Iowa Telecommunications Services, Inc.

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Iowa Telecommunications Services, Inc.

115 South 2nd Avenue West
Newton, Iowa 50208
U.S.A.
Telephone: (641) 787-2000
Fax: (641) 787-2001
Web site: http://www.iowatelecom.com

Public Company
Incorporated: 1999
Employees: 625
Sales: $231.6 million (2005)
Stock Exchanges: New York
Ticker Symbol: IWA
NAIC: 517110 Wired Telecommunications Carriers

Iowa Telecommunications Services, Inc. (Iowa Telecom), the second largest telephone company in Iowa, ranks as the largest provider of telecommunications services to residential and business customers in rural Iowa. The average population of an Iowa Telecom community is 1,250. The company serves roughly 440 communities with 257,700 access lines and 290 telephone exchanges. Iowa Telecom offers local and long-distance telephone service and dial-up and digital subscriber line (DSL) Internet access. The company also generates a substantial percentage of its annual revenue from access fees charged to other telecommunications carriers for calls originated or terminated on its network. Through a subsidiary, Iowa Telecom Communications, Inc., the company serves 18 larger communities in Iowa, targeting markets with populations of approximately 15,000.

ORIGINS

Iowa Telecom took what others no longer wanted and turned the discarded assets into a thriving business. The company's opportunity to inject vitality into neglected assets arose from a trend in the telecommunications industry during the late 1990s. Several large companies, including GTE Midwest, Incorporated, decided to get rid of their assets that served rural communities. Whatever resources were being devoted to serving rural customers, the retreating companies reasoned, would be better used to strengthen their urban markets and national wireless and business-services operations. As part of this shift in strategy, GTE Midwest, based in Dallas, Texas, decided to sell its operations in Iowa. Iowa Telecom, supported by founding shareholders Iowa Network Service and New York-based FS Private Investments, was formed to acquire the assets for sale.

Iowa Telecom was incorporated in May 1999, more than a year before it completed the acquisition that would mark the beginning of its life as a commercially active company. Several industry veterans were brought in to lead the company as it prepared to enter the market, including Edward J. Buchanan, William P. Bagley, and James L. Daubendiek. Buchanan, with more than four decades of experience in the telecommunications industry, spent his career serving as the president and general manager of Interstate 35 Telephone Company, a Truro, Iowa-based concern. He also earned the esteem of his peers, serving stints as the president of the Rural Iowa Independent Telephone Association and as chairman and vice-president of the Iowa Telephone Association. Buchanan was joined by Bagley, who became Iowa Telecom's first chief executive officer. A telecommunications executive since the 1960s, Bagley spent a decade as general manager of Fidelity Telephone Co., a concern based in Sullivan, Missouri, and another decade serving in various management positions at Continental Telephone. Daubendiek, who boasted more than 30 years of involvement in the telecommunications industry, spent much of his career working for Jefferson, Iowa-based Jefferson Telephone Company, rising to the post of general manager and chief executive officer. A member, along with Buchanan, of the Iowa Telecommunications Association's board of directors, Daubendiek also served as president of Remsen, Iowa-based West Iowa Telephone Company and as a member of the board of directors of the United States Telecom Association.

With seasoned executives guiding it forward, Iowa Telecom hoped its treatment of unwanted assets would demonstrate the growth potential of rural telecommunications. By improving existing networks, expanding service offerings, and improving customer service, the company planned to improve the financial performance of the 440 Iowa communities served by GTE Midwest, which generated slightly less than $200 million in revenue in 1999. Iowa Telecom acquired the assets in June 2000, basing itself in Newton, Iowa, a town 30 miles east of Des Moines with a population of roughly 15,000. The company assumed control over 265,000 access lines that provided service to small towns within a 20,000-square-mile area. Its switching centers were spaced no more than 30 miles apart, giving the company a contiguous, geographically concentrated network that allowed for a high level of efficiency in terms of management. The average population of an Iowa Telecom community was 1,250, typifying the small, rural communities that historically had been underserved by larger telecommunications providers.

Iowa Telecom's improvements took time and money to complete. Consequently, discernible improvements in financial performance took several years before they emerged. One aspect of the company's business that later recorded encouraging growth was formed in 2002, a subsidiary named Iowa Telecom Communications, Inc. The subsidiary operated as a competitive local exchange carrier (CLEC), free from regulatory rates it could charge and markets it could enter. Iowa Telecom Communications began operating in Iowa towns larger than the rural communities targeted by Iowa Telecom, preferring towns the size of Newton. Iowa Telecom's core business pursued growth by improving its network and offering services such as Caller ID, Voice Mail, and Call Waiting, and Internet access to customers "bypassed by the information superhighway," as the July 16, 2004, Cedar Rapids, Iowa Gazette referred to the rural customers who had suffered under the aegis of GTE Midwest. A third avenue of growth taken by Iowa Telecom brought new assets in via external means. The company acquired assets to expand its local and long-distance service and, perhaps most important to its growth prospects, to bring high-speed Internet service to rural Iowa.

APPOINTMENT OF WELLS AS CHIEF EXECUTIVE OFFICER: 2002

In 2002, a new chief executive officer was appointed whose tenure would witness the improved financial performance promised at the company's outset. Alan L. Wells took the helm during Iowa Telecom's second year of operation, but he had been with the company during the months devoted to financial planning, raising capital, and closing on the acquisition of GTE Midwest's Iowa operations. Wells joined Iowa Telecom in 1999 as chief operating officer, bringing with him a background in the utility industry. He spent the 1990s working for Iowa-Illinois Gas and Electric and its successor, MidAmerican Energy Holdings Company, a Des Moines, Iowa-based electric and gas utility concern. Wells rose to the posts of senior vice-president and chief financial officer at MidAmerican, the positions he vacated to join Iowa Telecom. Under Wells's day-to-day control, Iowa Telecom began to hit its stride, attracting attention from industry onlookers who witnessed something rare in their business: a company directing capital and resources to rural markets.

COMPANY PERSPECTIVES

At Iowa Telecom, we work hard to provide you with reliable dial tone, long distance and Internet services every second of every day. We are an Iowa company, providing telephone service to over 435 communities across the state. We know you depend on your telephone and Internet services. It's our responsibility to provide reliable service with a personal touch. We have over 600 trained professionals working across the state doing just that.

Financially, Iowa Telecom recorded modest progress during its first years in operation. Revenues reached $203 million in 2001, the same total registered the following year. Elusive profits, a concern particularly for investors who initially backed the company, suggested more discouraging news than the company's stagnant revenue volume, although there were extenuating factors that offered consolation. Iowa Telecom recorded $50.8 million in operating income in 2001, from which it failed to make a profit, posting instead a $6.7 million net loss. The following year, working with essentially the same revenue total, the company recorded $73.9 million in operating income, but a change in accounting standards adopted at the start of the year turned what would have been an encouraging leap to $22.6 million in net income into a net loss of $75.7 million. The financial figures were about to improve, however, buoyed by moves such as the company's acquisition of Internet service provider FBX in 2003. Started by Des Moines-based Lighthouse Communications in 2001, FBX provided dial-up service to roughly 10,000 customers, strengthening Iowa Telecom's existing dial-up and DSL business. In the coming months, further moves to expand the company's business would deliver encouraging financial news from the main offices in Newton.

"We're pretty tied to the Iowa economy," Wells said in a January 24, 2005, interview with Business Record. "We're only located in Iowa, so as Iowa grows, we grow, and vice versa." He demonstrated his company's commitment to bettering Iowa's telecommunications infrastructure by launching the "Connect Rural Iowa" program, a $110 million modernization program. The program involved capital expenditures on several fronts, including adding 120 miles of fiber-optic cable and upgrading obsolete switching equipment to a modern digital platform. Nearly $18 million was set aside to spend on the program in 2004, which promised to bring DSL service to all communities served by Iowa Telecom by mid-2005. The deployment of DSL and other sophisticated services ran counter to convention, flying in the face of the strategy espoused by other telecommunications companies who deemed such investment as not economically feasible. "This is a model that's worked for us—putting these advanced services in markets where other people say it's crazy," an Iowa Telecom spokesperson explained in a July 16, 2004 interview with the Gazette. Iowa Telecom's commitment to bringing high-speed Internet access to its service area contributed greatly to giving "a high-speed on-ramp" to customers otherwise overlooked or neglected in this area. A report issued by the Iowa Utilities Board in 2005 revealed that 28 percent of the state's rural communities had some sort of high-speed Internet access in 2000, the year Iowa Telecom acquired GTE Midwest's Iowa assets. By mid-2004, an estimated 73 percent of the state's rural communities had some sort of access to high-speed Internet service.

INITIAL PUBLIC OFFERING OF STOCK IN 2004

Iowa Telecom could point to substantial progress as it neared its fifth year of operation. In 2003, revenues inched up to $205 million, but far more impressive was the $28 million posted in net income. The financial gain coupled with the improvements made in the company's infrastructure convinced Iowa Telecom officials that the time was right for converting to public ownership. In November 2004, the company sold 19.1 million shares at $19 per share, raising $363 million from its initial public offering (IPO) of stock. As part of the company's public debut, documents filed with the Securities and Exchange Commission (SEC) revealed a financial breakdown of its business. Of the $228 million it generated in revenue in 2004, Iowa Telecom derived 36 percent of its revenue from local telephone service and 42 percent from access fees charged to other telecommunication carriers for calls originating or terminating on the company's network. Another 10 percent of revenue was collected from 135,000 subscribers to long-distance telephone service, with the balance derived from the company's growing Internet-related business. By the end of 2004, Iowa Telecom served 51,500 dial-up subscribers and 15,600 DSL subscribers, yielding $27.2 million in revenue.

KEY DATES

1999:: Iowa Telecommunications Services, Inc., (Iowa Telecom) is incorporated.
2000:: The company acquires the Iowa-based operations belonging to GTE Midwest, Inc.
2002:: A subsidiary, Iowa Telecom Communications, Inc., is formed to compete as a non-regulated competitive local exchange carrier.
2004:: Iowa Telecom completes its initial public offering of stock.
2005:: The company agrees to purchase Montezuma Mutual Telephone Co.
2006:: Baker Communications, Inc., is acquired.

With the proceeds from its IPO, Iowa Telecom could afford to adopt a more aggressive posture toward expansion. The extension of its DSL service was completed in May 2005, two months ahead of schedule, giving high-speed Internet service to roughly 80 percent of the customers it served. Activity on the acquisition front also occurred in the wake of the IPO, touched off in December 2005 when Iowa Telecom agreed to purchase Montezuma Mutual Telephone Co. Iowa Telecom agreed to pay nearly $10.5 million for the Iowa-based telephone company, which operated 2,200 access lines that served residents in Montezuma and Deep River.

A second acquisition followed in August 2006, perhaps suggesting that the years ahead would include the purchase of additional companies. Iowa Telecom paid $8.2 million for a Des Moines-based data networking firm named Baker Communications, Inc. With Iowa offices in Des Moines and Hiawatha and an office in Omaha to serve its customers in Nebraska, Baker Communications specialized in Internet protocol communications, data networking, storage, and server support. "Baker Communications does a great job of serving their clients, who are generally located in communities in which Iowa Telecom currently has little presence," Wells noted in an August 1, 2006, company press release. "Their operation aligns well with our company's mission of providing reliable voice and data solutions to our customers, and further expands our existing offerings and our customer base." Looking ahead, the company hoped to build on the $46.3 million it recorded in net income in 2005 by adhering to its strategy of investing in markets eschewed by its rivals.

Jeffrey L. Covell

PRINCIPAL SUBSIDIARIES

Iowa Telecom Communications, Inc.; Iowa Telecom Technologies, LLC; Iowa Telecom Data Services, L.C.; IT Communications, LLC; IWA Holdings, LLC; IWA MC, Inc.