| CITIZENS COMMUNICATIONS CO Item 1A Risk Factors 9 Item 1A Risk Factors ------------ Before you invest in our securities, you should carefully consider all the information we have included or incorporated by reference in this Form 10-K and our subsequent periodic filings with the SEC In particular, you should carefully consider the risk factors described below and read the risks and uncertainties related to "e forward-looking statements "e as set forth in the "e Managementapstas Discussion and Analysis of Financial Condition and Results of Operations "e section of this Form 10-K The risks and uncertainties described below are not the only ones facing our company |
| Additional risks and uncertainties that are not presently known to us or that we currently deem immaterial or that are not specific to us, such as general economic conditions, may also adversely affect our business and operations |
| The telecommunications industry is extremely competitive and competition is increasing |
| The traditional dividing lines between long distance, local, wireless, cable and internet services are becoming increasingly blurred |
| Our competitors include CLECs and other providers (or potential providers) of services, such as internet service providers, or ISPs, wireless companies, neighboring incumbents, VOIP providers such as Vonage and cable companies that may provide services competitive with ours or services that we intend to introduce |
| Competition is intense and increasing and we cannot assure you that we will be able to compete effectively |
| For example, at December 31, 2005 we had 102cmam000 fewer access lines than we had at December 31, 2004 and we believe wireless and cable telephony providers have increased their market share in our markets |
| We expect to continue to lose access lines and that competition with respect to all our products and services will increase |
| We expect competition to intensify as a result of the entrance of new competitors and the development of new technologies, products and services |
| We cannot predict which of the many possible future technologies, products or services will be important to maintain our competitive position or what expenditures will be required to develop and provide these technologies, products or services |
| Our ability to compete successfully will depend on marketing and on our ability to anticipate and respond to various competitive factors affecting the industry, including a changing regulatory environment that may affect our competitors and us differently, new services that may be introduced, changes in consumer preferences, demographic trends, economic conditions and pricing strategies by competitors |
| Increasing competition may reduce our revenues and increase our costs as well as require us to increase our capital expenditures and thereby decrease our cash flow |
| Some of our competitors have superior resources, which may place us at a cost and price disadvantage |
| Some of our current and potential competitors have market presence, engineering, technical and marketing capabilities, and financial, personnel and other resources substantially greater than ours |
| In addition, some of our competitors can raise capital at a lower cost than we can |
| Consequently, some competitors may be able to develop and expand their communications and network infrastructures more quickly, adapt more swiftly to new or emerging technologies and changes in customer requirements, take advantage of acquisition and other opportunities more readily and devote greater resources to the marketing and sale of their products and services than we can |
| Additionally, the greater brand name recognition of some competitors may require us to price our services at lower levels in order to retain or obtain customers |
| Finally, the cost advantages of some competitors may give them the ability to reduce their prices for an extended period of time if they so choose |
| 9 ELI faces substantial competition for its telecommunications services from larger companies |
| ELIapstas competitors for telecommunications services are primarily larger incumbents, CLECs and IXCs |
| Because it is not an incumbent provider, ELIapstas ability to succeed in the telecommunications services market depends to a large extent on its ability to provide differentiated services for business customers and to maintain its customer base and develop additional business customers |
| We anticipate that general pricing competition and pressures for CLECs will increase, including ELI We have not obtained significant market share in any of the areas where we offer our CLEC services, nor do we expect to do so given the size of our ELI markets, the intense competition therein and the diversity of customer requirements |
| There can be no assurance that ELI will be able to compete effectively in any of our markets |
| Furthermore, the bankruptcies and weakened financial position of a number of CLECs have resulted in a more demanding operating environment for CLECs, as both customers and suppliers are more concerned about each CLECapstas creditworthiness |
| Risks Related to Our Business - ----------------------------- Decreases in certain types of our revenues will impact our profitability |
| Our Frontier business has been experiencing declining access lines, switched access minutes of use, long distance prices and related revenues because of economic conditions, increasing competition, changing consumer behavior (such as wireless displacement of wireline use, email use, instant messaging and increasing use of VOIP), technology changes and regulatory constraints |
| These factors are likely to cause our local network service, switched network access, long distance and subsidy revenues to continue to decline, and these factors, together with our increasing employee costs, and the potential need to increase our capital spending, may cause our cash generated by operations to decrease |
| We may be unable to grow our revenue and cash flow despite the initiatives we have implemented |
| We must produce adequate cash flow that, when combined with funds available under our revolving credit facility, will be sufficient to service our debt, fund our capital expenditures, pay our taxes and maintain our current dividend policy |
| We have implemented several growth initiatives, including increasing our marketing expenditures and launching new products and services with a focus on areas that are growing or demonstrate meaningful demand such as high-speed internet |
| There is no assurance that these initiatives will result in an improvement in our financial position or our results of operations |
| We may complete a significant business combination or other transaction that could increase our shares outstanding, affect our debt, result in a change in control, or both |
| From time to time we evaluate potential acquisitions and other arrangements that would extend our geographic markets, expand our services, enlarge the capacity of our networks or increase the types of services provided through our networks |
| If we complete any acquisition or other arrangement, we may require additional financing that could result in an increase in our shares outstanding and/or debt, result in a change in control, or both |
| There can be no assurance that we will enter into any transaction |
| Our business is sensitive to the creditworthiness of our wholesale customers |
| We have substantial business relationships with other telecommunications carriers for whom we provide service |
| During the past few years, several of our customers have filed for bankruptcy |
| While these bankruptcies have not had a material adverse effect on our business to date, future bankruptcies in our industry could result in our loss of significant customers, more price competition and uncollectible accounts receivable |
| As a result, our revenues and results of operations could be materially and adversely affected |
| 10 Risks Related to Liquidity, Financial Resources, and Capitalization - ------------------------------------------------------------------- Substantial debt and debt service obligations may adversely affect us |
| We have a significant amount of indebtedness |
| We may also obtain additional long-term debt and working capital lines of credit to meet future financing needs, subject to certain restrictions under our existing indebtedness, which would increase our total debt |
| The significant negative consequences on our financial condition and results of operations that could result from our substantial debt include: * limitations on our ability to obtain additional debt or equity financing; * instances in which we are unable to meet the financial covenants contained in our debt agreements or to generate cash sufficient to make required debt payments, which circumstances have the potential of accelerating the maturity of some or all of our outstanding indebtedness; * the allocation of a substantial portion of our cash flow from operations to service our debt, thus reducing the amount of our cash flow available for other purposes, including operating costs, dividends and capital expenditures that could improve our competitive position or results of operations; * requiring us to sell debt or equity securities or to sell some of our core assets, possibly on unfavorable terms, to meet payment obligations; * compromising our flexibility to plan for, or react to, competitive challenges in our business and the communications industry; and * the possibility of our being put at a competitive disadvantage with competitors who do not have as much debt as us, and competitors who may be in a more favorable position to access additional capital resources |
| We will require substantial capital to upgrade and enhance our operations |
| Replacing or upgrading our infrastructure will result in significant capital expenditures |
| If this capital is not available when needed, our business will be adversely affected |
| Increasing competition, offering new services, improving the capabilities or reducing the maintenance costs of our plant may cause our capital expenditures to increase in the future |
| In addition, our ongoing annual dividend of dlra1dtta00 per share under our current policy utilizes a significant portion of our cash generated by operations and therefore limits our operating and financial flexibility and our ability to significantly increase capital expenditures |
| While we believe that the amount of our dividend will allow for adequate amounts of cash flow for capital spending and other purposes, any material reduction in cash generated by operations and any increases in capital expenditures, interest expense or cash taxes would reduce the amount of cash generated in excess of dividends |
| Losses of access lines, increases in competition, lower subsidy and access revenues and the other factors described above may reduce our cash generated by operations and may require us to increase capital expenditures |
| In addition, we expect our cash paid for taxes to increase significantly over the next several years |
| Risks Related to Regulation - --------------------------- The access charge revenues we receive may be reduced at any time |
| A significant portion of our revenues is derived from access charges paid by IXCs for services we provide in originating and terminating intrastate and interstate traffic |
| The amount of access charge revenues we receive for these services is regulated by the FCC and state regulatory agencies |
| Recent rulings regarding access charges have lowered the amount of revenue we receive from this source |
| Additional actions by these agencies could further reduce the amount of access revenues we receive |
| In addition, a portion of our access revenues is received from state and federal universal service funds based upon the high cost of providing telephone service to certain rural areas |
| In the future, there may be proposals by state or federal regulatory agencies to eliminate or reduce these revenues |
| A material reduction in the revenues we receive from these funds would adversely affect our financial results |
| 11 We are reliant on support funds provided under federal and state laws |
| We receive a significant portion of our revenues from the federal universal service fund and, to a lesser extent, state support funds |
| These governmental programs are reviewed and amended from time to time, and we cannot assure you that they will not be changed or impacted in a manner adverse to us |
| Our company and industry are highly regulated, imposing substantial compliance costs and restricting our ability to compete in our target markets |
| As an incumbent, we are subject to significant regulation from federal, state and local authorities |
| This regulation restricts our ability to change our rates, especially on our basic services, and imposes substantial compliance costs on us |
| Regulation restricts our ability to compete and, in some jurisdictions, it may restrict how we are able to expand our service offerings |
| In addition, changes to the regulations that govern us may have an adverse effect upon our business by reducing the allowable fees that we may charge, imposing additional compliance costs, or otherwise changing the nature of our operations and the competition in our industry |
| This is likely to increase the number of our customers who decide to disconnect their service from us |
| Other pending rulemakings, including those relating to intercarrier compensation, universal service and VOIP regulations, could have a substantial adverse impact on our operations |
| Risks Related to Technology - --------------------------- In the future as competition intensifies within our markets, we may be unable to meet the technological needs or expectations of our customers, and may lose customers as a result |
| The telecommunications industry is subject to significant changes in technology |
| If we do not replace or upgrade technology and equipment, we will be unable to compete effectively because we will not be able to meet the needs or expectations of our customers |
| Replacing or upgrading our infrastructure could result in significant capital expenditures |
| In addition, rapidly changing technology in the telecommunications industry may influence our customers to consider other service providers |
| For example, we may be unable to retain customers who decide to replace their wireline telephone service with wireless telephone service |
| In addition, VOIP technology, which operates on broadband technology, now provides our competitors with a low-cost alternative to provide voice services to our customers |