004 through Dec 31, 2004, $51,864 related to cost of service, $64,828 related  to selling and marketing, and $523,891 related to general  and administrative) |       | 640,583                    |        | 145,044                          |       | 619,640 |   | 680,749 |   |
| Depreciation and amortization                                                                                                                                                                                     |       | 25,539,237                 |        | 24,568,048                       |       | 111,310,199 |   | 40,271,034 |   |
| Loss (gain) on disposal or sale of PCS assets                                                                                                                                                                     |       | 312                        |        | (42,062,619                      | )          | 216,312 |   | 631,417 |   |
| Impairment of goodwill and impact of acquisition-related  deferred taxes                                                                                                                                          |       | —                     |        | —                           |       | — |   | 13,222,180 |   |
| Total operating expenses                                                                                                                                                                                          |       | 65,907,566                 |        | 59,574,298                       |       | 503,550,048 |   | 335,373,877 |   |
|                                                                                                                                                                                                              |       |                       |        |                             |       |   |   |   |   |
| Operating income (loss)                                                                                                                                                                                           |       | (20,701,226                | )           | 112,994,130                      |       | (247,984,135 | ) | (119,336,277 | ) |
|                                                                                                                                                                                                              |       |                       |        |                             |       |   |   |   |   |
| Interest income and other, net                                                                                                                                                                                    |       | 271,274                    |        | 832,840                          |       | 885,439 |   | 2,989,026 |   |
| Interest expense, net of capitalized  interest                                                                                                                                                                    |       | (3,611,805                 | )           | (8,701,555                       | )          | (44,718,586 | ) | (60,600,568 | ) |
| Cancellation of debt                                                                                                                                                                                              |       | —                     |        | 321,943,771                      |       | — |   | — |   |
| Income (loss) before income tax benefit                                                                                                                                                                           |       | (24,041,757                | )           | 427,069,186                      |       | (291,817,282 | ) | (176,947,819 | ) |
| Income tax benefit                                                                                                                                                                                                |       | —                     |        | —                           |       | 6,031,000 |   | — |   |
| Net income (loss)                                                                                                                                                                                                 |       | (24,041,757                | )           | 427,069,186                      |       | (285,786,282 | ) | (176,947,819 | ) |
| Preferred stock dividend                                                                                                                                                                                          |       | —                     |        | (10,135,398                      | )          | (12,680,098 | ) | (11,756,253 | ) |
| Net income (loss) attributable to common  shareholders                                                                                                                                                            |       | $                          | (24,041,757 | )                                | $          | 416,933,788 |   | $ | (298,466,380 | ) | $ | (188,704,072 | ) |
|                                                                                                                                                                                                              |       |                       |        |                             |       |   |   |   |   |
| Basic and diluted loss per share attributed  to common stockholders                                                                                                                                               |       | $                          | (2.70       | )                                |       |   |   |   |   |   |
| Weighted-average common shares outstanding                                                                                                                                                                        |       | 8,909,568                  |        |                             |       |   |   |   |   |

 

Seeaccompanying notes to consolidated financial statements.

 

F-4

----

 

**HORIZONPCS, INC.**

 

**CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)**

 
| ** **                                       | ** ** | **Successor   Company**    | ** **  | ** **                       | ** ** |
|--------------------------------------------------|------------|----------------------------|-------------|----------------------------------|------------|
| ** **                                       | ** ** | **October 1, 2004**   | ** **  | **Predecessor Company**          | ** ** |
| ** **                                       | ** ** | **Through**                | ** **  | **January 1, 2004 Through** | ** ** | **Year Ended December 31,** | ** ** |
| ** **                                       | ** ** | **December 31, 2004** | ** **  | **September 30, 2004**      | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                             |       |                       |        |                             |       |   |   |   |   |
| Net income (loss)                                |       | $                          | (24,041,757 | )                                | $          | 427,069,186 |   | $ | (285,786,282 | ) | $ | (176,947,819 | ) |
| Other comprehensive income (loss):               |       |                       |        |                             |       |   |   |   |   |
| Net unrealized gain (loss) on hedging activities |       | —                     |        | —                           |       | 394,575 |   | 443,276 |   |
| Comprehensive income (loss)                      |       | $                          | (24,041,757 | )                                | $          | 427,069,186 |   | $ | (285,391,707 | ) | $ | (176,504,543 | ) |

 

Seeaccompanying notes to consolidated financial statements.

 

F-5

----

 

**HORIZONPCS, INC.**

 

**CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)**

 
| ** **                                                                                                              | ** ** | **Common  Stock** | ** ** | **Treasury  Stock** | ** ** | **Accumulated  Other  Comprehensive  Income (Loss)** | ** ** | **Additional  Paid-In  Capital** | ** ** | **Deferred  Stock  Option  Compensation** | ** ** | **Accumulated  Deficit** | ** ** | **Total  Stockholders’  Equity (Deficit)** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|---------------------|------------|------------------------------------------------------|------------|----------------------------------|------------|-------------------------------------------|------------|--------------------------|------------|-------------------------------------------------|------------|
| **Predecessor Company:**                                                                                                |       |              |       |                |       |                                                 |       |                             |       |                                      |       |                     |       |                                            |       |
| Balance, December 31, 2001                                                                                         |       | $                 | 5,849      |                | $          | (111,061                                             | )          | $                                | (837,851   | )                                         | $          | 91,852,117               |       | $                                               | (1,566,496 | ) | $ | (201,309,899 | ) | $ | (111,967,341 | ) |
| Stock option compensation expense                                                                                       |       | —            |       | —              |       | —                                               |       | —                           |       | 680,749                                   |       | —                   |       | 680,749                                         |       |
| Net loss                                                                                                                |       | —            |       | —              |       | —                                               |       | —                           |       | —                                    |       | (176,947,819             | )          | (176,947,819                                    | )          |
| Other comprehensive income (loss)                                                                                       |       | —            |       | —              |       | 443,276                                              |       | —                           |       | —                                    |       | —                   |       | 443,276                                         |       |
| Preferred dividend                                                                                                      |       | —            |       | —              |       | —                                               |       | —                           |       | —                                    |       | (11,756,253              | )          | (11,756,253                                     | )          |
| Balance, December 31, 2002                                                                                         |       | 5,849             |       | (111,061            | )          | (394,575                                             | )          | 91,852,117                       |       | (885,747                                  | )          | (390,013,971             | )          | (299,547,388                                    | )          |
| Stock option compensation expense                                                                                       |       | —            |       | —              |       | —                                               |       | —                           |       | 619,640                                   |       | —                   |       | 619,640                                         |       |
| Exercise of stock options                                                                                               |       | —            |       | —              |       | —                                               |       | 24                               |       | —                                    |       | —                   |       | 24                                              |       |
| Net loss                                                                                                                |       | —            |       | —              |       | —                                               |       | —                           |       | —                                    |       | (285,786,282             | )          | (285,786,282                                    | )          |
| Other comprehensive income (loss)                                                                                       |       | —            |       | —              |       | 394,575                                              |       | —                           |       | —                                    |       | —                   |       | 394,575                                         |       |
| Preferred dividend                                                                                                      |       | —            |       | —              |       | —                                               |       | —                           |       | —                                    |       | (12,680,098              | )          | (12,680,098                                     | )          |
| Balance, December 31, 2003                                                                                         |       | 5,849             |       | (111,061            | )          | —                                               |       | 91,852,141                       |       | (266,107                                  | )          | (688,480,351             | )          | (596,999,529                                    | )          |
| Stock option compensation expense                                                                                       |       | —            |       | —              |       | —                                               |       | —                           |       | 145,044                                   |       | —                   |       | 145,044                                         |       |
| Net income                                                                                                              |       | —            |       | —              |       | —                                               |       | —                           |       | —                                    |       | 427,069,186              |       | 427,069,186                                     |       |
| Preferred dividend                                                                                                      |       | —            |       | —              |       | —                                               |       | —                           |       | —                                    |       | (10,135,398              | )          | (10,135,398                                     | )          |
| Elimination of predecessor stock, deferred  compensation accumulated deficit and accumulated other comprehensive income |       | (5,849            | )          | 111,061             |       | —                                               |       | (91,852,141                      | )          | 121,063                                   |       | 271,546,563              |       | 179,920,697                                     |       |
|                                                                                                                    |       |              |       |                |       |                                                 |       |                             |       |                                      |       |                     |       |                                            |       |
| **Successor Company:**                                                                                                  |       |              |       |                |       |                                                 |       |                             |       |                                      |       |                     |       |                                            |       |
| Balance, October 1, 2004                                                                                           |       | —            |       | —              |       | —                                               |       | —                           |       | —                                    |       | —                   |       | —                                          |       |
| Issuance of new common stock                                                                                            |       | 891               |       | —              |       | —                                               |       | 156,594,173                      |       | —                                    |       | —                   |       | 156,595,064                                     |       |
| Stock option compensation expense                                                                                       |       | —            |       | —              |       | —                                               |       | 640,583                          |       | —                                    |       | —                   |       | 640,583                                         |       |
| Net loss                                                                                                                |       | —            |       | —              |       | —                                               |       | —                           |       | —                                    |       | (24,041,757              | )          | (24,041,757                                     | )          |
| Balance, December 31, 2004                                                                                         |       | 891               |       | —              |       | —                                               |       | 157,234,756                      |       | —                                    |       | (24,041,757              | )          | 133,193,890                                     |       |
|                                                                                                                         |            |                   |            |                     |            |                                                      |            |                                  |            |                                           |            |                          |            |                                                 |            |  |  |  |  |  |  |  |

 

Seeaccompanying notes to consolidated financial statements.

 

F-6

----

 

**HORIZONPCS, INC.**

 

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

 
| ** **                                                                                                 | ** ** | **Successor**              | ** **  | ** **                  | ** ** | ** **                       | ** ** | ** **  | ** **   |
|------------------------------------------------------------------------------------------------------------|------------|----------------------------|-------------|-----------------------------|------------|----------------------------------|------------|-------------|--------------|
| ** **                                                                                                 | ** ** | **Company**                | ** **  | **Predecessor Company**     | ** ** |
| ** **                                                                                                 | ** ** | **October 1, 2004**   | ** **  | **January 1, 2004**    | ** ** | ** **                       | ** ** |
| ** **                                                                                                 | ** ** | **Through**                | ** **  | **Through**                 | ** ** | **Year Ended December 31,** | ** ** |
| ** **                                                                                                 | ** ** | **December 31, 2004** | ** **  | **September 30, 2004** | ** ** | **2003**                         | ** ** | **2002**    | ** **   |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                                      |       |                       |        |                        |       |                             |       |        |         |
| Net income (loss)                                                                                          |       | $                          | (24,041,757 | )                           | $          | 427,069,186                      |       | $           | (285,786,282 | ) | $ | (176,947,819 | ) |
| Adjustments to reconcile net income (loss)  to net cash  provided by (used in)  operating activities: |       |                       |        |                        |       |                             |       |        |         |
| Depreciation and amortization                                                                              |       | 25,539,237                 |        | 24,568,048                  |       | 37,549,921                       |       | 40,271,034  |         |
| Asset impairment included in depreciation  and amortization                                                |       | —                     |        | —                      |       | 73,760,278                       |       | —      |         |
| Non-cash restructuring items                                                                               |       | —                     |        | 1,123,464                   |       | 110,084,005                      |       | —      |         |
| Cancellation of debt                                                                                       |       | —                     |        | (321,943,771                | )          | —                           |       | —      |         |
| Gain on fresh-start adjustments                                                                            |       | —                     |        | (92,407,987                 | )          | —                           |       | —      |         |
| Deferred federal income taxes                                                                              |       | —                     |        | —                      |       | (6,031,000                       | )          | —      |         |
| Impairment of goodwill and impact of  acquisition-related deferred taxes                                   |       | —                     |        | —                      |       | —                           |       | 13,222,180  |         |
| Noncash compensation expense                                                                               |       | 640,583                    |        | 145,044                     |       | 619,640                          |       | 680,749     |         |
| Noncash interest expense                                                                                   |       | 131,346                    |        | —                      |       | 20,314,586                       |       | 27,986,604  |         |
| Gain on Sprint transaction                                                                                 |       | —                     |        | (42,062,619                 | )          | —                           |       | —      |         |
| Bad debt expense                                                                                           |       | 1,689,079                  |        | 3,121,975                   |       | 7,509,286                        |       | 15,518,084  |         |
| Loss on hedging activities                                                                                 |       | —                     |        | —                      |       | 14,433                           |       | 48,536      |         |
| Loss on disposal of PCS assets                                                                             |       | 312                        |        | —                      |       | 216,312                          |       | 631,417     |         |
| Change in:                                                                                                 |       |                       |        |                        |       |                             |       |        |         |
| Accounts receivable                                                                                        |       | (1,900,501                 | )           | 1,873,383                   |       | (8,969,819                       | )          | (20,748,840 | )            |
| Equipment inventory                                                                                        |       | (22,924                    | )           | 229,078                     |       | 3,488,674                        |       | (237,362    | )            |
| Interest receivable and other                                                                              |       | 589,316                    |        | 1,226,693                   |       | (847,574                         | )          | (1,830,488  | )            |
| Accounts payable                                                                                           |       | (7,227,856                 | )           | (4,624,738                  | )          | 8,717,712                        |       | (3,164,423  | )            |
| Accrued liabilities and deferred service  revenue                                                          |       | 3,216,247                  |        | 2,320,810                   |       | 14,915,108                       |       | 25,330,341  |         |
| Liabilities subject to compromise                                                                          |       | —                     |        | (2,782,327                  | )          | (3,217,204                       | )          | —      |         |
| Payable to Sprint                                                                                          |       | (492,996                   | )           | (4,988,586                  | )          | 16,770,583                       |       | (334,267    | )            |
| Receivable/payable from affiliates and  Parent                                                             |       | —                     |        | —                      |       | (239,217                         | )          | 575,725     |         |
| Other assets and liabilities, net                                                                          |       | (176,075                   | )           | (492,916                    | )          | 846,806                          |       | 189,283     |         |
| Total adjustments                                                                                          |       | 21,985,768                 |        | (434,694,449                | )          | 275,502,530                      |       | 98,138,573  |         |
| Net cash flows from operating activities                                                                   |       | (2,055,989                 | )           | (7,625,263                  | )          | (10,283,752                      | )          | (78,809,246 | )            |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                                                      |       |                       |        |                        |       |                             |       |        |         |
| Capital expenditures, net                                                                                  |       | (2,619,317                 | )           | (1,641,228                  | )          | (5,202,510                       | )          | (63,082,910 | )            |
| Proceeds from the sale of property and  equipment                                                          |       | 29,162                     |        | 88,758                      |       | —                           |       | 1,563,970   |         |
| Proceeds from Sprint transaction, net                                                                      |       | —                     |        | 33,010,271                  |       | —                           |       | —      |         |
| Restricted cash released - to be  distributed to bondholders                                               |       | 12,032,009                 |        | —                      |       | —                           |       | —      |         |
| Net cash flows from investing activities                                                                   |       | 9,441,854                  |        | 31,457,801                  |       | (5,202,510                       | )          | (61,518,940 | )            |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                                                      |       |                       |        |                        |       |                             |       |        |         |
| Restricted cash released - distributed to  bondholders                                                     |       | (12,032,009                | )           | —                      |       | —                           |       | —      |         |
| Distributed interest earned on restricted  cash                                                            |       | (93,819                    | )           | —                      |       | —                           |       | —      |         |
| Exercise of stock options                                                                                  |       | —                     |        | —                      |       | 24                               |       | —      |         |
| Deferred financing fees                                                                                    |       | (4,096                     | )           | (4,198,985                  | )          | —                           |       | (2,310,092  | )            |
| Notes payable - borrowings                                                                                 |       | —                     |        | 125,000,000                 |       | —                           |       | 105,000,000 |         |
| Notes payable - repayments                                                                                 |       | —                     |        | (155,000,000                | )          | —                           |       | —      |         |
| Net cash flows from financing activities                                                                   |       | (12,129,924                | )           | (34,198,985                 | )          | 24                               |       | 102,689,908 |         |
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                                       |       | (4,744,059                 | )           | (10,366,447                 | )          | (15,486,238                      | )          | (37,638,278 | )            |
| CASH AND CASH EQUIVALENTS, BEGINNING                                                                       |       | 60,284,599                 |        | 70,651,046                  |       | 86,137,284                       |       | 123,775,562 |         |
| CASH AND CASH EQUIVALENTS, ENDING                                                                          |       | $                          | 55,540,540  |                        | $          | 60,284,599                       |       | $           | 70,651,046   |   | $ | 86,137,284 |   |
|                                                                                                       |       |                       |        |                        |       |                             |       |        |         |
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:                                                         |       |                       |        |                        |       |                             |       |        |         |
| Cash paid during the period for:                                                                           |       |                       |        |                        |       |                             |       |        |         |
| Interest, net of amounts capitalized                                                                       |       | $                          | —      |                        | $          | 5,818,308                        |       | $           | 22,368,280   |   | $ | 33,081,907 |   |
| Income taxes                                                                                               |       | 30,000                     |        | 140,000                     |       | —                           |       | —      |         |

 

Seeaccompanying notes to consolidated financial statements.

 

F-7

----

 

**HORIZONPCS, INC.**

 

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

 

Supplementaldisclosure of noncash investing and financing activities:

 

During2003 and 2002, the Company paid $12,528,995 and $11,636,969, respectively, ofdividends on convertible preferred stock. The dividends were paid in additionalshares of convertible preferred stock. The convertible preferred stock waseliminated as part of the Plan of Reorganization.

 

As partof the Plan of Reorganization, the Company converted bonds and trade payableswith a value of $470,000,000 and $11,287,350, respectively into new commonstock which was valued at approximately $156.6 million as of October 1,2004 under fresh-start accounting principles.

 

Seeaccompanying notes to consolidated financial statements.

 

F-8

----

 

**HORIZONPCS, INC.**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**(1) Bankruptcy**

 

***(a) VoluntaryBankruptcy Filing***

 

On August 15,2003, Horizon PCS, Inc., a Delaware corporation (“Horizon PCS” or the “Company”),Horizon Personal Communications, Inc., an Ohio corporation and subsidiaryof the Company (“Percom”), and Bright Personal Communications Services LLC, anOhio limited liability company and subsidiary of the Company (“Bright”) (theCompany, Bright, and Percom collectively, the “Debtors”), filed voluntarypetitions for relief under Chapter 11 of Title 11 of the United States Code(the “Bankruptcy Code”) in the United States Bankruptcy Court for the SouthernDistrict of Ohio (the “Bankruptcy Court”). The Debtors continued to managetheir properties and operate their businesses in the ordinary course ofbusiness as “debtors-in-possession” subject to the supervision and orders ofthe Bankruptcy Court pursuant to Sections 1107(a) and 1108 of theBankruptcy Code, in Case No. 03-62424 (the “Bankruptcy Case”).

 

***(b) Plan ofReorganization***

 

On September 21,2004, the bankruptcy court approved a Plan of Reorganization that satisfies therequirements of the Bankruptcy Code.

 

The Planof Reorganization divided the claims against and interests in the Company intoseven classes according to the priority of the claims. A summary of each classand settlement is as follows:

 

HorizonPCS, Inc.

 
| **Class** | ** ** | **Claim/Interest**                  | ** ** | **Treatment**                                  | ** ** | **Status** | ** ** | **Entitled to  Vote** |
|-----------|------------|-------------------------------------|------------|------------------------------------------------|------------|------------|------------|-----------------------|
| 1A        |       | Priority Non-Tax Claims             |       | Paid in full                                   |       | Unimpaired |       | No                    |
| 2A        |       | Prepetition Secured Lender  Claims  |       | Paid in full                                   |       | Unimpaired |       | No                    |
| 3A1       |       | Prepetition Note Secured  Claims    |       | Paid in full                                   |       | Unimpaired |       | No                    |
| 3A2       |       | Other Secured Claims                |       | Paid in full                                   |       | Unimpaired |       | No                    |
| 4A1       |       | General Unsecured Trade  Claims     |       | Paid at 16%, and received  8% new common stock |       | Impaired   |       | Yes                   |
| 4A2       |       | Prepetition Note Deficiency  Claims |       | Paid at 16%, and received  8% new common stock |       | Impaired   |       | Yes                   |
| 5A        |       | Convenience Claims                  |       | Paid at 24%                                    |       | Impaired   |       | Yes                   |
| 6A        |       | Horizon Preferred Interests         |       | None                                           |       | Impaired   |       | No                    |
| 7A        |       | Percom Interests                    |       | None                                           |       | Impaired   |       | No                    |

 

F-9

----

 

BrightPersonal Communications Services, LLC

 
| **Class** | ** ** | **Claim/Interest**                 | ** ** | **Treatment**                                  | ** ** | **Status** | ** ** | **Entitled to  Vote** |
|-----------|------------|------------------------------------|------------|------------------------------------------------|------------|------------|------------|-----------------------|
| 1B        |       | Priority Non-Tax Claims            |       | Paid in full                                   |       | Unimpaired |       | No                    |
| 2B        |       | Prepetition Secured Lender  Claims |       | Paid in full                                   |       | Unimpaired |       | No                    |
| 3B        |       | Other Secured Claims               |       | Paid in full                                   |       | Unimpaired |       | No                    |
| 4B1       |       | General Unsecured Trade  Claims    |       | Paid at 16%, and received  8% new common stock |       | Impaired   |       | Yes                   |
| 4B2       |       | Prepetition Note Claims            |       | Paid at 16%, and received  8% new common stock |       | Impaired   |       | Yes                   |
| 5B        |       | Convenience Claims                 |       | Paid at 24%                                    |       | Impaired   |       | Yes                   |
| 6B        |       | Intercompany Claims                |       | None                                           |       | Impaired   |       | Yes                   |
| 7B        |       | Bright Interests                   |       | None                                           |       | Impaired   |       | No                    |

 

HorizonPersonal Communications, Inc.

 
| **Class** | ** ** | **Claim/Interest**                 | ** ** | **Treatment**                                  | ** ** | **Status** | ** ** | **Entitled to  Vote** |
|-----------|------------|------------------------------------|------------|------------------------------------------------|------------|------------|------------|-----------------------|
| 1C        |       | Priority Non-Tax Claims            |       | Paid in full                                   |       | Unimpaired |       | No                    |
| 2C        |       | Prepetition Secured Lender  Claims |       | Paid in full                                   |       | Unimpaired |       | No                    |
| 3C        |       | Other Secured Claims               |       | Paid in full                                   |       | Unimpaired |       | No                    |
| 4C1       |       | General Unsecured Trade  Claims    |       | Paid at 16%, and received  8% new common stock |       | Impaired   |       | Yes                   |
| 4C2       |       | Prepetition Note Claims            |       | Paid at 16%, and received  8% new common stock |       | Impaired   |       | Yes                   |
| 5C        |       | Convenience Claims                 |       | Paid at 24%                                    |       | Impaired   |       | Yes                   |
| 6C        |       | Intercompany Claims                |       | None                                           |       | Impaired   |       | Yes                   |
| 7C        |       | Percom Interests                   |       | None                                           |       | Impaired   |       | No                    |

 

Significantterms of the Plan of Reorganization are as follows:

 

•                                          All common and preferred equity shares of the Debtors (and all stockoptions and warrants)  were cancelled;

 

•                                          The senior secured debt was paid in full;

 

•                                          All pre-petition debt securities of the Debtors were settled andcancelled;

 

•                                          Unexpired leases and executory contracts of the Debtors were assumed orrejected;

 

•                                          Approximately 8.7 million shares of new common stock were issued to settleclaims of bond holders, approximately 0.2 million shares were issued to settlethe claims of general unsecured creditors and approximately 0.1 million shareshave been held in reserve for issuance upon the settlement of disputed claims;

 

•                                          Five new directors were appointed to the Company’s Board of Directors.

 

F-10

----

 

***(c) Accounting Impact***

 

TheCompany is required to follow the provisions of Statement of Position 90-7, *Financial Reporting by Entities in ReorganizationUnder the Bankruptcy Code*(“SOP 90-7”). Pursuant to SOP 90-7, theCompany’s pre-petition liabilities that were subject to compromise are reportedseparately on the balance sheet as an estimate of the amount that wasultimately allowed by the Bankruptcy Court. SOP 90-7 also requires separate reportingof certain expenses, realized gains and losses and provisions for lossesrelated to the bankruptcy filing as reorganization items. The followingpre-petition amounts are classified as liabilities subject to compromise as of December 31,2003:

 

| Payable to affiliate                             |   | $           | 110,460     |   |
|--------------------------------------------------|--------|-------------|-------------|--------|
| Accounts payable                                 |   | 20,865,427  |        |
| Accrued liabilities                              |   | 5,970,622   |        |
| Accrued real estate and personal property  taxes |   | 2,319,018   |        |
| Payable to Sprint                                |   | 10,005,850  |        |
| Long-term debt                                   |   | 625,000,000 |        |
| Other long-term liabilities                      |   | 6,462,772   |        |
| Total all liabilities subject to compromise      |   | $           | 670,734,149 |   |

 

Theconsolidated financial statements included herein include the accounts ofHorizon PCS, Inc. and its subsidiaries, Horizon Personal Communications, Inc.and Bright Personal Communications Services LLC. In accordance with SOP 90-7,the Company adopted fresh-start accounting for financial reporting purposes asof October 1, 2004, and the Company’s emergence from Chapter 11 resultedin a new reporting entity. The periods as of and prior to September 30,2004 have been designated “Predecessor Company” and the periods subsequent to September 30,2004 have been designated “Successor Company”. Under fresh-start accounting,the reorganization value of the Company was allocated to the assets based ontheir respective fair values and was in conformity with Statement of FinancialAccounting Standards (“SFAS”) No. 141 *Business Combinations*.Each existing liability was stated at present value of the amount to be paid.As a result of the implementation of fresh-start accounting, the financialstatements of the Company after the effective date are not comparable to theCompany’s financial statements for prior periods.

 

TheCompany estimated the reorganization value for purposes of fresh start reportingutilizing the estimated value of the Company on an enterprise basis (the “EnterpriseValue”), adjusting to exclude known liabilities other than the New CreditFacility at September 30, 2004. The Company engaged a valuation specialistto conduct this analysis.

 

TheEnterprise Value was determined by valuation specialists using the guidelinetransaction method and the discounted cash flow (the “DCF Analysis”) method.The guideline transaction method value was derived using metrics and financialdata, with more weight placed on the metrics data. For the DCF analysis, thespecialist calculated the present value of the debt-free cash flows onmanagement’s projections, including an assumption for a terminal value (the “DCFAnalysis”). The DCF Analysis involves deriving the debt-free cash flowsthat the Company would generate assuming the projections developed bymanagement are realized. These cash flows and an estimated value of the Companyat the end of the projected period (the “Terminal Value”) are discounted at theCompany’s estimated post-reorganization weighted average cost ofcapital. The financial projections utilized in the DCF analysis weredeveloped by management and are based on estimates and assumptions, whichinclude, but are not limited to, estimates and assumptions with respect topricing by market, capital spending and working capital levels, and thedevelopment of a discount rate that is utilized to convert future projectedcash flows to their estimated present value. The estimated projections andassumptions, while considered reasonable by management, may not be realized andare inherently subject to uncertainties and contingencies, which couldsignificantly affect the measurement of the Enterprise Value and thereorganization value. Based on the above methodologies, the EnterpriseValue was determined to be approximately $281.6 million.

 

Thereorganization value of the Successor Company of approximately $330.1 millionwas determined based on the negotiated sum of the Successor Company’s liabilitiesand equity that were issued and outstanding after final negotiations andBankruptcy Court approval. These included $125.0 million of debtoutstanding, $156.6 million of equity, and $48.5 million of otherliabilities that were not eliminated or discharged under the Plan ofReorganization.

 

Theeffect of the Plan of Reorganization on the Company’s balance sheet, as of October 1,2004, is as follows:

 

F-11

----

 
| ** **                                                 | ** ** | **Predecessor   Company** | ** **  | **Debt   Discharge** | ** ** | **Cancellation of   Old Equity (e)** | ** ** | **Fresh-start   Adjustments** | ** ** | **Successor   Company** | ** ** |
|------------------------------------------------------------|------------|---------------------------|-------------|----------------------|------------|--------------------------------------|------------|-------------------------------|------------|-------------------------|------------|
| ASSETS                                                     |       |                      |        |                 |       |                                 |       |                          |       |                    |       |
| Current assets:                                            |       |                      |        |                 |       |                                 |       |                          |       |                    |       |
| Cash and cash equivalents                                  |       | $                         | 55,578,205  |                 | $          | 4,706,394                            | (a)        |                          |       |                    |       | $ | 60,284,599 |   |
| Restricted cash                                            |       | 142,624,192               |        | (130,592,183         | )(a)       |                                 |       |                          |       | 12,032,009              |       |
| Accounts receivable, net                                   |       | 10,466,005                |        | (323,931             | )(h)       |                                 |       |                          |       | 10,142,074              |       |
| Equipment inventory                                        |       | 365,043                   |        |                 |       |                                 |       |                          |       | 365,043                 |       |
| Prepaid expenses and other current assets                  |       | 2,451,129                 |        | (158,790             | )(i)       |                                 |       |                          |       | 2,292,339               |       |
| Total current assets                                       |       | 211,484,574               |        | (126,368,510         | )          | —                               |       | —                        |       | 85,116,064              |       |
| Other assets:                                              |       |                      |        |                 |       |                                 |       |                          |       |                    |       |
| Debt issuance costs, net of amortization                   |       | 448,985                   |        | 3,750,000            | (g)        |                                 |       |                          |       | 4,198,985               |       |
| Deferred activation expense and other  assets              |       | 1,576,796                 |        |                 |       |                                 |       | (1,393,231                    | )(f)       | 183,565                 |       |
| Intangible assets, net                                     |       | —                    |        |                 |       |                                 |       | 120,350,750                   | (f)        | 120,350,750             |       |
| Total other assets                                         |       | 2,025,781                 |        | 3,750,000            |       | —                               |       | 118,957,519                   |       | 124,733,300             |       |
| Property and equipment, net                                |       | 146,839,022               |        |                 |       |                                 |       | (26,549,532                   | )(f)       | 120,289,490             |       |
| Total assets                                               |       | $                         | 360,349,377 |                 | $          | (122,618,510                         | )          | $                             | —     |                    | $          | 92,407,987 |   | $ | 330,138,854 |   |
|                                                       |       |                      |        |                 |       |                                 |       |                          |       |                    |       |
| LIABILITIES AND STOCKHOLDERS’ EQUITY  (DEFICIT)       |       |                      |        |                 |       |                                 |       |                          |       |                    |       |
| Current liabilities:                                       |       |                      |        |                 |       |                                 |       |                          |       |                    |       |
| Accounts payable                                           |       | $                         | 7,345,577   |                 | $          | 4,573,071                            | (b)        |                          |       |                    |       | $ | 11,918,648 |   |
| Accrued liabilities                                        |       | 1,468,182                 |        |                 |       |                                 |       |                          |       | 1,468,182               |       |
| Accrued interest                                           |       | 2,883,247                 |        | 12,125,828           | (b)        |                                 |       |                          |       | 15,009,075              |       |
| Accrued real estate, property and other  taxes             |       | 1,663,734                 |        | 4,734,190            | (b)        |                                 |       |                          |       | 6,397,924               |       |
| Payable to Sprint                                          |       | 5,556,347                 |        |                 |       |                                 |       |                          |       | 5,556,347               |       |
| Liabilities subject to compromise                          |       | 623,916,579               |        | (623,916,579         | )(c)       |                                 |       |                          |       | —                  |       |
| Deferred service revenue                                   |       | 4,037,904                 |        |                 |       |                                 |       |                          |       | 4,037,904               |       |
| Total current liabilities                                  |       | 646,871,570               |        | (602,483,490         | )          | —                               |       | —                        |       | 44,388,080              |       |
|                                                       |       |                      |        |                 |       |                                 |       |                          |       |                    |       |
| Long-term liabilities:                                     |       |                      |        |                 |       |                                 |       |                          |       |                    |       |
| Long-term debt                                             |       | 125,000,000               |        |                 |       |                                 |       |                          |       | 125,000,000             |       |
| Other long-term                                            |       | 1,450,780                 |        | 2,704,930            | (b)        |                                 |       |                          |       | 4,155,710               |       |
| Deferred activation revenue                                |       | 1,378,785                 |        | (1,378,785           | )(c)       |                                 |       |                          |       | —                  |       |
| Total other long-term                                      |       | 127,829,565               |        | 1,326,145            |       | —                               |       | —                        |       | 129,155,710             |       |
| Total liabilities                                          |       | 774,701,135               |        | (601,157,345         | )          | —                               |       | —                        |       | 173,543,790             |       |
|                                                       |       |                      |        |                 |       |                                 |       |                          |       |                    |       |
| Convertible preferred stock                                |       | 179,920,697               |        |                 |       | (179,920,697                         | )          |                          |       | —                  |       |
|                                                       |       |                      |        |                 |       |                                 |       |                          |       |                    |       |
| Stockholders’ equity (deficit):                       |       |                      |        |                 |       |                                 |       |                          |       |                    |       |
| Predecessor preferred stock                                |       | —                    |        |                 |       |                                 |       |                          |       | —                  |       |
| Predecessor common stock - class A                         |       | 3                         |        |                 |       | (3                                   | )          |                          |       | —                  |       |
| Predecessor common stock - class B                         |       | 5,846                     |        |                 |       | (5,846                               | )          |                          |       | —                  |       |
| Successor preferred stock                                  |       | —                    |        |                 |       |                                 |       |                          |       | —                  |       |
| Successor common stock                                     |       |                      |        | 891                  | (c)        |                                 |       |                          |       | 891                     |       |
| Treasury stock                                             |       | (111,061                  | )           |                 |       | 111,061                              |       |                          |       | —                  |       |
| Accumulated other comprehensive income  (loss)             |       | —                    |        |                 |       |                                 |       |                          |       | —                  |       |
| Additional paid-in capital                                 |       | 91,852,141                |        | 156,594,173          | (c)        | (91,852,141                          | )          |                          |       | 156,594,173             |       |
| Deferred stock option compensation                         |       | (121,063                  | )           |                 |       | 121,063                              |       |                          |       | —                  |       |
| Accumulated deficit                                        |       | (685,898,321              | )           | 321,943,771          | (d)        | 271,546,563                          |       | 92,407,987                    | (f)        | —                  |       |
| Total stockholders’ equity (deficit)                  |       | (594,272,455              | )           | 478,538,835          |       | 179,920,697                          |       | 92,407,987                    |       | 156,595,064             |       |
| Total liabilities and stockholders’ equity  (deficit) |       | $                         | 360,349,377 |                 | $          | (122,618,510                         | )          | $                             | —     |                    | $          | 92,407,987 |   | $ | 330,138,854 |   |

 

----

(a)             Representsthe release of the proceeds from the July 2004 senior notes offering andother required amounts held in escrow. These funds were used to repay thesecured bank credit facility and debt issuance costs with the excesstransferred to operating cash.

 

(b)            Representsthe accrual of liabilities upon emergence under the Plan of Reorganization.

 

(c)             Representsthe pre-petition liabilities discharged under the Plan of Reorganization andthe issuance of the Successor Company’s new common stock.

F-12

----

 

(d)            Representsgain on debt discharge.

 

(e)             Representsthe elimination of the Predecessor Company’s equity.

 

(f)               Representsthe fresh-start adjustments to adjust the assets to fair value. The weightedaverage remaining lives of the in-service property, plant and equipment as of October 1, 2004 are as follows:

 
| Network assets                            |   | 4 years  |
|-------------------------------------------|--------|----------|
| Buildings                                 |   | 36 years |
| Switching equipment                       |   | 4 years  |
| Furniture, vehicles and  office equipment |   | 3 years  |

 

(g)   Representsdebt issuance costs consisting of fees and expenses of the July 2004senior notes offering.

 

(h)   Representsthe discharge of accounts receivable no longer able to be collected uponemergence under the Plan of Reorganization.

 

(i)   Representsthe collection of interest receivable earned onrestricted cash upon the release of the amounts held in escrow.

 

***(d) Reorganizationitems***

 

On July 28,2003, the Company implemented a work force reduction to further reduce coststhat were within its control. The employment of 309 employees was terminated,and the Company closed 20 of its 42 Company-owned sales and service centers toreduce costs in areas where revenues were not currently meeting criteria for returnon investment. The Company recorded a restructuring charge of $4.5 million in July 2003,related to these store closings and employee separation costs. In September 2004,the Company closed 5 additional stores and terminated 18 employees as part ofthe restructuring plan, resulting in $600,000 of restructuring charges. TheCompany incurred additional reorganization expenses of approximately $114.3million and approximately $17.2 million related to the bankruptcy during 2003and 2004, respectively. In addition, the Company recorded a gain on thefresh-start adjustments of approximately $92.4 million for the year ended December 31,2004. The detail of the reorganization items are as follows:

 

F-13

----

 

Predecessor Company:

 
| ** **                                          | ** ** | **Year Ended December 31, 2003** | ** **  |
|-----------------------------------------------------|------------|---------------------------------------|-------------|
| ** **                                          | ** ** | ** **                            | ** **  | ** ** | ** ** | ** ** | ** ** | **Ending** | ** ** |
| ** **                                          | ** ** | ** **                            | ** **  | **Cash** | ** ** | **Non-Cash** | ** ** | **Accrual** | ** ** |
| ** **                                          | ** ** | **Charges**                           | ** **  | **Deductions** | ** ** | **Deductions** | ** ** | **Balance** | ** ** |
| Employee separations                                |       | $                                     | 1,659,149   |   | $ | 1,625,066 |   | $ | — |   | $ | 34,083 |   |
| Lease commitments, net of sublease                  |       | 798,260                               |        | — |   | — |   | 798,260 |   |
| Equipment disposals                                 |       | 2,051,719                             |        | — |   | 2,051,719 |   | — |   |
| Professional fees                                   |       | 5,708,547                             |        | 3,208,547 |   | — |   | 2,500,000 |   |
| Key employee retention plan payments                |       | 551,883                               |        | 551,883 |   | — |   | — |   |
| Amortization of debt issuance fees                  |       | 18,143,362                            |        |   |   | 18,143,362 |   | — |   |
| Amortization of warrants                            |       | 16,127,275                            |        |   |   | 16,127,275 |   | — |   |
| Accelerated accretion of the senior  discount notes |       | 73,761,649                            |        | — |   | 73,761,649 |   | — |   |
|                                                |       | $                                     | 118,801,844 |   | $ | 5,385,496 |   | $ | 110,084,005 |   | $ | 3,332,343 |   |

 

Predecessor Company:

 
| ** **                           | ** ** | **Nine Months Ended September 30, 2004** | ** ** |
|--------------------------------------|------------|-----------------------------------------------|------------|
| ** **                           | ** ** | **Beginning**                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Ending** | ** ** |
| ** **                           | ** ** | **Accrual**                                   | ** ** | ** ** | ** ** | **Cash** | ** ** | **Non-Cash** | ** ** | **Accrual** | ** ** |
| ** **                           | ** ** | **Balance**                                   | ** ** | **Charges** | ** ** | **Deductions** | ** ** | **Deductions** | ** ** | **Balance** | ** ** |
| Fresh start adjustments              |       | $                                             | —     |   | $ | (92,407,987 | ) | $ | — |   | $ | (92,407,987 | ) | $ | — |   |
| Employee separations                 |       | 34,083                                        |       | 792,570 |   | 372,276 |   | — |   | 454,377 |   |
| Lease commitments, net of sublease   |       | 798,260                                       |       | — |   | — |   | 798,260 |   | — |   |
| Equipment disposals                  |       | —                                        |       | 325,204 |   | — |   | 325,204 |   | — |   |
| Professional fees                    |       | 2,500,000                                     |       | 15,072,479 |   | 14,030,273 |   | — |   | 3,542,206 |   |
| Key employee retention plan payments |       | —                                        |       | 1,604,290 |   | 1,604,290 |   | — |   | — |   |
|                                 |       | $                                             | 3,332,343  |   | $ | (74,613,444 | ) | $ | 16,006,839 |   | $ | (91,284,523 | ) | $ | 3,996,583 |   |

 

Successor Company:

 
| ** **           | ** ** | **Three Months Ended December 31, 2004** | ** ** |
|----------------------|------------|-----------------------------------------------|------------|
| ** **           | ** ** | **Beginning**                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Ending** | ** ** |
| ** **           | ** ** | **Accrual**                                   | ** ** | ** ** | ** ** | **Cash** | ** ** | **Non-Cash** | ** ** | **Accrual** | ** ** |
| ** **           | ** ** | **Balance**                                   | ** ** | **Charges** | ** ** | **Deductions** | ** ** | **Deductions** | ** ** | **Balance** | ** ** |
| Employee separations |       | $                                             | 454,377    |   | $ | — |   | $ | 411,376 |   | $ | — |   | $ | 43,001 |   |
| Professional fees    |       | 3,542,206                                     |       | — |   | 3,542,206 |   | — |   | — |   |
|                 |       | $                                             | 3,996,583  |   | $ | — |   | $ | 3,953,582 |   | $ | — |   | $ | 43,001 |   |

 

***(2) Organization andBusiness Operations***

 

On April 26,2000, Horizon Telcom, Inc. (“Parent” or “Horizon Telcom”) formed HorizonPCS, Inc. The Company primarily provides wireless personal communicationsservices (“PCS”) as a PCS affiliate of Sprint. The Company entered intomanagement agreements with Sprint during 1998 and 1999. These agreements, asamended, provide the Company with the exclusive right to build, own, and managea wireless voice and data services network in markets located in Ohio, West Virginia,Kentucky, Tennessee, Maryland, Pennsylvania, New York, New Jersey, Michigan,North Carolina and Indiana under the Sprint PCS brand. The term of theagreements is twenty years with three successive ten-year renewal periodsunless terminated by either party under provisions outlined in the managementagreements. The management agreements include indemnification clauses betweenthe Company and Sprint to indemnify each party against claims arising fromviolations of laws or the management agreements, other than liabilitiesresulting from negligence or willful misconduct of the party seeking to beindemnified.

 

In thesecond quarter of 2004, Horizon PCS Escrow Company, a wholly owned subsidiaryof Horizon PCS Inc., was formed solely to issue senior notes and to merge withand into Horizon PCS Inc. in connection with the reorganization. Horizon PCSEscrow Company was not a part of the bankruptcy estate of Horizon PCS, Inc.,had no operations or assets and did not incur any liabilities, other than thesenior notes, prior to the merger. Prior to consummation of the reorganization,the net proceeds of the 11 3/8% senior notes offering, together with otheramounts contributed directly or indirectly by Horizon PCS, Inc. to HorizonPCS Escrow Company, were placed in an escrow account. Upon consummation of thePlan of Reorganization on October 1, 2004, the senior notes became thesenior unsecured obligations of Horizon PCS, Inc. and were jointly andseverally guaranteed by all of its existing domestic restricted subsidiaries,and will be so guaranteed by any future domestic restricted subsidiaries.

 

F-14

----

 

**(3) Summary of SignificantAccounting Policies**

 

***(a) ******Principles of Consolidation***

 

Theconsolidated financial statements include the financial statements of HorizonPCS, Inc (the “Company”) and its wholly owned subsidiaries. Allsignificant intercompany balances and transactions have been eliminated.

 

***(b) Estimates***

 

Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expensesduring the reporting period. Actual results could differ materially from thoseestimates.

 

***(c) Cash and CashEquivalents***

 

Cash andcash equivalents include cash on hand, money market accounts and corporatebonds and investments in commercial paper with original maturities of threemonths or less.

 

Thebreakout of cash and cash equivalents as of December 31, 2004 and 2003, isdetailed below:

 
| ** **                           | ** ** | **Successor   Company   2004** | ** ** | **Predecessor   Company   2003** | ** ** |
|--------------------------------------|------------|--------------------------------|------------|----------------------------------|------------|
| Cash on hand                         |       | $                              | 12,886,639 |                             | $          | 56,738,127 |   |
| Money market accounts                |       | 10,795,142                     |       | 4,921,006                        |       |
| Corporate bonds and commercial paper |       | 31,858,759                     |       | 8,991,913                        |       |
| Cash and cash equivalents            |       | $                              | 55,540,540 |                             | $          | 70,651,046 |   |

 

***(d) Restricted Cash***

 

In connectionwith the Company’s December 2001 offering of $175,000,000 of senior notesdue in 2011 (Note 7), approximately $48,660,000 of the offering’s proceeds wereplaced in an escrow account to be used toward the first four semi-annualinterest payments due under the terms of the notes. During 2003, the Companypaid approximately $12,031,000 representing the third installment. The finalinstallment of $12,125,828 was distributed to the holders of the senior anddiscount notes in October 2004 according to the Plan of Reorganization.The funds were invested in a government security money market account. Interestearned on the escrow funds totaled approximately $13,000 for the period October 1,2004 to December 31, 2004, $52,000 for the period January 1, 2004 to September 30,2004, $183,000 in 2003 and $673,000 in 2002.

 

***(e) Allowance forAccounts Receivable***

 

Estimatesare used in determining our allowance for doubtful accounts receivable, whichis based on a percentage of our accounts receivable by aging category. Thepercentage is derived by considering our historical collections and write-offexperience, current aging of our accounts receivable and credit quality trends,as well as Sprint’s credit policy. Account balances are charged off against theallowance after all means of collection have been exhausted and the potentialfor recovery is considered remote. The Company does not have any off-balancesheet credit exposure related to its customers. The amounts presented in theconsolidated balance sheets are net of an allowance for uncollectible accountsas presented in the following table:

 

F-15

----

 
| ** **                    | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------|------------|----------------------------------|------------|
| ** **                    | ** ** | **2004**                         | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                    | ** ** | **(In thousands)**               | ** ** |
| Balance at beginning of year  |       | $                                | 1,840      |   | $ | 2,308 |   | $ | 1,804 |   |
| Provisions charged to expense |       | 4,811                            |       | 7,509 |   | 15,518 |   |
| Write-offs, net of recoveries |       | (5,655                           | )          | (7,977 | ) | (15,014 | ) |
| Balance at end of year        |       | $                                | 996        |   | $ | 1,840 |   | $ | 2,308 |   |

 

Theprovisions charged to expense for the period October 1, 2004 to December 31,2004 and January 1, 2004 to September 30, 2004 were approximately$1,689,000 and $3,122,000, respectively.

 

***(f)  EquipmentInventory***

 

Equipmentinventory consists of handsets and related accessories. Inventories are carriedat the lower of cost (determined by the weighted average method) or market(replacement cost).

 

***(g)  Property andEquipment***

 

Propertyand equipment, including improvements that extend useful lives, are stated atcost or allocated fair values determined in fresh-start reporting, whilemaintenance and repairs are charged to operations as incurred. Constructionwork in progress includes expenditures for the purchase of capital equipment,construction and items such as direct payroll and related benefits and interestcapitalized during construction. The Company capitalizes interest pursuant toSFAS No. 34, Capitalization of Interest Cost. The Company capitalizedinterest of approximately $74,000 for the period October 1, 2004 through December 31,2004 and $740,000 and $4,437,000 for the years ended December 31, 2003 and2002, respectively. In addition, the Company capitalized labor costs ofapproximately $36,000 for the period October 1, 2004 through December 31,2004, and $83,000 and $2,339,000 for the years ended December 31, 2003 and2002, respectively.

 

***(h)  Depreciation andAmortization of Property and Equipment***

 

TheCompany provides for depreciation and amortization of property and equipmentunder the straight-line method, based on the estimated service lives of thevarious classes of property. Estimated useful lives are as follows:

 

| ** **                                | ** ** | **Years** | ** ** |
|-------------------------------------------|------------|-----------|------------|
| Network assets                            |       | 5-15      |       |
| Buildings                                 |       | 36        |       |
| Switching equipment                       |       | 5-8       |       |
| Furniture, vehicles, and office equipment |       | 3-5       |       |

 

***(i)  Debt IssuanceCosts***

 

Inconnection with the issuance of long-term debt (Note 7), the Company incurredapproximately $24,072,000 in deferred financing costs through December 31,2003. These debt issuance costs were amortized using the effective interestmethod over the term of the underlying obligation, ranging from eight to tenyears. For the years ended December 31, 2003 and 2002, approximately$2,231,000 and $2,752,000, respectively, of amortization of debt issuancecosts, including costs related to subsequently retired financings, was includedin interest expense. As a result of the bankruptcy filing, all cost related todebt issuance balances as of August 15, 2003 were written off. Theseamounts were expensed to restructuring costs and totaled approximately$18,143,000.

 

In October 2004,the senior notes of Horizon PCS Escrow Company became the senior unsecuredobligations of Horizon PCS, Inc. (Note 7), and the Company incurredapproximately $4,203,000 in associated debt issuance costs. These debt issuancecosts are being amortized using the effective interest rate method over 8years. Accordingly, approximately $131,000 of amortization was included ininterest expense for the period October 1, 2004 to December 31, 2004.

 

***(j)  Goodwill and Other Intangible Assets***

 

On January 1,2002, the Company adopted SFAS No. 142, *Goodwilland Other Intangible Assets*(Note 4). Pursuant to SFAS No. 142,goodwill and intangible assets determined in fresh-start reporting ,or acquiredin a purchase business combination, and determined to have an indefinite usefullife are not amortized, but instead tested for impairment at least

 

F-16

----

 

annually in accordancewith the provisions of SFAS No. 142. SFAS No. 142 also requires thatintangible assets with estimable useful lives be amortized over theirrespective estimated useful lives to their estimated residual values, andreviewed for impairment in accordance with SFAS No. 144, *Accounting for Impairment or Disposal of Long-Lived Assets*.Prior to January 1, 2002, the Company amortized goodwill on astraight-line basis over a 20-year period. Under SFAS No. 142, the Companyceased amortization of goodwill and conducted an impairment test of thegoodwill balance. As of January 1, 2002, the goodwill balance was deemednot to be impaired. However, the December 31, 2002 goodwill balance wasdeemed impaired and was written off during the fourth quarter of 2002. See Note4 for further details on the impairment of goodwill.

 

***(k)  Impairment of Long-Lived Assets***

 

Long-livedassets such as property, plant and equipment, and intangibles subject toamortization, are reviewed for impairment whenever events or changes incircumstances indicate that the carrying amount of an asset may not berecoverable. Recoverability of assets to be held and used is measured by acomparison of the carrying amount of an asset to estimated undiscounted futurecash flows expected to be generated by the asset. If the carrying amount of anasset exceeds its estimated future cash flows, an impairment charge isrecognized by the amount by which the carrying amount of the asset exceeds thefair value of the asset. Assets to be disposed of are reported at the lower ofthe carrying amount or fair value less costs to sell, and depreciation ceases.

 

Goodwilland intangible assets not subject to amortization are tested annually forimpairment. An impairment loss is recognized to the extent that the carryingamount exceeds the asset’s fair value (Note 4).

 

HorizonPCS was not in compliance with certain covenants contained in its financingdocuments as of June 30, 2003. This created the need for an impairmentassessment of its intangible assets and property and equipment as required bySFAS No. 144. Therefore, Horizon PCS projected future undiscounted cashflows and determined they were insufficient to recover the carrying amounts forthe intangible assets and property and equipment. This required Horizon PCS torecognize an impairment loss for the excess of carrying value over fair value.To determine fair value, Horizon PCS performed a valuation utilizing a costapproach adjusted for items such as technological and functional obsolescenceas appropriate.

 

HorizonPCS determined the carrying value of the intangible assets exceeded the fairvalue of the assets. As a result, Horizon PCS recorded impairment on theintangible assets of approximately $39,152,000. As a result of the impairmentcharge, Horizon PCS recorded a tax benefit of $6,031,000 due to the reductionof a deferred tax liability related to the intangibles bringing the net balanceto zero. Additionally, Horizon PCS determined the fair market value of theproperty and equipment was less than the carrying value of the assets. As aresult, Horizon PCS recorded an impairment of property and equipment ofapproximately $34,609,000. These impairment charges are included indepreciation expense in the accompanying consolidated statements of operations.

 

As aresult of the voluntary bankruptcy filing on August 15, 2003 the Companywas required to perform another review of the carrying value of long-livedassets. Horizon hired a third party appraiser to perform this review. Theappraiser projected future undiscounted cash flows based on updated informationand determined that they were sufficient to support the carrying amounts forthe property and equipment. Therefore no impairment was required to thelong-lived assets at August 15, 2003 and December 31, 2003.

 

During2002, Horizon PCS launched switches in Tennessee and Pennsylvania anddisconnected some switching equipment in Chillicothe, Ohio. As a result,approximately $6,200,000 of switching equipment was considered an impairedasset as defined by SFAS No. 144. Accordingly, depreciation expense forthe year ended December 31, 2002, includes approximately $3,500,000 inimpairment charges related to the impaired assets. The total amount ofdepreciation recorded through December 31, 2002 on this equipment wasapproximately $5,600,000. This equipment was sold for book value during 2003.

 

***(l)  Derivative Financial Instruments***

 

TheCompany utilizes derivative financial instruments to reduce interest rate riskand not for trading or speculative purposes. Interest rate swap agreements areused to hedge the exposure of the variable interest rates of certain notespayable and are designed as cash flow hedges. The interest rate swap agreementsinvolve the periodic exchange of payments without the exchange of the notionalamount upon which the payments are based. The related amount payable to orreceivable from counter-parties is included as an adjustment to accruedinterest. The carrying amount of the interest swap agreements is included inaccrued liabilities, with the changes in carrying amounts recorded as anadjustment to other comprehensive income (loss), a component of retaineddeficit. The Company also formally assesses, both at the hedge’s inception andon an ongoing basis,

 

F-17

----

 

whether the derivativesthat are used in hedging transactions are highly effective in offsettingchanges in fair values or cash flows of hedged items. When it is determinedthat a derivative is not highly effective as a hedge or that it has ceased tobe a highly effective hedge, the Company discontinues hedge accountingprospectively. The swaps matured in 2003.

 

***(m)  Revenue Recognition***

 

TheCompany recognizes revenues when persuasive evidence of an arrangement exists,services have been rendered, the price to the buyer is fixed or determinable,and collectibility is reasonably assured. The Company recognizes servicerevenue from the Company’s subscribers as they use the service. The Companypro-rates monthly subscriber revenue over the billing period and recordsairtime usage in excess of the pre-subscribed usage plan. The Company’ssubscribers pay an activation fee when they initiate service. The Companyreduces recorded service revenue for billing adjustments. Effective July 1,2003, The Company adopted EITF No. 00-21, *Accountingfor Revenue Arrangements with Multiple Deliverables*. This EITFguidance addresses accounting for arrangements that involve multiplerevenue-generating activities. In applying this guidance, separate contractswith the same party, entered into at or near the same time, will be presumed tobe a bundled transaction, and the consideration will be measured and allocatedto the separate units of the arrangement based on their relative fair values.The guidance in EITF 00-21 became effective for revenue arrangements enteredinto for quarters beginning after June 15, 2003. The Company elected toapply this guidance prospectively from July 1, 2003. Prior to the adoptionof EITF 00-21, under the provisions of SAB No. 101, the Company accountedfor the sale of its handsets and subsequent service to the customer as a singleunit of accounting because the Company’s wireless service is essential to thefunctionality of the Company’s handsets. Accordingly, the Company deferred allactivation fee revenue and its associated direct costs and amortized theserevenues and costs over the average life of the Company’s subscribers, whichthe Company estimates to be 24 months. Under EITF 00-21 The Company nolonger needs to consider whether customers can use their handsets without theCompany’s wireless service provided to them. Because the Company meets thecriteria stipulated in EITF 00-21, the adoption of EITF 00-21 requires theCompany to account for the sale of the handset as a separate unit of accountingfrom the subsequent service to the customer. With the adoption of EITF 00-21,the Company now recognizes activation fee revenue generated from the Company’sretail stores as equipment revenue. In addition, the Company recognizes theportion of the direct activation fee costs related to the handsets sold in theCompany’s retail stores. Subsequent to July 1, 2003, the Company hascontinued to apply the provisions of SAB No. 101 and have deferred andamortized activation fee revenue and costs generated by subscribers activatedother than through the Company’s retail stores.

 

TheCompany participates in the Sprint PCS national and regional distributionprogram in which national retailers such as RadioShack and Best Buy sell SprintPCS products and services. In order to facilitate the sale of Sprint PCSproducts and services, national retailers purchase wireless handsets fromSprint for resale and receive compensation from Sprint PCS for products andservices sold. For industry competitive reasons, Sprint PCS subsidizes the priceof these handsets by selling the handsets at a price below cost. Under theCompany’s affiliation agreements with Sprint PCS, when a national retailersells a handset purchased from Sprint PCS to a subscriber in the Company’sterritory, the Company is obligated to reimburse Sprint PCS for the handsetsubsidy that Sprint originally incurred. The national retailers sell Sprintwireless services under the Sprint and Sprint PCS brands and marks. The Companydoes not receive any revenues from the sale of wireless handsets by nationalretailers. The Company classifies these Sprint PCS wireless handset subsidycharges as a sales and marketing expense for a wireless handset sale to a newsubscriber and classify these subsidies as a cost of service for a wirelesshandset upgrade to an existing subscriber.

 

TheCompany recognized approximately $19,000 for the period October 1, 2004 toDecember 31, 2004, $2,560,000 for the period January 1, 2004 to September 30,2004, $5,182,000 in 2003 and $2,992,000 in 2002 of both activation fee revenueand customer activation expense, and had deferred approximately $279,000 and$3,749,000 of activation fee revenue and direct customer activation expense asof December 31, 2004 and 2003, respectively. In applying fresh-startreporting, the deferred activation revenue and expense were deemed to have azero value and were eliminated in the fresh-start adjustments.

 

Amanagement fee of 8% of collected PCS revenues from Sprint PCS subscribersbased in Horizon PCS’ territory is accrued as services are provided, remittedto Sprint PCS and recorded as general and administrative expense. Revenuesgenerated from the sale of handsets and accessories, inbound and outboundSprint PCS roaming fees, and roaming services provided to Sprint PCS customerswho are not based in Horizon PCS’ territory are not subject to the 8%affiliation fee. Expense related to the management fees charged under theagreement was approximately $2,421,000 for the period October 1, 2004 to December 31,2004, $9,559,000 for the period January 1, 2004 to September 30,2004, $15,020,000 for the year ended December 31, 2003 and $12,027,000 forthe year ended December 31, 2002.

 

F-18

----

 

***(n)  Reorganization items***

 

Reorganizationitems relate to income recorded and expenses incurred as a direct result of thePredecessor’s bankruptcy proceeding. These items include employee separations,lease commitments, equipment disposals, professional fees, key employeeretention plan payments, amortization of debt issuance fees and warrants,accelerated accretion of the senior notes, and fresh-start adjustments.Reorganization items are displayed separately on the consolidated statements ofoperations.

 

***(o)  Advertising Costs***

 

Costsrelated to advertising and other promotional expenditures are expensed asincurred. Advertising and promotional costs totaled approximately $902,000 forthe period October 1, 2004 to December 31, 2004, $854,000 for theperiod January 1, 2004 to September 30, 2004, $3,340,000 in 2003 and$10,632,000 in 2002.

 

***(p)  Stock-Based Compensation***

 

TheSuccessor Company has adopted the provisions of SFAS No. 123 (Revised2004), *Share-Based Payment* (“SFAS No. 123R”).Pursuant to SFAS No. 123R, the Company measures the cost of employeeservices received in exchange for the award of equity instruments based on thefair value of the award as of the date of grant using the Black-Scholes optionpricing model. The fair value is recognized in the consolidated statements ofoperations on a straight-line basis over the expected life of the equityinstruments.

 

In October 2004,the Successor Company adopted a stock option plan pursuant to which the Company’sboard of directors may grant stock options to officers, key employees andcertain directors. The new stock option plan authorized grants of options topurchase up to 986,702 shares of authorized but unissued common stock. Thesestock options have 10 year terms and vest equally in six month increments overthree years from the date of grant. Certain option awards provide foraccelerated vesting if there is a change in control as defined by the plan.

 

Thecompensation cost that has been charged against income for the plan wasapproximately $641,000 for the period October 1, 2004 through December 31,2004. This compensation cost was based on the fair value of the options.

 

The fairvalue of each option grant is estimated on the date of grant using theBlack-Scholes option-pricing model with the following weighted-averageassumptions for the period ended December 31, 2004:

 

| Successor Company:       |   |   |   |
|--------------------------|--------|--------|--------|
| Expected Dividend Yield  |   | 0.0    | %      |
| Forfeiture rate          |   | 10.0   | %      |
| Risk-free rate           |   | 3.1    | %      |
| Expected volitility      |   | 130.0  | %      |
| Expected life (in years) |   | 3.0    |   |

 

Asummary of the Successor Company’s option activity under the plan during theperiod October 1, 2004 through December 31, 2004, is as follows:

 
| **Options**                              | ** ** | **Number of  Shares** | ** ** | **Weighted-  Average  Exercise Price** | ** ** | **Weighted-  Average  Remaining  Contractual  Term** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
|------------------------------------------|------------|-----------------------|------------|----------------------------------------|------------|------------------------------------------------------|------------|--------------------------------|------------|
| Balance as of October 1, 2004       |       | —                |       | $                                      | —     |                                                 |       |                           |       |   |
| Granted                                  |       | 778,381               |       | 17.76                                  |       |                                                 |       |                           |       |
| Exercised                                |       | —                |       | —                                 |       |                                                 |       |                           |       |
| Forfeited                                |       | —                |       | —                                 |       |                                                 |       |                           |       |
| Outstanding as of December 31, 2004 |       | 778,381               |       | $                                      | 17.76      |                                                 | 9.81       |                           | $          | 4,546,523 |   |
|                                          |            |                       |            |                                        |            |                                                      |            |                                |            |  |  |

 

F-19

----

 

The fairvalue of options on the November 11, 2004 grant date was approximately$14.31 per share. All options were issued at $17.76 and none were exercisableduring the year. As of December 31, 2004, there was approximately $9.4million of total unrecognized compensation cost related to nonvestedshare-based compensation arrangements granted under the plan. That cost isexpected to be recognized over a weighted-average period of 2.81 years.

 

In 1999,the Predecessor Company adopted a stock option plan pursuant to which the boardof directors could grant stock options to officers, key employees and certainnonemployees. These stock options were eliminated in the Plan ofReorganization.

 

ThePredecessor Company applied the intrinsic value-based method of accountingprescribed by Accounting Principles Board (APB) Opinion No. 25, *Accounting for Stock Issued to Employees*,and related interpretations including FASB Interpretation No. 44, *Accounting for Certain Transactions involving StockCompensation, an interpretation of APB Opinion No. 25*, issuedin March 2000, to account for its fixed plan stock options. Under thismethod, compensation expense was recorded on the date of grant only if thecurrent 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-basedmethod of accounting for stock-based employee compensation plans. At the time,as allowed by SFAS No. 123, the Company elected to apply the intrinsic value-basedmethod of accounting, and adopted the disclosure requirements of SFAS No. 148*Accounting for Stock-Based Compensation —Transition and Disclosure — an Amendment of FASB Statement No. 123*.

 

ThePredecessor Company applied APB Opinion No. 25 in accounting for theoptions granted to officers and key employees, and SFAS No. 123 inaccounting for the options granted to certain nonemployees, under its plan. Theaccompanying consolidated financial statements reflect non-cash compensationcharges relating to the Predecessor Company of approximately $145,000 for theperiod January 1, 2004 through September 30, 2004, and $620,000 and$681,000 for the years ended December 31, 2003 and 2002, respectively.These options were cancelled as part of the Plan of Reorganization.

 

Thefollowing table illustrates the effect on net income (loss) if thefair-value-based method under SFAS No. 123 had been applied to alloutstanding and unvested awards in each period.

 
| ** **                                                                                                                                  | ** ** | **Predecessor Company**           | ** **  |
|---------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------|-------------|
| ** **                                                                                                                                  | ** ** | **January 1, 2004  Through** | ** **  | **Year Ended December 31,** | ** ** |
| ** **                                                                                                                                  | ** ** | **September 30, 2004**       | ** **  | **2003** | ** ** | **2002** | ** ** |
| Net income (loss) attributed to common  stockholders - as reported                                                                          |       | $                                 | 416,933,788 |   | $ | (298,466,380 | ) | $ | (188,704,072 | ) |
| Add stock-based employee compensation  expense included in reported net loss                                                                |       | 145,044                           |        | 619,640 |   | 680,749 |   |
| Deduct total stock-based employee  compensation expense determined under fair value base method for all awards,  net of related tax effects |       | (145,010                          | )           | (791,141 | ) | (1,150,666 | ) |
| Pro forma net income (loss) attributed to  common stockholders                                                                              |       | $                                 | 416,933,822 |   | $ | (298,637,881 | ) | $ | (189,173,989 | ) |

 

The fairvalue of options granted during 2002 was estimated on the date of grant usingthe Black-Scholes option-pricing model with the following weighted-averageassumptions for each respective period ended:

 

| ** **               | ** ** | **Predecessor   Company**         | ** ** |
|--------------------------|------------|-----------------------------------|------------|
| ** **               | ** ** | **Year Ended December  31, 2002** | ** ** |
|                     |       |                              |       |
| Expected Dividend Yield  |       | 0.0                               | %          |
| Risk-free interest rate  |       | 5.0                               | %          |
| Expected volitility      |       | 95.0                              | %          |
| Expected life (in years) |       | 10.0                              |       |

 

F-20

----

 

Stockoption activity for the Predecessor Company during the periods indicated is asfollows:

 
| ** **                            | ** ** | **Number of  Class A  Options** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Number of  Class B  Options** | ** ** | **Weighted  Average  Exercise Price** | ** ** |
|---------------------------------------|------------|--------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|---------------------------------------|------------|
| Balance as of December 31, 2001  |       | 116,971                              |       | 5.88                                  |       | 4,196,883                            |       | 0.12                                  |       |
| Granted                               |       | 200,000                              |       | 5.60                                  |       | —                               |       | —                                |       |
| Exercised                             |       | —                               |       | —                                |       | —                               |       | —                                |       |
| Forfeited                             |       | —                               |       | —                                |       | —                               |       | —                                |       |
| Balance as of December 31, 2002  |       | 316,971                              |       | 5.70                                  |       | 4,196,883                            |       | 0.12                                  |       |
| Granted                               |       | —                               |       | —                                |       | —                               |       | —                                |       |
| Exercised                             |       | —                               |       | —                                |       | (200                                 | )          | 0.12                                  |       |
| Forfeited                             |       | —                               |       | —                                |       | (80,709                              | )          | 0.12                                  |       |
| Balance as of December 31, 2003  |       | 316,971                              |       | 5.70                                  |       | 4,115,974                            |       | 0.12                                  |       |
| Eliminated in bankruptcy              |       | (316,971                             | )          | 5.70                                  |       | (4,115,974                           | )          | 0.12                                  |       |
| Granted                               |       | —                               |       | —                                |       | —                               |       | —                                |       |
| Exercised                             |       | —                               |       | —                                |       | —                               |       | —                                |       |
| Forfeited                             |       | —                               |       | —                                |       | —                               |       | —                                |       |
| Balance as of September 30, 2004 |       | —                               |       | $                                     | —     |                                 | —     |                                  | $          | — |   |
|                                       |            |                                      |            |                                       |            |                                      |            |                                       |            |  |  |

 

***(q)  Net Loss Per Share***

 

TheCompany computes net loss per common share in accordance with SFAS No. 128,Earnings per Share. Basic and diluted net loss per share attributed to commonstockholders is computed by dividing net loss attributed to common stockholdersfor each period by the weighted-average outstanding common shares. Noconversion of common stock equivalents has been assumed in the calculationsince the effect would be antidilutive. As a result, the number ofweighted-average outstanding common shares as well as the amount of net lossper share is the same for basic and diluted net loss per share calculations forthe period presented. The only items that could potentially dilute earnings pershare in the future are common stock options. The common stock options will beincluded in the diluted earnings per share calculation when dilutive. Netincome (loss) per share for periods prior to October 1, 2004 are not shownas the common stock of the Predecessor Company was cancelled as part of thePlan of Reorganization, and therefore are no longer meaningful.

 

***(r)  Site Bonuses***

 

During2001 and 2000, the Company received $740,000 and $7,220,000, respectively, forsite bonuses from SBA, which constructs towers leased by the Company. TheCompany defers and amortizes the site bonus over the life of the respectivelease. For the period January 1, 2004 to September 30, 2004 and forthe years 2003 and 2002, the Company recorded approximately $718,000, $957,000and $941,000, respectively, as a reduction to lease expense. In applyingfresh-start reporting, the remaining site bonuses to be amortized were deemedto have zero value, and were eliminated in the fresh-start adjustments.

 

***(s)  Postretirement Plans***

 

TheCompany sponsored a defined benefit health care plan for substantially allretirees and employees until July 15, 2004. The Company measured the costsof its obligation based on its best estimate. The net periodic costs wererecognized as employees rendered the services necessary to earn thepostretirement benefits. This benefit was terminated on July 15, 2004.

 

***(t) Income Taxes***

 

Incometaxes are accounted for under the asset and liability method. Deferred taxassets and liabilities are recognized for the future tax consequencesattributable to differences between the financial statement carrying amounts ofexisting assets and liabilities and their respective tax bases and operatingloss and tax credit carryforwards. Deferred tax assets and liabilities are measuredusing enacted tax rates expected to apply to taxable income in the years inwhich those temporary differences are expected to be recovered or settled. Theeffect on deferred tax assets and liabilities of a change in tax rates isrecognized in income in the period that includes the enactment date.

 

F-21

----

 

***(u) Concentration ofCredit Risk***

 

TheCompany maintains cash and cash equivalents in an account with a financialinstitution in excess of the amount insured by the Federal Deposit InsuranceCorporation. The financial institution is one of the largest banks in theUnited States and management does not believe there is significant credit riskassociated with deposits in excess of federally insured amounts.

 

Restrictedcash was invested in short-term government money market funds. The Company didnot believe there was significant credit risk associated with the funds as theunderlying securities were issued by the U.S. Treasury Department.

 

TheCompany maintains accounts with nationally recognized investment managers. TheFederal Deposit Insurance Corporation does not insure such deposits. Managementdoes not believe there is significant credit risk associated with theseuninsured deposits.

 

Otherfinancial instruments that potentially subject the Company to concentrations ofcredit risk consist primarily of accounts receivable from subscribers.Management believes the risk is limited due to the number of customerscomprising the Company’s customer base and its geographic diversity.

 

Asignificant amount of the Company’s financial transactions result from theCompany’s relationship with Sprint. Additionally, Sprint holds approximatelyfour to eleven days of the Company’s subscriber lockbox receipts prior to remittingthose receipts to the Company weekly. The Company does not record these lockboxreceipts until Sprint remits them.

 

*** (v) Recent Accounting Pronouncements***

 

In December 2004,the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment, whichreplaces SFAS No. 123, Accounting for Stock-Based Compensation andsupercedes APB Opinion No. 25, Accounting for Stock Issued to Employees.SFAS No. 123R requires all share-based payments to employees,including grants of employee stock options, to be recognized in the financialstatements based on their fair values. The pro forma disclosures previouslypermitted under SFAS No. 123 no longer will be an alternative to financialstatement recognition. SFAS No. 123R has been adopted as discussed inNote 3 and did not have a material effect on our consolidated financialstatements.

 

In November 2004,the FASB issued SFAS No. 151, Inventory Costs, an amendment of ARB No. 43,Chapter 4. The amendments made by SFAS No. 151 clarify that abnormalamounts of idle facility expense, freight, handling costs, and wasted materials(spoilage) should be recognized as current-period charges and require theallocation of fixed production overheads to inventory based on the normalcapacity of the production facilities. SFAS 151 is effective for fiscalyears beginning after June 15, 2005. The adoption of SFAS No. 151 isnot expected to have a material impact on the Company’s financial position andresults of operations.

 

***(w) Reclassifications***

 

Certainprior year amounts have been reclassified to conform with the 2004presentation.

 

**(4)  Goodwill and IntangibleAssets**

 

On October 1,2004, the Company recorded intangible assets related to the fair value of ownedlicensed spectrum, its subscriber base and the Sprint affiliation agreements.The owned licensed spectrum was determined to have an indefinite life as it isexpected to be renewed with minimal effort and cost. The subscriber base isbeing amortized on a straight-line basis over 24 months, which is the estimatedaverage life of a customer. The Sprint affiliation intangible is beingamortized over the remaining life of the Sprint affiliation agreements, or 164months. For the period from October 1, 2004 to December 31, 2004, theCompany incurred $8,918,000 of amortization expense. The detail of intangiblesas of December 31, 2004, is as follows:

 

F-22

----

 
| ** **                   | ** ** | **Amortization  Period** | ** ** | **Gross Intangible  Value** | ** **  | **Accumulated  Amortization** | ** ** | **Net Intangible  Value** | ** ** |
|------------------------------|------------|--------------------------|------------|-----------------------------|-------------|-------------------------------|------------|---------------------------|------------|
| Successor intangible assets: |       |                     |       |                        |        |                          |       |                      |       |
| Owned licensed spectrum      |       | Indefinite               |       | $                           | 1,200,000   |                          | $          | —                    |       | $ | 1,200,000 |   |
| Subscriber base              |       | 2 years                  |       | 63,150,750                  |        | (7,893,844                    | )          | 55,256,906                |       |
| Sprint affiliation           |       | 13.67 years              |       | 56,000,000                  |        | (1,024,390                    | )          | 54,975,610                |       |
|                         |       |                     |       | $                           | 120,350,750 |                          | $          | (8,918,234                | )          | $ | 111,432,516 |   |

 

Futureamortization for the next five years is as follows:

 
| ** **         | ** ** | **Year Ended December 31,** | ** ** |
|--------------------|------------|----------------------------------|------------|
| ** **         | ** ** | **2005**                         | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** |
| Subscriber base    |       | $                                | 31,575,375 |   | $ | 23,681,531 |   | $ | — |   | $ | — |   | $ | — |   |
| Sprint affiliation |       | 4,097,561                        |       | 4,097,561 |   | 4,097,561 |   | 4,097,561 |   | 4,097,561 |   |
| Total              |       | $                                | 35,672,936 |   | $ | 27,779,092 |   | $ | 4,097,561 |   | $ | 4,097,561 |   | $ | 4,097,561 |   |

 

Thevalue of the owned license spectrum intangible was tested under therequirements of SFAS No. 142 as of December 31, 2004, and was deemedto be unimpaired.

 

During1999, the Company entered into a joint venture agreement through the purchaseof 25.6% of Bright PCS. On June 27, 2000, the Company acquired theremaining 74.4% of Bright PCS. The total purchase price was approximately$49,300,000 and was treated as a purchase method acquisition for accountingpurposes. The purchase price exceeded the fair market value of the net assetsacquired by approximately $7,778,000. The resulting goodwill was amortized on astraight-line basis over 20 years until December 31, 2001.

 

On December 31,2002, the Company performed the annual valuation assessment of goodwill. Thisvaluation determined that the carrying amount of the goodwill exceeded the fairvalue of the assets. As a result the Company recorded goodwill impairment of$13,222,180, related to the impairment of goodwill and impact ofacquisition-related deferred taxes. The impairment eliminated the entirebalance of goodwill as of December 31, 2002. The fair value was measuredbased on projected discounted future operating cash flows using a discount ratereflecting the Company’s average cost of funds.

 

Inconjunction with the acquisition of Bright PCS, the Company recognized anintangible asset totaling approximately $33,000,000 related to the licensingagreement. It was being amortized on a straight line basis over 20 years, theinitial term of the underlying management agreement. In addition, the Companyagreed to grant Sprint warrants to acquire shares of common stock in exchangefor the right to service additional PCS markets. These licenses were recordedas an intangible asset of approximately $13,356,000 (Note 12) and were beingamortized on a straight line basis over approximately 18 years. In June 2003,Horizon PCS performed an evaluation of both intangible assets under SFAS No. 144.

 

Accordingly,the Sprint licenses were deemed impaired, and resulted in the elimination ofthe entire balance of the Sprint licenses.

 

**(5) Propertyand Equipment**

 

Propertyand equipment consists of the following as of December 31: 

 

F-23

----

 

| ** **                                | ** ** | **Successor  Company  2004** | ** **  | **Predecessor  Company  2003** | ** ** |
|-------------------------------------------|------------|------------------------------|-------------|--------------------------------|------------|
| Network assets                            |       | $                            | 89,174,889  |                           | $          | 130,727,556 |   |
| Switching equipment                       |       | 26,413,700                   |        | 64,442,793                     |       |
| Furniture, vehicles, and office equipment |       | 1,322,057                    |        | 7,891,132                      |       |
| Building                                  |       | 1,680,000                    |        | —                         |       |
| Land                                      |       | 470,000                      |        | 966,689                        |       |
| Property and equipment in service         |       | $                            | 119,060,646 |                           | $          | 204,028,170 |   |
| Accumulated depreciation                  |       | (16,620,410                  | )           | (34,075,900                    | )          |
| Property and equipment in service, net    |       | 102,440,236                  |        | 169,952,270                    |       |
| Construction work in progress             |       | 3,818,094                    |        | 1,835,513                      |       |
| Total property and equipment, net         |       | $                            | 106,258,330 |                           | $          | 171,787,783 |   |

 

On October 1,2004, the Company applied fresh-start reporting, which required the assets andliabilities to be recorded at fair value. Accordingly, the Company wrote downthe value of the property, plant and equipment approximately $26.6 million. Thevalue of the property, plant and equipment, along with the intangibles withidentifiable useful lives, were tested in accordance with SFAS No. 144 asof December 31, 2004, and were deemed to be unimpaired.

 

In June 2004,the Company sold seven retail store leases and related store assets in theNtelos market, with a net book value of approximately $1.6 million, to SprintPCS (Note 15).

 

During2003 and 2002, the Company retired certain network assets and replaced themwith equipment required to upgrade the network. As a result of theseretirements, the Company recorded a loss on disposal of $216,312 and $631,417for the years ended December 31, 2003 and 2002, respectively.

 

Duringthe first quarter of 2003, Horizon PCS recorded a liability of $22,600 and acumulative change in accounting principle of $9,570 related to the adoptionSFAS No. 143 for potential costs associated with certain asset retirementobligations. The cumulative change in accounting principle is included in “interestincome and other, net” on the accompanying statement of operations.

 

Duringthe second quarter of 2003, Horizon PCS reduced the book value of the networkassets related to an impairment recorded on property and equipment discussedabove in Note 3.

 

***(6)  SprintAgreements***

 

Underthe Sprint Agreements, Sprint provides the Company significant support servicessuch as billing, collections, long distance, customer care, network operationssupport, inventory logistics support, use of the Sprint and Sprint PCS brandnames, national advertising, national distribution, and product development.Additionally, the Company derives substantial roaming revenue and expenses whenSprint’s and Sprint’s network partners’ PCS wireless subscribers incur minutesof use in the Company’s territories and when the Company’s subscribers incurminutes of use in Sprint and other Sprint network partners’ PCS territories.These transactions are recorded in roaming revenue, cost of service, cost ofequipment, and selling and marketing expense captions in the accompanyingconsolidated statements of operations. Cost of service and roaming transactionsinclude long distance charges, roaming expense, and the costs of services suchas billing, collections, and customer service and other pass-through expenses.Cost of equipment transactions relate to inventory purchased by the Companyfrom Sprint under the Sprint Agreements. Selling and marketing transactionsrelate to subsidized costs on handsets and commissions paid by the Companyunder Sprint’s national distribution program. The 8% management fee is includedin general and administrative. Amounts recorded relating to the SprintAgreements are approximately as follows:

 

F-24

----

 
| ** **                  | ** ** | **Successor  Company**     | ** ** | **Predecessor Company**     | ** ** |
|-----------------------------|------------|----------------------------|------------|-----------------------------|------------|
| ** **                  | ** ** | **October 1, 2004**   | ** ** | **January 1, 2004**    | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                  | ** ** | **Through**                | ** ** | **Through**                 | ** ** | **Year Ended December 31,** | ** ** |
| ** **                  | ** ** | **December 31, 2004** | ** ** | **September 30, 2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| Roaming revenue             |       | $                          | 11,515,778 |                        | $          | 37,892,099 |   | $ | 53,223,520 |   | $ | 51,687,545 |   |
| Cost of service:            |       |                       |       |                        |       |   |   |   |   |
| Roaming                     |       | $                          | 7,654,182  |                        | $          | 29,212,646 |   | $ | 45,593,205 |   | $ | 40,883,189 |   |
| Billing and customer care   |       | 3,581,131                  |       | 12,041,770                  |       | 22,328,999 |   | 20,587,070 |   |
| Long distance               |       | 1,535,441                  |       | 6,513,584                   |       | 10,810,726 |   | 10,469,590 |   |
| Total cost of service       |       | 12,770,754                 |       | 47,768,000                  |       | 78,732,930 |   | 71,939,849 |   |
| Selling and marketing       |       | 133,777                    |       | 663,963                     |       | 970,320 |   | 2,566,222 |   |
| General and administrative: |       |                       |       |                        |       |   |   |   |   |
| Management fee              |       | 2,420,702                  |       | 9,559,334                   |       | 15,020,045 |   | 12,027,148 |   |
| Total expense               |       | $                          | 15,325,233 |                        | $          | 57,991,297 |   | $ | 94,723,295 |   | $ | 86,533,219 |   |

 

**(7) Long-TermDebt**

 

The componentsof long-term debt outstanding are as follows:

 
| ** **                                                                   | ** ** | ** **            | ** ** | **Successor**         | ** **  | **Predecessor** | ** ** |
|------------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|-------------|-----------------|------------|
| ** **                                                                   | ** ** | **Interest Rate at**  | ** ** | **Company**           | ** **  | **Company**     | ** ** |
| ** **                                                                   | ** ** | **December 31,** | ** ** | **December 31,** | ** **  |
| ** **                                                                   | ** ** | **2004**              | ** ** | **2004**              | ** **  | **2003**        | ** ** |
| Senior notes                                                                 |       | 11 3/8                | %          | $                     | 125,000,000 |            | $          | — |   |
| Discount notes                                                               |       |                  |       | —                |        | 295,000,000     |       |
| Senior notes                                                                 |       |                  |       | —                |        | 175,000,000     |       |
| Secured credit facility — term loan A                                   |       |                  |       | —                |        | 105,000,000     |       |
| Secured credit facility — term loan B                                   |       |                  |       | —                |        | 50,000,000      |       |
| Long-term debt, face value                                                   |       |                  |       | $                     | 125,000,000 |            | $          | 625,000,000 |   |
| Less:                                                                        |       |                  |       |                  |        |            |       |
| Debt classified as liability subject to  compromise due to bankruptcy filing |       |                  |       | —                |        | (625,000,000    | )          |
| Total long-term debt, net                                                    |       |                  |       | $                     | 125,000,000 |            | $          | — |   |

 

In thesecond quarter of 2004, Horizon PCS Escrow Company issued $125.0 million of 113/8% senior notes. The net proceeds of the 11 3/8% senior notes offering wererestricted and placed in an escrow account until the Company’s emergence on October 1,2004. On October 1, 2004, the proceeds were used to extinguish theremaining balance of the secured credit facilities.

 

We willpay interest on the 11 3/8% senior notes semi-annually on each January 15and July 15 commencing on January 15, 2005. These senior notes matureon July 15, 2012, and contain restrictive covenants. The Company is incompliance with these covenants as of December 31, 2004.

 

The 113/8% senior notes are guaranteed by the Company’s existing subsidiaries,Horizon Personal Communications, Inc., and Bright Personal CommunicationsServices, LLC, and will be guaranteed by the Company’s future domesticrestricted subsidiaries. The Company has no independent assets or operationsapart from its subsidiaries. The guarantees are general unsecured obligations.Each guarantor unconditionally guarantees, jointly and severally, on a seniorsubordinated basis, the full and punctual payment of principal premium andliquidated damages, if any, and interest on the discount notes when due. Thereare no significant restrictions on the ability of the Company to obtain fundsfrom its subsidiaries from dividend or loan. If the Company creates or acquiresunrestricted subsidiaries and foreign restricted subsidiaries, thesesubsidiaries need not be guarantors.

 

Uponconsummation of the Plan of Reorganization on October 1, 2004, Horizon PCSEscrow Company merged with and into Horizon PCS, Inc. The 11 3/8% seniornotes became the senior unsecured obligations of Horizon PCS, Inc. and arejointly and severally guaranteed by all of its existing and future domesticrestricted subsidiaries. Under the Plan of

 

F-25

----

 

Reorganization, the 14%discount notes and the 13 3/4% senior notes were cancelled and the holders ofthe 14% discount notes and 13 3/4% senior notes became equity holders of thereorganized company.

 

On December 7,2001, the Company received $175,000,000 from the issuance of unsecured seniornotes (the senior notes) due on June 15, 2011. Interest was paidsemi-annually on June 15 and December 15 at an annual rate of 13.75%,with interest payments commencing June 15, 2002. Approximately $48,660,000of the offering’s proceeds were placed in an escrow account to fund the firstfour semi-annual interest payments.

 

On September 26,2000, the Company received $149,680,050 from the issuance of $295,000,000 ofunsecured senior discount notes due on October 1, 2010 (the discountnotes). The discount notes were to accrete in value until October 1, 2005,at a rate of 14% compounded semi-annually. Cash interest on the notes was to bepayable on April 1 and October 1 of each year, beginning on April 1,2006. The discount notes included warrants to purchase 3,805,500 shares of theCompany’s class A common stock at $5.88 per share. The warrants represented theright to purchase an aggregate of approximately 4.0% of the issued andoutstanding common stock of the Company on a fully diluted basis, assuming theexercise of all outstanding options and warrants to purchase common stock andthe conversion of the convertible preferred stock (Note 10) into shares ofclass A common stock. The proceeds from the issuance of the discount notes wereallocated to long-term debt and the value of the warrants ($20,245,000 or $5.32per share) was allocated to additional paid-in capital. The fair value of thewarrants was estimated on the date of the grant using the Black-Scholesoption-pricing model with the following weighted average assumptions: expecteddividend yield of 0.0%, a risk-free interest rate of 6.5%, expected life of 10years (equal to the term of the warrants), and a volatility of 95%.

 

On September 26,2000, and concurrent with the issuance of the convertible preferred stock (Note11) and the discount notes described above, the Company entered into a seniorsecured credit facility (the secured credit facility) with a group of financialinstitutions to provide an aggregate commitment, subject to certain conditions,of up to $250,000,000 (including a $95,000,000 line of credit, a $50,000,000term note and a $105,000,000 term note) expiring on September 30, 2008.The secured credit facility beared interest at various floating rates, whichapproximated one to six month LIBOR rates plus 400 to 450 basis points. Thesecured credit facility was collateralized by a perfected security interest insubstantially all of the Company’s tangible and intangible current and futureassets, including an assignment of the Company’s affiliation agreements with Sprintand a pledge of all of the capital stock of the Company’s subsidiaries. As of December 31,2003, the outstanding balance on the secured credit facility was $155,000,000.The Company paid a commitment fee of 1.375% on the unused portion of the $250,000,000note through August 14, 2003 when the Company filed for bankruptcy.Amounts recorded relating to this commitment fee expense for the year ended December 31,2003 and 2002, are as follows:

 

| ** **                                 | ** ** | **Predecessor Company** | ** ** |
|--------------------------------------------|------------|-------------------------|------------|
| ** **                                 | ** ** | **2003**                | ** ** | **2002** | ** ** |
| Secured credit facility — term loan A |       | $                       | —     |   | $ | 325,000 |   |
| Line of credit                             |       | 821,000                 |       | 1,324,000 |   |
| Total commitment fee expense               |       | $                       | 821,000    |   | $ | 1,649,000 |   |

 

**(8) Income Taxes**

 

TheCompany’s provision for income tax expense (benefit) consists of:

 
| ** **            | ** ** | **Successor  Company**            | ** ** | **Predecessor Company**           | ** ** |
|-----------------------|------------|-----------------------------------|------------|-----------------------------------|------------|
| ** **            | ** ** | **October 1, 2004  Through** | ** ** | **January 1, 2004  Through** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **            | ** ** | **December 31,**             | ** ** | **September 30,**            | ** ** | **Year Ended Dec 31,** | ** ** |
| ** **            | ** ** | **2004**                          | ** ** | **2004**                          | ** ** | **2003** | ** ** | **2002** | ** ** |
| Current               |       | $                                 | —     |                              | $          | — |   | $ | — |   | $ | — |   |
| Deferred              |       | —                            |       | —                            |       | (6,031,000 | ) | — |   |
| Tax expense (benefit) |       | $                                 | —     |                              | $          | — |   | $ | (6,031,000 | ) | $ | — |   |

 

Thereconciliation of the differences between the effective income tax expense(benefit) and the federal income tax expense (benefit) computed at the federalstatutory rate of 35% is as follows:

 

F-26

----

 
| ** **                                         | ** ** | **Successor  Company**            | ** ** | **Predecessor Company**           | ** ** |
|----------------------------------------------------|------------|-----------------------------------|------------|-----------------------------------|------------|
| ** **                                         | ** ** | **October 1, 2004  Through** | ** ** | **January 1, 2004  Through** | ** ** | ** ** | ** ** |
| ** **                                         | ** ** | **December 31,**             | ** ** | **September 30,**            | ** ** | **Year Ended December 31,** | ** ** |
| ** **                                         | ** ** | **2004**                          | ** ** | **2004**                          | ** ** | **2003** | ** ** | **2002** | ** ** |
| Tax at statutory rate applied to pretax Book  loss |       | $                                 | (8,414,617 | )                                 | $          | 149,474,218 |   | $ | (102,136,049 | ) | $ | (61,931,737 | ) |
| Increase (decrease) in tax from:                   |       |                              |       |                              |       |   |   |   |   |
| State income tax expense (benefit)                 |       | (1,071,813                        | )          | 21,933,435                        |       | (13,282,521 | ) | (7,852,928 | ) |
| Restructuring charges not deductible for  tax      |       | 911,928                           |       | 4,045,827                         |       | — |   | — |   |
| Goodwill impairment                                |       | —                            |       | —                            |       | — |   | 4,627,740 |   |
| Nondeductible interest                             |       | —                            |       | —                            |       | 9,131,240 |   | 2,286,992 |   |
| Change in valuation allowance                      |       | 8,574,502                         |       | (175,467,480                      | )          | 99,732,350 |   | 62,823,423 |   |
| Other, net                                         |       | —                            |       | 14,000                            |       | 523,980 |   | 46,510 |   |
| Total tax expense (benefit)                        |       | $                                 | —     |                              | $          | — |   | $ | (6,031,000 | ) | $ | — |   |

 

Deferredincome taxes result from temporary differences between the financial reportingand the tax basis amounts of existing assets and liabilities. The source ofthese differences and tax effect of each are as follows, as of December 31:

 

| ** **                                    | ** ** | **Successor  Company   2004** | ** **  | **Predecessor  Company   2003** | ** ** |
|-----------------------------------------------|------------|-------------------------------|-------------|---------------------------------|------------|
| Deferred income tax assets:                   |       |                          |        |                            |       |
| Deferred income — site bonuses           |       | $                             | —      |                            | $          | 1,939,333 |   |
| Allowance for doubtful accounts               |       | 398,420                       |        | 736,197                         |       |
| Sprint PCS Licenses — Bright acquisition |       | 3,631,416                     |        | 4,033,674                       |       |
| Accrued vacation                              |       | 153,330                       |        | 186,103                         |       |
| Net operating loss carryforwards              |       | 93,958,699                    |        | 160,746,722                     |       |
| Interest expense                              |       | —                        |        | 50,333,267                      |       |
| Other                                         |       | 1,151,668                     |        | 13,211,596                      |       |
| Total deferred income tax assets              |       | $                             | 99,293,533  |                            | $          | 231,186,892 |   |
| Deferred income tax liabilities:              |       |                          |        |                            |       |
| Property and equipment                        |       | $                             | (2,293,348  | )                               | $          | (14,904,884 | ) |
| Intangible assets                             |       | (44,573,006                   | )           | —                          |       |
| Capitalized interest                          |       | (29,692                       | )           | (5,289,232                      | )          |
| Other                                         |       | (111,539                      | )           | (160,076                        | )          |
| Total deferred income tax liabilities         |       | $                             | (47,007,585 | )                               | $          | (20,354,192 | ) |
| Deferred income taxes, net                    |       | $                             | 52,285,948  |                            | $          | 210,832,700 |   |
| Less valuation allowance                      |       | (52,285,948                   | )           | (210,832,700                    | )          |
| Total deferred income taxes, net              |       | $                             | —      |                            | $          | — |   |

 

Inassessing the realizability of deferred tax assets, management considerswhether it is more likely than not that some portion or all of the deferred taxassets will not be realized. The ultimate realization of deferred tax assets isdependent upon the generation of future taxable income during the periods inwhich those temporary differences become deductible. No benefit for federalincome taxes has been recorded for the period ended December 31, 2004, theperiod ended September 30, 2004 and for the years ended December 31,2003 and 2002, as the net deferred tax asset generated, primarily related tonet operating loss carryforwards, was offset by a full valuation allowancebecause it is not considered more likely than not that these benefits will berealized due to the Company’s losses since inception.

 

TheCompany realized approximately $187.0 million cancellation of debt, or “COD,”income for income tax purposes as a result of the implementation of the Plan ofReorganization. The difference between the tax COD income of$187.0 million and the book COD income of $321.9 million is a resultof the application of the Internal Revenue Code provisions related to highyield debt obligations. Because the Company was a debtor in a bankruptcy caseat the time it realized the COD income, it will not be required to include suchCOD income in its taxable income for federal income tax purposes. Instead, theCompany is required to reduce certain of its tax attributes (including NOLcarryforwards) by the amount of COD income so excluded. The Company’s net operatingloss carryforwards at December 31, 2004 have been adjusted for thisimpact.

 

F-27

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An “ownershipchange” (as defined in Internal Revenue Code Section 382 (“Section 382”))occurred on October 1, 2004, in connection with the emergence frombankruptcy and with respect to the Company’s new stock issued under the Plan ofReorganization. An ownership change generally occurs if certain persons orgroups increase their aggregate ownership percentage in a corporation’s stockby more than 50 percentage points in the shorter of any three-year periodbeginning the day after the day of the last ownership change. Section 382will limit the Company’s future ability to utilize any remaining NOLs generatedbefore the ownership change and certain subsequently recognized “built-in”losses and deductions, if any, existing as of the date of the ownership change.The Company’s ability to utilize new NOLs arising after the ownership changewill not be affected. At December 31, 2004, the Company has net operatingloss carryforwards for federal income tax purposes of approximately $217.0million, which are available to offset future taxable income through 2024. Theutilization of such net operating loss carryforwards is limited as a result ofthe ownership change in connection with the Plan of Reorganization. The amountof this annual limitation is approximately $7.2 million.

 

**(9) Postretirement Benefits**

 

The postretirement benefit plan was eliminated in July 2004. Therefore, the Companywill not record expense in future periods. The $1.4 million liability at thetime of the announcement was reversed to benefit expense during the thirdquarter of 2004.

 

Certainemployees of the Company participated in the Horizon Telcom’s, the Parent ofthe Predecessor Company, postretirement plan. The plan was maintained by theHorizon Telcom and the Company was charged based on its employee participationin the plan. The Company applied the accounting and measurement practicesprescribed by SFAS No. 106, *Employers’ Accounting forPostretirement Benefits Other Than Pensions*, and the disclosurerequirements of SFAS No. 132, *Employers’ Disclosuresabout Pensions and Other Postretirement Benefits*, which supercededthe disclosure requirements of SFAS No. 106. As permitted by SFAS No. 106,the Company elected to amortize the accumulated postretirement benefitobligation existing at the date of adoption (the transition obligation) overthe estimated remaining service life of employees. The accrued benefit cost wasincluded in other long-term liabilities in the accompanying consolidatedbalance sheets.

 

The planprovided coverage of postretirement medical, prescription drug, telephoneservice, and life insurance benefits to eligible retirees whose status, atretirement from active employment, qualified for postretirement benefits.Coverage of postretirement benefits was also provided to totally andpermanently disabled active employees whose status, at disablement, qualifiedfor postretirement benefits as a retiree from active employment (retireddisabled). Certain eligible retirees were required to contribute toward thecost of coverage under the postretirement health care and telephone servicebenefits plans. No contribution was required for coverage under thepostretirement life insurance benefits plan. Unrecognized prior service costwas being amortized over the estimated remaining service life of employees.

 

Thefunding status of the Company’s participation in the postretirement benefitplan as of December 31, 2004 and 2003 is as follows:

 

F-28

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| ** **                                         | ** ** | **2004**           | ** ** | **2003** | ** ** |
|----------------------------------------------------|------------|--------------------|------------|----------|------------|
| ** **                                         | ** ** | **(In thousands)** | ** ** |
| Change in benefit obligation                       |       |               |       |     |       |
| Benefit obligation, beginning of year              |       | $                  | 1,403,960  |     | $          | 879,463 |   |
| Service cost                                       |       | 222,498            |       | 370,136  |       |
| Interest cost                                      |       | 65,811             |       | 80,953   |       |
| Actuarial loss                                     |       | —             |       | 635,671  |       |
| Effect of curtailment                              |       | —             |       | (562,263 | )          |
| Discontinued post retirement benefits              |       | (1,692,269         | )          | —   |       |
| Benefit obligation, end of year                    |       | $                  | —     |     | $          | 1,403,960 |   |
| Change in plan assets:                             |       |               |       |     |       |
| Fair value of plan assets, beginning of  year      |       | $                  | —     |     | $          | — |   |
| Employer contributions                             |       |               |       |     |       |
| Benefits paid                                      |       |               |       |     |       |
| Fair value of plan assets, end of year             |       | $                  | —     |     | $          | — |   |
| Funded status                                      |       | $                  | —     |     | $          | (1,403,960 | ) |
| Unrecognized transition obligation                 |       | —             |       | 30,888   |       |
| Unrecognized prior service cost                    |       | —             |       | 34,252   |       |
| Unrecognized actuarial (gain) or loss              |       | —             |       | 237,810  |       |
| Accrued benefit cost                               |       | $                  | —     |     | $          | (1,101,010 | ) |
| Weighted average assumptions at  December 31: |       |               |       |     |       |
| Discount rate                                      |       |               |       | 6.25     | %          |

 

Theassumed medical benefit cost trend rate used in measuring the accumulatedpostretirement benefit obligation for the under age 65 retirees and theirspouses was 10% in 2003 and 10% in 2002, declining gradually to 5% for allperiods presented. For the over 65 retirees and their spouses, the assumedmedical benefit cost trend rate was 10% in 2003 and 10% in 2002, declininggradually to 5% for all periods presented. The assumed dental and visionbenefit cost was 0 as no employees were receiving these benefits. The telephoneservice benefit cost trend rate for retirees and their spouses in 2003 and2002, was estimated at 5% for all future years.

 

Thefollowing summarizes the components of net periodic benefit costs of theCompany’s participation in the postretirement benefit plan for the years ended December 31,2003:

 
| ** **                                  | ** ** | **Predecessor Company** | ** ** |
|---------------------------------------------|------------|-------------------------|------------|
| ** **                                  | ** ** | **2004**                | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                  | ** ** | **(In thousands)**      | ** ** |
| Components of net periodic benefit cost:    |       |                    |       |   |   |   |   |
| Service cost                                |       | $                       | 222,498    |   | $ | 370,136 |   | $ | 246,808 |   |
| Interest cost                               |       | 65,811                  |       | 80,953 |   | 33,719 |   |
| Amortization of transition obligation       |       | 2,106                   |       | 4,340 |   | 5,435 |   |
| Amortization of prior service cost          |       | 1,647                   |       | 3,394 |   | 4,250 |   |
| Recognized net actuarial gain (loss)        |       | 4,566                   |       | 19,844 |   | — |   |
| Net periodic benefit cost                   |       | $                       | 296,628    |   | $ | 478,667 |   | $ | 290,212 |   |
| Curtailment                                 |       | —                  |       | 62,841 |   | — |   |
| Discontinuation of post retirement benefits |       | (1,397,638              | )          | — |   | — |   |
| Total expense                               |       | $                       | (1,101,010 | ) | $ | 541,508 |   | $ | 290,212 |   |

 

In May 1999,the Company adopted a defined contribution plan covering certain eligibleemployees. The plan provides for participants to defer up to 15% of the annualcompensation, as defined under the plan, as contributions to the plan. The

 

F-29

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Company has the option,at the direction of the board of directors, to make a matching contribution tothe plan of up to 50% of an employee’s contribution to the plan, limited to amaximum of 3% of the employee’s salary. A matching contribution ofapproximately $33,000 was recognized for the period October 1, 2004 to December 31,2004 and $158,000 for the period January 1, 2004 to September 30,2004. A matching contribution of $305,000 and $361,000 was recognized during2003 and 2002, respectively.

 

**(10) Redeemable ConvertiblePreferred Stock**

 

Prior tothe reorganization, the Predecessor Company had authorized 175,000,000 sharesof convertible preferred stock at $0.0001 par value. On September 26,2000, an investor group purchased 23,476,683 shares of convertible preferredstock for approximately $126,500,000 in a private placement offering. Concurrentwith the closing, holders of a $14,100,000 short-term convertible noteconverted the principal and unpaid interest into 2,610,554 shares of the sameconvertible preferred stock purchased by the investor group. The convertiblepreferred stock paid a 7.5% stock dividend semi-annually, commencing April 30,2001. The dividends were payable in additional preferred stock. Through September 30,2004, the Company paid a cumulative total $35,941,922 of dividends inadditional shares of convertible preferred stock. On October 1, 2004, theconvertible preferred stock was eliminated under the Plan of Reorganization.

 

**(11) Common Stock**

 

Underthe Plan of Reorganization, the Company has authorized 25,000,000 shares ofcommon stock at $0.0001 par value and 10,000,000 shares of preferred stock at$0.0001 par value. As of December 31, 2004, the Company has issued andoutstanding 8,909,568 shares of common stock.

 

**(12) Sprint PCS Warrants**

 

On May 19,2000, pursuant to an addendum to its Sprint PCS Management Agreement, HorizonPCS agreed to grant to Sprint warrants to acquire 2,510,460 shares of HorizonPCS’ class A common stock in consideration for additional PCS service areas.The warrants were to be issued to Sprint at the earlier of (i) an initialpublic offering of Horizon PCS’ common stock or (ii) July 31, 2003.By September 30, 2000, Horizon PCS completed the required purchase ofcertain Sprint assets. Horizon PCS valued the warrants and recorded anintangible asset of approximately $13,356,000 (based on a price of $5.88 pershare, valued using the Black-Scholes pricing model using an expected dividendyield of 0.0%, a risk-free interest rate of 6.5%, expected life of 10 years anda volatility of 95%). The intangible asset was being amortized over theremaining term of the Sprint management agreement resulting in approximately$752,000 of amortization expense per year. The warrants were not issued by July 31,2003 and were not issued during the Horizon PCS’ bankruptcy proceeding. During2003, Horizon PCS determined the carrying value of the Sprint licenses exceededthe fair value of the assets. As a result, Horizon PCS recorded an impairmentof approximately $11,286,000 (Note 4). The Sprint warrants were cancelled inthe bankruptcy proceedings.

 

**(13) Disclosures About Fair Valueof Financial Instruments**

 

SFAS No. 107requires disclosure of the fair value of all financial instruments. Forpurposes of this disclosure, the fair value of a financial instrument is theamount at which the instrument could be exchanged in a current transactionbetween willing parties, other than in a forced or liquidation sale. Fair valuemay be based on quoted market prices for the same or similar financialinstruments or on valuation techniques such as the present value of estimatedfuture cash flows using a discount rate commensurate with the risks involved.

 

Theestimates of fair value required under SFAS No. 107 require theapplication of broad assumptions and estimates. Accordingly, any actualexchange of such financial instruments could occur at values significantlydifferent from the amounts disclosed. As cash and cash equivalents, currentreceivables, current payables and certain other short-term financialinstruments are all short term in nature, their carrying amounts approximatefair value. The carrying values of restricted cash approximate fair value asthe investment funds are short-term. The Company’s secured credit facility wasbased on market-driven rates and, therefore, its carrying value approximatedfair value. The fair values of the senior and discount notes, set forth below,were based on market rates for the Company’s notes.

 

| ** **             | ** ** | **Fair Value** | ** **  | **Recorded Value** | ** ** |
|------------------------|------------|----------------|-------------|--------------------|------------|
| December 31, 2004 |       | $              | 140,468,750 |               | $          | 125,000,000 |   |
| December 31, 2003 |       | $              |        | **                 | $          | 470,000,000 |   |

 

F-30

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** Fairvalue could not be determined as of December 31, 2003 because the Companywas in bankruptcy.

 

In thefirst quarter of 2001, the Company entered into a two-year interest rate swap,effectively fixing $25,000,000 of a term loan under the secured credit facility(Note 7) at a rate of 9.4%. In the third quarter of 2001, the Company enteredinto a two-year interest rate swap, effectively fixing the remaining$25,000,000 borrowed under the secured credit facility at 7.65%. The swaps weredesignated as a hedge of a portion of the future variable interest cash flowsexpected to be paid under the secured credit facility borrowings. Othercomprehensive income may fluctuate based on changes in the fair value of theswap instrument. A gain of approximately $395,000 and $443,000 was recorded inother comprehensive income during the years ended December 31, 2003 and2002, respectively. The Company also recognized a loss of approximately $14,000and $49,000 as interest income and other in the statement of operations during2003 and 2002, respectively, related to the ineffectiveness of the hedge. Theswaps matured in 2003.

 

**(14) Related Parties**

 

HorizonPersonal Communications, one of the Company’s operating subsidiaries, hasentered into a service agreement with Horizon Services, Inc. and aseparate services agreement with Horizon Technology, Inc. Horizon Servicesand Horizon Technology are both wholly owned subsidiaries of Horizon Telcom, Inc.,the Company’s largest stockholder prior to the Reorganization. Thomas McKell, aformer director and the father of the Company’s CEO, is the President and adirector and stockholder of Horizon Telcom. Prior to the effective date of ourPlan of Reorganization on October 1, 2004, Horizon Telcom was the majoritystockholder of Horizon PCS, Inc.

 

HorizonServices provides services to Horizon Personal Communications and Bright PCSincluding insurance functions, accounting services, computer access and othercustomer relations, human resources, and other administrative services that theCompany would otherwise be required to undertake on its own. These agreementshave a term of three years, with the right to renew the agreement foradditional one-year terms each year thereafter. The Company has the right to terminateeach agreement during its term by providing 90 days’ written notice to HorizonServices. Horizon Services may terminate the agreement prior to its expirationdate only in the event that the Company breach its obligations under theservices agreement and the Company does not cure the breach within 90 daysafter the Company receives written notice of breach from Horizon Services.Horizon Services is entitled to the following compensation from the Company forservices provided:

 

•                                          direct labor charges at cost; and

 

•                                          expenses and costs that are directly attributable to the activitiescovered by the agreement on a direct allocation basis.

 

Theagreement provides that Horizon Services’ obligations do not relieve theCompany of any of its rights and obligations to its subscribers and toregulatory authorities having jurisdiction over them. Horizon Services receivedcompensation from the Company of approximately $800,000 for the period October 1,2004 to December 31, 2004, $3.8 million for the period January 1,2004 to September 30, 2004, $5.4 million in 2003 and $5.2 million in 2002.As of December 31, 2004, the Company had a non-interest bearing payable toHorizon Services of approximately $445,000 and a receivable of approximately$8,000.

 

TheCompany leases its principal office space and the space for certain equipmentfrom The Chillicothe Telephone Company, a former affiliate of ours prior to ouremergence from bankruptcy and a wholly-owned subsidiary of Horizon Telcom.Under the lease, the Company paid The Chillicothe Telephone Company $30,000 forthe period October 1, 2004 to December 31, 2004, $90,000 for theperiod January 1, 2004 to September 30, 2004, and $120,000 per yearin 2003 and 2002. The Company believes the lease was made on terms no less favorableto the Company than would have been obtained from a non-affiliated third party.The lease term expires in May 2007. As of December 31, 2004, the Company had a payable to TheChillicothe Telephone Company of approximately $40,000, and a receivable ofapproximately $26,000.

 

**(15) Sprint Transaction**

 

In August 1999,the Company entered into a wholesale network services agreement with the WestVirginia PCS Alliance, L.C. and the Virginia PCS Alliance, L.C. (theAlliances), two related, independent PCS providers whose network is managed byNTELOS. Under the network services agreement, the Alliances provide the Companywith the use of and access to key components of their network in most ofHorizon PCS’ markets in Virginia and West Virginia. The initial term wasthrough June 8, 2008, with four automatic ten-year renewals.

 

F-31

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On May 12,2004, the Company executed two related agreements with Sprint PCS, whichpertained to the sale of most of its assets in the NTELOS markets to SprintPCS, the termination of the Company’s contractual relationship with Sprint PCSin the Company’s NTELOS markets in Virginia and West Virginia and thesettlement of existing litigation and billing disputes between Sprint PCS andthe Company. On June 1, 2004, the Bankruptcy Court approved thetransactions and the related agreements. On June 14, 2004, the BankruptcyCourt’s order of approval became final, and on June 15, 2004, the partiesclosed the Sprint Transaction.

 

Under anAsset Purchase Agreement, Sprint PCS paid the Company approximately $33.0million, net of the Company’s payment of $4.0 million to settle disputedchanges, to acquire the Company’s economic interests in approximately 92,500subscribers in the Company’s NTELOS markets in Virginia and West Virginia. Inaddition to the subscribers, this transaction also included the Company’stransfer to Sprint PCS of seven retail store leases and related store assets inthese markets, with a net book value of approximately $1.6 million. At theclosing, Sprint PCS assumed responsibility for the marketing, sales anddistribution of Sprint PCS products and services in these areas. Pursuant to amotion with the Bankruptcy Court, the Company rejected the Company’s networkservice agreement with NTELOS, effective upon the closing of the SprintTransaction.

 

TheCompany and Sprint also signed a related settlement agreement and mutualrelease, which resulted in a dismissal of the litigation brought by the Companyagainst Sprint in August 2003 and the settlement of a series of billingdisputes raised by the Company since May 2003. In its lawsuit againstSprint, the Company alleged that Sprint PCS had breached the affiliationagreements, generally with respect to amounts billed to the Company under thoseagreements. The Company also alleged breaches of fiduciary duties, violationsof federal and state statutes and other claims. With respect to the billingdisputes, the Company had disputed charges for services rendered by Sprint PCSfrom May 2003 through the date of the settlement agreements. Under thesettlement agreement and mutual release, Sprint PCS released the Company fromall of its claims for these charges in return for the payment by the Company of$4.0 million, and the Company released all of its claims against Sprint. Thesettlement also resulted in the Company’s forgiveness of $16.2 million ofamounts owed to Sprint, offset by the Company’s forgiveness of $5.5 million ofreceivables from Sprint PCS. The net gain of $42.1 million is included in loss(gain) on disposal or sale of PCS assets in the accompanying consolidatedstatements of operations during the period January 1, 2004 through September 30,2004.

 

**(16) Commitments andContingencies**

 

***(a)  Sprint Fees***

 

TheSuccessor Company has disputed and withheld from payment approximately $1.2million of charges from Sprint related to 3G and third party handset returns.These charges have been expensed during 2004 and are accrued in the payable toSprint as of December 31, 2004.

 

***(b)  Operating Leases***

 

TheCompany leases office space and various equipment under several operatingleases. In addition, the Company has tower lease agreements with third partieswhereby the Company leases towers for substantially all of the Company’s cellsites. The tower leases are operating leases which generally have a term offive to ten years with three consecutive five-year renewal option periods.

 

TheCompany also leases space for its retail stores. As of December 31, 2004,the Company leased all of its 10 stores operating throughout its territories.

 

Thefollowing table summarizes the annual lease payments required under the Company’sexisting lease agreements as of December 31, 2004.

 

| ** **                         | ** ** | **December 31** | ** ** |
|------------------------------------|------------|----------------------|------------|
| Year:                              |       |                 |       |
| 2005                               |       | $                    | 14,021,788 |   |
| 2006                               |       | 9,437,823            |       |
| 2007                               |       | 4,667,269            |       |
| 2008                               |       | 3,390,530            |       |
| 2009                               |       | 2,990,490            |       |
| Thereafter                         |       | 2,162,183            |       |
| Future operating lease obligations |       | $                    | 36,670,083 |   |

 

F-32

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Rentalexpense for all operating leases was approximately $3,946,000 for the period October 1,2004 to December 31, 2004, $12,413,000 for the period January 1, 2004to September 30, 2004, $17,168,000 for the year ended December 31,2003 and $15,241,000 for year ended December 31, 2002.

 

***(c)  Legal Matters***

 

TheCompany 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, willhave a material adverse impact on the Company’s results of operations orfinancial condition.

 

**(17) Subsequent Event**

 

On March 17,2005, the Company entered into an Agreement and Plan of Merger with iPCS, Inc.(“iPCS”), another PCS Affiliate of Sprint, pursuant to which the Company will be merged with and into iPCS.  Pursuant to the merger, each issued andoutstanding share of the Company’s common stock will be converted into  0.7725 shares of common stock of iPCS,subject to adjustments for subsequent issuances of warrants, stock dividends andother similar transactions.  Outstandingoptions of to purchase the Company’s common stock will be converted intooptions to purchase common stock of iPCS. The new options will have the same terms and conditions as the oldoptions, except that the number of shares of iPCS common stock for which theoptions may be exercised and the exercise price of such options will beadjusted based upon the exchange ratio. For accounting purposes, iPCS will bethe acquirer.

 

If themerger is consummated, the board of directors of iPCS  will consist of three members of the Company’sboard of directors, three members  of theboard of directors of iPCS and Timothy M. Yager, currently chief executiveofficer of iPCS.

 

Themerger is subject to approval by the holders of a majority of the Company’scommon stock and approval by the holders of a majority of iPCS commonstock.   In addition, the merger issubject to the clearance or expiration of the applicable waiting periods underthe Hart-Scott-Rodino Antitrust Improvements Act of 1976 and the satisfactionof other customary closing conditions.

 

Themerger agreement may be terminated under certain circumstances, including ifthe Company or iPCS receive and decide to accept an unsolicited, superioroffer.

 

If themerger is consummated, the senior notes will become the direct obligations ofiPCS.

 

On March 16,2005, the Company entered into a new addendum to its affiliation agreementswith Sprint PCS. This addendum implemented the “price simplification”provisions of similar addenda which Sprint PCS has entered into with most ofthe other PCS affiliates of Sprint PCS. Under this simplification, servicebureau fees will be charged at a monthly rate per subscriber of $7.00 for 2005and $6.75 for 2006; cost per gross addition services will be charged at amonthly rate of $22.00 per gross subscriber addition in the Company’smarkets. With respect to roaming charges, the addendum establishes areciprocal roaming rate for voice subscribers within the Sprint network of$0.058 per minute through December 31, 2006. Beginning on January 1,2007, the reciprocal roaming rate will change annually to equal 90% of SprintPCS’ retail yield for voice usage from the prior year. With respect toseveral of its markets in western Pennsylvania and eastern Pennsylvania, theCompany receives the benefit of a special reciprocal rate of $0.10 perminute. Under the addendum, this special $0.10 rate will terminate, withrespect to each of these two sets of markets, on the earlier of December 31,2011 or the first day of the calendar month which follows the first calendarquarter during which the Company achieves a subscriber penetration rate of atleast 7% of its covered POPs.

 

On February 1,2005, the Company entered into an agreement to sell approximately 1,600subscribers to Sprint for approximately $639,000.

 

F-33

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