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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549    FORM 10-Q þ
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the Period Ended March 31, 2005
 or o
    
    Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the Transition Period from  to
 Commission File Number 001-32354    IOWA TELECOMMUNICATIONS SERVICES, INC.  IOWA
    
    42-1490040(State or Other Jurisdiction of Incorporation or Organization)
    
    (I.R.S. Employer Identification No.)
 115 S. Second Avenue West
Newton, Iowa 50208
(Address of principal executive offices) Registrants telephone number, including area code: (641) 787-2000 Not Applicable
(Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o Applicable Only to Corporate Issuers Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act). Yes o or No þ The number of shares of the registrants common stock, $.01 par value, outstanding as of April
29, 2005 was 30,864,195.




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TABLE OF CONTENTS PagePART I. FINANCIAL INFORMATION
    
    
    1ITEM 1. FINANCIAL STATEMENTS
    
    
    1ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
    
    
    11ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    25ITEM 4. CONTROLS AND PROCEDURES
    
    
    25PART II. OTHER INFORMATION
    
    
    26ITEM 1. LEGAL PROCEEDINGS
    
    
    26ITEM 6. EXHIBITS
    
    
    26Certification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification of CEO Pursuant to Section 906Certification of CFO Pursuant to Section 906
  i




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##### Table of Contents



PART I. FINANCIAL INFORMATION 
 ITEM 1. FINANCIAL STATEMENTS IOWA TELECOMMUNICATIONS SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)(dollars in thousands) December 31,
    
    
    March 31,ASSETS
    
    2004
    
    
    2005CURRENT ASSETS:Cash and cash equivalents
    
    $
    2,874
    
    
    $
    4,107Accounts receivable, net
    
    
    19,416
    
    
    
    18,151Inventories
    
    
    2,979
    
    
    
    3,579Prepayments and other current assets
    
    
    3,224
    
    
    
    2,781Total Current Assets
    
    
    28,493
    
    
    
    28,618PROPERTY, PLANT AND EQUIPMENT:Property, plant and equipment
    
    
    496,145
    
    
    
    501,319Accumulated depreciation
    
    
    (164,409
    )
    
    
    (175,750
    )Net Property, Plant and Equipment
    
    
    331,736
    
    
    
    325,569GOODWILL
    
    
    460,113
    
    
    
    460,113INTANGIBLE ASSETS AND OTHER, net
    
    
    15,800
    
    
    
    22,699INVESTMENT IN AND RECEIVABLE FROM THE RURAL
TELEPHONE FINANCE COOPERATIVE
    
    
    16,642
    
    
    
    14,085Total Assets
    
    $
    852,784
    
    
    $
    851,084LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Revolving credit facility
    
    $
    41,507
    
    
    $
    34,000Accounts payable
    
    
    15,889
    
    
    
    12,793Advanced billings and customer deposits
    
    
    6,525
    
    
    
    6,437Accrued and other current liabilities
    
    
    23,123
    
    
    
    24,041Total Current Liabilities
    
    
    87,044
    
    
    
    77,271LONG-TERM DEBT
    
    
    477,778
    
    
    
    477,778OTHER LONG-TERM LIABILITIES
    
    
    12,000
    
    
    
    12,691Total Liabilities
    
    
    576,822
    
    
    
    567,740COMMITMENTS AND CONTINGENCIES (Note 8)STOCKHOLDERS EQUITY:Preferred stock, $0.01 par value, 50,000,000 shares authorized,
no shares issued and outstanding
    
    
    
    
    
    
    Common stock, $0.01 par value, 100,000,000 shares authorized,
30,864,195 issued and outstanding
    
    
    309
    
    
    
    309Additional paid-in capital
    
    
    314,634
    
    
    
    314,988Retained deficit
    
    
    (38,897
    )
    
    
    (39,553
    )Other comprehensive income (loss)
    
    
    (84
    )
    
    
    7,600Total Stockholders Equity
    
    
    275,962
    
    
    
    283,344Total Liabilities and Stockholders Equity
    
    $
    852,784
    
    
    $
    851,084
 See notes to condensed consolidated financial statements. 1




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IOWA TELECOMMUNICATIONS SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)(in thousands, except per share data) Three Months EndedMarch 31,
    
    
    March 31,2004
    
    
    2005REVENUE AND SALES:Local services
    
    $
    17,762
    
    
    $
    18,807Network access services
    
    
    23,665
    
    
    
    25,502Toll services
    
    
    5,575
    
    
    
    5,989Other services and sales
    
    
    6,430
    
    
    
    7,203Total Revenues and Sales
    
    
    53,432
    
    
    
    57,501OPERATING EXPENSES:Cost of services and sales
    
    
    12,849
    
    
    
    15,533Selling, general and administrative
    
    
    9,193
    
    
    
    10,118Depreciation and amortization
    
    
    11,800
    
    
    
    12,343Total Operating Costs and Expenses
    
    
    33,842
    
    
    
    37,994OPERATING INCOME
    
    
    19,590
    
    
    
    19,507OTHER INCOME (EXPENSE):Interest and dividend income
    
    
    918
    
    
    
    159Interest expense
    
    
    (12,843
    )
    
    
    (7,743
    )Other, net
    
    
    
    
    
    
    (79
    )Total Other Expense, net
    
    
    (11,925
    )
    
    
    (7,663
    )NET INCOME
    
    
    7,665
    
    
    
    11,844GAIN ON REDEMPTION OF REDEEMABLE
CONVERTIBLE PREFERRED STOCK
    
    
    57,681
    
    
    
    PREFERRED DIVIDEND
    
    
    (2,056
    )
    
    
    INCOME AVAILABLE FOR COMMON STOCKHOLDERS
    
    $
    63,290
    
    
    $
    11,844BASIC  Earnings Per Share
    
    $
    2.80
    
    
    $
    0.38BASIC  Weighted Average Number of Shares Outstanding
    
    
    22,601
    
    
    
    30,864DILUTED  Earnings Per Share
    
    $
    1.88
    
    
    $
    0.37DILUTED  Weighted Average Number of Shares Outstanding
    
    
    34,825
    
    
    
    31,594
 See notes to condensed consolidated financial statements. 2




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IOWA TELECOMMUNICATIONS SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(unaudited)(dollars in thousands) Additional
    
    
    
    
    
    
    OtherCommon
    
    
    Common
    
    
    Paid-In
    
    
    Retained
    
    
    ComprehensiveShares
    
    
    Stock
    
    
    Capital
    
    
    Earnings
    
    
    Income
    
    
    TotalBalance, January 1, 2004
    
    
    22,601,037
    
    
    $
    226
    
    
    $
    179,774
    
    
    $
    (103,325
    )
    
    $
    
    
    
    $
    76,675Net Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    63,290
    
    
    
    
    
    
    
    63,290Balance, March 31, 2004
    
    
    22,601,037
    
    
    $
    226
    
    
    $
    179,774
    
    
    $
    (40,035
    )
    
    $
    
    
    
    $
    139,965Balance, January 1, 2005
    
    
    30,864,195
    
    
    $
    309
    
    
    $
    314,634
    
    
    $
    (38,897
    )
    
    $
    (84
    )
    
    $
    275,962Net Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,844
    
    
    
    
    
    
    
    11,844Compensation from compensatory
stock option plans
    
    
    
    
    
    
    
    
    
    
    354
    
    
    
    
    
    
    
    
    
    
    
    354Other comprehensive income (loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,684
    
    
    
    7,684Dividends Declared
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12,500
    )
    
    
    
    
    
    
    (12,500
    )Balance, March 31, 2005
    
    
    30,864,195
    
    
    $
    309
    
    
    $
    314,988
    
    
    $
    (39,553
    )
    
    $
    7,600
    
    
    $
    283,344
 See notes to condensed consolidated financial statements. 3




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IOWA TELECOMMUNICATIONS SERVICES, INC.ANDSUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)(dollars in thousands) Three Months EndedMarch 31, 2004
    
    
    March 31, 2005CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    7,665
    
    
    $
    11,844Adjustments to reconcile net income to cash provided
by operating activities:Depreciation
    
    
    11,230
    
    
    
    11,750Amortization of intangible assets
    
    
    570
    
    
    
    593Non-cash stock based compensation expense
    
    
    
    
    
    
    354Changes in operating assets and liabilities:Receivables
    
    
    828
    
    
    
    1,265Inventories
    
    
    969
    
    
    
    (600
    )Accounts payable
    
    
    (745
    )
    
    
    (3,096
    )Other assets and liabilities
    
    
    214
    
    
    
    (2,339
    )Net Cash Provided by Operating Activities
    
    
    20,731
    
    
    
    19,771CASH FLOWS FROM INVESTING ACTIVITIES:Capital expenditures
    
    
    (6,552
    )
    
    
    (5,630
    )Business acquisition
    
    
    (1,697
    )
    
    
    Net Cash used in Investing Activities
    
    
    (8,249
    )
    
    
    (5,630
    )CASH FLOWS FROM FINANCING ACTIVITIES:Net change in revolving credit facility
    
    
    
    
    
    
    (7,507
    )Redemption of redeemable preferred stock
    
    
    (100,000
    )
    
    
    Issuance of senior subordinated notes
    
    
    66,000
    
    
    
    Payment of debt issuance costs
    
    
    (1,974
    )
    
    
    Payment on long-term debt
    
    
    (8,250
    )
    
    
    Dividends paid
    
    
    
    
    
    
    (5,401
    )Net Cash Used in Financing Activities
    
    
    (44,224
    )
    
    
    (12,908
    )NET CHANGE IN CASH AND CASH EQUIVALENTS
    
    
    (31,742
    )
    
    
    1,233CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD
    
    
    36,849
    
    
    
    2,874CASH AND CASH EQUIVALENTS AT
END OF PERIOD
    
    $
    5,107
    
    
    $
    4,107Cash paid for interest
    
    $
    12,695
    
    
    $
    9,427SUPPLEMENTAL NON CASH ACTIVITIES:During the three months ended March 31, 2004, the Company
recorded undeclared and unpaid preferred stock dividends of
$2,056.Dividends on common stock of $12,500 were declared on
March 15, 2005 for shareholders of record as of March 31, 2005
and the dividends were paid on April 15, 2005.
 See notes to condensed consolidated financial statements. 4




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IOWA TELECOMMUNICATIONS SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements of Iowa Telecommunications Services,
Inc. and Subsidiaries (the Company) have been prepared by the Company pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and disclosures normally
included in annual financial statements prepared in accordance with accounting principles generally
accepted in the United States of America have been omitted pursuant to such rules and regulations.
In the opinion of the Companys management, all adjustments (consisting of only normal and
recurring accruals) have been made to present fairly the financial positions, the results of
operations and cash flows for the periods presented. The results of operations for the periods
presented are not necessarily indicative of the results to be expected for the full year. Although
the Company believes that the disclosures are adequate to make the information presented not
misleading, these financial statements should be read in conjunction with the Companys audited
consolidated financial statements as of and for the year ended December 31, 2004, that are included
in the Companys most recently filed annual report on Form 10-K. 2. EARNINGS PER SHARE Basic earnings per share is computed based on the weighted average number of common shares
outstanding. Diluted earnings per share is computed based on the weighted average outstanding
common shares plus equivalent shares assuming exercise of stock options and conversion of
outstanding convertible securities, where dilutive. The following is a reconciliation between
basic and diluted weighted average shares outstanding: Three Months EndedMarch 31, 2004
    
    
    March 31, 2005(in thousands, except per share data)Net Income
    
    $
    7,665
    
    
    $
    11,844Gain on redemption of redeemable convertible
preferred stock
    
    
    57,681
    
    
    
    Preferred dividend
    
    
    (2,056
    )
    
    
    Income available to common stockholders  basic
    
    
    63,290
    
    
    
    11,844Effects of dilutive securities:Preferred dividend
    
    
    2,056
    
    
    
    Income available to common stockholders  diluted
    
    $
    65,346
    
    
    $
    11,844Weighted average shares outstanding  basic
    
    
    22,601
    
    
    
    30,864Diluted shares outstanding:Weighted average shares outstanding
    
    
    22,601
    
    
    
    30,864Add shares contingently issuable upon conversion
of preferred securities
    
    
    12,224
    
    
    
    Add shares issuable upon exercise of stock
options, net
    
    
    
    
    
    
    730Weighted average shares outstanding  diluted
    
    
    34,825
    
    
    
    31,594Earnings Per Share:Basic
    
    $
    2.80
    
    
    $
    0.38Diluted
    
    $
    1.88
    
    
    $
    0.37
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As of March 31, 2005 and March 31, 2004, total options outstanding were 1,195,919 and 2,227,714
respectively. At March 31, 2004, 2,227,714 options were outstanding, with exercise prices in
excess of the market value of common stock and, therefore, were excluded from the diluted earnings
per share calculation. 3. EMPLOYEE BENEFIT PLANS Retirement Pension Plan The Company sponsors the Iowa Telecom Pension Plan (the Plan), a defined benefit pension plan
that covers many former GTE employees and most union employees. The provisions of the Plan were
assumed by the Company in connection with the GTE Acquisition. The Plan generally provides for
employee retirement at age 65 with benefits based upon length of service and compensation. The Plan
provides for early retirement, lump sum death benefits, and various annuity options. No company
contributions were made during the first quarter of 2005. Components of pension benefit costs are as follows: Three Months EndedMarch 31, 2004
    
    
    March 31, 2005(in thousands)Pension Benefit Cost:Service cost
    
    $
    242
    
    
    $
    267Interest cost
    
    
    334
    
    
    
    384Expected return on plan assets
    
    
    (225
    )
    
    
    (262
    )Amortization of unrecognized actuarial loss
    
    
    69
    
    
    
    97Net periodic benefit cost
    
    $
    420
    
    
    $
    486
 Post Retirement Benefits The Company assumed a postretirement benefit obligation plan for employees who qualified for
benefits at the date of the GTE Acquisition. This plan provides for certain medical and life
insurance benefits to select employees who satisfy the requirements for an early or normal pension
under the defined benefit pension plan. Components of postretirement benefit costs and weighted average actuarial assumptions are as
follows: Three Months EndedMarch 31, 2004
    
    
    March 31, 2005(in thousands)Postretirement Benefit Cost:Service cost
    
    $
    51
    
    
    $
    46Interest cost
    
    
    138
    
    
    
    134Amortization of unrecognized net actuarial loss
    
    
    32
    
    
    
    49Amortization of unrecognized prior service cost
    
    
    (20
    )
    
    
    (39
    )Net periodic benefit cost
    
    $
    201
    
    
    $
    190
 6




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4. LONG-TERM DEBT Credit Facilities As a part of our initial public offering and the related debt refinancing, we entered into new
credit facilities with a group of lenders, including the Rural Telephone Finance Cooperative,
providing for a total of up to $577.8 million in term and revolving credit facilities and retired
the previously outstanding senior credit facility with the Rural Telephone Finance Corporation. As
of March 31, 2005, we had outstanding $477.8 million of senior debt under the new term facilities
and $34.0 million drawn under the $100.0 million revolving credit facility. The details of the
facilities are as follows: The revolving credit facility will expire in 2011 and permits borrowings up to the aggregate
principal amount of $100.0 million (less amounts reserved for letters of credit up to a maximum
amount of $25 million). As of March 31, 2005, $34.0 million was outstanding on the revolving
credit facility and $66.0 million was available. Borrowings under the new revolving credit
facility bear interest per annum at either (a) the London inter-bank offered rate, or LIBOR, plus
2.0% or (b) a base rate plus 1.0%. As of March 31, 2005, we had $29.0 million outstanding under
LIBOR elections at an average all-in rate of 4.7% and $5.0 million outstanding under the base rate
election with an all-in rate of 6.75%. Term Loan B is a $400.0 million senior secured term facility maturing in 2011, bearing interest per
annum at either (a) LIBOR plus 2.0% or (b) a base rate plus 1.0%. As of March 31, 2005, $350
million was based upon a LIBOR election effective through June 30, 2005, at an all-in rate of
5.10%. We have entered into an interest rate swap to fix the rate on $350 million of Term Loan B
as more fully described below. As of March 31, 2005, the interest rate on the remaining $50
million was based upon a LIBOR election effective through June 9, 2005 at an all-in rate of 4.97%. Term Loan C is a $70.0 million senior secured term facility maturing in 2011, bearing interest per
annum at either (a) a fixed rate or (b) a Rural Telephone Finance Cooperative variable rate plus
0.85%. Upon the expiration of the 6.65% fixed interest rate on Term Loan C in November 2007, the
interest rate on such term loan will convert to the Rural Telephone Finance Cooperative base
variable rate plus 0.85%. Term Loan D is a $7.8 million senior secured term facility maturing in 2011, bearing interest per
annum at either (a) a fixed rate or (b) a Rural Telephone Finance Cooperative variable rate plus
0.85%. Upon the expiration of the 6.65% fixed interest rate Term Loan D has in November 2007,
interest on such term loan will convert to the Rural Telephone Finance Cooperative variable rate
plus 0.85%. As a condition of borrowing under Term Loans C and D, we are required to invest $7.8 million,
representing 10% of the total amounts of Term Loans C and D, in Subordinated Capital Certificates
(SCCs) of the Rural Telephone Finance Cooperative. SCCs are non-interest bearing but, as a
member of the Rural Telephone Finance Cooperative, we share proportionately in the institutions
net earnings. The Rural Telephone Finance Cooperative will redeem the SCCs in proportion to our
principal repayments on Term Loans C and D. The credit facilities are secured by substantially all of our tangible and intangible assets,
properties and revenues as well as those of all of our current and future subsidiaries. The credit
facilities will be guaranteed by all of our current and future subsidiaries. The credit facilities permit us to pay dividends to holders of our common stock; however, they
contain significant restrictions on our ability to do so. The credit facilities contain certain
negative covenants that, among other things, limit or restrict our ability (as well as those of our
subsidiaries) to: create liens and encumbrances; incur debt, issue preferred stock, or enter into
leases and guarantees; enter into loans, investments and acquisitions; make asset sales, transfers
or dispositions; change lines of business; enter into hedging agreements; pay dividends, redeem
stock, or make certain restricted payments; amend material debt agreements or other material
contracts; engage in certain transactions with affiliates; enter into sale/leaseback or synthetic
lease transactions; grant negative pledges or agree to such other restrictions relating to
subsidiary dividends and distributions; make changes to our fiscal year and engage in mergers and
consolidations. 7




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In addition, the financial covenants under the credit facilities specify, among other things,
certain fixed charge coverage ratios and a maximum total leverage ratio, as defined, all of which
we were in compliance with at March 31, 2005. Interest Rate Swap On November 4, 2004 we entered into an interest rate swap agreement with a nationally recognized
commercial bank that effectively fixes the interest rate we will pay on specified portions of our
indebtedness under Term Loan B. Pursuant to this swap, from November 5, 2004 through December 30,
2007 the interest on $350.0 million of our indebtedness under Term Loan B will be fixed at a
weighted average rate of 5.69%; from December 31, 2007 through December 30, 2008 the interest rate
on $285.3 million of such indebtedness will be fixed at a weighted average rate of 5.76%; and from
December 31, 2008 through November 4, 2009 the interest rate on $142.7 million of such indebtedness
will be fixed at 5.87%. 5. REPURCHASE OF REDEEMABLE CONVERTIBLE PREFERRED STOCK On March 5, 2004, the Company agreed to repurchase its Series A mandatorily redeemable convertible
preferred stock and related accrued preferred stock dividends for an aggregate purchase price of
$100 million. The recorded amounts of preferred stock and related accrued preferred stock dividend
were $125 million and $32.7 million, respectively, as of closing of the repurchase on March 26,
2004. The repurchase was financed through a combination of funds received from the issuance of $66
million of senior subordinated notes and cash on hand. 6. STOCK INCENTIVE PLAN The Iowa Telecommunications Services, Inc. 2002 Stock Incentive Plan (the Incentive Plan) allows
for the issuance of incentive stock options or nonqualified stock options. Under the Incentive
Plan, options have been granted for the purchase of 2,227,714 shares of which 1,031,795 have been
redeemed for cash and 1,195,919 remain outstanding. No new options will be granted under the
Incentive Plan. The term of each option did not exceed 10 years from the date of grant. Options
granted to employees vested over 3 to 5 years from the date of the grant. All unvested options
outstanding at the time of the closing of the Companys initial public offering in November 2004
vested pursuant to the terms of the Incentive Plan. The exercise price for unexercised options is
automatically decreased by the amount of dividends that would have been paid on the shares issuable
upon exercise. During 2004, the Company adopted the fair value recognition provisions of SFAS No. 123 Accounting
for Stock-Based Compensation, using the retroactive restatement method described in SFAS No. 148,
Accounting for Stock-Based Compensation  Transition and Disclosure, effective January 1, 2004.
Under the fair value recognition provisions of SFAS No. 123, stock-based compensation cost is
recognized as expense over the vesting period. In connection with the use of the retroactive
restatement method, the Company calculated the fair value of outstanding awards using the minimum
value method as if the fair value method of SFAS No. 123 had been applied from its original
effective date. The Company recorded less than $1,000 of stock-based compensation expense during
the three months ended March 31, 2004. During the three months ended March 31, 2005, the Company
recorded $354,000 of stock-based compensation expense to reflect the change in fair value of the
outstanding options as a result of the reduction of the exercise price from the declaration of a
cash dividend on March 15, 2005. The fair value of each option grant is estimated on the date of grant using the Black-Scholes
option-pricing model. There were no options granted during the three months ended March 31, 2005
and 27,028 granted during the three months ended March 31, 2004. The following weighted-average
assumptions were used in determining the options fair value: dividend yield of 0%; average
risk-free interest rate of approximately 5%; and expected lives of 10 years from grant date.
Because the Company was not a public entity, the volatility of the stock was excluded in estimating
the options value, as permitted under SFAS No. 123. To determine the stock-based compensation expense which arises from the change in fair value of the
options upon the reduction of the exercise price resulting from the declaration of a cash dividend,
the following weighted-average assumptions were used: dividend yield of 0%; average risk-free
interest rate of approximately 5%; and expected 8




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remaining lives of 4.6 years. Because the Companys stock had not been publicly traded long enough
to establish a reliable historical volatility rate, the average historical volatility rate of 34%
for a pool of similar entities was used. A summary of the status of the Incentive Plan as of March 31, 2005 and 2004, and the changes during
the three-month periods then ended is presented below: March 31, 2004
    
    
    March 31, 2005Average
    
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    
    ExercisePrice
    
    
    
    
    
    
    PriceFixed Options
    
    Shares
    
    
    per Share
    
    
    Shares
    
    
    per ShareOUTSTANDING AT
BEGINNING OF QUARTER
    
    
    2,200,686
    
    
    $
    8.04
    
    
    
    1,195,919
    
    
    $
    7.90Granted
    
    
    27,028
    
    
    
    11.10
    
    
    
    
    
    
    
    OUTSTANDING AT END OF
QUARTER(1)
    
    
    2,227,714
    
    
    $
    8.08
    
    
    
    1,195,919
    
    
    $
    7.50Options exercisable at quarter end
    
    
    1,718,524
    
    
    $
    7.99
    
    
    
    1,195,919
    
    
    $
    7.50Weighted-average grant date fair
value of options granted during
the quarter
    
    
    27,028
    
    
    $
    0.67
    
    
    
    
    
    
    $
    
   (1) The weighted average exercise price of options exercisable at March 31, 2005
reflects the reduction in accordance with the Incentive Plan which resulted from the
declaration of a $.405 per share cash dividend. The cash dividend was declared March 15,
2005. The following table summarizes information about stock options outstanding at March 31, 2005: Options Outstanding
    
    
    Options ExercisableWeightedExercise
    
    
    
    
    
    Average
    
    
    
    
    
    
    WeightedPrice
    
    
    
    
    
    Remaining
    
    
    
    
    
    
    Averageper Share
    
    
    
    
    
    Contractual Life
    
    
    
    
    
    
    Exercise PriceRange
    
    Number
    
    
    In Years
    
    
    Number
    
    
    per Share$7.00 to $7.50
    
    
    1,021,546
    
    
    
    4.6
    
    
    
    1,021,546
    
    
    $
    7.38$7.51 to $8.00
    
    
    159,178
    
    
    
    4.9
    
    
    
    159,178
    
    
    
    7.93$10.25 to $10.75
    
    
    15,195
    
    
    
    6.5
    
    
    
    15,195
    
    
    
    10.52
 Pursuant to the Incentive Plan, all options became fully vested on November 23, 2004 as a result of
the change in share ownership resulting from the Companys initial public offering of common stock.
However, in accordance with agreements entered into in connection with our initial public
offering, the unexercised options generally may not be exercised for a period of at least 180 days
after the initial public offering. 7. DISCLOSURES ABOUT FAIR VALUE OF INTEREST RATE SWAP On November 4, 2004, the Company entered into an interest rate swap agreement in contemplation of
the recapitalization which occurred on November 23, 2004. The purpose of the swap agreement is to
adjust the interest rate profile of our debt obligations and to achieve a targeted mix of floating
and fixed rate debt. Effective November 23, 2004, the Company designated the swap agreement as a hedge against the
variability of interest payments resulting from fluctuations in market interest rates. The hedged
item is $350 million of the 9




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##### Table of Contents



Companys Term Loan B. In the first quarter ended March 31, 2005, the Company recognized a gain of
$7.6 million resulting from the increase in fair market value of the swap instrument. The portion
of the gain attributable to hedge ineffectiveness, $1,000, is recorded in the Other income section
of the Companys Consolidated Statement of Operations. The portion of the gain attributable to
hedge effectiveness, $7.6 million, is recorded in the Other comprehensive income section of the
Companys Statement of Stockholders Equity. In assessing hedge effectiveness, no portion of the
gain or loss from the swap is excluded. The fair value of our interest rate swap has been calculated by discounting the future cash flows
of both the fixed rate and variable rate interest payments. The discount rate was derived from a
yield curve created by a nationally recognized financial institution. The fair value and the
carrying amount of the interest rate swap as of March 31, 2005 was approximately $9.0 million and
is recorded in the Intangible and Other Assets section of our Consolidated Balance Sheets. The
entry to adjust the fair value of the interest rate swap has not been tax effected as valuation
allowance has been provided at March 31, 2005 for the net deferred tax assets due to the Companys
cumulative losses. The Company did not have any interest rate swaps at any time during the first
quarter ended March 31, 2004. 8. COMMITMENTS AND CONTINGENCIES The Company is involved in various claims and legal actions arising in the ordinary course of
business. In the opinion of management, the ultimate disposition of these matters is not expected
to have a material adverse effect on the Companys financial position, results of operations or
cash flows. 9. NEW ACCOUNTING PRONOUNCEMENT In December 2004, the FASB issued SFAS No. 123 (Revised), Share-Based Payment. This statement
replaces SFAS No. 123, Accounting for Stock-Based Compensation and supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees. SFAS 123R requires companies to apply a
fair-value-based measurement method in accounting for share-based payment transactions with
employees and to record compensation cost for all stock awards granted after the required effective
date and to awards modified, repurchased, or cancelled after that date. In addition, we are
required to record compensation expense (as previous awards continue to vest) for the unvested
portion of previously granted awards that remain outstanding at the date of adoption, if any. On
April 14, 2005 the Securities and Exchange Commission announced the adoption of a rule that defers
the effective date for adoption to the first fiscal year beginning after June 15, 2005. Adoption
of this standard is not expected to have a material effect on the Companys financial position,
results of operations or cash flows as all of our outstanding stock options were fully vested at
the date of issuance of SFAS 123R. Modifications to outstanding stock options after the
effective date of the standard may result in additional compensation expense pursuant to the
provisions of SFAS 123R. 10




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Information contained herein contains forward-looking statements which can be identified by the
use of forward-looking terminology such as believes, expects, may, will, should, or
anticipates or the negative thereof or variations thereon or comparable terminology, or by
discussions of strategy. No assurance can be given that the future results covered by the
forward-looking statements will be achieved. Some of the matters set forth in the Risk Factors
section of our Annual Report on Form 10-K for the year ended December 31, 2004 constitute
cautionary statements identifying factors with respect to such forward-looking statements,
including certain risks and uncertainties, that could cause actual results to vary materially from
the future results indicated in such forward-looking statements. Other factors could also cause
actual results to vary materially from the future results indicated in such forward-looking
statements. Overview General We are the largest provider of wireline local exchange telecommunications services to residential
and business customers in rural Iowa, serving over 440 communities across the state. We are the
second-largest local exchange carrier in Iowa and estimate that we are the fifteenth largest in the
United States. We operate 294 telephone exchanges as the incumbent or historical local exchange
carrier and are currently the sole telecommunications company providing wireline services in
approximately 86% of the communities where we serve as the incumbent. Together with our
competitive local exchange carrier subsidiary, we provide services to approximately 266,400 access
lines in Iowa. Our core businesses are the provision of local telephone service and network access to other
telecommunications carriers for calls originated or terminated on our network. In addition to
these core activities, which generated 77% of our total revenues in the first quarter of 2005, we
provide long distance service, dial-up and DSL Internet access and other communications services.
In 2002, as part of our strategy of pursuing low-cost growth beyond our current service area, we
began to compete for customers in adjacent markets in Iowa through our competitive local exchange
carrier subsidiary, Iowa Telecom Communications, Inc. (ITC). Factors Affecting Our Operating Performance We believe that a number of industry and company-specific factors have affected and will continue
to affect our results of operations. These factors include the following:  1.
    the effect on our revenues of flat or declining numbers of access lines and our strategic
response to this trend, which includes efforts to introduce enhanced local services and
additional services like dial-up and DSL Internet access and long distance service and to
cross-sell these services to our subscriber base;2.
    the effect on our revenues of our rate and pricing structure, including recent and potential
future changes in rate regulation at the state and federal levels;3.
    the effect of elections made on or after July 1, 2005 to deregulate retail local exchange
services in accordance with the new statutory provisions enacted in March 2005;4.
    our ability to control our variable operating expenses, such as sales and marketing expense;
and5.
    the development of our competitive local exchange carrier strategy. Revenues We derive our revenues from four sources: 11




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##### Table of Contents



Local Telephone Services. We receive revenues from providing local exchange telephone services.
These revenues include monthly subscription charges for basic service, as well as charges for
extended area service (mandatory expanded calling service to selected nearby communities at a flat
monthly rate), local private line services and enhanced calling features, such as voice mail,
caller ID and 3-way calling. During the quarter ended March 31, 2004, we also received revenues
from expanded local calling plans (optional service to additional selected nearby communities at an
additional flat monthly rate). We discontinued these expanded local calling plans in the third
quarter of 2004. Network Access Services. We receive revenues from charges established to compensate us for the
origination, transport and termination of calls of long distance and other interexchange carriers.
These include subscriber line charges imposed on end users, and switched and special access charges
paid by carriers. In addition, we receive federal funds, representing approximately 1% of our
total revenue in 2004, as universal service support as a result of the switched access support
provisions of the FCCs CALLS Order. Switched access charges for long distance services within
Iowa are based on rates approved by the Iowa Utilities Board. Switched and special access charges
for interstate and international services are based on rates approved by the FCC. Toll Services. We receive revenues for providing toll, or long distance, services to our
customers. This revenue category also includes fees relating to our provision of directory
assistance, operator assistance and long distance private lines. Other Services and Sales. We receive revenues from monthly recurring charges for dial-up and DSL
Internet access services. Other services and sales also include revenues from directory
publishing, inside line care and the sale and maintenance of customer premise equipment. The following table summarizes our revenues and sales from these sources: % of Total Revenues andFor the Three Months Ended
    
    
    Sales for the Three MonthsMarch 31,
    
    
    Ended March 31,2004
    
    
    2005
    
    
    2004
    
    
    2005Local services
    
    $
    17,762
    
    
    $
    18,807
    
    
    
    34
    %
    
    
    33
    %Network access services
    
    
    23,665
    
    
    
    25,502
    
    
    
    44
    %
    
    
    44
    %Toll services
    
    
    5,575
    
    
    
    5,989
    
    
    
    10
    %
    
    
    10
    %Other services and sales
    
    
    6,430
    
    
    
    7,203
    
    
    
    12
    %
    
    
    13
    %Total
    
    $
    53,432
    
    
    $
    57,501
    
    
    
    100
    %
    
    
    100
    %
 Access Line Trends.The number of access lines served is a fundamental factor affecting a
telecommunications providers revenues. Reflecting a general trend in the rural local exchange
carrier industry in the past few years, the number of access lines we serve as an incumbent local
exchange carrier has been gradually decreasing. We expect that this trend will continue. As
substantially all of our revenues result from our relationships with customers who utilize our
access lines and the level of activity recorded on those lines, the access line trend has a direct
adverse impact on our revenues. Our response to this trend will have an important impact on our
future revenues. Our primary strategy to respond to this trend consists of leveraging our strong
incumbent market position to increase revenue per access line by selling additional services to our
customer base, and to promote our DSL Internet access service offering, which is often used in lieu
of additional access lines devoted to internet usage. In addition, we expect to obtain some new
access lines as we pursue limited expansion of our service area through our competitive local
exchange carrier subsidiary and, potentially, through selected acquisitions of lines from other
telecommunications companies. However, we believe that the number of access lines served is not
the sole meaningful indicator of our operating prospects and that, given our relatively stable
subscriber base and ability to offer additional services, average revenue per access line is also a
significant metric for us. The table below indicates the total number of access lines served by us, the number of customers
subscribing to the indicated types of service, and average revenue per access line, as of the dates
and for the periods shown: 12




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##### Table of Contents



As of and for theThree Months Ended March 31,2004
    
    
    2005Incumbent local exchange access
lines(1)
    
    
    260,500
    
    
    
    249,000Competitive local exchange carrier
access lines (2)
    
    
    7,000
    
    
    
    17,400Total access lines
    
    
    267,500
    
    
    
    266,400Long distance subscribers
    
    
    116,000
    
    
    
    139,200Dial-up Internet subscribers
    
    
    53,900
    
    
    
    49,300DSL subscribers
    
    
    8,600
    
    
    
    19,600Average monthly revenue per access
line (3)
    
    $
    67
    
    
    $
    72
   (1)
    
    Includes lines subscribed by our incumbent local exchange carrier retail customers and lines
subscribed by our wholesale customers who are competing local exchange carriers. Wholesale
access lines include: lines subscribed by our local exchange carrier competitors pursuant to
interconnection agreements on an unbundled network element basis, for which the competitive
local exchange carrier pays us a monthly fee; lines that we provide to competitive local
exchange carriers for resale to their subscribers, for which the competitive local exchange
carrier pays us a monthly fee equal to what we would charge our customers for local service
less an agreed discount; and shared lines, for which a competitive local exchange carrier pays
us a monthly fee to provide DSL service to its customers. We had 4,200 wholesale lines
subscribed at March 31, 2005, compared to 4,500 wholesale lines subscribed at March 31, 2004.(2)
    
    Access lines subscribed by retail customers of our competitive local exchange carrier
subsidiary, ITC.(3)
    
    Average monthly revenue per access line is computed by dividing the total revenue for the
period by the average of the access lines at the beginning and at the end of the period. We believe that one of the primary reasons for our loss of 11,500 incumbent local exchange carrier
access lines between March 31, 2004 and March 31, 2005 was customer response to the rate
increases we have instituted pursuant to our April 2004 rate settlement with the Iowa Utilities
Board. We will continue our strategy of increasing revenues by cross selling services to our existing
customer base, in the form of both bundled service packages and individual additional services.
Our numbers of long distance service subscribers increased by 20% from March 31, 2004 to March
31, 2005. While our dial-up Internet customers decreased by 4,600 from March 31, 2004 to March 31,
2005 as some dial-up Internet access service customers migrated to our DSL offering, our DSL
Internet access service customers increased by 11,000 over that same period. Even though our total
access line count fell by 0.4% from March 31, 2004 to March 31, 2005, average revenue per access
line grew by 7.5%. The primary contributor to our ability to maintain our revenue stream during a
time of decreasing access lines has been our success at selling additional services and our ability
to increase our pricing. The following is a discussion of the major factors affecting our access line count: Cyclical Economic and Industry Factors. We believe that the general downturn in economic
conditions since 2000 has had a negative effect on our access line count. We expect that improved
performance in the Iowa economy will stabilize this cyclical factor. In addition, incumbent local
exchange carriers generally experienced an unusual increase in access line demand during the late
1990s, for example, as households purchased additional lines devoted to dial-up Internet access.
In our view, this spike in access line demand was not sustainable over the long term, and current
access line levels are more indicative of underlying demand. Competition. When we purchased GTE Midwest Incorporateds assets in June 2000, competitive local
exchange carriers had begun to offer service, or were in the process of network overbuilding, in
approximately 31 of the 425 incumbent local exchange carrier communities we serve, and we have
experienced line losses to these competitive 13




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##### Table of Contents



local exchange carriers. We believe that these competitive local exchange carrier incursions and
subsequent line losses were related to customer dissatisfaction with the previous providers
service. Since 2001, we believe we have slowed significantly the loss of customers to competitive
local exchange carriers by providing additional service offerings, focusing our marketing efforts
and implementing competitive pricing. In addition, we have experienced and expect to continue experiencing some line losses due to
competition from wireless providers, but cannot precisely quantify the effect of this competition
on us. We are responding proactively to the threat of wireless competition by offering bundled
service packages that include blocks of long distance minutes designed to meet the demand of our
customers who wish to purchase both local and long distance services in a package, as is typically
offered by wireless providers. In response to the inroads that competitors have made in certain markets, the Iowa Utilities Board
initiated a proceeding in 2004 to consider deregulating local service in exchanges where
competitors have gained significant market share. The Iowa Utilities Board determined that
effective competition existed in 14 exchanges where we operate as the incumbent local exchange
carrier and issued an order deregulating local service in these exchanges. In addition, in early
2005, the Iowa Utilities Board approved our request to modify our rates for local exchange services
in three exchanges in order to respond to a competitors lower rates. We believe implementation of
the Iowa Utilities Boards orders deregulating the 14 exchanges and approving competitively
responsive rates in the three exchanges will enhance our ability to compete and regain market share
in these exchanges. Also, in March 2005 the Iowa legislature enacted new statutory provisions
allowing a price regulated carrier like us to elect, after July 1, 2005, deregulation of all retail
local exchange services except single line flat-rated business and residential service, and further
providing that single line flat-rated business and residential service shall be deregulated as of
July 1, 2008 unless the Iowa Utilities Board determines that the public interest requires it to
extend its jurisdiction over such services to July 1, 2010. We believe that the gradual
deregulation of our business will enable us to better respond to competitive offerings by other
providers. Exchange Sales. We currently have agreed to two additional exchange sale transactions, subject to
certain regulatory approvals and conditions, in which we will sell approximately 800 lines and
2,200 lines, respectively. In each of these cases, we believe the sale price makes the disposal
economically compelling. We expect that the two pending sales will result in $13.2 million of net
cash, and as part of one transaction we have already purchased the buyers dial-up and DSL Internet
businesses since this component of the transaction did not require regulatory approval. Ancillary Effects of our Data Businesses. Part of our decreasing line count has been an ancillary
effect of our strategic focus on growing our DSL Internet access service business. As our Internet
service provider business expanded, some of our smaller competitors have cancelled their
connections to our network, connections that we had counted as access lines. Moreover, as we
increase DSL Internet access service penetration, customer demand for second lines for dial-up
Internet access service decreases accordingly, because DSL Internet access service obviates the
need for a second line. We believe that the revenue generated by our dial-up and DSL Internet
access services outweighs the effect of this type of access line loss. Our Rate and Pricing Structure Basic business and residential telephone service, intra-state switched access, extended area
service, 911 and E911 services, white pages directory listings and dual party relay service are all
regulated as basic communications services by the Iowa Utilities Board. The Iowa statutory price
regulation plan pursuant to which we operate provides a mechanism to adjust our rates for basic
communications services to reflect the impact of inflation. On April 2, 2004, we entered into a
settlement agreement relating to an Iowa Utilities Board rate proceeding we had initiated in 2002.
As a result of the settlement agreement, effective April 23, 2004, our monthly charges for basic
local service in all of our exchanges was $16.60 for residential customers and $32.09 for business.
Pursuant to our settlement agreement relating to the Iowa Utilities Board rate proceeding, most of
the resulting incremental revenues we will receive as a result of these rate increases must be
expended on capital improvements to our network. Effective January 17, 2005, our monthly charges
for basic local services became $16.98 for residential customers and $32.98 for business customers
pursuant to an inflationary increase allowed under the existing Iowa statutory price regulation
plan. During the first quarter of 2004, average monthly basic local services charges across all of
our exchanges were $12.15 and $25.09, respectively. 14




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##### Table of Contents



Certain local telecommunications services regulated by the Iowa Utilities Board not classified as
basic communications services, such as caller ID, call waiting, call forwarding and other enhanced
calling services, are regulated as non-basic communications services. We are allowed to increase
our rates each year for some or all of the non-basic communications services we provide by amounts
that will generate revenues from non-basic communications services that are 6% higher than the
revenues from such services during the prior year. Our rates for other services we provide, including local services like voice messaging, centrex
station lines, private lines and directory assistance, long-distance services and data services
like dial-up and DSL Internet access, are not price regulated. In the first quarter of 2005, 75.7% of our total revenues were generated from services that were
either unregulated or regulated in a manner that would allow us to increase our rates to match or
exceed that years rate of inflation up to 6%. Effective July 1, 2005, we may elect further deregulation of rates for some of our services under
legislation enacted in March 2005. Operating Expenses Categories of Operating Expense Our operating expenses are categorized as cost of services and sales; selling, general and
administrative expense; and depreciation and amortization. Cost of services and sales. This includes expense for salaries and wages relating to plant
operation and maintenance; other plant operations, maintenance and administrative costs; network
access costs; bad debt expense; operating tax expense and cost of sales for our dial-up and DSL
Internet access services and CPE products and services. Selling, general and administrative expense. This includes expense for salaries, wages and
benefits and contract service payments (e.g., legal fees) relating to customer and corporate
operations; recruiting costs; expenses for travel, lodging and meals; internal communications
costs; insurance premiums; and supplies and postage. Depreciation and amortization. This includes depreciation of our telecommunications network and
equipment, and amortization of intangible assets. Our Ability to Control Operating Expenses We strive to control expenses in order to maintain our operating margins. We anticipate that
operating expenses generally will remain stable in line with revenue growth. Because many of our
operating expenses, such as those relating to sales and marketing, are variable, we believe we can
calibrate expenses to growth in the business to a significant degree. Development of our Competitive Local Exchange Carrier Strategy Part of our business strategy is to use our competitive local exchange carrier subsidiary, ITC, to
pursue customers in markets adjacent to our rural local exchange carrier markets. We plan to
continue this strategy by seeking growth opportunities on a low-cost, selective basis. As of March 31, 2005, ITC served approximately 5,000 business and 12,400 residential access lines.
ITC accounted for 6.5% of Iowa Telecoms total access lines as of March 31, 2005. As of March 31,
2005, our investment in ITC was $3.1 million, the majority of which relates to customer acquisition
and marketing expense. Throughout 2005, we plan to maintain this limited investment approach as we
continue to grow our competitive local exchange carrier business. 15




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##### Table of Contents



Results of Operations The following table sets forth certain items reflected in our consolidated statements of operations
for the periods indicated, expressed as a percentage of total revenues and sales: For the Three Months EndedMarch 31,2004
    
    
    2005Total revenue and sales
    
    
    100
    %
    
    
    100
    %Cost of services and sales (excluding
expenses listed separately below)
    
    
    24
    
    
    
    27Selling, general and administrative
    
    
    17
    
    
    
    18Depreciation and amortization
    
    
    22
    
    
    
    21Operating income
    
    
    37
    
    
    
    34Total other expenses, net
    
    
    23
    
    
    
    13Net income
    
    
    14
    %
    
    
    21
    %
 Three Months Ended March 31, 2005 and 2004 Revenues and Sales The table below sets forth the components of our revenues and sales for the three months ended
March 31, 2005 compared to the three months ended March 31, 2004: For the Three Months EndedMarch 31,
    
    
    Change2004
    
    
    2005
    
    
    Amount
    
    
    Percent(dollars in thousands)Revenue and SalesLocal services
    
    $
    17,762
    
    
    $
    18,807
    
    
    $
    1,045
    
    
    
    5.9
    %Network access services
    
    
    23,665
    
    
    
    25,503
    
    
    
    1,838
    
    
    
    7.8
    %Toll services
    
    
    5,575
    
    
    
    5,988
    
    
    
    413
    
    
    
    7.4
    %Other services and sales
    
    
    6,430
    
    
    
    7,203
    
    
    
    773
    
    
    
    12.0
    %Total revenues and sales
    
    $
    53,432
    
    
    $
    57,501
    
    
    $
    4,069
    
    
    
    7.6
    %
 Local Services. Local services revenues increased $1.0 million, or 5.9%, for the first three
months of 2005 as compared to 2004, primarily due to $2.5 million of additional revenue as a result
of the new rates established pursuant to a rate increase settlement agreement we entered into on
April 2, 2004, with the Iowa Utilities Board. The new rates established under the settlement
agreement became effective on April 23, 2004. Enhanced local services revenue also increased by
$246,000 for first quarter of 2005 as compared to 2004, due to the growth of bundled product
offerings. The increased revenues were partially offset by a loss of $1.6 million in revenues
resulting from the discontinuance of the expanded local area calling plans during the third quarter
of 2004. Our historical ability to provide expanded local calling plans at favorable margins depended on the
existence of an agreement for mutual exchange of traffic with another telecommunications provider.
Expanded local calling plans allowed customers, for a fixed monthly fee, to increase the geographic
range of their local calling areas. That agreement terminated on July 31, 2004. As a result, we
have discontinued the expanded local calling plans and encouraged customers who subscribed to our
expanded local calling plans to replace those plans with substitute toll services. Network Access Services. Our network access service revenues increased $1.8 million, or 7.8%, for
the first three months of 2005 as compared to the same period in 2004. Revenues from switched
access services increased approximately $2.1 million, due primarily to an increase in access
minutes per line which is due in part to the elimination of the expanded local calling plans. That
increase was partially offset by a $326,000 decrease in revenue from the Universal Service Fund. 16




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##### Table of Contents



Toll Services. Our toll services revenues increased by $413,000, or 7.4%, for the first three
months of 2005 as compared to the same period in 2004. This revenue growth was attributable to an
increase in the number of long distance customers of approximately 23,200, or 20%, offset by a
decrease in average minutes of use per customer and average revenue per minute. Our growth in long
distance customers from March 31, 2004 to March 31, 2005 can be attributed in significant part to
the elimination of the expanded local calling plans. Other Services and Sales. Other services and sales revenues increased by $773,000, or 12.0%, for
the first three months of 2005 as compared to the first three months of 2004. The revenue increase
was primarily due to growth in the number of DSL Internet customers. DSL Internet access service
revenues increased $1.1 million, or 101.0%, due primarily to customer growth. We believe the
decline in dial-up Internet access service customers is the result of customer migration to
broadband products such as DSL. Operating Costs and Expenses The table below sets forth the components of our operating costs and expenses for first three
months of 2005 as compared to 2004. For the Three Months EndedMarch 31,
    
    
    Change2004
    
    
    2005
    
    
    Amount
    
    
    Percent(dollars in thousands)Operating Costs and Expenses:Cost of services and sales (exclusive of
items shown separately below)
    
    $
    12,849
    
    
    $
    15,533
    
    
    $
    2,684
    
    
    
    20.9
    %Selling, general and administrative
    
    
    9,193
    
    
    
    10,118
    
    
    
    925
    
    
    
    10.1
    %Depreciation and amortization
    
    
    11,800
    
    
    
    12,343
    
    
    
    543
    
    
    
    4.6
    %Total operating costs and expenses
    
    $
    33,842
    
    
    $
    37,994
    
    
    $
    4,152
    
    
    
    12.3
    %
 Cost of Services and Sales. Cost of services and sales increased $2.7 million, or 20.9%, for
the first three months of 2005 as compared to the same period in 2004. As a result of customer
growth, we experienced an increase in competitive local exchange carrier access lines which, in
turn, raised costs for providing this service by $1.0 million for the first three months of 2005 as
compared to the same period in 2004. The increase in long distance customers coupled with the
termination of the historical agreement for the exchange of traffic related to our discontinued
local calling plans, resulted in approximately $1.9 million of additional cost to deliver long
distance traffic. Selling, General and Administrative Costs. Selling, general and administrative costs increased
$925,000, or 10.1%, for the first three months of 2005 as compared to the same period in 2004. The
increase is primarily attributable to higher salary, wages and benefits and additional costs
related to being a publicly traded company. Contributing to the increase in salary, wages and
benefits was $354,000 of non-cash compensation expense related to exercise price reductions on
outstanding stock options. Depreciation and Amortization. Depreciation and amortization increased $543,000, or 4.6%, for the
first three months of 2005 as compared to the same period in 2004. This was primarily due to
higher average plant balances relating mainly to additions to our network facilities. 17




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##### Table of Contents



Other Income (Expense) The table below sets forth other income (expense) for the three months ended March 31, 2005 as
compared to the same period in 2004. For the Three Months EndedMarch 31,
    
    
    Change2004
    
    
    2005
    
    
    Amount
    
    
    Percent(dollars in thousands)Other Income (Expense)Interest and dividend income
    
    $
    918
    
    
    $
    159
    
    
    $
    (759
    )
    
    
    -82.7
    %Interest expense
    
    
    (12,843
    )
    
    
    (7,743
    )
    
    
    5,100
    
    
    
    39.7
    %Other, net
    
    
    
    
    
    
    (79
    )
    
    
    (79
    )
    
    NATotal other expense
    
    $
    (11,925
    )
    
    $
    (7,663
    )
    
    $
    4,262
    
    
    
    35.7
    %
 Interest and Dividend Income. Interest and dividend income decreased $759,000, or 82.7%,
primarily due to the reduction in patronage dividend income from the RTFC Subordinated Capital
Certificates which were partially redeemed in connection with the initial public offering and debt
refinancing in November 2004. Also contributing to the decrease was the reduction in interest
income resulting from the use of $34 million of cash on hand to redeem the Series A mandatorily
redeemable convertible preferred stock on March 26, 2004. Interest Expense. Interest expense decreased $5.1 million, or 39.7%, for first three months of
2005 as compared to the first three months of 2004, principally as a result of the reductions in
the amount of debt outstanding, and in the average interest rate on our new debt issued in
connection with our debt refinancing in November 2004. Other, Net. Other, net was a net expense of $79,000 for the first quarter of 2005 compared to $0
in the first quarter of 2004, related to the change in the fair value of the interest rate swap
agreement. Income Tax Expense A valuation allowance has been provided at March 31, 2005 for our net deferred tax assets, due to
our cumulative losses. We will continue to assess the recoverability of deferred tax assets and
the related valuation allowance. To the extent we generate taxable income in future years and it
is determined that such valuation allowance is no longer required, the tax benefit of the remaining
deferred tax assets will be recognized at such time. As of March 31, 2005, the balance of the
deferred tax asset and the valuation allowance was $18 million. Our unused tax net operating loss
carry forward was approximately $212 million, and will expire between 2020 and 2024. Our initial public offering resulted in an ownership change for purposes of Section 382 of the
Internal Revenue Code, and consequently our ability to utilize our net operating losses will be
subject to limitation each year. We currently anticipate that, as a result of such ownership
change, we will generally be limited by Section 382 to utilizing approximately $19 million of our
pre-transaction net operating losses annually. However, Internal Revenue Code Section 338 may
allow for an increase in this allowance for tax periods ending in 2005 through 2009. After 2009,
the IRC Section 382 limitation will apply. Furthermore, we expect that we will continue to be able
to take deductions related to the amortization of intangibles in excess of the amount recorded for
book purposes in the amount of approximately $40 million annually through 2014. Redemption of Preferred Stock On March 26, 2004, we repurchased our Series A mandatorily redeemable convertible preferred stock
and related accrued dividends for an aggregate purchase price of $100.0 million. The recorded
amounts of the preferred stock and the related accrued preferred stock dividend were $125.0 million
and $32.7 million, respectively, as of the redemption date of March 26, 2004. 18




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##### Table of Contents



Liquidity and Capital Resources Our short-term and long-term liquidity requirements arise primarily from: (i) interest payments
related to our credit facilities; (ii) capital expenditures, which totaled $5.6 million in the
first three months of 2005; (iii) working capital requirements; (iv) dividend payments on our
common stock; and (v) potential acquisitions. On December 17, 2004, our board of directors declared an initial dividend of $0.175 per share on
our common stock. This dividend was paid on January 17, 2005 to shareholders of record at the
close of business on December 31, 2004. On March 15, 2005, our board of directors declared a
dividend of $0.405 per share on our common stock. The dividend was paid on April 15, 2005 to
shareholders of record on March 31, 2005. The dividends represent an indicated annual dividend
rate of $1.62 per share. Our intention is to distribute a substantial portion of the cash
generated by our business to our shareholders in regular quarterly dividends to the extent we
generate cash in excess of operating needs, interest and principal payments on our indebtedness,
and capital expenditures. This policy reflects our judgment that our shareholders would be better
served if we distributed to them a substantial portion of the cash generated by our business. We intend to fund our operations, interest expense, capital expenditures, working capital
requirements and dividend payments on our common stock from cash from operations. For the three
months ended March 31, 2004 and 2005, cash provided by operating activities was $20.7 million and
$19.8 million, respectively. To fund any significant future acquisitions, we intend to use borrowings under our new revolving
credit facility or, subject to the restrictions in the new credit facilities, to arrange additional
funding through the sale of public or private debt and/or equity securities, including common
stock, or to obtain additional senior bank debt. Our ability to service our indebtedness will depend on our ability to generate cash in the future.
We will not be required to make any scheduled amortization payment under our credit facilities,
which will mature in 2011. However, we may be required to make annual mandatory prepayments under
our new credit facilities with a portion of our available cash. We will need to refinance all or a
portion of our indebtedness on or before maturity in 2011. Based on the dividend policy with respect to our common stock which our board of directors has
adopted, we may not have any significant cash available to meet any large unanticipated liquidity
requirements, other than available borrowings, if any, under our revolving credit facility. As a
result, we may not retain a sufficient amount of cash to finance growth opportunities, including
acquisitions, or unanticipated capital expenditures or to fund our operations. If we do not have
sufficient cash for these purposes, our financial condition and our business could suffer.
However, our board of directors may, in its discretion, amend or repeal this dividend policy to
decrease the level of dividends provided for under the policy, or discontinue entirely the payment
of dividends. We have historically funded our operations and capital expenditure requirements primarily from cash
from operations and our revolving line of credit. The following table summarizes our short-term
liquidity, as of March 31, 2005, and December 31, 2004: As ofDecember 31, 2004
    
    
    March 31, 2005(in thousands)Short-Term Liquidity:Current assets
    
    $
    28,493
    
    
    $
    28,618Current liabilities
    
    
    (87,044
    )
    
    
    (77,271
    )Net working capital
    
    $
    (58,551
    )
    
    $
    (48,653
    )Cash and cash equivalents
    
    $
    2,874
    
    
    $
    4,107Available on revolving credit facility
    
    $
    58,493
    
    
    $
    66,000
 The decrease in current liabilities from December 31, 2004 to March 31, 2005 is primarily due
to the use of cash generated from operations to reduce the amount outstanding on our revolving line
of credit. 19




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##### Table of Contents



The following table summarizes our sources and uses of cash for the three months ended March 31,
2004 and 2005. For the Three Months Ended March 31,Description
    
    2004
    
    
    2005(in thousands)Net Cash Provided (Used)Operating activities
    
    $
    20,731
    
    
    $
    19,771Investing activities
    
    
    (8,249
    )
    
    
    (5,630
    )Financing activities
    
    
    (44,224
    )
    
    
    (12,908
    )
 Cash Provided by Operating Activities For the three months ended March 31, 2004 and 2005, cash provided by operating activities was
$20.7 million, and $19.8 million, respectively. Cash Used in Investing Activities The table below sets forth the components of cash used in investing activities for the three months
ended March 31, 2004 and 2005: For the Three Months Ended March 31,2004
    
    
    2005(in thousands)Network and support assets
    
    $
    5,000
    
    
    $
    5,265Other
    
    
    1,552
    
    
    
    365Total capital expenditures
    
    
    6,552
    
    
    
    5,630Business acquisitions
    
    
    1,697
    
    
    
    Total
    
    $
    8,249
    
    
    $
    5,630
 Capital expenditures for the first three months of 2005 decreased by $922,000 as compared to
first three months of 2004 primarily due to information systems expenditures during 2004. Pursuant to the terms of our April 2004 Iowa Utilities Board rate proceeding settlement agreement,
substantially all additional revenues generated by the new rates approved pursuant to the agreement
are required to be invested in capital improvements identified in a network improvement plan
approved by the Iowa Utilities Board on May 10, 2004. This plan was updated in November of 2004 to
reflect anticipated improvements to be made in 2005 through 2007. We expect that capital expenditures will be approximately $30.0 million in fiscal 2005. We
estimate that approximately $25.8 million of this amount will be used to maintain and enhance our
network infrastructure, as directed by our rate settlement agreement, and that approximately $4.2
million of this amount will be used for information technology or other capital expenditures. We
expect to fund all of these capital expenditures through cash generated by our business. Although
the amount of our capital expenditures will fluctuate from quarter to quarter, on an annual basis
we do not expect capital expenditures for our existing operations beyond 2005 to vary significantly
from our estimated amounts. Our capital expenditure obligations pursuant to our rate settlement agreement may be affected by
the new Iowa deregulation law. We are currently determining what, if any, effect the newly-enacted
legislation will have on such obligations if we elect deregulation as provided for in the new
provisions. On August 4, 2004, the FCC adopted an order increasing the obligations of carriers to report
service outages to the FCC. Most significantly, the order required us to report certain
non-customer affecting events related to our fiber rings. As part of an industry wide-effort to
convince the FCC to reconsider this requirement, we stated to the FCC, in industry wide hearings
held on November 19, 2004, that compliance would cause Iowa Telecom to incur at least 20




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$16 million of additional capital expenditures over a period of three to five years. As a result
of the industry efforts, on December 20, 2004, the FCC prevented the rule from going into effect
until the FCC has reconsidered the matter. At this time, we cannot predict the result of this FCC
reconsideration, the financial or operational effects or the impact the final rules may have on our
operations. Cash Used in Financing Activities For the three months ended March 31, 2005, net cash used in financing activities was $12.9 million
as compared to $44.2 million for the same period in 2004, due primarily to the use of cash on hand
in 2004 to redeem the Redeemable Convertible Preferred Stock, and the net impact of our initial
public offering and the related refinancing on our 2005 levels. Long-Term Debt and Revolving Credit Facilities Credit Facilities As a part of our initial public offering and the related debt refinancing, we entered into new
credit facilities with a group of lenders, including the Rural Telephone Finance Cooperative,
providing for a total of up to $577.8 million in term and revolving credit facilities, and retired
the previously outstanding senior credit facility with the Rural Telephone Finance Corporation. As
of March 31, 2005, we had outstanding $477.8 million of senior debt under the new term facilities,
and had $34.0 million drawn under the $100.0 million revolving credit facility. The details of the
facilities are as follows: The revolving credit facility will expire in 2011 and permits borrowings up to the aggregate
principal amount of $100.0 million (less amounts reserved for letters of credit up to a maximum
amount of $25 million). As of March 31, 2005, $34.0 million was outstanding on the revolving
credit facility and $66.0 million was available. Borrowings under the new revolving credit
facility bear interest per annum at either (a) the London inter-bank offered rate, or LIBOR, plus
2.0% or (b) a base rate plus 1.0%. As of March 31, 2005, we had $29.0 million outstanding under
LIBOR elections at an average all-in rate of 4.7% and $5.0 million outstanding under the base rate
election with an all-in rate of 6.75%. Term Loan B is a $400.0 million senior secured term facility maturing in 2011, bearing interest per
annum at either (a) LIBOR plus 2.0% or (b) a base rate plus 1.0%. As of March 31, 2005, $350
million was based upon a LIBOR election effective through June 30, 2005, at an all-in rate of
5.10%. We have entered into an interest rate swap to fix the rate on $350 million of Term Loan B
as more fully described below. As of March 31, 2005, the interest rate on the remaining $50
million was based upon a LIBOR election effective through June 9, 2005 at an all-in rate of 4.97%. Term Loan C is a $70.0 million senior secured term facility maturing in 2011, bearing interest per
annum at either (a) a fixed rate or (b) a Rural Telephone Finance Cooperative variable rate plus
0.85%. Upon the expiration of the 6.65% fixed interest rate on Term Loan C in November 2007, the
interest rate on such term loan will convert to the Rural Telephone Finance Cooperative base
variable rate plus 0.85%. Term Loan D is a $7.8 million senior secured term facility maturing in 2011, bearing interest per
annum at either (a) a fixed rate or (b) a Rural Telephone Finance Cooperative variable rate plus
0.85%. Upon the expiration of the 6.65% fixed interest rate Term Loan D has in November 2007,
interest on such term loan will convert to the Rural Telephone Finance Cooperative variable rate
plus 0.85%. As a condition of borrowing under Term Loans C and D, we are required to invest $7.8 million,
representing 10% of the total amounts of Term Loans C and D, in Subordinated Capital Certificates
(SCCs) of the Rural Telephone Finance Cooperative. SCCs are non-interest bearing but, as a
member of the Rural Telephone Finance Cooperative, we share proportionately in the institutions
net earnings. The Rural Telephone Finance Cooperative will redeem the SCCs in proportion to our
principal repayments on Term Loans C and D. 21




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##### Table of Contents



The credit facilities are secured by substantially all of our tangible and intangible assets,
properties and revenues as well as those of all of our current and future subsidiaries. The new
credit facilities will be guaranteed by all of our current and future subsidiaries. The credit facilities permit us to pay dividends to holders of our common stock; however, they
contain significant restrictions on our ability to do so. The credit facilities contain certain
negative covenants that, among other things, limit or restrict our ability (as well as those of our
subsidiaries) to: create liens and encumbrances; incur debt, issue preferred stock, or enter into
leases and guarantees; enter into loans, investments and acquisitions; make asset sales, transfers
or dispositions; change lines of business; enter into hedging agreements; pay dividends, redeem
stock, or make certain restricted payments; amend material debt agreements or other material
contracts; engage in certain transactions with affiliates; enter into sale/leaseback or synthetic
lease transactions; grant negative pledges or agree to such other restrictions relating to
subsidiary dividends and distributions; make changes to our fiscal year and engage in mergers and
consolidations. In addition, the financial covenants under the credit facilities specify, among other things,
certain fixed charge coverage ratios and a maximum total leverage ratio, as defined, all of which
we were in compliance with at March 31, 2005. Interest Rate Swap On November 4, 2004, we entered into an interest rate swap agreement with a nationally recognized
commercial bank that effectively fixes the interest rate we will pay on specified portions of our
indebtedness under Term Loan B. Pursuant to this swap, from November 5, 2004 through December 30,
2007 the interest on $350.0 million of our indebtedness under Term Loan B will be fixed at a
weighted average rate of 5.69%; from December 31, 2007 through December 30, 2008 the interest rate
on $285.3 million of such indebtedness will be fixed at a weighted average rate of 5.76%; and from
December 31, 2008 through November 4, 2009 the interest rate on $142.7 million of such indebtedness
will be fixed at 5.87%. Obligations and Commitments Our ongoing capital commitments include capital expenditures and debt service requirements. For
the three months ended March 31, 2005, capital expenditures were $5.6 million. The following table sets forth our contractual obligations as of March 31, 2005. Payments Due by PeriodApril  Dec.Obligation
    
    Total
    
    
    2005
    
    
    2006-2007
    
    
    2008-2010
    
    
    2010 and AfterLong-Term Debt:Senior debt
payments
    
    $
    477,778
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    477,778Revolving
credit facility
    
    
    34,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    34,000Interest
Payments(1)
    
    
    91,995
    
    
    
    18,815
    
    
    
    49,604
    
    
    
    23,576
    
    
    
    Operating Lease
Payments
    
    
    501
    
    
    
    152
    
    
    
    224
    
    
    
    123
    
    
    
    2Total Contractual
Obligations
    
    $
    604,274
    
    
    $
    18,967
    
    
    $
    49,828
    
    
    $
    23,699
    
    
    $
    511,780
   (1)
    
    Excludes interest payments on variable rate long-term debt that has not been fixed through
hedging arrangements. Amounts include the impact of hedging arrangements. As of March 31, 2005, no letters of credit were outstanding. 22




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We currently project that cash provided by operations will be adequate to meet our foreseeable
operational liquidity needs for the next 12 months. However, our actual cash needs and the
availability of required funding may differ from our expectations and estimates, and those
differences could be material. Our future capital requirements will depend on many factors,
including, among others, the demand for our services in our existing markets and regulatory,
technological and competitive developments. Critical Accounting Policies The process of preparing financial statements requires the use of estimates on the part of
management. The estimates used by management are based on our historical experiences combined with
managements understanding of current facts and circumstances. Certain of our accounting policies
are considered critical, as they are both important to the portrayal of our financial statements
and require significant or complex judgments on the part of management. The following is a summary
of certain policies considered critical by management. Impairment of Long-Lived Assets (Including Property, Plant and Equipment), Goodwill and
Identifiable Intangible Assets.We reduce the carrying amounts of long-lived assets, goodwill and
identifiable intangible assets to their fair values when the fair value of such assets is
determined to be less than their carrying amounts. Fair value is typically estimated using a
discounted cash flow analysis, which requires us to estimate the future cash flows anticipated to
be generated by the particular asset being tested for impairment, and to select a discount rate to
measure the present value of the anticipated cash flows. When determining future cash flow
estimates, we consider historical operating results, as adjusted to reflect current and anticipated
operating conditions. Estimating future cash flows requires significant judgment by us in such
areas as future economic conditions, industry specific conditions and necessary capital
expenditures. The use of different assumptions or estimates for future cash flows could produce
different impairment amounts (or none at all) for long-lived assets, goodwill and identifiable
intangible assets. We are required to perform an annual impairment review of goodwill as required by Statement of
Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets. No impairment
of goodwill or other long-lived assets resulted from the annual valuation of goodwill we conducted
in August 2004. Revenue Recognition. Revenues are recorded based upon services provided to customers. We record
unbilled revenue representing the estimated amounts customers will be billed for services rendered
since the last billing date through the end of a particular month. The unbilled revenue estimate
is reversed in the following month when actual billings are made. Allowance for Doubtful Accounts. Our allowance for doubtful accounts reflects reserves for
customer receivables to reduce receivables to amounts expected to be collected. In estimating
uncollectible amounts, management considers factors such as current overall economic conditions,
industry-specific economic conditions, historical customer payment trends and anticipated customer
payment trends. While we believe our process effectively addresses our exposure for doubtful
accounts, changes in economic, industry or specific customer conditions may require adjustment to
the allowance for doubtful accounts recorded by us. Income Taxes. Management calculates the income tax provision, current and deferred income taxes,
along with the valuation allowance based upon various complex estimates and interpretations of
income tax laws and regulations. Deferred tax assets are reduced by a valuation allowance to the
extent that it is more likely than not they will not be realized. As of March 31, 2005, the
balance of the deferred tax asset and the valuation allowances was $18 million. To the extent we
begin to generate taxable income in future years and it is determined the valuation allowance is no
longer required, the tax benefit for the remaining deferred tax assets will be recognized at such
time. At March 31, 2005, our unused tax net operating loss carry forward was $212 million, and will
expire between 2020 and 2024. The amount of net operating loss allowable to offset income after a
change in ownership is limited under Internal Revenue Code (IRC) Section 382. Additionally, IRC
Section 338 may allow for an increase in this allowance for the periods ending in 2005 through
2009. IRC Section 382 will continue to apply after 2009. Employee-Related Benefits. We incur certain employee-related benefits associated with pensions and
other post-retirement health care benefits (OPEB). We use third party specialists to assist
management in appropriately 23




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##### Table of Contents



measuring the expenses associated with these employee-related benefits. In order to measure the
expense associated with these employee-related benefits, management must make a variety of
estimates, including discount rates used to measure the present value of certain liabilities,
assumed rates of return on assets set aside to fund these expenses, compensation increases,
employee turnover rates, anticipated mortality rates and anticipated healthcare costs. The
estimates used by management are based on our historical experience, as well as current facts and
circumstances. Different estimates could result in our recognizing different amounts of expense
over different time periods. We evaluate our critical assumptions at least annually, and selected
assumptions are based on the following factors:  
    The discount rate is based on a hypothetical portfolio of high quality bonds with cash
flows matching our expected benefit payments.
    The expected return on plan assets is based on our asset allocation mix and our
historical return, taking into consideration current and expected market conditions.
    The healthcare costs trend rate is based on our historical rates of inflation and
expected market conditions. The following table presents the key assumptions used to measure pension and OPEB expense for 2005
and the estimated impact on pension and OPEB expense for the first three months of 2005 relative to
a change in those assumptions: Assumptions
    
    Pension
    
    OPEBDiscount rate
    
    
    5.75
    %
    
    
    5.50
    %Expected return on plan assets
    
    
    7.00
    %
    
    
    N/AHealthcare costs trend rate:Current
    
    
    N/A
    
    
    
    9.50
    %Level in 2010
    
    
    N/A
    
    
    
    7.00
    %
 Increase in Expense for the ThreeMonths Ended March 31, 2005Sensitivities
    
    Pension
    
    
    OPEB(in thousands)0.25% decrease in discount rate
    
    $
    40
    
    
    $
    40.25% decrease in expected return on
plan assets
    
    
    9
    
    
    
    N/A1% increase in healthcare costs trend rate
    
    
    N/A
    
    
    
    127
 Off-Balance Sheet Risk and Concentration of Credit Risk The Company has no off-balance sheet exposure or risk. Certain financial instruments potentially subject us to concentrations of credit risk. These
financial instruments consist primarily of trade receivables and cash and temporary cash
investments. We place our cash and temporary cash investments with high credit quality financial institutions.
We also periodically evaluate the credit worthiness of the institutions with which we invest. We have entered into an interest rate swap agreement to adjust the interest rate profile of our
debt obligations and to achieve a targeted mix of floating and fixed rate debt. The floating rate
payer under the interest rate swap agreement is a nationally recognized commercial bank, which has
been accorded ratings similar to other large commercial banks by primary rating agencies. We
periodically monitor these credit ratings. While we may be exposed to losses due to
non-performance of the bank or the calculation agent, we consider the risk remote and do not expect
the settlement of this transaction to have a material effect on our financial condition or results
of operations. 24




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##### Table of Contents



New Accounting Pronouncements In December 2004, the FASB issued SFAS No. 123 (Revised), Share-Based Payment. This statement
replaces SFAS No. 123, Accounting for Stock-Based Compensation and supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees. SFAS 123R requires companies to apply a
fair-value-based measurement method in accounting for share-based payment transactions with
employees and to record compensation cost for all stock awards granted after the required effective
date and to awards modified, repurchased, or cancelled after that date. In addition, we are
required to record compensation expense (as previous awards continue to vest) for the unvested
portion of previously granted awards that remain outstanding at the date of adoption, if any. On
April 14, 2005, the Securities and Exchange Commission announced the adoption of a rule that defers
the effective date for adoption to the first fiscal year beginning after June 15, 2005. Adoption
of this standard is not expected to have a material effect on the Companys financial position,
results of operations or cash flows as all of our outstanding stock options were fully vested at
the date of issuance of SFAS 123R. Modifications to outstanding stock options after the
effective date of the standard may result in additional compensation expense pursuant to the
provisions of SFAS 123R. Inflation We do not believe that inflation has a significant effect on the financial results of our operations. 
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK For information regarding our exposure to certain market risks, see Item 7A, QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK, in our Annual Report on Form 10-K for the year ended
December 31, 2004. There have been no significant changes in our market risk exposures from
December 31, 2004. 
 ITEM 4. CONTROLS AND PROCEDURES Disclosure Controls and Procedures Under the supervision and with the participation of our management, including our Chief Executive
Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of
our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of
March 31, 2005 (the Evaluation Date). Based upon that evaluation, the Chief Executive Officer
and Chief Financial Officer concluded that, as of the Evaluation Date, our disclosure controls and
procedures were effective to ensure that information required to be disclosed by us in the reports
we file or submit under the Exchange Act is recorded, processed, summarized and reported within the
time periods specified in Securities and Exchange Commission rules and forms. Changes in internal controls There were no changes in our internal control over financial reporting during our most recently
completed fiscal quarter that has materially affected, or is reasonably likely to affect, our
internal control over financial reporting. 25




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##### Table of Contents



PART II. OTHER INFORMATION 
 ITEM 1. LEGAL PROCEEDINGS We currently, and from time to time, are involved in litigation and regulatory proceedings
incidental to the conduct of our business. We are not a party to any lawsuit or proceeding that, in
the opinion of our management, is likely to have a material adverse effect on us. 
 ITEM 6. EXHIBITS See Exhibit Index following the signature page of this Report 26




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##### Table of Contents



SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized. Iowa Telecommunications Services, Inc. (Registrant)Date: May 12, 2005
    By:
    /S/  Alan L. WellsAlan WellsPresident and Chief Executive Officer
(Principal Executive Officer)Date: May 12, 2005
    By:
    /S/ Craig A. KnockCraig A. KnockVice President,
Chief Financial Officer
(Principal Financial Officer and
Chief Accounting Officer)




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EXHIBIT INDEX IOWA TELECOMMUNICATIONS SERVICES, INC.
FORM 10-Q FOR QUARTER ENDED MARCH 31, 2005 ExhibitNumber
    
    Description3.1
    
    Amended and Restated Articles of Incorporation of Iowa Telecommunications Services, Inc. -
incorporated by reference to Exhibit 3.1 to Iowa Telecoms Registration Statement on Form
S-1/Amendment No. 6 (File No. 333-114349)3.2
    
    Amended and Restated Articles of Incorporation of Iowa Telecommunications Services, Inc. -
incorporated by reference to Exhibit 3.2 to Iowa Telecoms Registration Statement on Form
S-1/Amendment No. 6 (File No. 333-114349)4.1
    
    Amended and Restated Stockholders and Registration Rights Agreement, dated as of November 17,
2004, among Iowa Telecommunications Services, Inc., ING Furman Selz Investors III, L.P., ING
Barings US Leveraged Equity Plan LLC, ING Barings Global Leveraged Equity Plan Ltd., Iowa Network
Services, Inc., BancBoston Ventures Inc., Teachers Insurance and Annuity Association of America,
and the individual holders of options to purchase common stock named therein - incorporated by
reference to Exhibit 4.2 to Iowa Telecoms Registration Statement on Form S-1/Amendment No. 7
(File No. 333-114349)31.1*
    
    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2*
    
    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1*
    
    Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2*
    
    Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 * Filed herewith.