| IOWA TELECOMMUNICATIONS SERVICES INC ITEM 1A Risk Factors Set forth below are risks and uncertainties that could cause actual results to differ materially from those described herein |
| Risk Related to Our Capital Structure and Ownership Our dividend policy may limit our ability to pursue growth opportunities |
| Our board of directors adopted a dividend policy, effective upon closing of our initial public offering in November 2004, which reflects an intention to distribute a substantial portion of the cash generated by our business in excess of operating needs, interest and principal payments on our indebtedness and capital expenditures as regular quarterly dividends to our shareholders |
| As a result, we may not retain a sufficient amount of cash to finance a material expansion of our business, or to fund our operations consistent with past levels of funding in the event of a significant business downturn |
| In addition, because a significant portion of cash available to pay dividends will be distributed to holders of our common stock under our dividend policy, our ability to pursue any material expansion of our business, including through acquisitions or increased capital spending, will depend more than it otherwise would on our ability to obtain third party financing |
| We cannot assure you that such financing will be available to us at all, or at an acceptable cost |
| We are not obligated to pay dividends |
| Dividend payments are not guaranteed and are within the absolute discretion of our board of directors |
| Future dividends with respect to shares of our common stock, if any, will depend on, among other things, our results of operations, working capital requirements, financial condition, contractual restrictions, business opportunities, anticipated cash needs, provisions of applicable law and other factors that our board of directors may deem relevant |
| In addition, we have reported a loss from continuing operations in the past |
| We might not generate sufficient cash from operations in the future to pay dividends on our common stock in the intended amounts or at all |
| Our board of directors may decide not to pay dividends at any time and for any reason |
| Our dividend policy is based upon our directors’ current assessment of our business and the environment in which we operate, and that assessment could change based on competitive or technological developments (which could, for example, increase our need for capital expenditures), new growth opportunities or other factors |
| If our cash flows from operations for future periods were to fall below our minimum expectations, we would need either to reduce or eliminate dividends or, to the extent permitted under the terms of our credit facilities, fund a portion of our dividends with borrowings or from other sources |
| If we were to use working capital or permanent borrowings to fund dividends, we would have less cash and/or borrowing capacity available for future dividends and other purposes, which could negatively affect our financial condition, our results of operations, our liquidity and our ability to maintain or expand our business |
| Our board is free to depart from or change our 22 ______________________________________________________________________ [51]Table of Contents dividend policy at any time and could do so, for example, if it were to determine that we had insufficient cash to take advantage of growth opportunities |
| In addition, our credit facilities contain limitations on our ability to pay dividends |
| See “Dividend Policy and Restrictions” in Item 5 of this report |
| The reduction or elimination of dividends may negatively affect the market price of our common stock |
| We have substantial indebtedness and may incur additional indebtedness in the future, which could restrict our ability to pay dividends |
| Our ability to make distributions, pay dividends or make other payments will be subject to applicable law and contractual restrictions contained in the instruments governing any indebtedness of ours and our subsidiaries, including our credit facilities |
| The degree to which we are leveraged on a consolidated basis could have important consequences to the holders of our common stock, including the following: • our ability in the future to obtain additional financing for working capital, capital expenditures or acquisitions may be limited; • a significant portion of our cash flow from operations is likely to be dedicated to the payment of the principal of and interest on our indebtedness, thereby reducing funds available for future operations, capital expenditures and/or dividends on our common stock; • we may be more vulnerable to economic downturns and be limited in our ability to withstand competitive pressures; and • we may have limited flexibility to plan for and react to changes in our business or strategy |
| In addition, we may be able to incur substantial additional indebtedness in the future |
| Any additional debt incurred by us could increase the risks associated with our substantial leverage |
| We are subject to restrictive debt covenants and other requirements related to our outstanding debt that limit our business flexibility by imposing operating and financial restrictions on us |
| Covenants in the credit facilities impose significant operating and financial restrictions on us |
| These restrictions prohibit or limit, among other things: • the incurrence of additional indebtedness and the issuance of preferred stock and certain redeemable capital stock; • the payment of dividends on, and purchase or redemption of, capital stock; • a number of other restricted payments, including investments and acquisitions; • specified sales of assets; • specified transactions with affiliates; • the creation of a number of liens on our assets; • consolidations, mergers and transfers of all or substantially all of our assets; • our ability to change the nature of our business; and • our ability to make capital expenditures |
| These restrictions could limit our ability to obtain future financing, make acquisitions or fund capital expenditures, withstand downturns in our business or take advantage of business opportunities |
| Furthermore, the credit facilities also require us to maintain specified total leverage and fixed charge coverage ratios and satisfy specified financial condition tests, and may require us to make annual mandatory prepayments with a portion of our available cash |
| Our ability to comply with the ratios or tests may be affected by events beyond our control, including prevailing economic, financial and industry conditions |
| 23 ______________________________________________________________________ [52]Table of Contents A breach of any of these covenants, ratios or tests could result in a default under the credit facilities |
| Upon the occurrence of an event of default under the credit facilities, the lenders could elect to declare all amounts outstanding under the credit facilities to be immediately due and payable |
| If the lenders accelerate the payment of the indebtedness under the credit facilities, our assets may not be sufficient to repay in full this indebtedness and our other indebtedness |
| We may not be able to refinance our credit facilities at maturity on favorable terms or at all |
| Our credit facilities will mature in full in 2011 |
| We may not be able to renew or refinance the credit facilities, or any renewal or refinancing may occur on less favorable terms |
| If we were unable to refinance or renew our credit facilities, our failure to repay all amounts due on the maturity date would cause a default under the credit facilities |
| In addition, our interest expense may increase significantly if we refinance our credit facilities on terms that are less favorable to us than the terms of our existing credit facilities, which could impair our ability to pay dividends |
| We will require a significant amount of cash, which may not be available to us, to service our debt, pay dividends and fund our other liquidity needs |
| Our ability to make payments on, or to refinance or repay, our debt, to fund planned capital expenditures, to pay dividends and to expand our business will depend largely upon our future operating performance |
| Our future operating performance is subject to general economic, financial, competitive, legislative and regulatory factors, as well as other factors that are beyond our control |
| Our business may not generate enough cash flow, or future borrowings may not be available to us under the credit facilities or otherwise, in an amount sufficient to enable us to pay our debt, pay dividends or fund our other liquidity needs |
| If we are unable to generate sufficient cash to service our debt requirements, we will be required to refinance our credit facilities |
| We may not be able to refinance any of our debt, including the credit facilities, under such circumstances on commercially reasonable terms or at all |
| If we were unable to refinance our debt or obtain new financing under these circumstances, we would have to consider other options, including: • sales of certain assets to meet our debt service requirements; • sales of equity; and • negotiations with our lenders to restructure the applicable debt |
| Our credit facilities could restrict our ability to do some of these things |
| If we are forced to pursue any of the above options under distressed conditions, our business and/or the value of our common stock could be adversely affected |
| There may be volatility in the trading price of our common stock, which could negatively affect the value of your investment |
| The market price of our common stock may fluctuate widely as a result of various factors, such as period-to-period fluctuations in our operating results, sales of our common stock by principal shareholders, developments in the telecommunications industry, the failure of securities analysts to cover our common stock or changes in financial estimates or opinions by analysts, competitive factors, regulatory developments, economic and other external factors, interest rates, general market conditions and market conditions affecting the stock of telecommunications companies in particular |
| Telecommunications companies have in the past experienced extreme volatility in the trading prices and volumes of their securities, which has often been unrelated to operating performance |
| Any such market volatility may have a significant adverse effect on the market price of our common stock |
| 24 ______________________________________________________________________ [53]Table of Contents Future sales, or the possibility of future sales, of a substantial amount of our common stock may depress the price of the shares of our common stock |
| Future sales, or the availability for sale in the public market, of substantial amounts of our common stock could adversely affect the prevailing market price of our common stock, and could impair our ability to raise capital through future sales of equity securities |
| Certain investors that held shares of our common stock prior to our initial public offering in November 2004, continue to hold 3cmam512cmam307 shares of common stock as of December 31, 2005 |
| These shares are restricted securities within the meaning of Rule 144 under the Securities Act, but are eligible for resale subject to applicable volume, manner of sale, holding period and other limitations of Rule 144 |
| In addition, members of our management and other employees hold fully vested options to purchase a total of 995cmam507 shares of our common stock as of December 31, 2005, all of which have been registered under the Securities Act of 1933 and may be exercised and sold at any time |
| Finally, certain principal shareholders have certain registration rights with respect to the common stock that they hold |
| We may issue shares of our common stock, or other securities, from time to time as consideration for future acquisitions and investments |
| In the event any such acquisition or investment is significant, the number of shares of our common stock, or the number or aggregate principal amount, as the case may be, of other securities that we may issue may in turn be significant |
| We may also register, or grant registration rights covering, those shares or other securities in connection with any such acquisitions and investments |
| Your interests may conflict with those of our current shareholders with whom we conduct significant business |
| Our largest shareholder, Iowa Network Services, Inc, as of December 31, 2005 held 11dtta2prca of our outstanding common stock through one of its subsidiaries, Pine Island Capital Corporation |
| Iowa Network Services, Inc |
| is in the telecommunications business and provides long distance, wireless, dial-up and DSL Internet access and other services throughout Iowa that compete with certain aspects of our business to the extent permitted by the terms of non-competition arrangements between Iowa Network Services, Inc |
| We anticipate that Iowa Network Services, Inc |
| will continue to compete with us in the future, and such competition may intensify following any reduction in Iowa Network Services, Inc |
| ’s equity interest in us |
| is owned by approximately 127 independent incumbent local exchange carriers, which we believe each own less than 5prca of Iowa Network Services, Inc |
| These incumbent local exchange carriers provide telecommunications services in exchanges adjacent to or nearby our exchanges, sometimes in competition with services we provide |
| Competition with these incumbent local exchange carriers could intensify following any reduction in Iowa Network Services, Inc |
| Our organizational documents could limit another party’s ability to acquire us and therefore could deprive our investors of the opportunity to obtain a takeover premium for their shares |
| A number of provisions in our articles of incorporation and bylaws will make it difficult for another company to acquire us and, therefore, for investors to receive any related takeover premium for their shares |
| For example, our articles of incorporation provide for a classified board of directors, prohibit removal of directors without cause and authorize the issuance of preferred stock without shareholder approval and upon such terms as the board of directors may determine |
| The rights of the holders of shares of our common stock will be subject to, and may be adversely affected by, the rights of holders of any class or series of preferred stock that may be issued in the future |
| For example, federal and Iowa telecommunications laws and regulations generally prohibit a direct or indirect transfer of control over our business without prior regulatory approval |
| Section 490dtta1110 of the Iowa Business Corporation Act prohibits us from engaging in a business combination with an interested shareholder for a period of three years from the date 25 ______________________________________________________________________ [54]Table of Contents the person became an interested shareholder unless certain conditions are met |
| The Iowa Business Corporation Act also provides that only shareholders representing at least 50prca of our shares entitled to vote may request that our board of directors call a special meeting of shareholders and that, in evaluating any acquisition offer, our board of directors may consider the interests of our employees, suppliers, creditors and customers, the interests of the communities in which we operate, and the long-term interests of our company and the shareholders, in addition to the financial interests of shareholders |
| Limitations on usage of our net operating losses, and other factors requiring us to pay cash taxes in future periods, may affect our ability to pay dividends to you |
| Our initial public offering resulted in an “ownership change” for purposes of Section 382 of the Internal Revenue Code |
| In addition, we currently are able to take deductions of approximately dlra40dtta0 million from taxable income associated with the amortization of intangibles through 2014 |
| Consequently, in the future we may be required to pay cash income taxes because of limitations on using our net operating losses, or because all of our net operating losses have been used or have expired, or because our intangible assets have been fully amortized |
| Any of the foregoing would have the effect of increasing our taxable income and potentially reducing our after-tax cash flow available for payment of dividends in future periods, and may require us to reduce dividend payments on our common stock in such future periods |
| Risks Relating to Our Business and Industry Competition in the telecommunications industry could result in access line losses or reduce our customer base, possibly requiring that we lower our rates, increase marketing expenditures, invest in new technologies or capabilities or use discounting and promotional campaigns that adversely affect our margins |
| We face actual or potential competition from other telecommunications service providers, including wireless service providers, who have entered and may continue to enter our service areas |
| Such competition has resulted in access line losses |
| In general, when we lose a customer to a competitor for local service we also lose that customer for all related services, such as long distance and Internet service, and may also lose the access charge revenues for that customer |
| We have interconnection agreements with 28 of the competitive local exchange carriers authorized to offer local service in our service area, of which four are authorized to provide service statewide and 24 are authorized to provide service only in specific exchanges or regions |
| In addition, six municipal telephone utilities operate as competitive local exchange carriers in some of our markets, and we understand that other communities we serve may be evaluating the establishment of a municipal telephone utility |
| In particular, in November 2004, an organization called “Opportunity Iowa” was formed to encourage municipalities to build their own fiber to the home communications networks |
| The Iowa Legislature considered, but did not pass legislation in 2005 that would have provided procedural safeguards to ensure that citizens can make informed decisions when voting on referenda necessary to approve such ventures |
| Opportunity Iowa referendum votes were held in the November 2005 general election cycle in seven Iowa Telecom exchanges |
| The Opportunity Iowa referendums were defeated in all seven communities |
| We cannot predict the likelihood of passage of additional legislation concerning municipal utility ventures, in the future or the effect of such legislation or the residual effect of the Opportunity Iowa advocacy efforts or further competition from municipal telecommunications utilities on our business |
| MCC Telephony of Iowa, Inc, the telecommunications affiliate of Mediacom, the dominant cable television provider in Iowa, is certified to provide competitive local telecommunications service in 84 Iowa Telecom exchanges |
| We believe MCC’s stated business plan is to use Sprint Communications Company LP (“Sprint”) as an intermediary in interconnecting with incumbent local exchange carriers throughout Iowa, including Iowa Telecom while MCC would retain the retail customer relationship |
| MCC has already entered the Des Moines market, but has yet to provide traditional wireline local exchange services in non-Qwest markets in Iowa, which we believe is at least partially due to the absence of interconnection agreements between either MCC or Sprint 26 ______________________________________________________________________ [55]Table of Contents and us or certain other incumbent carriers |
| MCC’s ability to enter other Iowa markets without its own interconnection agreement with such incumbent carriers remains a contested issue at the Iowa Utilities Board in the context of an arbitration petition filed by Sprint on March 31, 2005 |
| We cannot predict the outcome of the arbitration proceeding, any potential appeals of such outcome, or potential changes in MCC’s proposed legal relationships between the relevant parties |
| Wireless providers also currently compete in most of our rural markets |
| We expect this competition to continue, and likely become more acute, in the future |
| We also compete, or may in the future compete, with companies that provide other close substitutes for the traditional telephone services we provide, like cable television, voice over Internet protocol, high-speed fiber optic networks or satellite telecommunications services, and companies that might provide traditional telephone services over nontraditional network infrastructures, like electric utilities |
| We are subject to regulations, like those requiring us to provide number portability for wireless carriers, that reduce the barriers to entry faced by some providers of substitute services, and may be subject to other regulations favoring substitute services in the future |
| We may in the future compete with the Iowa Communications Network or with a future purchaser of the assets now owned by the Iowa Communications Network |
| The Iowa Communications Network, a state-owned limited use network with more than 3cmam000 miles of fiber optic cable extending into all 99 Iowa counties, and capable of providing a variety of voice, data and video communication services, currently is prohibited by state law from providing telephone service to parties other than school districts, higher education institutions, state and federal agencies, the United States Post Office, hospitals and physicians’ clinics and public libraries |
| The assets now owned by the Iowa Communications Network could be used to provide voice, data and video communications, and the state of Iowa has previously considered modifying state law to remove some of the usage restrictions applicable to the Iowa Communications Network or permit the sale of the Iowa Communications Network to a private party |
| A sale of the Iowa Communications Network or its assets, or a change in the law permitting broader use of the Iowa Communications Network, could provide additional competition for us |
| We may continue to lose access lines due to economic conditions and competition |
| Our business generates revenue by delivering voice and data services over access lines |
| In the past, we have experienced net access line losses due to challenging economic conditions and increased competition |
| Our total access line count decreased by 3dtta1prca during 2005, and decreased 5dtta5prca if we consider only our incumbent local exchange carrier |
| We may continue to experience net access line losses in our markets |
| Continued access line losses could adversely affect our revenues and earnings |
| We may not be able to integrate future technologies, respond effectively to customer requirements or provide new services |
| 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 technological changes on our business |
| New technologies and products may not be compatible with our existing technologies and systems |
| In addition, our existing technologies and systems may not be competitive with new superior technologies and products, which may reduce service prices |
| These developments could require us to incur unbudgeted upgrades or to procure additional products that could be expensive |
| If we do not adequately replace or upgrade our technology and equipment that becomes obsolete, we may not be able to compete effectively |
| Technological changes in the communications industry may have a material adverse effect on our business or financial results |
| We may not be able to obtain timely access to new technology on satisfactory terms or incorporate new technology into our systems in a cost effective manner, or at all |
| In addition to technological advances, other factors could require us to further expand or adapt our network, including an increasing number of customers, demand for greater data transmission capacity, failure of our 27 ______________________________________________________________________ [56]Table of Contents technology and equipment to support operating results anticipated in our business plan and changes in our customers’ service requirements |
| Expanding or adapting our network could require substantial additional financial, operational and managerial resources, any of which may not be available to us |
| Network disruptions could adversely affect our operating results |
| To be successful, we will need to continue providing our customers with a high capacity, reliable and secure network |
| Some of the risks to our network and infrastructure include: • physical damage to access lines, central offices, central office equipment, or equipment used in our underlying voice and data networks; • power loss from, among other things, adverse weather conditions; • capacity limitations; • software and hardware defects and malfunctions; • breaches of security, including sabotage, tampering, computer viruses and break-ins; and • other disruptions that are beyond our control |
| Disruptions or system failures may cause interruptions in service or reduced capacity for customers |
| If service is not restored in a timely manner, agreements with our customers or service standards set by the Iowa Utilities Board may obligate us to provide credits or other remedies, and this would reduce our revenues or increase our costs |
| Service disruptions could also damage our reputation with customers, causing us to lose existing customers or have difficulty attracting new ones |
| We are dependent on rights-of-way and other permits from railroads, utilities, state highway authorities, local governments and transit authorities to install conduit and related telecommunications equipment for any expansion of our network |
| We may need to renew current rights-of-way for our network and cannot assure you that we would be successful in renewing these agreements on acceptable terms |
| Some of our agreements may be short-term, revocable at will, or subject to termination upon customary default provisions, and we may not have access to existing rights-of-way after they have expired or terminated |
| If any of these agreements were terminated or could not be renewed, we may be required to remove our existing facilities from under the streets or abandon our networks |
| Similarly, we may not be able to obtain right-of-way agreements on favorable terms, or at all, in new service areas, and, if we are unable to do so, our ability to expand our network, if we decide to do so, could be impaired |
| The successful operation and growth of our business are dependent on economic conditions and population stability in Iowa |
| Virtually all of our customers and operations are located in Iowa |
| Due to our geographical concentration, the successful operation and growth of our businesses is dependent on economic conditions in Iowa |
| The Iowa economy, in turn, is dependent upon many factors, including the strength of the agricultural economy and continued growth in manufacturing and service industries |
| The economies of rural communities, such as those that we serve, are affected by many of the same factors as the Iowa economy in general |
| In addition, rural communities face additional challenges to their economic stability and growth |
| The populations of many rural communities in Iowa, particularly smaller towns, have been declining |
| Limited capital availability may hinder the growth of rural businesses |
| Any deterioration in general economic conditions in Iowa is likely to result in lower demand for our services, which would reduce our revenues |
| 28 ______________________________________________________________________ [57]Table of Contents Our competitive local exchange carrier strategy may adversely affect our profitability and Adjusted EBITDA We intend to expand our operations in both telephone and Internet services through our two competitive local exchange carrier subsidiaries into areas adjacent to our incumbent local exchange carrier territory |
| As of December 31, 2005, we had approximately 20cmam800 competitive local exchange carrier access lines in 18 exchanges |
| We expanded into additional markets and invested approximately dlra3dtta0 million in our competitive local exchange carrier operations cumulative though December 31, 2005, principally to fund operating losses during this expansion phase |
| Our competitive local exchange carrier business incurred losses through most of this expansion period and may require additional funding for capital expenditures and potential operating losses in the future |
| Competitive local exchange carrier profitability is contingent on obtaining customers from the incumbent local exchange service provider in a cost-effective manner |
| Either an incumbent provider or another competitive local exchange carrier may diminish our profitability by expanding its marketing efforts or offering additional products |
| Furthermore, as a result of the recently enacted statutory provisions regarding deregulation of basic local services, the incumbent provider will have greater flexibility to respond to competition from our competitive local exchange carriers, which may reduce our margins and have other negative impacts on our profitability |
| We face risks associated with our strategy of growth through acquisitions |
| Any future acquisitions will depend on our ability to identify suitable acquisition candidates, negotiate acceptable terms for their acquisition and finance those acquisitions |
| In addition, future acquisitions by us could result in the incurrence of indebtedness or contingent liabilities, which could have a material adverse effect on our business and our ability to achieve sufficient cash flow, provide adequate working capital and service our indebtedness |
| Any future acquisitions could also expose us to increased risks, including: • the difficulty of integrating the acquired personnel, network, operations and other support systems; • the potential disruption of our ongoing business and diversion of resources and management time; • the inability to generate revenues from acquired businesses sufficient to offset acquisition costs; • the inability of management to maintain uniform standards, controls, procedures and policies; • the risks of entering markets in which we have little or no direct prior experience; • the difficulty in enhancing our customer support resources to adequately service our existing customers and acquired customers; and • the impairment of relationships with suppliers, employees, or unions as a result of changes in management of the acquired company |
| Any future acquisitions of access lines will likely be subject to prior approvals from the Federal Communications Commission and the Iowa Utilities Board or other applicable state regulatory commissions |
| We may not be able to obtain such approvals, in which case the acquisition could be delayed or not consummated |
| We may not be successful in efficiently managing the growth of our business |
| Our business plan will, if successfully implemented, result in growth of our operations, which may place a significant strain on our management, financial and other resources |
| To achieve and sustain growth we must, among other things, monitor operations, control costs, maintain regulatory compliance, maintain effective quality controls and maintain adequate internal management, technical, provisioning, information, billing, customer service and accounting systems |
| We may not be able to successfully integrate and use the employee, management, operational and financial resources necessary to manage a developing and expanding business in an evolving, regulated and increasingly competitive industry |
| 29 ______________________________________________________________________ [58]Table of Contents Our relationships with other telecommunications companies are material to our operations and their financial difficulties may affect our business |
| We originate and terminate calls for long distance carriers and other interexchange carriers over our network and for that service we receive payments called access charges |
| Some of the carriers that pay us these access charges are our largest customers in terms of revenues |
| Several such carriers have declared bankruptcy, and others are experiencing substantial financial difficulties |
| Our inability to collect access charges from these bankrupt or financially distressed carriers has had a negative effect on our financial results and cash flows, as would any subsequent bankruptcies or disruptions in the businesses of these or other interexchange carriers |
| Our ability to collect past due amounts of access billings from carriers is hampered by federal and state regulations governing business relationships of these bankrupt or financially distressed carriers |
| We use many vendors and suppliers that derive significant amounts of business from customers in the telecommunications business |
| Associated with the difficulties facing many service providers, some of these vendors and suppliers recently have experienced substantial financial difficulties, in some cases leading to bankruptcies and liquidations |
| Any disruptions experienced by these vendors and suppliers as a result of their own financial difficulties may affect their ability to deliver products or services to us, and delays in such deliveries could have an adverse affect on our business |
| We face risks associated with our reliance on our information and billing systems |
| We currently rely on a combination of internal systems and licenses with third party vendors for our information and billing systems |
| These systems are vital to our growth and our ability to monitor and control costs, bill customers, process orders, and provide customer service |
| If our information and billing systems fail or do not perform as expected, our ability to collect revenues, provide adequate customer service and accurately track our expenses and revenues would be impaired, with potentially materially adverse effects on our business and operations |
| In addition, if our third party vendors cancel or do not renew our license agreements, we could face disruption in our operations, as well as unforeseen expense for obtaining suitable replacement services from other vendors |
| We depend on key members of our senior management team |
| Our success depends largely on the skills, experience and performance of key members of our senior management team, including Alan L Wells, our President, CEO and Chairman |
| Competition for senior management in our industry is intense, and we may have difficulty retaining our current managers or attracting new managers in the event of termination or resignation |
| Risks Related to Our Regulatory Environment Our business is subject to extensive regulation that could change in a manner adverse to us |
| We operate in a heavily regulated industry, and most of our revenues come from providing services regulated by the Federal Communications Commission, or FCC, and the Iowa Utilities Board |
| Federal and state communications laws and regulations may be amended in the future, and other laws or regulations may be enacted which will affect our business |
| The FCC and the Iowa Utilities Board may add new rules, amend their rules or change the interpretation of their rules at any time |
| Laws and regulations applicable to us and our competitors may be, and have been, challenged in the courts, and could be changed at any time |
| We cannot predict future developments or changes to the regulatory environment, or the impact such developments or changes would have on us |
| Regulatory decisions relating to unbundling and pricing of network services may have an adverse effect on us |
| The FCC requires incumbent local exchange carriers to unbundle elements of their networks and provide these unbundled network elements to competitive local exchange carriers based on a forward-looking cost 30 ______________________________________________________________________ [59]Table of Contents methodology |
| As discussed under Item 1, “Federal Regulation—Unbundling of Network Elements,” the extent of these obligations remains the subject of litigation and potential further regulatory revision |
| Future regulatory and related judicial decisions regarding the availability and pricing of unbundled network elements may also affect potential plans regarding our competitive local exchange carriers |
| FCC decisions concerning telecommunications policy and judicial review of such decisions may adversely affect our business |
| The Telecom Act provides for significant changes and increased competition in the telecommunications industry |
| This federal statute and its related regulations remain subject to judicial review and additional rulemakings of the FCC, thus making it difficult to predict what effect this actually will have on us, our operations and our competitors |
| For example, the FCC is considering changes to intercarrier compensation applicable to wireless providers and other local exchange carriers that could adversely affect the access revenues of our incumbent local exchange carrier and competitive local exchange carrier operations, and the manner in which we will be compensated for terminating calls originating on other carriers’ networks and compensate other carriers for handling calls that originate on our network |
| The FCC is also examining its universal service policies, including policies with respect to both contribution and disbursement, that could have an effect on the amount and timing of our receipt of universal service funds |
| Further, many FCC telecommunications decisions are subject to substantial judicial review and delay |
| These delays and related litigation create uncertainty over federal policies and rules, and may affect our business plans, investments and operations |
| New regulations and changes in existing regulations may force us to incur significant expenses |
| Our business may be adversely affected by laws and regulations that impose new or greater obligations related to assisting in law enforcement, bolstering homeland security, reducing environmental impacts, or other aspects of our business |
| For example, existing provisions of the Communications Assistance for Law Enforcement Act and FCC regulations implementing the Communications Assistance for Law Enforcement Act require telecommunications carriers to ensure that their equipment, facilities, and services are able to facilitate authorized electronic surveillance |
| As discussed in Item 1 under “Regulation—Federal Regulation”, the FCC has concluded that facilities-based broadband providers and providers of interconnected voice over Internet protocol services must be prepared to accommodate law enforcement wiretaps by May 12, 2007, although the FCC has yet to specify precise requirements and the order is already subject to appeal |
| We cannot predict whether and when the FCC might modify such regulations or any other rules, or what compliance with new rules might cost |
| Similarly, we cannot predict whether or when federal or state legislators or regulators might impose new security, environmental or other obligations on our business |
| Changes to laws and regulations to which we are subject, and the introduction of new technologies, including voice over Internet protocol, may result in loss or reduction of revenues from network access charges |
| Access charges, which are intended to compensate us for providing other carriers with originating, terminating or transport services for their calls on our local network, accounted for approximately 44prca of our revenues in 2005 |
| Access charges are collected as fees charged to providers of long distance services, fees charged to business and residential customers, and fees charged to wireless providers and other local exchange carriers for originating and terminating their interexchange calls |
| Large long distance providers have advocated in the past, and continue to advocate, that access charges they are required to pay should be reduced and the revenues replaced, perhaps only in part, by raising the fees charged to business and residential customers or by receipts from a universal service fund |
| Large long-haul network providers have also argued and continue to argue that access charges do not apply to specific types of traffic |
| The combined or individual results of these long distance carrier efforts could reduce the amount of access charge revenue we receive |
| Access charge reform is a key element of the universal service issues under review by state 31 ______________________________________________________________________ [60]Table of Contents and federal regulators and legislators |
| We cannot predict whether or when action may be taken on any of these issues, or what effect any action may have on revenues and costs of our incumbent local exchange carrier and competitive local exchange carrier operations |
| The emerging technology known as voice over Internet protocol can be used to carry user-to-user voice communications over dial-up or broadband service |
| The FCC has determined that a particular type of entirely Internet-based voice over Internet protocol service also is an information service and exempt from such regulatory obligations, but that another, more widely-used, version of voice over Internet protocol service is an interstate service and therefore outside the jurisdiction of state telecommunications regulations |
| Certain aspects of the FCC’s determination have been challenged in judicial proceedings |
| The FCC is currently considering the regulatory status of a variety of voice over Internet protocol service configurations in the context of a comprehensive proceeding launched in February 2004 as well as several more application and issue-specific proceedings |
| These proceedings concern, among other things, what, if any, intercarrier compensation must be paid by providers of such service and what, if any, universal service contributions such providers must make |
| Expanded use of voice over Internet protocol technology could reduce the access revenues received by local exchange carriers like us |
| We cannot predict the outcome of these proceedings or the effect of FCC or judicial decisions on any of our ISP, incumbent local exchange carrier or competitive local exchange carrier businesses |
| As the incumbent local exchange carrier in our service areas, we are subject to regulation that is not applicable to our competitors |
| Federal and state rules impose obligations and limitations on us, as an incumbent local exchange carrier, that are not imposed on some of our competitors |
| Federal obligations require us to, among other things, share facilities, allow unbundled access to our network and resale of our services purchased at wholesale rates, file tariffs for access charges, maintain certain types of accounts, and file certain types of reports |
| Similarly, Iowa law, among other things, imposes accounting and reporting requirements and service obligations on us that do not exist for our competitors |
| In addition, in Iowa we operate under a statutory price regulation plan that, with regard to our single line flat-rated retail local exchange services, imposes obligations and restrictions on us that are not generally imposed on our competitors |
| As our business becomes increasingly competitive, these regulatory disparities could impede our incumbent local exchange carrier business’s ability to compete in the marketplace, which, in turn, could have a material adverse effect on our business |
| Service outage reporting may result in substantial expenditures |
| On August 4, 2004, the FCC adopted rules requiring certain telecommunications carriers to begin reporting additional information to the FCC in the event of selected service outages and related events affecting some fiber rings |
| On December 20, 2004, the FCC stayed the rules’ effectiveness pending agency reconsideration of their merits, in part due to concerns about the substantial expenditures required of telecommunications carriers in order to comply with the new reporting obligations |
| At this time, we cannot predict the consequences of the FCC’s reconsideration or the financial or operational impacts any final rules may have on us |