10-Q 1 e16162_10q.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended: September 30, 2003 or [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ____ to ____ Commission File Number: 0-32617 Horizon Telcom, Inc. (Exact name of registrant as specified in its charter) Ohio 31-1449037 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 68 East Main Street, Chillicothe, OH 45601-0480 (Address of principal executive offices) (Zip Code) (740) 772-8200 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicated by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] As of November 13, 2003, there were 90,561 shares of class A common stock and 271,926 shares of class B common stock outstanding. HORIZON TELCOM, INC. FORM 10-Q THIRD QUARTER REPORT TABLE OF CONTENTS Page No. -------- PART I FINANCIAL INFORMATION Item 1. Financial Statements...............................................3 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.........................................20 Item 3. Quantitative and Qualitative Disclosures About Market Risk........31 Item 4. Controls and Procedures...........................................31 PART II OTHER INFORMATION Item 1. Legal Proceedings.................................................33 Item 2. Changes in Securities and Use of Proceeds.........................33 Item 3. Defaults Upon Senior Securities...................................33 Item 4. Submission of Matters to a Vote of Security Holders...............33 Item 5. Other Information.................................................33 Item 6. Exhibits and Reports on Form 8-K..................................37 As used herein and except as the context may otherwise require, "the Company," "we," "us," "our" or "Horizon Telcom" means, collectively, Horizon Telcom, Inc., and its subsidiaries: The Chillicothe Telephone Company ("Chillicothe Telephone"), Horizon Technology, Inc. ("Horizon Technology"), and Horizon Services, Inc. ("Horizon Services"). References to "Horizon PCS" refer to Horizon PCS, Inc., and its subsidiaries: Horizon Personal Communications, Inc. ("HPC"), and Bright Personal Communications Services, LLC ("Bright PCS"). On August 15, 2003, Horizon PCS, Inc. filed for bankruptcy protection under Chapter 11 of the United States Bankruptcy Code. Therefore, the results herein include the operations of Horizon PCS through August 14, 2003. The Company will no longer include the results of Horizon PCS in its consolidated results. See Note 2 to the Consolidated Financial Statements. 2 PART I. FINANCIAL INFORMATION Item 1. Financial Statements HORIZON TELCOM, INC. AND SUBSIDIARIES Consolidated Balance Sheets As of September 30, 2003 and December 31, 2002 -------------------------------------------------------------------------------- September 30, December 31, 2003 2002 ------------- ------------ ASSETS (unaudited) CURRENT ASSETS: Cash and cash equivalents ($55,000,000 on deposit at December 31, 2002, in accordance with covenant amendment in 2002).. $ 12,989,775 $ 94,948,351 Restricted cash ............................... -- 24,063,259 Accounts receivable - subscriber, less allowance for doubtful accounts of approximately $363,000 and $2,654,000 at September 30, 2003 and December 31, 2002, respectively ............. 1,000,318 20,560,658 Accounts receivable - interexchange carriers, access charge pools and other, less allowance for doubtful accounts of approximately $170,000 as of September 30, 2003 and $71,000 as of December 31, 2002 ........................ 4,666,440 5,045,930 Inventories ................................... 2,130,678 6,336,877 Investments, available-for-sale, at fair value ............................... 1,251,780 745,860 Prepaid expenses and other current assets ..... 2,041,986 5,926,816 ------------ ------------ Total current assets .................... 24,080,977 157,627,751 ------------ ------------ OTHER ASSETS: Intangible assets - Sprint PCS licenses, net of amortization ......................... -- 40,381,201 Debt issuance costs, net ...................... 345,146 20,365,415 Deferred PCS activation expense ............... -- 6,092,645 Prepaid pension costs and other ............... 4,202,931 5,361,994 ------------ ------------ Total other assets ...................... 4,548,077 72,201,255 ------------ ------------ PROPERTY, PLANT AND EQUIPMENT, NET ............... 75,809,174 315,921,107 ------------ ------------ Total assets ....................... $104,438,228 $545,750,113 ============ ============ (Continued on next page) The accompanying notes are an integral part of these consolidated financial statements. 3 HORIZON TELCOM, INC. AND SUBSIDIARIES Consolidated Balance Sheets (Continued) As of September 30, 2003 and December 31, 2002 -------------------------------------------------------------------------------- September 30, December 31, 2003 2002 ------------- -------------- (unaudited) LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Accounts payable ........................... $ 1,536,627 $ 24,827,065 Payable to Sprint .......................... -- 9,910,262 Deferred PCS revenue ....................... -- 5,308,457 Accrued personal property, real estate and other taxes .......................... 1,817,136 6,514,707 Accrued interest, payroll and other accrued liabilities ...................... 3,596,809 10,237,300 Lines of credit ............................ 1,000,000 -- ------------- ------------- Total current liabilities ............ 7,950,572 56,797,791 ------------- ------------- LONG-TERM DEBT AND OTHER LIABILITIES: Long-term debt ............................. 42,000,000 558,284,349 Deferred income taxes, net ................. 9,905,703 15,234,409 Postretirement benefit obligation .......... 7,462,844 6,526,991 Deferred PCS activation revenue ............ -- 6,092,645 Investment in Horizon PCS .................. 483,488,553 -- Other long-term liabilities ................ 2,469,682 11,075,183 ------------- ------------- Total long-term debt and other liabilities .................. 545,326,782 597,213,577 ------------- ------------- Total liabilities .................. 553,277,354 654,011,368 ------------- ------------- CONVERTIBLE PREFERRED STOCK OF SUBSIDIARY ..... -- 157,105,236 COMMITMENTS AND CONTINGENCIES (Note 11) STOCKHOLDERS' EQUITY (DEFICIT): Common stock - class A, no par value, 200,000 shares authorized, 99,726 shares issued and 90,561 shares outstanding, stated at $4.25 per share ... 423,836 423,836 Common stock - class B, no par value, 500,000 shares authorized, 299,450 shares issued and 271,926 shares outstanding, stated at $4.25 per share ... 1,272,662 1,272,662 Treasury stock - 36,689 shares, at cost .... (5,504,700) (5,504,700) Accumulated other comprehensive income (loss), net .............................. 661,175 (67,307) Additional paid-in capital ................. 61,358,833 72,197,212 Deferred stock compensation ................ -- (666,721) Retained deficit ........................... (507,050,932) (333,021,473) ------------- ------------- Total stockholders' equity (deficit) (448,839,126) (265,366,491) ------------- ------------- Total liabilities and stockholders' equity (deficit) ..................... $ 104,438,228 $ 545,750,113 ============= ============= The accompanying notes are in integral part of these consolidated financial statements. 4 HORIZON TELCOM, INC. AND SUBSIDIARIES Consolidated Statements of Operations For the Three and Nine Months Ended September 30, 2003 and 2002 (unaudited) --------------------------------------------------------------------------------

~~HORIZON~~For ~~TELCOM~~the Three Months Ended For the Nine Months Ended September 30, ~~INC.~~September ~~FORM~~30, 10-Q------------------------------ ~~SECOND~~------------------------------- ~~QUARTER~~2003 ~~REPORT~~2002 ~~TABLE~~2003 OF2002 ~~CONTENTS~~------------- ~~PAGE~~------------- NO------------- ------------- OPERATING REVENUES: PCS subscriber and roaming ............................ ~~PART~~$ I33,106,473 ~~FINANCIAL~~$ ~~INFORMATION~~54,212,134 ~~Item~~$ 151,897,229 $ 150,069,815 PCS equipment ......................................... 518,841 1,787,076 4,408,297 5,760,004 Basic local and long-distance service ................. ~~Financial~~4,567,747 ~~Statements~~4,737,885 13,652,690 14,089,158 Network access ........................................ 5,069,514 5,217,569 16,838,886 16,548,336 Equipment systems sales, information services, Internet access and other ......................... 3,005,148 ~~Item~~ 2,235,065 7,512,567 6,402,148 ------------- ------------- ------------- ------------- Total operating revenues ........................ ~~Management's~~46,267,723 ~~Discussion~~68,189,729 ~~and~~194,309,669 ~~Analysis~~192,869,461 of------------- ~~Financial~~------------- ~~Condition~~------------- ~~and~~------------- ~~Results~~OPERATING EXPENSES: Cost of ~~Operations~~goods sold .................................... 1,301,568 4,138,059 12,387,126 13,066,769 Cost of services (exclusive of items shown separately below) ............23..................... ~~Item~~30,152,888 347,921,985 129,102,054 132,751,926 Selling and marketing ................................. ~~Quantitative~~4,246,367 13,475,910 29,883,137 39,894,584 General and ~~Qualitative~~administrative ~~Disclosures~~(exclusive ~~About~~of ~~Market~~items ~~Risk~~shown separately below) ...............43............ ~~Item~~10,598,052 414,878,317 38,938,212 41,578,153 Non-cash compensation ................................. ~~Controls~~81,256 120,031 274,474 309,667 (Gain) Loss on sale of property and ~~Procedures~~equipment ......... -- (2,655) 216,312 638,349 Impairment of intangible assets and property and equipment ..................................... -- -- 73,760,278 3,500,000 Depreciation and amortization ....43..................... ~~PART~~6,387,324 II11,583,788 ~~OTHER~~32,213,728 ~~INFORMATION~~33,434,783 ~~Item~~PCS 1restructuring charges ............................. ~~Legal~~4,509,128 ~~Proceedings~~-- 4,509,128 -- ------------- ------------- ------------- ------------- Total operating expenses ........................ 57,276,583 92,115,435 321,284,449 265,174,231 ------------- ------------- ------------- ------------- OPERATING LOSS ................................45............. ~~Item~~(11,008,860) 2.(23,925,706) ~~Changes~~(126,974,780) in(72,304,770) ~~Securities~~------------- ~~and~~------------- ~~Use~~------------- of------------- ~~Proceeds~~NONOPERATING INCOME (EXPENSE): Interest expense, net ................................45. ~~Item~~(8,973,846) 3(17,023,096) (43,667,308) (46,151,846) Subsidiary preferred stock dividends .................. ~~Defaults~~(1,594,948) ~~Upon~~(3,005,897) ~~Senior~~(7,815,505) ~~Securities~~(8,718,663) Interest income and other, net ........................ 76,064 726,243 641,996 2,412,935 ------------- ------------- ------------- ------------- Total nonoperating expense ..................45.... ~~Item~~(10,492,730) 4(19,302,750) (50,840,817) (52,457,574) ------------- ------------- ------------- ------------- LOSS BEFORE INCOME TAX BENEFIT (EXPENSE) AND MINORITY INTEREST ....................................... ~~Submission~~(21,501,590) of(43,228,456) ~~Matters~~(177,815,597) to(124,762,344) aINCOME ~~Vote~~TAX ofBENEFIT ~~Security~~(EXPENSE) ~~Holders~~......................45......... ~~Item~~(18,861) 64,722 5.,199,801 ~~Other~~(1,115,349) ~~Information~~MINORITY INTEREST IN LOSS .................................. -- -- 24 -- ------------- ------------- ------------- ------------- NET LOSS ......................45............................. ~~Item~~$ 6.(21,520,451) ~~Exhibits~~$ (43,163,734) $(172,615,772) $(125,877,693) ============= ============= ============= ============= Basic and ~~Reports~~diluted onnet ~~Form~~loss ~~8-K~~per share ....................... $ (59.37) $ (119.08) $ (476.20) $ (347.33) ============= ============= ============= ============= Weighted-average common shares outstanding ..............50... 362,487 362,478 362,487 362,413 ============= ============= ============= =============

The accompanying notes are in integral part of these consolidated financial statements. 5 HORIZON TELCOM, INC. AND SUBSIDIARIES Consolidated Statements of Other Comprehensive Income (Loss) For the Three and Nine Months Ended September 30, 2003 and 2002 (unaudited) --------------------------------------------------------------------------------

~~June~~For the Three Months Ended For the Nine Months Ended September 30, ~~December~~September 3130, ~~2003 2002~~ --------------- --------------- ~~ASSETS (unaudited)~~ ------ CURRENT ASSETS: Cash and cash equivalents ($55,000,000 on deposit at December 31, 2002, in accordance with covenant amendment in 2002).............................. $ 58,676,617 $ 94,948,351 Restricted cash............................................................ 12,032,010 24,063,259 Accounts receivable - subscriber, less allowance for doubtful accounts of approximately $2,371,000 and $2,654,000 at June 30, 2003 and December 31, 2002, respectively....................................................... 23,686,991 20,560,658 Accounts receivable - interexchange carriers, access charge pools and other, less allowance for doubtful accounts of approximately $168,000 as of June 30, 2003 and $71,000 as of December 31, 2002............................. 5,530,948 5,045,930 Inventories................................................................ 5,495,716 6,336,877 Investments, available-~~for~~-~~sale, at fair value............................. 1,282,470 745,860 Prepaid expenses and other current assets.................................. 7,292,822 5,926,816~~ --------------- ----- 2003 2002 2003 2002 ---------- ~~Total current assets................................................. 113,997,574 157,627,751~~ --- ------------- ------------- -- ~~OTHER ASSETS: Intangible assets~~ ----------- ~~Sprint~~NET ~~PCS~~LOSS ~~licenses, net of amortization~~.......................................................~~......~~ --$ 40(21,~~381~~520,~~201~~451) ~~Debt~~$ ~~issuance costs~~(43,163,734) ~~net................................................... 18~~$(172,~~859~~615,~~358~~772) 20$(125,~~365~~877,~~415~~693) ~~Deferred~~============= ~~PCS~~============= ~~activation~~============= ~~expense............................................~~============= ~~5,247,821~~OTHER ~~6,092,645~~COMPREHENSIVE ~~Prepaid~~INCOME ~~pension~~(LOSS) ~~costs~~Net ~~and~~unrealized ~~other~~gain (loss) on hedging activities ...............~~.............................~~ 4-- 20,~~694~~686 461,~~135~~644 5140,~~361,994~~728 ~~---------------~~Net unrealized gain (loss) on securities available-for-~~-------------~~sale ~~Total~~net ~~other~~of ~~assets~~taxes of $10,434 and $172,013 for the three and nine months ended September 30, 2003, respectively ....~~...............................................~~ 28(20,~~801~~254) (131,~~314~~353) 72333,~~201~~907 (2,~~255~~024,926) --------------- --------------- ~~PROPERTY, PLANT AND EQUIPMENT, NET ........................................... 266,731,021 315,921,107~~ --------------- --------------- ~~Total~~COMPREHENSIVE ~~assets~~INCOME (LOSS) ....................................~~................~~ $ ~~409~~(21,~~529~~540,~~909~~705) $ ~~545~~(43,~~750~~274,~~113~~401) $(171,820,221) $(127,761,891) ============= ============= ============= =============

The accompanying notes are an integral part of these consolidated financial statements. 6 HORIZON TELCOM, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows For the Nine Months Ended September 30, 2003 and 2002 (unaudited) -------------------------------------------------------------------------------- Nine Months Ended September 30, ------------------------------- 2003 2002 ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss ...................................... $(172,615,772) $(125,877,693) ------------- ------------- Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization .............. 32,213,728 33,434,783 Impairment of intangible assets and property and equipment ................... 73,760,278 3,500,000 Non-cash restructuring charges ............. 2,884,062 -- Deferred income tax benefit ................ (6,031,000) -- Non-cash compensation expense .............. 274,474 309,667 Non-cash interest expense .................. 20,381,687 20,252,352 Loss on disposal of property, plant and equipment ............................ 216,312 638,349 Non-cash preferred stock dividend of subsidiary ............................ 7,815,505 8,718,663 Minority interest in subsidiary ............ (24) -- Provision for bad debt expense ............. 5,197,879 12,189,333 Loss on hedging activities ................. -- 83,689 Decrease (Increase) in certain assets: Accounts receivable ...................... (6,461,289) (18,301,998) Inventories .............................. 2,291,411 1,447,779 Prepaid expenses and other current assets (407,551) (567,126) Increase (Decrease) in certain liabilities: Accounts payable ......................... (3,371,225) (8,781,795) Payable to Sprint ........................ 7,290,020 4,621,053 Accrued liabilities and deferred PCS service revenue .................... 15,150,260 16,729,817 Postretirement benefit obligation ........ 946,287 555,897 Other assets and liabilities, net ........ 1,046,141 (207,333) ------------- ------------- Total adjustments ...................... 153,196,955 74,623,130 ------------- ------------- Net cash used in operating activities (19,418,817) (51,254,563) ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures, net .................. (11,640,475) (66,084,898) Proceeds from sale of property and equipment -- 1,563,970 Deconsolidation of Horizon PCS ............. (50,485,621) -- ------------- ------------- Net cash used in investing activities (62,126,096) (64,520,928) ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings on line of credit ............... 1,000,000 -- Borrowings on long-term debt ............... -- 135,000,000 Repayments on long-term debt ............... -- (25,167,337) Deferred financing fees .................... -- (2,841,511) Exercise of subsidiary stock options ....... 24 -- Dividends paid ............................. (1,413,687) (1,359,106) ------------- ------------- Net cash provided by (used in) financing activities ............... (413,663) 105,632,046 ------------- ------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (81,958,576) (10,143,445) CASH AND CASH EQUIVALENTS, beginning of period ................................... 94,948,351 127,154,227 ------------- ------------- CASH AND CASH EQUIVALENTS, end of period ................................... $ 12,989,775 $ 117,010,782 ============= ============= The accompanying notes are an integral part of these consolidated financial statements. 7 HORIZON TELCOM, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements As of September 30, 2003 and December 31, 2002 And for the Three and Nine Months Ended September 30, 2003 and 2002 (unaudited) -------------------------------------------------------------------------------- NOTE 1 - General The results of operations for the periods shown are not necessarily indicative of the results to be expected for the fiscal year (See Note 2, Accounting Impact). In the opinion of management, the information contained herein reflects all adjustments necessary to make a fair statement of the periods presented. The financial information presented herein should be read in conjunction with the Company's Form 10-K for the year ended December 31, 2002, which includes information and disclosures not presented herein. NOTE 2 - Bankruptcy of Horizon PCS and Liquidity Voluntary Bankruptcy Filing On August 15, 2003, Horizon PCS, Inc., a Delaware corporation and majority-owned subsidiary of Horizon Telcom, HPC, an Ohio corporation and wholly-owned subsidiary of Horizon PCS Inc., and Bright PCS, an Ohio limited liability company and majority-owned subsidiary of Horizon PCS, Inc. (collectively, the "Debtors"), filed voluntary petitions for relief under Chapter 11 of Title 11 of the United States Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the Southern District of Ohio (the "Bankruptcy Court"). The Debtors expect to continue to manage their properties and operate their businesses in the ordinary course of business as "debtors-in-possession" subject to the supervision and orders of the Bankruptcy Court pursuant to Sections 1107(a) and 1108 of the Bankruptcy Code (the "Bankruptcy Case"). In general, as debtors-in-possession, the Debtors are authorized under Chapter 11 to continue to operate as an ongoing business, but may not engage in transactions outside the ordinary course of business without the prior approval of the Bankruptcy Court. Under Section 362 of the Bankruptcy Code, the filing of a bankruptcy petition automatically stays most actions against the Debtors, including most actions to collect pre-petition indebtedness or to exercise control of the property of the Debtors' estate. Absent an order of the Bankruptcy Court, substantially all pre-petition liabilities will be subject to settlement under a plan of reorganization. Horizon Telcom, due to its loan covenants, cannot provide capital or other financial support to the Debtors. The Company believes Horizon Telcom operations will continue independent of the outcome of the Bankruptcy Case. However, upon conclusion of the Bankruptcy Case, the ownership interests of Horizon Telcom and the other current stockholders in Horizon PCS may be reduced. While the long-term effect of the Bankruptcy Case cannot be determined, management believes the Bankruptcy Case will not have a material adverse effect on the liquidity of Horizon Telcom. Accounting Impact In accordance with Statement of Financial Accounting Standards ("SFAS") No. 94 "Consolidation of All Majority-Owned Subsidiaries" and Accounting Research Bulletin ("ARB") No. 51 "Consolidated Financial Statements," when control of a majority-owned subsidiary does not rest with the majority owners (as, for instance, where the subsidiary is in legal reorganization or in bankruptcy), ARB No. 51 precludes consolidation of the majority-owned subsidiary. As a result, subsequent to August 14, 2003, Horizon Telcom no longer consolidates the accounts and results of operations of Horizon PCS. Therefore, Horizon Telcom's investment in Horizon PCS is the balance based on the application of the equity method through August 14, 2003 and any cost based activity subsequent to that date. Accordingly, the accompanying consolidated balance sheet as of September 30, 2003 does not include the consolidated accounts of Horizon PCS; it does however, include a negative investment of approximately $483 million, related to the deconsolidation of Horizon PCS. In addition, the accompanying consolidated statement of operations for the period ended September 30, 2003 includes the consolidated results of operations of Horizon PCS through August 14, 2003. Upon emergence of Horizon PCS from bankruptcy, the negative investment will be reduced proportionately to the remaining ownership percentage, if any, retained by Horizon Telcom. 8 HORIZON TELCOM, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements As of September 30, 2003 and December 31, 2002 And for the Three and Nine Months Ended September 30, 2003 and 2002 (unaudited) -------------------------------------------------------------------------------- NOTE 3 - Organization and Business Operations The Company is a facilities-based telecommunications carrier that provides a variety of voice and data services to commercial, residential/small business and local market segments. The Company provides landline telephone service, very-high digital subscriber line ("VDSL") television service and Internet access services to the southern Ohio region, principally in and surrounding Chillicothe, Ohio. NOTE 4 - Summary of Significant Accounting Policies Note 2 in the Notes to Consolidated Financial Statements in the Company's Annual Report on Form 10-K for the year ended December 31, 2002, describes the Company's significant accounting policies in greater detail than presented herein. Basis of Presentation The accompanying consolidated financial statements reflect the operations of Horizon Telcom, and its subsidiaries, Chillicothe Telephone, Horizon Services and Horizon Technology, and have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States have been condensed or omitted pursuant to such rules and regulations. All material intercompany transactions and balances have been eliminated in consolidation. Inventories Inventories consist of equipment held for resale, materials and supplies and installation-related work in progress held by Chillicothe Telephone and Horizon PCS. Chillicothe Telephone inventories include the cost (determined by the first-in, first-out method) of equipment to be used in the installation of telephone systems, as well as costs related to direct sales orders in process. Horizon PCS' inventories consist of handsets and related accessories which are carried at the lower of cost (determined by the weighted-average method) or market (replacement cost). Inventories consist of the following at September 30, 2003 and at December 31, 2002: September 30, December 31, 2003 2002 ---------- ---------- Equipment held for resale ................ $ 124,677 $ 121,501 Materials, supplies and work in progress . 2,006,001 2,132,581 PCS inventory ............................ -- 4,082,795 ---------- ---------- Total inventories ................... $2,130,678 $6,336,877 ========== ========== Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates. Accounting for Rate Regulation Chillicothe Telephone is subject to rate regulation. SFAS No. 71 "Accounting for the Effects of Certain Types of Rate Regulation" provides that rate-regulated public utilities account for revenues and expenses and report assets and liabilities consistent with the economic effect of the way in which regulators establish rates. Chillicothe 9 HORIZON TELCOM, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements As of September 30, 2003 and December 31, 2002 And for the Three and Nine Months Ended September 30, 2003 and 2002 (unaudited) -------------------------------------------------------------------------------- NOTE 4 - Summary of Significant Accounting Policies (Continued) Telephone follows the accounting and reporting requirements of SFAS No. 71. As of September 30, 2003, the Company has recorded regulatory liabilities of approximately $1,003,000. As of December 31, 2002, regulatory assets and liabilities were approximately $63,000 and $480,000, respectively. Restricted Cash In connection with Horizon PCS' December 2001 offering of $175,000,000 of senior notes due in 2011 (Note 10), approximately $48,660,000 of the offering's proceeds were placed in an escrow account to be used toward the first four semi-annual interest payments due under the terms of the notes. Horizon PCS paid approximately $24,596,000, during the year ended December 31, 2002 and $12,031,000 during the period ended August 14, 2003. Property, Plant and Equipment Property, plant and equipment, including improvements that extend useful lives, are stated at cost (Note 7), while maintenance and repairs are charged to operations as incurred. Construction work in progress includes expenditures for the purchase of capital equipment, construction and items such as direct payroll and related benefits and interest capitalized during construction. The Company capitalizes interest pursuant to SFAS No. 34 "Capitalization of Interest Cost." The Company capitalized interest of approximately $719,000 and $3,926,000 for the nine months ended September 30, 2003 and 2002, respectively. In addition, the Company capitalized labor costs of approximately $1,684,000 and $4,088,000 for the nine months ended September 30, 2003 and 2002, respectively. Derivative Financial Instruments The Company's policies do not permit the use of derivative financial instruments for speculative purposes. The Company uses interest rate swaps to manage interest rate risk. The net amount paid or received on interest rate swaps is recognized as an adjustment to interest income and other. The Company has adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 138, "Accounting for Derivative Instruments and Certain Hedging Activities." These statements require an entity to recognize all derivative and hedging activities as an asset or liability measured at fair value. Depending on the intended use of the derivative, changes in its fair value will be reported in the period of change as either a component of earnings or a component of other comprehensive income. The Company uses interest rate swaps, designated as cash flow hedges, to manage interest rate risk. Changes in the fair value of a derivative that is highly effective and that is designated and qualifies as a cash-flow hedge are recorded in other comprehensive income to the extent that the derivative is effective as a hedge, until earnings are affected by the variability in cash flows of the designated hedged item. The ineffective portion of the change in fair value of a derivative instrument that qualifies as either a fair-value hedge or a cash-flow hedge is reported in earnings. Changes in the fair value of derivative trading instruments are reported in current period earnings. Outstanding temporary gains and losses are netted together and shown as either a component of other assets or accrued liabilities. Revenue Recognition The landline telephone services operating segment consists of basic local and long-distance toll, network access services and other telephone service revenue. All revenue is recognized monthly as service is provided. 10 HORIZON TELCOM, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements As of September 30, 2003 and December 31, 2002 And for the Three and Nine Months Ended September 30, 2003 and 2002 (unaudited) -------------------------------------------------------------------------------- NOTE 4 - Summary of Significant Accounting Policies (Continued) Stock-Based Compensation The Company applies the intrinsic value-based method of accounting prescribed by Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations including Financial Accounting Standards Board ("FASB") Interpretation No. 44, "Accounting for Certain Transactions involving Stock Compensation an interpretation of APB Opinion No. 25", to account for its fixed plan stock options. Under this method, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeds the exercise price. SFAS No. 148, "Accounting for Stock-Based Compensation -Transition and Disclosure - an amendment of FASB Statement No. 123" established accounting and disclosure requirements using a fair value-based method of accounting for stock-based employee compensation plans. As allowed by SFAS No. 148, the Company has elected to continue to apply the intrinsic value-based method of accounting described above, and has adopted the disclosure requirements of SFAS No. 148. The following table illustrates the effect on net loss if the fair-value-based method had been applied to all outstanding and unvested awards in each of the three and nine month periods ended September 30:

~~June~~Three Months Ended September 30, ~~December~~Nine ~~31,~~Months ~~2003~~Ended ~~2002~~September 30, ---------------- ------------------ ~~(unaudited) LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)~~ ---------------------------------- 2003 2002 2003 2002 ------------- CURRENT LIABILITIES: Accounts payable........................................................... $ 17,654,473 $ 24,827,065 Payable to Sprint.......................................................... 13,998,869 9,910,262 Deferred PCS revenue....................................................... 6,340,000 5,308,457 Accrued personal property, real estate and other taxes..................... 6,571,996 6,514,707 Accrued interest, payroll and other accrued liabilities.................... 10,953,390 10,237,300 Lines of credit............................................................ 750,000 -- ~~Current portion of long~~-~~term debt, net of discount......................... 531,344,322~~ -- -------- -------- ----- ----------- ~~Total current liabilities............................................ 587,613,050 56,797,791 LONG~~-~~TERM~~- ~~DEBT~~Net ~~AND~~loss ~~OTHER~~As ~~LIABILITIES:~~reported ~~Long-term debt~~..................................~~...........................~~ ~~42,000,000~~$ ~~558~~(21,~~284~~520,~~349~~451) ~~Deferred~~$ ~~income taxes~~(43,163,734) ~~net................................................. 9~~$(172,~~916~~615,~~203~~772) 15$(125,~~234~~877,~~409~~693) ~~Postretirement~~Add: ~~benefit~~Stock-based ~~obligation..........................................~~employee ~~7,150,767~~compensation ~~6,526,991~~expense ~~Deferred~~included ~~PCS~~in ~~activation~~reported ~~revenue~~net loss ........~~....................................~~ 581,~~247~~256 120,~~821~~031 6274,~~092~~474 309,~~645~~667 ~~Other~~Deduct: ~~long~~Total stock-~~term~~based ~~liabilities................................................~~employee ~~10,671,551~~compensation ~~11,075,183~~expense ~~----------------~~determined ~~----------------~~under ~~Total~~fair ~~long-term~~value ~~debt~~base ~~and~~method ~~other~~for ~~liabilities~~all awards ........~~...................~~ 74(99,~~986~~676) (292,~~342~~428) ~~157~~(496,~~105~~812) (887,~~236~~284) -------------~~---~~ -------------~~---~~ ~~Total liabilities.................................................. 662,599,392 654,011,368~~ -------------~~---~~ -------------~~---~~ ~~CONVERTIBLE~~Pro ~~PREFERRED~~Forma ~~STOCK~~net OFloss ~~SUBSIDIARY~~.............................~~........~~ ~~163,325,759~~$ ~~157~~(21,~~105~~538,~~236 COMMITMENTS AND CONTINGENCIES (Note 11~~871) ~~STOCKHOLDERS'~~$ ~~EQUITY~~ (~~DEFICIT): Common stock - class A~~43, ~~no par value~~336,131) ~~200~~$(172,~~000 shares authorized~~838,110) ~~99,726 shares issued and 90,561 shares outstanding, stated at~~ $~~4.25 per share... 423~~(126,~~836 423~~455,~~836~~310) ~~Common~~============= ~~stock~~============= -============= ~~class~~============= B,Basic ~~no par value, 500,000 shares authorized, 299,450 shares issued~~ and ~~271,926~~diluted ~~shares~~loss ~~outstanding, stated at $4.25~~ per share.. ~~1,272,662~~As ~~1,272,662~~reported ~~Treasury stock - 36,689 shares, at cost~~.................................... ~~(5,504,700)~~$ (~~5,504,700~~59.37) ~~Accumulated~~$ ~~other comprehensive income~~ (~~loss~~119.08), ~~net.........................~~$ ~~748,499~~ (~~67,307~~476.20) ~~Additional~~$ ~~paid-in capital~~(347.~~................................................~~33) ~~72,197,212~~Pro ~~72,197,212~~forma ~~Deferred stock compensation~~......................................~~..........~~ ~~(473,503)~~$ (~~666,721) Retained deficit~~59.~~.......................................................... (485,059,248~~42) ~~(333,021,473)~~$ ~~--------------- --------------- Total stockholders' equity~~ (~~deficit)~~119.~~.............................. (416,395,242~~56) ~~(265,366,491)~~$ ~~---------------- ---------------- Total liabilities and stockholders' equity~~ (~~deficit)~~476.~~...........~~81) $ ~~409,529,909 $ 545,750,113 ================ ================~~(348.93)

The Company accounts for equity instruments issued to non-employees in accordance with the provisions of SFAS No. 148 and Emerging Issues Task Force ("EITF") Issue No. 96-18, "Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services." All transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable. The measurement date of the fair value of the equity instrument issued is the earlier of the date on which the counter-party's performance is complete or the date on which it is probable that performance will occur. 11 HORIZON TELCOM, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements As of September 30, 2003 and December 31, 2002 And for the Three and Nine Months Ended September 30, 2003 and 2002 (unaudited) -------------------------------------------------------------------------------- NOTE 4 - Summary of Significant Accounting Policies (Continued) Net Loss per Share The Company computes net loss per common share in accordance with SFAS No. 128, "Earnings per Share." Basic and diluted net loss per share is computed by dividing net loss, for each period, by the weighted-average outstanding common shares. No conversion of common stock equivalents (options, warrants or convertible securities) has been assumed in the calculations since the effect would be antidilutive. As a result, the number of weighted-average outstanding common shares as well as the amount of net loss per share are the same for basic and diluted net loss per share calculations for all periods presented. Stock options could potentially dilute basic earnings per share in the future and will be included in the diluted earnings per share calculation when dilutive. Recent Accounting Pronouncements In May 2003, the FASB issued SFAS No.150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within the scope of SFAS No. 150 as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. The application of SFAS No. 150 is not expected to have a material effect on the Company's consolidated financial statements. This Statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. In April 2003, the FASB issued SFAS No.149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amendments require that contracts with comparable characteristics be accounted for similarly, clarifies when a contract with an initial investment meets the characteristic of a derivative and clarifies when a derivative requires special reporting in the statement of cash flows. SFAS No. 149 is effective for hedging relationships designated and for contracts entered into or modified after June 30, 2003, except for provisions that relate to SFAS No. 133 Statement Implementation Issues that have been effective for fiscal quarters prior to June 15, 2003, which should be applied in accordance with their respective effective dates, and certain provisions relating to forward purchases or sales of when-issued securities or other securities that do not exist, which should be applied to existing contracts, as well as new contracts entered into after June 30, 2003. The application of SFAS No. 149 is not expected to have a material effect on the Company's consolidated financial statements. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure - an amendment of FASB Statement No. 123." This Statement provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement requires prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company adopted the disclosure requirements of SFAS No. 148 as of December 31, 2002, but continues to account for stock compensation costs in accordance with APB Opinion No. 25 (See Note 4, Stock-Based Compensation). In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." This Statement addresses financial accounting and reporting for costs associated with exit or disposal activities by requiring that expenses related to the exit of an activity or disposal of long-lived assets be recorded when they are incurred and measurable. Prior to SFAS No. 146, these charges were accrued at the time of commitment to exit or dispose of an activity. The Company adopted SFAS No. 146 on January 1, 2003, and it did not have a material effect on the Company's financial position, results of operations or cash flows. In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No. 145 addresses the accounting for gains and 12 HORIZON TELCOM, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements As of September 30, 2003 and December 31, 2002 And for the Three and Nine Months Ended September 30, 2003 and 2002 (unaudited) -------------------------------------------------------------------------------- NOTE 4 - Summary of Significant Accounting Policies (Continued) losses from the extinguishment of debt, economic effects and accounting practices of sale-leaseback transactions and makes technical corrections to existing pronouncements. The Company adopted SFAS No. 145 on January 1, 2003, and it did not have a material effect on the Company's financial position, results of operations or cash flows. In 2002, the FASB's EITF, reached a consensus on Issue 00-21, "Revenue Arrangements with Multiple Deliverables." Issue 00-21 provides guidance on how a vendor should account for arrangements under which it will perform multiple revenue-generating activities. The guidance in this Issue is effective for revenue agreements entered into in fiscal periods beginning after June 15, 2003. The Company adopted the guidance in Issue 00-21 as of July 1, 2003. This adoption did not have a material impact on the financial position, results of operations, or cash flows. Reclassifications Certain prior year amounts have been reclassified to conform with the 2003 presentation. 13 HORIZON TELCOM, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements As of September 30, 2003 and December 31, 2002 And for the Three and Nine Months Ended September 30, 2003 and 2002 (unaudited) -------------------------------------------------------------------------------- NOTE 5 - Segment Information The Company (including Horizon PCS is organized around the differences in products and services it offers. Under this organizational structure, the Company operates in two reportable business segments as defined by SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." These segments are landline telephone services and wireless personal communications services. The landline telephone services segment includes four major revenue streams: basic local service, long-distance service, network access and other related telephone service. As discussed in Note 2, subsequent to August 14, 2003, Horizon Telcom no longer consolidates the accounts and results of operations of Horizon PCS and the accounts of Horizon PCS will be recorded as an investment using the cost method of accounting. Accordingly, the wireless personal communications segment does not include activity after August 14, 2003. Other business activities of the Company include Internet access services, equipment systems sales, and other miscellaneous revenues, which do not meet the definition of a reportable segment under SFAS No. 131. Amounts related to these business activities are included below under the heading "All other." Unallocated administrative expenses represent general and administrative expenses incurred at a corporate level. All other assets represent common assets not identified to an operating segment. The Company evaluates the performance of the segments based on operating earnings before the allocation of administrative expenses. Information about interest income and expense and income taxes is not provided on a segment level. The accounting policies of the segments are the same as described in the summary of significant accounting policies. The following table includes revenue, intercompany revenues, operating earnings (loss), depreciation and amortization expense, and capital expenditures for the quarters ended September 30, 2003 and 2002, and assets as of September 30, 2003 and December 31, 2002, for each segment and reconciling items necessary to total to amounts reported in the financial statements:

~~For~~Net ~~the~~Revenue Three Months Ended ~~For~~September ~~the~~30, ~~Six~~Nine Months Ended ~~June~~September 30, ~~June 30,~~ -------------------------------- ------------------------------- 2003 2002 2003 2002 -------------- -------------- -------------- -------------- ~~OPERATING~~Wireless ~~REVENUES:~~personal ~~PCS~~communications ~~subscriber~~services ~~and roaming~~...................... $ 6133,~~419~~625,~~109~~314 $ 5055,~~124~~999,~~293~~210 $ ~~118~~156,~~790~~305,~~756~~526 $ 95155,~~857~~829,~~681~~819 ~~PCS~~Landline ~~equipment~~telephone services .................................... 29,~~071~~637,~~361~~261 19,~~597~~955,~~640~~454 330,~~889~~491,~~457~~576 330,~~972~~637,~~928~~494 ~~Basic~~All ~~local~~other ~~and long-distance service~~....... ~~4,707,434 4,753,442 9,084,943 9,351,273 Network access~~.............................. ~~6,342,539 6,735,297 11,769,372 11,330,767 Equipment systems sales, information services, Internet access and other~~................. 23,~~262~~005,~~594~~148 2,~~061~~235,~~334~~065 47,~~507~~512,~~418~~567 46,~~167~~402,~~083~~148 -------------- -------------- -------------- -------------- Total ~~operating~~net revenues~~..............~~ ~~76,803,037 65,272,006 148,041,946 124,679,732 OPERATING EXPENSES: Cost of goods sold~~ ......................... ~~5,175,011 3,836,701 11,085,558 8,928,711 Cost of services (exclusive of items shown separately below)~~................~~.......~~ ~~50,889,739~~$ 4546,~~337~~267,~~798~~723 ~~98,949,166~~$ 8468,~~829~~189,~~940~~729 ~~Selling~~$ ~~and marketing....................... 12~~194,~~779~~309,~~812~~669 ~~11,333,217~~$ 25192,~~636~~869,~~771~~461 ~~26,418,675~~============= ~~General~~============= ~~and~~============= ~~administrative~~============= ~~(exclusive~~Intercompany ofRevenue ~~items~~Three ~~shown~~Months ~~separately~~Ended ~~below)...........~~September 1530,~~476,271~~ ~~13,901,747~~Nine ~~28,340,160~~Months ~~26,699,836~~Ended ~~Non-cash~~September ~~compensation....................... 96~~30,~~609~~ 87,768 193,218 189,635 (Gain) Loss on sale of property and equipment............................... (41,064) 355,265 216,312 641,004 Impairment of intangible assets and property and equipment.................. 73,760,278 3,500,000 73,760,278 3,500,000 Depreciation and amortization............... 12,617,127 11,730,985 25,826,403 21,850,995 -------------- -------------- ----~~----------~~ -------------- ~~Total operating expenses.............. 170,753,783 90,083,481 264,007,866 173,058,796~~ -------------- ---~~-----------~~ ~~--------------~~2003 ~~--------------~~2002 ~~OPERATING~~2003 ~~LOSS...................................~~2002 ~~(93,950,746) (24,811,475) (115,965,920) (48,379,064)~~ -------------- -------------- -------------- -------------- ~~NONOPERATING~~Wireless ~~INCOME~~personal ~~(EXPENSE):~~communications ~~Interest~~services ~~expense, net~~....................... ~~(17,718,757)~~$ ~~(15~~28,~~925,172)~~341 ~~(34,693,462)~~$ ~~(29~~61,~~128,751)~~770 ~~Subsidiary~~$ ~~preferred stock dividends........ (3~~50,~~151,448)~~871 ~~(2,856,397)~~$ (6254,~~220,557)~~863 ~~(5,712,766)~~Landline ~~Interest~~telephone ~~income~~services ~~and other, net~~.............. ~~249,540 944,518 565,931 1,686,693 -------------- -------------- -------------- -------------- Total nonoperating expense~~......... ~~(20,620,665) (17,837,051) (40,348,088) (33,154,824) -------------- -------------- -------------- -------------- LOSS BEFORE INCOME TAX EXPENSE and minority interest~~.............~~.........................~~ ~~(114~~242,~~571,411)~~599 ~~(42~~280,~~648,526)~~886 ~~(156~~851,~~314,008)~~812 ~~(81~~1,~~533~~086,~~888)~~141 ~~INCOME~~All ~~TAX~~other ~~BENEFIT~~............................... ~~5,381,937 (972,437) 5,218,663 (1,180,071) MINORITY INTEREST IN LOSS~~........................ --168,423 --99,738 24467,968 --318,477 -------------- -------------- -------------- -------------- ~~NET~~Total ~~LOSS~~intercompany revenues ................................~~.........~~ $~~(109~~ 439,~~189,474)~~363 $ ~~(43~~442,~~620,963)~~394 $~~(151,095,321)~~ ~~$ (82~~1,~~713~~370,~~959)~~651 ~~============== ============== ============== ============== Basic and diluted net loss per share.............~~ $ ~~(301.22) $ (120.36) $ (416.83) $ (228.25) ============== ============== ============== ============== Weighted-average common shares outstanding ...... 362~~1,~~487 362~~659,~~429~~481 ~~362,487 362,379~~ ============== ============== ============== ==============

14 HORIZON TELCOM, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements As of September 30, 2003 and December 31, 2002 And for the Three and Nine Months Ended September 30, 2003 and 2002 (unaudited) -------------------------------------------------------------------------------- NOTE 5 - Segment Information (Continued)

~~For~~Operating ~~the~~Earnings (Loss) Three Months Ended ~~For~~September ~~the~~30, ~~Six~~Nine Months Ended ~~June~~September 30, ~~June 30,~~ -------------------------------- ------------------------------- 2003 2002 2003 2002 -------------- -------------- -------------- --------------- ~~NET~~Wireless ~~LOSS~~personal communications services ...................... $ (11,075,250) $ (23,691,879) $(127,576,728) $ (73,435,201) Landline telephone services .................................... 3,143,205 3,450,426 11,444,152 12,415,267 All other ...................................................... (965,454) (1,031,266) (2,870,837) (2,815,211) Unallocated administrative expenses ............................ (2,111,361) (2,652,987) (7,971,367) (8,469,625) ------------- ------------- ------------- ------------- Total operating loss ....................................... $ (~~109~~11,~~189~~008,~~474~~860) $ (4323,~~620~~925,~~963~~706) $(~~151~~126,~~095~~974,~~321~~780) $ (8272,~~713~~304,~~959~~770) ============== ============== ============== =============== ~~OTHER~~Depreciation ~~COMPREHENSIVE~~and ~~INCOME~~Amortization ~~(LOSS)~~Three ~~Net~~Months ~~unrealized~~Ended ~~gain~~September ~~(loss)~~30, onNine ~~hedging~~Months ~~activities~~Ended September 30, -------------------------------- ------------------------------- 2003 2002 2003 2002 -------------- -------------- ------------- -------------- Wireless personal communications services ...................... ~~127~~$ 4,~~737~~023,504 ~~(269~~$ 9,~~901)~~302,721 ~~461~~$ 25,~~644~~175,810 ~~120~~$ 26,~~042~~732,128 ~~Net~~Landline ~~unrealized~~telephone ~~gain~~services ~~(loss)~~.................................... on1,715,478 ~~securities~~1,711,465 ~~available~~5,149,727 5,114,793 All other ...................................................... 648,342 569,602 1,888,191 1,587,862 -~~for~~-~~sale~~----------- ~~net~~------------- of------------- ~~taxes~~------------- ofTotal depreciation and amortization ........................ $~~159~~ 6,~~681~~387,324 ~~and~~$ 11,583,788 $~~182~~ 32,~~447~~213,728 ~~for~~$ ~~the~~33,434,783 ~~three~~============= ~~and~~============= ~~six~~============= ~~months~~============= ~~ended~~Capital ~~June~~Expenditures Three Months Ended September 30, ~~2003~~Nine Months Ended September 30, ~~respectively~~-------------------------------- ------------------------------- 2003 2002 2003 2002 -------------- -------------- ------------- -------------- Wireless personal communications services ...................... ~~309~~$ 198,~~969~~190 ($ 8,507,660 $ 5,255,326 $ 57,620,672 Landline telephone services .................................... 1,~~215~~753,~~938)~~193 ~~354~~2,~~162~~014,624 (5,375,638 5,868,406 All other ...................................................... 357,232 928,340 1,~~893~~009,~~573)~~511 2,595,820 -------------- -------------- -------------- --------------- ~~COMPREHENSIVE~~Total ~~INCOME~~capital ~~(LOSS)~~expenditures ................................. $~~(108~~ 2,~~751~~308,~~768)~~615 $ ~~(45~~11,~~106~~450,~~802)~~624 $~~(150~~ 11,~~279~~640,~~515)~~475 $ ~~(84~~66,~~487~~084,~~490)~~898 ============== ============== ============== ===============

Assets September 30, December 31, 2003 2002 -------------- ------------ Wireless personal communications services .... $ -- $443,116,762 Landline telephone services .................. 87,285,086 83,258,131 All other .................................... 17,153,142 19,375,220 ------------ ------------ Total assets ............................. $104,438,228 $545,750,113 ============ ============ 15 HORIZON TELCOM, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements As of September 30, 2003 and December 31, 2002 And for the Three and Nine Months Ended September 30, 2003 and 2002 (unaudited) -------------------------------------------------------------------------------- NOTE 5 - Segment Information (Continued) Net operating revenues by product and services were as follows for the three and nine months ended September 30:

~~Six~~Three Months Ended ~~June~~September 30, ~~2003~~Nine ~~2002~~Months Ended September 30, ---------------- ---------------- ~~CASH FLOWS FROM OPERATING ACTIVITIES: Net loss............................................................... $ (151,095,321) $ (82,713,959)~~ ---------------- ---------------- ~~Adjustments~~2003 to2002 ~~reconcile~~2003 ~~net~~2002 ~~loss~~-------------- to-------------- ~~net~~------------- ~~cash~~-------------- ~~provided~~Wireless bypersonal ~~(used~~communications ~~in) operating activities~~services: ~~Depreciation~~PCS ~~and~~subscriber ~~amortization~~revenue ......................................... 25$ 24,~~826~~229,~~403~~074 21$ 39,~~850~~219,~~995~~056 ~~Impairment~~$ ~~of intangible assets and property and equipment.......... 73~~115,~~760~~643,~~278~~263 3$ 111,~~500~~141,~~000~~497 ~~Deferred~~PCS ~~income~~roaming ~~tax~~revenue ~~benefit~~............................................ (68,~~031~~877,~~000)~~399 --14,993,078 ~~Non-cash compensation expense....................................... 193~~36,~~218~~253,966 ~~189~~38,~~635~~928,318 ~~Non-cash~~PCS ~~interest~~equipment ~~expense~~sales ............................................ 16518,~~275,128~~841 121,~~993~~787,~~755~~076 ~~Loss on disposal of property~~4, ~~plant and equipment................... 216~~408,~~312~~297 ~~641~~5,760,004 ~~Non~~-~~cash~~------------ ~~preferred~~------------- ~~stock~~------------- ~~dividend of subsidiary..................... 6,220,557 5,712,766 Minority interest in subsidiary..................................... (24)~~ ------------- ~~Provision~~Total ~~for~~personal ~~bad~~communication ~~debt~~services ~~expense~~........................~~..............~~ 333,~~843~~625,~~309~~314 755,~~368~~999,~~879~~210 ~~Loss~~156,305,526 on155,829,819 ~~hedging~~------------- ~~activities..........................................~~------------- ------------- ~~34,103~~------------- ~~Decrease~~Landline ~~(Increase)~~telephone inservices: ~~certain~~Basic ~~assets:~~local ~~Accounts~~service ~~receivable~~............................................~~...~~ (73,~~454~~490,~~660)~~871 ~~(13~~3,~~280~~641,~~531)~~695 ~~Inventories....................................................... 841~~10,~~161 2~~362,~~008,333~~212 ~~Prepaid expenses and other current assets......................... (1~~10,~~366~~905,~~006)~~384 ~~(2,048,175)~~Long-distance ~~Increase~~service ~~(Decrease) in certain liabilities: Accounts payable~~..........................................~~........~~ (7237,~~172~~738 300,~~592)~~115 (4716,~~448~~473 878,~~623)~~529 ~~Payable~~Network toaccess ~~Sprint~~................................................. 45,~~088~~069,~~607~~514 45,~~597~~217,~~189~~569 ~~Accrued liabilities and deferred PCS service revenue.............. 13~~16,~~836~~838,~~172~~886 816,~~211~~548,~~315~~336 Other ~~accrued~~related ~~liabilities.........................................~~telephone --service ~~-- Postretirement benefit obligation~~................................. ~~623~~839,~~776~~138 ~~424~~796,~~129~~075 ~~Other assets and liabilities~~2, ~~net................................. 1~~574,~~239,731~~005 ~~(58~~2,~~950) ---------------- --------------- Total adjustments............................................... 124~~305,~~940,370~~245 ~~47,695,824~~ -------------~~---~~ -------------~~---~~ ~~Net cash used in operating activities......................... (26,154,951) (35,018,135)~~ -------------~~---~~ -------------~~---~~ ~~CASH~~Total ~~FLOWS~~landline ~~FROM~~telephone ~~INVESTING~~services ~~ACTIVITIES: Capital expenditures, net~~............................~~...............~~ (9,~~924~~637,~~353)~~261 ~~(54~~9,~~634~~955,~~274)~~454 ~~Proceeds from sale of property and equipment........................ -- 1~~30,~~543~~491,~~482~~576 ~~Purchase of short-term investments.................................. -- (6~~30,~~525~~637,~~263)~~494 -------------~~---~~ -------------~~---~~ ~~Net cash used in investing activities......................... (9,924,353) (59,616,055)~~ -------------~~---~~ -------------~~---~~ ~~CASH FLOWS FROM FINANCING ACTIVITIES~~Other: ~~Borrowings~~Internet onaccess ~~line~~services ~~of credit~~........................................ ~~750~~661,~~000~~918 --760,057 ~~Borrowings~~2,033,961 ~~on long-term debt........................................ -- 105~~2,~~000~~385,~~000~~462 ~~Repayments~~Equipment onsystem ~~long-term~~sales ~~debt~~......................................... --228,532 ~~(767~~315,~~338)~~667 ~~Deferred~~710,583 ~~financing~~936,620 ~~fees~~Other miscellaneous revenues ...................................~~..........~~ ~~-- (~~2,~~461~~114,~~230)~~698 ~~Exercise~~1,159,341 ~~of subsidiary stock options................................ 24 -- Dividends paid...................................................... (942~~4,~~454)~~768,023 ~~(906~~3,~~009)~~080,066 -------------~~---~~ -------------~~---~~ ~~Net cash provided by (used in) financing activities........... (192,430) 100,865,423~~ -------------~~---~~ -------------~~---~~ ~~NET~~Total ~~INCREASE~~other ~~(DECREASE) IN CASH AND CASH EQUIVALENTS~~................... ~~(36,271,734) 6,231,233 CASH AND CASH EQUIVALENTS, beginning of period~~............................... 943,~~948~~005,~~351~~148 ~~127~~2,~~154~~235,~~227~~065 7,512,567 6,402,148 ------------- ------------- ------------- ------------- ~~CASH~~Total ~~AND~~operating ~~CASH~~revenues ~~EQUIVALENTS, end of period~~................................. $ 5846,~~676~~267,~~617~~723 $ ~~133~~68,~~385~~189,~~460~~729 $ 194,309,669 $ 192,869,461 ============= ============= ============= =============

16 HORIZON TELCOM, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements As of September 30, 2003 and December 31, 2002 And for the Three and Nine Months Ended September 30, 2003 and 2002 (unaudited) -------------------------------------------------------------------------------- NOTE 6 - Investments The following summarizes unrealized gains and losses on investments at September 30, 2003, and December 31, 2002: 2003: Unrealized Unrealized Fair Cost Gain Loss Value ---------- ---------- ---------- ---------- Equity securities available-for-sale ...... $ 250,000 $1,001,780 $ -- $1,251,780 ========== ========== ======= ========== 2002: Unrealized Unrealized Fair Cost Gain Loss Value ---------- ---------- ---------- ---------- Equity securities available-for-sale ...... $ 250,000 $ 495,860 $ -- $ 745,860 ========== ========== ======= ========== NOTE 7 - Property, Plant and Equipment Property, plant and equipment consists of the following: September 30, December 31, 2003 2002 ------------- ------------- Network assets ............................... $ 102,068,741 $ 92,276,815 Switching equipment .......................... -- -- Land and buildings ........................... 15,088,979 14,889,802 Computer and telecommunications equipment .... 11,391,390 10,716,345 Furniture, vehicles and office equipment ..... 4,958,911 4,823,818 PCS assets ................................... -- 271,157,682 ------------- ------------- Property, plant and equipment in-service, at cost ...................... 133,508,021 398,864,462 Accumulated depreciation ..................... (58,554,860) (53,100,188) PCS accumulated depreciation ................. -- (46,273,707) ------------- ------------- Property, plant and equipment in-service, net ....................... 74,953,161 299,487,567 Construction work in progress ................ 856,013 1,780,922 PCS construction work in progress ............ -- 14,652,618 ------------- ------------- Total property, plant and equipment, net ................... $ 75,809,174 $ 315,921,107 ============= ============= During the first quarter of 2003, Horizon PCS recorded a liability of $22,600 and a cumulative change in accounting principle of $9,570 related to the adoption SFAS No. 143 for potential costs associated with certain asset retirement obligations. The cumulative change in accounting principle is included in "interest income and other, net" on the accompanying statement of operations. During the second quarter of 2003, Horizon PCS reduced the book value of the network assets related to an impairment recorded on property and equipment discussed below in Note 8. NOTE 8 - Impairment of Horizon PCS Intangible Assets and Property and Equipment Horizon PCS was not in compliance with certain covenants contained in its financing documents as of June 30, 2003. This created the need for an impairment assessment of its intangible assets and property and equipment as required by SFAS No. 144. Therefore, Horizon PCS projected future undiscounted cash flows and determined they were insufficient to recover the carrying amounts for the intangible assets and property and equipment. This required Horizon PCS to recognize an impairment loss for the excess of carrying value over fair value. To determine fair value, Horizon PCS performed a valuation utilizing a cost approach adjusted for items such as technological and functional obsolescence as appropriate. 17 HORIZON TELCOM, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements As of September 30, 2003 and December 31, 2002 And for the Three and Nine Months Ended September 30, 2003 and 2002 (unaudited) -------------------------------------------------------------------------------- NOTE 8 - Impairment of Horizon PCS Intangible Assets and Property and Equipment (Continued) Horizon PCS determined the carrying value of the intangible assets exceeded the fair value of the assets. As a result, Horizon PCS recorded impairment on the intangible assets of approximately $39,152,000. As a result of the impairment charge, Horizon PCS recorded a tax benefit of $6,031,000 due to the reduction of a deferred tax liability related to the intangibles. As of September 30, 2003, net deferred income taxes were zero. Additionally, Horizon PCS determined the fair market value of the property and equipment was less than the carrying value of the assets. As a result, Horizon PCS recorded an impairment on property and equipment of approximately $34,609,000. During 2002, Horizon PCS launched switches in Tennessee and Pennsylvania and disconnected some switching equipment in Chillicothe, Ohio. As a result, approximately $6,200,000 of switching equipment was considered an impaired asset as defined by SFAS No. 144. Accordingly, impairment expense for the nine months ended September 30, 2002, includes approximately $3,500,000 of expense related to the impaired assets. The total amount of depreciation recorded to date on this equipment was approximately $5,600,000. This equipment was sold for book value during 2003. NOTE 9 - Lines of Credit On December 15, 2002, Chillicothe Telephone entered into an agreement with Huntington National Bank for a line of credit that provides maximum borrowings of $15,000,000, payable on demand. Interest accrues on the outstanding balance at a fluctuating rate tied to the London Interbank Offered Rate ("LIBOR") and is due and payable monthly. At September 30, 2003, the interest rate on the line of credit was 2.65%. As of September 30, 2003, Chillicothe Telephone had drawn $1,000,000 under this line of credit. The line of credit contains several covenants requiring minimum tangible net worth, a fixed charge coverage ratio, a funded debt to consolidated total capitalization ratio and an interest coverage ratio. As of September 30, 2003, Chillicothe Telephone was in compliance with these covenants. NOTE 10 - Long-Term Debt The components of long-term debt outstanding are as follows: Interest Rate at September 30, September 30, December 31, 2003 2003 2002 ------------ ------------- ------------- Horizon PCS: Discount notes .................... $ -- $ 295,000,000 Senior notes ...................... -- 175,000,000 Secured credit facility-term loan A -- 105,000,000 Secured credit facility-term loan B -- 50,000,000 Chillicothe Telephone: 2002 Senior Notes ................. 6.64% 30,000,000 30,000,000 1998 Senior Notes ................. 6.72% 12,000,000 12,000,000 ------------- ------------- Long-term debt, par value ...... 42,000,000 667,000,000 Less: Unaccreted interest portion of Horizon PCS discount notes ....... -- (108,715,651) ------------- ------------- Total long-term debt .......... $ 42,000,000 $ 558,284,349 ------------- ------------- Subsequent to August 14, 2003, Horizon Telcom no longer consolidates the accounts and results of operations of Horizon PCS. Accordingly, the schedule above as of September 30, 2003 does not include the consolidated accounts of Horizon PCS. 18 HORIZON TELCOM, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements As of September 30, 2003 and December 31, 2002 And for the Three and Nine Months Ended September 30, 2003 and 2002 (unaudited) -------------------------------------------------------------------------------- NOTE 11 - Commitments and Contingencies Operating Leases The Company leases office space and various equipment under several operating leases. Legal Matters The Company is party to legal claims arising in the normal course of business. Although the ultimate outcome of the claims cannot be ascertained at this time, it is the opinion of management that none of these matters, when resolved, will have a material adverse impact on the Company's results of operations or financial condition. On August 21, 2003, HPC and Bright PCS, subsidiaries of Horizon PCS, Inc., filed a lawsuit in the United States District Court for the Southern District of Ohio, Eastern Division, against Sprint Corporation, Sprint Spectrum, L.P., Wirelessco, L.P. and Sprintcom, Inc. (collectively, "Sprint"), alleging wrongful conduct on the part of Sprint in its relationship and business dealings with Horizon PCS. In the Complaint, HPC and Bright PCS assert claims under the federal RICO laws and similar Ohio state laws, and also assert fraud, negligent misrepresentation, conversion, breach of contract and breach of fiduciary duties. NOTE 12 - PCS Restructuring Costs On July 28, 2003, Horizon PCS implemented a restructuring plan that included a company-wide work force reduction in order to reduce costs that are within Horizon PCS' control. The employment of approximately 300 employees has been terminated, and Horizon PCS has closed approximately 19 of its 42 company-owned sales and service centers to reduce costs in areas where revenues are not currently meeting criteria for return on investment. Horizon PCS also converted approximately 13 of its other company-owned sales and service centers to customer service centers. Horizon PCS' restructuring plan resulted in restructuring charges of $4,509,128. Cash Non-Cash Charges Deductions Deductions ---------- ---------- ---------- Employee separations .................... $1,659,149 $1,625,066 $ 34,083 Lease commitments, net of sublease ...... 798,260 -- 798,260 Equipment disposals ..................... 2,051,719 -- 2,051,719 ---------- ---------- ---------- $4,509,128 $1,625,066 $2,884,062 ========== ========== ========== 19 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations FORWARD-LOOKING STATEMENTS This quarterly report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), which can be identified by the use of forward-looking terminology such as: "may", "might", "could", "would", "believe", "expect", "intend", "plan", "seek", "anticipate", "estimate", "project" or "continue" or the negative thereof or other variations thereon or comparable terminology. All statements other than statements of historical fact included in this quarterly report on Form 10-Q, including without limitation, the statements under "ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations" regarding our financial position and liquidity are forward-looking statements. These forward-looking statements also include, but are not limited to: o changes in industry conditions created by the Federal Telecommunications Act of 1996 (the "Telecom Act") and related state and federal legislation and regulations; o recovery of the substantial costs which will result from the implementation and expansion of our new businesses; o retention of our existing customer base and our ability to attract new customers; o rapid changes in technology; o our future compliance with debt covenants; o actions of our competitors; o estimates of current and future population for our markets; o statements regarding the effects of, or the outcome of, Horizon PCS' Bankruptcy Case; o statements regarding our anticipated revenues, expense levels, liquidity and capital resources and projections; and o the anticipated impact of recent accounting pronouncements. Although we believe the expectations reflected in such forward-looking statements are reasonable, we can give no assurance such expectations will prove to have been correct. Important factors with respect to any such forward-looking statements, including certain risks and uncertainties that could cause actual results to differ materially from our expectations ("Cautionary Statements"), are disclosed in this quarterly report on Form 10-Q, including, without limitation, in conjunction with the forward-looking statements included in this quarterly report on Form 10-Q. Important factors that could cause actual results to differ materially from those in the forward-looking statements included herein include, but are not limited to: o changes or advances in technology and the acceptance of new technology in the marketplace; o competition in the industry and markets in which we operate; o changes in government regulation; o general political economic and business conditions; and o the impact and outcome of the Horizon PCS bankruptcy filing and related proceedings. 20 These forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the Cautionary Statements. Overview Horizon Telcom is a holding company, which, in addition to its majority ownership of Horizon PCS, owns 100% of 1) Chillicothe Telephone, a local telephone company, 2) Horizon Services, which provides administrative services to other Horizon Telcom affiliates including Horizon PCS, and 3) Horizon Technology, a long-distance and Internet services business. Horizon Telcom provides a variety of voice and data services to commercial, residential/small business and local market segments. Horizon Telcom provides landline telephone service, VDSL television service and Internet access services to the southern Ohio region, principally in and surrounding Chillicothe, Ohio. At September 30, 2003, Chillicothe Telephone serviced approximately 37,200 access lines in Chillicothe, Ohio and the surrounding area. Horizon Technology provided Internet service to approximately 10,400 customers through its bright.net Internet service Critical Accounting Policies and Estimates Allowance for Doubtful Accounts. With respect to our landline segments, accounts receivable consists primarily of amounts billed to interexchange carriers for allowing their customers to access our network when their customers place a call. Accounts receivable also includes charges for advertising in Chillicothe Telephone's yellow pages directory and amounts billed to customers for monthly services. Our collection history with interexchange carriers has been good. However, all pre-petition accounts receivables from WorldCom and WorldCom's MCI division, which declared bankruptcy on July 21, 2002, were written off at year-end 2002. Approximately $188,000 of this written off amount was recovered in the second quarter of 2003. Revenue Recognition. The landline telephone services operating segment consists of basic local and long-distance toll, network access services and other related telephone service revenue. Intra-LATA, (Local Access and Transport Area) (i.e., the area of southern Ohio, including Columbus originally covered by area code 614), basic local exchange and long-distance service revenue consists of flat rate services and measured services billed to customers utilizing Chillicothe Telephone's landline telephone network. Long distance intraLATA/interstate revenue consists of message services that terminate beyond the basic service area of the originating wire center. Network access revenue consists of revenue derived by our landline telephone services segment from the provision of exchange access services to an interexchange carrier or to an end user beyond the exchange carrier's network. Other related telephone service revenue includes directory advertising related to a telephone directory published annually. Other revenues include Internet access services, equipment systems sales and information services. Internet access revenues for our bright.net services are monthly service fees and other charges billed to our bright.net customers. Service fees primarily consist of monthly recurring charges billed to customers. Equipment system sales and other revenues consist of sales made by Chillicothe Telephone to various businesses or other residential customers for equipment used on the telephone system. Chillicothe Telephone is an independent local exchange carrier that provides local telephone service within ten local exchanges. Chillicothe Telephone follows an access charge system as ordered by the Federal Communications Commission ("FCC") and the PUCO ("Public Utilities Commission of Ohio") in 1984. The access charge methodology provides a means whereby local exchange carriers, including Chillicothe Telephone, provide their customers access to the facilities of the long-distance carriers and charge long-distance carriers for interconnection to local facilities. 21 The PUCO issued an Opinion and Order effective January 1, 1988, for reporting intra-LATA (Local Access and Transport Area) toll revenues. This methodology is defined as the Originating Responsibility Plan with a Secondary Carrier Option (ORP-SCO). This plan calls for one or more primary carriers in each LATA with other local exchange carriers acting as secondary carriers. The secondary carriers provide the primary carrier with access to local facilities and are compensated based upon applicable intra-LATA access charge tariffs. Chillicothe Telephone is a primary carrier. Intra-LATA toll revenue is reflected in basic and long-distance service revenue on the accompanying consolidated statements of operations, and is recognized as such services are provided. Estimated unbilled amounts are accrued at the end of each month. Chillicothe Telephone recognizes revenue for billing and collection services performed on behalf of certain interexchange carriers. Chillicothe Telephone is reimbursed for this service based on the number of messages billed on behalf of the interexchange carrier. The revenues from this service are recognized in the same period the services are provided. Chillicothe Telephone also recognizes advertising revenues from its telephone directory. Telephone directory customers sign an annual contract, which is billed in twelve equal installments. The revenue derived from directory advertising is recognized equally over the twelve-month period of the directory, consistent with the ratemaking treatment. These items are recorded in other revenues on the accompanying consolidated statements of operations. Chillicothe Telephone recognizes revenues on the completed contract basis for the installation of telecommunication and other related equipment. These revenues are reported as equipment system sales on the accompanying consolidated statements of operations. Maintenance revenues are recognized over the life of the contract, and recorded as other revenues on the accompanying consolidated statements of operations. Horizon Technology provides Internet access services and resells long-distance service. Revenues on equipment sales were recognized at the time of sale. Revenues for the Internet and long distance services are recognized monthly as service is rendered. 22 Results of Operations for the Three Months Ended September 30, 2003 Compared to the Three Months Ended September 30, 2002 This discussion and analysis is presented on an operating segment basis. The following unaudited table details the consolidated statements of income by operating segment for the three months ended September 30, 2003 and 2002:

For the Three Months Ended, ~~June~~September 30, ~~Six~~----------------------------------------------------------------------------------- ~~Months~~Wireless ~~Ended~~Personal ~~June~~Communications ~~30,~~Services(1) Landline Telephone All Other Services ----------------------- ----------------------- ----------------------- (Dollars in thousands) 2003 2002 2003 2002 2003 2002 OPERATING REVENUES: -------- -------- -------- -------- -------- -------- PCS subscriber and roaming ............ $ 33,106 $ 54,212 $ -- $ -- $ -- $ -- PCS equipment ......................... 519 1,787 -- -- -- -- ~~Net~~Basic ~~loss~~local Asand ~~reported~~long-distance and other landline ............................ -- -- 4,568 4,738 -- -- Network access ........................ $-- ~~(109~~-- 5,~~189~~070 5,~~474~~218 -- -- Equipment systems sales, information services, Internet access and other ........... -- -- -- -- 3,005 2,235 -------- -------- -------- -------- -------- -------- Total operating revenues ............ 33,625 55,999 9,638 9,956 3,005 2,235 -------- -------- -------- -------- -------- -------- OPERATING EXPENSES: Cost of PCS and other equipment sale ...................... 1,207 3,974 -- -- 95 164 Cost of services ...................... 25,852 43,761 2,471 2,379 1,830 1,782 Selling and marketing ................. 3,794 13,073 206 150 247 252 General and administrative ............ 5,237 9,490 2,102 2,263 3,259 3,125 Non-cash compensation ................. 77 99 1 1 3 20 Loss (Gain) $on disposal of assets ........................... -- (4310) -- -- -- 7 Depreciation and amortization ........................ 4,~~620~~024 9,~~963~~303 1,715 1,712 648 570 Impairment of Horizon PCS Assets .............................. -- -- -- -- -- -- Restructuring charges ................. 4,509 -- -- -- -- -- -------- -------- -------- -------- -------- -------- Total operating expenses ............ 44,700 79,690 6,495 6,505 6,082 5,920 -------- -------- -------- -------- -------- -------- OPERATING INCOME (LOSS) $.................. (~~151~~11,~~095~~075) (23,~~321~~691) $3,143 3,451 (823,~~713~~077) (3,~~959~~685) ~~Add:~~-------- ~~Stock~~-~~based~~------- ~~employee~~-------- ~~compensation~~-------- ~~expense~~-------- ~~included~~-------- inNONOPERATING ~~reported~~INCOME (EXPENSE): Interest expense, net ~~loss~~................. 96(8,~~609~~269) 87(15,~~768~~890) ~~193,218~~(705) ~~189~~(1,~~635~~133) ~~Deduct:~~-- ~~Total~~-- Subsidiary preferred stock dividends ........................... (1,595) (3,006) -~~based~~- ~~employee~~-- ~~compensation~~-- -- Interest income and other, net ............................. 70 720 5 5 2 1 -------- -------- -------- -------- -------- -------- Total nonoperating expense ~~determined~~............ ~~under~~(9,794) ~~fair~~(18,176) ~~value~~(700) ~~base~~(1,128) ~~method~~2 ~~for~~1 ~~all~~-------- ~~awards~~-------- -------- -------- -------- -------- LOSS BEFORE INCOME TAX EXPENSE AND MINORITY INTEREST ................. (~~182~~20,~~626~~869) (~~292~~41,~~428~~867) 2,443 2,323 (~~397~~3,~~137~~075) (~~584~~3,~~856~~684) INCOME TAX (EXPENSE) BENEFIT ............. -- -- (226) (161) 207 225 MINORITY INTEREST IN LOSS ................ -- -- -- -- -- -- -------- -------- -------- -------- -------- -------- ~~Pro~~NET ~~Forma~~INCOME ~~net~~(LOSS) ~~loss~~........................ $(20,869) $(~~109~~41,~~275,491~~867) $ ~~(43~~2,~~825~~217 $ 2,~~623)~~162 $ (~~151~~2,~~299,240~~868) $ (833,~~109,180~~459) ========~~=======~~ ========~~=======~~ ======== ======== ======== ======== ~~Basic~~OTHER ~~and~~COMPREHENSIVE ~~diluted~~INCOME (LOSS) Net realized gain (loss) ~~per~~on ~~share~~hedging Asactivities ~~reported~~.......................~~........~~ $-- ~~(301.22)~~21 $-- ~~(120.36)~~-- $-- ~~(416.83)~~-- $Net unrealized gain (~~228.25~~loss) ~~Pro~~on ~~forma~~securities available-for-sale, net of taxes ............................. -- -- (21) (131) -- -- -------- -------- -------- -------- -------- -------- COMPREHENSIVE INCOME (LOSS) .............. $ (~~301.46~~20,869) $ (~~120.92~~41,846) $ 2,196 $ 2,031 $ (~~417.39~~2,868) $ (~~229.34~~3,459) ======== ======== ======== ======== ======== ========

(1) Amounts in the wireless personal communication services column include the results of Horizon PCS through August 14, 2003 (Note 2). 23 Wireless Personal Communications Services Segment On August 15, 2003, Horizon PCS and its subsidiaries filed voluntary petitions for reorganization under Chapter 11 of the United States Bankruptcy Code. In accordance with SFAS No. 94 "Consolidation of All Majority-Owned Subsidiaries" and ARB No. 51 "Consolidated Financial Statements," when control of a majority-owned subsidiary does not rest with the majority owners (as, for instance, where the subsidiary is in legal reorganization or in bankruptcy), ARB No. 51 precludes consolidation of the majority-owned subsidiary. As a result, subsequent to August 14, 2003, Horizon Telcom no longer consolidates the accounts and results of operations of Horizon PCS and the accounts of Horizon PCS will be recorded as an investment using the cost method of accounting. Accordingly, the accompanying consolidated balance sheet as of September 30, 2003 does not include the consolidated accounts of Horizon PCS; it does however, include Horizon Telcom's investment at cost in Horizon PCS as of August 14, 2003. The accompanying consolidated statement of operations for the period ended September 30, 2003 includes the consolidated results of Horizon PCS' operations through August 14, 2003. Since future results will not include the results of Horizon PCS, this management discussion and analysis will focus only on the results of the landline telephone and all other services segments. Landline Telephone Services Segment and All Other Services The following discussion details the results of operations of our landline telephone services segment and all other services not assigned to a segment for the last fiscal quarter. Results of Operations Revenues. Network access revenue was relatively flat decreasing by approximately $100,000 for the three months ended September 30, 2003, to approximately $5.1 million. Basic local and long distance revenues decreased approximately $100,000 to approximately $4.6 million for the three months ended September 30, 2003 as compared to September 30, 2002. Internet access and other revenues increased by approximately $800,000 to approximately $3.0 million for the three months ended September 30, 2003. Other revenues were impacted by increased VDSL revenue as we continue to build our customer base, which was offset slightly by lower bright.net dial-up Internet service subscribers. We believe a number of these lost dial-up customers have switched to high-speed VDSL service. Cost of equipment sales. Cost of goods sold primarily consists of business system sales and customer maintenance expenses. Cost of goods sold for all other services was essentially flat for the three months ended September 30, 2003 as compared to the same period in 2002. Cost of services. Cost of services includes customer care support and network-related costs, including switching, access and circuit expenses. Cost of services also includes expenses related to the installation of our VDSL service. Cost of services for the three months ended September 30, 2003 for the landline telephone segment increased approximately $100,000 to approximately $2.5 million as compared to the three months ended September 30, 2002. This increase was due to increased payroll costs. Cost of services for the three months ended September 30, 2003 for all other services was essentially flat at approximately $1.8 million compared to the same period in 2002. Selling and marketing expenses. Selling and marketing expenses consist of costs associated with local marketing and advertising programs including marketing for VDSL. Selling and marketing expenses for the landline telephone segment and all other services were essentially flat for the three months ended September 30, 2003 compared to the same three months in 2002. General and administrative expenses. General and administrative expenses include the costs related to corporate support functions. These include finance functions, billing and collections, accounting services, computer access and administration, executive, supervisory, consulting, customer relations, human 24 resources and other administrative services. General and administrative expenses for the landline telephone segment decreased by approximately $200,000 to approximately $2.1 million for the three months ended September 30, 2003 as compared to the same period in 2002. This decrease was the result of a reduction in the amount of customer uncollectibles. General and administrative expenses for all other services increased by approximately $200,000 to approximately $3.3 million for the three months ended September 30, 2003. This increase was due to higher professional fees in 2003. Non-cash compensation expense. Non-cash compensation expense is the amortization of the value of stock options granted in November 1999. Stock-based compensation expense will continue to be recognized through the conclusion of the vesting period for these options in 2005. Non-cash compensation expense for the landline telephone segment and all other services was essentially flat for the three months ended September 30, 2003 compared to the same three months in 2002. Depreciation and amortization expense. Depreciation and amortization expense for the landline telephone segment was essentially flat at approximately $1.7 million for the three months ended September 30, 2003 and 2002. Depreciation and amortization expense for all other services was also relatively flat at approximately $600,000 for the three months ended September 30, 2003 and 2002. Interest expense, net. Interest expense for the landline telephone segement and all other services for the three months ended September 30, 2003, was approximately $700,000, compared to approximately $1.1 million for the three months ended September 30, 2002. The decrease in interest expense was the result of a one-time increase in 2002 due to a $500,000 payment made in connection with the early retirement of senior notes issued by Chillicothe Telephone. The decrease was partially offset by an increase due to our additional debt outstanding during the three months ended September 30, 2003, compared to the same period in 2002. We expect further increases in interest expense in 2003 due to anticipated higher average debt levels. In August 2002, Chillicothe Telephone issued $30,000,000 of 6.64% senior notes. A portion of the proceeds was used to retire a Chillicothe Telephone line of credit on September 28, 2002. Interest expense on the aforesaid senior notes was approximately $500,000 and $200,000 for the three months ended September 30, 2003 and 2002. Interest expense on the retired line of credit and the retired senior notes was approximately $700,000 for the three months ended September 30, 2002. Interest expense on Chillicothe Telephone's senior notes issued in 1998 was approximately $200,000 in the third quarter of both 2003 and 2002. Capitalized construction interest was approximately $9,000 and $24,000, for the three months ended September 30, 2003 and 2002, respectively. Interest income and other, net. The landline telephone service segment recorded approximately $5,000 of other income in the three months ended September 30, 2003 and 2002. Income tax expense. Income tax expense for the three months ended September 30, 2003 was flat at approximately $200,000 as compared to the same period in 2002. Other comprehensive income (loss). The Company recognized approximately $21,000 of loss in the third quarter of 2003, compared to a loss of approximately $131,000 for the same period in 2002, related to its investments available-for-sale, net of tax benefit of approximately $10,000 and $68,000, respectively. 25 Results of Operations for the Nine Months Ended September 30, 2003 Compared to the Nine Months Ended September 30, 2002 This discussion and analysis is presented on an operating segment basis. The following unaudited table details the consolidated statements of income by operating segment for the nine months ended September 30, 2003 and 2002:

~~Net~~For ~~Revenue~~the ~~Three~~Nine Months Ended, ~~June~~September 30, ~~Six~~------------------------------------------------------------------------------------ ~~Months~~Wireless ~~Ended~~Personal ~~June~~Communications ~~30,~~Services(1) Landline Telephone All Other Services ------------------------ ----- ------------------- ------------------------ (Dollars in thousands) 2003 2002 2003 2002 2003 2002 OPERATING REVENUES: --------- ---- ----- --------- --------- --- ------ --------- ~~Wireless~~PCS ~~personal~~subscriber ~~communications~~and ~~services~~roaming ............ $ 63151,~~490,470~~897 $ 51150,~~721,933~~070 $~~122~~ -- $ -- $ -- $ -- PCS equipment ......................... 4,~~680~~408 5,~~213~~760 $-- 99-- -- -- Basic local and long-distance and other landline .................. -- -- 13,~~830~~653 14,~~609~~089 ~~Landline~~-- ~~telephone~~-- ~~services~~Network access ........................ 11-- -- 16,~~049~~839 16,~~973~~548 11-- -- Equipment systems sales,~~488~~ information services,~~739~~ 20Internet access and other ........... -- -- -- -- 7,~~854~~513 6,~~315~~402 20--------- --------- --------- --------- --------- --------- Total operating revenues ............ 156,~~682~~305 155,~~040~~830 ~~All~~30,492 30,637 7,513 6,402 --------- --------- --------- --------- --------- --------- OPERATING EXPENSES: Cost of PCS and other equipment sale ...................... 12,035 12,635 -- -- 352 432 Cost of services ...................... 2116,~~262~~490 120,~~594~~946 27,~~061~~343 7,~~334~~058 5,269 4,~~507~~748 Selling and marketing ................. 28,~~418~~585 38,661 569 411 729 822 General and administrative ............ 22,848 25,862 5,982 5,634 10,108 10,082 Non-cash compensation ................. 263 298 4 4 8 8 Loss on disposal of assets ............ 216 631 -- -- -- 7 Depreciation and amortization ......... 25,~~167~~176 26,~~083~~732 5,150 5,115 1,888 1,588 Impairment of Horizon PCS Assets .............................. 73,760 3,500 -- -- -- -- Restructuring charges ................. 4,509 -- -- -- -- -- --------- --------- --------- --------- --------- --------- Total ~~net~~operating ~~revenues~~expenses ............ 283,882 229,265 19,048 18,222 18,354 17,687 --------- --------- --------- --------- --------- --------- OPERATING INCOME (LOSS) .................. $(127,577) 76(73,~~803~~435) 11,~~037~~444 $12,415 65(10,~~272~~841) (11,~~006~~285) ~~$148~~--------- --------- --------- --------- --------- --------- NONOPERATING INCOME (EXPENSE): Interest expense,~~041~~ net ................. (41,~~946~~553) ~~$124~~(44,~~679~~084) (2,~~732~~114) ~~=============~~(2,067) ~~=============~~-- ~~=============~~(1) ~~=============~~Subsidiary ~~Intercompany~~preferred ~~Revenue~~stock ~~Three~~dividends ~~Months~~........................... ~~Ended~~(7,816) ~~June 30~~(8,719) ~~Six~~-- ~~Months~~-- ~~Ended~~-- ~~June~~-- 30Interest income and other, net ........ 595 2,465 39 (65) 8 13 --------- --------- --------- --------- --------- --------- Total nonoperating expense ............ (48,774) (50,338) (2,075) (2,132) 8 12 --------- --------- ~~2003~~--------- ~~2002~~--------- ~~2003~~--------- ~~2002~~--------- LOSS BEFORE INCOME TAX EXPENSE AND MINORITY INTEREST ................. (176,351) (123,773) 9,369 10,283 (10,833) (11,273) INCOME TAX (EXPENSE) BENEFIT ............. 6,031 -- (1,388) (1,707) 556 592 MINORITY INTEREST IN LOSS ................ -- -- -- -- -- -- --------- --------- --------- --------- --------- --------- ~~Wireless~~NET ~~personal~~INCOME ~~communications~~(LOSS) ~~services~~........................ $(170,320) 17$(123,~~351~~773) $ 917,~~986~~981 $ 228,~~531~~576 $ ~~193~~(10,~~092~~277) ~~Landline~~$ ~~telephone~~(10,681) ~~services~~========= ========= ========= ========= ========= ========= OTHER COMPREHENSIVE INCOME (LOSS) Net realized gain on hedging activities ............................... ~~294,637~~462 ~~403,341~~141 ~~609,212~~-- ~~805~~-- -- -- Net unrealized gain (loss) on securities available-for-sale,~~255~~ ~~All~~net ~~other~~of taxes .............................~~......~~ ~~174,509~~-- ~~111,422~~-- ~~306,153~~334 ~~218~~(2,~~739~~025) -- -- --------- --------- ---- ----- --------- --------- --------- ~~Total~~COMPREHENSIVE ~~intercompany~~INCOME ~~revenues~~(LOSS) .............. $(169,858) ~~486~~$(123,~~497~~632) $ ~~606~~8,~~749~~315 $ ~~937~~6,~~896~~551 $ 1(10,~~217~~277) $ (10,~~086~~681) ========= ==== ===== ========= ========= ==== ===== =========

(1) Amounts in the wireless personal communication services column include the results of Horizon PCS through August 14, 2003 (Note 2). 26 Landline Telephone Services Segment and All Other Services The following discussion details the results of operations of our landline telephone services segment and all other services not assigned to a segment for the past three fiscal quarters. Results of Operations Revenues. Network access revenues increased by approximately $300,000 for the nine months ended September 30, 2003, to approximately $16.8 million. This increase in access revenues was due to an increase in Universal Service Support Fund ("USSF") revenues for the nine months ended September 30, 2003 compared to the same period in 2002. USSF revenues have increased from an added element, Interstate Safety Net Support, and we have also benefited from an increase in loop costs. USSF revenues are provided by a federal fund and are used to subsidize high cost carriers in rural markets. Basic local and long distance revenues decreased by approximately $400,000 to approximately $13.7 million for the nine months ended September 30, 2003. Internet access and other revenues increased by approximately $1.1 million to $7.5 million for the nine months ended September 30, 2003. Other revenues were impacted by increased VDSL revenue as we continue to build our customer base, which was offset slightly by lower bright.net dial-up Internet service subscribers. We believe a number of these lost dial-up customers have switched to high-speed VDSL service. Cost of equipment sales. Cost of goods sold primarily consists of business system sales and customer maintenance expenses. Cost of goods sold for corporate and other services was essentially flat for the nine months ended September 30, 2003 as compared to the same period in 2002. Cost of services. Cost of services includes customer care support, and network-related costs, including switching, access and circuit expenses. Cost of services also includes expenses related to the installation of our VDSL service. Cost of services for the nine months ended September 30, 2003, was approximately $7.3 million for the landline telephone segment, compared to approximately $7.1 million for the nine months ended September 30, 2002, an increase of approximately $200,000 due to increased personnel wages and other related expenses. Cost of services for the nine months ended September 30, 2003 for all other services was approximately $5.3 million compared to approximately $4.7 million for the same period in 2002, an increase of approximately $600,000. The increase is related to the continued installation and programming expenses associated with our VDSL service. Selling and marketing expenses. Selling and marketing expenses consist of costs associated with local marketing and advertising programs including marketing for VDSL. Selling and marketing expenses for the landline telephone segment was approximately $600,000 for the nine months ended September 30, 2003, compared to approximately $400,000 for the nine months ending September 30, 2002. The increase is related to additional payroll and related benefit expenses. Selling and marketing expenses for all other services for the nine months ended September 30, 2003 was relatively flat at approximately $700,000 compared to approximately $800,000 for the same period in 2002. General and administrative expenses. General and administrative expenses include the costs related to corporate support functions. These include finance functions, billing and collections, accounting services, computer access and administration, executive, supervisory, consulting, customer relations, human resources and other administrative services. General and administrative expenses for the landline telephone segment increased by approximately $400,000 to approximately $6.0 million for the nine months ended September 30, 2003, primarily due to an increase in the provision for uncollectibles. General and administrative expenses for all other services was relatively flat at approximately $10.1 million for the nine months ended September 30, 2003 and 2002. 27 Non-cash compensation expense. Non-cash compensation expense is the amortization of the value of stock options granted in November 1999. Stock-based compensation expense will continue to be recognized through the conclusion of the vesting period for these options in 2005. Non-cash compensation expense for the landline telephone segment and all other services was essentially flat for the nine months ended September 30, 2003 compared to the same nine months in 2002. Depreciation and amortization expense. Depreciation and amortization expense for the landline telephone segment was essentially flat at approximately $5.1 million for the nine months ended September 30, 2003 and 2002. Depreciation and amortization expense for all other services increased by approximately $300,000 to approximately $1.9 million for the nine months ended September 30, 2003. This increase was related to the additional VDSL assets that have been added to our network. Interest expense, net. Interest expense for the landline telephone segment and all other services for the nine months ended September 30, 2003 and 2002 remained unchanged at approximately $2.1 million. In August 2002, Chillicothe Telephone issued $30,000,000 of 6.64% senior notes. A portion of the proceeds was used to retire a Chillicothe Telephone line of credit on September 28, 2002. Interest expense on the aforesaid senior notes was approximately $1.5 million and $200,000 for the nine months ended September 30, 2003 and 2002. Interest expense on the retired line of credit and the retired senior notes of Chillicothe Telephone issued in 1993 was approximately $1.3 million for the nine months ended September 30, 2002, including $500,000 paid to retire such senior notes ahead of schedule. Interest expense on Chillicothe Telephone's senior notes issued in 1998 was approximately $600,000 for the third quarter ended 2003 and 2002. Capitalized construction interest was approximately $24,000 and $83,000, for the nine months ended September 30, 2003 and 2002, respectively. Interest income and other, net. The landline telephone service segment recorded approximately $40,000 of other income in the nine months ended September 30, 2003. In 2002, expense of approximately $70,000 was recorded related to non-operating corporate activity. Income tax expense. Income tax expense for the landline telephone service segment was approximately $1.4 million for the nine months ended September 30, 2003, compared to approximately $1.7 million for the same period in 2002, reflecting lower net income before tax in 2003. All other services was essentially flat at an approximate benefit of $600,000 for the nine months ended September 30, 2003 and 2002. Other comprehensive income (loss). Chillicothe Telephone recognized approximately $334,000 of income for the nine months ended September 30, 2003, compared to a loss of approximately $2,025,000 for the same period in 2002, related to its investments available-for-sale, net of tax expense of approximately $172,000 and net of tax benefit of approximately $1.0 million, respectively. 28 Liquidity and Capital Resources The following table presents the estimated future outstanding long-term debt at the end of each year and future required annual principal payments for each year then ended associated with our financing based on our contractual level of long-term indebtedness:

~~Operating~~(Dollars ~~Earnings~~in ~~(Loss~~millions) ~~Three~~Years ~~Months~~Ending ~~Ended~~December ~~June 30~~31, ~~Six Months Ended June 30,~~ ------------------------------ ------------------------------ ~~2003 2002 2003 2002~~ -------------- -- 2003 2004 2005 2006 2007 Thereafter ---- ---- ---- ---- ----~~-------~~ ----------~~----~~ ~~Wireless~~Chillicothe ~~personal~~Telephone: ~~communications~~1998 ~~services~~Senior notes, due 2018 (1) ................ $ ~~(94,930,836)~~12.0 $~~(26,667,777)~~ 12.0 $~~(116,501,478)~~ 12.0 $~~(49,743,322)~~ ~~Landline~~12.0 ~~telephone~~$ ~~services~~12.0 $ -- Fixed interest rate ....................... ~~4,794,325~~6.72% ~~5,416,299~~6.72% ~~8,300,947~~6.72% ~~8,964,841~~6.72% ~~All~~6.72% ~~other~~6.72% Principal payments ........................ $ -- $ -- $ -- $ -- $ -- $ 12.0 2002 Senior notes, due 2012 (2) ................ ~~(878,131)~~$ ~~(810,890)~~30.0 ~~(1,905,384)~~$ ~~(1,783,945)~~30.0 ~~Unallocated~~$ ~~administrative~~30.0 ~~expenses~~$ 30.0 $ 30.0 $ -- Fixed interest rate ....................... ~~(2,936,104)~~6.64% ~~(2,749,107)~~6.64% ~~(5,860,005)~~6.64% ~~(5,816,638)~~6.64% ~~--------------~~6.64% ~~--------------~~6.64% ~~---------------~~Principal ~~--------------~~payments ~~Total operating loss~~........................ $ ~~(93,950,746)~~-- $ ~~(24,811,475)~~-- $~~(115,965,920)~~ -- $ ~~(48,379,064)~~-- ~~==============~~$ ~~==============~~-- ~~==============~~$ ~~==============~~30.0

---------- (1) On November 12, 2002, Chillicothe Telephone amended and restated its 1998 $12,000,000 senior notes due 2018. The interest rate on the amended notes is 6.72%, an increase of 10 basis points, with the same maturity date as the 1998 Senior Notes. (2) In August 2002, Chillicothe Telephone issued $30,000,000 of 6.64%, 10-year Senior notes due July 1, 2012. The proceeds of the offering were used to retire both the short-term line of credit and the non-current portion of the senior notes issued by Chillicothe Telephone in 1993. Horizon Telcom, Chillicothe Telephone, Horizon Technology, and Horizon Services are not obligated to assist Horizon PCS. While Horizon PCS faces several liquidity issues, the liquidity of Horizon Telcom independent of Horizon PCS is believed to be more favorable. Cash and working capital for Horizon Telcom, net of Horizon PCS, is approximately $13.0 million and approximately $16.1 million, respectively. We feel that this level of working capital is adequate to maintain Horizon Telcom's operations for the next twelve months. Horizon Telcom, net of Horizon PCS, generated approximately $18.8 million of cash flow from operations during 2003. Horizon Telcom, through its Horizon Services subsidiary, recovered approximately $4.0 million from Horizon PCS for the nine months ended September 30, 2003. Future liquidity of Horizon Services will be impacted, perhaps materially, from the successful reorganization of Horizon PCS. Statement of Cash Flows. At September 30, 2003, we had cash and cash equivalents of approximately $13.0 million, and working capital of approximately $16.1 million. At December 31, 2002, we had cash and cash equivalents of approximately $94.9 million and working capital of approximately $100.8 million. Horizon PCS was also required to escrow funds sufficient to cover the first four interest payments on certain senior notes issued by Horizon PCS. These funds are presented as restricted cash on the consolidated balance sheet. The decrease in cash and cash equivalents of approximately $82.0 million is primarily attributable to the deconsolidation of Horizon PCS of approximately $50.5 million, funding of our loss from continuing operations of approximately $172.6 million (this loss also includes certain non-cash charges), and funding our capital expenditures of approximately $11.6 million during the nine months ended September 30, 2003. Net cash used in operating activities for the nine months ended September 30, 2003, was approximately $19.4 million. This reflects the continuing use of cash for our operations to build Horizon PCS' customer base, including but not limited to providing service in their markets and the costs of acquiring new customers. The net loss of approximately $172.6 million was partially offset by increases to depreciation, increases in accrued liabilities, offset by increases to accounts receivable. Horizon PCS is reviewing all phases of operations and capital expenditures, to reduce the amount of cash needed for operations. We do not expect to have significant uses of cash flow from operations in the future. Net cash used in investing activities was approximately $62.1 million for the nine months ended September 30, 2003, reflecting the deconsolidation of Horizon PCS of $50.5 million and the upgrade of Horizon PCS' wireless network, as well as the deployment of capital necessary to offer VDSL service. We expect future capital expenditures to be much less than 2002 as we focus more on the operation and maintenance of our network and less on build out and expansion. 29 Net cash used in financing activities for the nine months ended September 30, 2003, was approximately $414,000, reflecting Chillicothe Telephone's draw on its line of credit for $1,000,000 somewhat offset by Horizon Telcom's payment of dividends of approximately $1,414,000, during the first quarter of 2003. Debt Covenants. As of September 30, 2003, Chillicothe Telephone was in compliance with the covenants set forth by its senior notes. Credit Ratings. At September 30, 2003, the Chillicothe Telephone senior notes were rated by the NAIC as "1". A "1" rating by the NAIC is the equivalent of an S&P rating of "A-" or better. Funding Requirements. The terms of its credit agreement prohibits the ability of Chillicothe Telephone to provide funds to Horizon PCS and its affiliates in the event that Horizon PCS or one of its affiliates experiences a shortfall. The actual funds required to fund operating losses, working capital needs and other capital needs may vary materially from our estimates and additional funds may be required because of unforeseen delays, cost overruns, unanticipated expenses, regulatory changes, engineering design changes and required technological upgrades and other technological risks. Inflation We believe that inflation has not had and will not have an adverse material effect on our results of operations. Recent Accounting Pronouncements In May 2003, the FASB issued SFAS No.150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within the scope of SFAS No. 150 as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. The application of SFAS No. 150 is not expected to have a material effect on the Company's consolidated financial statements. This Statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. In April 2003, the FASB issued SFAS No.149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amendments require that contracts with comparable characteristics be accounted for similarly, clarifies when a contract with an initial investment meets the characteristic of a derivative and clarifies when a derivative requires special reporting in the statement of cash flows. SFAS No. 149 is effective for hedging relationships designated and for contracts entered into or modified after June 30, 2003, except for provisions that relate to SFAS No. 133 Statement Implementation Issues that have been effective for fiscal quarters prior to June 15, 2003, which should be applied in accordance with their respective effective dates, and certain provisions relating to forward purchases or sales of when-issued securities or other securities that do not exist, which should be applied to existing contracts as well as new contracts entered into after June 30, 2003. The application of SFAS No. 149 is not expected to have a material effect on the Company's consolidated financial statements. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure - an amendment of FASB Statement No. 123." This Statement provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement requires prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company adopted the disclosure requirements of SFAS No. 148 as of December 31, 2002, but continues to account for stock compensation costs in accordance with APB Opinion No. 25. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." This Statement addresses financial accounting and reporting for costs associated with exit or disposal activities by requiring that expenses related to the exit of an activity or disposal of long-lived assets be recorded when they are incurred and measurable. Prior to SFAS No. 146, these charges were accrued at the time of 30 commitment to exit or dispose of an activity. The Company adopted SFAS No. 146 on January 1, 2003, and it did not have a material effect on the Company's financial position, results of operations or cash flows. In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No. 145 addresses the accounting for gains and losses from the extinguishment of debt, economic effects and accounting practices of sale-leaseback transactions and makes technical corrections to existing pronouncements. The Company adopted SFAS No. 145 on January 1, 2003, and it did not have a material effect on the Company's financial position, results of operations or cash flows. In 2002, the FASB's EITF, reached a consensus on Issue 00-21, "Revenue Arrangements with Multiple Deliverables." Issue 00-21 provides guidance on how a vendor should account for arrangements under which it will perform multiple revenue-generating activities. The guidance in this Issue is effective for revenue agreements entered into in fiscal periods beginning after June 15, 2003. The Company adopted the guidance in Issue 00-21 as of July 1, 2003. This adoption did not have a material impact on the financial position, results of operations, or cash flows. ITEM 3. Quantitative and Qualitative Disclosures About Market Risk We do not engage in commodity futures trading activities and do not enter into derivative financial instruments for trading purposes. We also do not engage in transactions in foreign currencies that would expose us to market risk. In the normal course of business, our operations are exposed to interest rate risk on our secured credit facility. Our primary interest rate risk exposures relate to the impact of interest rate movements on our ability to meet interest expense requirements and meet financial covenants under our debt instruments. While we cannot predict our ability to refinance existing debt, we continue to evaluate our interest rate risk on an ongoing basis. As of September 30, 2003, $42,000,000 of our $43,000,000 total debt is at a fixed rate. Currently, a 100 basis point increase in interest rates would increase our interest expense approximately $10,000. ITEM 4. Controls and Procedures Our Chief Executive Officer and Chief Financial Officer are responsible for establishing and maintaining "disclosure controls and procedures" (as defined in Exchange Act Rules 13a-14(c) and 15d-14(c)) for the Company. With the participation of management, the Company's Chief Executive Officer and Chief Financial Officer evaluated the Company's disclosure controls and procedures as of September 30, 2003. Under Horizon PCS' agreements with Sprint, Sprint provides Horizon PCS with billing, collections, customer care and other back office services. Horizon PCS, as a result, necessarily relies on Sprint to provide accurate, timely and sufficient data and information to properly record its revenues, expenses and accounts receivable which underlie a substantial portion of its periodic financial statements and other financial disclosures. The relationship with Sprint is established by Horizon PCS' agreements and its flexibility to use a service provider other than Sprint is limited. Because of Horizon PCS' reliance on Sprint for financial information, Horizon PCS must depend on Sprint to design adequate internal controls with respect to the processes established to provide this data and information to Horizon PCS and Sprint's other network partners. To address this issue, Sprint engages its independent auditors to perform a periodic evaluation of these controls and to provide a "Report on Controls Placed in Operation and Tests of Operating Effectiveness for Affiliates" under guidance provided in Statement of Auditing Standards No. 70. These reports are provided annually to Horizon PCS. The Company's management, including the CEO and CFO, does not expect that its disclosure controls and procedures will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control system, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been 31 detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdown can occur because of simple error or mistake. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Based upon the Company's disclosure controls and procedures evaluation, the CEO and CFO have concluded that, subject to the limitations noted above, the Company's disclosure controls and procedures are effective to give reasonable assurance that the information required to be disclosed by the Company in its periodic reports is accumulated and communicated to management, including the CEO and CFO, as appropriate to allow timely decisions regarding disclosure and is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. There were no significant changes in the Company's internal controls or, to the knowledge of the management of the Company, in other factors that could significantly affect these controls during the quarter ended September 30, 2003. 32 PART II. OTHER INFORMATION ITEM 1. Legal Proceedings On August 15, 2003, Horizon PCS and its subsidiaries filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code. See Note 2 to the Consolidated Financial Statements. On August 21, 2003, HPC and Bright PCS, subsidiaries of Horizon PCS, Inc., filed a lawsuit in the United States District Court for the Southern District of Ohio, Eastern Division, against Sprint Corporation, Sprint Spectrum, L.P., Wirelessco, L.P. and Sprintcom, Inc. (collectively, "Sprint"), alleging wrongful conduct on the part of Sprint in its relationship and business dealings with Horizon PCS. In the Complaint, HPC and Bright PCS assert claims under the federal RICO laws and similar Ohio state laws, and also assert fraud, negligent misrepresentation, conversion, breach of contract and breach of fiduciary duties. ITEM 2. Changes in Securities and Use of Proceeds None. ITEM 3. Defaults Upon Senior Securities As of June 30, 2003, Horizon PCS was not in compliance with certain covenants under its financing agreements. The failure to comply with these covenants constitutes an event of default under Horizon PCS' secured credit facility. On August 15, 2003, the secured credit facility lenders elected to accelerate the amounts due to them. This acceleration also constitutes a default under the indentures for Horizon PCS' senior notes and discount notes (see Note 10 to the Consolidated Financial Statements). In addition, Sprint has the right to invoke certain remedies under Horizon PCS' Consent and Agreement with Sprint. Horizon PCS does not have sufficient liquidity to repay all of the indebtedness under these obligations. ITEM 4. Submission of Matters to a Vote of Security Holders None. ITEM 5. Other Information RISK FACTORS You should carefully consider the risks described below in evaluating our businesses. RISKS RELATED TO CHILLICOTHE TELEPHONE, LONG DISTANCE AND INTERNET BUSINESSES The information set forth under this heading describes risk factors relating to the business of our wholly-owned subsidiaries the Chillicothe Telephone Company, Horizon Technology and Horizon Services. References under this heading to "we," "us" and "our" are to those subsidiaries. Significant competition in telecommunications services in our markets may cause us to lose customers, or incur lower network access service minutes of use. We face, or will face, significant competition in the markets in which we currently provide local telephone, long distance, data and Internet services. Many of our competitors are substantially larger and have greater financial, technical and marketing resources than we do. In particular, larger competitors have certain advantages over us, which could cause us to lose customers and impede our ability to attract new customers, including: o long-standing relationships and greater name recognition with customers; o financial, technical, marketing, personnel and other resources substantially greater than ours; 33 o more capital to deploy services; and o potential to lower prices of competitive services. These factors place us at a disadvantage when we respond to our competitors' pricing strategies, technological advances and other initiatives. Additionally, our competitors may develop services that are superior to ours or that achieve greater market acceptance. We face competition from other current and potential market entrants, including: o domestic and international long distance providers seeking to enter, re-enter or expand entry into our local communications marketplace; o other domestic and international competitive communications providers, resellers, cable television companies and electric utilities; and o providers of broadband and Internet services. A continuing trend toward combinations and strategic alliances in the communications industry could give rise to significant new competitors. This could cause us to lose customers and impede our ability to attract new customers. The restructuring of Horizon PCS may have adverse effects on Horizon Telcom. Horizon Telcom has agreements and relationships with third parties, including suppliers, subscribers and vendors that are integral to conducting its day to day operations. A restructuring of Horizon PCS in or out of a bankruptcy proceeding could have a material adverse affect on the perception of Horizon Telcom and the Horizon Telcom business and its prospects in the eyes of subscribers, employees, suppliers, creditors and vendors. These persons may perceive that there is increased risk in doing business with Horizon Telcom as a result of Horizon PCS' restructuring. Some of these persons may terminate their relationships with Horizon Telcom which would make it more difficult for Horizon Telcom to conduct is business. In the event that the services agreement between Horizon Telcom and Horizon PCS is terminated for any reason, Horizon Telcom may not be able to reduce its general and administrative costs in an amount sufficient to subsidize the portion of the combined Company's costs currently borne by Horizon PCS. On a net basis, we estimate that Horizon PCS will incur approximately $5.5 million of charges from Horizon Services (a subsidiary of Horizon Telcom) in fiscal 2003. If the services agreement between Horizon Telcom and Horizon PCS is terminated for any reason, Horizon Telcom and its subsidiaries (excluding Horizon PCS) will lose this source of revenue and will be required to lower its costs and expenses to meet its business plan. Horizon Telcom may have little notice of any such termination. A failure to reduce these expenses in a timely manner could adversely affect Horizon Telcom's liquidity, financial condition and results of operations. We may not be able to successfully integrate new technologies or respond effectively to customer requirements. The communications industry is subject to rapid and significant changes in technology, frequent new service introductions and evolving industry standards. We cannot predict the effect of these changes on us or our industry. Technological developments may reduce the competitiveness of our networks and require unbudgeted upgrades or the procurement of additional products that could be expensive and time consuming. If we fail to adapt successfully to technological changes or obsolescence or fail to obtain access to important new technologies, we could lose customers and be limited in our ability to attract new customers. If our back office and customer care systems are unable to meet the needs of our customers, we may lose customers. Sophisticated back office processes and information management systems are vital to our anticipated growth and our ability to achieve operating efficiencies. We cannot assure you that our systems will perform as expected as we 34 increase our number of customers. If these systems fail to perform as expected, we could lose customers. The following could prevent our back office and customer care systems from meeting the needs of our customers: o failure of third-party vendors to deliver products and services in a timely manner at acceptable costs; o our failure to identify key information and processing needs; o our failure to integrate products or services effectively; o our failure to upgrade systems as necessary; or o our failure to attract and retain qualified systems support personnel. Furthermore, as our suppliers revise and upgrade their hardware, software and equipment technology, we could encounter difficulties in affording and integrating this new technology into our business or find that such new hardware, software and technology is not appropriate for our business. In addition, our right to use such hardware, software and technology depends upon license agreements with third-party vendors. Vendors may cancel or elect not to renew some of these agreements, which may adversely affect our business. Because we operate in a heavily regulated industry, changes in regulation could have a significant effect on our revenues and compliance costs. We are subject to significant regulation that could change in a manner adverse to us. We operate in a heavily regulated industry, and the majority of our revenues generally have been supported by regulations, including in the form of support for the provision of telephone services in rural areas. Laws and regulations applicable to us and our competitors may be, and have been, challenged in the courts, and could be changed by Congress or regulators at any time. In addition, any of the following have the potential to have a significant impact on us: Risk of loss or reduction of network access charge revenues. Approximately 24% of Chillicothe Telephone's total revenues for the nine months ended September 30, 2003 came from network access charges which are paid to us by intrastate carriers and interstate long distance carriers for originating and terminating calls in the regions we serve. The amount of access charge revenues that we receive is calculated based on guidelines set by federal and state regulatory bodies, and such guidelines could change at any time. The FCC continues to reform the federal access charge system. States often mirror these federal rules in establishing intrastate access charges. It is unknown at this time how changes to the FCC's access charge regime will affect us. Federal policies being implemented by the FCC strongly favor access charge reform, and our revenues from this source could be at risk. Regulatory developments of this type could adversely affect our business. Risk of loss or reduction of Universal Service Support Fund. We receive USSF revenues to support the high cost of our operations in rural markets. For the nine months ended September, 2003, USSF revenues accounted for approximately 24% of the total revenues of Chillicothe Telephone. If we were unable to receive support from the USSF, or if such support was reduced, we would be unable to operate as profitably as before such reduction. In addition, potential competitors generally cannot, under current laws, receive the same USSF support enjoyed by Chillicothe Telephone. Chillicothe Telephone therefore enjoys a competitive advantage, which could, however, be removed by regulators at any time. The Telecom Act provides that competitors could obtain the same support as we do if the PUCO determines that granting such support to competitors would be in the public interest. If such USSF support were to become available to potential competitors, we might not be able to compete as effectively or otherwise continue to operate as profitably in our Chillicothe Telephone markets. Any shift USSF regulation could, therefore, have an adverse effect on our business. The method for calculating the amount of USSF support could change in 2003. It is unclear whether the chosen methodology will accurately reflect the costs incurred by Chillicothe Telephone, and whether it will provide for the same amount of USSF support that Chillicothe Telephone enjoyed in the past. The outcome of any of these proceedings or other legislative or regulatory changes could affect the amount of USSF support that we receive, and could have an adverse effect on our business. 35 Risk of loss of protected status under interconnection rules. Chillicothe Telephone takes the position that it does not have to comply with more burdensome requirements in the Telecom Act governing the rights of competitors to interconnect to our traditional telephone companies' networks due to our status as a rural telephone company. If state regulators decide that it is in the public's interest to impose these interconnection requirements on us, more competitors could enter our traditional telephone markets than are currently expected and we could incur additional administrative and regulatory expenses as a result of such newly imposed interconnection requirements. Risks posed by costs of regulatory compliance. Regulations create significant compliance costs for us. Chillicothe Telephone provides intrastate services is also generally subject to certification, tariff filing and other ongoing regulatory requirements by state regulators. Challenges to these tariffs by regulators or third parties could cause us to incur substantial legal and administrative expenses. Regulatory changes in the telecommunications industry involve uncertainties, and the resolution of these uncertainties could adversely affect our business by facilitating greater competition against us, reducing potential revenues or raising our costs. The Telecom Act provides for significant changes in the telecommunications industry, including the local telecommunications and long distance industries. This federal statute and the related regulations remain subject to judicial review and additional rulemakings of the FCC, thus making it difficult to predict what effect the legislation will have on us, our operations and our competitors. Several regulatory and judicial proceedings have recently concluded, are underway or may soon be commenced, that address issues affecting our operations and those of our competitors, which may cause significant changes to our industry. We cannot predict the outcome of these developments, nor can we assure that these changes will not have a material adverse effect on us. RISKS RELATED TO HORIZON PCS Horizon PCS has declared bankruptcy, which may cause the value of Horizon Telcom's ownership interest in Horizon PCS to be worthless. There is a substantial risk that Horizon Telcom will lose all or a substantial portion of the value of its investment in Horizon PCS in connection with the Bankruptcy Case of Horizon PCS. Since the amount of Horizon PCS' obligations under its credit facility and senior and discount notes was greater than its cash and other assets at the time such payment obligations were accelerated, the possibility exists that there will be no assets available for distribution to Horizon Telcom and the other stockholders of Horizon PCS. While Horizon Telcom may request an equity participation in the Horizon PCS Bankruptcy Case, there can be no assurance that Horizon Telcom will receive an equity participation. 36 ITEM 6. Exhibits and Reports on Form 8-K Exhibits and Reports on Form 8-K (A) Exhibits 3.1(a) Articles of Incorporation of Horizon Telcom, Inc. 3.2(a) Bylaws of Incorporation of Horizon Telcom, Inc. 4.1(a) Form of Stock Certificate. 31.1(b) Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2(b) Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1(b) Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2(b) Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. ---------- (a) Incorporated by reference to the exhibit with the same number previously filed by the Registrant on Form 10 (Reg. No. 0-32617). (b) Filed herewith. (B) Reports on Form 8-K On August 15, 2003, Horizon Telcom, Inc. filed a Current Report on Form 8-K with the Securities and Exchange Commission under Item 9 - Regulation FD Disclosure relating to the filing of a Chapter 11 bankruptcy petition in the United States Bankruptcy Court for the Southern District of Ohio for the purpose of effecting a court administered reorganization by its subsidiary, Horizon PCS, Inc. and its subsidiaries, Horizon Personal Communications, Inc. and Bright Personal Communications Services LLC. On August 21, 2003, Horizon Personal Communications, Inc. and Bright Personal Communications Services, LLC, subsidiaries of Horizon PCS, Inc. (collectively, "Horizon"), which is majority owned by Horizon Telcom, Inc., filed a Current Report on Form 8-K with the Securities and Exchange Commission under Item 9 - Regulation FD Disclosure relating to the filing of a lawsuit in the United States District Court for the Southern District of Ohio, Eastern Division, against Sprint Corporation, Sprint Spectrum, L.P., Wirelessco, L.P. and Sprintcom, Inc. (collectively, "Sprint"), alleging wrongful conduct on the part of Sprint in its relationship and business dealings with Horizon. 37 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HORIZON TELCOM, INC. (Registrant) Date: November 14, 2003 By: /s/ Thomas McKell ---------------------------------- Thomas McKell Chief Executive Officer Date: November 14, 2003 By: /s/ Peter M. Holland ---------------------------------- Peter M. Holland Chief Financial Officer (Principal Financial and Chief Accounting Officer) 38

Depreciation and Amortization Three Months Ended June 30, Six Months Ended June 30, ------------------------------ ----------------------------- 2003 2002 2003 2002 -------------- -------------- --------------- ------------- Wireless personal communications services... $ 10,291,619 $ 9,479,776 $ 21,152,305 $ 17,429,407 Landline telephone services................. 1,695,936 1,723,654 3,434,249 3,403,328 All other................................... 629,572 527,555 1,239,849 1,018,260 -------------- -------------- -------------- -------------- Total depreciation and amortization..... $ 12,617,127 $ 11,730,985 $ 25,826,403 $ 21,850,995 ============== ============== ============== ==============

Capital Expenditures Three Months Ended June 30, Six Months Ended June 30, ----------------------------- --------------------------- 2003 2002 2003 2002 ------------- ------------- ------------- ------------- Wireless personal communications services.. $ 3,440,316 $ 25,675,000 $ 5,649,629 $ 49,113,012 Landline telephone services................ 2,121,249 1,851,251 3,622,445 3,853,782 All other.................................. 289,061 774,777 652,279 1,667,480 ------------- ------------- ------------- ------------- Total capital expenditures............. $ 5,850,626 $ 28,301,028 $ 9,924,353 $ 54,634,274 ============= ============= ============= =============

Assets June 30, December 31, 2003 2002 -------------- -------------- Wireless personal communications services........ $ 303,510,054 $ 443,116,762 Landline telephone services...................... 87,710,171 83,258,131 All other........................................ 18,309,684 19,375,220 -------------- -------------- Total assets................................. $ 409,529,909 $ 545,750,113 ============== ==============

Three Months Ended June 30, Six Months Ended June 30, ----------------------------- ----------------------------- 2003 2002 2003 2002 ------------- ------------- ------------- ------------- Wireless personal communications services: PCS subscriber revenue..................... $ 47,840,415 $ 37,008,341 $ 91,414,189 $ 71,922,441 PCS roaming revenue........................ 13,578,695 13,115,952 27,376,568 23,935,240 PCS equipment sales........................ 2,071,360 1,597,640 3,889,456 3,972,928 ------------- ------------- ------------- ------------- Total personal communication services.... 63,490,470 51,721,933 122,680,213 99,830,609 ------------- ------------- ------------- ------------- Landline telephone services: Basic local service........................ 3,483,204 3,658,433 6,871,340 7,263,689 Long-distance service...................... 230,190 269,022 478,735 578,414 Network access............................. 6,342,539 6,735,297 11,769,372 11,330,767 Other related telephone service............ 994,040 825,987 1,734,868 1,509,170 ------------- ------------- ------------- ------------- Total landline telephone services........ 11,049,973 11,488,739 20,854,315 20,682,040 ------------- ------------- ------------- ------------- Other: Internet access services................... 668,302 818,577 1,372,043 1,625,405 Equipment system sales..................... 202,723 240,617 482,051 620,953 Other miscellaneous revenues............... 1,391,569 1,002,140 2,653,324 1,920,725 ------------- ------------- ------------- ------------- Total other.............................. 2,262,594 2,061,334 4,507,418 4,167,083 ------------- ------------- ------------- ------------- Total operating revenues............. $ 76,803,037 $ 65,272,006 $ 148,041,946 $ 124,679,732 ============= ============= ============= =============

2003: ---- Unrealized Unrealized Fair Cost Gain Loss Value ---------- ---------- ---------- ---------- Equity securities available-for-sale $ 250,000 $1,032,470 $ -- $1,282,470 ========== ========== ========== ========== 2002: ---- Unrealized Unrealized Fair Cost Gain Loss Value ---------- ---------- ---------- ---------- Equity securities available-for-sale $ 250,000 $ 495,860 $ -- $ 745,860 ========== ========== ========== ==========

June 30, December 31, 2003 2002 ------------- ------------- Network assets.................................. $229,663,299 $293,825,031 Switching equipment............................. 64,037,616 63,294,413 Land and buildings.............................. 15,997,233 15,856,491 Computer and telecommunications equipment....... 13,923,784 13,369,767 Furniture, vehicles and office equipment........ 12,572,461 12,518,760 ------------- ------------- Property, plant and equipment in-service, at cost. 36,194,393 398,864,462 Accumulated depreciation........................ (74,937,977) (99,376,895) ------------- ------------- Property, plant and equipment in-service, net 261,256,416 299,487,567 Construction work in progress................... 5,474,605 16,433,540 ------------- ------------- Total property, plant and equipment, net $266,731,021 $315,921,107 ============= =============

Interest Rate at June 30, June 30, December 31, 2003 2003 2002 ---------------- ------------- ------------- Horizon PCS: Discount notes..................... 14.00% $295,000,000 $295,000,000 Senior notes....................... 13.75% 175,000,000 175,000,000 Secured credit facility-term loan A 5.10% 105,000,000 105,000,000 Secured credit facility-term loan B 5.60% 50,000,000 50,000,000 Chillicothe Telephone: 2002 Senior Notes.................. 6.64% 30,000,000 30,000,000 1998 Senior Notes.................. 6.72% 12,000,000 12,000,000 ------------- ------------- Long-term debt, par value......... 667,000,000 667,000,000 Less: Unaccreted interest portion of Horizon PCS discount notes........ (93,655,678) (108,715,651) Less: debt classified as short-term due to covenant violation.......... (531,344,322) -- ------------- ------------- Total long-term debt............ $ 42,000,000 $558,284,349 ------------- -------------

Three Months Ended June 30, Six Months Ended June 30, 2003 2002 2003 2002 ------------- ------------- ------------- ------------- Provision as a percent of wireless subscriber 5% 11% 4% 10% revenue...................................... Write-offs, net of recoveries as a percent of wireless subscriber revenue.............. 4% 10% 5% 10% Allowance for doubtful accounts as a percent of PCS accounts receivable........... 8% 10% 8% 10%

For the Three Months Ended, June 30, ----------------------------------------------------------------------------- Wireless Personal Communications Corporate and Services Landline Telephone Other Services ---------------------- ----------------------- ------------------------ (Dollars in thousands) OPERATING REVENUES: 2003 2002 2003 2002 2003 2002 ---------- ---------- ---------- ---------- ---------- ---------- PCS subscriber and roaming..... $ 61,419 $ 50,124 $ -- $ -- $ -- $ -- PCS equipment.................. 2,071 1,598 -- -- -- -- Basic local and long-distance and other landline........... -- -- 4,707 4,754 -- -- Network access................. -- -- 6,343 6,735 -- -- Equipment systems sales, information services, Internet access and other.... -- -- -- -- 2,263 2,061 ---------- ---------- ---------- ---------- ---------- ---------- Total operating revenues.... 63,490 51,722 11,050 11,489 2,263 2,061 ---------- ---------- ---------- ---------- ---------- ---------- OPERATING EXPENSES: Cost of PCS and other equipment sale.............. 5,074 3,742 -- -- 101 95 Cost of services.............. 46,841 41,535 2,382 2,394 1,667 1,409 Selling and marketing......... 12,351 10,880 180 148 249 305 General and administrative.... 10,051 8,806 1,997 1,806 3,427 3,290 Non-cash compensation......... 93 92 1 1 3 (6) Loss (Gain) on disposal of assets...................... (41) 355 -- -- -- -- Depreciation and amortization. 10,292 9,480 1,696 1,724 630 528 Impairment of Horizon PCS Assets...................... 73,760 3,500 -- -- -- -- ---------- ---------- ---------- ---------- ---------- ---------- Total operating expenses.... 158,421 78,390 6,256 6,073 6,077 5,621 ---------- ---------- ---------- ---------- ---------- ---------- OPERATING INCOME (LOSS).......... (94,931) (26,668) 4,794 5,416 (3,814) (3,560) ---------- ---------- ---------- ---------- ---------- ---------- NONOPERATING INCOME (EXPENSE): Interest expense, net......... (17,011) (15,456) (707) (469) -- -- Subsidiary preferred stock dividends................... (3,151) (2,856) -- -- -- -- Interest income and other, net 226 1,001 22 (57) 1 -- ---------- ---------- ---------- ---------- ---------- ---------- Total nonoperating expense.... (19,936) (17,311) (685) (526) 1 ---------- ---------- ---------- ---------- ---------- ---------- LOSS BEFORE INCOME TAX EXPENSE AND MINORITY INTEREST......... (114,867) (43,979) 4,109 4,890 (3,813) (3,560) INCOME TAX (EXPENSE) BENEFIT..... 6,031 -- (820) (1,107) 171 135 MINORITY INTEREST IN LOSS........ -- -- -- -- -- -- ---------- ---------- ---------- ---------- ---------- ---------- NET INCOME (LOSS)................ $(108,836) $ (43,979) $ 3,289 $ 3,783 $ (3,642) $ (3,425) ========== ========== ========== ========== ========== ========== OTHER COMPREHENSIVE INCOME (LOSS) Net realized gain (loss) on hedging activities............. 127 (270) -- -- -- -- Net unrealized gain (loss) on securities available-for-sale, net of taxes................... -- -- 310 (1,216) -- -- ---------- ---------- ---------- ---------- ---------- ---------- COMPREHENSIVE INCOME (LOSS)...... $(108,709) $ (44,249) $ 3,599 $ 2,567 $ (3,642) $ (3,425) ========== ========== ========== ========== ========== ==========

For the Six Months Ended June 30, ------------------------------------------------------------------------------------- Wireless Personal Corporate and Communications Services Landline Telephone Other Services --------------------------- -------------------------- --------------------------- (Dollars in thousands) 2003 2002 2003 2002 2003 2002 ------------ ------------ ------------ ------------ ------------ ------------ OPERATING REVENUES: PCS subscriber and roaming..... $ 118,791 $ 95,858 $ -- $ -- $ -- $ -- PCS equipment.................. 3,889 3,973 -- -- -- -- Basic local and long-distance and other landline........... -- -- 9,085 9,351 -- -- Network access................. -- -- 11,769 11,331 -- -- Equipment systems sales, information services, Internet access and other.... -- -- -- -- 4,508 4,167 ------------ ------------ ------------ ------------ ------------ ------------ Total operating revenues.... 122,680 99,831 20,854 20,682 4,508 4,167 ------------ ------------ ------------ ------------ ------------ ------------ OPERATING EXPENSES: Cost of PCS and other equipment sale.............. 10,829 8,661 -- -- 257 268 Cost of services.............. 90,638 77,185 4,872 4,679 3,438 2,966 Selling and marketing......... 24,792 25,588 363 261 482 570 General and administrative.... 17,608 16,372 3,882 3,371 6,851 6,957 Non-cash compensation......... 186 198 2 3 5 (11) Loss on disposal of assets.... 216 641 -- -- -- -- Depreciation and amortization. 21,152 17,429 3,434 3,403 1,240 1,018 Impairment of Horizon PCS Assets 73,760 3,500 -- -- -- -- ------------ ------------ ------------ ------------ ------------ ------------ Total operating expenses.... 239,181 149,574 12,553 11,717 12,273 11,768 ------------ ------------ ------------ ------------ ------------ ------------ OPERATING INCOME (LOSS).......... (116,501) (49,743) 8,301 8,965 (7,765) (7,601) ------------ ------------ ------------ ------------ ------------ ------------ NONOPERATING INCOME (EXPENSE): Interest expense, net......... (33,284) (28,194) (1,409) (934) -- (1) Subsidiary preferred stock dividends (6,221) (5,713) -- -- -- -- Interest income and other, net 526 1,745 34 (70) 6 12 ------------ ------------ ------------ ------------ ------------ ------------ Total nonoperating expense.... (38,979) (32,162) (1,375) (1,004) 6 11 ------------ ------------ ------------ ------------ ------------ ------------ LOSS BEFORE INCOME TAX EXPENSE AND MINORITY INTEREST......... (155,480) (81,905) 6,926 7,961 (7,759) (7,590) INCOME TAX (EXPENSE) BENEFIT..... 6,031 -- (1,162) (1,547) 349 367 MINORITY INTEREST IN LOSS........ -- -- -- -- -- -- ------------ ------------ ------------ ------------ ------------ ------------ NET INCOME (LOSS)................ $ (149,449) $ (81,905) $ 5,764 $ 6,414 $ (7,410)$ (7,223) ============ ============ ============ ============ ============ ============ OTHER COMPREHENSIVE INCOME (LOSS) Net realized gain on hedging activities....................... 462 120 -- -- -- -- Net unrealized gain (loss) on securities available-for-sale, net of taxes..................... -- -- 354 (1,894) -- -- ------------ ------------ ------------ ------------ ------------ ------------ COMPREHENSIVE INCOME (LOSS)........ $ (148,987) $ (81,785) $ 6,118 $ 4,520 $ (7,410) $ (7,223) ============ ============ ============ ============ ============ ============

(Dollars in millions) Years Ending December 31, ------------------------------------------------------------------ 2003 2004 2005 2006 2007 Thereafter ------------ ------------ ------------ ------------ ------------ ------------ Horizon PCS: Secured credit facility, due 2008....................... $ 155.0 $ 146.7 $ 126.5 $ 99.7 $ 71.6 $ -- Variable interest rate (1) . 5.55% 5.55% 5.55% 5.55% 5.55% 5.55% Principal payments.......... $ -- $ 8.3 $ 20.2 $ 26.8 $ 28.1 $ 71.6 Discount notes, due 2010 (2)..... $ 217.5 $ 253.1 $ 283.7 $ 286.1 $ 288.5 $ -- Fixed interest rate......... 14.00% 14.00% 14.00% 14.00% 14.00% 14.00% Principal payments.......... $ -- $ -- $ -- $ -- $ -- $ 295.0 Senior notes, due 2011........... $ 175.0 $ 175.0 $ 175.0 $ 175.0 $ 175.0 $ -- Fixed interest rate......... 13.75% 13.75% 13.75% 13.75% 13.75% 13.75% Principal payments.......... $ -- $ -- $ -- $ -- $ -- $ 175.0 Chillicothe Telephone: 1998 Senior notes, due 2018 (3).. $ 12.0 $ 12.0 $ 12.0 $ 12.0 $ 12.0 $ -- Fixed interest rate......... 6.72% 6.72% 6.72% 6.72% 6.72% 6.72% Principal payments.......... $ -- $ -- $ -- $ -- $ -- $ 12.0 2002 Senior notes, due 2012 (4).. $ 30.0 $ 30.0 $ 30.0 $ 30.0 $ 30.0 $ -- Fixed interest rate......... 6.64% 6.64% 6.64% 6.64% 6.64% 6.64% Principal payments.......... $ -- $ -- $ -- $ -- $ -- $ 30.0

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