UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

or

Commission File Number 001-32354

IOWA TELECOMMUNICATIONS SERVICES, INC.

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.

TABLE OF CONTENTS

 i 

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

IOWA TELECOMMUNICATIONS SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(dollars in thousands)

See notes to condensed consolidated financial statements.

1

IOWA TELECOMMUNICATIONS SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share data)

See notes to condensed consolidated financial statements.

2

IOWA TELECOMMUNICATIONS SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(unaudited)
(dollars in thousands)

See notes to condensed consolidated financial statements.

3

IOWA TELECOMMUNICATIONS SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(dollars in thousands)

See notes to condensed consolidated financial statements.

4

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:

5

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:

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:

6

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

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

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: