| JOURNAL COMMUNICATIONS INC ITEM 1A RISK FACTORS You should carefully consider the following risk factors and warnings before making an investment decision |
| If any of the risks below actually occur, our business, financial condition, results of operations or prospects could be materially adversely affected |
| In that case, the price of our securities could decline and you could lose all or part of your investment |
| You should also refer to the other information set forth or incorporated by reference in this document |
| Risks Relating to Our Diversified Media Business Decreases in advertising spending, resulting from economic downturn, war, terrorism or other factors, could adversely affect our financial condition and results of operations |
| Approximately 54prca of our revenue in 2005 was generated from the sale of local, regional and national advertising appearing in our newspapers and shoppers and for broadcast on our radio and television stations |
| Advertisers generally reduce their advertising spending during economic downturns; a recession or economic downturn could have an adverse effect on our financial condition and results of operations |
| Also, our advertising revenue tends to decline in times of national or local crisis because our radio and television stations broadcast more news coverage and sell less advertising time |
| For example, the threatened outbreak of hostilities in Iraq in March 2003 and the war itself had a negative impact on our broadcast results due to reduced spending levels by some advertisers, cancellations by some advertisers for the duration of war coverage and elimination of advertising inventory available from our television networks during their continuous coverage of the war |
| As a result, the war in Iraq, additional terrorist attacks or other wars involving the United States could adversely affect our financial condition and results of operations |
| Additionally, some of our printed publications and our radio and television stations generate a large percentage of their advertising revenue from a limited number of sources, including the automotive industry, political advertising and professional sports contracts |
| As a result, even in the absence of a recession or economic downturn, adverse changes specifically affecting these advertising sources could significantly reduce advertising revenue and have a material adverse affect on our financial condition and results of operations |
| In addition, our advertising revenue and circulation revenue depend upon a variety of other factors specific to the communities that we serve |
| Changes in those factors could negatively affect those revenues |
| These factors include, among others, the size and demographic characteristics of the local population, the concentration of retail stores and local economic conditions in general |
| If the population demographics, prevailing retail environment or local economic conditions of a community served by us were to change adversely, revenue could decline and our financial condition and results of operations could be adversely affected |
| This is especially true with respect to the metropolitan Milwaukee market, which is served by our daily newspaper, the Milwaukee Journal Sentinel, one of our television stations, two of our radio stations and a number of our community newspapers and shoppers, and from which we derived approximately 41prca of our operating revenue in 2005 |
| Our diversified media businesses operate in highly competitive markets, and during a time of rapid competitive changes, we may lose market share and advertising revenue to competing newspapers, radio and television stations, as well as to other types of media competitors or through consolidation of media competitors or changes in advertisers’ media buying strategies |
| Our diversified media businesses operate in highly competitive markets |
| Our newspapers, shoppers, radio stations, television stations and Internet sites compete for audiences and advertising revenue with other newspapers, shoppers, radio stations, television stations and Internet sites as well as with other media such as magazines, cable television, satellite television, satellite radio, outdoor advertising, the Internet and direct mail |
| Some of our current and potential competitors have greater financial, marketing, programming and broadcasting resources than we do and may respond faster or more aggressively to changing competitive dynamics |
| 21 ______________________________________________________________________ [47]Table of Contents In newspapers and shoppers, our revenue primarily consists of advertising and paid circulation |
| Competition for advertising expenditures and paid circulation comes from local, regional and national newspapers, shoppers, magazines, broadcast and cable television, radio, direct mail, yellow pages, the Internet and other media |
| Competition for newspaper advertising revenue is based largely upon advertiser results, advertising rates, readership, demographics and circulation levels, while competition for circulation is based largely upon the content of the newspaper, its price, editorial quality and customer service |
| On occasion, our businesses compete with each other for regional and local advertising, specifically in the Milwaukee market |
| Our local and regional competitors in community newspapers and shoppers are typically unique to each market, but we have many competitors for advertising revenue that are larger and have greater financial and distribution resources than us |
| Circulation revenue and our ability to achieve price increases for our print products are affected by competition from other publications and other forms of media available in our various markets, declining consumer spending on discretionary items like newspapers, decreasing amounts of free time, and declining frequency of regular newspaper buying among young people |
| We may incur increasing costs competing for advertising expenditures and paid circulation |
| If we are not able to compete effectively for advertising expenditures and paid circulation, our revenue may decline and our financial condition and results of operations may be adversely affected |
| Our radio and television broadcasting businesses compete for audiences and advertising revenue primarily on the basis of programming content and advertising rates |
| Advertising rates are set based upon a variety of factors, including a program’s popularity among the advertiser’s target audience, the number of advertisers competing for the available time, the size and demographic make-up of the market served and the availability of alternative advertising in the market |
| Our ability to maintain market share and competitive advertising rates depends in part on audience acceptance of our network, syndicated and local programming |
| Changes in market demographics, the entry of competitive stations to our markets, the introduction of competitive local news or other programming by cable, satellite or other news providers, or the adoption of competitive formats by existing stations could result in lower ratings and have a material adverse effect on our financial condition and results of operations |
| Changes in ratings technology or metrics used by advertisers or other changes in advertisers’ media buying strategies also could have a material adverse effect on our financial condition and results of operations |
| Further, our operations may be adversely affected by consolidation in the broadcast industry, especially if competing stations in our markets are acquired by competitors who have a greater national scope, can offer a greater variety of national and syndicated programming for listeners and viewers and have enhanced opportunities for advertisers to reach broader markets |
| On June 2, 2003, the FCC voted to relax rules that currently restrict media ownership; the modified rules, which were to have become effective on September 4, 2003, would likely result in additional industry consolidation |
| However, the US Court of Appeals for the Third Circuit issued a stay of the new rules on September 3, 2003 and, in an opinion issued on June 24, 2004, remanded the case to the FCC for further proceedings |
| The court retained jurisdiction over the case pending its future review of the FCC’s action on remand |
| In an order issued on September 3, 2004, in response to a request by the FCC, the court lifted its stay insofar as it applied to the modified Local Radio Ownership rule, which has taken effect |
| In all other respects, the rules that were in effect prior to June 2, 2003 will remain in effect until proceedings related to the rules are resolved or the stay is lifted |
| We cannot predict the outcome of any further administrative or judicial proceedings related to the rules |
| Seasonal and cyclical changes in advertising volume affect our quarterly revenue and results of operations and may cause our stock price to be volatile |
| Our quarterly revenue and results of operations are subject to seasonal and cyclical fluctuations that we expect to continue to affect our results of operations in future periods |
| Our first fiscal quarter of the year tends to be our weakest quarter because advertising volume is typically at its lowest levels following the holiday season |
| Our fourth fiscal quarter tends to be our strongest quarter primarily because of revenue from holiday season advertising |
| Our quarterly revenue also varies based on the dynamics of the television broadcast industry |
| In particular, we experience fluctuations, primarily during our third and fourth quarters, during political voting 22 ______________________________________________________________________ [48]Table of Contents periods as advertising dramatically increases |
| Also, since NBC has exclusive rights to broadcast the Olympics through 2012, our NBC affiliated stations experience increased viewership and revenue during Olympic broadcasts |
| Other factors that affect our quarterly revenue and results of operations may be beyond our control, including changes in the pricing policies of our competitors, the hiring and retention of key personnel, wage and cost pressures, changes in newsprint prices and general economic factors |
| These quarterly fluctuations in revenue and results of operations may cause our stock price to be volatile |
| We may not be able to acquire radio stations, television stations, newspapers or assets related to our Internet-based growth strategy, successfully manage acquired properties, or increase our profits from these operations |
| Our diversified media business has in the past expanded through acquisitions of radio and television stations and community newspapers and shoppers in selected markets |
| We intend to pursue continued growth through selected acquisitions, including acquisitions and investments related to our Internet-based growth strategy, if we are able to identify strategic acquisition candidates, negotiate definitive agreements on acceptable terms and, as necessary, secure additional financing |
| Our acquisition strategy includes certain risks |
| For example: • we may not be able to identify suitable acquisition candidates or, if identified, negotiate successfully their acquisition; • we may not be able to secure additional financing necessary to complete acquisitions; • we may encounter unforeseen expenses, difficulties, complications or delays in connection with the integration of acquired entities and the expansion of operations; • we may fail to achieve anticipated financial benefits from acquisitions; • we may encounter regulatory delays or other impediments in connection with proposed transactions; • our acquisition strategy may divert management’s attention from the day-to-day operation of our businesses; • key personnel at acquired companies may leave employment; or • we may be required to focus resources on integration of operations rather than more profitable areas |
| In addition, we may compete for certain acquisition targets with companies having greater financial resources than us |
| We cannot assure you that we will be able to successfully make future acquisitions or what effects those acquisitions may have on our financial condition and results of operations |
| We have in the past and may in the future “cluster” multiple radio and television stations in markets that we believe have demographic characteristics and growth potential suitable to further our business objectives |
| Multiple stations in the same geographic market area could make our results of operations more vulnerable to adverse local economic or demographic changes than they would otherwise be if our stations were located in geographically diverse areas |
| We anticipate that we would finance potential acquisitions through cash provided by operating activities and/or borrowings, which would reduce our cash available for other purposes |
| We cannot assure you, however, that we would be able to obtain needed financing in the event strategic acquisition opportunities are identified |
| We may also consider financing acquisitions by issuing additional shares of class A common stock, which would dilute current shareholders’ ownership |
| Another potential source of financing for future acquisitions is to incur more debt, which would lead to increased leverage and debt service requirements |
| Inherent in any future acquisitions is the risk of transitioning company cultures and facilities, which could have a material adverse effect on our financial condition and results of operations, particularly during the period immediately following any acquisitions |
| 23 ______________________________________________________________________ [49]Table of Contents Our publishing business may suffer if there is a significant increase in the cost of newsprint or a reduction in the availability of newsprint |
| Our newsprint consumption related to our publications totaled dlra38dtta5 million in 2005, which was 11dtta4prca of our total publishing revenue |
| We currently purchase approximately 86prca of our newsprint from two suppliers |
| Our inability to obtain an adequate supply of newsprint in the future or significant increases in newsprint costs could have a material adverse effect on our financial condition and results of operations |
| Changes relating to information collection and use could adversely affect our ability to collect and use data, which could harm our business |
| Recent public concern over methods of information-gathering has led to the enactment of legislation in certain jurisdictions that restricts the collection and use of information |
| Our publishing business relies in part on telemarketing sales, which are affected by recent “do not call” legislation at both the federal and state levels |
| We also engage in email marketing in connection with our publishing and broadcasting businesses |
| Further legislation, industry regulations, the issuance of judicial interpretations or a change in customs relating to the collection, management, aggregation and use of consumer information could materially increase the cost of collecting that data, or limit our ability to provide that information to our customers or otherwise utilize telemarketing or email marketing, and could adversely affect our results of operations |
| If we are unable to respond to changes in technology and evolving industry standards, our radio stations may not be able to effectively compete |
| The broadcast media industry is subject to the emergence of new media technologies and evolving industry standards |
| Several new technologies are being developed that may compete with our radio stations, including: • audio programming by cable television systems, direct broadcast satellite systems, personal communications systems, Internet content providers and other digital audio broadcast formats; • satellite digital audio radio service, with sound quality comparable to that of compact discs, which has resulted in the introduction of two satellite radio services that provide numerous niche formats; • in-band on-channel digital radio, which could improve the quality of existing AM and FM stations, including stations owned by us; • expanded approval of low-power FM radio, which could result in additional FM radio broadcast outlets designed to serve small, localized areas; and • enhanced capabilities of cell phones, MP3 players, and other mobile devices |
| These new technologies have the potential to introduce new market competitors or change the means by which radio advertisers can most efficiently and effectively reach their target audiences |
| We may not have the resources to acquire new technologies or to introduce new services that could compete with these new technologies |
| If we are unable to respond to changes in technology and evolving industry standards, our television stations may not be able to effectively compete |
| New technologies could also adversely affect our television stations |
| Programming alternatives such as cable, direct satellite-to-home services, pay-per-view, the Internet and home video and entertainment systems have fractionalized television viewing audiences |
| Over the past decade, cable television programming services have captured an increasing market share, while the aggregate viewership of the major television networks has declined |
| In addition, the expansion of cable television and other technological changes, including the recent entry by certain of the regional Bell operating companies into the video services delivery market, has increased, 24 ______________________________________________________________________ [50]Table of Contents and may continue to increase, competitive demand for programming |
| Such increased demand, together with rising production costs may, in the future, increase our programming costs or impair our ability to acquire programming |
| The enhanced video and audio capabilities of cell phones, MP3 players and other mobile devices also has the potential to affect television viewership |
| In addition, video compression techniques now in use with direct broadcast satellites and, increasingly, by cable and wireless cable, are expected to permit greater numbers of channels to be carried within existing bandwidth |
| These compression techniques, as well as other technological developments, are applicable to all video delivery systems, including over-the-air broadcasting, and have the potential to provide vastly expanded programming to highly targeted audiences |
| Reduction in the cost of creating additional channel capacity could lower entry barriers for new channels and encourage the development of increasingly specialized niche programming |
| This ability to reach very narrowly defined audiences may alter the competitive dynamics for advertising expenditures |
| We are unable to predict the effect that these technological changes will have on the television industry or the future results of our television broadcast business |
| If the network programming we broadcast pursuant to network affiliation agreements does not maintain satisfactory viewership levels, our advertising revenues, financial condition and results of operations may be adversely affected |
| The television viewership levels, and ultimately advertising revenue, for each station are materially dependent upon network programming, which is provided pursuant to network affiliation agreements |
| We cannot assure you that network programming will achieve or maintain satisfactory viewership levels |
| In particular, because four of our stations (including our low-power station) are parties to affiliation agreements with ABC, three with NBC, two with FOX and one with CBS, failures of ABC, NBC, FOX or CBS network programming to attract viewers or generate satisfactory ratings may have an adverse effect on our financial condition and results of operations |
| In addition, we cannot assure you that we will be able to renew our network affiliation agreements on as favorable terms or at all |
| The termination or non-renewal, or renewal on less favorable terms, of the affiliation agreements could have an adverse effect on us |
| Changes in the relationship of television networks with their affiliates and other content providers and distribution channels also could affect our success |
| For example, networks and other content providers recently have begun to sell programming content through new distribution channels and offer viewers the ability to watch programs on-demand, rather than on an established “live” television broadcast schedule |
| In addition, the creation of a new “The CW” network and the termination of the existing UPN and WB networks was recently announced and could affect network relationships in certain markets |
| The costs of television programming may increase, which could adversely affect our results of operations |
| Television programming is a significant operating cost component in our broadcasting operations |
| We cannot assure you that we will not be exposed in the future to increased programming costs |
| Should such an increase occur, it could have an adverse effect on our results of operations |
| Television networks have been seeking arrangements from their affiliates to share the networks’ programming costs |
| We cannot predict the nature or scope of any such potential compensation arrangements or the effect, if any, on our operations |
| In addition, acquisitions of program rights for syndicated programming are usually made two or three years in advance and may require multi-year commitments, making it difficult to predict accurately how a program will perform |
| In some instances, programs must be replaced before their costs have been fully amortized, resulting in write-offs that increase station operating costs and decrease station earnings |
| If our key on-air talent does not remain with us or loses popularity, our advertising revenue and results of operations may be adversely affected |
| We employ or independently contract with a number of on-air personalities and hosts of television and radio programs whose ratings success depends in part on audience loyalty in their respective markets |
| Although we 25 ______________________________________________________________________ [51]Table of Contents have entered into long-term agreements with some of our key on-air talent and program hosts to protect our interests in those relationships, we cannot assure you that all or any of these key employees will remain with us over the long term |
| Furthermore, the popularity and audience loyalty of our key on-air talent and program hosts is highly sensitive to rapidly changing public tastes |
| A loss of such popularity or audience loyalty could reduce ratings and may impact our ability to generate advertising revenue |
| In addition, our key local management employees are extremely important to our business since we believe that our growth and future success depends on retaining local management with knowledge of the community, its audience and its advertisers |
| Our inability to attract or retain these skilled personnel could have a material adverse impact on our financial condition and results of operations |
| Changes in the professional sports industry could result in decreased ratings for our Milwaukee radio station and adversely affect our results of operations and financial condition |
| Our Milwaukee radio station, WTMJ-AM, currently maintains exclusive radio broadcast rights for the Green Bay Packers, Milwaukee Bucks and Milwaukee Brewers, and arranges a statewide radio network for these organizations |
| Our advertising revenue could be adversely affected by changes in the professional sports industry, such as a relocation of one of the local professional sports teams from the Wisconsin market or the potential loss of exclusivity due to league or team initiatives such as pay-per-listen, satellite radio or Internet broadcast of games |
| In addition, we could lose our exclusive broadcast rights during periodic bidding, or suffer damage to the marketplace value of sports advertising due to factors such as a players’ strike, negative publicity or downturn in on-field performance of a team |
| If cable systems do not carry our new digital channels, our revenue and results of operations may be adversely affected |
| Since our television stations are highly dependent on carriage by cable systems in many of the areas they service, any rules of the FCC that ultimately impose no or limited obligations on cable systems to carry digital television signals in their local markets could result in some of our television stations or channels not being carried on cable systems, which could adversely affect our revenue and results of operations |
| If we cannot renew our FCC broadcast licenses, our business will be impaired |
| Our business depends upon maintaining our broadcast licenses, which are issued by the FCC Our broadcast licenses will expire between 2006 and 2013 and are renewable |
| Pursuant to FCC rules, certain of our broadcast licenses that expired in 2005 remain in effect pending processing by the FCC of their timely filed renewal applications |
| Interested parties may challenge a renewal application |
| The FCC has the authority to revoke licenses, not renew them, or renew them only with significant qualifications, including renewals for less than a full term |
| We cannot assure you that our future renewal applications will be approved, or that the renewals will not include conditions or qualifications that could adversely affect our operations |
| If we fail to renew any of our licenses, or renew them with substantial conditions or modifications (including renewing one or more of our licenses for a term of fewer than eight years), it could prevent us from operating the affected station and generating revenue from it |
| The FCC may impose sanctions or penalties for violations of rules or regulations |
| If we or any of our officers, directors or significant shareholders materially violate the FCC’s rules and regulations or are convicted of a felony or are found to have engaged in unlawful anticompetitive conduct or fraud upon another government agency, the FCC may, in response to a petition by a third party or on its own initiative, in its discretion, commence a proceeding to impose sanctions upon us that could involve the imposition of monetary penalties, the denial of a license renewal application, revocation of our broadcast licenses or other sanctions |
| If the FCC were to issue an order denying a license renewal application or revoking a license, we 26 ______________________________________________________________________ [52]Table of Contents would be required to cease operating the broadcast station only after we had exhausted all administrative and judicial review without success |
| In addition, the FCC has recently emphasized more vigorous enforcement of indecency standards, which could result in increased costs associated with FCC fines and implementation and adoption of more strict indecency standards at our broadcast facilities |
| We could experience delays in expanding our business due to antitrust laws |
| The Federal Trade Commission, the United States Department of Justice and the FCC carefully review our proposed business acquisitions and dispositions under their respective regulatory authority, focusing on the effects on competition, the number of stations owned in a market and the effects on concentration of market revenue share |
| Recently, the Department of Justice has challenged a number of radio broadcasting transactions |
| Some of these challenges ultimately resulted in consent decrees requiring, among other things, divestitures of certain stations |
| In general, the Department of Justice has more closely scrutinized radio broadcasting acquisitions that result in local market shares in excess of 40prca of radio advertising revenue |
| Any delay, prohibition or modification required by regulatory authorities could adversely affect the terms of a proposed transaction or could require us to modify or abandon an otherwise attractive opportunity |
| The filing of petitions or complaints against us or any FCC licensee from which we acquire a station could result in the FCC delaying the grant of, refusing to grant or imposing conditions on its consent to the assignment or transfer of control of licenses |
| Regulatory changes may result in increased competition in our radio and television broadcasting business |
| The radio and television broadcasting industry is subject to extensive and changing federal regulation |
| Among other things, the Communications Act of 1934, as amended, and FCC rules and policies require FCC approval for transfers of control and assignments of licenses, and limit the number of broadcasting properties in a market in which any person or entity may have an attributable interest |
| Media ownership restrictions include a variety of local limits on ownership, such as a limit of one television station in medium and smaller markets and two stations in larger markets as long as one station is not a top-four rated station (known as the duopoly rule), prohibitions on ownership of a daily newspaper and broadcast station in the same market and limits of four to eight radio stations and one television station in the same market |
| Under rules adopted by the FCC, on June 2, 2003, a party would be permitted to own up to three television stations in the very largest markets, up to two television stations in medium markets and one television station in smaller markets |
| The FCC’s new rules also would relax restrictions on common ownership of broadcast stations and newspapers within the same area |
| The new FCC media ownership rules were to have become effective on September 4, 2003 |
| However, the US Court of Appeals for the Third Circuit issued a stay of the new rules on September 3, 2003, and, in an opinion issued on June 24, 2004, remanded the case to the FCC for further proceedings |
| The court retained jurisdiction over the case pending its future review of the FCC’s actions on remand |
| In all other respects the rules that were in effect prior to June 2, 2003 will remain in effect until proceedings related to the rules are resolved or the stay is lifted |
| In addition, the 2004 Consolidated Appropriations Act prohibits any person or entity from having an attributable interest in broadcast television stations with an aggregate audience reach exceeding 39prca of television households nationally |
| The increase in the national television viewership cap gave the largest television operators the ability to acquire additional stations, which may give them a competitive advantage over us, since they have much greater financial and other resources than we have |
| In addition, the networks’ ability to acquire additional stations could give them “leverage” over their affiliates on issues such as compensation and program clearance, in part because of the risk that a network facing an uncooperative affiliate could acquire a station in the market and terminate its agreement with that affiliate |
| The relaxation of the national and local media ownership restrictions may cause us to face increasing competition with larger and more diversified entities for circulation and advertising revenue |
| 27 ______________________________________________________________________ [53]Table of Contents Risks Relating to Our Telecommunications Business Telecommunications technology changes very rapidly, which could result in price declines or render our telecommunications technology obsolete |
| We expect that new telecommunications products and technologies will emerge and that existing products and technologies, including high-speed data transmission, voice transmission over the Internet and wireless technologies, will further develop |
| These new products and technologies may reduce the prices for our telecommunications services and/or they may be superior to, and render obsolete, the products and services we offer and the technologies we use |
| As a result, our most significant competitors in the future may be new entrants to our markets that would not be burdened by an installed base of older equipment |
| It may be very expensive for us to upgrade our products and technology in order to continue to compete effectively |
| The future success of our telecommunications business depends, in part, on our ability to anticipate and adapt in a timely manner to technological changes |
| Advances in transmission equipment used with fiber optic technology have resulted in significant price declines |
| Recent changes in technology have continued to lower the cost of providing services |
| If there is a bigger drop in prices than we project, it could adversely affect our operating margins and, accordingly, our results of operations |
| We cannot be certain, even if our projections with respect to pricing are realized, that we will be able to implement our strategy or that our strategy will be successful in the rapidly evolving telecommunications market |
| Continued overcapacity and intense competition may necessitate further price decreases or lead to service disconnections, which would have an adverse effect on our results of operations |
| While many competitors in the telecommunications industry have been acquired or ceased operations within the recent past, our telecommunications business continues to compete with multiple large national carriers, regional carriers and local exchange carriers |
| Many of these competitors have built large fiber optic networks that remain underutilized, resulting in excess capacity that places downward pressure on the prices we and others are able to charge for our telecommunications services |
| Specifically, the recent business combinations of Sprint and Nextel, SBC and AT&T, now known as AT&T, and Verizon and MCI, now known as Verizon/MCI, may contribute to further changes in the competitive landscape in that we could lose existing business as the new entities consolidate traffic on owned facilities or face stiffer competition for other new business |
| Continued excess capacity and price competition could further decrease the prices we are able to charge our customers, which could have an adverse effect on our results of operations |
| In addition, due to the turmoil in the telecommunications industry, we have experienced a significant increase in customers disconnecting or terminating service, which may continue in the future and could be significant |
| While we are not always able to determine the specific reason a customer may disconnect service, we believe this is primarily the result of financially weaker customers going out of business, along with current customers eliminating excess network capacity and thus minimizing their costs |
| We believe the trend of customers focusing on reducing their network costs will continue, primarily due to consolidating traffic on least cost routes and economic and other changes occurring within our customers’ “end-user” customer base, which could have an adverse effect on our results of operations |
| The expenditures necessary to sufficiently develop our telecommunications network to reach customers within the local exchange network and develop our telecommunications services in order to satisfy our customers’ demands may surpass our available cash, and we may be unable to obtain additional capital to develop our services on a timely basis and on acceptable terms |
| Although we have expended significant resources in building our telecommunications network and our developing telecommunications customer base, we may require significant additional cash to develop local access capacity and the range of services we can offer throughout our service area in order to remain competitive in our market |
| We may have to expand or adapt our telecommunications network components to respond to the following: • a need for new product offerings, specifically local access capacity; • an increasing number of customers; 28 ______________________________________________________________________ [54]Table of Contents • demand for greater transmission capacity; • changes in our customers’ service requirements; and • technological advances |
| These expenditures for expansion and for more services, together with associated operating expenses, may reduce our cash flow and profitability |
| We cannot guarantee that additional financing will be available to us or, if available, that we can obtain it on a timely basis and on acceptable terms |
| Service interruptions on the network could cause immediate loss of revenue, payment of outage credits to our customers and the loss of our customers’ confidence and our business reputation |
| Our success in marketing our telecommunications services to our customers requires that we provide high reliability, high bandwidth and a secure network |
| Our network and the infrastructure upon which it depends requires the coordination and integration of sophisticated and highly specialized hardware and software technologies and equipment, and are subject to physical damage, power loss, capacity limitations, software defects, breaches of security and other disruptions beyond our control that may cause interruptions in service or reduced capacity for customers |
| While we have built-in system redundancies to reduce these risks, a prolonged network failure could jeopardize our ability to continue operations |
| Our agreements with our customers typically provide for the payment of outage related credits (a predetermined reduction or offset against our lease rate when a customer’s leased facility is non-operational or otherwise does not meet certain operating parameters) |
| In the case of a large-scale disruption of our network or the support infrastructure, these credits could be substantial and could significantly decrease our net revenue |
| In addition, should a significant service interruption occur, our ongoing customers may choose a different provider and our reputation may be damaged, reducing our attractiveness to new customers |
| To the extent that any disruption or security breach results in a loss or damage to our customers’ data or applications, or inappropriate disclosure of confidential information, we may incur liability and suffer from adverse publicity |
| We may also incur additional costs to remedy the damage caused by these disruptions or security breaches |
| Our network utilization is dependent on maintaining our rights-of-way and indefeasible rights of use |
| The construction and operation of significant portions of our fiber optic network depend upon rights-of-way from railroads, utilities, governmental authorities and third-party landlords, and we also have obtained indefeasible rights of use (called “IRUs”) from other telecommunications providers that are critical to our ability to operate our fiber optic network |
| Our rights-of-way and IRUs are generally subject to expiration at some future date |
| We cannot guarantee that we will be able to maintain all of our existing rights-of-way and IRUs, and the loss of a substantial number of existing rights-of-way or IRUs or our inability to renew existing agreements would have a material adverse impact on our business, financial condition and results of operations |
| While IRUs are commonly used in the telecommunications industry, they remain a relatively new concept in property law |
| Although they give the holder a number of rights to control the relevant rights-of-way or fiber optic filaments, legal title remains with the grantor of the rights |
| Therefore, the legal status of IRUs remains uncertain and could result in, for example, our IRUs becoming voidable in the event of bankruptcy of the grantor |
| If we were to lose an IRU in a key portion of our network, our ability to service our customers could become seriously impaired, and we could be required to incur significant expense to resume the operation of our fiber optic network in the affected areas |
| We need to obtain additional capacity for the network from other providers in order to serve our customers and keep our costs down |
| We lease telecommunications capacity and obtain rights to use dark fiber from both long distance and local telecommunications carriers in order to extend the scope of our network |
| Any failure by these companies to 29 ______________________________________________________________________ [55]Table of Contents provide service to us would adversely affect our ability to serve our customers or increase our costs of doing so |
| Costs of obtaining local services from other carriers comprise a significant proportion of the operating expenses of our telecommunications business |
| We could be harmed by the recent adverse developments affecting other telecommunications companies |
| We have substantial business relationships with a few large customers, including major long distance carriers |
| Our top 10 customers accounted for 40dtta1prca and 37dtta0prca of our telecommunications revenue in 2005 and 2004, respectively |
| In 2005, we reached an agreement with MCI/Verizon on a contract renewal that both extended the term of its service agreement at a reduced price and provided for higher capacity circuits to replace existing circuits being disconnected |
| We expect the effect of this new contract to be fully implemented during the first quarter of 2006 |
| We expect this contract change to result in a significant decrease in our telecommunications operating earnings |
| Though we cannot predict the impact of the MCI/Verizon combination, they remain a significant customer and we believe they will continue to be so |
| The loss of a significant amount of ongoing business from our largest customers would have a significant adverse effect on our results of operations |
| In addition, continued weakness in the telecommunications industry could have future adverse effects on us, including reducing our ability to collect receivables and to access the capital markets on favorable terms |
| Federal regulation of the telecommunications industry is changing rapidly and we could become subject to unfavorable new rules and requirements which could impose substantial financial and administrative burdens on us and interfere with our ability to successfully execute our business strategies |
| Regulation of the telecommunications industry is changing rapidly |
| Since our relationships with the telecommunications companies with whom we deal are affected by our respective positions in the federal, state and local regulatory scheme, existing and future federal, state, and local governmental regulations will influence our viability |
| Consequently, undesirable regulatory changes could adversely affect our business, financial condition and results of operations |
| For example, the FCC in 2005 adopted new procedures and rules providing the ILECs greater flexibility with respect to the availability and pricing of ILEC services and facilities |
| Several of these changes may adversely affect our results of operations |
| The FCC may also increase regulation over our Internet access services and IP-based services, and subject our business to increased assessments to support universal service or other similar programs and funds |
| The role of the states in regulation of companies providing telecommunications services is increasing, although the rules continue to vary substantially from state to state, and we may become increasingly subject to burdensome and restrictive state regulations |
| Heightened legislative activity, state public utility commission involvement and judicial appeals are anticipated, requiring continued vigilance and the commitment of resources |
| Depending on factors unique to the local marketplace, the rules can and will vary substantially from state to state |
| Moreover, if we expand our fiber optic network into a broader geographic area, we may be subject to additional state regulations |
| The costs of maintaining compliance with and abiding by state regulatory obligations could have a material adverse effect on our results of operations |
| Municipal regulation of our access to public rights-of-way is subject to change and could impose administrative burdens that would adversely affect our business |
| Local governments affect the timing and costs associated with our use of public rights-of-way because they typically retain the ability to license public rights-of-way, subject to the federal requirement that local governments may not prohibit the provision of telecommunications services |
| Change in local government regulation could impose additional costs on our business and limit our operations |
| 30 ______________________________________________________________________ [56]Table of Contents Risks Relating to Our Printing Services Business and Other Segment Postal rate increases and disruptions in postal services could lead to reduced volumes of business |
| Our printing services business, as well as our direct marketing business, have been negatively impacted from time to time during the past years by postal rate increases |
| In January 2006, first class rates and standard class rates were increased |
| Rate increases may result in customers mailing fewer and lighter pieces |
| Additionally, the amount of mailings could be reduced in response to disruptions in and concerns over the security of the US mail system |
| These sorts of responses by customers could negatively impact us by decreasing the amount of printing and direct marketing services or other services that our customers purchase from us, which could result in decreased revenue |
| Revenue from our direct marketing business may decline if our data products do not maintain technological competitiveness |
| Our direct marketing service business is affected by the complexity and uncertainty of new technologies |
| If we are not able to maintain technological competitiveness in our data products, processing functionality or software systems and services, we may not be able to provide effective or efficient service to our customers, and our revenue may decline |
| Other Business Risks We depend on key personnel, and we may not be able to operate and grow our business effectively if we lose the services of any of our senior executive officers or are unable to attract qualified personnel in the future |
| We are dependent upon the efforts of our senior executive officers |
| The success of our business is heavily dependent on our ability to retain our current management and to attract and retain qualified personnel in the future |
| Competition for senior management personnel is intense, and we may not be able to retain our personnel |
| We have not entered into employment agreements with our key personnel, other than with our Chairman and Chief Executive Officer, and these individuals may not continue in their present capacity with us for any particular period of time |
| We do not have key man insurance for any of our executive officers or key personnel |
| The loss of any senior executive officer could require the remaining executive officers to divert immediate and substantial attention to seeking a replacement |
| Our inability to find a replacement for any departing executive officer on a timely basis could adversely affect our ability to operate and grow our business |
| Our business may be negatively affected by work stoppages, slowdowns or strikes by our employees |
| Currently, there are 11 bargaining units representing approximately 830 (or approximately 15prca) of our total number of employees |
| We have entered into various collective bargaining agreements with these bargaining units |
| Eight of these agreements will expire within the next two years |
| A majority of the employees covered by a collective bargaining agreement work at the daily newspaper |
| We cannot assure you as to the results of negotiations of future collective bargaining agreements, whether future collective bargaining agreements will be negotiated without interruptions in our businesses, or the possible impact of future collective bargaining agreements on our financial condition and results of operations |
| We also cannot assure you that strikes will not occur in the future in connection with labor negotiations or otherwise |
| Any prolonged strike or work stoppage could have a material adverse effect on our financial condition and results of operations |