** **

**UNITED STATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-K**

 

**(Mark one)**
| **x**      |       | **ANNUAL REPORT PURSUANT TO SECTIONS  13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**         |
|------------|------------|---------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                    |
| ** ** | ** ** | **For the fiscal year ended  December 31, 2007**                                                   |
|       |       |                                                                                                    |
|       |       | **OR**                                                                                                  |
|       |       |                                                                                                    |
| **o**      | ** ** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**CommissionFile No. 333-131152**

 

**HAWAIIANTELCOM COMMUNICATIONS, INC.**

(Exact name ofregistrant as specified in our charter)

 

| **Delaware** | ** **                       | **16-1710376** |                 |
|--------------|----------------------------------|----------------|----------------------|
|         | (State or other  jurisdiction of |           | (I.R.S. Employer     |
|         | incorporation or  organization)  |           | Identification  No.) |
|              |                                  |                |                      |  |  |  |

 
| **1177  Bishop Street**                                                        |
|--------------------------------------------------------------------------------|
| **Honolulu,  Hawaii 96813**                                                    |
| (Address of  principal executive offices) (Zip Code)                           |
|                                                                           |
| **808-546-4511**                                                               |   |
| (Registrant’s  telephone number, including area code)                     |   |
|                                                                           |   |
| Securities registered pursuant to Section 12 (b) of the Act:**None** |   |
| Securities registered pursuant to Section 12 (g) of the Act:**None** |   |

 

Indicate by check mark if the registrant is awell-known seasoned issuer as defined in Rule 405 of the Securities Act.Yes  o  No  x

 

Indicate by check mark if the registrant is notrequired to file reports pursuant to Section 13 orSection 15(d) of the Securities Exchange Act of 1934.   Yes  o  No  x

 

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 suchreports), and (2) has been subject to such filing requirements for thepast 90 days.    Yes  x  No   o

 

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not contained herein, and willnot be contained, to the best of registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of thisForm 10-K or any amendment to this Form 10-K.   x

 

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, a non-accelerated filer or asmaller reporting company. See the definitions of “large accelerated filer”,“accelerated filer” and “smaller reporting company” in Rule 12b-2 of theExchange Act.

 

| Large  Accelerated Filer  o | Accelerated  Filer  o | Non-Accelerated  Filer  x | Smaller  Reporting Company  o |
|----------------------------------|----------------------------|--------------------------------|------------------------------------|
|                             |                       | (Do not check if  a            |                               |
|                             |                       | smaller  reporting company)    |                               |

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act). Yes oNo  x

 

The registrant is a wholly-owned subsidiary ofHawaiian Telcom Holdco, Inc. As of March 31, 2008, there were noshares of voting or non-voting common equity held by non-affiliates of theregistrant. As of March 31, 2008, 1,000 shares of the registrant’s commonstock, $0.10 par value, were outstanding.

 

 

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**HAWAIIANTELCOM COMMUNICATIONS, INC.**

 

**TABLEOF CONTENTS**

 
| ** ** | ** ** | ** **                                                                                                          | **Page**   |
|------------|------------|---------------------------------------------------------------------------------------------------------------------|------------|
| ** ** | ** ** | ** **                                                                                                          | ** ** |
|       |       | **PART I**                                                                                                     | 1          |
|       |       |                                                                                                                |       |
| Item 1.    |       | Business                                                                                                            | 1          |
|       |       |                                                                                                                |       |
| A.         |       | History                                                                                                             | 1          |
| B.         |       | Industry Overview                                                                                                   | 2          |
| C.         |       | Markets and  Customers                                                                                              | 3          |
| D.         |       | Our  Products and Services                                                                                          | 3          |
| E.         |       | Sales and Marketing                                                                                                 | 5          |
| F.         |       | Network  Architecture and Technology                                                                                | 6          |
| G.         |       | Back-Office and  Information Technology                                                                             | 7          |
| H.         |       | Competition                                                                                                         | 7          |
| I.         |       | Employees                                                                                                           | 8          |
| J.         |       | Insurance                                                                                                           | 8          |
| K.         |       | Regulation                                                                                                          | 8          |
| L.         |       | Business Transactions                                                                                               | 11         |
| Item  1A.  |       | Risk  Factors                                                                                                       | 15         |
| Item 1B.   |       | Unresolved  Staff Comments                                                                                          | 21         |
| Item  2.   |       | Properties                                                                                                          | 21         |
| Item 3.    |       | Legal Proceedings                                                                                                   | 21         |
| Item 4.    |       | Submission  of Matters to a Vote of Security Holders                                                                | 21         |
|       |       |                                                                                                                |       |
| ** ** | ** ** | **PART II**                                                                                                    | 22         |
|       |       |                                                                                                                |       |
| Item 5.    |       | Market for  Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases  of Equity Securities | 22         |
| Item 6.    |       | Selected Financial  Data                                                                                            | 23         |
| Item 7.    |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                         | 24         |
| Item 7A.   |       | Quantitative  and Qualitative Disclosures About Market Risk                                                         | 43         |
| Item 8.    |       | Financial  Statements and Supplementary Data                                                                        | 44         |
| Item 9.    |       | Changes in  and Disagreements With Accountants on Accounting and Financial Disclosure                               | 78         |
| Item 9A.   |       | Controls and  Procedures                                                                                            | 78         |
| Item 9B.   |       | Other Information                                                                                                   | 80         |
|       |       |                                                                                                                |       |
| ** ** | ** ** | **PART III**                                                                                                   | 81         |
|       |       |                                                                                                                |       |
| Item 10.   |       | Directors,  Executive Officers and Corporate Governance                                                             | 81         |
| Item 11.   |       | Executive Compensation                                                                                              | 84         |
| Item 12.   |       | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters                    | 93         |
| Item 13.   |       | Certain Relationships  and Related Transactions, and Director Independence                                          | 95         |
| Item 14.   |       | Principal  Accountant Fees and Services                                                                             | 96         |
|       |       |                                                                                                                |       |
| ** ** | ** ** | **PART IV**                                                                                                    | 97         |
|       |       |                                                                                                                |       |
| Item 15.   |       | Exhibits,  Financial Statement Schedules                                                                            | 97         |

 

i

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**PART I**

 

**Item 1.Business**

 

Hawaiian TelcomCommunications, Inc. (the “Company”) is a full-service telecommunicationsprovider in Hawaii, operating two business segments:

 

*WirelineServices.*This segment provides local telephone serviceincluding voice and data transport, enhanced custom calling features, networkaccess, directory assistance and private lines. In addition, the WirelineServices segment provides high-speed Internet, long distance services, customerpremise equipment, data solutions, billing and collection, and pay telephoneservices. Our services are offered on all of Hawaii’s major islands. As ofDecember 31, 2007, our telecommunication operations served: 560,417 localaccess lines, of which 59% served residential customers and 40% served businesscustomers, with the remaining 1% serving other customers; 263,882 long distancelines, of which 68% served residential customers and 32% served businesscustomers; and 93,446 high-speed Internet lines, which served 76,091 retailresidential lines, 15,776 retail business lines, and 1,579 wholesale businesslines.

 

*Other*.This segment consists primarily of wireless services, including the sale ofwireless handsets and accessories.

 

Prior to entering into anagreement on April 29, 2007 to sell its directories publishing business,the Company reported financial results based on the following businesssegments: Telecommunications Services and Directories Publishing. As disclosedin Note 4, the directories publishing business, the sale of which wasconsummated on November 30, 2007, is classified as discontinuedoperations.

 

**A. History**

 

Originally incorporatedin 1883 as Mutual Telephone Company, we have a strong heritage, through ourHawaiian Telcom, Inc. subsidiary, of over 120 years as Hawaii’s incumbentlocal exchange carrier (ILEC). From 1967 to May 1, 2005, we operated as adivision of Verizon Communications Inc. (Verizon) or its predecessors. OnMay 2, 2005, the Verizon businesses conducted in Hawaii (comprised ofVerizon Hawaii Inc. and carved-out components of Verizon Information Services,GTE.NET LLC (dba Verizon Online), Bell Atlantic Communications Inc. (dba VerizonLong Distance), and Verizon Select Services, Inc. (collectively, the“Verizon Hawaii Business”)), were transferred to Verizon Holdco LLC, which thenwas merged (the “2005 Acquisition”) with and into the Company.

 

As a result of the 2005Acquisition, we became a stand-alone provider of telecommunications services,operating as Hawaiian Telcom, Inc. (fka Verizon Hawaii Inc.) and HawaiianTelcom Services Company, Inc., both wholly-owned subsidiaries of theCompany. The Company in turn is a wholly-owned subsidiary of Hawaiian TelcomHoldco, Inc.

 

HawaiianTelcom, Inc. operates our regulated local exchange carrier business, andhas a wholly-owned subsidiary, Hawaiian Telcom Insurance Company, Incorporated,which is a captive insurance subsidiary that until December 31, 2003provided auto liability, general liability and worker’s compensation insuranceto Verizon Hawaii Inc. on a direct basis. The captive subsidiary continues tosettle claims related to incidents which occurred prior to January 1,2004, while current incidents are insured with external carriers. 

 

Hawaiian Telcom ServicesCompany, Inc. operates our other businesses including our long distance,Internet, and wireless businesses. It also operated a directories publishingbusiness until November 30, 2007, when it consummated the sale of thebusiness to HYP Media Holdings LLC, a Delaware limited liability company andwholly-owned subsidiary of CBD Investor, Inc.

 

The following is a chartof our organizational structure.

 

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**B. Industry Overview**

 

The telecommunicationsindustry is comprised of companies involved in the transmission of voice, dataand video communications over various media and through various technologies.There are two predominant types of local telephone service providers, or carriers,in the telecommunications industry: ILECs and CLECs. An ILEC refers to theregional Bell operating companies (RBOCs), which were the local telephonecompanies created from the break up of AT&T in 1984, as well as small andmidsize independent telephone companies, such as Hawaiian Telcom, Inc.,Cincinnati Bell Inc., and Embarq Corporation, which sell local telephoneservice. These ILECs were the traditional monopoly providers of local telephoneservice prior to the passage of the Telecommunications Act of 1996. On theother hand, a CLEC is a competitor to local telephone companies that has beengranted permission by a state regulatory commission to offer local telephoneservice in an area already served by an ILEC.

 

In recent years, the U.S.telecommunications industry has undergone significant structural changes. Manyof the largest service providers have achieved growth through acquisitions andmergers, while an increasing number of competitive providers have restructuredor entered bankruptcy to obtain protection from their creditors. Since 2001,capital in the form of public financing has been generally difficult to obtainfor new entrants and competitive providers. Capital constraints have caused anumber of competitive providers to change their business plans, resulting inconsolidation. Despite these changes, the demand for all types oftelecommunications services, particularly data services, has not diminished,and telecommunications companies increasingly bundle services and provideintegrated offerings for end-user customers.

 

Hawaii’stelecommunications industry remains active and demand for telecommunicationsservices is strong, due in part to the comparative advantage provided by thestate’s geographic position. With its location between the mainland UnitedStates and Asia, Hawaii has been and will likely continue to be a surfacinglocation for cables running between the two continents. Hawaii is alsoconnected to the mainland United States and Asia via several satellitenetworks.

 

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**C. Markets and Customers**

 

***Wireline Services***

 

We have been atelecommunications provider in Hawaii for more than 120 years. Our marketconsists of 86 central offices serving an area of approximately 6,263 squaremiles on the islands of Oahu, Maui, Hawaii, Kauai, Molokai and Lanai. We arethe incumbent provider of local exchange services within this area and own thestate’s most extensive local telecommunications network, with 560,417 localaccess lines served as of December 31, 2007, of which 59% servedresidential customers, 40% served business customers and the remaining 1%served other customers. Other customers include (1) interexchange carriersthat pay for access to long distance calling customers located within our localservice area and (2) CLECs that pay for wholesale access to our network inorder to provide competitive local service on either a resale or unbundlednetwork element (UNE) basis as prescribed under the Communications Act of 1934,as amended, which we refer to throughout this annual report as theCommunications Act.

 

Our market ischaracterized by high population density, with 71% of the state’s populationconcentrated on Oahu. This concentration of customers and commerce providesopportunities to leverage our network infrastructure to deliver products andservices efficiently and in a cost-effective manner, and to market and sell ourservices more effectively. Given Hawaii’s geographic location, its distancefrom the mainland United States, and the diversity of its population(approximately 40% being of Asian descent), Hawaii residents and businesseshave telecommunications needs that may be different from those on the mainlandUnited States. Furthermore, in 2007, the median household income in Hawaii was$58,366, compared to the national average of $49,280. For the foregoingreasons, our strategy is to leverage the distinctive qualities of the Hawaiimarket to develop customized, local marketing strategies.

 

Our business marketplaceis dominated by several key industries. State and federal government accountfor 27% of gross state product. With the U.S. Pacific Command, one of thelargest of the U.S. unified service commands, based in Hawaii and 39,000military personnel stationed in Hawaii, the federal government is one of ourlargest customers. The hospitality industry and financial institutions alsoaccount for a significant portion of our business. The operations of theseleading sectors are communications intensive, and we believe that they aredependent on our modern, reliable services. Hawaii’s small business market (inaggregate) is also a key driver of Hawaii’s economy — approximately 94% of thecompanies in Hawaii employ fewer than 50 employees, representing approximately30,500 business customers. We believe that these business customers representan underserved segment that we are targeting aggressively with new product andservice offerings.

 

***Other***

 

We have been providingwireless services since 2005. The wireless market in Hawaii is projected togrow from the current 810,000 wireless subscribers to 1,100,000 by the end of2011. Currently, less than 3% of these subscribers utilize us as their wirelessprovider. We are investigating opportunities to capture a higher share of this marketand to leverage the *Hawaiian Telcom*®brand and our existing customer base to enhance customer loyalty for ourvarious product and service offerings.

 

**D.Our Products and Services**

 

***Wireline Services***

 

Our strategy for thetelecommunications business is to increase customer loyalty and reduce churn byincreasing the penetration of bundled service offerings that enhance the valueof basic network service with value-added services, long distance, Internet andwireless.

 

*LocalExchange Services*

 

Our local exchangecarrier business generates revenue from local network services, network accessservices and certain other services, each of which is described below.

 

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*LocalNetwork Service*

 

Our traditional local networkservice enables customers to originate and receive telephone calls within adefined “exchange” area. We provide basic local services on a retail basis toresidential and business customers, generally for a fixed monthly recurringcharge. Basic local service also includes non-recurring charges to customersfor the installation of new products and services. Basic local exchangeservices are enhanced with a variety of value-added services such as callwaiting, caller ID, voice messaging, three-way calling, call forwarding andspeed dialing. Value-added services may be purchased individually or as part ofa package offering for a monthly recurring charge. We also offer other localexchange services such as local private line and wire maintenance. The ratesthat can be charged to customers for basic local and certain other services aredetermined by the Public Utilities Commission of the State of Hawaii (HPUC). Wecharge business customers higher rates to recover a portion of the costs ofproviding local service to residential customers, as is customary in theindustry. See “—Regulation” for further discussion of regulatory mattersincluding our local network service rate proceedings.

 

*NetworkAccess Services*

 

Our network accessservices are offered in connection with the origination and termination of longdistance, or toll, calls that typically involve more than one company in theprovision of end-to-end long distance service. Since toll calls are generallybilled to the customer originating the call, a mechanism is required tocompensate each company providing services relating to the call. This mechanismis the access charge, which we bill to each interexchange carrier for the useof our facilities to access our customers. In addition, we bill a component ofaccess charges directly to our customers. Our network access services generateintrastate access revenue when an intrastate long distance call that involvesus and an interexchange carrier is originated and terminated within Hawaii.This access charge is regulated by the HPUC. Similarly, our network accessservices generate interstate access revenue when an interstate long distancecall is originated from a Hawaii local calling area served by us and isterminated in a local calling area in another state, and vice versa. Interstateaccess charges are regulated by the Federal Communications Commission (FCC). Wealso offer special access voice and data services, which are a key area ofgrowth driven by demand for increasing bandwidth from business customers.Special access services include switched and non-switched (or dedicated)services such as point-to-point single channel circuits, Synchronous OpticalNetwork (SONET) and Time Division Multiplexing (TDM) transport services, aswell as IP-based private networks.

 

*LongDistance Services*

 

We provide long distanceservices to transmit international calls, interLATA (Local Access TransportArea) domestic calls and regional toll calls made to points outside acustomers’ local calling area, but within our local service area (intraLATAtoll). In Hawaii, each of the islands is a local calling area, and callsbetween the islands are intraLATA toll calls. Other long distance servicesinclude 800-number services and wide area telecommunication services, or WATS,private line services, and operator services associated with long distancecalls. As of December 31, 2007, we served 263,882  long distancelines, of which 68% served residential customers and 32% served businesscustomers.

 

*InternetServices*

 

We provide high-speedInternet (HSI) and dial-up Internet access to our residential and businesscustomers. Our data network enables us to provide extensive high-speed networkaccess. We have HSI available in 79 of our 86 central offices. As ofDecember 31, 2007, we served 76,091 retail residential HSI lines,15,776  retail business HSI lines, and 1,579 wholesale business HSI lines.We also provided dial-up Internet access to approximately 3,000 subscribers asof the same date.

 

*OtherWireline Services*

 

We seek to capitalize onour local presence and network infrastructure by offering other services tocustomers and interexchange carriers. Sales and maintenance of customerpremises equipment to the business markets are an important source of localexchange revenues. Customer premises equipment services are also an area ofpotential growth as attractive contracts with major equipment providers allowus to offer complete voice and data network and management solutions. For thewholesale or carrier market, we offer services including operator services,billing and collection services and space and power rents for collocationservices. We also offer public pay telephone services at approximately 5,200locations throughout the state.

 

4

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During 2007, we continuedto develop a network capable of providing integrated digital television,high-speed broadband and voice services to new and existing customers.Negotiations with the Cable Television Division of the State of HawaiiDepartment of Commerce and Consumer Affairs concerning our application for avideo franchise for the island of Oahu are ongoing. In addition to investing inour network to offer video services, we are developing the requisite hardwareand software platform and securing programming content for our proposed videoservices. Our ability to provide an attractive and profitable video offeringwill depend significantly on the results of these regulatory and infrastructuredevelopment efforts.

 

***Other***

 

We offer wireless servicespursuant to a mobile virtual network operator (MVNO) services agreement with asubsidiary of Sprint Nextel Corporation (Sprint). That agreement allows us toresell Sprint wireless services, including access to Sprint’s nationwidepersonal communication service (PCS) wireless network to residential andbusiness customers in Hawaii under the *HawaiianTelcom*® brand name. The services agreement with Sprintwas effective as of January 2005 and has an initial term of five yearswith an automatic renewal for successive two-year terms until either partyprovides notice of non-renewal. In October 2007, we began to provide  back-office support for our wirelessoperations internally and terminated agreements with Mobile Technology Services(a subsidiary of InPhonic, Inc.), a mobile virtual network enabler.

 

**E. Sales and Marketing**

 

Our sales and marketingstrategy is to position our business as a local Hawaii company and to developand deliver products designed to meet our market’s specific needs. Keycomponents of our sales and marketing strategy include:

 

·                  developing anddelivering products, services and bundles customized to meet the needs of thelocal Hawaii market;

 

·                  leveraging the *Hawaiian Telcom*® brand acrossall our product offerings;

 

·                  partnering withleaders in the Hawaii business community;

 

·                  raisingvisibility in the community through key sponsorships and executive positioning;and

 

·                  creating acustomer driven organization, locally operated and managed, that providesreliable and high quality service in addition to excellent customer service.

 

We areimplementing this strategy by:

 

·                  developingintegrated sales and marketing plans that focus on meeting the needs of thelocal market;

 

·                  focusing localadvertising and marketing expenditures to create demand, promote our productsand services, and establish competitive positioning;

 

·                  re-designingsales coverage models to focus on underserved customers and to increasesegmentation and target marketing to small- and medium-sized businesscustomers;

 

·                  improving thecustomer service experience; and

 

·                  increasing thecapacity of all sales and marketing channels by centralizing sales supportfunctions, enhancing performance of retail stores, and tracking and managingprofitability by sales channel.

 

Our long distanceservices sales efforts are primarily directed toward increasing the number ofsubscribers we serve, selling bundled services and generating incrementalrevenues through product and feature up-sale opportunities. We sell our longdistance communications services through local advertising, as part of bundledtelecommunications packages, and up-selling by our customer contact personnel.

 

5

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We market our Internetservices as a stand-alone product, as well as part of a package of bundledtelecommunications services to our residential and business customers. Webelieve our ability to bundle Internet services with other telecommunicationsservices has contributed to the revenue growth generated by our Internetservices business.

 

We sell wireless phonesand services primarily through our eight retail stores. We are currentlyinvestigating alternative sales strategies.

 

**F. Network Architecture and Technology**

 

Our strategy is to buildand operate the most technologically advanced communications network in thestate of Hawaii. In 2007, we invested approximately $55 million in our networkincluding significant expenditures transforming our network from a traditionalTime Division Multiplexing (TDM) telecommunications network to an InternetProtocol (IP)-based packet network.

 

*BackboneNetwork*

 

In March 2007, weactivated a statewide Multiprotocol Label Switching (MPLS) network. Thatcompleted the foundation, or backbone, of our IP-based network. Migration plansare in place to converge our entire network onto this platform. Our current backboneinfrastructure consists of seven core MPLS routers, 23 service edge routers, 21Frame Relay switches, and 13 ATM switches. There are also 499 SynchronousOptical Network (SONET) rings in service.

 

We began offering newservices statewide on our MPLS network in May 2007, including an IP-basedvirtual private network (IPVPN) service and an enhanced IP-based data service.These services provide converged data connections over our MPLS network,compared to ATM, frame relay, or SONET services that provide data connectionsover separate overlay networks. In addition to increasing the capacity of ourMPLS backbone, we also continued preparations to provide proposed videoservices, including configuration design and installation of a video head endand the middleware (user interface) solution. In 2007, we introduced a new,higher speed HSI service at up to 11 Mbps over our MPLS network. As we completethe upgrade of our backbone network, we plan to migrate customers from ourlegacy ATM-based HSI service to our new IP-based network. Our convergence ofservices to a single IP infrastructure is consistent with the industry movementtoward Ethernet, and will allow us to prioritize our bandwidth to provide abroader range of services and reduce congestion on our network.

 

*VoiceNetwork*

 

We continue to migrateour voice network from a traditional circuit-switched network to apacket-switched network. In February 2007, we completed the upgrade of ourClass 4 access tandem to a next generation, packet-based Nortel CS2000core. This hybrid core will manage both TDM- and IP-based network elementswhile we complete the installation of IP-based network elements. InMay 2007, we also installed an IP-based long distance tandem-switchingsystem that permits us to retain 100% of our inter-island traffic on ournetwork, thereby reducing usage fees paid to Sprint to terminate our longdistance traffic, reducing sources of problems to our network, and improvingcustomer service. Furthermore, we are now able to utilize multiple longdistance vendors for interLATA and international traffic for both diversity andcost purposes.

 

As of December 31,2007, we owned a total of 116 local base and remote switches and a total ofseven tandem switches serving 560,417 total lines on the islands of Hawaii,Kauai, Lanai, Maui, Molokai and Oahu. All of our access lines are served bydigital switches provided predominantly by Alcatel-Lucent and Nortel. Since2002, we have updated our infrastructure to meet the technological needs of ourcustomers. Our switches on every island are linked through a combination ofextensive aerial, underground, and undersea cable, allowing us to provide ourservices to customers in a very challenging geographical territory.

 

*TransportInfrastructure*

 

In 2007, we introducedour first fiber-to-the-premise solution to serve greenfield multi-dwelling unit(MDU) and subdivision developments. By laying fiber and utilizing variouspassive optical network components from these developments to our centraloffices, we can further leverage the capabilities of our MPLS backbone, providehigher bandwidth services to our customers including the proposed video services,and reduce maintenance costs. We intend to utilize this technology for futuregreenfield developments.

 

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Our telecommunicationinfrastructure includes more than 13,212 sheath miles of fiber optic cable andcopper wire distribution lines. Submarine and deep-sea fiber optic cablesconnect the islands of Kauai, Oahu, Maui and Hawaii, while digital microwave providesother inter-island connections. The islands also are connected withTrans-Pacific fiber optic cables, not owned by us. In 2007, we added aninter-island fiber link between Oahu and Hawaii, creating a survivableinter-island ring between Oahu, Maui, and Hawaii.

 

*Network Surveillance andOperations*

 

Certain networkmanagement operationsare provided by our Network Operations Center (NOC) and our Network ServicesComputer Center (NSCC) located in Honolulu. We also have a customer servicecenter that coordinates installations and repairs, as well as 86 centraloffices that permit us to service our customers’ needs statewide. Thesefacilities offer extended business hours to handle customer inquiries andservice orders. In addition, the Honolulu operations center is responsible forservice delivery, installation, maintenance and repair, outside plantconstruction activity, and inventory management of supplies and equipmentnecessary for telephone operations. This function includes management andmaintenance of the fleet of cars and trucks that support our outside plantactivities.

 

In addition to ournetwork infrastructure, we have operating equipment consisting of motorvehicles and other equipment. We own or lease most of our administrative andmaintenance facilities, customer service centers, central offices and remoteswitching platforms and transport and distribution network facilities. Ourlocal telephone assets are located primarily in Hawaii.

 

**G.  Back-Office and Information Technology**

 

Since the 2005 Acquisition,we have made substantial investments in a new back-office and ITinfrastructure. This back-office and IT infrastructure was necessary to enableus to migrate off software systems that we used prior to the 2005 Acquisition.We initially engaged BearingPoint, Inc. (BearingPoint) to build theback-office and IT infrastructure, and in February 2007 terminated ourrelationship with BearingPoint and transferred certain services previouslyperformed by BearingPoint to Accenture LLP (Accenture). See “—Transitionto Becoming a Stand-alone Provider.”

 

We believe that our newback-office and IT infrastructure, when fully functional, will allow us toimprove and expand our customer services and streamline our operations.Enhanced data management and billing capabilities will allow us to broaden ourbundled product offerings. In addition, our new back-office and ITinfrastructure will provide us with more comprehensive customer information,which we believe will enhance our market intelligence. We believe that theenhanced functionality of our new IT infrastructure will allow us to sell moreproducts and bundles, operate more efficiently, and reduce our costs. See “—BusinessTransactions.”

 

**H. Competition**

 

***WirelineServices***

 

*LocalExchange Service*

 

ILECs are subject toseveral types of competition, including (i) facilities-based providerswith their own local networks; (ii) resale providers who purchase localservice from ILECs at wholesale rates and resell these services to theircustomers; (iii) providers who lease UNEs from ILECs; (iv) cablecompanies who offer local service through Voice over Internet Protocol (VoIP)over their cable platform, and (v) new entrants and providers withtechnology alternatives to local service networks like wireless providers. Technologicaldevelopments in wireless telephone features, personal communications services,digital microwave and other wireless technologies are expected to promote thedevelopment of alternatives to traditional wireline services. We believe thatcompetition is likely to come from resale interconnection or UNEinterconnection. We also anticipate increased competition from certain serviceproviders in Hawaii, primarily Oceanic Time Warner Cable, and two local CLECs.

 

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*LongDistance Services*

 

The long distancetelecommunications market is intensely competitive and has been for severalyears. Competition in the long distance business is based primarily on price,although service bundling, branding, customer service, billing services andquality also play a role in customers’ choices. In the long distance market, wecompete against the three largest interstate long distance carriers in Hawaii —AT&T, Verizon and Sprint — as well as all of the wireless providers thatoffer bundled long distance with their rate plans. In addition, we believe thatVoIP will also offer an alternative to long distance services.

 

*InternetServices*

 

We expect that theInternet access services business will continue to be highly competitive due tothe absence of significant barriers to entry. We currently compete with OceanicTime Warner Cable, Pacific LightNet, Clearwire and traditional carriersproviding dedicated Internet access services to business customers.

 

***Other***

 

*WirelessServices*

 

While the market forwireless telephone services in Hawaii continues to grow, it is highlycompetitive. All of the national wireless carriers including Verizon Wireless,AT&T Mobility LLC, Sprint, and T-Mobile USA, Inc., as well as MobiPCS,currently service the Hawaii wireless market. Federal local number portabilityrequirements also increase competition by allowing customers to keep theirtelephone numbers when they switch carriers.

 

**I. Employees**

 

As of March 15,2008, we employed 1,504 full-time employees (FTEs) in Hawaii, compared to 1,704FTEs as of March 15, 2007. The decrease reflects a reduction in the numberof non-union employees that took place between October 2007 and January 2008and a voluntary retirement package offered in January 2008. Of the totalemployees, 62.4% were represented by the International Brotherhood ofElectrical Workers (IBEW) Local 1357. As part of the 2005 Acquisition, weassumed all of the obligations of the collective bargaining agreement thatgoverns the terms and conditions of employment for all IBEW-representedemployees working for us. On March 26, 2007, we announced a tentativeagreement with IBEW Local 1357 to extend the term of the current collectivebargaining agreement from September 1, 2007 to August 31, 2008 thatwas ratified by union members and approved by our Board of Directors. We are inthe process of preparing for negotiations later this year with IBEW Local 1357on a new collective bargaining agreement. We believe that management currentlyhas a constructive relationship with the represented and non-representedemployee group.

 

**J.  Insurance**

 

We have insurance tocover risks incurred in the ordinary course of business, including errors andomissions,  generalliability, property coverage (which includes business interruption), directorand officers and employment practices liability, auto, crime, fiduciary, andworker’s compensation insurance in amounts typical of similar operators in ourindustry and with reputable insurance providers. Central office equipment,buildings, furniture and fixtures and certain operating and other equipment areinsured under a blanket property insurance program. This program providessubstantial coverage against “all risks” of loss including fire, windstorm,flood, earthquake and other perils not specifically excluded by the terms ofthe policies. As is typical in the telecommunications industry, we areself-insured for damage or loss to certain of our transmission facilities,including our buried, undersea, and above-ground transmission lines. We believethat our insurance coverage is adequate; however, if we become subject tosubstantial uninsured liabilities due to damage or loss to such facilities, ourfinancial results may be adversely affected.

 

**K.  Regulation**

 

***Federal and State Regulation of Telecommunications Services***

 

Our telephone operationsgenerally are subject to the jurisdiction of the FCC with respect to interstateservices and the HPUC with respect to intrastate services. The followingsummary does not purport to describe all current and proposed applicablefederal and state regulation.

 

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***Competition***

 

We face increasingcompetition in all areas of our business. Regulatory changes brought on by the1996 amendments to the Communications Act, regulatory and judicial actions, andthe development of new technologies, products and services have createdopportunities for alternative telecommunication service providers, many ofwhich are subject to fewer regulatory constraints than our ILEC. We are unableto predict definitively the impact that the ongoing changes in thetelecommunications industry will ultimately have on our business, results ofoperations or financial condition. The financial impact will depend on severalfactors, including the timing, extent and success of competition in ourmarkets, the timing and outcome of various regulatory proceedings and anyappeals, and the timing, extent and success of our pursuit of new opportunitiesresulting from the amendments to the Communications Act and technologicaladvances, and any changes in the State or Federal laws or regulations governingcommunications.

 

***UniversalService***

 

As a provider ofinterstate telecommunications, we are required to contribute to federal universalservice programs. The FCC adjusts the contribution amount quarterly, and mayincrease or decrease this amount depending on demand for support and the totalbase of contributors. Pending proposals to change the contribution methodologycould increase or reduce our total obligation to this funding. We also drawInterstate Access Support from this funding.

 

On December 31,2007, we filed a petition with the FCC requesting a waiver to determine oureligibility to receive support from the non-rural high-cost support mechanismaccording to our average line costs per wire center, rather than our statewideaverage line costs. Grant of the petition would increase the amount of suchsupport we receive. There is no definite timeframe for an FCC decision on thispetition.

 

Sandwich IslesCommunications, a rural local exchange carrier, has obtained eligibletelecommunications carrier (ETC) status to serve certain remote areas of thestate administered by the State Department of Hawaiian Home Lands, and isestimated to have received over $14,000 per-line of annual federal high-costloop support for 2006. Sandwich Isles receives this funding to serve certainparts of the Hawaiian Home Lands based on its representations that it servesareas that were unserved as of 1997. Our lack of such support makes itdifficult for us to compete effectively in those remote areas of the state.Nextel Partners, Inc. also has been granted ETC status by the HPUC, anddraws federal support for some of its licensed service areas.

 

***State Regulation of Retail Rates***

 

Although the FCCgenerally does not regulate our retail rates, the HPUC imposes relativelyextensive rate regulation on us. However, the HPUC has reduced its rateregulation of some of our services, using a three-tiered approach. Services maybe classified as fully competitive, partially competitive, or non-competitive.Certain services, such as intrastate (inter-island) toll, are classified asfully competitive services and are exempt from rate-of-return regulation andprice ceilings. They must be offered on prices, terms, and conditions reflectedin tariffs filed at the HPUC and may not be priced below the total servicelong-run incremental cost. Other services, such as central exchange (Centrex)features, are classified as partially competitive services and may be flexiblypriced, although they may be subject to regulation (other than rate-of- returnregulation) such as price floors and price ceilings, as authorized by the HPUC.Most services, including residential and business local exchange services,integrated service digital network (ISDN), services, and directory assistance,are considered non-competitive services when offered on a stand-alone basis andare subject to rate-of-return regulation. However, the HPUC has recently grantedus some pricing flexibility on these services when they are bundled with otherfully or partially competitive services or other services that are not withinthe HPUC’s jurisdiction, enabling us to charge a discounted rate for thebundle. The competitive classification of certain services and the ability tobundle the services have helped us to respond to competition, but we cannotquantify the effect.

 

The rates charged to endusers for the provision of basic local service are generally subject to rate-of-returnregulation administered by the HPUC. Local rates historically have been set ata level that will allow the recovery of embedded costs for local service.Recognized costs include an allowance for a rate-of-return on investment inplant used and useful to provide local service. Competitive forces andconditions in the HPUC order approving the 2005 Acquisition may cause us to beunable to raise our local rates in the future. Rate cases brought to the HPUCoccur infrequently, typically spaced by several years, are initiated by thecarrier and require the carrier to submit substantial evidence and meet a highburden of proof for rate increases. Moreover, the HPUC order approving the 2005Acquisition forbids us from initiating a rate case with a test year earlierthan 2009, unless the HPUC finds a compelling financial need to justify anearlier filing. In addition, the order restricts in some ways our ability topay dividends. If we seek a rate case with a test year earlier than 2009, wewould be subject to certain additional conditions including the obligation ofHawaiian Telcom Holdco, Inc. to make an additional capital investment inus.

 

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***State and Federal Regulation of Long Distance Services***

 

We are subject to certainconditions imposed by the HPUC and the FCC on the manner in which we conductour long distance operations. For example, we are prohibited from jointownership of local and long-distance telephone transmission or switchingfacilities. We are also required to file tariffs and submit cost studies whenbundling local service with intrastate, interstate, or international longdistance services. The HPUC must ensure that these bundled offerings do notresult in (a) our long distance business being cross-subsidized by theregulated portion of our local exchange business or (b) discrimination byour ILEC against other long distance providers.

 

***Federal Interconnection and Unbundling Requirements***

 

As an ILEC, we aresubject to a number of access and interconnection requirements under federallaw.  Among other things, an ILEC must negotiate in good faithwith other carriers requesting interconnection and access to unbundled networkelements (UNEs) and offer its competitors access to certain UNEs, such aslocal loops and inter-office transport, at regulated rates.  However,we are no longer required to provide our competitors with access to loop ortransport UNEs, switching or the combination of UNEs known as the UNE Platform(UNE-P), as certain competitive thresholds have been met in our market. The FCC also has limited our obligation to unbundle fiber facilities tomultiple dwelling units, such as apartment buildings, and to homes andoffices deployed in fiber-to-the-curb and fiber-to-the-premises arrangements.  The FCC currently is examining its pricing standard for UNEs, andmay modify other aspects of its UNE rules as market conditionschange.

 

***Interstate and Intrastate Access Charges***

 

The rates that we cancharge for interstate access are regulated by the FCC. The FCC has made variousreforms to the existing rate structure for access charges, which, combined withthe development of competition, have generally caused the aggregate amount ofaccess charges paid by long-distance carriers to decrease over time. Forexample, the FCC has instituted caps on the per-minute rate we can charge forour switched access services as well as on our monthly subscriber line charges(SLCs). The FCC has adopted rules for special access services that providefor pricing flexibility and ultimately the removal of services from priceregulation when prescribed competitive thresholds are met. The FCC currently isconsidering whether to modify the special access pricing rules for pricecap carriers like us. On November 16, 2007, we filed a petition withthe FCC seeking pricing flexibility for certain special access services offeredon the neighbor islands.  An order is pending FCC decision. We currentlyhave pricing flexibility for certain special access services offered on Oahu.

 

Our intrastate accessrates are set forth in an interim tariff approved by the HPUC in 1995 and arebased on our embedded costs. Although it has been the HPUC’s intention toinitiate a proceeding to adopt permanent access rates based on a forward-lookingcost methodology, the HPUC has not yet initiated a proceeding to do so.

 

***Federal Framework for Intercarrier Compensation***

 

The FCC has an ongoingrulemaking that could fundamentally restructure the regulatory regime forintercarrier compensation. This comprehensive reform proposal seeks, amongother things, to unify state and interstate intercarrier charges in certaincircumstances, provide a mechanism to replace intercarrier revenues lostthrough rate unification, and resolve a number of outstanding disputes amongcarriers regarding interconnection and compensation obligations. The FCC hasalso sought comment on whether access charges should apply to Voice overInternet Protocol (VoIP) or other Internet protocol-based service providers. TheFCC has not yet announced whether it will take any action with respect to theseissues.

 

The FCC has found thatInternet-bound traffic is not subject to reciprocal compensation under Section 251(b)(5) ofthe Communications Act. Instead, the FCC established a federal rate cap forthis traffic, which is and will remain $0.0007 per minute until the FCC decidesotherwise.

 

***Federal Regulatory Classification of Broadband and InternetServices***

 

The FCC has beenconsidering whether, and under what circumstances, services that employInternet protocol are “telecommunications services” subject to regulations thatapply to other telecommunications services, but it has not definitively ruledon the issue and instead has made a series of decisions addressing specificservices and regulations. For example, some VoIP providers must comply with thefederal wiretap law and with FCC requirements to provide enhanced  911 emergency calling capabilities, ensuredisability access, and provide local number portability. Certain VoIP providersare exempt from state telecommunications market entry regulation. As a result,our VoIP competitors may be less heavily regulated than we are.

 

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In September 2005,the FCC ruled that ILECs like ours may offer dedicated broadband Internetaccess service as an information service. As a result, we are no longerrequired to offer the underlying broadband transmission capacity used toprovide our HSI service on a tariffed, common carrier basis to competingInternet Service Providers (ISPs). This decision gives us greater flexibilityin how we offer and price such transmission capacity. It also puts us on moreeven footing with our cable competitors in the broadband market since the FCChad previously held that high-speed Internet access service delivered usingcable television facilities constitutes an information service not subject tocommon carrier regulations, a determination that was upheld by the UnitedStates Supreme Court.

 

***Other Federal and State Regulatory Proceedings***

 

Currentlypending before the HPUC is a proceeding, filed on October 6, 2006,concerning our service quality and performance levels and standards in relationto our wholesale and retail customers. The HPUC, as part of its approval of the2005 Acquisition pursuant to which Hawaiian Telcom acquired Verizon’s Hawaiiassets, had called for such service quality review to take place beginning sixmonths after the systems cutover from Verizon, which occurred April 1,2006. The Consumer Advocate of the State of Hawaii, the Department of Defense,Time Warner Telecom of Hawaii LLP and Pacific LightNet, Inc. are partiesto the proceeding. In general, the HPUC is examining the effect that the 2005Acquisition had on our wholesale and retail customers, including whether anyaudit or other remedy should be required to mitigate any negative effects. TheHPUC also is addressing whether any of the current service quality standardswith which we are required to comply should be modified or eliminated andwhether any new standards should be enacted, including whether a procedureshould be established to impose fines for any failure to meet the servicestandards. All formal filings provided for in the schedule established by theHPUC, as well as a hearing, have been completed. We continue to fileperiodic service quality reports as required by the HPUC and respond toinformation requests concerning them. We cannot predict the outcome of this orother proceedings before the FCC, the HPUC or the courts.

 

***Environmental, Health and Safety Regulations***

 

We are subject to variousenvironmental, health and safety laws and regulations that govern ouroperations and may adversely affect our costs. Some of our properties use, ormay have used in the past, on-site facilities or underground storage tanks forthe storage of hazardous materials that could create the potential for therelease of hazardous substances or contamination of the environment. We cannotpredict with any certainty our future capital expenditure requirements for environmentalregulatory compliance, although we have not currently identified any of ourfacilities as requiring major expenditures for environmental remediation or toachieve compliance with environmental regulations.

 

**L.  Business Transactions**

 

***Transition******toBecoming a Stand-alone Provider***

 

Verizon and itsaffiliates historically provided our predecessor with services that werecritical to the operation of our business. Our transition from Verizon tobecoming a stand-alone provider of telecommunications services began on May 2,2005 and ended April 1, 2006 (the “Transition Period”).

 

Upon the expiration ofthe Transition Period on April 1, 2006, we completed our transition fromVerizon, which involved (a) terminating the services from Verizon andtransitioning those services to us, and (b) migrating the data used inVerizon’s Hawaii Business from Verizon’s systems to our systems. As a result,the services previously provided to us by Verizon and its affiliates are nowbeing provided by our internal operations or third-party service providers.

 

We engaged BearingPointin 2004 to build a back-office and IT infrastructure to allow us to migrate offsoftware systems that we used prior to the 2005 Acquisition and during theTransition Period, thereby enabling us to operate as a stand-alone provider oftelecommunication services. These “build services” generally consisted ofintegration and installation of software, databases, hardware, operatingsystems, and internal network systems; providing the services of the primaryand back-up data centers; providing certain training; and business processdefinition. The new back-office and IT infrastructure was integrated withcertain core operations support systems purchased from Verizon as part of the2005 Acquisition, and provides network operations support functions andoperates our billing systems, customer 

 

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relationship management systems, corporate financesystems, human resource and payroll systems. Under our agreement withBearingPoint, BearingPoint also provided certain infrastructure managementservices (including management of databases, storage, application and utilityservers and managed network services) and application development andmaintenance services (including application planning, design, testing,implementation, and maintenance and support). BearingPoint had committed tocomplete the “build services” by the end of the Transition Period expiring April 1,2006.

 

On the April 1, 2006 cutover date, while themajor network operational systems were built and functioned without significantproblems, critical systems related to back-office functions, such as customercare, order management, billing, supply chain, and other systems interfacingwith our financial systems, lacked significant functionality. This led todeficiencies in billings and collections, revenue assurance, and order entryflow-through. Despite BearingPoint’s efforts to improve the functionality ofthe related systems, we continued to experience many of these same issues,requiring us to incur significant incremental expenses in 2006 to retainthird-party service providers to provide call center and manual processingservices in order to operate our business. To help remediate deficiencies, we alsoengaged the services of Accenture, which has expertise in telecommunicationsback-office software systems and processes. In addition to the third-partycosts, we incurred additional internal labor costs in the form of overtime pay.As a result, we engaged in discussions with BearingPoint seeking reimbursementof the aforementioned costs and compensation for damages arising from failuresto deliver promised services in a timely manner.

 

Effectiveas of February 6, 2007, we reached a mutual agreement with BearingPointthat was memorialized in a Settlement Agreement and Transition Agreement. Underthe Settlement Agreement, BearingPoint paid to us the aggregate amount of $52.0million (the “Settlement Payment”) on March 27, 2007 and agreed todischarge previously-submitted invoices in an aggregate amount of approximately$29.6 million as well as other amounts otherwise payable to BearingPoint. Thetotal benefit to us under the settlement includes the cash Settlement Paymentand a reduction in accounts payable ($38.6 million at February 6, 2007,including certain accrued costs) associated with reversing amounts accruedunder our agreement with BearingPoint. For the year ended December 31,2006, we recorded a recovery contractually due under our agreement with BearingPointamounting to $24.1 million. The remaining settlement consideration wasrecognized in the first quarter of 2007. The Transition Agreement provided for,among other things, the transition of certain of the remaining “build services”and application management and support services to a successor provider, andcontemplated a transition period that ended on May 2, 2007 during whichBearingPoint provided transition services at no cost to us.

 

Contemporaneouslywith the Settlement Agreement and Transition Agreement, we entered into anApplication Services Agreement with Accenture, effective as of February 5,2007, pursuant to which Accenture agreed to perform certain of the applicationdevelopment and management services previously provided under the BearingPointMaster Services Agreement. The Application Services Agreement commenced with atransition period that ended May 2, 2007, during which Accenture assumedresponsibility for the completion and ongoing development of applications fromBearingPoint. The transition from BearingPoint to Accenture was accomplishedwithout any material issues. The Application Services Agreement requiresAccenture to provide three main areas of support: Application ManagementServices, Recovery Services, and Enhancement Services. For the ApplicationManagement Services, Accenture is providing ongoing system maintenance andsupport services for 17 months from the effective date of the agreement. Forthe Recovery Services, which concluded in December 2007, Accenture wasresponsible for leading and executing the remediation of systems issuesidentified by the parties in 2006 to increase functionality and reducecontingency costs. See “—Agreements Relating to our Back-Office and InformationTechnology.” For the Enhancement Services, Accenture is developing key customerservice and business support systems to improve operations, increase stability,and introduce new products. Originally set to conclude in December 2007,we extended the term of the Enhancement Services to June 30, 2008.

 

Theterm of the Application Services Agreement ends in July 2008. Discussionsare ongoing with vendors, including Accenture, to provide long-term IT supportservices following the expiration of the Application Services Agreement.

 

Throughthe maintenance and remediation efforts beginning in 2006 and continuing into2008, we have seen continued improvements in system stability and a reductionin system defect rates. Implementation of order-to-cash flow-through upgradescontinue to improve overall performance, accuracy of orders and bills, and somereduction in third-party support costs. These improvements in stability andaccuracy have allowed the implementation and support of new products andservices to our customers, such as new product bundles and HSI products, andprovided us with improved capability to offer targeted and timed promotions.

 

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***Intellectual Property Agreements***

 

Although the mergeragreement for the 2005 Acquisition contains several provisions relating to thedisposition of intellectual property assets related to our business, such as anobligation of GTE to use commercially reasonable efforts from signing of themerger agreement through May 2, 2006 to obtain for us the right to use allthird-party network element software that is installed on our network elementsin Hawaii, the ownership, rights, and licenses of Hawaiian Telcom inintellectual property are generally established under an Intellectual PropertyAgreement and a Verizon Proprietary Software License Agreement, which wereentered into with GTE on May 2, 2005.

 

Pursuant to theIntellectual Property Agreement, we acquired certain trademarks and trade namesthat relate to our business, although the majority of the marks and names thatwere used in the business before the 2005 Acquisition were retained by Verizonand GTE, which required us to undertake a re-branding process. We also acquired(a) the copyrights to 41 specified phone books and compilation copyrightsto all of the white page, yellow page and other telephone print directoryproducts published by Verizon’s Hawaii Business for use by its customers(subject to a license back to GTE in such copyrights), (b) all customerproprietary network information (other than subscriber list information) thatrelates solely to customers of Verizon’s Hawaii Business, and (c) a jointownership interest (with GTE) in the other non-technical proprietary businessinformation relating to Verizon’s Hawaii Business. In addition, under theIntellectual Property Agreement we are licensing from GTE all otherintellectual property used in the business (other than trademarks, third-partyintellectual property, and Verizon proprietary software). Effective November 30,2007, in connection with the sale of our directories publishing business to HYPMedia Holdings LLC (see “— Agreements Relating to Directories Publishing.”), we transferredthe copyrights to our phone books (including those acquired from GTE) to HYPMedia LLC, a wholly-owned subsidiary of HYP Media Holdings LLC.  We alsolicensed to HYP Media LLC the right to use several of our trademarks inconnection with certain of its directory products.

 

Pursuant to the VerizonProprietary Software License Agreement with GTE, we have nonexclusive, perpetual,internal-use only licenses to use certain Verizon proprietary software(including object and source code) that was used by Verizon in connection withVerizon’s Hawaii Business. The software licensed to us consists of numerousback-office systems that were used in various operations of Verizon’s HawaiiBusiness. The software includes, among other things, the assignment, activationand inventory system (AAIS); an automated workforce administration system(AWAS); an FTTP and HSI loop qualification system (LQP); and data exchangeutility and connection engine systems (DEU/DEUCE).

 

Certain other Verizonsoftware applications are licensed under other agreements with GTE and VerizonInformation Technologies, Inc. For example, Verizon’s AccessGuardiansoftware is licensed to us for a term equal to the term of the TransitionServices Agreement plus two years, pursuant to a Supplemental Software LicenseAgreement, dated May 2, 2005, between us and Verizon InformationTechnologies LLC, or VIT, an affiliate of Verizon. Further, Verizon’s AINService Logic programs are licensed to us perpetually pursuant to the VerizonProprietary AIN Software License Agreement, entered into as of May 2,2005.

 

***Agreements Relating to Directories Publishing***

 

Effective November 30, 2007, we completed thesale of our directories publishing business to HYP Media Holdings LLC, aDelaware limited liability company and wholly-owned subsidiary of CBD Investor, Inc.(CBD). The sale was made pursuant to the Purchase Agreement dated as of April 29,2007 among the Company, Hawaiian Telcom Services Company, Inc., and HYPMedia Holdings LLC as assignee of CBD, for a cash purchase price of $435.0million plus certain adjustments related to working capital. In connection withthe sale, we entered into continuing commercial arrangements with HYP Media LLCrelating to the directory publishing business, including but not limited to a50-year publishing agreement pursuant to which HYP Media LLC will serve as theexclusive official publisher of telephone directories on behalf of HawaiianTelcom, Inc. Under this agreement, HYP Media LLC will publish both whiteand yellow pages print directories under the *HawaiianTelcom*® brand. Also as part of this transaction, HYPMedia LLC assumed our rights and obligations under our directory servicesagreement with L.M. Berry. Under the directory services agreement, L.M. Berry,a subsidiary of AT&T, is responsible for selling advertising in theHawaiian Telcom print directories as well as for the publication, printing and distributionof the print directories.

 

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***Agreements Relating to our Back-Office and InformationTechnology***

 

We originally engagedBearingPoint, pursuant to a Master Services Agreement effective as of August 6,2004, to build and operate an IT solution environment, including businessprocesses, software applications and systems (such as billing systems,corporate finance systems, human resource and payroll systems and customerrelationship management systems) and hardware, that we would use to operate ourbusiness.

 

Effective as of February 6,2007, we entered into a Settlement Agreement with BearingPoint to resolve adispute relating to reimbursement of costs to temporarily obtain additionalresources to assist with processing transactions and compensation for damagesarising from failures to deliver promised services in a timely manner. See “—Transitionto Becoming a Stand-alone Provider.” As a result of payment of the SettlementPayment on March 27, 2007, the Master Services Agreement was terminated.

 

Contemporaneouslywith the Settlement Agreement, we entered into a Transition Agreement withBearingPoint pursuant to which, among other things, the services provided underthe Master Services Agreement were transferred to a successor provider. TheTransition Agreement also governed all future liability matters between theCompany and BearingPoint (other than for those claims reserved in theSettlement Agreement). The Transition Agreement included a transition periodending May 2, 2007 during which BearingPoint provided transition servicesat no charge to us. In addition, we entered into an Application ServicesAgreement with Accenture effective as of February 5, 2007, pursuant towhich Accenture will complete the development of key customer service andbusiness support systems. The initial focus of this agreement was on critical,high-volume systems functionality.

 

***Agreement Relating to Procurement and Logistics***

 

On December 10,2004, we entered into a supply chain services agreement with Sprint NorthSupply Company, now known as Embarq Logistics, a division of Embarq Corporation(Embarq), pursuant to which Embarq provides us with a variety oftelecommunications products and handles the logistics with respect to suchproducts, including procurement, shipping, warranty returns, and relatedservices such as testing. On May 2, 2005, these services replaced theprocurement and logistic services that had been provided by Verizon.

 

We have the ability topurchase a significant portion of our telecommunications equipment from Embarqunder the agreement. The agreement is non-exclusive and has no minimum purchaserequirements. The agreement also contains benchmarking andmost-favored-customer provisions that enable us to receive pricing that isroughly equivalent to prices generally available to similarly situatedcustomers in the telecommunications industry. The term of the agreement is fiveyears from December 10, 2004. We may terminate the agreement forconvenience at any time upon 90 days notice to Embarq.

 

***Agreements Relating to our Wireless Business***

 

*SprintWireless Agreement*

 

We entered into a PrivateLabel PCS Services Agreement with Sprint Spectrum, L.P., a subsidiary ofSprint, effective as of January 11, 2005, by which we purchase wirelesstelephone and data services from Sprint and resell those services to our ownend users under the *Hawaiian Telcom*®brand name. This agreement allows us to buy airtime from Sprint at wholesalerates that decline with volume and requires us to meet certain minimum line andusage volumes. The agreement has a term of five years and is renewable foradditional two-year terms after the initial period.

 

*OtherAgreements*

 

We have contracts withother parties that provide the equipment and other services that are necessaryto our wireless business. In August 2007, we entered into a Non-ExclusiveLicense and Servicing Agreement with Qualution Systems Inc. to utilize itsCatalyst customer relations management software application suite, for which  we pay a flat monthly fee. The agreement hasa term of two years and is renewable for additional one-year terms. TheQualution agreement replaced our mobile virtual network enabler (MVNE)agreement with Mobile Technology Services, pursuant to which we previouslyobtained various back-office services for our wireless business. We purchaseour wireless handsets and related equipment through an agreement withBrightpoint, Inc. that has no specific term or minimum purchaserequirement.

 

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** **

**Item 1A. Risk****Factors**

 

*You**should carefully consider the risks described below as well as the other informationcontained in this annual report. The risks described below are not the onlyrisks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially and adversely affect our business operations. Any of thefollowing risks could materially adversely affect our business, financialcondition or results of operations.*

 

**Risks Relating toour Business**

 

Ourbusiness faces a variety of financial, operating and market risks, includingthe following:

 

***Deficiencies in our critical back-office systems and IT infrastructurehave negatively impacted our ability to operate as a stand-alone provider oftelecommunication services, which has had an adverse effect on our business andresults of operations.***

 

To facilitate ourtransition to a stand-alone telecommunications provider following the 2005Acquisition, we engaged BearingPoint to build and operate a back-office and ITinfrastructure, including critical business processes, software applications(such as billing systems, corporate finance systems, human resources andpayroll systems and customer relationship management systems), and hardware. Thisback-office and IT infrastructure was necessary to enable us to migrate offsoftware systems provided by Verizon. On April 1, 2006, we ceasedreceiving services from Verizon. While the major network operational systemswere built and functioned without significant problems at and after the April 1,2006 cutover date, critical systems related to back-office functions such ascustomer care, order management, billing and financial reporting systemslacked, and continue to lack, significant functionality.  In particular, lack of systems functionalityled to customer care, order management, and billing systems issues, whichsubstantially impacted both customer satisfaction and collection efforts.Effective as of February 6, 2007, we entered into a Settlement Agreementwith BearingPoint as well as a Transition Agreement that provided for, amongother things, the transfer of the services previously provided under ouragreement with BearingPoint to a successor provider. Contemporaneously, weentered into an Application Services Agreement with Accenture, effective as of February 5,2007, pursuant to which Accenture agreed to perform certain of the applicationdevelopment and management services previously performed by BearingPoint.

 

It also has beennecessary for us to incur significant incremental expenses to retainthird-party service providers to provide manual processing services in order tooperate our business.  In addition to thecosts of third-party service providers, we also incurred additional internallabor costs, in the form of diversion from other efforts. We expect to continueto incur significant incremental costs in the future, although the amounts ofsuch costs should decline over time if and as our systems functionalityimproves.

 

In addition to the significantexpenses we have incurred, because we do not have fully functional back-officeand IT systems, we have been unable to fully implement our business strategyand effectively compete in the marketplace, which has had an adverse effect onour business and results of operations. While we are continuing to work to improve the functionality of oursystems and we have seen improvement, there is no certainty that theseactivities will be successful or when we will achieve the desired level of  functionality.  Until we are able to achieve this level offunctionality, our lack of critical back-office and IT infrastructure willnegatively impact our ability to operate as a stand-alone provider oftelecommunication services, and will have an adverse effect on our business andoperations.

 

***Wehave had a material weakness in internal control over financial reporting andcannot assure you that additional material weaknesses will not be identified inthe future. Our failure to implement and maintain effective internal controlover financial reporting could result in material misstatements in ourfinancial statements which could require us to restate financial statements andcause investors to lose confidence in our reported financial information.***

 

Our senior management hasdetermined that on December 31, 2007 the Company’s internal control overfinancial reporting was not effective due to the existence of materialweaknesses as defined in the Public Company Accounting Oversight Board’sAuditing Standard No. 5 that may have affected our financial statementsthrough December 31, 2007.  Thematerial weaknesses relate to internal control deficiencies identified inconnection with revenue transactions, including information technology systemfunctionality and data integrity, property plant and equipment, as well asaccess controls over certain information technology systems.

 

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We cannot provideassurance that significant deficiencies or additional material weaknesses inour internal control over financial reporting will not be identified in thefuture. Any failure to maintain or implement required new or improved controls,or any difficulties we encounter in their implementation, could result inadditional significant deficiencies or material weaknesses, cause us to fail tomeet our periodic reporting obligations or result in material misstatements inour financial statements. The existence of a material weakness could result inerrors in our financial statements that could give rise to a restatement offinancial statements, cause us to fail to meet our reporting obligations, whichmay result in defaults under our senior credit facilities, and cause investorsto lose confidence in our reported financial information.

 

***We have limited experience operating as astand-alone provider of telecommunications services.***

 

Wehave limited experience operating as a stand-alone provider oftelecommunications services. The increased costs and lack of flexibilityassociated with operating as a stand-alone provider of telecommunicationservices could negatively impact our financial results and ability to maintaincompliance with the covenant requirements of our debt agreements.

 

***Wehave made and expect to continue to make a significant amount of capitalexpenditures and to incur significant transition related expenses in connectionwith our transition to a fully functional stand-alone provider oftelecommunications services.  We intendto fund a portion of such capital expenditures and expenses with our revolvingcredit facility.***

 

In connection with ourtransition to a stand-alone telecommunications provider, we have made andexpect to continue to make a significant amount of capital expenditures andincur significant transition related expenses to, among other things, build newIT systems and to enhance the functionality of our existing systems. We intendto fund a portion of these capital expenditures and expenses with funds drawnby us under our revolving credit facility. On March 25, 2008, we drew theremaining $73.8 million available under our revolving credit facility inresponse to uncertain conditions in financial markets and were fully drawnunder the facility ($90.0 million).  Thefunds drawn will be invested in highly-rated, liquid instruments.  We filed a request with the HPUC in February 2008for authority to increase our allowable borrowings under the revolving creditfacility from $90.0 million to $150.0 million. If the amount of capital expenditures and expenses required to become afully functional stand-alone provider oftelecommunications services exceeds those that are contemplated by ourcurrent business plan, our revolving credit facility may be insufficient tofund such capital expenditures and expenses and to provide us with theliquidity that we otherwise would require. The availability of funds under our revolving credit facility will beconditioned upon, among other things, our continued compliance with thecovenants in our credit agreement.  If wefail to meet those conditions and are unable to draw funds under our revolvingcredit facility, we will be unable to execute on our business plan.

 

***We rely on several materialagreements to operate our business. The loss of any of these agreements, or thefailure of any third party to perform under any of these agreements, could havea material adverse effect on our business.***

*** ***

Since May 2005,several critical services historically provided by Verizon and its affiliatesare currently being provided by third-party service providers. For example, wehave entered into agreements with Accenture and other third parties for theprovision of, among other things, critical printing, billing, accounting, andIT services. In addition, we have an agreement with Sprint to provide Internettransit, long distance, and private line services. We have also entered into aMVNO agreement with a subsidiary of Sprint that allows us to resell Sprintwireless services, including access to Sprint’s nationwide personalcommunications service wireless network, under the *Hawaiian Telcom*® brand name.

 

Theexpiration or termination of any of our material agreements by third-partyservice providers could have a material adverse effect on our business. Uponexpiration or termination of any of these agreements, we may not be able toreplace the services provided to us in a timely manner or on terms andconditions, including service levels and cost, favorable to us. The failure ofany of our third-party service providers to satisfy its obligations under itsagreement with us could have a material adverse effect on our business.  Additionally, if any of our third-partyservice providers seeks U.S. bankruptcy law protection, our agreements withsuch service provider, and such service provider’s ability to provide theservices under its agreements with us, could be adversely impacted. Forexample, in bankruptcy proceedings, the third-party service provider, or abankruptcy trustee acting on its behalf, could seek to reject our agreementswith it as “executory” contracts under U.S. bankruptcy law. If the bankruptcycourt were to hold that any such contracts are executory, the third-partyservice provider would be able to avoid its obligations under such contracts,and we would have a claim for damages against the bankruptcy estate, which mayor may not be paid in the bankruptcy proceeding.

 

16

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***Our business is subject toextensive governmental regulation. Applicable legislation and regulations andchanges to them could adversely affect our business.***

*** ***

Weoperate in a heavily regulated industry, and most of our revenues come from theprovision of services regulated by the Federal Communications Commission (FCC)and the Public Utilities Commission of the State of Hawaii (HPUC). Laws andregulations applicable to us and our competitors may be, and have been,challenged in the courts, and could be changed by federal or state legislativeinitiative, judicial review or regulatory agencies at any time. We cannotpredict the impact of future developments or changes to the regulatoryenvironment or the impact such developments or changes would have on us.

 

Thereare a number of FCC policies under review that could have a significant impacton us. Changes to inter-carrier compensation that could impact our accessrevenues are possible. Changes to the universal service contributionmethodology also have been proposed. Changes in FCC policies may increase our obligations and/or reduce ourrevenue. Further, the FCC’s decisions are subject to judicial review. Theuncertainty created by these pending FCC proceedings and related litigationmake it difficult to predict the impact on us.

 

Inaddition, state government regulation also is a source of business uncertainty.The outcome of the service quality proceeding, a requirement from the 2005Acquisition, is not certain. In response to competitors’ requests, the HPUC mayinitiate a proceeding to re-evaluate performance measures and to evaluatewhether performance incentives applicable to our provision of services tocompetitors should be adopted. The HPUC also has deferred several matters fromearlier telecommunications proceedings, which could be initiated in the future.We cannot predict whether state proceedings will be initiated or the possibleoutcome of such proceedings at this time.

 

***A reduction by the HPUC orthe FCC of the rates we charge our customers would reduce our revenues andcould reduce our earnings.***

*** ***

Therates we charge our local telephone customers are based, in part, on a rate-of-returnauthorized by the HPUC on capital invested in our network. These authorizedrates, as well as allowable investment and expenses, are subject to review andchange by the HPUC at any time. If the HPUC orders us to reduce our rates, ourrevenues would be reduced and our earnings also could be reduced absentcorresponding reductions in costs or growth in services.

 

Wecannot assure you that our rates will remain at their current levels. Inconnection with the HPUC proceeding involving the 2005 Acquisition, we agreedwith the Division of Consumer Advocacy that we would not initiate a rate casewith a test year earlier than 2009, unless the HPUC found a compellingfinancial need to justify an earlier filing. If we seek a rate case with a testyear earlier than 2009, we would be subject to certain additional conditionsincluding the obligation of Hawaiian Telcom Holdco, Inc. to make anadditional capital investment in the Company. In addition, the HPUC orderreceived in connection with the 2007 sale of the Company’s directoriespublishing business imposed a condition requiring the imputation of revenues.Specifically, a directory publishing revenue credit in the annual amount of$42.6 million per year must be added as regulated revenues into the calculationof Hawaiian Telcom, Inc.’s earnings from 2008 to 2022 in all future ratecases, alternative form of regulation proceedings, or other proceedings beforethe HPUC investigating Hawaiian Telcom, Inc.’s earnings or financialperformance. Such conditions may adversely affect our ability to obtain rateincreases in the future. Our local exchange service competitors also may gain acompetitive advantage based on rules which favor competitors. For example,competitors have the ability to resell our services at rates set by the HPUCand are not subject to the level of regulatory scrutiny generally faced by us.Additionally, as a result of the state regulators permitting our competitors tointervene in rate-setting proceedings, there is a potential that such competitorscould obtain business sensitive information about us during such proceedings.

 

TheFCC approves tariffs for interstate access and subscriber line charges, both ofwhich are components of our network access revenue. The FCC currently isconsidering whether to restrain special access pricing by carriers like ussubject to price caps on interstate rates. The FCC also is considering proposals to reduce switched interstateaccess charges for carriers like us, and may require us to recover the foregonerevenue from our end users. If the FCC lowers interstate switched or specialaccess charges, we may be required to recover more revenue through subscriberline charges or forego this revenue altogether. This could reduce our revenueor impair our competitive position.

 

***The telecommunicationsindustry is increasingly competitive, and we may have difficulty competingeffectively.***

*** ***

Allsectors of the telecommunications industry are competitive. Competition in themarkets in which we operate could:

 

·                  reduce our customer base;

·                  require us to lower rates and other prices in order tocompete; or

·                  require us to increase marketing expenditures and theuse of discounting and promotional campaigns.

 

17

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Any ofthese factors could adversely affect our business.

 

*Wireline Services*. As the ILEC, we face competition fromresellers, local providers who lease UNEs from us, and, to a lesser degree,from facilities-based providers of local telephone services.

 

We havehistorically faced access line losses as a result of competition andsubstitution of traditional wireline services with wireless services. Accessline losses have been faced by the industry as a whole, and we cannot assureyou that access line losses will not continue in the future. In particular, theincreasing penetration of high-speed internet and Voice over Internet Protocol,or VoIP, could lead to further primary and second access line losses.

 

Interconnectionduties are governed, in part, by telecommunications rules and regulationsrelated to the UNEs that must be provided. These rules and regulationsremain subject to ongoing modifications. Our business is subject to extensivegovernmental regulation. Applicable legislation and regulations and changes tothem could adversely affect our business. In addition, while cellular wirelessservices have historically complemented traditional local exchange and longdistance services, existing and emerging wireless and Internet protocol, or IP,technologies are increasingly competitive with local exchange and,particularly, long distance services in some or all of our service areas.

 

*Internet Services*. We expect that the Internet accessservices business will continue to be highly competitive due to the absence ofsignificant barriers to entry. We currently compete with a number ofestablished online services companies, inter-exchange carriers and cablecompanies. Competition is particularly intense for broadband services.

 

*Wireless Services*. Weare a relatively new entrant in the wireless telecommunications servicesbusiness. We provide this service by use of a MVNO model in which we resellanother carrier’s facilities-based wireless services under the Hawaiian Telcom® brandname. The market in Hawaii for wireless telecommunications services is subjectto intense competition. In addition, our wireless business may be lessprofitable than the wireless businesses of other telecommunications companiesdue to our use of a MVNO model.

 

Inaddition, the significant expenses we have incurred because we do not havefully functional back-office and IT systems have prevented us from fullyimplementing our business strategy and effectively competing in themarketplace.  For example, we are stillworking on assuring our back-office can support all forms of service bundles.

 

***If we do not adapt totechnological changes in the telecommunications industry, we could losecustomers or market share.***

*** ***

Thetelecommunications industry is subject to rapid and significant changes intechnology, frequent new service introductions and evolving industry standards.We cannot predict the effect of these changes on our competitive position,profitability or industry. Technological developments may reduce thecompetitiveness of our network and require unbudgeted upgrades or theprocurement of additional products that could be expensive and time consumingto implement. In addition, new products and services arising out oftechnological developments may reduce the attractiveness of our services. If wefail to adapt successfully to technological changes or fail to obtain access toimportant new technologies, we could lose customers and be limited in ourability to attract new customers and sell new services to our existingcustomers. An element of our business strategy is to deliver enhanced andancillary services to customers. The successful delivery of new services isuncertain and dependent on many factors, and we may not generate anticipatedrevenues from such services.

 

***The successful operation andgrowth of our businesses are dependent on economic conditions in Hawaii.***

*** ***

Substantiallyall of our customers and operations are located in Hawaii. Because of ourgeographical position, the successful operation and growth of our businesses isdependent on economic conditions in Hawaii. The Hawaii economy, in turn, isdependent upon many factors, including:

 

·                  the level of government and military spending;

·                  the development of the local financial servicesindustry;

·                  the strength of the Hawaii tourism industry;

·                  the continued growth in services industries; and

·                  the absence of hurricanes or terrorism incidents.

 

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Thecustomer base for telecommunications services in Hawaii is small andgeographically concentrated. In 2007, the population of Hawaii wasapproximately 1.29 million, approximately 71% of whom live on the islandof Oahu. Any adverse development affecting Oahu, or Hawaii generally, couldsubstantially impact our ability to do business there.

 

In addition,the relatively low unemployment rate in Hawaii could make it more difficult forus to retain and find qualified personnel needed to operate as a stand-aloneprovider of telecommunications services. Labor shortages or increased laborcosts could have a material adverse effect on our operations. We cannot assureyou that we will be able to continue to hire and retain a sufficient laborforce of qualified persons.

 

***Our business could suffer if weare unsuccessful in negotiating a new collective bargaining agreement. As of March 15,2008, 62.4% of our workforce was represented by IBEW Local 1357. On March 26,2007, we announced a tentative agreement with IBEW Local 1357 to extend thecurrent collective bargaining agreement from September 1, 2007 to August 31,2008. The tentative agreement subsequently was ratified by union membersand approved by the Company’s Board of Directors. Although we believe that ourrelations with our employees are good, we cannot assure you that we will besuccessful in negotiating a new collective bargaining agreement, that suchnegotiations will not result in significant increases in the cost of labor, orthat a breakdown in such negotiations or relations will not result in thedisruption of our operations.***

*** ***

***We depend on key members ofour executive management team.***

*** ***

Ourfuture success as a stand-alone telecommunications provider is highly dependentupon members of our executive management team. Although certain of thesemembers are subject to employment agreements and participate in the variousincentive plans, such employment agreements may be terminated and the loss ofthe services of any such individuals or other key personnel could have amaterial adverse effect upon our future success as a stand-alonetelecommunications provider. We do not maintain any “key person” insurance onany of our personnel. In 2007 and early 2008, we experienced significantkey management changes, including the departures of Michael S. Ruley, our ChiefExecutive Officer, Paul H. Sunu, our Chief Financial Officer, and Harvey A.Plummer, our SVP - Engineering and Operations.  On February 4,2008, we entered into a Services Agreement with Kroll Zolfo CooperLLC, whereby Stephen F. Cooper will serve as our ChiefExecutive and Kevin J. Nystrom will serve as our Chief OperatingOfficer.  Given the significant change in management in the lastyear, our future success will be dependent in part upon the abilities of Messrs. Cooper andNystrom to leverage their extensive management and operating experience toimprove our financial performance and business operations.

 

***We are controlled byCarlyle, whose interests may not be aligned with those of our note holders.***

*** ***

Aholding company controlled by Carlyle and its affiliates currently ownssubstantially all of our equity and, therefore, Carlyle has the power tocontrol our affairs and policies. It also controls the election of directors,the appointment of management, the entering into mergers, sales ofsubstantially all of our assets and other extraordinary transactions. Thedirectors so elected have authority, subject to the terms of our debt andapplicable HPUC requirements, to issue additional stock, implement stockrepurchase programs, declare dividends and make other decisions.

 

Theinterests of Carlyle and its affiliates could conflict with the interests ofthe holders of our notes. For example, if we encounter financial difficultiesor are unable to pay our debts as they mature, the interests of Carlyle, asequity holders, might conflict with the interests of our note holders. Carlyleand its affiliates also may have an interest in pursuing acquisitions,divestitures, financings or other transactions that, in their judgment, couldenhance their equity investments, even though such transactions might involve risksto holders of notes. Additionally, Carlyle and its affiliates are in thebusiness of making investments in companies, and may from time to time in thefuture acquire interests in businesses that directly or indirectly compete withcertain portions of our business or are suppliers or customers of ours.

 

***Our substantial indebtedness could adversely affectour financial condition.***

*** ***

We nowhave and will continue to have a significant amount of indebtedness. On March 25,2008, we drew the remaining $73.8 million available under our revolving creditfacility in response to uncertain conditions in financial markets. As aresult, we had total outstanding indebtedness of $1,074.7 million, consisting of $500.0 million of outstandingnotes, $90.0 million of secured indebtednessunder our revolving credit facility, and $484.7 million of secured indebtednessunder our senior credit facilities. We filed a request with the HPUC in February 2008for authority to increase our allowable borrowings under the revolving creditfacility from $90.0 million to $150.0 million.

 

19

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Ourcurrent level of indebtedness could:

 

·                  make it more difficult for us to satisfy ourobligations with respect to our outstanding indebtedness;

·                  increase our vulnerability to general adverse economicand industry conditions;

·                  require us to dedicate a substantial portion of ourcash flow from operations to payments on our indebtedness, thereby reducing theavailability of our cash flow to fund working capital, capital expenditures,research and development efforts and other general corporate purposes;

·                  limit our flexibility in planning for, or reacting to,changes in our business and the industry in which we operate;

·                  place us at a competitive disadvantage compared to ourcompetitors that have less debt; and

·                  limit our ability to borrow additional funds.

 

Inaddition, the indentures governing our notes and the agreement governing oursenior credit facilities contain financial and other restrictive covenants thatlimit our ability to engage in activities that may be in our long-term bestinterests. Our failure to comply with those covenants could result in an eventof default which, if not cured or waived, could result in the acceleration ofall of our debts.

 

***Despite current indebtednesslevels, we and our subsidiaries may be able to incur substantially more debt.This could further exacerbate the risks associated with our substantialfinancial leverage.***

*** ***

Althoughcovenants under our senior credit facilities and the indentures governing ournotes limit our ability and the ability of our restricted subsidiaries to incuradditional indebtedness, the terms of our senior credit facilities and theindentures permit us and our guarantors to borrow significant additionalindebtedness, including secured indebtedness, in the future if conditions aresatisfied. In addition, on March 25, 2008 we drew the remaining $73.8million available under our revolving credit facility in response to uncertainconditions in financial markets and were fully drawn under the facility($90.0 million). We filed a request with the HPUC in February 2008 forauthority to increase our allowable borrowings under the revolving creditfacility from $90.0 million to $150.0 million. If new debt is added to our and our subsidiaries’ current debt levels,the related risks that we and they now face could intensify.

 

***To service our indebtedness,we will require a significant amount of cash. Our ability to generate cashdepends on many factors beyond our control.***

*** ***

Ourability to make payments on and to refinance our indebtedness and to fundplanned capital expenditures and certain transition related expenses willdepend on our ability to generate cash in the future. This, to a certainextent, is subject to general economic, financial, competitive, legislative,regulatory and other factors that are beyond our control.

 

Wecannot assure you that our business will generate sufficient cash flow fromoperations, and in particular, that our anticipated cost structure will berealized on schedule or that future borrowings will be available to us underour senior credit facilities in an amount sufficient to enable us to pay ourindebtedness or to fund our other liquidity needs. We may need to refinance allor a portion of our indebtedness on or before maturity. We cannot assure youthat we will be able to refinance any of our indebtedness, including our seniorcredit facilities and our notes, on commercially reasonable terms or at all.

 

***Restrictive covenants in theindentures governing our notes and in the agreement governing our senior creditfacilities may restrict our ability to pursue our business strategies, and abreach of such covenants may result in the acceleration of our long-term debtmaturities.***

*** ***

The indenturesgoverning our notes and the agreement governing our senior credit facilitieslimit our ability, among other things, to:

 

·                  incur additional indebtedness;

·                  pay dividends or make distributions in respect of ourcapital stock or to make certain other restricted payments or investments;

·                  sell assets, including capital stock of restrictedsubsidiaries;

·                  agree to payment restrictions affecting our restrictedsubsidiaries;

·                  consolidate, merge, sell or otherwise dispose of allor substantially all of our assets;

·                  enter into transactions with our affiliates;

·                  incur liens; and

·                  designate any of our subsidiaries as unrestricted subsidiaries.

 

20

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Inaddition, the agreement governing our senior credit facilities includes otherand more restrictive covenants and prohibit us from prepaying our otherindebtedness, including the notes, while indebtedness under our senior creditfacilities is outstanding. The agreement governing our senior credit facilitiesalso requires us to maintain compliance with specified financial ratios. Ourability to comply with these ratios may be affected by events beyond ourcontrol.

 

Therestrictions contained in the indentures governing the notes and the agreementgoverning our senior credit facilities could limit our ability to plan for orreact to market conditions or meet capital needs or otherwise restrict ouractivities or business plans.

 

Abreach of any of these restrictive covenants or our inability to comply withthe required financial ratios could result in a default under the agreementgoverning our senior credit facilities. If a default occurs, the lenders underour senior credit facilities may elect to:

 

·                  declare all borrowings outstanding, together withaccrued interest and other fees, to be immediately due and payable; or

·                  prevent us from making payments on the notes,

 

either of which would result in an event of defaultunder the notes. The lenders will also have the right in these circumstances toterminate any commitments they have to provide further borrowings. If we areunable to repay outstanding borrowings when due, the lenders under our seniorcredit facilities will also have the right to proceed against the collateral,including our available cash, granted to them to secure the indebtedness. Ifthe indebtedness under our senior credit facilities and the notes were to beaccelerated, we cannot assure you that our assets would be sufficient to repayin full that indebtedness and our other indebtedness.

 

**Item 1B.Unresolved Staff Comments**

 

None.

 

**Item 2.****Properties**

 

We own our corporateheadquarters, which is located in 1177 BishopStreet, Honolulu, Hawaii 96813 and consists of over 465,000 square feet of office space. We also have other properties consisting primarily of approximately 120 owned and approximately 60 leasedreal estate properties, including our administrative facilities andfacilities for call centers, switching equipment, fiber optic networks, microwave radio and cable and wire facilities, cable head-end equipment, coaxial distributionnetworks, routers and servers used inour wireline business. See Item 1, “Business—Network Architecture and Technology.” There are nomaterial real estate properties relating to our wireless business. Forpurposes of Hawaii statelaw, we are classified as a public utility and, accordingly. do not pay any property taxes.

 

Substantially all of our assets (including those of our subsidiaries) are pledged as collateral for our senior credit facilities.

 

**Item****3. Legal Proceedings**

 

We are involved invarious claims, legal actions and regulatory proceedings arising in the ordinary course of business. Inthe opinion of management,the ultimate disposition of these matters will not have a material adverse effect on our combined financial position, results of operations or cash flows.

 

**Item 4.****Submission of Matters to a Voteof Security Holders**

 

Not applicable.

 

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## **PART II**

##  

**Item 5.****Market for Registrant’s CommonEquity, Related Stockholder Matters andIssuer Purchases of Equity Securities**

 

**MarketInformation**

 

There is no established public market for our common stock.

 

**Stockholders**

 

All of our common stock is held by Hawaiian Telcom Holdco, Inc. Affiliates of Carlyle control a substantial majority of thecommon stock of Hawaiian Telcom Holdco, Inc.

 

**Dividends**

 

We have not declared or paid any dividends on our common stock. Our senior secured creditfacilities and the indenturesgoverning our senior notes and senior subordinated notes limit our ability to declare or paydividends. For more detailed informationon our senior secured credit facilities and the indentures governing ournotes, see Item 7, “Management’s Discussion and Analysis of FinancialCondition and Results of Operations—Liquidity and Capital Resources” and notes to our consolidatedfinancial statements.

 

**Sales ofUnregistered Equity Securities**

 

None.

 

**Purchases of****Equity Securities by the Issuer and AffiliatedPurchasers**

 

None.

 

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**Item6:  Selected Financial Data**

 

The following data should be read in conjunction with “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” andour audited financial statements and related notes thereto included elsewherein this annual report.

 

**Selected Financial Data (dollarsin thousands)**

** **
| ** **

** **                                              | ** ** | **Predecessor**                            | ** ** | **Company (1)**       | ** ** |
|---------------------------------------------------------------------|------------|--------------------------------------------|------------|----------------------------|------------|
| ** **                                                          | ** ** | ** **                                 | ** ** | ** **                 | ** ** | ** ** | ** ** | **Period from** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                          | ** ** | ** **                                 | ** ** | ** **                 | ** ** | **Period from** | ** ** | **May 21 to** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                          | ** ** | **Year Ended December 31,** | ** ** | **January 1 to** | ** ** | **December** | ** ** | **Year Ended December 31,** | ** ** |
| ** **                                                          | ** ** | **2003**                                   | ** ** | **2004**                   | ** ** | **May 1, 2005** | ** ** | **31, 2004** | ** ** | **2005** | ** ** | **2006** | ** ** | **2007** | ** ** |
|                                                                |       |                                       |       |                       |       |   |   |   |   |   |   |   |   |   |   |
| Statement of  operations data:                                      |       |                                       |       |                       |       |   |   |   |   |   |   |   |   |   |   |
| Operating  revenues                                                 |       | $                                          | 546,200    |                       | $          | 529,500 |   | $ | 178,700 |   | $ | — |   | $ | 326,311 |   | $ | 503,135 |   | $ | 483,676 |   |
| Depreciation and  amortization (2)                                  |       | 109,300                                    |       | 114,700                    |       | 39,500 |   | — |   | 101,402 |   | 163,967 |   | 159,872 |   |
| Operating income  (loss) (3)                                        |       | 16,800                                     |       | 48,200                     |       | 21,900 |   | (17,373 | ) | (90,352 | ) | (55,047 | ) | (19,419 | ) |
| Interest expense                                                    |       | 33,700                                     |       | 36,800                     |       | 11,700 |   | — |   | 55,611 |   | 80,256 |   | 85,945 |   |
| Provision (benefit)  for income tax                                 |       | 8,200                                      |       | 3,400                      |       | 3,100 |   | — |   | 1,700 |   | 2,482 |   | (47,700 | ) |
| Income (loss)  from discontinued operations (4)                     |       | (3,200                                     | )          | 25,600                     |       | 8,400 |   | — |   | (28,917 | ) | (7,279 | ) | 182,531 |   |
| Cumulative  effect of change in accounting principle (5)            |       | 75,800                                     |       | —                     |       | — |   | — |   | — |   | — |   | — |   |
| Net income  (loss)                                                  |       | 65,500                                     |       | 36,900                     |       | 16,100 |   | (17,373 | ) | (175,705 | ) | (144,637 | ) | 117,326 |   |
|                                                                |       |                                       |       |                       |       |   |   |   |   |   |   |   |   |   |   |
| Statement of  cash flow data – net cash provided by (used in): |       |                                       |       |                       |       |   |   |   |   |   |   |   |   |   |   |
| Operating  activities                                               |       | $                                          | 125,300    |                       | $          | 107,700 |   | $ | 36,200 |   | $ | — |   | $ | (5,381 | ) | $ | 38,299 |   | $ | 101,508 |   |
| Investing  activities (6)                                           |       | (144,100                                   | )          | 3,300                      |       | (11,700 | ) | — |   | (1,421,035 | ) | (104,368 | ) | 63,160 |   |
| Financing  activities (6)                                           |       | 18,900                                     |       | (110,200                   | )          | (24,000 | ) | — |   | 1,436,737 |   | 60,500 |   | (160,648 | ) |
|                                                                |       |                                       |       |                       |       |   |   |   |   |   |   |   |   |   |   |
| Balance Sheet  data (as of end of period):                          |       |                                       |       |                       |       |   |   |   |   |   |   |   |   |   |   |
| Cash and cash  equivalents (7)                                      |       | $                                          | 400        |                       | $          | 1,200 |   | $ | 1,700 |   | $ | — |   | $ | 10,321 |   | $ | 4,752 |   | $ | 8,772 |   |
| Property, plant  and equipment, net                                 |       | 786,400                                    |       | 734,000                    |       | 717,800 |   | — |   | 817,333 |   | 818,172 |   | 794,051 |   |
| Total assets                                                        |       | 1,607,700                                  |       | 1,489,000                  |       | 1,459,800 |   | 6,734 |   | 1,756,554 |   | 1,712,164 |   | 1,637,840 |   |
| Long-term debt                                                      |       | 427,400                                    |       | 301,700                    |       | 151,300 |   | — |   | 1,343,500 |   | 1,380,500 |   | 989,700 |   |
| Stockholder’s  equity (deficiency) and parent funding          |       | 419,200                                    |       | 410,000                    |       | 685,800 |   | (17,373 | ) | 246,197 |   | 102,039 |   | 201,480 |   |

 

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(1) The consolidated financial information for the Companyincludes the consolidated financial position, results of operations and cashflows of the Company from inception on May 21, 2004 and also includes theresults of the Verizon Hawaii Business from the May 2, 2005 acquisitiondate.

(2) Depreciation and amortization for the Company reflects thedepreciation of acquired property and equipment and amortization of acquiredamortizable intangibles based on the fair value and useful lives as of theMay 2, 2005 acquisition date.

(3) The operating loss for the Company is, in part, due to thetransition costs the Company is incurring to become a stand-alone provider oftelecommunications services.

(4) On April 29, 2007, the Company entered into an agreementto sell its directories publishing segment to an unrelated entity. The sale wasconsummated on November 30, 2007 resulting in a gain on sale of $231.8million. See “Discontinued Operations” for further information.

(5) The Predecessor changed its method of accounting for directoryrevenues and expenses and asset retirement obligations effectiveJanuary 1, 2003.

(6) The Company’s investing and financing activities during theyear ended December 31, 2005 include the 2005 Acquisition, and during theyear ended December 31, 2007 include the sale of the directoriespublishing segment.

(7) Cash and cash equivalents at December 31, 2007 excludessegregated cash of $271.5 million in a short-term Treasury money marketaccount. Proceeds from the sale of the directories publishing segment have beentemporarily invested in this account.

 

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**Item7.  Management’s Discussion and Analysisof Financial Condition and Results of Operations**

 

**Background**

 

The following discussion and analysis covers bothperiods prior to and subsequent to our consummation of the 2005 Acquisition.

 

The statements in the discussion and analysisregarding industry outlook, our expectations regarding the future performanceof our business and the other non-historical statements in the discussion andanalysis are forward-looking statements. These forward-looking statements aresubject to numerous risks and uncertainties, including, but not limited to, therisks and uncertainties described in Item 1A, “Risk Factors.” Our actualresults may differ materially from those contained in any forward-lookingstatements. You should read the following discussion together with Item 1A, “RiskFactors,” Item 6, “Selected Historical Financial Information” and our auditedfinancial statements and related notes thereto included elsewhere in thisannual report.

 

We have operated as a stand-alone company since the2005 Acquisition. We have provided a discussion and analysis of a comparison ofthe Company’s results for the year ended December 31, 2007 and 2006.  In addition, we have provided a discussionand analysis of a comparison for the year ended December 31, 2006 to thecombined results of the Company and our Predecessor for the year ended December 31,2005.  We believe such financialinformation may be important to an understanding of our future operations. Thecombined presentation for 2005 is not in accordance with generally acceptedaccounting principles and the periods presented are not comparable because ofthe change in the historical carrying value or basis of assets and liabilitiesthat resulted from the 2005 Acquisition. We have presented the combined resultsof operations for 2005 in order to provide a more meaningful discussion of theperiods presented.

 

On April 29, 2007, the Company entered into anagreement to sell its directories publishing segment to an unrelatedentity.  The sale was consummated on November 30,2007.

 

**Segments and Sources of Revenue**

 

We operate in two reportable segments (WirelineServices and Other) based on how resources are allocated and performance isassessed by our chief operating decision maker.

 

***Overview***

 

Weoperate the local telecommunications company that serves business andresidential customers in the State of Hawaii. We offer our customers a variety of telecommunications servicesincluding local telephone, network access, long distance, High-speed Internet(HSI) and other Internet, and other telecommunication sales and services.  At December 31, 2007, we hadapproximately 654,000 switched access lines and HSI lines.

 

***Wireline Services***

 

The Wireline segment derives revenue from thefollowing sources:

 

Local Telephone Services – We receive revenue fromproviding local exchange telephone services. These revenues include monthlycharges for basic service, local private line services and enhanced callingfeatures such as voice mail, caller ID and 3-way calling.

 

Network Access Services – We receive revenue fromcharges established to compensate us for origination, transport and terminationof calls for long distance and other interexchange carriers. These includesubscriber line charges imposed on end users, and switched and special accesscharges paid by carriers and others.

 

24

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Long Distance Services – We receive revenue fromproviding toll, or long distance, services to our customers.

 

Internet Services – We provide high-speed Internet anddial-up Internet to our residential and business customers.

 

Other Telecommunication Services and Sales – Otherservices and sales include inside wire maintenance, and installation andmaintenance of customer premise equipment. We also incurred certain costs related to the potential development of apotential video services offering.

 

***Other***

 

We receive revenue from wireless services, includingthe sale of wireless handsets and other wireless accessories.

 

**Results of Operations for the YearsEnded December 31, 2007 and 2006 and the Combined Operations for the YearEnded December 31, 2005**

 

We reported net income of$117.3 million for the year ended December 31, 2007, a net loss of $144.6million for the year ended December 31, 2006 and a net loss of $175.7million for the year ended December 31, 2005.  Our Predecessor reported net income of $16.1million for the period from January 1, 2005 to May 1, 2005.

 

***Operating Revenues***

 

The following table summarizes our volume informationas of December 31, 2007, 2006 and 2005.

 

**Volume Information**

 
| ** **                 | ** ** | ** **            | ** ** | ** **            | ** ** | ** **            | ** ** | **2007 vs. 2006** | ** ** | **2006 vs. 2005** | ** ** |
|----------------------------|------------|-----------------------|------------|-----------------------|------------|-----------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                 | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **Change**                  | ** ** | **Change**                  | ** ** |
| ** **                 | ** ** | **2007**              | ** ** | **2006**              | ** ** | **2005**              | ** ** | **Number**                  | ** ** | **Percentage**              | ** ** | **Number** | ** ** | **Percentage** | ** ** |
| Switched access  lines     |       |                  |       |                  |       |                  |       |                        |       |                        |       |   |   |   |   |
| Residential                |       | 328,370               |       | 369,105               |       | 406,801               |       | (40,735                     | )          | -11.0                       | %          | (37,696 | ) | -9.3 | % |
| Business                   |       | 226,483               |       | 228,052               |       | 233,058               |       | (1,569                      | )          | -0.7                        | %          | (5,006 | ) | -2.1 | % |
| Public                     |       | 5,564                 |       | 5,705                 |       | 5,868                 |       | (141                        | )          | -2.5                        | %          | (163 | ) | -2.8 | % |
| Total                      |       | 560,417               |       | 602,862               |       | 645,727               |       | (42,445                     | )          | -7.0                        | %          | (42,865 | ) | -6.6 | % |
|                       |       |                  |       |                  |       |                  |       |                        |       |                        |       |   |   |   |   |
| High-Speed  Internet lines |       |                  |       |                  |       |                  |       |                        |       |                        |       |   |   |   |   |
| Residential                |       | 76,091                |       | 74,636                |       | 69,831                |       | 1,455                       |       | 1.9                         | %          | 4,805 |   | 6.9 | % |
| Business                   |       | 15,776                |       | 15,684                |       | 9,142                 |       | 92                          |       | 0.6                         | %          | 6,542 |   | 71.6 | % |
| Wholesale                  |       | 1,579                 |       | 1,906                 |       | 7,882                 |       | (327                        | )          | -17.2                       | %          | (5,976 | ) | -75.8 | % |
| Total                      |       | 93,446                |       | 92,226                |       | 86,855                |       | 1,220                       |       | 1.3                         | %          | 5,371 |   | 6.2 | % |
|                       |       |                  |       |                  |       |                  |       |                        |       |                        |       |   |   |   |   |
| Long distance  lines       |       |                  |       |                  |       |                  |       |                        |       |                        |       |   |   |   |   |
| Residential                |       | 179,215               |       | 193,716               |       | 211,649               |       | (14,501                     | )          | -7.5                        | %          | (17,933 | ) | -8.5 | % |
| Business                   |       | 84,667                |       | 83,601                |       | 75,551                |       | 1,066                       |       | 1.3                         | %          | 8,050 |   | 10.7 | % |
| Total                      |       | 263,882               |       | 277,317               |       | 287,200               |       | (13,435                     | )          | -4.8                        | %          | (9,883 | ) | -3.4 | % |

 

25

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**2007 compared to 2006**

 

**OperatingRevenues (dollars in thousands)**

 
| ** **                              | ** ** | ** ** | ** ** | ** ** | ** ** | **Change** | ** ** |
|-----------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                              | ** ** | **2007**   | ** ** | **2006**   | ** ** | **Amount** | ** ** | **Percentage** | ** ** |
|                                    |       |       |       |       |       |       |       |   |   |
| Wireline  Services                      |       |       |       |       |       |       |       |   |   |
| Local services                          |       | $          | 210,503    |       | $          | 225,311    |       | $ | (14,808 | ) | -6.6 | % |
| Network access  services                |       | 144,378    |       | 151,620    |       | (7,242     | )          | -4.8 | % |
| Long distance  services                 |       | 37,284     |       | 39,724     |       | (2,440     | )          | -6.1 | % |
| High-Speed  Internet and other Internet |       | 35,402     |       | 39,153     |       | (3,751     | )          | -9.6 | % |
| Other services  and sales               |       | 46,011     |       | 40,430     |       | 5,581      |       | 13.8 | % |
|                                    |       | 473,578    |       | 496,238    |       | (22,660    | )          | -4.6 | % |
| Other                                   |       | 10,098     |       | 6,897      |       | 3,201      |       | 46.4 | % |
|                                    |       |       |       |       |       |       |       |   |   |
| Total operating  revenues               |       | $          | 483,676    |       | $          | 503,135    |       | $ | (19,459 | ) | -3.9 | % |

 

For 2007, local servicesrevenue decreased $14.8 million, or 6.6%, compared to 2006.  The decrease in revenue was related primarilyto the decline in the volume of switched access lines and higher levels ofbilling adjustments for local service partially offset by lower deferrals ofestimated activation fee revenue during 2007.

 

The decline in switchedaccess lines reflects two categories of factors:

 

·                  General industrytrends – continued competition in the telecommunications industry hasincreasingly resulted in customers using other technologies rather thantraditional phone lines for voice and data. Residential customers are increasingly moving local voice service toVoIP technology offered with cable services as well as using wireless servicesin place of traditional wireline.  Also,residential “second lines” continue to be disconnected as customers switch fromdial-up Internet services to HSI and cable broadband service.  Additionally, Competitive Local Exchange Carriers(CLECs), continue to focus on business customers and successfully sell servicesto our embedded customer base.

·                  Specificimpact of our systems implementation effort — our on-going effort to stabilizeour systems has limited our ability to launch new products and robustly supportcustomer service requirements for both residential and business customers.  As our systems stabilization progresses, theimpact of this effort is expected to have a diminished effect on switchedaccess line loss.

 

In an effort to slow therate of line loss, we have instituted retention and acquisition programs, andare increasingly focusing efforts on bundling of services.  These efforts also include reemphasizingwin-back and employee referral programs. Additionally, we are intensifying our efforts relative to developingtools and training to enhance our customer service capability to improvecustomer retention.

 

For 2007, network accessservices revenue decreased by $7.2 million, or 4.8%, compared to 2006.  Network access revenue decreased primarilydue to the impact of the erosion of switched access lines and certain downwardadjustments in rates and billing adjustments provided in connection with theresolution of various disputes during 2007.

 

26

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Long distance revenuedecreased $2.4 million, or 6.1%, for 2007 compared to the prior year.  The revenue decline was related to thereduction in switched access lines (resulting in fewer customers utilizing tollservices), competitive pressures similar to those faced with local service,customers moving to the use of VoIP technology and reduced rates for the longdistance component of bundled services. We continue to promote a flat-rate long distance plan and haveintroduced several long distance packages to increase marketability tocustomers.  These plans are intended toextend the service life of existing customers who use significant amounts oflong distance while attracting new long distance users.

 

High-speed Internet (HSI)and other Internet revenues decreased by $3.8 million, or 9.6%, for 2007 ascompared to the prior year.  The decreaseis primarily due to the elimination of the billing for (and related cost of) agovernment surcharge as well as certain promotional pricing programs whichstarted during 2007 and are expected to continue.  In the third quarter of 2007, the Companybegan offering HSI residential customers the option of purchasing higher speedservices in an effort to enhance revenues and attract new customers.  The higher speed services are made possibleby recent improvements to our network.

 

Other services and salesincreased $5.6 million, or 13.8%, for 2007 as compared to 2006.  The increase was primarily related to higherlevels of customer premise equipment installations and correspondingmaintenance agreements.

 

Other revenues, primarilyconsisting of revenues generated from our wireless operations, increased $3.2million, or 46.4%, for 2007 as compared to the same period in the prioryear.  The increase is primarily becauseof the increase in wireless subscribers. We had approximately 19,300 and 16,600 external wireless subscribers asof December 31, 2007 and 2006, respectively.

 

**2006 compared to 2005**

 

**OperatingRevenues (dollars in thousands)**

** **
| ** **                              | ** ** | ** **  | ** ** | **Combined**         | ** ** | ** ** | ** ** | ** **     | ** ** |
|-----------------------------------------|------------|-------------|------------|----------------------|------------|------------|------------|----------------|------------|
| ** **                              | ** ** | ** **  | ** ** | **Company and** | ** ** | ** ** | ** ** | ** **     | ** ** |
| ** **                              | ** ** | **Company** | ** ** | **Predecessor**      | ** ** | **Change** | ** ** |
| ** **                              | ** ** | **2006**    | ** ** | **2005**             | ** ** | **Amount** | ** ** | **Percentage** | ** ** |
|                                    |       |        |       |                 |       |       |       |           |       |
| Wireline                                |       |        |       |                 |       |       |       |           |       |
| Local services                          |       | $           | 225,311    |                 | $          | 222,693    |       | $              | 2,618      |   | 1.2 | % |
| Network access  services                |       | 151,620     |       | 151,930              |       | (310       | )          | -0.2           | %          |
| Long distance  services                 |       | 39,724      |       | 40,211               |       | (487       | )          | -1.2           | %          |
| High-Speed  Internet and Other Internet |       | 39,153      |       | 35,154               |       | 3,999      |       | 11.4           | %          |
| Other services  and sales               |       | 40,430      |       | 53,452               |       | (13,022    | )          | -24.4          | %          |
|                                    |       | 496,238     |       | 503,440              |       | (7,202     | )          | -1.4           | %          |
| Other                                   |       | 6,897       |       | 1,571                |       | 5,326      |       | 339.0          | %          |
|                                    |       |        |       |                 |       |       |       |           |       |
| Total operating  revenues               |       | $           | 503,135    |                 | $          | 505,011    |       | $              | (1,876     | ) | -0.4 | % |

 

For 2006, local services revenues increased $2.6million, or 1.2%, as compared to 2005. The increase was related to the customer appreciation credit whichreduced revenue in 2005 and changes in the level of estimated activation feerevenue which was being deferred.  In2006, the Company adjusted its estimate of activation fee revenue resulting inthe recognition of $4.2 million of additional revenue.  The increases in revenue were principallyoffset by declines related to losses in the volume of switched access lines.

 

27

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In conjunction with the 2005 Acquisition, Verizonagreed to reimburse us $12.0 million to fund a customer appreciationcredit.  We recognized the reimbursementas a reduction of the purchase price of the 2005 Acquisition.  The actual credits granted to customersamounted to approximately $11.3 million (this amount was recognized as areduction of revenue during the five month period from May to September 2005).  Local telephone service customers as of thedate of the 2005 Acquisition received a one time credit during the fifth monthafter the 2005 Acquisition (as agreed to with the Hawaii Public UtilitiesCommission (HPUC)).  The remaining amountof $0.7 million was contributed in the fourth quarter of 2005 to localcharitable and not-for-profit organizations to satisfy the terms of theacquisition.

 

For 2006, network access service revenues decreased by$0.3 million, or 0.2%, as compared to 2005. The revenue decrease was caused bylower end user subscriber line and switched access charges as we served fewerswitched access lines in 2006 than in 2005.

 

Long distance revenues decreased $0.5 million, or1.2%, for 2006, as compared to 2005. The revenue decline was related to thereduction in switched access lines (resulting in fewer customers utilizing tollservices) and competitive pressures similar to those faced with local service.

 

HSI and other Internet revenues increased $4.0million, or 11.4%, for 2006, as compared to 2005. The revenue increase wasrelated to the increase in subscribers during these periods.

 

Other services and sales decreased $13.0 million, or24.4%, for 2006, as compared to 2005. These decreases were primarily related to a decline in sales andinstallation revenues of customer premise equipment.  In addition, most of the billing andcollection agreements and related revenue maintained by the Predecessor werenot retained by us.

 

Other revenues, primarily consisting of revenuesgenerated from our wireless operation, increased $5.3 million for 2006, ascompared to 2005.  The increase wasrelated to the increase in wireless subscribers.  As of December 31, 2006 and 2005, we hadapproximately 16,600 and 6,200, respectively, of external wireless subscribers.

 

28

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***Operating Costs andExpenses***

 

**2007 compared to 2006**

 

We are continuing to incur certain expenses in ourefforts to become a stand-alone provider of telecommunication services as wellas certain costs associated with the realignment of our managementworkforce.  In addition, the Company hasincurred substantial costs related to systems remediation and manual workaround efforts during 2007.  Theseexpenses, referred to as contingency costs (both for internal labor andcontracted services), represent additional amounts paid to external vendors andinternal personnel to maintain acceptable operating performance until certainsystem remediation work led by Accenture can be completed.  The major components of such expensesincurred are summarized as follows (dollars in thousands):

 
| ** **                                                                                  | ** ** | **Year Ended**   | ** ** |
|---------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                  | ** ** | **December 31,** | ** ** |
| ** **                                                                                  | ** ** | **2007**              | ** ** | **2006** | ** ** |
|                                                                                        |       |                  |       |   |   |
| Employee  separation costs                                                                  |       | $                     | 2,954      |   | $ | — |   |
| Pension non  periodic costs and gains                                                       |       | 1,391                 |       | — |   |
| Sarbanes-Oxley  controls development                                                        |       | 1,771                 |       | — |   |
| Employee  relocation costs                                                                  |       | 745                   |       | 836 |   |
| Expense  component of BearingPoint contract to build information technology  infrastructure |       | —                |       | 1,842 |   |
| Verizon  transition services                                                                |       | —                |       | 23,048 |   |
| Accenture  transition services                                                              |       |                  |       | 8,480 |   |
| Facilities  renovation costs                                                                |       | —                |       | 2,238 |   |
| Contingency  internal labor costs                                                           |       | 4,210                 |       | — |   |
| Contingency  contracted services                                                            |       | 20,732                |       | — |   |
| Other                                                                                       |       | 5,399                 |       | 10,664 |   |
|                                                                                        |       |                  |       |   |   |
|                                                                                        |       | $                     | 37,202     |   | $ | 47,108 |   |

 

The following table summarizes our costs and expensesfor 2007 compared to the costs and expenses for 2006 (dollars in thousands):

 
| ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** | **Change** | ** ** |
|-----------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                                    | ** ** | **2007**   | ** ** | **2006**   | ** ** | **Amount** | ** ** | **Percentage** | ** ** |
|                                          |       |       |       |       |       |       |       |   |   |
| Costs of  services and sales                  |       | $          | 190,238    |       | $          | 214,535    |       | $ | (24,297 | ) | -11.3 | % |
| Selling, general  and administrative expenses |       | 173,304    |       | 179,680    |       | (6,376     | )          | -3.5 | % |
| Settlement with  BearingPoint                 |       | (42,219    | )          | —     |       | (42,219    | )          | N/A |   |
| Intangible asset  impairment                  |       | 21,900     |       | —     |       | 21,900     |       | N/A |   |
| Depreciation and  amortization                |       | 159,872    |       | 163,967    |       | (4,095     | )          | -2.5 | % |
|                                          |       |       |       |       |       |       |       |   |   |
| Total                                         |       | $          | 503,095    |       | $          | 558,182    |       | $ | (55,087 | ) | -9.9 | % |

 

The Company’s total headcount as of December 31,2007 was 1,609 compared to 1,808 as of December 31, 2006.  Employee related costs are included in bothcost of services and sales and selling, general and administrative expenses.

 

29

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Cost of services and sales consists of costs we incurto provide our products and services including those for operating andmaintaining our networks, installing and maintaining customer premiseequipment, and cost of goods sold directly associated with variousproducts.  Costs of sales and servicesdecreased by $24.3 million, or 11.3%, for 2007 compared to the same period inthe prior year.  The decline relates primarilyto $23.0 million of costs incurred in the first quarter of 2006 to Verizonunder the Transition Services Agreement, as well as our cost reductionefforts.  The cost reduction effortsinclude lower salaries and wages in connection with the reduction in headcount,reductions in pension and other benefits, facilities rents, utilities and otherfacilities costs.  These reductions wereoffset, in part, by costs for services required to replace those thatpreviously were being provided by Verizon as well as additional costsassociated with the increase in customer premise equipment installations.

 

Selling, general and administrative includes expensesrelated to sales and marketing, customer service, information systems and otheradministrative functions.  Selling,general and administrative expenses decreased by $6.4 million, or 3.5%, for2007, as compared to 2006.  The decreaseis primarily attributable to a bad debt allowance adjustment of $9.0 millionthat was recognized during the third quarter of 2006 to accommodate for a slowdown in collections, primarily related to our transition to a stand-aloneprovider of telecommunication services. In addition, the decrease is due to the cost reduction efforts referredto above, specifically lower salaries and wages, reduced costs for pensions andother benefits and lower bad debt expense. These cost savings were substantially offset by the $24.9 million ofcontingency costs described above related to systems remediation and workaround costs for 2007.  These contingencycosts are expected to continue through much of 2008.

 

Effective February 6, 2007, the Company andBearingPoint entered into an agreement to settle disputes and transition workto a third party.  The settlementprovided for a payment to us of $52.0 million, which was received in March 2007,and waived obligations to pay all outstanding BearingPoint invoices (amountingto approximately $38.6 million at February 6, 2007 including certainaccrued costs).

 

During the year ended December 31, 2006 and forthe period from January 1, 2007 to February 6, 2007, we recordedrecoveries contractually due under the BearingPoint agreement of $24.1 millionand $2.2 million, respectively.  Theremaining settlement consideration was recognized upon settlement in the firstquarter of 2007 resulting in a gain on settlement of $42.2 million.  The settlement gain was net of a charge for$22.1 million representing the write-down of certain software costs for theestimated additional costs to remediate deficiencies in certain systems thathad been developed by BearingPoint.  Thewrite-down of $22.1 million includes a charge of $3.5 million recognized in thefourth quarter of 2007 when it was determined that the actual costs ofremediation were greater than originally anticipated.

 

In conjunction with our annual impairment test fornon-amortizable intangible assets in the fourth quarter of 2007, we recognizedimpairment expense of $21.9 million.  Theimpairment was determined as the difference between the fair value of thenon-amortizable intangible assets and their carrying values.  The fair value was based on discounted cashflow for the asset.

 

Our cost structure has gone through significantchanges during 2006 and 2007.  The mostsignificant area is related to the composition of third-party service providersin our operations such as Verizon, BearingPoint and Accenture.

 

Through March 31, 2006, Verizon provided servicesto us under the Transition Services Agreement. The cost of such services amounted to $29.5 million for 2006 with mostof these costs incurred in the first quarter.

 

We previously had an agreement with BearingPoint tobuild and operate our information technology infrastructure.  The costs of operating our informationtechnology infrastructure amounted to $20.2 million for 2006.  There were no BearingPoint costs incurred in2007.

 

30

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In conjunction with the transition to us fromBearingPoint of the responsibility for the build and operation of ourinformation technology infrastructure, we began utilizing the services ofAccenture late in the third quarter of 2006. Fees to Accenture for operating services amounted to $12.1 million and$8.5 million for the years ended December 31, 2007 and 2006, respectively.

 

We have taken steps and are evaluating further actionsto reduce the cost of operations. Beginning in October 2007, the Company initiated a realignmenteffort which has since resulted in the elimination of more than 125 positionsincluding 75 positions in January 2008. The Company has also substantially curtailed use of outside contractorsto the extent practical.  The Companywill continue to pursue other cost saving opportunities.

 

Depreciation and amortization decreased by $4.1million, or 2.5%, for 2007 when compared to 2006.  The decrease resulted primarily from thereduced declining balance rates for intangible amortization and certain assetswhich became fully depreciated in the second quarter of 2007.  The decrease was offset by an increaserelated to depreciation on new information technology infrastructure placed inservice on April 1, 2006.

 

**2006 compared to 2005**

 

We incurred significant expenses in our efforts tobecome a stand-alone provider of telecommunication services and certain othertransition services.  The majorcomponents of such expenses incurred are summarized as follows (dollars inthousands):

** **
| ** **                                                                                  | ** ** | **Year Ended**   | ** ** |
|---------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                  | ** ** | **December 31,** | ** ** |
| ** **                                                                                  | ** ** | **2006**              | ** ** | **2005** | ** ** |
|                                                                                        |       |                  |       |   |   |
| Expense  component of BearingPoint contract to build information technology  infrastructure |       | $                     | 1,842      |   | $ | 20,808 |   |
| Internet  aggregation contract                                                              |       | —                |       | 6,000 |   |
| Directories’  data conversion cost                                                     |       | —                |       | 3,576 |   |
| Verizon  transition services                                                                |       | 23,048                |       | 55,492 |   |
| Verizon software  license fee amortization                                                  |       | —                |       | 3,310 |   |
| Financial  advisory services related to the Hawaii Business Acquisition                     |       | —                |       | 5,465 |   |
| Accenture  transition services                                                              |       | 8,480                 |       | — |   |
| Facilities  renovation costs                                                                |       | 2,238                 |       | — |   |
| Employee  relocation costs                                                                  |       | 836                   |       | 2,782 |   |
| Other                                                                                       |       | 10,664                |       | 18,347 |   |
|                                                                                        |       |                  |       |   |   |
|                                                                                        |       | $                     | 47,108     |   | $ | 115,780 |   |

 

Our cost structure changed considerably during 2006when compared to 2005.  The mostsignificant change is related to the composition of third-party serviceproviders utilized in our operations such as Verizon, BearingPoint andAccenture.

 

Through March 31, 2006, Verizon provided servicesto us under the Transition Services Agreement. The cost of such services amounted to $29.5 million for 2006 with mostof these costs incurred in the first quarter. Costs incurred under the Transition Services Agreement amounted to $69.8million for 2005.We previously had an agreement with BearingPoint to build and operateour information technology infrastructure. The costs for operating our information technology infrastructure, whichare currently all expensed, amounted to $20.2 million for 2006.  BearingPoint costs for operating ourinformation technology infrastructure were not significant for 2005.

 

In conjunction with the transition to us fromBearingPoint for the responsibility for the build and operate of ourinformation technology infrastructure, we began utilizing the service ofAccenture late in the third quarter of 2006. Fees to Accenture for the transition services amounted to $8.5 millionin 2006.

 

31

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Our combined operating expenses are significantlyimpacted by not incurring expenses that were allocated by Verizon and itsaffiliates to our Predecessor for services performed.  Such expenses amounted to $31.6 million forthe period January 1, 2005 to May 1, 2005.

 

The following table summarizes our costs and expensesfor 2006 compared to the combined costs and expenses for 2005 (dollars inthousands):

** **
| ** **                                    | ** ** | ** **  | ** ** | **Combined**         | ** ** | ** ** | ** ** | ** **     | ** ** |
|-----------------------------------------------|------------|-------------|------------|----------------------|------------|------------|------------|----------------|------------|
| ** **                                    | ** ** | ** **  | ** ** | **Company and** | ** ** | ** ** | ** ** | ** **     | ** ** |
| ** **                                    | ** ** | **Company** | ** ** | **Predecessor**      | ** ** | **Change** | ** ** |
| ** **                                    | ** ** | **2006**    | ** ** | **2005**             | ** ** | **Amount** | ** ** | **Percentage** | ** ** |
|                                          |       |        |       |                 |       |       |       |           |       |
| Costs of  services and sales                  |       | $           | 214,535    |                 | $          | 226,221    |       | $              | (11,686    | ) | -5.2 | % |
| Selling, general  and administrative expenses |       | 179,680     |       | 206,340              |       | (26,660    | )          | -12.9          | %          |
| Depreciation and  amortization                |       | 163,967     |       | 140,902              |       | 23,065     |       | 16.4           | %          |
|                                          |       |        |       |                 |       |       |       |           |       |
| Total                                         |       | $           | 558,182    |                 | $          | 573,463    |       | $              | (15,281    | ) | -2.7 | % |

 

Costs of services and sales decreased by $11.7million, or 5.2%, for 2006, as compared to 2005.  The decrease in expense is related to changesin our cost structure discussed previously and the purchase adjustment fordeferred activation costs.

 

Selling, general and administrative expenses decreasedby $26.7 million, or 12.9%, for 2006 compared to the prior year.  The decline in selling, general andadministrative expenses is primarily related to changes in cost structurediscussed previously.

 

Depreciation and amortization increased by $23.1 million,or 16.4%, for 2006 when compared to 2005. The increase is the result of the impact of purchase accountingassociated with the recognition of amortizable intangible assets.

 

***Interest Expense,Loss on Early Extinguishment of Debt and Loss on Interest Rate Swap***

 

Interestexpense increased by $5.7 million, or 7.1% for 2007 compared to 2006 primarilybecause of higher interest rates.  Interestexpense increased by $12.9 million for 2006 compared to the combined interestexpense for 2005 primarily because of increased levels of debt.

 

Inconnection with the refinancing of debt in the second quarter of 2007 weincurred a $7.8 million charge to income which represented unamortized debtissuance and refinancing costs.  Thistransaction is more fully described under “Outstanding Debt and FinancingArrangements.”  As a result of therepayment of debt in the fourth quarter of 2007, the Company expensed $1.5million of deferred financing costs resulting in a loss on early extinguishmentof debt.

 

***Income Tax Expense***

 

A valuation allowance has been provided at December 31,2007 and 2006 for our deferred tax assets because of the uncertainty as to therealization of such assets.  We willcontinue to assess the recoverability of deferred tax assets and the relatedvaluation allowance.  To the extent thatwe generate taxable income in future years and it is determined that suchvaluation allowance is no longer required, the tax benefit of the remainingdeferred tax assets will be recognized at such time.

 

32

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***DiscontinuedOperations***

 

On April 29, 2007, the Company entered into anagreement to sell its directories publishing segment to an unrelated entity fora cash purchase price of $435.0 million, subject to adjustments related toworking capital and excluding fees and expenses. The sale was consummated on November 30,2007 resulting in a gain on the sale of $231.8 million.

 

The income from operations of the discontinuedsegment amounted to $24.3 million in 2007 and $31.8 million in 2006. The lossfrom operations of the discontinued segment amounted to $2.9 million in 2005(excluding Predecessor operations).

 

Income from operations of the discontinued segmentdecreased by $7.6 million in 2007 compared to 2006 because of higher feesincurred to L.M. Berry offset by a reduction in our own publishing costs aswell as the inclusion of 11 months of operations versus a full year in 2006. Ouragreement with L.M. Berry provided for them to receive a percentage of revenuesfor services they provided in selling, publishing, printing and distributingour directories published beginning in 2006.

 

Income from operations of the discontinued segmentincreased by $34.8 million in 2006 compared to the prior year. Predecessorpublishing deferred revenue and related costs as of the date of the 2005Acquisition were not carried over to our balance sheet due to the applicationof purchase accounting. This resulted in no publishing revenue being recognizedand reduced expenses until we distributed our first directories in October 2005.

 

33

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**Resultsof Operations for the Three Months Ended December 31, 2007 and December 31,2006**

 

We believe it is useful to provide condensed financialinformation for the fourth quarter of 2007 in comparison to the fourth quarterof 2006. Such condensed financial information is as follows:

 
| ** **                                                                   | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                   | ** ** | **December 31,**            | ** ** |
| ** **                                                                   | ** ** | **2007**                         | ** ** | **2006** | ** ** |
|                                                                         |       |                             |       |   |   |
| Operating  revenues                                                          |       | $                                | 116,401    |   | $ | 124,643 |   |
|                                                                         |       |                             |       |   |   |
| Operating  expenses:                                                         |       |                             |       |   |   |
| Cost of services  and sales                                                  |       | 49,959                           |       | 44,449 |   |
| Selling, general  and administrative                                         |       | 49,003                           |       | 48,579 |   |
| Settlement with  BearingPoint                                                |       | 3,462                            |       | — |   |
| Intangible asset  impairment                                                 |       | 21,900                           |       | — |   |
| Depreciation and  amortization                                               |       | 41,311                           |       | 36,373 |   |
|                                                                         |       |                             |       |   |   |
| Total operating  expenses                                                    |       | 165,635                          |       | 129,401 |   |
|                                                                         |       |                             |       |   |   |
| Operating loss                                                               |       | (49,234                          | )          | (4,758 | ) |
|                                                                         |       |                             |       |   |   |
| Other income  (expense):                                                     |       |                             |       |   |   |
| Interest expense                                                             |       | (23,928                          | )          | (20,622 | ) |
| Loss on early  extinguishment of debt                                        |       | (1,516                           | )          | — |   |
| Interest income  and other, net                                              |       | 1,390                            |       | 103 |   |
|                                                                         |       |                             |       |   |   |
| Total other  expense                                                         |       | (24,054                          | )          | (20,519 | ) |
|                                                                         |       |                             |       |   |   |
| Loss from  continuing operations before provision (benefit) for income taxes |       | (73,288                          | )          | (25,277 | ) |
|                                                                         |       |                             |       |   |   |
| Provision  (benefit) for income taxes                                        |       | (52,900                          | )          | 939 |   |
|                                                                         |       |                             |       |   |   |
| Loss from  continuing operations                                             |       | (20,388                          | )          | (26,216 | ) |
|                                                                         |       |                             |       |   |   |
| Income (loss) from  discontinued operations, net of tax                      |       | 130,297                          |       | (3,666 | ) |
|                                                                         |       |                             |       |   |   |
| Net income  (loss)                                                           |       | $                                | 109,909    |   | $ | (29,882 | ) |

 

We reported net income of$109.9 million and a net loss of $29.9 million for the three months ended December 31,2007 and for the three months ended December 31, 2006, respectively.

 

34

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***Operating Revenues***

 

The following tables summarize our volume statisticsas of December 31, 2007 and September 30, 2007 and our revenueinformation for the three months ended December 31, 2007 in comparison tothe three months ended December 31, 2006.

 

**VolumeInformation**

 
| ** **                 | ** ** | **December 31,** | ** ** | **September 30,** | ** ** | **Change** | ** ** |
|----------------------------|------------|-----------------------|------------|------------------------|------------|------------|------------|
| ** **                 | ** ** | **2007**              | ** ** | **2007**               | ** ** | **Number** | ** ** | **Percentage** | ** ** |
|                       |       |                  |       |                   |       |       |       |   |   |
| Switched access  lines     |       |                  |       |                   |       |       |       |   |   |
| Residential                |       | 328,370               |       | 338,482                |       | (10,112    | )          | -3.0 | % |
| Business                   |       | 226,483               |       | 228,906                |       | (2,423     | )          | -1.1 | % |
| Public                     |       | 5,564                 |       | 5,609                  |       | (45        | )          | -0.8 | % |
| Total                      |       | 560,417               |       | 572,997                |       | (12,580    | )          | -2.2 | % |
|                       |       |                  |       |                   |       |       |       |   |   |
| High-Speed  Internet lines |       |                  |       |                   |       |       |       |   |   |
| Residential                |       | 76,091                |       | 75,373                 |       | 718        |       | 1.0 | % |
| Business                   |       | 15,776                |       | 15,866                 |       | (90        | )          | -0.6 | % |
| Wholesale                  |       | 1,579                 |       | 1,567                  |       | 12         |       | 0.8 | % |
| Total                      |       | 93,446                |       | 92,806                 |       | 640        |       | 0.7 | % |
|                       |       |                  |       |                   |       |       |       |   |   |
| Long distance  lines       |       |                  |       |                   |       |       |       |   |   |
| Residential                |       | 179,215               |       | 182,915                |       | (3,700     | )          | -2.0 | % |
| Business                   |       | 84,667                |       | 85,008                 |       | (341       | )          | -0.4 | % |
| Total                      |       | 263,882               |       | 267,923                |       | (4,041     | )          | -1.5 | % |

 

**OperatingRevenues (dollars in thousands)**

 
| ** **                              | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------------------|------------|----------------------------------|------------|------------|------------|------------|------------|
| ** **                              | ** ** | **December 31,**            | ** ** | **Change** | ** ** |
| ** **                              | ** ** | **2007**                         | ** ** | **2006**   | ** ** | **Amount** | ** ** | **Percentage** | ** ** |
|                                    |       |                             |       |       |       |       |       |   |   |
| Wireline  Services                      |       |                             |       |       |       |       |       |   |   |
| Local services                          |       | $                                | 51,768     |       | $          | 54,680     |       | $ | (2,912 | ) | -5.3 | % |
| Network access  services                |       | 33,746                           |       | 37,192     |       | (3,446     | )          | -9.3 | % |
| Long distance  services                 |       | 8,794                            |       | 9,854      |       | (1,060     | )          | -10.8 | % |
| High-Speed  Internet and Other Internet |       | 8,877                            |       | 9,200      |       | (323       | )          | -3.5 | % |
| Other services  and sales               |       | 10,537                           |       | 11,756     |       | (1,219     | )          | -10.4 | % |
|                                    |       | 113,722                          |       | 122,682    |       | (8,960     | )          | -7.3 | % |
| Other                                   |       | 2,679                            |       | 1,961      |       | 718        |       | 36.6 | % |
|                                    |       |                             |       |       |       |       |       |   |   |
| Total operating  revenues               |       | $                                | 116,401    |       | $          | 124,643    |       | $ | (8,242 | ) | -6.6 | % |

 

For the three monthsended December 31, 2007, local services revenues decreased $2.9 million,or 5.3%, as compared to the three months ended December 31, 2006. Thedecrease was caused by the decline in switched access lines.

 

For the three months ended December 31, 2007,network access service revenues decreased by $3.4 million, or 9.3%, as comparedto the three months ended December 31, 2006. The decrease was caused bycertain downward adjustments in rates, billing adjustments provided inconnection with resolution of various disputes and lower end user chargesassociated with a decline in switched access lines.

 

35

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Long distance revenues decreased $1.1 million, or10.8%, for the quarter ended December 31, 2007 as compared to the quarterended December 31, 2006. The revenue decline was primarily related to areduction in switched access lines and lower average rates due to competitivepressures.

 

HSI and other Internet revenues decreased $0.3million, or 3.5%, for the three months ended December 31, 2007 as comparedto the three months ended December 31, 2006. The demand for HSI services,as evidenced by the change in HSI line counts, has increased slightly from 2006to 2007. The decrease in revenue is attributed to certain promotional pricingprograms in response to competitive factors.

 

Other services and sales decreased $1.2 million, or10.4%, for the three months ended December 31, 2007 as compared to thesame period in 2006. The decrease was related primarily to a decline in salesand installations of customer premise equipment.

 

Otherrevenues, primarily consisting of revenues generated from our wirelessoperation, increased $0.7 million, or 36.6%, for the three months ended December 31,2007 as compared to the same period in the prior year. The increase isprimarily because of the increase in wireless subscribers as previouslydiscussed.

 

***Operating Costs andExpenses***

 

We are continuing toincur certain expenses in our efforts to become a stand-alone provider oftelecommunication services as well as certain costs associated with therealignment of our management workforce. In addition, the Company has incurredsubstantial costs related to systems remediation and manual work around effortsduring 2007. These expenses, referred to as contingency costs, representadditional amounts paid to external vendors and internal personnel to maintainacceptable operating performance until certain system remediation work led byAccenture can be completed. The major components of such expenses incurred aresummarized as follows (dollars in thousands):

 
| ** **                            | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------|------------|----------------------------------|------------|
| ** **                            | ** ** | **December 31,**            | ** ** |
| ** **                            | ** ** | **2007**                         | ** ** | **2006** | ** ** |
|                                  |       |                             |       |   |   |
| Employee  separation costs            |       | $                                | 596        |   | $ | — |   |
| Pension non  periodic costs and gains |       | 1,710                            |       | — |   |
| Sarbanes-Oxley  controls development  |       | 558                              |       | — |   |
| Employee  relocation costs            |       | 274                              |       | 47 |   |
| Accenture  transition services        |       | —                           |       | 6,350 |   |
| Facilities  renovation costs          |       | —                           |       | 167 |   |
| Contingency  internal labor costs     |       | 818                              |       | — |   |
| Contingency  contracted services      |       | 4,479                            |       | — |   |
| Other                                 |       | 3,709                            |       | 3,311 |   |
|                                  |       |                             |       |   |   |
|                                  |       | $                                | 12,144     |   | $ | 9,875 |   |

 

36

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The following tablesummarizes our costs and expenses for the three months ended December 31,2007 compared to the three months ended December 31, 2006 (dollars inthousands):

 
| ** **                                    | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------------------------|------------|----------------------------------|------------|------------|------------|------------|------------|
| ** **                                    | ** ** | **December 31,**            | ** ** | **Change** | ** ** |
| ** **                                    | ** ** | **2007**                         | ** ** | **2006**   | ** ** | **Amount** | ** ** | **Percentage** | ** ** |
|                                          |       |                             |       |       |       |       |       |   |   |
| Costs of  services and sales                  |       | $                                | 49,959     |       | $          | 44,449     |       | $ | 5,510 |   | 12.4 | % |
| Selling, general  and administrative expenses |       | 49,003                           |       | 48,579     |       | 424        |       | 0.9 | % |
| Settlement with  BearingPoint                 |       | 3,462                            |       | —     |       | 3,462      |       | N/A |   |
| Intangible asset  impairment                  |       | 21,900                           |       | —     |       | 21,900     |       | N/A |   |
| Depreciation and  amortization                |       | 41,311                           |       | 36,373     |       | 4,938      |       | 13.6 | % |
|                                          |       |                             |       |       |       |       |       |   |   |
|                                          |       | $                                | 165,635    |       | $          | 129,401    |       | $ | 36,234 |   | 28.0 | % |

 

Costs of services and sales increased by $5.5 million,or 12.4%, for the three months ended December 31, 2007 as compared to thethree months ended December 31, 2006. The increase for the three monthperiod is primarily attributed to ramp up of wireless operations, additionalcosts of customer premise equipment installations, utilities and certaincontingency costs.

 

Selling, general and administrative expenses were flatfor the three months ended December 31, 2007 compared to the same periodin the prior year.

 

As previously discussed, the Company and BearingPointentered into an agreement to settle disputes and transition work to a thirdparty. The settlement gain recognized in the first quarter of 2007 was net of acharge representing the write-down of certain software costs for the estimatedadditional costs to remediate deficiencies in certain systems that weredeveloped by BearingPoint. In the fourth quarter of 2007, we recognized a $3.5million additional charge when it was determined that actual costs ofremediation were greater than originally anticipated.

 

In conjunction with our annual impairment test fornon-amortizable intangible assets in the fourth quarter of 2007, we recognizedimpairment expense of $21.9 million. The impairment was determined as thedifference between the fair value of the non-amortizable intangible assets and theircarrying value. The fair value was based on discounted cash flow for the asset.

 

Depreciation and amortization for the three monthsended December 31, 2007 increased by $4.9 million, or 13.6%, as comparedto the three months ended December 31, 2006. The increase was related to ahigher depreciable asset base and certain depreciation rate changes.

 

***Interest Expense***

 

Interest expense increased by $3.3 million for thethree months ended December 31, 2007 compared to the same period in 2006. Theincrease was because of higher interest rates.

 

***Income Tax Expense***

 

A valuation allowance has been provided at December 31,2007 and 2006 for our deferred tax assets because of the uncertainty as to therealization of such assets. We will continue to assess the recoverability ofdeferred tax assets and the related valuation allowance. To the extent that wegenerate taxable income in future years and it is determined that suchvaluation allowance is no longer required, the tax benefit of the remainingdeferred tax assets will be recognized at such time.

 

37

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***DiscontinuedOperations***

 

OnApril 29, 2007, the Company entered into an agreement to sell itsdirectories publishing segment to an unrelated entity. The sale was consummatedon November 30, 2007 resulting in a gain on the sale of $231.8 millionwhich was recognized in the fourth quarter of 2007.

 

Theincome from operations of the discontinued segment amounted to $4.1 million forthe three months ended December 31, 2007 (reflecting only two months ofoperations) and $6.2 million for the three months ended December 31, 2006.

 

Interestexpense allocated to discontinued operations amounted to $6.3 million for thethree months ended December 31, 2007 (reflecting only two months ofoperations) and $9.0 million for the three months ended December 31, 2006.

 

Theincome tax provision for discontinued operations amounted to $99.3 million forthe three months ended December 31, 2007 and $0.9 million for the sameperiod in the prior year. The increase in the income tax provision resultedprimarily from the tax attributed to the gain from the sale.

 

**Liquidity and Capital Resources**

 

Our short-term and long-term liquidity requirementsprimarily arise from: (i) interest and principal payments related to oursenior credit facilities; (ii) capital expenditures; and (iii) workingcapital requirements.

 

We intend to fund our operations, interest expense,debt principal payments and working capital requirements from our cash fromoperations and our revolving credit facility, subject to covenant restrictions.

 

Our ability to service our indebtedness will depend onour ability to generate cash in the future. Given our high level of debt andrelated debt service requirements, we may not have significant cash availableto meet any large unanticipated liquidity requirements, other than fromavailable borrowings, if any, under our revolving credit facility. As a result,we may not retain a sufficient amount of cash to finance growth opportunities, includingacquisitions, or unanticipated capital expenditures, or to fund our operations.If we do not have sufficient cash for these purposes, our financial conditionand our business could suffer.

 

On November 30, 2007, the Company sold itsdirectories publishing segment to an unrelated entity and received grossproceeds of $437.3 million ($435.0 million, subject to adjustments related to working capital andexcluding fees and expenses). The Company is required by the terms ofits bank debt agreement and an agreement with the HPUC to repay debt with thenet proceeds of the sale. As a result, the Company repaid $160.0 million ofbank debt in December 2007 and an additional $261.0 million of bank debtin January 2008.

 

On March 25, 2008,we drew the remaining $73.8 million available under our revolving creditfacility in response to uncertain conditions in financial markets and arefully-drawn under the facility ($90.0 million). We may elect to increase theavailable commitment on the revolving credit facility, on or before June 1,2008, up to the full $150.0 million pursuant to HPUC approval, which werequested in February 2008.

 

***Cash Flows***

 

Net cash provided by operations of $101.5 million for2007 was related primarily to our net income of $117.3 million adjusted toexclude non-cash items of $216.0 million and the gain on sale of thedirectories publishing segment of $231.8 million. The most significant non-cashitem during the period was depreciation and amortization expense of $162.4million.

 

38

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Net cash provided fromoperations amounted to $38.3 million for 2006. The increase in cash provided byoperations from 2007 compared to 2006 was related primarily to the $52.0million received from the BearingPoint settlement and our improved coststructure.

 

Cash provided byinvesting activities was $63.1 million for 2007. This was primarily comprisedof cash received from the sale of the directories publishing segment of $437.3million, net transfers to segregated cash of $271.5 million and capitalexpenditures of $97.6 million. Cash used in investing activities was $104.4million for 2006 which consisted primarily of capital expenditures. The 2007and 2006 capital expenditures included $23.0 million and $19.6 million,respectively, related to our efforts to build our back-office and ITinfrastructure. We expect our 2008 capital expenditures to be lower than 2006or 2007 primarily related to lower levels of spending for our back-office andIT infrastructure.

 

Cash used in financingactivities was $160.6 million in 2007. Cash provided by financing activitieswas $60.5 million in 2006. All financing activities related to borrowingactivities. The net change in borrowing activity from 2007 compared to 2006 isattributed primarily to the use of the proceeds of $52.0 million received fromthe BearingPoint settlement and $160.0 million of the proceeds received fromthe sale of the directories publishing segment to repay debt. As indicatedabove, at December 31, 2007, the Company still had additional proceedsfrom the sale which were temporarily invested in a money-market account whichwere used to repay debt in January 2008.

 

***OutstandingDebt and Financing Arrangements***

 

As of December 31,2007, we had outstanding $1,252.7 million in aggregate indebtedness, excludingunused commitments, with $32.8 million of additional borrowing capacityavailable, subject to covenant restrictions, under our amended revolving creditfacility. In January 2008, the Company repaid $261.0 million of debt withthe remaining proceeds from the sale of the directories publishing segment.

 

On June 1, 2007, weamended our bank credit facilities to provide for a new revolving creditfacility and a new Tranche C term loan that was used to repay $109.0 million ofthe existing revolving credit facility and the balance due on our Tranche A andTranche B term loans.

 

The amended revolvingcredit facility has a principal balance of $150.0 million (in January 2008,we requested a permanent reduction in the commitment from $200.0 million to$150.0 million) that will mature on April 30, 2012. Of the $150.0 millionrevolver commitment, only $90.0 million is currently available to us though wemay elect, on or before June 1, 2008, to increase the available commitmentup to the full $150.0 million pursuant to HPUC approval, which we requested in February 2008.As of December 31, 2007, the available balance on the facility amounted to$32.8 million (subject to covenants described below and a $0.2 millionoutstanding letter of credit). On March 25, 2008, we drew the remaining$73.8 million available under our revolving credit facility in response touncertain conditions in financial markets and are fully-drawn under thefacility ($90.0 million).

 

The Tranche C term loanhas an original principal amount of $860.0 million. The Tranche C term loanwill mature on June 1, 2014 and amortizes with quarterly principalpayments amounting to $1.3 million per quarter beginning March 2012 withthe balance due at maturity. The maturity will be April 30, 2012 if we areunable to obtain approval of the HPUC to extend certain guaranty agreementsthrough June 1, 2014. The facility provides for a one percent prepaymentpremium for certain refinancing transactions through June 1, 2008 and nopremium thereafter. The obligations under the bank credit facilities areguaranteed by Holdco and each subsidiary with certain exceptions. In addition,the bank credit facilities are collateralized by substantially all of theCompany’s assets.

 

In December 2007,the Company made a principal repayment of the Tranche C debt in the amount of$160.0 million using a portion of the proceeds of the sale of the directoriespublishing business and an additional principal repayment of $211.0 million in January 2008.

 

39

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Borrowings under the bankcredit facilities bear interest at a rate equal to the applicable margin plus,at our option, either:  (a) a baserate determined by reference to the higher of (1) prime rate, as defined,and (2) the federal funds rate plus 1⁄2 of 1%; or (b) a Eurocurrencyrate on deposits for one-, two-, three- or six-month periods (or nine- ortwelve-month periods if, at the time of the borrowing, all lenders agree tomake such a duration available).

 

The bank creditfacilities contain various negative and affirmative covenants that restrict,among other things, incurrence of additional indebtedness, payment ofdividends, redemptions of stock, other distributions to shareholders and saleof assets. In addition, there are financial covenants consisting of a leverageratio and a maximum level of capital expenditures.

 

Our ability to make payments on and to refinance ourindebtedness and to fund planned capital expenditures and certain transitionrelated expenses will depend on our ability to generate cash in the future. Thisability, to a certain extent, is subject to general economic, competitive,regulatory and other factors that are beyond our control. We cannot provideassurance that our business will generate sufficient cash flow from operationsor that future borrowing will be available to us under our revolving creditfacility to pay our indebtedness or to fund our other liquidity needs. Inaddition, our cost structure may be higher than currently anticipated. We mayneed to refinance all or a portion of our indebtedness on or before maturity. Wecannot provide assurance that we will be able to refinance any of ourindebtedness on commercially reasonable terms or at all.

 

The following table sets forth our long-term debt andcontractual obligations for the next several years (dollars in thousands):

 
| ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **2013 and** | ** ** | ** ** | ** ** |
|--------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|-------------------|------------|------------|------------|
| ** **                     | ** ** | **2008**   | ** ** | **2009**   | ** ** | **2010**   | ** ** | **2011**   | ** ** | **2012**   | ** ** | **Thereafter**    | ** ** | **Total**  | ** ** |
|                           |       |       |       |       |       |       |       |       |       |       |       |              |       |       |       |
| Debt (1):                      |       |       |       |       |       |       |       |       |       |       |       |              |       |       |       |
| Revolving credit  facility (2) |       | $          | 52,000     |       | $          | —     |       | $          | —     |       | $          | —            |       | $          | 5,000      |   | $ | — |   | $ | 57,000 |   |
| Term loan  facility, Tranche C |       | 211,000    |       | —     |       | —     |       | —     |       | 5,075      |       | 479,625           |       | 695,700    |       |
| Senior notes                   |       | —     |       | —     |       | —     |       | —     |       | —     |       | 500,000           |       | 500,000    |       |
| Total debt                     |       | 263,000    |       | —     |       | —     |       | —     |       | 10,075     |       | 979,625           |       | 1,252,700  |       |
| Operating leases               |       | 2,157      |       | 1,970      |       | 1,804      |       | 1,315      |       | 987        |       | 9,597             |       | 17,830     |       |
| Supplier  contracts            |       | 6,130      |       | 6,130      |       | 6,130      |       | 1,859      |       | —     |       | —            |       | 20,249     |       |
|                           |       |       |       |       |       |       |       |       |       |       |       |              |       |       |       |
| Total                          |       | $          | 271,287    |       | $          | 8,100      |       | $          | 7,934      |       | $          | 3,174             |       | $          | 11,062     |   | $ | 989,222 |   | $ | 1,290,779 |   |

 

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(1)                                  Interestcommitments on debt amount to approximately $90,907 to $89,865 for years 2008to 2012, $105,635 cumulative for years 2013 and thereafter, and $557,434 in theaggregate. The interest commitment was estimated based on the fixed rate whereapplicable or, for floating rate debt, it was based on the rate in effect atDecember 31, 2007.

(2)                                  Basedon balance at December 31, 2007.

 

**Critical Accounting Policies andEstimates**

 

The preparation of consolidated financial statementsin conformity with accounting principles generally accepted in the United Statesof America requires management to make estimates and assumptions that affectamounts reported in the consolidated financial statements. Changes in theseestimates and assumptions are considered reasonably possible and may have amaterial effect on the consolidated financial statements and thus actualresults could differ from the amounts reported and disclosed herein. Thefollowing is a summary of certain policies considered critical by management.

 

40

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***Indefinite-LivedIntangible Assets***

 

Intangible assets not subject to amortization aretested for impairment annually, or when events or changes in circumstancesindicate that the asset might be impaired. The impairment test consists of acomparison of the fair value of the intangible asset with its carrying value.If the carrying value of an indefinite-lived intangible asset exceeds its fairvalue, an impairment loss is recognized in an amount equal to that excess. Fairvalue is an estimate based on the present value of an expected range of futurecash flows. The expected range of future cash flows is based on internalforecasts developed utilizing management’s knowledge of the business and theanticipated effects of market forces. The use of different assumptions orestimates of future cash flows could produce different impairment amounts (ornone at all).

 

***Impairment ofLong-Lived Assets Other than Goodwill and Indefinite-Lived Intangibles***

 

We assess the recoverability of long-lived assets,including property, plant and equipment and definite-lived intangible assets,whenever events or changes in circumstances indicate that the carrying amountof an asset may not be recoverable. In such cases, if the sum of the expectedcash flows, undiscounted and without interest, resulting from use of the assetis less than the carrying amount, an impairment loss is recognized based on thedifference between the carrying amount and the fair value of the assets. Whendetermining future cash flow estimates, we consider historical operatingresults, as adjusted to reflect current and anticipated operating conditions.Estimating future cash flows requires significant judgment by us in such areasas future economic conditions, industry specific conditions and necessarycapital expenditures. The use of different assumptions or estimates for futurecash flows could produce different impairment amounts (or none at all) forlong-lived assets, including identifiable intangible assets subject toamortization.

 

***Revenue Recognition***

 

We recognize service revenues based upon usage of ourlocal exchange network and facilities and contract******fees. In general, fixed fees for localtelephone, Internet access and certain other services are billed one month in******advance andrecognized the following month when earned. Revenue from other products thatare not fixed fee or******thatexceed contracted amounts is recognized when such services are provided. Longdistance revenues are******generallybilled in arrears and recognized as service is provided.

 

***Allowance forDoubtful Accounts***

 

Our allowance for doubtful accounts reflects reservesfor customer receivables to reduce receivables to amounts expected to becollected. In estimating uncollectible amounts, management considers factorssuch as current overall economic conditions, industry-specific economicconditions, historical customer performance and anticipated customerperformance. While we believe our process effectively addresses our exposure fordoubtful accounts, changes in economic, industry or specific customerconditions may require adjustment to the allowance for doubtful accountsrecognized by us.

 

***Income Taxes***

 

Management calculates the income tax provision,current and deferred income taxes along with the valuation allowance based uponvarious complex estimates and interpretations of income tax laws andregulations. Deferred tax assets are reduced by a valuation allowance to theextent that it is more likely than not that they will not be realized. To theextent we begin to generate taxable income in future years and it is determinedthe valuation allowance is no longer required, the tax benefit for theremaining deferred tax assets will be recognized at such time.

 

41

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***Employee-RelatedBenefits***

 

We incur certain employee-related costs associatedwith pensions and post-retirement health care benefits. In order to measure theexpense associated with these employee-related benefits, management must make avariety of estimates, including discount rates used to measure the presentvalue of certain liabilities, assumed rates of return on assets set aside tofund these expenses, compensation increases, employee turnover rates,anticipated mortality rates and anticipated healthcare costs. The estimatesused by management are based on our historical experience, as well as currentfacts and circumstances. We use third-party specialists to assist management inappropriately measuring the expenses associated with these employee-relatedbenefits. Different estimates could result in our recognizing different amountsof expense over different time periods.

 

42

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**Item 7A.Quantitative and Qualitative Disclosures about Market Risk**

 

As of December 31, 2007, our floating rateobligations consisted of $57.0 million of debt outstanding under our revolvingcredit facility, $695.7 million of debt outstanding under our Tranche C termloan facility and $150.0 million in aggregate principal amount of outstandingsenior floating rate notes. Accordingly, our earnings and cash flow areaffected by changes in interest rates. Based on our borrowings at December 31,2007 and assuming a 0.125 percentage point increase in the average interestrate under these borrowings, we estimate that our annual interest expense wouldincrease by approximately $1.1 million if not otherwise impacted by theinterest rate swap agreements described below.

 

We utilize a combination of fixed-rate andvariable-rate debt to finance our operations. The variable-rate debt exposes usto variability in interest payments due to changes in interest rates. Ourmanagement believes that it is prudent to mitigate our interest rate risk on aportion of our variable-rate borrowings.

 

To manage fluctuations in cash flows resulting fromadverse changes in interest rates on our term loan facilities and notes, wemaintain interest rate swap agreements to hedge against the effects ofincreases in interest rates associated with floating rate debt on our term loanfacilities and notes. The interest rate swap agreements have a cumulativenotional amount that ranges from $577.2 million at December 31, 2007 to abalance of $253.0 million at maturity on December 31, 2010. The fixed rateis 4.36% from December 31, 2006 to December 31, 2010. The interestrate swaps effectively change the variable-rate cash flow exposure on our debtobligations to fixed cash flows. Under the terms of the interest rate swapagreements, we receive fluctuating interest rate payments and make fixed ratepayments, thereby creating the equivalent of fixed-rate interest payments. Wedo not speculate using derivative financial instruments and do not enter intoderivative instruments for any purpose other than cash-flow-hedging purposes.The fair value of the swap amounted to a liability of $6.5 million as of December 31,2007. Changes in the fair value of these swaps are recognized in othercomprehensive income to the extent of the swaps’ effectiveness. As of December 31,2007, approximately $577.2 million of our $902.7 million variable rate dateoutstanding was fixed at 4.36% (plus the applicable margin). The weightedaverage cost of our total debt outstanding during the fourth quarter of 2007was 8.89%.

 

By using derivative financial instruments to hedgeexposures to changes in interest rates, we expose ourselves to market risk.Market risk may involve the adverse or beneficial effects on the value of afinancial instrument resulting from changes in interest rates. While we expectsuch changes in value may be significant, the market risk associated withinterest-rate contracts is managed by establishing and monitoring parametersthat limit the types and degree of market risk that may be undertaken. Marketrisk may have significantly changed the value of our swap agreements subsequentto date of the most recent balance sheet presented.

 

43

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**Item 8.Financial Statements and Supplementary Data**

 

**Index to Financial Statements**

 
| **Hawaiian Telcom  Communications, Inc. Consolidated Financial Statements**                                                                                                                        | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Reports  of Independent Registered Public Accounting Firms                                                                                                                                              | 45         |
| Consolidated Statements of Operations for the Years  Ended December 31, 2007, 2006 and 2005 with Predecessor Comparative  Information for the Period from January 1, 2005 to May 1, 2005 | 47         |
| Consolidated Balance Sheets as of December 31,  2007 and 2006                                                                                                                                      | 48         |
| Consolidated Statements of Cash Flows for the Years  Ended December 31, 2007, 2006 and 2005 with Predecessor Comparative  Information for the Period from January 1, 2005 to May 1, 2005 | 49         |
| Consolidated Statements of Changes in Stockholder’s  Equity (Deficiency) for the Years Ended December 31, 2007, 2006 and 2005                                                                 | 50         |
| Combined  Statements of Changes in Parent Funding (Predecessor) for the Period from  January 1, 2005 to May 1, 2005                                                                           | 51         |
| Notes to Consolidated Financial Statements                                                                                                                                                              | 52         |

 

44

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**Report of Independent Registered Public AccountingFirm**

 

To the Stockholder andBoard of Directors of

Hawaiian TelcomCommunications, Inc.

Honolulu, Hawaii

 

We have audited theaccompanying consolidated balance sheets of Hawaiian Telcom Communications, Inc.and subsidiaries (the “Company”) as of December 31, 2007 and 2006, and therelated consolidated statements of operations, changes in stockholder’s equity(deficiency), and cash flows for each of the three years in the period ended December 31,2007. These financial statements are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these financialstatements based on our audits.

 

We conducted our auditsin accordance with the standards of the Public Company Accounting OversightBoard (United States). Those standards require that we plan and perform theaudit to obtain reasonable assurance about whether the financial statements arefree of material misstatement. The Company is not required to have, nor were weengaged to perform, an audit of its internal control over financial reporting. Ouraudits included consideration of internal control over financial reporting as abasis for designing audit procedures that are appropriate in the circumstances,but not for the purpose of expressing an opinion on the effectiveness of theCompany’s internal control over financial reporting. Accordingly, we express nosuch opinion. An audit also includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements, assessingthe accounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation. We believethat our audits provide a reasonable basis for our opinion.

 

In our opinion, suchconsolidated financial statements present fairly, in all material respects, thefinancial position of Hawaiian Telcom Communications, Inc. andsubsidiaries as of December 31, 2007 and 2006, and the results of theiroperations and their cash flows for each of the three years in the period endedDecember 31, 2007, in conformity with accounting principles generallyaccepted in the United States of America.

 

As discussed in Note 3 tothe consolidated financial statements, the Company adopted the provisions ofStatement of Financial Accounting Standards (“SFAS”) No. 158,*Employers’ Accounting for Defined Benefit Pensionand Other Postretirement Plans—an amendment of FASB Statements No. 87, 88,106, and 132(R) *on December 31, 2007, and SFAS No. 123(R),*Share-Based Payment* on January 1,2006.

 

 

/s/ DELOITTE & TOUCHE LLP

 

Honolulu, Hawaii

March 28, 2008

 

45

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**Report of Independent Registered Public AccountingFirm**

 

The Board of Directorsand Management

Verizon CommunicationsInc.

 

We have audited thespecial-purpose combined statements of income (consolidated statements ofoperations in the accompanying financial statements), parent funding (combinedstatements of changes in parent funding – predecessor), and cash flows(consolidated statements of cash flows) of Verizon Communications Inc.’s (“Verizon”)Hawaii Business, a combination of Verizon Hawaii Inc. and carved-out componentsof Verizon Information Services, GTE.Net LLC, Bell Atlantic CommunicationsInc., and Verizon Select Services Inc., for the period from January 1,2005 to May 1, 2005. These financial statements are the responsibility ofVerizon’s management. Our responsibility is to express an opinion on thesefinancial statements based on our audit.

 

We conducted our audit inaccordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the financial statements are free ofmaterial misstatement. We were not engaged to perform an audit of the internalcontrol over financial reporting of Verizon’s Hawaii Business. Our auditincluded consideration of internal control over financial reporting as a basisfor designing audit procedures  that areappropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the internal control over financial reportingof Verizon’s Hawaii Business. Accordingly, we express no such opinion. An auditalso includes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements, assessing the accounting principlesused and significant estimates made by management, and evaluating the overallfinancial statement presentation. We believe that our audit provides areasonable basis for our opinion.

 

As described in Notes 2and 3, the special-purpose combined financial statements were prepared topresent the statements of income, parent funding and cash flows of Verizon’s HawaiiBusiness in contemplation of a potential sale. The combined financialstatements include allocations of certain indirectly attributable amounts onbases determined by management of Verizon.

 

In our opinion, thespecial-purpose combined financial statements referred to above present fairly,in all material respects, the combined results of operations, changes in parentfunding and cash flows of Verizon’s Hawaii Business for the period from January 1,2005 to May 1, 2005, in conformity with U.S. generally accepted accountingprinciples.

 

 

/s/ ERNST& YOUNGLLP

 

New York, New York

July 26, 2005

 

46

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**Hawaiian Telcom Communications, Inc.**

**Consolidated Statements of Operations**

**(Dollars in thousands)**

 
| ** **                                                                  | ** ** | **Company**           | ** ** | **Predecessor**            | ** ** |
|-----------------------------------------------------------------------------|------------|-----------------------|------------|----------------------------|------------|
| ** **                                                                  | ** ** | **Year Ended**   | ** ** | **Period from**       | ** ** |
| ** **                                                                  | ** ** | **December 31,** | ** ** | **January 1 to** | ** ** |
| ** **                                                                  | ** ** | **2007**              | ** ** | **2006**                   | ** ** | **2005** | ** ** | **May 1, 2005** | ** ** |
|                                                                        |       |                  |       |                       |       |   |   |   |   |
| Operating  revenues                                                         |       | $                     | 483,676    |                       | $          | 503,135 |   | $ | 326,311 |   | $ | 178,700 |   |
|                                                                        |       |                  |       |                       |       |   |   |   |   |
| Operating  expenses:                                                        |       |                  |       |                       |       |   |   |   |   |
| Cost of services  and sales (exclusive of depreciation and amortization)    |       | 190,238               |       | 214,535                    |       | 154,821 |   | 71,400 |   |
| Selling, general  and administrative                                        |       | 173,304               |       | 179,680                    |       | 160,440 |   | 45,900 |   |
| Settlement with  BearingPoint                                               |       | (42,219               | )          | —                     |       | — |   | — |   |
| Intangible asset  impairment                                                |       | 21,900                |       | —                     |       | — |   | — |   |
| Depreciation and  amortization                                              |       | 159,872               |       | 163,967                    |       | 101,402 |   | 39,500 |   |
|                                                                        |       |                  |       |                       |       |   |   |   |   |
| Total operating  expenses                                                   |       | 503,095               |       | 558,182                    |       | 416,663 |   | 156,800 |   |
|                                                                        |       |                  |       |                       |       |   |   |   |   |
| Operating income  (loss)                                                    |       | (19,419               | )          | (55,047                    | )          | (90,352 | ) | 21,900 |   |
|                                                                        |       |                  |       |                       |       |   |   |   |   |
| Other income  (expense):                                                    |       |                  |       |                       |       |   |   |   |   |
| Interest expense                                                            |       | (85,945               | )          | (80,256                    | )          | (55,611 | ) | (11,700 | ) |
| Loss on early  extinguishment of debt                                       |       | (9,296                | )          | —                     |       | — |   | — |   |
| Interest income  and other, net                                             |       | 1,755                 |       | 427                        |       | 875 |   | 600 |   |
|                                                                        |       |                  |       |                       |       |   |   |   |   |
| Total other expense                                                         |       | (93,486               | )          | (79,829                    | )          | (54,736 | ) | (11,100 | ) |
|                                                                        |       |                  |       |                       |       |   |   |   |   |
| Income (loss)  from continuing operations before provision for income taxes |       | (112,905              | )          | (134,876                   | )          | (145,088 | ) | 10,800 |   |
|                                                                        |       |                  |       |                       |       |   |   |   |   |
| Provision  (benefit) for income taxes                                       |       | (47,700               | )          | 2,482                      |       | 1,700 |   | 3,100 |   |
|                                                                        |       |                  |       |                       |       |   |   |   |   |
| Income (loss)  from continuing operations                                   |       | (65,205               | )          | (137,358                   | )          | (146,788 | ) | 7,700 |   |
|                                                                        |       |                  |       |                       |       |   |   |   |   |
| Income (loss)  from discontinued operations, net of tax                     |       | 182,531               |       | (7,279                     | )          | (28,917 | ) | 8,400 |   |
|                                                                        |       |                  |       |                       |       |   |   |   |   |
| Net income  (loss)                                                          |       | $                     | 117,326    |                       | $          | (144,637 | ) | $ | (175,705 | ) | $ | 16,100 |   |

 

Seeaccompanying notes to consolidated financial statements.

 

47

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**Hawaiian Telcom Communications, Inc.**

**Consolidated Balance Sheets**

**(Dollars in thousands, except share information)**

 
| ** **                                                                      | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                      | ** ** | **2007**              | ** ** | **2006** | ** ** |
|                                                                            |       |                  |       |   |   |
| **Assets**                                                                      |       |                  |       |   |   |
|                                                                            |       |                  |       |   |   |
| Current assets                                                                  |       |                  |       |   |   |
| Cash and cash  equivalents                                                      |       | $                     | 8,772      |   | $ | 4,752 |   |
| Segregated cash                                                                 |       | 271,464               |       | — |   |
| Receivables, net                                                                |       | 65,392                |       | 100,370 |   |
| Material and  supplies                                                          |       | 6,600                 |       | 9,915 |   |
| Prepaid expenses                                                                |       | 3,343                 |       | 4,894 |   |
| Other current  assets                                                           |       | 4,890                 |       | 7,690 |   |
| Total current  assets                                                           |       | 360,461               |       | 127,621 |   |
| Property, plant  and equipment, net                                             |       | 794,051               |       | 818,172 |   |
| Deferred  financing and other assets                                            |       | 25,891                |       | 46,372 |   |
| Intangible  assets, net                                                         |       | 457,437               |       | 583,220 |   |
| Goodwill                                                                        |       | —                |       | 136,779 |   |
|                                                                            |       |                  |       |   |   |
| Total assets                                                                    |       | $                     | 1,637,840  |   | $ | 1,712,164 |   |
|                                                                            |       |                  |       |   |   |
| **Liabilities  and Stockholder’s Equity**                                  | ** ** | ** **            | ** ** | ** ** | ** ** |
|                                                                            |       |                  |       |   |   |
| Current  liabilities                                                            |       |                  |       |   |   |
| Accounts payable                                                                |       | $                     | 54,099     |   | $ | 91,690 |   |
| Accrued expenses                                                                |       | 27,396                |       | 23,941 |   |
| Income taxes  payable                                                           |       | 1,150                 |       | — |   |
| Advance billings  and customer deposits                                         |       | 15,496                |       | 15,540 |   |
| Current  maturities of long-term debt                                           |       | 263,000               |       | 26,500 |   |
| Other current  liabilities                                                      |       | 16,648                |       | 3,764 |   |
| Total current  liabilities                                                      |       | 377,789               |       | 161,435 |   |
| Long-term debt                                                                  |       | 989,700               |       | 1,380,500 |   |
| Deferred income  taxes                                                          |       | —                |       | 10,300 |   |
| Employee benefit  obligations                                                   |       | 57,176                |       | 50,874 |   |
| Other  liabilities                                                              |       | 11,695                |       | 7,016 |   |
| Total  liabilities                                                              |       | 1,436,360             |       | 1,610,125 |   |
|                                                                            |       |                  |       |   |   |
| Commitments and  contingencies (Note 16)                                        |       |                  |       |   |   |
|                                                                            |       |                  |       |   |   |
| Stockholder’s  equity                                                      |       |                  |       |   |   |
| Common stock,  par value of $0.01 per share, 1,000 shares authorized and issued |       | —                |       | — |   |
| Additional  paid-in capital                                                     |       | 428,565               |       | 428,118 |   |
| Accumulated  other comprehensive income (loss)                                  |       | (6,696                | )          | 11,636 |   |
| Accumulated  deficit                                                            |       | (220,389              | )          | (337,715 | ) |
| Total  stockholder’s equity                                                |       | 201,480               |       | 102,039 |   |
|                                                                            |       |                  |       |   |   |
| Total  liabilities and stockholder’s equity                                |       | $                     | 1,637,840  |   | $ | 1,712,164 |   |

 

Seeaccompanying notes to consolidated financial statements.

 

48

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**Hawaiian Telcom Communications, Inc.**

**Consolidated Statements of Cash Flows**

**(Dollars in thousands)**

 
| ** **                                                                                          | ** ** | **Company**           | ** ** | **Predecessor**            | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|-----------------------|------------|----------------------------|------------|
| ** **                                                                                          | ** ** | **Year Ended**   | ** ** | **Period from**       | ** ** |
| ** **                                                                                          | ** ** | **December 31,** | ** ** | **January 1 to** | ** ** |
| ** **                                                                                          | ** ** | **2007**              | ** ** | **2006**                   | ** ** | **2005** | ** ** | **May 1, 2005** | ** ** |
|                                                                                                |       |                  |       |                       |       |   |   |   |   |
| Cash flows from  operating activities:                                                              |       |                  |       |                       |       |   |   |   |   |
| Net income  (loss)                                                                                  |       | $                     | 117,326    |                       | $          | (144,637 | ) | $ | (175,705 | ) | $ | 16,100 |   |
| Adjustments to  reconcile net income (loss) to net cash provided by (used in) operating  activities |       |                  |       |                       |       |   |   |   |   |
| Depreciation and  amortization                                                                      |       | 162,443               |       | 172,732                    |       | 107,753 |   | 39,600 |   |
| Deferred income  taxes, net                                                                         |       | (10,300               | )          | 6,200                      |       | 4,100 |   | (11,700 | ) |
| Employee  retirement benefits                                                                       |       | 6,005                 |       | 6,733                      |       | 10,072 |   | (300 | ) |
| Provision for  uncollectibles                                                                       |       | 16,290                |       | 25,563                     |       | 5,827 |   | 1,000 |   |
| Write-down of  software costs                                                                       |       | 22,055                |       | —                     |       | — |   | — |   |
| Loss on early  extinguishment of debt                                                               |       | 9,296                 |       | —                     |       | — |   | — |   |
| Intangible asset  impairment                                                                        |       | 21,900                |       | —                     |       | — |   | — |   |
| Gain on sale of  directories publishing segment                                                     |       | (231,788              | )          | —                     |       | — |   | — |   |
| Changes in  operating assets and liabilities:                                                       |       |                  |       |                       |       |   |   |   |   |
| Receivables                                                                                         |       | 13,135                |       | (49,248                    | )          | 17,470 |   | 10,400 |   |
| Material and  supplies                                                                              |       | 3,315                 |       | (4,204                     | )          | 276 |   | (3,300 | ) |
| Other current  assets                                                                               |       | 1,245                 |       | (1,876                     | )          | (8,854 | ) | (400 | ) |
| Accounts payable  and accrued expenses                                                              |       | (36,940               | )          | 29,435                     |       | 43,103 |   | (8,800 | ) |
| Other current  liabilities                                                                          |       | 2,414                 |       | (5,743                     | )          | (13,132 | ) | 1,400 |   |
| Other, net                                                                                          |       | 5,112                 |       | 3,344                      |       | 3,709 |   | (7,800 | ) |
| Net cash  provided by (used in) operating activities                                                |       | 101,508               |       | 38,299                     |       | (5,381 | ) | 36,200 |   |
|                                                                                                |       |                  |       |                       |       |   |   |   |   |
| Cash flows from  investing activities:                                                              |       |                  |       |                       |       |   |   |   |   |
| Capital  expenditures                                                                               |       | (97,640               | )          | (106,868                   | )          | (112,680 | ) | (22,800 | ) |
| Proceeds from  sale of directories publishing segment                                               |       | 437,282               |       | —                     |       | — |   | — |   |
| Transfer and use  of segregated cash                                                                |       | (271,464              | )          | —                     |       | — |   | — |   |
| Proceeds on sale  of investments                                                                    |       | 800                   |       | 2,500                      |       | 15,000 |   | — |   |
| Net change in  note receivable                                                                      |       | —                |       | —                     |       | — |   | 11,300 |   |
| Purchase of  Verizon’s Hawaii Business, net of cash acquired                                   |       | —                |       | —                     |       | (1,323,355 | ) | — |   |
| Other                                                                                               |       | (5,818                | )          | —                     |       | — |   | (200 | ) |
| Net cash  provided by (used in) investing activities                                                |       | 63,160                |       | (104,368                   | )          | (1,421,035 | ) | (11,700 | ) |
|                                                                                                |       |                  |       |                       |       |   |   |   |   |
| Cash flows from  financing activities:                                                              |       |                  |       |                       |       |   |   |   |   |
| Issuance of  common stock                                                                           |       | —                |       | —                     |       | 428,000 |   | — |   |
| Proceeds from  issuance of debt                                                                     |       | 985,000               |       | 443,000                    |       | 1,068,300 |   | — |   |
| Repayment of  debt                                                                                  |       | (1,139,300            | )          | (382,500                   | )          | (21,800 | ) | (283,800 | ) |
| Net change in  parent funding                                                                       |       | —                |       | —                     |       | — |   | 259,700 |   |
| Payment of debt  issue costs                                                                        |       | (6,348                | )          | —                     |       | (37,763 | ) | — |   |
| Other                                                                                               |       | —                |       | —                     |       | — |   | 100 |   |
| Net cash  provided by (used in) financing activities                                                |       | (160,648              | )          | 60,500                     |       | 1,436,737 |   | (24,000 | ) |
|                                                                                                |       |                  |       |                       |       |   |   |   |   |
| Net change in  cash and cash equivalents                                                            |       | 4,020                 |       | (5,569                     | )          | 10,321 |   | 500 |   |
| Cash and cash  equivalents, beginning of period                                                     |       | 4,752                 |       | 10,321                     |       | — |   | 1,200 |   |
|                                                                                                |       |                  |       |                       |       |   |   |   |   |
| Cash and cash  equivalents, end of period                                                           |       | $                     | 8,772      |                       | $          | 4,752 |   | $ | 10,321 |   | $ | 1,700 |   |

 

Seeaccompanying notes to consolidated financial statements.

 

49

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**Hawaiian Telcom Communications, Inc.**

**Consolidated Statements of Changes in Stockholder’sEquity (Deficiency)**

**(Dollars in thousands)**

 
| ** **                                               | ** ** | ** **            | ** ** | ** **  | ** ** | ** **        | ** ** | **Accumulated**        | ** ** | ** **  | ** ** | **Total**              | ** ** |
|----------------------------------------------------------|------------|-----------------------|------------|-------------|------------|-------------------|------------|------------------------|------------|-------------|------------|------------------------|------------|
| ** **                                               | ** ** | ** **            | ** ** | ** **  | ** ** | **Additional**    | ** ** | **Other**              | ** ** | ** **  | ** ** | **Stockholder’s** | ** ** |
| ** **                                               | ** ** | **Common Stock** | ** ** | **Paid-In** | ** ** | **Comprehensive** | ** ** | **Accumulated**        | ** ** | **Equity**  | ** ** |
| ** **                                               | ** ** | **Shares**            | ** ** | **Amount**  | ** ** | **Capital**       | ** ** | **Income (Loss)** | ** ** | **Deficit** | ** ** | **(Deficiency)**       | ** ** |
|                                                     |       |                  |       |        |       |              |       |                   |       |        |       |                   |       |
| Balance,  January 1, 2005                           |       | —                |       | $           | —     |              | $          | —                 |       | $           | —     |                   | $          | (17,373 | ) | $ | (17,373 | ) |
|                                                     |       |                  |       |        |       |              |       |                   |       |        |       |                   |       |
| Issuance of  common stock                                |       | 1,000                 |       | —      |       | 428,000           |       | —                 |       | —      |       | 428,000                |       |
|                                                     |       |                  |       |        |       |              |       |                   |       |        |       |                   |       |
| For the year  ended ended December 31, 2005:        |       |                  |       |        |       |              |       |                   |       |        |       |                   |       |
| Net loss                                                 |       | —                |       | —      |       | —            |       | —                 |       | (175,705    | )          | (175,705               | )          |
| Other  comprehensive income -                            |       |                  |       |        |       |              |       |                   |       |        |       |                   |       |
| Gains on cash  flow hedging derivatives                  |       | —                |       | —      |       | —            |       | 11,387                 |       | —      |       | 11,387                 |       |
| Unrealized loss  on investments                          |       | —                |       | —      |       | —            |       | (112                   | )          | —      |       | (112                   | )          |
| Total other  comprehensive income                        |       |                  |       |        |       |              |       |                   |       |        |       | 11,275                 |       |
| Comprehensive  loss                                      |       |                  |       |        |       |              |       |                   |       |        |       | (164,430               | )          |
|                                                     |       |                  |       |        |       |              |       |                   |       |        |       |                   |       |
| Balance,  December 31, 2005                         |       | 1,000                 |       | —      |       | 428,000           |       | 11,275                 |       | (193,078    | )          | 246,197                |       |
|                                                     |       |                  |       |        |       |              |       |                   |       |        |       |                   |       |
| Stock based  compensation                                |       | —                |       | —      |       | 118               |       | —                 |       | —      |       | 118                    |       |
|                                                     |       |                  |       |        |       |              |       |                   |       |        |       |                   |       |
| For the year  ended ended December 31, 2006:        |       |                  |       |        |       |              |       |                   |       |        |       |                   |       |
| Net loss                                                 |       | —                |       | —      |       | —            |       | —                 |       | (144,637    | )          | (144,637               | )          |
| Other  comprehensive income -                            |       |                  |       |        |       |              |       |                   |       |        |       |                   |       |
| Gains on cash  flow hedging derivatives                  |       | —                |       | —      |       | —            |       | 228                    |       | —      |       | 228                    |       |
| Unrealized gain  on investments                          |       | —                |       | —      |       | —            |       | 133                    |       | —      |       | 133                    |       |
| Total other  comprehensive income                        |       |                  |       |        |       |              |       |                   |       |        |       | 361                    |       |
| Comprehensive  loss                                      |       |                  |       |        |       |              |       |                   |       |        |       | (144,276               | )          |
|                                                     |       |                  |       |        |       |              |       |                   |       |        |       |                   |       |
| Balance,  December 31, 2006                         |       | 1,000                 |       | —      |       | 428,118           |       | 11,636                 |       | (337,715    | )          | 102,039                |       |
|                                                     |       |                  |       |        |       |              |       |                   |       |        |       |                   |       |
| Stock based  compensation                                |       | —                |       | —      |       | 447               |       | —                 |       | —      |       | 447                    |       |
|                                                     |       |                  |       |        |       |              |       |                   |       |        |       |                   |       |
| For the year  ended ended December 31, 2007:        |       |                  |       |        |       |              |       |                   |       |        |       |                   |       |
| Net income                                               |       | —                |       | —      |       | —            |       | —                 |       | 117,326     |       | 117,326                |       |
| Other  comprehensive loss -                              |       |                  |       |        |       |              |       |                   |       |        |       |                   |       |
| Loss on cash flow  hedging derivatives                   |       | —                |       | —      |       | —            |       | (18,099                | )          | —      |       | (18,099                | )          |
| Unrealized gain  on investments                          |       | —                |       | —      |       | —            |       | 64                     |       | —      |       | 64                     |       |
| Total other  comprehensive loss                          |       |                  |       |        |       |              |       |                   |       |        |       | (18,035                | )          |
| Comprehensive  income                                    |       |                  |       |        |       |              |       |                   |       |        |       | 99,291                 |       |
| Adjustment for  initial application of SFAS No. 158 |       | —                |       | —      |       | —            |       | (297                   | )          | —      |       | (297                   | )          |
|                                                     |       |                  |       |        |       |              |       |                   |       |        |       |                   |       |
| Balance,  December 31, 2007                         |       | 1,000                 |       | $           | —     |              | $          | 428,565                |       | $           | (6,696     | )                      | $          | (220,389 | ) | $ | 201,480 |   |

 

Seeaccompanying notes to consolidated financial statements.

 

50

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**Hawaiian Telcom Communications, Inc.**

**Combined Statements of Changes in Parent Funding -Predecessor**

**(Dollars in thousands)**

 
| Balance,  January 1, 2005                                                 |   | $       | 410,000 |   |
|--------------------------------------------------------------------------------|--------|---------|---------|--------|
|                                                                           |   |    |    |
| Net income                                                                     |   | 16,100  |    |
|                                                                           |   |    |    |
| Net change due  to parent funding, allocations and intercompany reimbursements |   | 259,700 |    |
|                                                                           |   |    |    |
| Balance,  May 1, 2005                                                     |   | $       | 685,800 |   |

 

Seeaccompanying notes to consolidated financial statements.

 

51

----

 

**HawaiianTelcom Communications, Inc.**

**Notes to Consolidated Financial Statements**

 

**1. Description of Business**

 

***BusinessDescription***

 

Hawaiian Telcom Communications, Inc. andsubsidiaries (the “Company”) is the incumbent local exchange carrier for theState of Hawaii and is estimated to be the tenth largest incumbent localexchange carriers in the United States with an integrated telecommunicationsnetwork servicing approximately 560,000 switched access lines as of December 31,2007. The Company also served approximately 264,000 long distance lines and had93,000 High-Speed Internet (HSI) connections as of that date.

 

The Company provides a range of voice and datacommunication services to residential and commercial customers. Local telephoneservice is provided on each island in Hawaii and intraLATA (Local AccessTransport Area) toll service is provided among the islands. InterLATA tollservices between Hawaii and domestic points within the United States areprovided by long-distance carriers, which connect to the Company’s localfacilities for call origination and termination. Business and residentialcustomers also pay access charges to the Company to connect to the localnetwork to obtain long-distance service. In addition, the Company providesInternet access services for customers located in Hawaii, including both HSIand remote dial-up for residential and business customers; long-distancetelecommunications services for interLATA and international toll trafficoriginating in Hawaii; and customer premise equipment sales and services. TheCompany offers *Hawaiian Telcom*® branded wireless services to residentialand commercial customers through a leased network.

 

The communication services the Company provides aresubject to regulation by the Public Utilities Commission of the State of Hawaii(HPUC) with respect to intrastate rates and services and other matters. Certainagreements with the HPUC limit the amount of dividends and other distributionsthe Company may pay as well as place restrictions on certain transactionsaffecting the operations and capital structure of the Company.  The Federal Communication Commission (FCC)regulates rates that the Company charges long distance carriers and otherend-user subscribers for interstate access services and interstate traffic.

 

On April 29, 2007, the Company entered into anagreement to sell its directories publishing segment to an unrelatedentity.  The sale was consummated on November 30,2007.

 

***2005**********Acquisition***

 

On May 21, 2004, the Company and Hawaiian TelcomHoldco, Inc. (Holdco), the parent of the Company, both new entities formedby the private equity firm of The Carlyle Group (the “Sponsor”), entered intoan Agreement of Merger, which was subsequently amended and restated on April 8,2005, with GTE and Verizon HoldCo LLC, both subsidiaries of VerizonCommunications Inc. (Verizon), to acquire Verizon’s Hawaii business (the “Predecessor”).The merger was consummated on May 2, 2005 (the “2005 Acquisition”).

 

***Organization***

 

With the 2005 Acquisition, the Company has two directsubsidiaries – Hawaiian Telcom, Inc. and Hawaiian Telcom Services Company, Inc.Hawaiian Telcom, Inc. operates the regulated local exchange carrier andHawaiian Telcom Services Company, Inc. operates all other businesses.Hawaiian Telcom Insurance Company, Incorporated is a captive insurancesubsidiary of Hawaiian Telcom, Inc. and, until December 31, 2003,provided auto liability, general liability and worker’s compensation insuranceto its parent. The captive subsidiary continues to settle claims related toincidents which occurred prior to January 1, 2004. The Company insurescurrent incidents with external carriers.

 

52

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**HawaiianTelcom Communications, Inc.**

**Notes toConsolidated Financial Statements**

 

**2. Basis of Presentation**

 

The accompanying financial statements have beenprepared in accordance with accounting principles generally accepted in theUnited States of America.

 

***The Company***

 

The accompanying consolidated balance sheets as of December 31,2007 and 2006 and the related consolidated statements of operations, cash flowsand changes in stockholder’s equity (deficiency) for the years ended December 31,2007, 2006 and 2005 reflect the Company’s operations (see Note 1).  These financial statements also include theresults of the Verizon Hawaii Business (defined below) from the May 2,2005 acquisition date. The historical financial statements of the Predecessorare included in the accompanying consolidated financial statements includingthe combined statements of operations, parent funding and cash flows for theperiod from January 1, 2005 to May 1, 2005. The Predecessor financialstatements have not been adjusted to give effect to the 2005 Acquisition.Accordingly, the accompanying consolidated financial statements of the Companyare not comparable to the Predecessor financial statements.

 

***The Predecessor***

 

The Predecessor financial statements include theactivities of Verizon conducted in Hawaii, with certain exceptions. Verizon’sHawaii business was comprised of Verizon Hawaii Inc. (now Hawaiian Telcom, Inc.)and carved-out components of Verizon Information Services (VIS), GTE.NET LLC(dba Verizon Online) (VOL), Bell Atlantic Communications Inc. (dba Verizon LongDistance) (VLD) and Verizon Select Services, Inc. (VSSI) (collectively,the “Verizon Hawaii Business”). To prepare these statements, management ofVerizon specifically identified, assigned or apportioned revenues and expensesof Verizon to the Verizon Hawaii Business. However, because of the VerizonHawaii Business’s relationship with Verizon and its other affiliates, therevenues and expenses are not necessarily indicative of what they would havebeen had the Verizon Hawaii Business operated without the shared resources ofVerizon and its affiliates. Accordingly, these Predecessor financial statementsare not necessarily indicative of future results of operations.

 

***The Subsidiary andParent Guarantors***

 

Hawaiian Telcom, Inc. and Hawaiian TelcomServices Company, Inc. guarantee the Company’s senior notes and notespayable to banks (see Note 9). Financial statements of the subsidiaryguarantors have not been presented as Hawaiian Telcom Communications, Inc.has no independent assets or operations, the guarantees are full andunconditional and joint and several, and the assets of Hawaiian TelcomInsurance Company, Incorporated, which are excluded from the guarantee, are notsignificant.

 

Holdco, the Company’s parent, also is a guarantor forthe Company’s notes payable to banks. Financial statements of Holdco have notbeen presented as it has no independent assets, liabilities or operations andthe guarantees are full and unconditional and joint and several.

 

**3. Summary of Significant AccountingPolicies**

 

***Use of Estimates***

 

The preparation of financial statements in conformitywith accounting principles generally accepted in the United States of Americarequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities and disclosure of contingent assets andliabilities at the date of the financial statements and the reported amounts ofrevenue and expenses during the reporting periods. Actual results could differfrom those estimates.

 

53

----

 

**HawaiianTelcom Communications, Inc.**

**Notes toConsolidated Financial Statements**

 

***Principles ofConsolidation***

 

The consolidated financial statements of the Companyinclude the results of operations, financial position, and cash flows ofHawaiian Telcom Communications, Inc. and its wholly-owned subsidiaries.All intercompany balances and transactions have been eliminated inconsolidation.

 

***Revenue Recognition***

 

Revenue is recognized when evidence of an arrangementexists, the earnings process is complete and collectibility is reasonablyassured. The prices for most services are filed in tariffs with the regulatorybody that exercises jurisdiction over the services.

 

Basic local service, enhanced calling features such ascaller ID, special access circuits, long distance flat rate calling plans, mostdata services and wireless services are billed one month in advance. Revenuefor these services is recognized in the month services are rendered. Theportion of advance-billed services associated with services that will bedelivered in a subsequent period is deferred and recorded as a liability inadvance billings and customer deposits.

 

Amounts billed to customers for activating wirelineservice are deferred and recognized over the average customer relationship. Thecosts associated with activating such services are deferred and recognized asan operating expense over the same period. Costs in excess of revenues arerecognized as expense in the period in which activation occurs.

 

Revenues for providing usage based services, such as per-minutelong distance service and access charges billed to long distance companies fororiginating and terminating long distance calls on the Company’s network, arebilled in arrears. Revenues for these services are estimated based on actualrated usage and, where necessary, historical usage patterns, and are recognizedin the month services are rendered.

 

Universal Service revenues are government-sponsoredsupport received in association with providing service in mostly rural,high-cost areas. These revenues are typically based on information provided bythe Company and are calculated by the government agency responsible foradministering the support program. These revenues are recognized in the periodthe service is provided.

 

Telephone equipment revenues generated from retailchannels are recorded at the point of sale. Telecommunication systems andstructured cabling project revenues are recognized on a percentage completionbasis except for short duration projects which are recognized upon completion ofthe project. Maintenance services are recorded when the service is provided.

 

The Company recognized publishing revenue and relatedexpenses on a straight-line method over the twelve month period in which thecorresponding directory is distributed.

 

***Taxes Collected from Customers***

 

The Company presents taxescollected from customers and remitted to governmental authorities on a grossbasis, including such amounts in the Company’s reported operatingrevenues.  Such amounts representprimarily Hawaii state excise taxes and Hawaii Public Utility Commissionfees.  Such taxes and fees for theCompany amounted to $11.6 million, $9.6 million and $3.6 million for the yearsended December 31, 2007, 2006 and 2005, respectively.

 

***Cash and CashEquivalents***

 

For purposes of reporting cash flows, cash and cashequivalents include cash and money market accounts with maturities atacquisition of three months or less.

 

54

----

 

**HawaiianTelcom Communications, Inc.**

**Notes toConsolidated Financial Statements**

 

***Segregated Cash***

 

TheCompany segregated cash proceeds from the sale of its directories publishingsegment (see Note 4) as such funds are required to be used to repay long termdebt based on an agreement with the HPUC and the terms of its bank debtagreement.  Segregated cash is maintainedin a short-term Treasury money-market account.

 

***Receivables***

 

The Company makes estimates of the uncollectibility ofits accounts receivables by specifically analyzing accounts receivables andhistoric bad debts, customer concentrations, customer creditworthiness, currenteconomic trends and changes in its customer payment terms when evaluating theadequacy of the allowance for doubtful accounts.

 

***Material andSupplies***

 

Material and supplies which consists mainly of cable,supplies and replacement parts, are stated at the lower of cost, determinedprincipally by the average cost method, or net realizable value.

 

***Property andDepreciation***

 

Property, plant and equipment are carried at cost.Depreciation has been calculated using the composite remaining life methodologyand straight-line depreciation rates. The composite method depreciates theremaining net investment in telephone plant over remaining economic asset livesby asset category. This method requires periodic review and revision ofdepreciation rates. The average economic lives utilized for assets acquiredfrom Verizon are as follows: buildings – 34 years; cable and wire – 5 to 18years; switching and circuit equipment – 1 to 12 years; and other property – 1to 20 years. The average economic lives for all other assets (i.e., primarilynew additions) are as follows: building – 34 years; cable and wire – 11 to 37years; switching and circuit equipment – 6 to 14 years; and other property – 5to 17 years.

 

***Software***

 

The Company capitalizes the costs associated withexternally acquired software for internal use. Project costs associated withinternally developed software are segregated into three project stages:preliminary project stage, application development stage andpost-implementation stage. Costs associated with both the preliminary projectstage and post-implementation stage are expensed as incurred. Costs associatedwith the application development stage are capitalized. Software maintenance andtraining costs are expensed as incurred. Capitalized software is generallyamortized on a straight-line method basis over its useful life, not to exceedfive years.

 

***Goodwill and OtherIntangible Assets***

 

Goodwill and indefinite-lived intangibles assets arenot amortized. Such assets are reviewed annually, or more frequently undervarious conditions, for impairment. Impairment occurs when the fair value ofthe asset is less than the carrying value. The Company performs its annualimpairment test during the fourth quarter, primarily using a discounted cashflow methodology. The annual impairment test performed during the fourthquarter of 2007 indicated partial impairment of certain indefinite-livedintangible assets (see Note 7). Intangible assets with definite lives, including the value assigned tothe customer base at the date of acquisition, are being amortized over theremaining estimated lives. For customer relationship intangibles, amortizationis calculated using a declining balance method in relation to estimatedretention lives of acquired customers.

 

55

----

 

**HawaiianTelcom Communications, Inc.**

**Notes toConsolidated Financial Statements**

 

***Impairment ofLong-Lived Assets***

 

The Company assesses the recoverability of long-livedassets, including property, plant and equipment and definite-lived intangibleassets, whenever events or changes in circumstances indicate that the carryingamount of an asset may not be recoverable. In such cases, if the sum of the expectedcash flows, undiscounted and without interest, resulting from use of the assetare less than the carrying amount, an impairment loss is recognized based onthe difference between the carrying amount and the fair value of the assets.

 

***Debt Issuance***

 

Deferred financing costs are amortized over the termof the related debt issuance.

 

***DerivativeFinancial Instruments***

 

The Company accounts for all derivative financialinstruments, such as interest rate swap agreements, by recognizing thederivative on the balance sheet at fair value, regardless of the purpose orintent of holding them.  In addition, forderivative instruments that qualify for hedge accounting, changes in the fairvalue will either be offset against the change in the fair value of the hedgedassets, liabilities, or firm commitment through earnings or recognized instockholder’s equity as a component of accumulated other comprehensive income(loss) until the hedged item is recognized in earnings, depending on whetherthe derivative is being used to hedge changes in fair value or cash flows. TheCompany measures hedge effectiveness by formally assessing, at least quarterly,the historical and probable future high correlation of changes in the fairvalue of expected future cash flows of the hedged item. The ineffective portionof a derivative’s change in fair value will be immediately recognized in otherincome or expense.

 

***Income Taxes***

 

Deferred tax assets and liabilities are determinedbased on the differences between the financial reporting and tax bases ofassets and liabilities at each balance sheet date using enacted tax ratesexpected to be in effect in the year the differences are expected to reverse.Deferred tax assets are reduced by a valuation allowance to the extent that itis unlikely they will be realized.

 

Effective January 1, 2007, the Company adoptedthe provisions of Financial Accounting Standards Board (FASB) Interpretation No. 48,“Accounting for Uncertainty in Income Taxes.” The new standard had no impact on the Company’s reported financialposition or results of operations for 2007.

 

***Employee BenefitPlans***

 

Pension and postretirement health and life insurancebenefits earned during the year as well as interest on projected benefitobligations are accrued currently.  Priorservice costs and credits resulting from changes in plan benefits are amortizedover the average remaining service period of the employees expected to receivebenefits.

 

Effective December 31, 2007, the Company adoptedStatement of Financial Accounting Standards (SFAS) No.158, “Employers’Accounting for Defined Benefit Pension and Other Postretirement Plans, anamendment of FASB Statements No. 87, 88, 106, and 132(R).”  Under this new standard, the Company hasrecognized the funded status of its benefit plans in the balance sheet.  The funded status is the difference betweenthe fair value of plan assets and the benefit obligation.  For pension plans, the benefit obligation isbased on the projected benefit obligation and for other postretirement benefitplans the benefit obligation is based on the accumulated postretirement benefitobligation.  The changes in the fundedstatus are recognized through comprehensive income the year in which the changeoccurs.  The adoption of SFAS No. 158resulted in a net decrease to stockholder’s equity of $0.3 million (see Note11).

 

56

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**HawaiianTelcom Communications, Inc.**

**Notes toConsolidated Financial Statements**

 

***Maintenance andRepairs***

 

The cost of maintenance and repairs, including thecost of replacing minor items not constituting substantial betterments, ischarged to expense as these costs are incurred.

 

***Advertising***

 

Advertising costs are expensed as incurred.Advertising expense for the Company amounted to $9.3 million, $8.2 million and$14.3 million for the years ended December 31, 2007, 2006 and 2005,respectively. For the Predecessor, advertising expense amounted to $0.4 millionfor the period from January 1, 2005 to May 1, 2005. Limitedadvertising expense was incurred by the Predecessor given the nationwide natureof the Verizon franchise.

 

***Stock BasedCompensation***

 

In accordance with SFAS No. 123(R), “Share-BasedPayment,” the Company accounts for stock based compensation at fair value usingthe prospective method for all new awards granted, modified or settled after January 1,2006.  The following table summarizes theeffect on net income (loss) for the years ended December 31, 2007, 2006and 2005 if the fair value method had been applied to all outstanding options(dollars in thousands):

*** ***
| ** **                                                                                                                     | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                                                     | ** ** | **2007**                                   | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                                                                                           |       |                                       |       |   |   |   |   |
| Net income  (loss), as reported                                                                                                |       | $                                          | 117,326    |   | $ | (144,637 | ) | $ | (175,705 | ) |
| Add: Stock  option related employee compensation   expense included in net income (loss)                                       |       | 447                                        |       | 118 |   | — |   |
| Deduct: Total  stock option related employee compensation expense determined under the fair  value based method for all awards |       | (1,759                                     | )          | (1,911 | ) | (2,834 | ) |
|                                                                                                                           |       |                                       |       |   |   |   |   |
| Pro forma net income (loss)                                                                                                    |       | $                                          | 116,014    |   | $ | (146,430 | ) | $ | (178,539 | ) |

 

***Interest Expense Allocation***

 

Interestexpense has been allocated to discontinued operations based on the amount ofdebt required to be repaid as a result of the sale of the DirectoriesPublishing segment in November 2007. Interest has been allocated for all Company periods presented.  Interest has not been allocated for thePredecessor as its debt structure was different from that of the Company.

 

***Earnings per Share***

 

Because the Company has only one shareholder, Holdco,and has no common stock trading in a public market, information on earnings(loss) per share is not meaningful and has not been presented.

 

57

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**HawaiianTelcom Communications, Inc.**

**Notes toConsolidated Financial Statements**

 

***PredecessorFinancial Statements***

 

Historically, financial statements had not beenprepared for the Verizon Hawaii Business as it had no separate legal existence.The combined Predecessor financial statements include the accounts of VerizonHawaii Inc. and its subsidiary, as well as printed directory, digitalsubscriber line, Internet access, long distance and customer premise equipmentservices provided to customers in the State of Hawaii.  The preparation of financial informationrelated to the operations of VIS, VOL, VLD and VSSI in Hawaii was based on thefollowing:

 

VIS: Revenues were identified using applicable billingsystem data. Cost of services and sales were identified based upon acombination of direct cost for Hawaii sales and information from the job ordercosting system. Selling, general, and administrative expenses were allocatedbased upon the percentage of total VIS selling, general, and administrativeexpenses to total VIS revenues applied to the VIS revenue component of theVerizon Hawaii Business.

 

VOL: Revenues were determined using applicable billingsystem data and average access lines in service. Cost of services and saleswere allocated based on the ratio of average Hawaii VOL access lines to totalVOL access lines applied to VOL operating expenses. Selling, general and administrativeexpenses were allocated based on the ratio of Verizon Hawaii Business revenuesrelated to the VOL component to total VOL revenues applied to total VOLselling, general and administrative expenses.

 

VLD: Revenues were determined using applicable billingsystem data. Cost of sales and services and selling, general and administrativeexpenses were allocated based on the ratio of Verizon Hawaii Business revenuerelated to the VLD component to total VLD revenues applied to operatingexpenses for total VLD.

 

VSSI: Revenues were identified using applicablebilling system data.  Cost of sales andservices and selling, general and administrative expenses were allocated basedon the ratio of Verizon Hawaii Business revenue related to the VSSI componentto total VSSI revenues applied to operating expenses for total VSSI.

 

Management of Verizon believes the allocations used todetermine selected amounts in the financial statements are appropriate methodsto reasonably reflect the related revenues and expenses of the Verizon HawaiiBusiness.

 

***Recently IssuedAccounting Pronouncements***

 

In December 2007, the FASB issued SFAS No. 141(R),“Business Combinations.”  SFAS No. 141(R) establishesprinciples and requirements for how an acquiring Company recognizes and measuresthe assets acquired (including goodwill), the liabilities assumed and anynoncontrolling interest.  The Company isin the process of evaluating the impact this standard will have on itsfinancial statements.  This standard iseffective for the Company’s fiscal year beginning January 1, 2009.

 

In February 2007, the FASB issued SFAS No. 159,“The Fair Value Option for Financial Assets and Financial Liabilities” whichallows entities to choose to measure many financial instruments and certainother assets and liabilities at fair value. The Company is in the process of evaluating the impact this standardwill have on its financial statements. This standard is effective for the Company’s fiscal year beginning January 1,2008.

 

In September 2006, the FASB issued SFAS No. 157,“Fair Value Measurements.”  SFAS No. 157provides a common definition for fair value under generally accepted accountingprinciples, establishes a framework for measuring fair value and expandsdisclosure requirements for fair value measurements.  The Company is in the process of evaluatingthe impact this standard will have on its financial statements.  This standard is effective for the Company’sfiscal year beginning January 1, 2008 except for non-financial assets andliabilities which is effective for the fiscal year beginning January 1,2009.

 

58

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**HawaiianTelcom Communications, Inc.**

**Notes toConsolidated Financial Statements**

 

**4. Discontinued Operations**

 

On April 29, 2007, theCompany entered into an agreement to sell its directories publishing segment toan unrelated entity.  The sale wasconsummated on November 30, 2007 for gross proceeds of $437.3 million ($435.0 million,subject to adjustments related to working capital and excluding fees andexpenses).

 

The results of thediscontinued operations, including prior year amounts which were reclassifiedfrom continuing operations to discontinued operations to conform to the currentyear’s presentation, are as follows (dollars in thousands):

 
| ** **                                                                 | ** ** | **Company**                                | ** ** | **Predecessor**            | ** ** |
|----------------------------------------------------------------------------|------------|--------------------------------------------|------------|----------------------------|------------|
| ** **                                                                 | ** ** | ** **                                 | ** ** | **Period from**       | ** ** |
| ** **                                                                 | ** ** | **Year Ended December 31,** | ** ** | **January 1 to** | ** ** |
| ** **                                                                 | ** ** | **2007**                                   | ** ** | **2006**                   | ** ** | **2005** | ** ** | **May 1, 2005** | ** ** |
|                                                                       |       |                                       |       |                       |       |   |   |   |   |
| Operating  revenues                                                        |       | $                                          | 61,437     |                       | $          | 67,033 |   | $ | 11,106 |   | $ | 22,000 |   |
| Operating  expenses                                                        |       | 37,171                                     |       | 35,198                     |       | 14,026 |   | 8,000 |   |
|                                                                       |       |                                       |       |                       |       |   |   |   |   |
| Income (loss)  from operations of discontinued segment                     |       | 24,266                                     |       | 31,835                     |       | (2,920 | ) | 14,000 |   |
|                                                                       |       |                                       |       |                       |       |   |   |   |   |
| Interest expense                                                           |       | (33,623                                    | )          | (35,514                    | )          | (23,597 | ) | — |   |
| Gain on sale of  discontinued segment                                      |       | 231,788                                    |       | —                     |       | — |   | — |   |
|                                                                       |       |                                       |       |                       |       |   |   |   |   |
| Income (loss)  from discontinued segment before provision for income taxes |       | 222,431                                    |       | (3,679                     | )          | (26,517 | ) | 14,000 |   |
|                                                                       |       |                                       |       |                       |       |   |   |   |   |
| Provision for  income taxes                                                |       | 39,900                                     |       | 3,600                      |       | 2,400 |   | 5,600 |   |
|                                                                       |       |                                       |       |                       |       |   |   |   |   |
| Income (loss)  from discontinued operations                                |       | $                                          | 182,531    |                       | $          | (7,279 | ) | $ | (28,917 | ) | $ | 8,400 |   |
|                                                                       |       |                                       |       |                       |       |   |   |   |   |
| Amortization  included in operating expenses                               |       | $                                          | 2,571      |                       | $          | 8,765 |   | $ | 6,351 |   | $ | 100 |   |

 

The net proceeds from thesale were required by the HPUC and the bank debt agreement to be used to repaydebt (see Note 9).

 

59

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**HawaiianTelcom Communications, Inc.**

**Notes toConsolidated Financial Statements**

 

**5. Receivables**

 

Receivables consisted of the following (dollars inthousands):

 
| ** **                              | ** ** | **December 31,** | ** ** |
|-----------------------------------------|------------|-----------------------|------------|
| ** **                              | ** ** | **2007**              | ** ** | **2006** | ** ** |
| ** **                              | ** ** | ** **            | ** ** | ** ** | ** ** |
| Customers and  other                    |       | $                     | 89,433     |   | $ | 106,426 |   |
| Receivable from  BearingPoint (Note 16) |       | —                |       | 24,129 |   |
| Allowance for  doubtful accounts        |       | (24,041               | )          | (30,185 | ) |
|                                    |       |                  |       |   |   |
| Total                                   |       | $                     | 65,392     |   | $ | 100,370 |   |

 

The Company grants credit to customers in the normalcourse of business.  At December 31,2007, the Company did not have any customer balances representing more than 10%of total receivables.  At December 31,2006, the Company did not have any customer balances representing more than 10%of total receivables other than the receivable due from BearingPoint.  During the years ended December 31,2007, 2006 and 2005, the Company and the Predecessor had no customers thatrepresented more than 10% of total revenues.

 

The following is a summary of activity for the allowancefor doubtful accounts (dollars in thousands):

 
| ** **                                      | ** ** | ** **    | ** ** | ** **           | ** ** | **Additional**      | ** ** | ** **     | ** ** | ** **  | ** ** |
|-------------------------------------------------|------------|---------------|------------|----------------------|------------|---------------------|------------|----------------|------------|-------------|------------|
| ** **                                      | ** ** | ** **    | ** ** | **Acquisition**      | ** ** | **Charges to** | ** ** | **Deductions** | ** ** | ** **  | ** ** |
| ** **                                      | ** ** | **Beginning** | ** ** | **and Related** | ** ** | **Costs and**  | ** ** | **from**       | ** ** | **Ending**  | ** ** |
| ** **                                      | ** ** | **Balance**   | ** ** | **Adjustments**      | ** ** | **Expenses**        | ** ** | **Allowance**  | ** ** | **Balance** | ** ** |
| Predecessor:                                    |       |          |       |                 |       |                |       |           |       |        |       |
| Period from  January 1 to May 1, 2005 |       | $             | 7,000      |                 | $          | —              |       | $              | 1,000      |        | $          | (2,800 | ) | $ | 5,200 |   |
|                                            |       |          |       |                 |       |                |       |           |       |        |       |
| Company:                                        |       |          |       |                 |       |                |       |           |       |        |       |
| Year ended  December 31, 2005              |       | —        |       | 7,854                |       | 5,827               |       | (3,964         | )          | 9,717       |       |
| Year ended  December 31, 2006              |       | 9,717         |       | 2,000                |       | 25,563              |       | (7,095         | )          | 30,185      |       |
| Year ended  December 31, 2007              |       | 30,185        |       | —               |       | 16,290              |       | (22,434        | )          | 24,041      |       |
|                                                 |            |               |            |                      |            |                     |            |                |            |             |            |  |  |  |  |  |

 

**6. Property, Plant and Equipment**

 

Property, plant and equipment consisted of thefollowing (dollars in thousands):

 
| ** **                                      | ** ** | **December 31,** | ** ** |
|-------------------------------------------------|------------|-----------------------|------------|
| ** **                                      | ** ** | **2007**              | ** ** | **2006** | ** ** |
|                                            |       |                  |       |   |   |
| Land                                            |       | $                     | 58,386     |   | $ | 57,997 |   |
| Buildings                                       |       | 114,441               |       | 108,205 |   |
| Central office  equipment                       |       | 316,597               |       | 280,596 |   |
| Outside  communications plant                   |       | 395,527               |       | 375,366 |   |
| Furniture,  vehicles and other work equipment   |       | 34,224                |       | 27,453 |   |
| Construction in  progress                       |       | 39,659                |       | 35,810 |   |
| Software,  including under development          |       | 88,342                |       | 85,065 |   |
| Other                                           |       | 3,875                 |       | 3,877 |   |
|                                            |       | 1,051,051             |       | 974,369 |   |
| Less accumulated  depreciation and amortization |       | 257,000               |       | 156,197 |   |
|                                            |       |                  |       |   |   |
| Total property,  plant and equipment, net       |       | $                     | 794,051    |   | $ | 818,172 |   |

 

60

----

 

**HawaiianTelcom Communications, Inc.**

**Notes toConsolidated Financial Statements**

 

**7. Goodwill and Intangible Assets**

 

The excess purchase price paid by the Company over itsestimates of the fair values of tangible assets and liabilities of the VerizonHawaii Business amounted to $692.1 million of identifiable intangible assetsand $136.8 million of goodwill. Identifiable intangible assets and goodwill allocated to the directoriespublishing segment sold in 2007 amounted to $68.8 million ($51.1 million net ofaccumulated amortization) and $136.8 million, respectively.

 

In conjunction with the Company’s annual impairmenttest for non-amortizable intangible assets in the fourth quarter of 2007, theCompany recognized impairment expense of $21.9 million.  The impairmentwas determined as the difference between the fair value of the non-amortizableintangible assets and their carrying value.  The fair value was based ondiscounted cash flows for the asset.  Theimpairment was in the Wireline Services segment.

 

The gross carrying amount and accumulated amortizationof the identifiable intangible assets are as follows (dollars in thousands):

 
| ** **                         | ** ** | **December 31, 2007** | ** ** | **December 31, 2006** | ** ** |
|------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                         | ** ** | **Gross**                       | ** ** | ** **                      | ** ** | ** ** | ** ** | **Gross** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                         | ** ** | **Carrying**                    | ** ** | **Accumulated**                 | ** ** | **Net Carrying** | ** ** | **Carrying** | ** ** | **Accumulated** | ** ** | **Net Carrying** | ** ** |
| ** **                         | ** ** | **Value**                       | ** ** | **Amortization**                | ** ** | **Value** | ** ** | **Value** | ** ** | **Amortization** | ** ** | **Value** | ** ** |
|                               |       |                            |       |                            |       |   |   |   |   |   |   |   |   |
| Subject to  amortization:          |       |                            |       |                            |       |   |   |   |   |   |   |   |   |
| Customer  relationships            |       | $                               | 503,900    |                            | $          | 139,963 |   | $ | 363,937 |   | $ | 561,100 |   | $ | 105,547 |   | $ | 455,553 |   |
| Covenant not to  compete           |       | 4,000                           |       | 4,000                           |       | — |   | 4,000 |   | 3,333 |   | 667 |   |
|                               |       | 507,900                         |       | 143,963                         |       | 363,937 |   | 565,100 |   | 108,880 |   | 456,220 |   |
| Not subject to  amortization:      |       |                            |       |                            |       |   |   |   |   |   |   |   |   |
| Franchise for  street right of way |       | 66,300                          |       | —                          |       | 66,300 |   | 88,400 |   | — |   | 88,400 |   |
| Brand name                         |       | 27,200                          |       | —                          |       | 27,200 |   | 38,600 |   | — |   | 38,600 |   |
|                               |       | 93,500                          |       | —                          |       | 93,500 |   | 127,000 |   | — |   | 127,000 |   |
|                               |       |                            |       |                            |       |   |   |   |   |   |   |   |   |
|                               |       | $                               | 601,400    |                            | $          | 143,963 |   | $ | 457,437 |   | $ | 692,100 |   | $ | 108,880 |   | $ | 583,220 |   |

 

The estimated useful lives for intangibles subject toamortization were as follows:

 
| ** **                   | ** ** | ** **   | ** ** | **Weighted** | ** ** |
|------------------------------|------------|--------------|------------|--------------|------------|
| ** **                   | ** ** | ** **   | ** ** | **Average**  | ** ** |
| ** **                   | ** ** | **Life**     | ** ** | **Life**     | ** ** |
|                         |       |         |       |         |       |
| Customer  relationships      |       | 8 - 15 years |       | 13 years     |       |
| Covenant not to  compete     |       | 2 years      |       | 2 years      |       |
| All amortizable  intangibles |       |         |       | 13 years     |       |

 

The determination of useful lives for customerrelationships was made based on historical and expected customer attritionrates.

 

61

----

 

**HawaiianTelcom Communications, Inc.**

**Notes toConsolidated Financial Statements**

 

Amortization expense, excluding discontinuedoperations, amounted to $50.2 million, $55.2 million and $38.6 million for theyears ended December 31, 2007, 2006 and 2005, respectively.  Estimated amortization expense for the nextfive years and thereafter is as follows (dollars in thousands):

 
| 2008       |   | $       | 46,174  |   |
|------------|--------|---------|---------|--------|
| 2009       |   | 43,101  |    |
| 2010       |   | 40,283  |    |
| 2011       |   | 37,690  |    |
| 2012       |   | 35,300  |    |
| Thereafter |   | 161,389 |    |
|       |   |    |    |
|       |   | $       | 363,937 |   |

 

**8.Current Liabilities**

 

Accrued expenses consisted of the following (dollars inthousands):

** **
| ** **             | ** ** | **December 31,** | ** ** |
|------------------------|------------|-----------------------|------------|
| ** **             | ** ** | **2007**              | ** ** | **2006** | ** ** |
| ** **             | ** ** | ** **            | ** ** | ** ** | ** ** |
| Salaries and  benefits |       | $                     | 16,732     |   | $ | 12,142 |   |
| Other taxes            |       | 1,559                 |       | 1,496 |   |
| Interest               |       | 9,105                 |       | 10,303 |   |
|                   |       |                  |       |   |   |
|                   |       | $                     | 27,396     |   | $ | 23,941 |   |

 

**9. Long-Term Debt**

 

Long-termdebt consisted of the following (dollars in thousands):

 
| ** **                                         | ** ** | **Interest**          | ** ** | ** **          | ** ** | ** **            | ** ** | ** ** | ** ** |
|----------------------------------------------------|------------|-----------------------|------------|---------------------|------------|-----------------------|------------|------------|------------|
| ** **                                         | ** ** | **Rate at**      | ** ** | ** **          | ** ** | ** **            | ** ** | ** ** | ** ** |
| ** **                                         | ** ** | **December 31,** | ** ** | **Final**           | ** ** | **December 31,** | ** ** |
| ** **                                         | ** ** | **2007**              | ** ** | **Maturity**        | ** ** | **2007**              | ** ** | **2006**   | ** ** |
|                                               |       |                  |       |                |       |                  |       |       |       |
| Notes payable to  banks, revolving credit facility |       | 7.17                  | %          | April 30, 2012 |       | $                     | 57,000     |       | $          | 160,000 |   |
| Notes payable to  banks, Tranche C term loan       |       | 7.45                  | %          | June 1, 2014   |       | 695,700               |       | —     |       |
| Notes payable to  banks, Tranche A term loan       |       | NA                    |       | NA                  |       | —                |       | 300,000    |       |
| Notes payable to  banks, Tranche B term loan       |       | NA                    |       | NA                  |       | —                |       | 447,000    |       |
| Senior floating  rate notes                        |       | 10.32                 | %          | May 1, 2013    |       | 150,000               |       | 150,000    |       |
| Senior fixed  rate notes                           |       | 9.75                  | %          | May 1, 2013    |       | 200,000               |       | 200,000    |       |
| Senior  subordinated notes                         |       | 12.50                 | %          | May 1, 2015    |       | 150,000               |       | 150,000    |       |
|                                               |       |                  |       |                |       | 1,252,700             |       | 1,407,000  |       |
| Current portion                                    |       |                  |       |                |       | 263,000               |       | 26,500     |       |
|                                               |       |                  |       |                |       |                  |       |       |       |
|                                               |       |                  |       |                |       | $                     | 989,700    |       | $          | 1,380,500 |   |

 

62

----

 

**HawaiianTelcom Communications, Inc.**

**Notes toConsolidated Financial Statements**

 

***NotesPayable to Banks***

 

On June 1, 2007, the Company amended its creditfacilities to provide for a new amended revolving credit facility and a newTranche C term loan with a syndicate of financial institutions which was usedto repay $109.0 million of the existing revolving credit facility and thebalance due on the Company’s Tranche A and Tranche B term loans.

 

The amended revolving credit facility had a principalbalance of $150.0 million (in January 2008, the Company requested apermanent reduction in the commitment from $200.0 million to $150.0 million)that will mature on April 30, 2012. Of the $150.0 million revolver commitment, only $90.0 million iscurrently available to the Company though the Company may elect, on or before June 1,2008, to increase the available commitment by up to the full $150.0 millionpursuant to HPUC approval, which we requested in February 2008.  As of December 31, 2007, the availablebalance on the facility amounted to $32.8 million (subject to covenantsdescribed below and a $0.2 million outstanding letter of credit).

 

The Tranche C term loan has an original principalamount of $860.0 million.  The Tranche Cterm loan facility will mature on June 1, 2014 and amortizes withquarterly principal payments amounting to $1.3 million per quarter beginning March 2012with the balance due at maturity.  Thematurity will be April 30, 2012 if the Company is not able to obtainapproval of the HPUC to allow certain guaranty agreements to be extendedthrough June 1, 2014.  The facilityprovides for a one percent prepayment premium for certain refinancingtransactions through June 1, 2008 and no premium thereafter.  The obligations under the bank credit facilitiesare guaranteed by Holdco and each subsidiary with certain exceptions.  In addition, the bank credit facilities arecollateralized by substantially all of the Company’s assets.

 

Borrowings under the bank credit facilities bearinterest at a rate equal to the applicable margin plus, at the Company’soption, either: (a) a base rate determined by reference to the higher of (1) primerate, as defined, and (2) the federal funds rate plus 1⁄2 of 1%; or (b) aEurocurrency rate on deposits of one-, two-, three- or six-month periods (ornine- or twelve-month periods if, at the time of the borrowing, all lendersagree to make such a duration available).

 

A commitment fee is payable to the lenders under therevolving credit facility.

 

The bank credit facilities contain various negativeand affirmative covenants that restrict, among other things, incurrence ofadditional indebtedness, payment of dividends, redemptions of stock, otherdistributions to shareholders and sales of assets. In addition, there arefinancial covenants consisting of a leverage ratio and a maximum level ofcapital expenditures.

 

In connection with the June 2007 refinancing, theCompany paid $6.3 million in underwriting fees, agency fees and legalcosts.  The refinancing costs wereaccounted for in accordance with Emerging Issues Task Force (EITF) 96-19, “Modificationof Debt Instruments with Different Terms” and EITF 98-14, “Debtor’s Accountingfor Changes in Line-of-Credit or Revolving Debt Agreements.”  The Company compared each syndicated lenders’loan under the Tranche C term loan with the syndicated lenders’ loan under theTranche A and Tranche B term loans.  Asimilar comparison was done for the revolving credit facility.  For loans under the Tranche C term loan thatwere substantially different, the Company recorded the exchange of debtinstruments as debt extinguishment, expensed deferred financing costsassociated with the extinguished debt and capitalized third-party costsassociated with the new loans.  For loansunder the Tranche C term loan that were not substantially different, theCompany accounted for the exchange of debt instruments as a refinancing andexpensed third-party costs associated with the refinancing.  As a result of the refinancing, the Companyexpensed $5.2 million of deferred financing costs and $2.6 million ofrefinancing costs resulting in a loss on early extinguishment of debt of $7.8million.  In addition, the Companycapitalized $3.7 million of refinancing fees.

 

In December 2007, the Company made a principalrepayment of the Tranche C debt in the amount of $160.0 million.  As a result of this repayment, the Companyexpensed $1.5 million of deferred financing costs resulting in a loss on earlyextinguishment of debt.

 

63

----

** **

**HawaiianTelcom Communications, Inc.**

**Notes toConsolidated Financial Statements**

 

One of the syndicated lenders is an affiliate of theSponsor, a private equity firm, with an approximately three percentparticipation in the Tranche C term loan.

 

***Senior Notes***

 

The senior floating rate notes in the aggregateprincipal amount of $150.0 million mature on May 1, 2013 and bear interestat a rate reset and payable semi-annually at LIBOR, as defined, plus 5.50%. Thesenior fixed rate notes in the aggregate principal amount of $200.0 millionmature on May 1, 2013 and bear interest at a rate of 9.75% per year. Thesenior subordinated notes in the aggregate principal amount of $150.0 millionwill mature on May 1, 2015 and bear interest at a rate of 12.50% per year.The senior notes are general unsecured obligations. A portion or all of thesenior notes may be redeemed at various dates beginning May 1, 2007 atcertain premiums based on specified terms. The senior notes contain variouscovenants that restrict among other things incurrence of additionalindebtedness, payment of dividends, redemptions of stock, other distributionsto shareholders and sales of assets. The senior notes are guaranteed by each ofthe Company’s subsidiaries with certain exceptions.

 

In conjunction with the issuance of the senior notesin May 2005, certain underwriters provided a commitment to the Company fora bridge loan which was available if the senior notes could not be placed. Thecommitment expired with the issuance of the notes. At that time, the relatedfee of $5.3 million was recognized as a component of interest expense.

 

***Maturities***

 

The annual requirements for principal payments onlong-term debt as of December 31, 2007 are as follows (dollars inthousands):

 
| **Year ended December 31,** | ** ** | ** ** | ** ** |
|--------------------------------------------|------------|------------|------------|
| 2008                                       |       | $          | 263,000    |   |
| 2009 to 2011                               |       | —     |       |
| 2012                                       |       | 10,075     |       |
| Thereafter                                 |       | 979,625    |       |
|                                       |       | $          | 1,252,700  |   |

 

Thecurrent portion of long-term debt and annual maturities for 2008 include thedebt required to be repaid using the proceeds from the sale of the directoriespublishing segment.  In January 2008,the Company repaid $211.0 million of the Tranche C debt and $50.0 million ofthe bank revolving credit facility using the proceeds from the sale of thedirectories publishing segment.  Therepayment will result in a loss on early extinguishment of debt which will berecognized when the applicable debt is repaid.

 

On March 25, 2008,the Company drew the remaining $73.8 million available under its revolvingcredit facility and is fully-drawn under the facility at that date ($90.0million).

 

***CapitalizedInterest***

 

Interest capitalized by the Company amounted to $1.5million, $2.8 million and $2.0 million during the years ended December 31,2007, 2006 and 2005, respectively. Interest capitalized by the Predecessoramounted to $0.1 million during the period from January 1, 2005 to May 1,2005.

 

64

----

 

**HawaiianTelcom Communications, Inc.**

**Notes toConsolidated Financial Statements**

 

**10. Derivative Instruments andHedging Activities**

 

The Company utilizes a combination of fixed-rate andvariable-rate debt to finance its operations. The variable-rate debt exposesthe Company to variability in interest payments due to changes in interestrates.  Management believes that it isprudent to mitigate the interest rate risk on a portion of its variable-rateborrowings. To meet this objective, management maintains interest rate swapagreements to manage fluctuations in cash flows resulting from adverse changesin interest rates on its term loans and notes. The interest rate swap agreements have a cumulative notional amount thatranges from $577.2 million at December 31, 2007 to a balance of $253.0million at maturity on December 31, 2010. Along with the repayment of bank debt in January 2008, the Companyterminated one of its swaps with a notional value of $115.4 million.

 

Changes in the fair value of interest rate swapsdesignated as hedging instruments that effectively offset the variability ofcash flows associated with the Company’s variable-rate debt obligations arereported in accumulated other comprehensive income (loss). These amounts aresubsequently reclassified into interest expense as a yield adjustment of thehedged interest payment in the same period in which the related interest paymentsaffect earnings. For the year ended December 31, 2007, the Company had anunrealized loss of $18.1 million included in other comprehensive loss.  During the years ended December 31, 2006and 2005, the Company had $0.2 million and $11.4 million, respectively, ofunrealized gains included in other comprehensive income. The fair value of theinterest rate swap reflecting a liability of $6.5 million is included in othercurrent liabilities and other liabilities, as applicable, on the consolidatedbalance sheet at December 31, 2007. The fair value of the interest rate swap of $11.6 million is included inother assets on the consolidated balance sheet at December 31, 2006. Theestimated amount of pre-tax losses included in accumulated other comprehensiveincome (loss) as of December 31, 2007 that is expected to be reclassifiedinto earnings during the year ended December 31, 2008 amounted to $2.0million.

 

65

----

 

**HawaiianTelcom Communications, Inc.**

**Notes toConsolidated Financial Statements**

 

**11.Employee Benefit Plans**

 

***Pension and OtherPostretirement Benefits***

 

The Company sponsors adefined benefit pension plan and postretirement medical and life insurancebenefits for union employees. The Company also sponsors a cash balance pensionplan for nonunion employees.  Effective April 1,2007, the Company froze the benefits in the non-union pension plan. The changein projected benefit obligation, change in plan assets, funded status andweighted average actuarial assumptions for the Company were as follows (dollarsin thousands):

 
| ** **                                                                         | ** ** | **Pension Benefits** | ** ** | **Other Postretirement Benefits** | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------|------------|---------------------------------------------|------------|
| ** **                                                                         | ** ** | **December 31,**     | ** ** | **December 31,**                       | ** ** |
| ** **                                                                         | ** ** | **2007**                  | ** ** | **2006**                                    | ** ** | **2007** | ** ** | **2006** | ** ** |
| Change in  projected benefit obligation:                                           |       |                      |       |                                        |       |   |   |   |   |
| Obligation at  beginning of year                                                   |       | $                         | 194,382    |                                        | $          | 210,727 |   | $ | 37,652 |   | $ | 35,315 |   |
| Service cost                                                                       |       | 9,856                     |       | 12,158                                      |       | 1,504 |   | 1,598 |   |
| Interest cost                                                                      |       | 11,773                    |       | 11,272                                      |       | 2,074 |   | 1,943 |   |
| Actuarial (gain)  loss                                                             |       | 9,758                     |       | (8,313                                      | )          | (2,004 | ) | (773 | ) |
| Benefits paid                                                                      |       | (39,695                   | )          | (31,462                                     | )          | (629 | ) | (431 | ) |
| Curtailment gain                                                                   |       | (1,392                    | )          | —                                      |       | — |   | — |   |
| Special  termination benefit cost                                                  |       | 1,810                     |       | —                                      |       | — |   | — |   |
| Obligation at  end of year                                                         |       | 186,492                   |       | 194,382                                     |       | 38,597 |   | 37,652 |   |
|                                                                               |       |                      |       |                                        |       |   |   |   |   |
| Change in plan  assets:                                                            |       |                      |       |                                        |       |   |   |   |   |
| Fair value of  plan assets at beginning of year                                    |       | 198,575                   |       | 204,155                                     |       | — |   | — |   |
| Actual return on  plan assets                                                      |       | 4,900                     |       | 24,274                                      |       | — |   | — |   |
| Employer  contributions                                                            |       | 2,897                     |       | 1,608                                       |       | — |   | — |   |
| Benefits paid                                                                      |       | (39,695                   | )          | (31,462                                     | )          | — |   | — |   |
| Fair value of  plan assets at end of year                                          |       | 166,677                   |       | 198,575                                     |       | — |   | — |   |
|                                                                               |       |                      |       |                                        |       |   |   |   |   |
| Funded status:                                                                     |       |                      |       |                                        |       |   |   |   |   |
| Plan assets  greater than (less than) projected benefit obligation                 |       | (19,815                   | )          | 4,193                                       |       | (38,597 | ) | (37,652 | ) |
| Unrecognized  actuarial gain                                                       |       | —                    |       | (16,467                                     | )          | — |   | (948 | ) |
|                                                                               |       |                      |       |                                        |       |   |   |   |   |
| Net amount  recognized                                                             |       | $                         | (19,815    | )                                           | $          | (12,274 | ) | $ | (38,597 | ) | $ | (38,600 | ) |
|                                                                               |       |                      |       |                                        |       |   |   |   |   |
| Amounts  recognized on balance sheet:                                              |       |                      |       |                                        |       |   |   |   |   |
| Other current  liabilities                                                         |       | $                         | —     |                                        | $          | — |   | $ | (1,236 | ) | $ | — |   |
| Employee benefit  obligation                                                       |       | (19,815                   | )          | (12,274                                     | )          | (37,361 | ) | (38,600 | ) |
|                                                                               |       |                      |       |                                        |       |   |   |   |   |
| Net amount recognized                                                              |       | $                         | (19,815    | )                                           | $          | (12,274 | ) | $ | (38,597 | ) | $ | (38,600 | ) |
|                                                                               |       |                      |       |                                        |       |   |   |   |   |
| Actuarial (gain)  loss recognized in accumulated other comprehensive income (loss) |       | $                         | 3,249      |                                        | $          | — |   | $ | (2,952 | ) | $ | — |   |
|                                                                               |       |                      |       |                                        |       |   |   |   |   |
| Actuarial  assumptions:                                                            |       |                      |       |                                        |       |   |   |   |   |
| Measurement date                                                                   |       | 12/31/2007                |       | 12/31/2006                                  |       | 12/31/2007 |   | 12/31/2006 |   |
| Discount rate                                                                      |       | 6.25                      | %          | 5.75                                        | %          | 6.25 | % | 5.75 | % |
| Rate of  compensation increase                                                     |       | 3.50% to 5.00             | %          | 3.50% to 5.00                               | %          | NA |   | NA |   |

 

The Company recognized aliability related to the funded status of its pension and postretirement plansat December 31, 2007 based on the provisions of SFAS No. 158amounting to $0.3 million.  The impact ofadoption to stockholder’s equity was a decrease of $0.3 million.

 

66

----

 

**HawaiianTelcom Communications, Inc.**

**Notes toConsolidated Financial Statements**

 

The estimated amounts ofthe actuarial loss to be amortized from accumulated other comprehensive income(loss) during 2008 are less than $0.1 million for both pension benefits andother postretirement benefits.

 

The Company accrues thecosts of pension and postretirement benefits over the period from the date ofhire until the date the employee becomes fully eligible for benefits.  The following provides the components of benefitcosts (income) and weighted average actuarial assumptions for the years ended December 31,2007, 2006 and 2005 (dollars in thousands):

 
| ** **                                          | ** ** | **Pension Benefits**                  | ** ** | **Other Postretirement Benefits** | ** ** |
|-----------------------------------------------------|------------|--------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                          | ** ** | **Year Ended December 31,** | ** ** | **Year Ended December 31,**  | ** ** |
| ** **                                          | ** ** | **2007**                                   | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                |       |                                       |       |                                        |       |   |   |   |   |   |   |   |   |
| Service cost                                        |       | $                                          | 9,856      |                                        | $          | 12,158 |   | $ | 8,062 |   | $ | 1,504 |   | $ | 1,598 |   | $ | 1,251 |   |
| Interest cost                                       |       | 11,773                                     |       | 11,272                                      |       | 7,158 |   | 2,074 |   | 1,943 |   | 1,206 |   |
| Expected asset  return                              |       | (15,680                                    | )          | (16,177                                     | )          | (8,378 | ) | — |   | — |   | — |   |
| Amortization of  net gain                           |       | (24                                        | )          | —                                      |       | — |   | — |   | — |   | — |   |
| Net periodic  benefit cost                          |       | 5,925                                      |       | 7,253                                       |       | 6,842 |   | 3,578 |   | 3,541 |   | 2,457 |   |
| Curtailment gain                                    |       | (1,391                                     | )          | —                                      |       | — |   | — |   | — |   | — |   |
| Settlement  (gain) loss                             |       | 847                                        |       | (2,000                                      | )          | — |   | — |   | — |   | — |   |
| Termination  benefit cost                           |       | 1,810                                      |       | —                                      |       | — |   | — |   | — |   | — |   |
|                                                |       |                                       |       |                                        |       |   |   |   |   |   |   |   |   |
| Total benefit  cost                                 |       | $                                          | 7,191      |                                        | $          | 5,253 |   | $ | 6,842 |   | $ | 3,578 |   | $ | 3,541 |   | $ | 2,457 |   |
|                                                |       |                                       |       |                                        |       |   |   |   |   |   |   |   |   |
| Actuarial  assumptions:                             |       |                                       |       |                                        |       |   |   |   |   |   |   |   |   |
| Discount rate                                       |       | 5.75                                       | %          | 5.50                                        | %          | 5.50 | % | 5.75 | % | 5.50 | % | 5.50 | % |
| Expected return  on plan assets                     |       | 8.00                                       | %          | 8.00                                        | %          | 8.00 | % | NA |   | NA |   | NA |   |
| Long-term rate  of compensation increase            |       | 3.50% to 5.00                              | %          | 3.50% to 5.00                               | %          | 3.50% to 5.00 | % | NA |   | NA |   | NA |   |
| Assumed health  care cost trend rate, current       |       | NA                                         |       | NA                                          |       | NA |   | 10.00 | % | 10.00 | % | 10.00 | % |
| Assumed health  care cost trend rate, ultimate      |       | NA                                         |       | NA                                          |       | NA |   | 5.00 | % | 5.00 | % | 5.00 | % |
| Assumed health  care cost trend rate, ultimate year |       | NA                                         |       | NA                                          |       | NA |   | 2012 |   | 2011 |   | 2010 |   |

 

During the first quarterof 2007, the Company provided a one-time early retirement benefit to selectedemployees.  The cost of such benefitamounted to $1.8 million.  As previouslymentioned, the Company froze the benefits in the pension plan for nonunionemployees effective April 1, 2007. The curtailment associated with this plan amendment resulted in a gainof $1.4 million.

 

Benefits paid during 2007included lump sum payments resulting in deemed settlements of $38.7 million anda loss on settlement of $0.9 million. Benefits paid during 2006 included lump sum payments resulting in deemedsettlements of $30.7 million and a gain on settlement of $2.0 million.

 

The measurement date forall plans was December 31, 2007 and 2006. The attributes of the Company’s pension plans were as follows (dollarsin thousands):

 
| ** **                      | ** ** | **December 31, 2007** | ** ** | **December 31, 2006** | ** ** |
|---------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                      | ** ** | **Plan Assets**            | ** ** | **Accumulated**                 | ** ** | ** ** | ** ** | **Plan Assets** | ** ** | **Accumulated** | ** ** | ** ** | ** ** |
| ** **                      | ** ** | **in Excess of**      | ** ** | **Benefit**                     | ** ** | ** ** | ** ** | **in Excess of** | ** ** | **Benefit** | ** ** | ** ** | ** ** |
| ** **                      | ** ** | **Accumulated**                 | ** ** | **Obligation in**          | ** ** | ** ** | ** ** | **Accumulated** | ** ** | **Obligation in** | ** ** | ** ** | ** ** |
| ** **                      | ** ** | **Benefit**                     | ** ** | **Excess of**              | ** ** | ** ** | ** ** | **Benefit** | ** ** | **Excess of** | ** ** | ** ** | ** ** |
| ** **                      | ** ** | **Obligation**                  | ** ** | **Plan Assets**            | ** ** | **Total** | ** ** | **Obligation** | ** ** | **Plan Assets** | ** ** | **Total** | ** ** |
| Accumulated  benefit obligation |       | $                               | 137,238    |                            | $          | — |   | $ | 137,238 |   | $ | 145,943 |   | $ | 4,552 |   | $ | 150,495 |   |
| Projected  benefit obligation   |       | 186,492                         |       | —                          |       | 186,492 |   | 188,955 |   | 5,427 |   | 194,382 |   |
| Fair value of  plan assets      |       | 166,677                         |       | —                          |       | 166,677 |   | 197,011 |   | 1,564 |   | 198,575 |   |
|                                 |            |                                 |            |                                 |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

67

----

 

**HawaiianTelcom Communications, Inc.**

**Notes toConsolidated Financial Statements**

 

The expected rate ofreturn on plan assets was based on various factors including historical experienceand long-term inflation assumptions. The Company’s expected long-term rate ofreturn on plan assets is determined using the target allocation of assets whichis based on the goal of earning the highest rate of return while maintainingrisk at acceptable levels. The plan strives to have assets sufficientlydiversified so that adverse or unexpected results from a security class willnot have a significant adverse impact on the entire portfolio.

 

The weighted averageactual asset allocations and weighted average target allocation by assetcategory for the Company’s pension plans were as follows:

 
| ** **   | ** ** | ** **     | ** ** | **Allocation**       | ** ** | **Allocation**       | ** ** |
|--------------|------------|----------------|------------|----------------------|------------|----------------------|------------|
| ** **   | ** ** | **Target**     | ** ** | **at December** | ** ** | **at December** | ** ** |
| ** **   | ** ** | **Allocation** | ** ** | **31, 2007**    | ** ** | **31, 2006**    | ** ** |
| Equities     |       | 61             | %          | 59                   | %          | 62                   | %          |
| Fixed income |       | 34             | %          | 35                   | %          | 33                   | %          |
| Other        |       | 5              | %          | 6                    | %          | 5                    | %          |
|         |       |           |       |                 |       |                 |       |
|         |       | 100%           |       | 100                  | %          | 100                  | %          |

 

The Company expects tocontribute $0.6 million to its defined benefit pension plans in 2008.

 

The Company projects thatit will make the following benefit payments for the years ended December 31(dollars in thousands):

 
| ** **         | ** ** | ** **             | ** ** | **Other**              | ** ** |
|--------------------|------------|------------------------|------------|------------------------|------------|
| ** **         | ** ** | **Pension Plans** | ** ** | **Postretirement**     | ** ** |
| ** **         | ** ** | **Benefits Paid** | ** ** | **Benefits Paid** | ** ** |
|               |       |                   |       |                   |       |
| 2008               |       | $                      | 7,684      |                   | $          | 1,276 |   |
| 2009               |       | 9,535                  |       | 1,560                  |       |
| 2010               |       | 11,230                 |       | 1,854                  |       |
| 2011               |       | 14,380                 |       | 2,161                  |       |
| 2012               |       | 17,346                 |       | 2,443                  |       |
| 2013 through  2017 |       | 117,033                |       | 15,959                 |       |
|               |       |                   |       |                   |       |
|               |       | $                      | 177,208    |                   | $          | 25,253 |   |

 

Assumed health care costtrend rates have a significant impact on the amounts reported for otherpostretirement benefits.  Aone-percentage point change in the assumed health care cost trend rates wouldhave the following annual effects (dollars in thousands):

 
| ** **                                                | ** ** | **1-Percentage**        | ** ** | **1-Percentage**        | ** ** |
|-----------------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                                                | ** ** | **Point Increase** | ** ** | **Point Decrease** | ** ** |
|                                                      |       |                    |       |                    |       |
| Effect on total  of service and interest costs components |       | $                       | 339        |                    | $          | (270 | ) |
| Effect on  postretirement benefit obligation              |       | 2,961                   |       | (2,414                  | )          |
|                                                           |            |                         |            |                         |            |  |  |

 

***PredecessorPension and Other Postretirement Benefits***

 

The structure of Verizon’sbenefit plans does not provide for separate determination of certaindisclosures for the Predecessor.  Thepension and other postretirement benefit costs for the period January 1,2005 to May 1, 2005 amounted to $6.1 million and $5.9 million,respectively.

 

68

----

 

**HawaiianTelcom Communications, Inc.**

**Notes toConsolidated Financial Statements**

 

***401(k) Plan***

 

The Company participates in two 401(k) employeesavings plans that allow for voluntary contributions into designated investmentfunds by eligible employees with the Company matching employee contributions atthe rate of 82% of the amount contributed up to a maximum of 6% of compensationfor union employees and 100% up to a maximum of 6% of compensation fornon-union employees. Company contributions were $3.9 million, $4.0 million and$1.9 million for the years ended December 31, 2007, 2006 and 2005,respectively. For the Predecessor, contributions amounted to $1.0 million forthe period from January 1, 2005 to May 1, 2005.

 

**12.  Income Taxes**

 

The components of theincome tax provision (benefit) are as follows (dollars in thousands):

 
| ** **                                                        | ** ** | **Company**           | ** ** | **Predecessor**            | ** ** |
|-------------------------------------------------------------------|------------|-----------------------|------------|----------------------------|------------|
| ** **                                                        | ** ** | **Year Ended**   | ** ** | **Period from**       | ** ** |
| ** **                                                        | ** ** | **December 31,** | ** ** | **January 1 to** | ** ** |
| ** **                                                        | ** ** | **2007**              | ** ** | **2006**                   | ** ** | **2005** | ** ** | **May 1, 2005** | ** ** |
| Current                                                           |       |                  |       |                       |       |   |   |   |   |
| Federal                                                           |       | $                     | —     |                       | $          | — |   | $ | — |   | $ | 12,200 |   |
| State and local                                                   |       | —                |       | (118                       | )          | — |   | 2,600 |   |
|                                                              |       | —                |       | (118                       | )          | — |   | 14,800 |   |
|                                                              |       |                  |       |                       |       |   |   |   |   |
| Deferred                                                          |       |                  |       |                       |       |   |   |   |   |
| Federal                                                           |       | (42,800               | )          | 2,000                      |       | 1,600 |   | (9,000 | ) |
| State and local                                                   |       | (4,900                | )          | 600                        |       | 100 |   | (2,000 | ) |
|                                                              |       | (47,700               | )          | 2,600                      |       | 1,700 |   | (11,000 | ) |
| Total income tax  expense (benefit) before investment tax credits |       | (47,700               | )          | 2,482                      |       | 1,700 |   | 3,800 |   |
| Investment tax  credits                                           |       | —                |       | —                     |       | — |   | (700 | ) |
|                                                              |       |                  |       |                       |       |   |   |   |   |
| Total income tax  expense (benefit)                               |       | $                     | (47,700    | )                          | $          | 2,482 |   | $ | 1,700 |   | $ | 3,100 |   |

 

The provision for incometaxes differs from the amounts determined by applying the statutory federalincome tax rate of approximately 35% to income (loss) before income taxes forthe following reasons (dollars in thousands):

 
| ** **                                  | ** ** | **Company**           | ** ** | **Predecessor**            | ** ** |
|---------------------------------------------|------------|-----------------------|------------|----------------------------|------------|
| ** **                                  | ** ** | **Year Ended**   | ** ** | **Period from**       | ** ** |
| ** **                                  | ** ** | **December 31,** | ** ** | **January 1 to** | ** ** |
| ** **                                  | ** ** | **2007**              | ** ** | **2006**                   | ** ** | **2005** | ** ** | **May 1, 2005** | ** ** |
|                                        |       |                  |       |                       |       |   |   |   |   |
| Expense  (benefit) at federal rate          |       | $                     | (39,517    | )                          | $          | (47,207 | ) | $ | (50,781 | ) | $ | 3,800 |   |
| Increase  (decrease) resulting from:        |       |                  |       |                       |       |   |   |   |   |
| State income  taxes, net of federal benefit |       | (4,516                | )          | (6,725                     | )          | (4,039 | ) | 100 |   |
| Investment  credit                          |       | —                |       | —                     |       | — |   | (700 | ) |
| Other, net                                  |       | 33                    |       | (586                       | )          | 220 |   | — |   |
| Valuation  allowance                        |       | (3,700                | )          | 57,000                     |       | 56,300 |   | (100 | ) |
|                                        |       |                  |       |                       |       |   |   |   |   |
| Total income tax  expense (benefit)         |       | $                     | (47,700    | )                          | $          | 2,482 |   | $ | 1,700 |   | $ | 3,100 |   |

 

69

----

 

**HawaiianTelcom Communications, Inc.**

**Notes toConsolidated Financial Statements**

 

Deferred income taxesconsisted of the following (dollars in thousands):

 
| ** **                                 | ** ** | **December 31,** | ** ** |
|--------------------------------------------|------------|-----------------------|------------|
| ** **                                 | ** ** | **2007**              | ** ** | **2006** | ** ** |
|                                       |       |                  |       |   |   |
| Deferred tax  liabilities:                 |       |                  |       |   |   |
| Depreciation and  amortization             |       | $                     | 37,000     |   | $ | 44,200 |   |
| Other basis  differences                   |       | 11,000                |       | 6,400 |   |
| Derivative  financial instruments          |       | —                |       | 4,700 |   |
|                                       |       | 48,000                |       | 55,300 |   |
|                                       |       |                  |       |   |   |
| Deferred tax  assets:                      |       |                  |       |   |   |
| Net operating  loss carryforwards          |       | 74,700                |       | 116,600 |   |
| Depreciation and  amortization             |       | 25,200                |       | 34,000 |   |
| Other basis  differences                   |       | 25,800                |       | 19,300 |   |
| Non-deductible  liabilities and allowances |       | 16,800                |       | 16,900 |   |
| Derivative  financial instruments          |       | 2,600                 |       | — |   |
|                                       |       | 145,100               |       | 186,800 |   |
| Valuation  allowance                       |       | (97,100               | )          | (141,800 | ) |
|                                       |       | 48,000                |       | 45,000 |   |
|                                       |       |                  |       |   |   |
| Deferred tax  liability, net               |       | $                     | —     |   | $ | 10,300 |   |

 

At December 31,2007, the Company had unused tax net operating loss carryforwards ofapproximately $185.0 million which expire through 2027.

 

A valuation allowance hasbeen provided at December 31, 2007 and 2006 for the deferred tax assetsbecause of the uncertainty of future realization of such amounts. The Companywill continue to assess the recoverability of deferred tax assets and therelated valuation allowance. To the extent that the Company generates taxableincome in future years and it determines that such valuation allowance is nolonger required, the tax benefit of the remaining deferred tax assets will berecognized at that time.

 

The Company evaluates its tax positions in accordancewith FASB Interpretation No. 48, “Accounting for Uncertainty in IncomeTaxes an Interpretation of FASB Statement No. 109.”  As of December 31, 2007 and for the yearthen ended, the Company had no unrecognized tax benefits.  No interest and penalties related to taxassessments were recognized in the Company’s statements of operations for theyears ended December 31, 2007, 2006 or 2005.  All tax years since the Company’s inceptionin 2004 remain open for both federal and Hawaii state purposes.

 

**13. Stock Option Plan**

 

On November 8, 2005, Holdco adopted the StockOption Plan of Hawaiian Telcom Holdco, Inc. (the “Plan”) that permits thegrant of options to its key employees and independent directors and those ofits wholly owned subsidiaries.  Thepurpose of the Plan is primarily to align compensation for key executives withthe performance of the Company. All options are to be granted at an exerciseprice that is greater than or equal to the fair value of the common stock ofHoldco on the date the stock option is granted.

 

The Company recognized $0.4 million and $0.1 millionof compensation expense during the years ended December 31, 2007 and 2006,respectively, related to option grants.

 

70

----

 

**HawaiianTelcom Communications, Inc.**

**Notes toConsolidated Financial Statements**

 

Outstanding options for key employees under the Planvest in two components. Subject to the optionee’s continued employment with theCompany, 25% of the options granted generally vest automatically in equalannual installments of 5% on each anniversary of the optionee’s hire and 75%vest in full on the day immediately preceding the eighth anniversary of thegrant date subject to earlier vesting if certain performance conditions aremet. The performance condition component of the Plan provides that aninstallment equal to 5% (15% if all three targets are met) of the option willvest for each fiscal year, beginning with the year of grant and ending with thefourth year thereafter, for the following three targets as defined in the Plan:Revenue, EBITDA (Earnings before Interest, Taxes, Depreciation andAmortization) and Free Cash-Flow. Options granted to independent directorsexclude a performance component and vest automatically in equal annualinstallments on each anniversary of the grant date up to and including theanniversary in 2010.

 

A summary of option activity under the Plan as of December 31,2007, 2006 and 2005 and changes during the years then ended is as follows(dollars in thousands):

 
| ** **                             | ** ** | ** ** | ** ** | ** **    | ** ** | **Weighted-**   | ** ** | ** **    | ** ** |
|----------------------------------------|------------|------------|------------|---------------|------------|-----------------|------------|---------------|------------|
| ** **                             | ** ** | ** ** | ** ** | **Weighted-** | ** ** | **Average**     | ** ** | ** **    | ** ** |
| ** **                             | ** ** | ** ** | ** ** | **Average**   | ** ** | **Remaining**   | ** ** | **Average**   | ** ** |
| ** **                             | ** ** | ** ** | ** ** | **Exercise**  | ** ** | **Contractual** | ** ** | **Intrinsic** | ** ** |
| ** **                             | ** ** | **Shares** | ** ** | **Price**     | ** ** | **Term**        | ** ** | **Value**     | ** ** |
|                                   |       |       |       |          |       |            |       |          |       |
| Outstanding at  January 1, 2005   |       | —     |       | $             | —     |            |       |          |       |   |
| Granted                                |       | 35,532     |       | 1,000         |       |            |       |          |       |
| Outstanding at  December 31, 2005 |       | 35,532     |       | 1,000         |       |            |       |          |       |
| Granted                                |       | 4,070      |       | 1,000         |       |            |       |          |       |
| Forfeited or  expired                  |       | (2,622     | )          | 1,000         |       |            |       |          |       |
| Outstanding at  December 31, 2006 |       | 36,980     |       | 1,000         |       |            |       |          |       |
| Granted                                |       | 7,437      |       | 1,000         |       |            |       |          |       |
| Forfeited or  expired                  |       | (16,358    | )          | 1,000         |       |            |       |          |       |
| Outstanding at  December 31, 2007 |       | 28,059     |       | $             | 1,000      |            | 7.7        |          | $          | — |   |
| Exercisable at  December 31, 2007 |       | 5,686      |       | $             | 1,000      |            | 7.1        |          | $          | — |   |

 

A summary of the status of the Company’s nonvestedshares as of December 31, 2007, 2006 and 2005 and changes during the yearsthen ended is as follows (dollars in thousands):

 
| ** **                           | ** ** | ** ** | ** ** | **Weighted-**       | ** ** |
|--------------------------------------|------------|------------|------------|---------------------|------------|
| ** **                           | ** ** | ** ** | ** ** | **Average**         | ** ** |
| ** **                           | ** ** | ** ** | ** ** | **Grant-Date**      | ** ** |
| ** **                           | ** ** | **Shares** | ** ** | **Fair Value** | ** ** |
|                                 |       |       |       |                |       |
| Nonvested at  January 1, 2005   |       | —     |       | $                   | —     |   |
| Granted                              |       | 35,532     |       | 400                 |       |
| Vested                               |       | (1,073     | )          | 400                 |       |
| Nonvested at  December 31, 2005 |       | 34,459     |       | 400                 |       |
| Granted                              |       | 4,070      |       | 400                 |       |
| Vested                               |       | (6,574     | )          | 400                 |       |
| Forfeited                            |       | (2,622     | )          | 400                 |       |
| Nonvested at  December 31, 2006 |       | 29,333     |       | 400                 |       |
| Granted                              |       | 7,437      |       | 400                 |       |
| Vested                               |       | (1,207     | )          | 400                 |       |
| Forfeited                            |       | (12,190    | )          | 400                 |       |
| Nonvested at  December 31, 2007 |       | 23,373     |       | $                   | 400        |   |

 

71

----

 

**HawaiianTelcom Communications, Inc.**

**Notes toConsolidated Financial Statements**

 

As of December 31, 2007, there was $3.3 millionof total unrecognized compensation cost related to non-vested share-basedcompensation arrangements granted under the plan.  The cost is expected to be recognized over aweighted-average period of 5 years.

 

The fair value of each stock option granted isestimated on the date of grant using the Black-Scholes option-pricing model.The following weighted average assumptions were used in determining the fairvalue for all grants: dividend yield of 0%; expected volatility of 33%;risk-free interest rate of 4.5%; expected term to exercise of 6.5 years; andforfeiture rate of 2%. The fair value for each individual option granted during2007, 2006 and 2005 amounted to $400.

 

**14. Leases**

 

The Company leases certain facilities and equipmentfor use in the Company’s operations under several operating agreements. Certainof the leases provide for escalation or renegotiation of rental rates, and forextension of lease terms. Total rent expense for the Company amounted to $3.9million, $5.3 million and $3.5 million for the years ended December 31,2007, 2006 and 2005, respectively. Total rent expense for the Predecessor,including allocated charges from Verizon, amounted to $11.5 million for theperiod January 1, 2005 to May 1, 2005.

 

Information on theaggregate minimum rental commitments under non-cancelable operating leases isas follows (dollars in thousands):

 
| **Years ended, December 31:** | ** ** | ** ** | ** ** |
|----------------------------------------------|------------|------------|------------|
| 2008                                         |       | $          | 2,157      |   |
| 2009                                         |       | 1,970      |       |
| 2010                                         |       | 1,804      |       |
| 2011                                         |       | 1,315      |       |
| 2012                                         |       | 987        |       |
| Thereafter                                   |       | 9,597      |       |
|                                         |       |       |       |
|                                         |       | $          | 17,830     |   |

 

**15.Accumulated Other Comprehensive Income (Loss)**

 

Thecomponents of accumulated other comprehensive income (loss) are as follows(dollars in thousands):

 
| ** **                                                | ** ** | **Gain (Loss)**    | ** ** | ** **                   | ** ** | ** **               | ** ** | ** ** | ** ** |
|-----------------------------------------------------------|------------|-------------------------|------------|------------------------------|------------|--------------------------|------------|------------|------------|
| ** **                                                | ** ** | **on Cash**        | ** ** | **Unrealized**               | ** ** | **Defined Benefit** | ** ** | ** ** | ** ** |
| ** **                                                | ** ** | **Flow Hedging**   | ** ** | **Gain (Loss) on** | ** ** | **Postretirement**       | ** ** | ** ** | ** ** |
| ** **                                                | ** ** | **of Derivatives** | ** ** | **Investments**              | ** ** | **Plans**                | ** ** | **Total**  | ** ** |
|                                                      |       |                    |       |                         |       |                     |       |       |       |
| January 1,  2005                                     |       | $                       | —     |                         | $          | —                   |       | $          | —     |   | $ | — |   |
| Other  comprehensive income (loss) for 2005               |       | 11,387                  |       | (112                         | )          | —                   |       | 11,275     |       |
| December 31,  2005                                   |       | 11,387                  |       | (112                         | )          | —                   |       | 11,275     |       |
| Other  comprehensive income for 2006                      |       | 228                     |       | 133                          |       | —                   |       | 361        |       |
| December 31,  2006                                   |       | 11,615                  |       | 21                           |       | —                   |       | 11,636     |       |
| Other  comprehensive income (loss) for 2007               |       | (18,099                 | )          | 64                           |       | —                   |       | (18,035    | )          |
| Adjustment for  initial application of SFAS No.  158 |       | —                  |       | —                       |       | (297                     | )          | (297       | )          |
| December 31,  2007                                   |       | $                       | (6,484     | )                            | $          | 85                       |       | $          | (297       | ) | $ | (6,696 | ) |

 

72

----

 

**HawaiianTelcom Communications, Inc.**

**Notes toConsolidated Financial Statements**

 

Theunrealized gain on the changes in assets and liabilities related to the Company’sinterest rate swap derivatives includes a reclassification adjustment forrealized net gains included in income of $6.4 million, $6.8 million and $0.5million for the years ended December 31, 2007, 2006 and 2005,respectively.

 

Theunrealized gain on investments relates to activity of the insurancesubsidiary.  The investments of thesubsidiary are included in deferred financing and other assets and are notsignificant at December 31, 2007.

 

**16.Commitments and Contingencies**

 

***BearingPoint,Accenture and Other Long-Term Fixed Supplier Commitments***

 

The Company had previously engaged BearingPoint tobuild and operate an information technology solution environment includingsoftware applications and systems and hardware that the Company uses in itsbusiness.  The Company had agreed to afixed fee for build-services and operate-services. Effective February 6,2007, the Company and BearingPoint entered into an agreement to settle disputesand transition work to a third party. The settlement provided for a payment to the Company of $52.0 million,which was received in March 2007, and waived obligations to pay alloutstanding BearingPoint invoices (amounting to approximately $38.6 million at February 6,2007 including certain accrued costs).

 

During the year ended December 31, 2006 and forthe period from January 1, 2007 to February 6, 2007, the Companyrecorded recoveries contractually due under the BearingPoint agreement of $24.1million and $2.2 million, respectively. The remaining settlement consideration was recognized upon settlement inthe first quarter of 2007 resulting in a gain on settlement of $42.2million.  The settlement gain was net ofa charge for $22.1 million representing the write-down of certain softwarecosts for the estimated additional costs to remediate deficiencies in certainsystems that had been developed by BearingPoint.  The write-down of $22.1 million includes acharge of $3.5 million recognized in the fourth quarter of 2007 when it wasdetermined that the actual costs of remediation were greater than originallyanticipated.  The write-down is includedin the results for the Wireline Services segment (see Note 21).

 

On February 5, 2007,the Company entered into an agreement with Accenture to complete thedevelopment and deployment of the Company’s key customer service and businesssupport systems.  The agreement includesa fixed development fee of $21.7 million and operate fees of $1.1 million permonth through May 2008.

 

The Company has also entered into agreements withother entities under long-term fixed contractual commitments primarily fornetwork related services.  Annual fixedfee commitments for agreements in effect at December 31, 2007, amounted tothe following (dollars in thousands):

 
| **Years ended, December 31:** | ** ** | ** ** | ** ** |
|----------------------------------------------|------------|------------|------------|
| 2008                                         |       | $          | 6,130      |   |
| 2009                                         |       | 6,130      |       |
| 2010                                         |       | 6,130      |       |
| 2011                                         |       | 1,859      |       |
| 2012                                         |       | —     |       |
|                                         |       |       |       |
|                                         |       | $          | 20,249     |   |

 

During the years ended December 31,2006 and 2005, the Company incurred fees under the BearingPoint agreementamounting to $24.0 million and $67.8 million, respectively.  Under the other long-term agreements, theCompany incurred fees amounting to $6.1 million, $2.7 million and $1.7 millionfor the years ended December 31, 2007, 2006 and 2005, respectively.

 

73

----

 

**HawaiianTelcom Communications, Inc.**

**Notes toConsolidated Financial Statements**

 

***CollectiveBargaining Agreement***

 

The Company has a collective bargaining agreement withthe International Brotherhood of Electrical Workers Local 1357. The agreementexpires on August 31, 2008 and covers about 61% of the workforce.

 

***Litigation***

 

The Company is involved in litigation arising in thenormal course of business. The outcome of this litigation is not expected tohave a material adverse impact on the Company’s financial statements.

 

**17. Transactions with Verizon**

 

Historically, the Predecessor was allocated chargesfor various centralized services including network related services, andoverhead and support services. Costs may have been directly assigned orallocated.

 

***Transition ServicesAgreement***

 

In conjunction with the 2005 Acquisition, the Companyentered into a Transition Services Agreement with Verizon to provideinformation technology services, customer support, customer billing,accounting, network operations, call center, plant engineering and Internetsupport. The agreement was for an initial term of nine months and could beextended under certain circumstances. In December 2005, the Companyarranged with Verizon to extend the agreement for a two month period through March 31,2006. Expenses incurred under the Transition Services Agreement amounted to$29.5 million and $69.8 million for the years ended December 31, 2006 and2005, respectively.

 

***Long Distance***

 

Also in conjunction with the 2005 Acquisition, theCompany entered into an agreement with Verizon to provide long distanceservices. Expenses under the long distance agreement amounted to $4.9 millionand $7.1 million for the years ended December 31, 2006 and 2005,respectively.

 

***Predecessor***

 

Transactions with Verizonfor the period January 1, 2005 to May 1, 2005 are as follows (dollarsin thousands):

 
| Operating revenues               |   | $      | 4,900  |   |
|----------------------------------|--------|--------|--------|--------|
| Operating  expenses              |   | 31,600 |   |
| Other income and  (expense), net |   | 100    |   |
| Interest expense                 |   | 3,700  |   |

 

**18. Transactions with the Sponsor**

 

In connection with the 2005 Acquisition, the Companyentered into a management consulting agreement with the Sponsor. The agreementallows the Company access to the Sponsor’s expertise in areas such as corporatemanagement, financial transactions, product strategy, investment, acquisitionsand other matters that relate to the Company’s business, administration andpolicies. Under the agreement, the Company pays an annual advisory fee of $1.0million to the Sponsor.

 

The Company also paid the Sponsor a one-time fee of$16.0 million on May 2, 2005 which was directly related to structuring the2005 Acquisition transaction and was capitalized as part of direct acquisitioncosts.

 

74

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**HawaiianTelcom Communications, Inc.**

**Notes toConsolidated Financial Statements**

 

**19. Fair Value of FinancialInstruments**

 

The following method and assumptions were used toestimate the fair value of each class of financial instruments for which it ispractical to estimate the fair value.

 

Cash and cash equivalents, segregated cash, accountsreceivable and accounts payable – The carrying amount approximates fair valuebecause of the short maturities of these instruments.

 

Debt – The fair value of debt is based on quotedmarket values or discounted cash flows to the extent that recent quoted valuesare not available.

 

Interest rate swap – The fair value was determined byspecialists based on yield curves and expectations as to future interest rates.

 

The estimated fair value of financial instruments isas follows (dollars in thousands):

 
| ** **                                    | ** ** | **Carrying** | ** **  | **Fair**  | ** ** |
|-----------------------------------------------|------------|--------------|-------------|-----------|------------|
| ** **                                    | ** ** | **Value**    | ** **  | **Value** | ** ** |
|                                          |       |         |        |      |       |
| December 31,  2007                       |       |         |        |      |       |
| Financial  liabilities -                      |       |         |        |      |       |
| Interest rate  swap agreement                 |       | $            |  6,484 |      | $          | 6,484 |   |
| Long-term debt,  including current maturities |       | 1,252,700    |        | 1,260,312 |       |
|                                          |       |         |        |      |       |
| December 31,  2006                       |       |         |        |      |       |
| Financial assets  -                           |       |         |        |      |       |
| Interest rate  swap agreement                 |       | $            | 11,615      |      | $          | 11,615 |   |
| Financial  liabilities -                      |       |         |        |      |       |
| Long-term debt,  including current maturities |       | 1,407,000    |        | 1,399,147 |       |

 

**20. CashFlow Information**

 

Supplemental cash flow information is as follows:

 
| ** **                                                                                           | ** ** | **Company**           | ** ** | **Predecessor**            | ** ** |
|------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|----------------------------|------------|
| ** **                                                                                           | ** ** | **Year Ended**   | ** ** | **Period from**       | ** ** |
| ** **                                                                                           | ** ** | **December 31,** | ** ** | **January 1 to** | ** ** |
| ** **                                                                                           | ** ** | **2007**              | ** ** | **2006**                   | ** ** | **2005** | ** ** | **May 1, 2005** | ** ** |
|                                                                                                 |       |                  |       |                       |       |   |   |   |   |
| Cash paid during  the year:                                                                          |       |                  |       |                       |       |   |   |   |   |
| Income taxes  paid, net of refunds                                                                   |       | $                     | 1,350      |                       | $          | — |   | $ | — |   | $ | 4,400 |   |
| Interest paid,  net of amounts capitalized                                                           |       | 116,759               |       | 118,353                    |       | 57,786 |   | 18,800 |   |
|                                                                                                 |       |                  |       |                       |       |   |   |   |   |
| Non-cash  financing activity:                                                                        |       |                  |       |                       |       |   |   |   |   |
| Assumption of  existing debentures in connection with acquisition of Verizon’s Hawaii  Business |       | $                     | —     |                       | $          | — |   | $ | 300,000 |   | $ | — |   |

 

**21.  Segment Information**

 

The Company operates in two reportable segments(Wireline Services and Other) based on how resources are allocated andperformance is assessed by the Company’s chief operating decision maker.

 

75

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**HawaiianTelcom Communications, Inc.**

**Notes to Consolidated FinancialStatements**

 

The Wireline Services segment provides local telephoneservice including voice and data transport, enhanced custom calling features,network access, directory assistance and private lines.  In addition, the Wireline Services segmentprovides HSI, long distance services, customer premise equipment, datasolutions, billing and collection, and pay telephone services.  The Company is currently incurring certaincosts related to the potential development of a video services offering.  The Other segment consists primarily ofwireless services.  The Company did nothave any separate segments prior to the 2005 Acquisition.

 

Through the first quarter of 2007, the Companyoperated another segment, Publishing, which comprised the sale of advertisingin printed and electronic directories in Hawaii.  On April 29, 2007, the Company enteredinto an agreement to sell its Publishing segment.  As disclosed in Note 4, the Publishingbusiness has been classified as discontinued operations and, accordingly, isnot presented in the segment results below. In connection therewith, the Company re-evaluated its structure forreporting financial results and identified the Wireline Services and Othersegments.  With the sale of thePublishing segment, the Predecessor had only one segment.

 

The following tablesprovide operating financial information for the Company’s two reportablesegments (dollars in thousands):

 
| ** **                                           | ** ** | ** **   | ** ** | ** ** | ** ** | **Intersegment** | ** ** | ** ** | ** ** |
|------------------------------------------------------|------------|--------------|------------|------------|------------|------------------|------------|------------|------------|
| ** **                                           | ** ** | **Wireline** | ** ** | **Other**  | ** ** | **Elimination**  | ** ** | **Total**  | ** ** |
|                                                 |       |         |       |       |       |             |       |       |       |
| For the year  ended and as of December 31, 2007 |       |         |       |       |       |             |       |       |       |
| Operating  revenues                                  |       | $            | 473,578    |       | $          | 11,435           |       | $          | (1,337     | ) | $ | 483,676 |   |
| Depreciation and  amortization                       |       | 159,872      |       | —     |       | —           |       | 159,872    |       |
| Loss from  continuing operations                     |       | (54,672      | )          | (9,196     | )          | (1,337           | )          | (65,205    | )          |
| Capital  expenditures                                |       | 96,821       |       | 819        |       | —           |       | 97,640     |       |
| Assets                                               |       | 1,636,413    |       | 1,427      |       | —           |       | 1,637,840  |       |
|                                                 |       |         |       |       |       |             |       |       |       |
| For the year  ended and as of December 31, 2006 |       |         |       |       |       |             |       |       |       |
| Operating  revenues                                  |       | $            | 496,238    |       | $          | 7,995            |       | $          | (1,098     | ) | $ | 503,135 |   |
| Depreciation and  amortization                       |       | 163,967      |       | —     |       | —           |       | 163,967    |       |
| Loss from  continuing operations                     |       | (128,935     | )          | (7,325     | )          | (1,098           | )          | (137,358   | )          |
| Capital  expenditures                                |       | 106,868      |       | —     |       | —           |       | 106,868    |       |
| Assets                                               |       | 1,530,702    |       | 1,170      |       | —           |       | 1,531,872  |       |
|                                                 |       |         |       |       |       |             |       |       |       |
| For the year ended  December 31, 2005           |       |         |       |       |       |             |       |       |       |
| Operating  revenues                                  |       | $            | 324,740    |       | $          | 1,920            |       | $          | (349       | ) | $ | 326,311 |   |
| Depreciation and  amortization                       |       | 101,402      |       | —     |       | —           |       | 101,402    |       |
| Loss from  continuing operations                     |       | (139,886     | )          | (6,553     | )          | (349             | )          | (146,788   | )          |
| Capital  expenditures                                |       | 112,680      |       | —     |       | —           |       | 112,680    |       |

 

The following reconcilessegment assets to total reported assets as of December 31, 2006 (dollarsin thousands):

 
| Segment assets              |   | $       | 1,531,872 |   |
|-----------------------------|--------|---------|-----------|--------|
| Publishing  division assets |   | 180,292 |      |
|                        |   |    |      |
| Total assets                |   | $       | 1,712,164 |   |

 

76

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**HawaiianTelcom Communications, Inc.**

**Notes toConsolidated Financial Statements**

 

**22.****      ****Quarterly Financial Information(Unaudited)**

 

The Company’s quarterly operating results arepresented in the following table (dollars in thousands):

 
| ** **                          | ** ** | **Operating** | ** ** | **Operating**          | ** ** | **Net**                | ** ** |
|-------------------------------------|------------|---------------|------------|------------------------|------------|------------------------|------------|
| ** **                          | ** ** | **Revenues**  | ** ** | **Income (Loss)** | ** ** | **Income (Loss)** | ** ** |
| Year Ended  December 31, 2007: |       |          |       |                   |       |                   |       |
| First Quarter                       |       | $             | 125,463    |                   | $          | 39,759                 |       | $ | 15,537 |   |
| Second Quarter                      |       | 121,404       |       | (4,243                 | )          | 21,411                 |       |
| Third Quarter                       |       | 120,408       |       | (5,701                 | )          | (29,531                | )          |
| Fourth Quarter                      |       | 116,401       |       | (49,234                | )          | 109,909                |       |
|                                |       |          |       |                   |       |                   |       |
| Total                               |       | $             | 483,676    |                   | $          | (19,419                | )          | $ | 117,326 |   |
|                                |       |          |       |                   |       |                   |       |
| Year Ended  December 31, 2006: |       |          |       |                   |       |                   |       |
| First Quarter                       |       | $             | 126,034    |                   | $          | (18,518                | )          | $ | (38,591 | ) |
| Second Quarter                      |       | 127,757       |       | (10,086                | )          | (32,230                | )          |
| Third Quarter                       |       | 124,701       |       | (21,685                | )          | (43,934                | )          |
| Fourth Quarter                      |       | 124,643       |       | (4,758                 | )          | (29,882                | )          |
|                                |       |          |       |                   |       |                   |       |
| Total                               |       | $             | 503,135    |                   | $          | (55,047                | )          | $ | (144,637 | ) |

 

Operating revenues and the operating income (loss) forall periods reflect results of continuing operations.  As disclosed in Note 4, the Publishingbusiness has been classified as discontinued operations.

 

77

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**Item 9. Changes in and Disagreementswith Accountants on Accounting and Financial Disclosure**

 

None.

 

**Item 9A. Controls and Procedures**

 

**Evaluationof Disclosure Controls and Procedures**

 

Under the supervision ofour Chief Executive Officer and Interim Chief Financial Officer, we evaluatedthe effectiveness of the design and operation of our disclosure controls andprocedures (as defined in Rule 13a-15(e) under the Exchange Act) asof December 31, 2007 (the “Evaluation Date”). Based upon that evaluation,as a result of the material weaknesses described below, the Chief ExecutiveOfficer and Interim Chief Financial Officer concluded that, as of theEvaluation Date, our disclosure controls and procedures were noteffective.  Disclosure controls andprocedures are designed to ensure that information required to be disclosed byus in the reports we file or submit under the Exchange Act is recorded,processed, summarized and reported within the time periods specified inSecurities and Exchange Commission rules and forms.

 

**Management’sAnnual Report on Internal Control Over Financial Reporting**

 

Our management isresponsible for establishing and maintaining adequate internal control overfinancial reporting as defined in Rules 13a-15(f) or 15d-15(f) underthe Securities Exchange Act of 1934. The Company’s internal control overfinancial reporting is a process designed to provide reasonable assuranceregarding the reliability of financial reporting and the preparation offinancial statements for external purposes in accordance with generallyaccepted accounting principles. Internal control over financial reportingincludes those written policies and procedures that:

 

·                  Pertain to the maintenance of recordsthat, in reasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the Company;

 

·                  Provide reasonable assurance thattransactions are recorded as necessary to permit preparation of financialstatements in accordance with generally accepted accounting principles, andthat receipts and expenditures of the Company are being made only in accordancewith authorizations of management and directors of the Company; and

 

·                  Provide reasonable assurance regardingprevention or timely detection of unauthorized acquisition, use or dispositionof the Company’s assets that could have a material effect on the consolidatedfinancial statements.

 

Because of its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements.  Also, projectionsof any evaluation of effectiveness to future periods are subject to the riskthat controls may become inadequate because of changes in conditions, or thatthe degree of compliance with the policies or procedures may deteriorate.

 

A material weakness is adeficiency, or a combination of deficiencies, in internal control overfinancial reporting, such that there is a reasonable possibility that amaterial misstatement in the Company’s annual or interim financial statementswill not be prevented or detected on a timely basis.  A significant deficiency is a deficiency, ora combination of deficiencies, in internal control over financial reporting thatis less severe than a material weakness, yet important enough to meritattention by those responsible for oversight of the Company’s financialreporting.

 

78

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Our management assessedthe effectiveness of the Company’s internal control over financial reporting,as defined in Securities Exchange Commission Act Rule 13a-15(f) as ofDecember 31, 2007, and this assessment identified the following materialweaknesses in the Company’s internal control over financial reporting:

 

1.               We did not maintain effective control for revenuesrelated to completeness, accuracy and timeliness of transactions.  Specifically, there is a lack of validationprocedures to ensure that services ordered by our customers are provisionedcompletely, accurately and timely.  Inaddition, effective controls do not exist to ensure that valid customer ordersare ultimately transmitted to our billing systems.  Timely reconciliations do not exist betweenordering and provisioning systems or provisioning to billing systems.

 

The majority of theinformation technology systems utilized to process revenue transactions wereimplemented on or after March 31, 2006. We are still making modifications and enhancements to certain of thesesystems as well as certain internal control processes associated with thesesystems.  We continue to experiencesystem functionality issues which prevent certain orders from flowing throughseamlessly to our billing systems.  Thiscondition causes data to not be synchronized between systems.  These current system functionalitylimitations introduce data integrity concerns and risk of error for certainrevenue transactions.

 

Our remediation effortsare ongoing and management is committed to addressing this material weakness asexpeditiously as possible.  We haveestablished a task force that has responsibility for reviewing and enhancingthe business processes, workflows and internal control procedures related toorder entry, provisioning and billing. We also have a team that is responsible for identifying differencesbetween our ordering, provisioning and billing systems, establishing thresholdsfor acceptable differences and developing processes for resolving differencesabove established thresholds.  In addition,we engaged the services of Accenture as a strategic partner with specificexpertise in information technology processes and system remediationefforts.  These continuing activities areintended to facilitate improvement in the functionality of our systems andoperation of internal controls.

 

2.               We did not maintain effective controls over ouraccounting for property, plant and equipment related to fixed assets, projectcosting and recording of asset retirements.

 

Our fixed assetsubsidiary ledger and our project costing records for telephone plant underconstruction were not reconciled to the general ledger to ensure complete andaccurate financial reporting.  Also, theproject costing subsidiary ledger was not reviewed in a timely manner toproperly update project status, creating discrepancies between the projectcosting subsidiary ledger and the general ledger.

 

In addition, the existingprocess to track and record the retirement of assets is not effective to ensurethat disposals and retirements are recorded completely and accurately.  Retirements are recorded through estimatesand such estimates do not include non-network fixed asset categories.  Retirements for non-network fixed assetcategories are recorded annually.

 

Our remediation effortsare ongoing and include an effort to synchronize the status of the projectcosting records for telephone plant under construction to those maintained byour engineering department, thus facilitating the reconciliation of the projectcosting subsidiary ledger to the general ledger.  We had completed a reconciliation of ourfixed asset subsidiary ledger to the general ledger as of December 31,2007 and are in the process of developing a monthly reconciliationroutine.  In addition, we are developinga process for accounting personnel to receive actual retirement information tofacilitate recording disposals and retirements on a timely and accurate basis.

 

79

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3.               We did not maintain effective controls over access tocertain information technology systems, including lack of policies andprocedures to ensure the existence of proper authorizations, periodic reviewsof security configurations, formal review over administrator activity andprocedures for application access removal.

 

Our remediation effortsare ongoing and include updating formal information technology securitypolicies and procedures to include definition and responsibility assignment ofoverall IT governance, for application system and shared drive owners, for alluser access requests and user access removals, and periodic reviews of securityconfigurations.

 

In making its assessmentof internal control over financial reporting, management used the criteriaissued by the Committee of Sponsoring Organizations of the Treadway Commission(COSO) in “Internal Control—Integrated Framework.” Because of the materialweaknesses described in the preceding paragraphs, management believes that, asof December 31, 2007, the Company’s internal control over financialreporting was not effective based on those criteria.

 

**Changes in Internal Control overFinancial Reporting**

 

During the fourth quarterof 2007, the Company implemented various improvements to information technologysystems and internal controls, including information technology systemremediation efforts and improved internal control procedures related to thevaluation of the Company’s inventory. Except for the item discussed above,there have been no changes in the Company’s internal control over financialreporting during the fourth quarter of 2007 that have materially affected, oris reasonably likely to materially affect, the Company’s internal control overfinancial reporting.

 

Because of its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements.  Therefore, it ispossible to design into the process safeguards to reduce, though not eliminate,this risk.  Also, projections of anyevaluation of effectiveness to future periods are subject to the risk thatcontrols may become inadequate because of changes in conditions, or that thedegree of compliance with the policies or procedures may deteriorate.

 

**Item 9B. Other Information**

 

None.

 

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**PART III**

 

**Item 10. Directors,Executive Officers and Corporate Governance**

 

Thefollowing table provides information regarding our executive officers and directors as of the date of this annual report:

 
| **Name**                    | ** ** | **Age** | ** ** | **Position(s)**                                            |
|-----------------------------|------------|---------|------------|------------------------------------------------------------|
| Stephen F. Cooper           |       | 61      |       | Chief Executive Officer                                    |
| Kevin J. Nystrom            |       | 48      |       | Chief Operating Officer                                    |
| Michael T. Brown            |       | 48      |       | Senior Vice President,  Sales and Marketing                |
| Alan M. Oshima              |       | 61      |       | Senior Vice President  and General Counsel                 |
| Robert F. Reich             |       | 48      |       | Senior Vice President  and Interim Chief Financial Officer |
| John K. Duncan              |       | 52      |       | Vice President, Finance  and Controller                    |
| Loren D. Tobey              |       | 55      |       | Vice President and  Chief Information Officer              |
| Daniel F. Akerson           |       | 59      |       | Chairman of the Board  of Directors                        |
| Stephen C. Gray             |       | 49      |       | Vice Chairman of the  Board of Directors                   |
| James A.  Attwood, Jr. |       | 49      |       | Director                                                   |
| Matthew P. Boyer            |       | 42      |       | Director                                                   |
| Walter A.  Dods, Jr.   |       | 66      |       | Director                                                   |
| William E. Kennard          |       | 51      |       | Director                                                   |
| Raymond A. Ranelli          |       | 60      |       | Director                                                   |

 

*Stephen F. Cooper* became ourChief Executive Officer in February 2008, bringing more than 35 years ofmanagement leadership experience to the role. Mr. Cooper is chairman ofKroll Zolfo Cooper LLC (KZC), a leading financial advisory and interimmanagement firm, where he has extensive experience improving businessoperations for companies. He assumedthe chairman position at KZC in September 2002, when Kroll Inc. acquiredZolfo Cooper, LLC, the corporate recovery and crisis management firm that Mr. Cooperco-founded in 1985. Mr. Cooper also is currently providing managementservices to American Home Mortgage Investment Corp. Mr. Cooper previously served as CEO ofKrispy Kreme Doughnuts, Inc. in 2005, and as interim CEO and ChiefRestructuring Officer of Enron Corp. from 2002 to 2005.

 

*Kevin J. Nystrom* became our ChiefOperating Officer in February 2008.  Mr. Nystrom is a SeniorDirector of KZC and has more than 20 years of experience in turnaround andfinancial management.  Mr. Nystrom has worked over seven years withKZC working on numerous turnaround assignments in the telecom, financialservices, manufacturing, and transportation industries.  Mr. Nystromhas advised and assisted clients in designing and executing turnaround plans,developing reorganization plans, and formulating business strategies. Most recently, Mr. Nystrom served as Director of Restructuring of AmericanHome Mortgage Investment Corp.from August 2007 to present.  Other past advisory clients of Mr. Nystromwhile working at KZC include ANH Refractories (February 2002 to present),PTS Transportation (October 2005 to January 2007), ICGTelecommunications (October 2000 to February 2002) and Marsh Inc. (November 2004to June 2005 and September 2006 to January 2007).

 

*Michael T. Brown* became our Vice Presidentin charge of Sales Operations and Process Engineering in December 2004.Effective December 17, 2006, Mr. Brown was promoted to Senior VicePresident, Customer Contact Centers and Wholesale Markets. He currentlyholds the title Senior Vice President, Sales and Marketing.  Mr. Brownhas extensive technology and telecommunicationsexperience, which includes 16 years with various divisions of Lucent Technologies from 1986 to 2002 where he served,among other roles, as a Sales Vice Presidentfor Optical, Services and Software. He also was regional Vice President of Saleswith Voxpath Networks, Inc. Prior to joiningus, Mr. Brown was Vice President of SalesOperations with NextiraOne, LLC, a major reseller of Nortel and Cisco solutions, from 2003 to2004 where he ran the daily sales operations of a 400-person North American sales team, managing services to top Fortune 500 companies.

 

*Alan M. Oshima* became our Senior Vice President and GeneralCounsel in February 2005. Mr. Oshima, a founding partner in the Honolulu law firm, Oshima Chun Fong & Chung, LLP, has extensive regulatory and legal experience in Hawaii and served as lead counsel inHawaiian Telcom’s acquisition of the VerizonHawaii Business. He has beenrecognized as one of “America’s Best Lawyers” in the field of public utilities. In addition to his work in telecommunications, Mr. Oshima has served as the regulatory attorney for the Kauai IslandUtility Cooperative, The Gas Company, various water and sewer companies, and other utility-related businesses in Hawaii. Mr. Oshimareceived a degree in marketing from Northwestern University and his law degree from University of California, Hastings College of Law. He served as a Supply Corps Officer with the U.S. Navy in, among other places, Pearl Harbor and San Diego.

 

*Robert F. Reich*became our Senior Vice President and interim Chief FinancialOfficer in March 2008.  Hepreviously had been Vice President, Finance and Controller from April 2007.  Mr. Reich oversees all financialoperations, including financial analysis and reporting, corporate andregulatory accounting, tax, risk management, treasury, and investor relations.Prior to joining us, Mr. Reich was with McLeodUSA Incorporated from 2002 to 2007, a facilities-based competitive local exchange carrierservicing small and mid-sized businesses in the Western and Midwestern UnitedStates, serving most recently as Vice President,Controller and Treasurer.  Mr. Reichis a Certified Public Accountant.

 

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*John K. Duncan*became our VicePresident, Finance and Controller in March 2008.  He previously served as Assistant Controllerof the Company from March 2005.  His responsibilities include all internal and externalfinancial reporting, financial accounting functions, tax operations andregulatory accounting for the Company.  Prior to joining us, Mr. Duncanwas Director of Internal Audit at Alexander & Baldwin, Inc. from March 2003to March 2005, and Regional Controller for Tesoro Hawaii from May 1998to March 2003.

 

*Loren D. Tobey*became our Vice President and Chief Information Officer in April 2007.  Prior to joining Hawaiian Telcom in August 2006,Mr. Tobey was with NextiraOne, LLC,a global provider of communications services and solutions, since 2001, mostrecently as National Vice President & Chief Information Officer. Heheld that position from 2002, and was responsible for the infrastructure andsystems supporting internal and external customers.  From 1998 to 2001, Mr. Tobey served asManager, Process Technology Team, with Williams Communications Solutions.

 

*Daniel F. Akerson*became the Chairman of our Board of Directorson May 2, 2005. Mr. Akerson has been a Managing Director of Carlylesince 2003 and is Co-Head ofthe U.S. Buyout fund. He has extensiveoperating and management experience in telecommunications and technology.Prior to joining Carlyle, Mr. Akerson served as chairman and chief executive officer of three companies. From late 1999 until January 2003, Mr. Akerson served as Chairman and Chief Executive Officer of XO Communications, Inc. At Nextel Communications, Inc., Mr. Akerson served as Chairman from 1996 to2001 and Chief Executive Officer from 1996 to 1999. In 1993, hebecame General Partner of Forstmann Little & Company, during which time he served as Chairman and Chief Executive Officer of General Instrument Company from 1993 to 1995. From 1983 to 1993, Mr. Akerson served in several key roles at MCICommunications Corporation including Executive Vice Presidentand Chief Financial Officer from 1987to 1990 and President and Chief Operating Officer from 1992 to 1993. Mr. Akerson isa member of the Boards of Directors ofthe American Express Company, Freescale Semiconductor, Inc., Manor Care, Inc., and Multiplan, Inc. Healso serves as a member of the Board ofDirectors of the U.S. Naval AcademyFoundation.

 

*James A. Attwood, Jr.*became a Director in May 2004. Mr. Attwoodhas been a Managing Director of Carlyle and head of the GlobalTelecommunications and Media group since November 2000. Prior tojoining Carlyle, he served as Executive Vice President—Strategy, Development and Planning for Verizon Communications, Inc.He served as Executive Vice President—StrategicDevelopment and Planning at GTECorporation prior to that. Mr. Attwoodjoined GTE Corporation in 1996 as VicePresident— Corporate Planning and Development after more than ten years in the investment banking division of Goldman, Sachs &Co. Mr. Attwood is amember of the Boards of Directors of Willcom, Inc., The Nielsen Company B.V.,and Insight Communications Company, Inc.

 

*Matthew P. Boyer*became a Director in May 2004. Mr. Boyer has beena Managing Director of Carlyle since 2005, and is focused on U.S.buyout transactions in the telecommunications sector witha particular focus on the wireline and wireless industries. He was integrally involvedin the execution of Carlyle’sinvestment in Dex Media, Inc. and Hawaiian Telcom Communications, Inc. Prior to joining Carlyle, Mr. Boyer was Senior Vice Presidentat Lehman Brothers andone of the founding members of the LehmanBrothers Communications Fund, an $800 millionprivate equity fund focused on early stage investments incommunications companies. Prior tothat, he was an investment banker at Lehman Brothers in the Communications and Media Group where he focused on wireless and emerging wirelinecommunications companies.

 

*Walter A. Dods, Jr.*became a Director on May 2, 2005. Mr. Dodswas the non-executive Chairman of theBoard of BancWest Corporation, a $74billion bank holding company basedin Honolulu, Hawaii, from January 2005through December 2007, and a director since 1983. BancWest, a wholly-owned subsidiary of BNP Paribas, is comprised of two major subsidiaries: First Hawaiian Bankand Bank of the West. He has also been the non-executive Chairman of the Board of First Hawaiian Bank since January 2005and a director since 1979, as well asVice Chairman of Bank of the Westsince 1998. Mr. Dods was Chairmanof the Board and Chief Executive Officer of BancWest and First Hawaiian Bank from 1989 to 2004. From 1996 to1997, Mr. Dods served as the National President of the American Bankers Association and was a member of the Federal Advisory Council of the Federal Reserve System, representing the 12th district of the Federal Reserve from 1999 to 2000. Mr. Dodsalso serves on the Boardsof Directors of Alexander & Baldwin, Inc.(and its Matson Navigation subsidiary), First Insurance Company of Hawaii, Grace Pacific Corporation, Pacific Guardian Life Insurance Company, Maui Land & Pineapple Company, Inc., and Servco Pacific, Inc.

 

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*StephenC. Gray* became a Directorin November 2006, and was elected Vice Chairman of the Board on February 4,2008. Mr. Gray has been a SeniorAdvisor to Carlyle’s Telecom & Media group since December 2007and Executive Chairman of ImOn Communications, LLC, a full service cable,telecommunications and Internet service provider located in Cedar Rapids, Iowa,since October 2006.  He also hasserved as Executive Chairman of SecurityCoverage, a provider of fully automatedcomputer security services for homes and small businesses, since October 2005. From October 1994 until his retirement in December 2004, Mr. Grayserved as president of McLeodUSA, which provides facilities-based integratedvoice and data services in more than 490 US cities.  One of the original founders of McLeodUSA in1992, Mr. Gray oversaw McLeodUSA’s primary business units and leddevelopment of the company’s overall strategy and its merger/acquisitionefforts.  Mr. Gray also previouslyserved as Vice President of Business Services at MCI. Mr. Gray also serveson the Board of Directors of Insight Communications, Inc.

 

*William E. Kennard* became a Director on May 2, 2005. Mr. Kennard is a ManagingDirector of Carlyle. Since joining Carlyle in 2001, hehas played key roles in theinvestments in Dex Media, Inc., CasemaHolding, BV, Insight Communications Company, Inc. and HawaiianTelcom Communications, Inc. Mr. Kennardalso is a member of the Boards ofDirectors of The NewYork Times Company and InsightCommunications, Inc. Prior to joiningCarlyle, Mr. Kennard served as Chairman of the U.S. Federal CommunicationsCommission from 1997 to 2001. Mr. Kennardserved as the FCC’s general counselfrom December 1993 to November 1997. Before serving in government, he was apartner and member of the Board of Directorsof the law firm of Verner,Liipfert, Bernhard, McPherson and Hand.

 

*Raymond A. Ranelli* becamea Director on May 2, 2005. Mr. Ranelli retired from PricewaterhouseCoopers in 2003 where he was a partner for over21 years. Mr. Ranelli held several positions at PricewaterhouseCoopers including Vice Chairman andGlobal Leader of the Financial Advisory Services practice. Mr. Ranelli is also a director of UnitedSurgical Partners International, UnitedComponents, Inc. and Centennial Communications Corp.

 

**Committees of the Boardof Directors**

 

OurBoard of Directors has an Audit Committee, Compensation Committee, Nominating and Governance Committee, and Executive Committee.The duties and responsibilities of the Audit Committee include recommendingthe appointment or termination of the engagement of our independent registered public accounting firm, overseeing the independent registered publicaccounting firm relationship, and reviewing significant accounting policies andcontrols. The duties and responsibilities of the Compensation Committeeinclude reviewing and approving thecompensation of officers and reviewing andmaking recommendations to the Board of Directors concerning the compensation of the independent directors. Theduties and responsibilities of the Nominating and Governance Committee includemaking recommendations regarding individuals qualified to become directors, thestructure and composition of the Board of Directors and committees of the Board, and corporate governance policies and practices. The purpose of the Executive Committee is to act for the Board of Directors in theevent formal action is required betweenBoard meetings. Affiliates of Carlyle control substantially all of the common stock of our parent, Hawaiian Telcom Holdco, Inc., and therefore have the power tocontrol our affairs and policies.Carlyle also controls the election of our directors. As of March 25, 2008, a majority of the members of our Boardof Directors are representatives of Carlyle.

 

The Board ofDirectors has determined that the Audit Committee includes an “audit committeefinancial expert”, Raymond A. Ranelli, as that term is defined in SECregulations. Mr. Ranelli also is “independent” under the NASDAQindependence standards. In addition, theBoard of Directors believes that each of the other current members ofthe Audit Committee is fully qualified to address any issues that are likely to come before the Committee, including the evaluation of our financial statements and supervision of our independent registered public accounting firm.

 

**Procedures for Nominations by Security Holders**

 

TheNominating and Governance Committee does not have a policy with regard to theconsideration of any director candidates recommended by security holders, becauseour common stock is not publicly held.

 

**Code of****Business Conduct**

 

We have adopted a Code of Business Conduct that sets forth legal, ethical and other obligations that apply to all of our officers and employees, as well as all partieswho work on behalf of Hawaiian Telcom, including but not limited toconsultants, in-house contractors, employees of subsidiaries and affiliates,and representatives. The Code ofBusiness Conduct is posted in the “Investor Relations – Governance” section ofour website at www.hawaiiantel.com. In the event that we make any amendmentto, or grant any waiver of,a provision of theCode of Business Conduct that appliesto our principal executive officer,principal financial officer, principal accounting officer or controller, we intend to disclosesuch amendment or waiver.

 

83

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**Item 11. ExecutiveCompensation**

 

**Compensation Discussion and Analysis**

 

The primary objectives of the Compensation Committee withrespect to executive compensation include: attracting, retaining and motivatingqualified executives; tying annual and long-term compensation to theachievement of specific meaningful corporate and/or individual performanceobjectives; and aligning the executives’ interests with creation of shareholdervalue.  To achieve these objectives, theCompensation Committee implements a comprehensive compensation program thatties a substantial portion of each executive’s overall compensation to keyperformance metrics. Our named executive officers’ compensation currentlyconsists of the following components:

 

***Base Salary.***  Base salariesfor our named executive officers are based on the scope of theirresponsibilities, taking into account competitive market compensation paid bycomparable companies for similar positions. To assist with developing our namedexecutive officer base salary ranges, the Company engaged Mercer, anindependent human resource consulting firm, in 2006 to conduct a marketcompensation study of 17 top executive positions (Vice President and higher) attelecommunications companies of comparable revenue size. For the top fiveexecutive positions, peer group data also was analyzed.  The peer group consisted of 14telecommunications companies of comparable revenue size and other businesscharacteristics. That study determined that our executive base salaries overallare at the market median although there was variance by position andlevel.  The executive base salaries werenot revised as a result of the study.

 

Basesalary merit increases for named executive officers are considered each yearand are based on the individual performance appraisals of the executives and onthe amount of the merit increase pool budgeted by management for the year inquestion. The CEO reviews the performance of the other named executive officersand makes recommendations to the Compensation Committee regarding changes totheir base salary.  The performance ofthe Chief Executive Officer is reviewed by the Compensation Committee, whichdetermines the CEO’s base salary change as well as the base salary changes ofthe other named executive officers.

 

Meritincreases awarded in 2007 to our former CEO and other named executive officerswere based on individual performance. The merit increase for the former CEO was 4%, and the merit increasesfor the other named executive officers ranged from 0% to 5%. The current ChiefExecutive Officer and Chief Operating Officer are employees of KrollZolfo Cooper LLC (KZC) and do not receive basesalaries or other compensation directly from the Company; the Companycompensates KZC for their management services pursuantto a Services Agreement dated February 4, 2008. See Item 13, “Certain Relationships and Related Transactions, and Director Independence.”

 

***Non-Union Bonus Plan. ***The Non-Union Bonus Plan provides our executive officersand other key employees with the opportunity to obtain, inaddition to their base salary, an annualcash bonus that is dependent upon achieving stated corporate and/or individualperformance goals for the year in question. Such cash bonuses, if any, are awarded no later than March 15 ofthe year following the year in question. Employment with the Company at the time of award is a prerequisite toreceiving an award.

 

The Non-Union Bonus Plan is reviewed annually and its terms may be modifiedfrom time to time to reflect changes in the Company’s business strategies andfocus. The Compensation Committeeapproves the annual bonus awards for the Chief Executive Officer and otherexecutive officers and the corporate and/or individual performance goals andtheir relative weights (as mentioned above, the current Chief Executive Officerand Chief Operating Officer are not entitled to participate in the Non-UnionBonus Plan).  Normally, corporate performanceis a greater factor for executive officers than it is for non-executiveemployees.  The performance-based bonusis calculated as a percentage of the employee’s annual salary. For our namedexecutive officers for 2007, the percentages of annual salary used to determinethe target bonus ranged from 75% to 100%. Depending on the achievement of the predetermined targets, the annualbonus may be less than or greater than the target bonus.

 

Based on the recommendation ofmanagement, for 2007 the Compensation Committee determined that emphasis shouldbe placed on the Company’s EBITDA (earnings before interest, taxes,depreciation and amortization), as adjusted fortransition and contingency charges, withno weighting for individual performance.We believe that public disclosure of the specific EBITDA targets would causecompetitive harm. However, as with the targets for 2006, these predeterminedtargets were deemed to be challenging to meet, and, in fact, the 2007 EBITDAtargets were not met. Nevertheless, in recognition for the significant effortsmade by certain employees in light of the difficult circumstances faced during2007, the Compensation Committee exercised its discretion to grant bonuses for2007 in some cases.  The 2007 bonuses forthe named executive officers, other than Daniel P. O’Brien and David A.Torline, ranged between 0% and 66 2/3% of their target bonuses.  Messrs. O’Brien and Torline, whoseemployment with the Company terminated in May and April, respectively, of2007, received bonuses for 2007 pursuant to the severance provisions of theiremployment agreements.

 

84

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Solely at ourdiscretion, additional performance-based compensation may be paid to ourexecutive officers and other key employees. No such additional bonuses were paid to a named executive officer in 2007.

 

***Stock Option Plan. ***The Stock Option Plan of Hawaiian Telcom Holdco, Inc. serves (1) to provideadditional long term incentives to our namedexecutive officers, other key employees, and thedirectors of Hawaiian Telcom Holdco, Inc. and its subsidiaries, and (2) torecruit and retain executives, otherkey employees, and directors. We do not make annual grants of stockoptions. Instead, stock option grants generally are made at the commencement ofservice.

 

Theoptions granted under the Stock Option Plan have both a time-based component(25%) and a performance-based component (75%).****Underthe performance-based component, up to fifteen percent (15%) of the sharescovered by the option will become exercisable each year depending upon whethercertain targets for EBITDA, free cash flow, and revenue for that year are met.** **We believe that public disclosure of these financialtargets would cause competitive harm. However, as with the targets for 2006,these predetermined targets were deemed to be challenging to meet, and, infact, the 2007 targets were not met.

 

Thesizes of these option grants vary with title and position, with higher-rankedexecutive officers receiving larger grants. In 2007, we awarded a new hire grant to a named executive officer, PaulH. Sunu, in the amount indicated in the section entitled “Grants of Plan-BasedAwards.”  Occasionally, we grant anoption to an executive following a significant change in job responsibilitiesor in connection with special retention or performance objectives.  We made two such grants in 2007 to namedexecutive officers in amounts indicated in the section entitled “Grants ofPlan-Based Awards.” No other options were granted in 2007 to our namedexecutive officers.

 

***Other Compensation.***  In 2007, ournamed executive officers were eligible to participate in the following plans,benefits and perquisites:

 

1.                 Voluntary defined contribution plan (401(k)), groupmedical plans, and other benefit plans available to salaried employeesgenerally (with the exception of group life, disability, and accidental deathand dismemberment insurance).

 

2.                 Company-funded executive group life, disability, andaccidental death and dismemberment insurance.

 

3.                 Reimbursement of out-of-pocket healthexpenses.

 

4.                 Benefitsand perquisites pursuant to the terms of executive employment agreements,consisting of housing allowance, reimbursement of relocation expenses, taxgross-up amounts on the housing allowances and relocation expensereimbursements, reimbursement for personal travel, entitlement to severancebenefits in the event of termination of employment under certain circumstances,and/or enhanced vacation benefits.

 

While we intend to continue to maintain our current benefits andperquisites for our named executive officers, we have discretion to revise,amend or add to them. We believe these benefits and perquisites are atcompetitive levels for comparable companies.

 

**Compensation Committee Report**

 

The Compensation Committeehas reviewed and discussed the Compensation Discussion and Analysis sectionof this annual report with management and, based on the review and thesediscussions, has recommended to the Board of Directors that the CompensationDiscussion and Analysis disclosure be included in this annual report on Form 10-K.

 
|   | William E. Kennard (Chairman) |
|--------|-------------------------------|
|   | James A. Attwood, Jr.    |
|   | Matthew P. Boyer              |
|   | Walter A. Dods, Jr.      |

 

85

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**SummaryCompensation Table**

 

Thefollowing table sets forth information regarding compensation earned during 2006 and 2007 by our principalexecutive officer and principal financial officers during 2007, thethree other most highly compensated executiveofficers who were serving as executive officers at the end of 2007, and oneadditional executive officer who was not serving as an executive officer at theend of 2007 but whose compensation is required to be disclosed (collectively,the “Named Executive Officers”).

 

**Summary Compensation Table**

 
| **Name and Principal  Position**           | ** ** | **Year** | ** ** | **Salary  ($)**                                              | ** ** | **Bonus  ($)**                                                      | ** ** | **Stock  Awards  ($)** | ** ** | **Option  Awards  ($)(6)**                                   | ** ** | **Non-Equity  Incentive Plan  Compensation  ($)(7)**           | ** ** | **Change in  Pension  Value and  Nonqualified  Deferred  Compensation  Earnings  ($)(8)** | ** ** | **All Other  Compensation  ($)(9)**                     | ** ** | **Total  ($)**                                                                 | ** ** |
|------------------------------------------------------|------------|----------|------------|--------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|------------------------|------------|--------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------|------------|--------------------------------------------------------------------------------|------------|
| **(a)**                                              | ** ** | **(b)**  | ** ** | **(c)**                                                      | ** ** | **(d)**                                                             | ** ** | **(e)**                | ** ** | **(f)**                                                      | ** ** | **(g)**                                                             | ** ** | **(h)**                                                                                             | ** ** | **(i)**                                                      | ** ** | **(j)**                                                                        | ** ** |
| Michael  S. Ruley(1)                                 |       | 2007     |       | 553,681                                                      |       |            0 |       | —                 |       |          — |       |            0 |       |   3,866                                                                                   |       | 318,145                                                      |       |    875,692                                                      |       |
| Chief  Executive Officer and Director                |       | 2006     |       | 527,423                                                      |       |          —        |       | —                 |       |          — |       | 207,256                                                             |       |   2,584                                                                                   |       | 406,425                                                      |       | 1,143,688                                                                      |       |
|                                                 |       |     |       |                                                         |       |                                                                |       |                   |       |                                                         |       |                                                                |       |                                                                                                |       |                                                         |       |                                                                           |       |
| Paul  H. Sunu(2)                                |       | 2007     |       | 208,800                                                      |       |            0 |       | —                 |       | 118,601                                                      |       |            0 |       |        —                                                    |       | 132,424                                                      |       |    459,825                                                      |       |
| Senior  Vice President and Chief Financial Officer   |       | 2006     |       |          — |       |          —        |       | —                 |       |          — |       |          —        |       |        —                                                    |       |          — |       |             — |       |
|                                                 |       |     |       |                                                         |       |                                                                |       |                   |       |                                                         |       |                                                                |       |                                                                                                |       |                                                         |       |                                                                           |       |
| Daniel  P. O’Brien(3)                           |       | 2007     |       | 170,495                                                      |       |            0 |       | —                 |       |          — |       |            0 |       |   3,962                                                                                   |       | 839,572                                                      |       | 1.014,029                                                                      |       |
| Senior  Vice President and Chief Financial Officer   |       | 2006     |       | 362,000                                                      |       |          —        |       | —                 |       |          — |       |   86,880                                                  |       |   8,909                                                                                   |       | 293,807                                                      |       |    751,596                                                      |       |
|                                                 |       |     |       |                                                         |       |                                                                |       |                   |       |                                                         |       |                                                                |       |                                                                                                |       |                                                         |       |                                                                           |       |
| David  A. Torline(4)                            |       | 2007     |       | 153,118                                                      |       |            0 |       | —                 |       |          — |       |            0 |       |   3,961                                                                                   |       | 726,436                                                      |       |    883,515                                                      |       |
| Senior  Vice President and Chief Information Officer |       | 2006     |       | 360,077                                                      |       |          —        |       | —                 |       |          — |       |   86,420                                                  |       |   8,453                                                                                   |       | 164,142                                                      |       |    619,092                                                      |       |
|                                                 |       |     |       |                                                         |       |                                                                |       |                   |       |                                                         |       |                                                                |       |                                                                                                |       |                                                         |       |                                                                           |       |
| Alan  M. Oshima                                      |       | 2007     |       | 309,231                                                      |       | 156,000                                                             |       | —                 |       |   29,660                                           |       |            0 |       |   4,633                                                                                   |       |   12,896                                           |       |    512,419                                                      |       |
| Senior  Vice President and General Counsel           |       | 2006     |       |          — |       |          —        |       | —                 |       |          — |       |          —        |       |        —                                                    |       |          — |       |             — |       |
|                                                 |       |     |       |                                                         |       |                                                                |       |                   |       |                                                         |       |                                                                |       |                                                                                                |       |                                                         |       |                                                                           |       |
| Michael  T. Brown                                    |       | 2007     |       | 228,462                                                      |       |   57,375                                                  |       | —                 |       | 107,236                                                      |       |            0 |       |   3,698                                                                                   |       | 109,692                                                      |       |    506,462                                                      |       |
| Senior  Vice President, Sales and Marketing          |       | 2006     |       |          — |       |          —        |       | —                 |       |          — |       |          —        |       |        —                                                    |       |          — |       |             — |       |
|                                                 |       |     |       |                                                         |       |                                                                |       |                   |       |                                                         |       |                                                                |       |                                                                                                |       |                                                         |       |                                                                           |       |
| Harvey  A. Plummer(5)                                |       | 2007     |       | 309,231                                                      |       |            0 |       | —                 |       |   48,546                                           |       |            0 |       |   4,596                                                                                   |       | 132,476                                                      |       |    494,849                                                      |       |
| Senior  Vice President, Engineering and Operations   |       | 2006     |       | 282,692                                                      |       |          —        |       | —                 |       |   40,154                                           |       |   50,880                                                  |       | 13,418                                                                                              |       | 205,726                                                      |       |    592,870                                                      |       |

 

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(1)  Mr. Ruleyleft the Company on February 4, 2008.

(2)  Mr. Sunujoined the Company as Senior Vice President and Chief Financial Officer on May 1,2007 and left the Company on March 7, 2008.

(3)  Mr. O’Brienleft the Company on May 14, 2007.

(4)  Mr. Torlineleft the Company on April 20, 2007.

(5)  Mr. Plummerleft the Company on March 21, 2008.

(6)  Represents thedollar value recognized for financial statement reporting purposes for thefiscal year identified in column (b) in accordance with SFAS No. 123R.The assumptions used in these calculations are set forth in Note 13 to theCompany’s consolidated financial statements included in this annual report on Form 10-K.

(7)  Represents cashperformance bonuses earned for the fiscal year identified in column (b) underthe Company’s Non-Union Bonus Plan.

(8)  Represents theaggregate change in the actuarial present value of the Named Executive Officer’saccumulated benefit under the Hawaiian Telcom Management Pension Plan duringthe fiscal year identified in column (b). The Company does not offer any above market or preferential earnings oncompensation that is deferred on a tax-qualified basis.

(9)  “All OtherCompensation” in 2007 includes: (i) bonus payouts pursuant to the terms ofseverance provisions in the Named Executive Officers’ employment agreements (Mr. O’Brien-$182,800 and Mr. Torline -$200,000), (ii) amounts contributed by theCompany to its 401(k) plan (including Mr. Ruley -$12,153, Mr. Sunu-$11,520, and Mr. Plummer -$12,171), (iii) premiums paid with respectto supplemental term life, accidental death and dismemberment, disability andhealth benefits for the benefit of the Named Executive Officers (including Mr. Ruley-$31,839), (iv) amounts paid or accrued pursuant to employment agreementsin connection with termination of employment (Mr. O’Brien -$224,985 and Mr. Torline -$370,400), (v) amountsreimbursed for estimated income tax liability by reason of the Company’spayments for relocation costs and housing allowances  (Mr. Ruley -$90,151, Mr. Sunu-$39,123, Mr. O’Brien -$38,325, Mr. Torline -$54,609, Mr. Brown- $29,863, and Mr. Plummer -$45,048), (vi) relocation costs for eachof the Named Executive Officers other than Messrs. Oshima and Plummer(including Mr. Sunu -$28,988 and Mr. O’Brien -$329,084), (vii) housingallowances (Mr. Ruley -$125,000, Mr. Sunu -$45,325, Mr. O’Brien-$32,500, Mr. Torline -$71,500, Mr. Brown - $48,000, and Mr. Plummer-$63,000), (viii) amounts reimbursed for personal travel for each of theNamed Executive Officers other than Messrs. Oshima, Brown and Plummer(including Mr. Ruley - $28,262), and (ix) reimbursement ofout-of-pocket medical expenses for each of the Named Executive Officers.

 

86

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**Employment Agreements**

 

Each of Messrs. Ruley, Sunu, O’Brien, Torline,Oshima, Brown, and Plummer had entered into an employment agreement with us.  As a result of the terminations of employmentof Messrs. Ruley, Sunu, O’Brien, Torline, and Plummer in 2007 and 2008, theiremployment agreements have terminated.

 

Mr. Oshima’s agreement had an initial three-year term that beginning February 1, 2008 isextended automatically for successiveone-year periods unless either party delivers notice of non-extensionno later than ninety days prior to the expiration of the then-applicableone-year period. Mr. Brown’sagreement had an initial one-year termthat beginning December 13, 2005 is extended automatically for successive one-year periods unlesseither party delivers notice of non-extension no later than sixty daysprior to the expiration of the then-applicable one-year period.

 

Under the terms of the employment agreements, Messrs. Oshimaand Brown are each eligible to receive an annual bonus under our Non-Union Bonus Plan, pursuant to whichbonuses are tied to achieving certain corporateand/or individual performance goals, with a target bonus payment of 75% of annual salary. Each executive also is entitled toparticipate in (i) our stock optionplan and has been granted options to purchase shares of stock pursuant to the terms of our stockoption plan and stock option agreement, and (ii) our employeebenefit plans, programs and arrangementsat a level commensurate with the executive’s position. Additionally, Mr. Brown is entitled to a monthly housing allowance not to exceed $4,000 per month, togetherwith a tax gross-up payment in an amount such that, after payment by him of all income taxes imposed on the housing allowance and the tax gross-up payment,he would retain an amount equal to theoriginal housing allowance.

 

87

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**Grants of Plan-Based Awards**

 

The following table summarizes pertinent information concerning plan-based awards granted to theNamed Executive Officers during 2007:

 

**Grants of Plan-Based Awards**

 
| ** **                                           | ** ** | ** **                                             | ** ** | ** **                                                                                        | ** ** | ** **                                                                                 | ** ** | ** **                                                            | ** ** | ** **                                                              | ** ** | ** **                                | ** ** | ** **                                   | ** ** | ** **     | ** ** | ** **                           | ** ** | ** **                           | ** ** | ** **                                                   | ** ** |
|------------------------------------------------------|------------|--------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|-------------------------------------------|------------|----------------------------------------------|------------|----------------|------------|--------------------------------------|------------|--------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                                           | ** ** | ** **                                             | ** ** | **Estimated Future Payouts  Under Non-Equity Incentive  Plan Awards(1)** | ** ** | **Estimated Future Payouts  Under Equity Incentive Plan  Awards** | ** ** | **All  Other  Stock  Awards:  Number  of  Shares  or Stock  or** | ** ** | **All  Other  Option  Awards:  Number of  Securities  Underlying** | ** ** | **Exercise  or  Base  Price  of  Option** | ** ** | **Grant  Date  Fair  Value  of  Stock  and** | ** ** |
| **Name**                                             | ** ** | **Grant  Date**                                        | ** ** | **Threshold  ($)**                                                                                | ** ** | **Target  ($)**                                                                            | ** ** | **Maximum  ($)**                                                      | ** ** | **Threshold  (#)**                                                      | ** ** | **Target  (#)**                           | ** ** | **Maximum  (#)**                             | ** ** | **Units  (#)** | ** ** | **Options  (#)**                     | ** ** | **Awards  ($/Sh)**                   | ** ** | **Option  Awards ($)**                                  | ** ** |
| **(a)**                                              | ** ** | **(b)**                                                | ** ** | **(c)**                                                                                           | ** ** | **(d)**                                                                                    | ** ** | **(e)**                                                               | ** ** | **(f)**                                                                 | ** ** | **(g)**                                   | ** ** | **(h)**                                      | ** ** | **(i)**        | ** ** | **(j)**                              | ** ** | **(k)**                              | ** ** | **(l)**                                                      | ** ** |
|                                                 |       |                                                   |       |                                                                                              |       |                                                                                       |       |                                                                  |       |                                                                    |       |                                      |       |                                         |       |           |       |                                 |       |                                 |       |                                                         |       |
| Michael S. Ruley                                     |       |         — |       |   0                                                                                     |       | 558,640                                                                                    |       | 670,368                                                               |       | —                                                                  |       | —                                    |       | —                                       |       | —         |       |      — |       |      — |       |          — |       |
| Chief Executive  Officer and Director                |       |                                                   |       |                                                                                              |       |                                                                                       |       |                                                                  |       |                                                                    |       |                                      |       |                                         |       |           |       |                                 |       |                                 |       |                                                         |       |
|                                                 |       |                                                   |       |                                                                                              |       |                                                                                       |       |                                                                  |       |                                                                    |       |                                      |       |                                         |       |           |       |                                 |       |                                 |       |                                                         |       |
| Paul H. Sunu                                         |       | 5/22/07                                                |       |   0                                                                                     |       | 234,000                                                                                    |       | 280,800                                                               |       | —                                                                  |       | —                                    |       | —                                       |       | —         |       | 3,131                                |       | 1,000                                |       | 128,451                                                      |       |
| Senior Vice  President and Chief Financial Officer   |       |                                                   |       |                                                                                              |       |                                                                                       |       |                                                                  |       |                                                                    |       |                                      |       |                                         |       |           |       |                                 |       |                                 |       |                                                         |       |
|                                                 |       |                                                   |       |                                                                                              |       |                                                                                       |       |                                                                  |       |                                                                    |       |                                      |       |                                         |       |           |       |                                 |       |                                 |       |                                                         |       |
| Daniel P. O’Brien                               |       |         — |       | —                                                                                            |       |          —                               |       |          —          |       | —                                                                  |       | —                                    |       | —                                       |       | —         |       |      — |       |      — |       |          — |       |
| Senior Vice  President and Chief Financial Officer   |       |                                                   |       |                                                                                              |       |                                                                                       |       |                                                                  |       |                                                                    |       |                                      |       |                                         |       |           |       |                                 |       |                                 |       |                                                         |       |
|                                                 |       |                                                   |       |                                                                                              |       |                                                                                       |       |                                                                  |       |                                                                    |       |                                      |       |                                         |       |           |       |                                 |       |                                 |       |                                                         |       |
| David A. Torline                                     |       |         — |       | —                                                                                            |       |          —                               |       |          —          |       | —                                                                  |       | —                                    |       | —                                       |       | —         |       |      — |       |      — |       |          — |       |
| Senior Vice  President and Chief Information Officer |       |                                                   |       |                                                                                              |       |                                                                                       |       |                                                                  |       |                                                                    |       |                                      |       |                                         |       |           |       |                                 |       |                                 |       |                                                         |       |
|                                                 |       |                                                   |       |                                                                                              |       |                                                                                       |       |                                                                  |       |                                                                    |       |                                      |       |                                         |       |           |       |                                 |       |                                 |       |                                                         |       |
| Alan M. Oshima                                       |       | 5/22/07                                                |       |   0                                                                                     |       | 234,000                                                                                    |       | 280,800                                                               |       | —                                                                  |       | —                                    |       | —                                       |       | —         |       |   783                      |       | 1,000                                |       |   40,154                                           |       |
| Senior Vice  President and General Counsel           |       |                                                   |       |                                                                                              |       |                                                                                       |       |                                                                  |       |                                                                    |       |                                      |       |                                         |       |           |       |                                 |       |                                 |       |                                                         |       |
|                                                 |       |                                                   |       |                                                                                              |       |                                                                                       |       |                                                                  |       |                                                                    |       |                                      |       |                                         |       |           |       |                                 |       |                                 |       |                                                         |       |
| Michael T. Brown                                     |       | 2/22/07                                                |       |   0                                                                                     |       | 172,125                                                                                    |       | 206,550                                                               |       | —                                                                  |       | —                                    |       | —                                       |       | —         |       | 1,566                                |       | 1,000                                |       |   96,369                                           |       |
| Senior Vice  President, Sales and Marketing          |       |                                                   |       |                                                                                              |       |                                                                                       |       |                                                                  |       |                                                                    |       |                                      |       |                                         |       |           |       |                                 |       |                                 |       |                                                         |       |
|                                                 |       |                                                   |       |                                                                                              |       |                                                                                       |       |                                                                  |       |                                                                    |       |                                      |       |                                         |       |           |       |                                 |       |                                 |       |                                                         |       |
| Harvey A. Plummer                                    |       |         — |       |   0                                                                                     |       | 234,000                                                                                    |       | 280,800                                                               |       | —                                                                  |       | —                                    |       | —                                       |       | —         |       |      — |       |      — |       |          — |       |
| Senior Vice  President, Engineering and Operations   |       |                                                   |       |                                                                                              |       |                                                                                       |       |                                                                  |       |                                                                    |       |                                      |       |                                         |       |           |       |                                 |       |                                 |       |                                                         |       |

 

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(1)  Representsestimated payouts under the Company’s Non-Union Bonus Plan. The actual payoutsare reflected in column (g) of the Summary Compensation Table.

 

*Exercisability of Options.*Subject to theNamed Executive Officer’s continued employment with the Company, 25% of theoptions granted generally will vest automatically in equal annual installmentsof 5% on each anniversary of the option holder’s hire date (or other awarddate, in the case of additional options awarded subsequent to the hire date) and75% will vest in full on the day immediately preceding the eighth anniversaryof the grant date subject to earlier vesting if certain performance conditionsare met. The performance condition component of the Plan provides that aninstallment equal to 5% (15% if all three targets are met) of the option willvest for each fiscal year, beginning with the year of grant and ending with thefourth year thereafter, for the following three targets, as defined in thePlan: Revenue, EBITDA (Earnings Before Interest, Taxes, Depreciation andAmortization), and Free Cash-Flow.

 

*Expiration of Stock Options*. The termof an option is set by the Compensation Committee of Hawaiian Telcom Holdco, Inc. (or the Board of Directors of Hawaiian Telcom Holdco, Inc. in the case of options granted to independent directors),provided the option term is not longer thanten years from the date of grant.

 

*Corporate Event*. Unless otherwise provided bythe terms of outstanding awards, if a corporate event (as definedin the Stock Option Plan to include any unusual or nonrecurring transaction or event)occurs, then the Compensation Committeeof Hawaiian Telcom Holdco, Inc. (or the Board of Directors of Hawaiian Telcom Holdco, Inc. in the case of options granted to independent directors) may take one or more of the following actions to prevent dilution or enlargement of benefits or potential benefits under the Stock Option Plan: (i) purchase outstanding options for anamount of cash, securities or property or replace outstanding options with other rights or property; (ii) terminate the award upon the occurrenceof such event; (iii) provide that only for a specified period of time prior to the occurrence of such event,options will be exercisable, notwithstanding any other provision in the Stock Option Plan or option award agreementto the contrary; (iv) provide that each award will be assumed or substituted for an equivalent awardby any successor or survivor corporation; or (v) make adjustments in the number and types of awards, the terms and conditions of awards and any performancecriteria included in awards.

 

88

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**Outstanding Equity Awards at Fiscal Year-End**

 

The following tablesummarizes the outstanding equity award holdings held by the Named ExecutiveOfficers at December 31, 2007. There was no public trading market for the common stock ofHawaiian Telcom Holdco, Inc. asof December 31, 2007.

 

**OutstandingEquity Awards at Fiscal Year-End**

 
| ** **                                           | ** ** | **Option Awards**                                           | ** ** | **Stock Awards**                                            | ** ** |
|------------------------------------------------------|------------|------------------------------------------------------------------|------------|------------------------------------------------------------------|------------|
| ** **                                           | ** ** | **Number of  Securities  Underlying  Unexercised  Options** | ** ** | **Number of  Securities  Underlying  Unexercised  Options** | ** ** | **Equity  Incentive  Plan  Awards:  Number of  Securities  Underlying  Unexercised  Unearned** | ** ** | **Option  Exercise** | ** ** | **Option** | ** ** | **Number  of  Shares  or Units  of  Stock  That  Have  Not** | ** ** | **Market  Value  of  Shares  or  Units  of  Stock  That  Have  Not** | ** ** | **Equity  Incentive  Plan  Awards:  Number  of  Unearned  Shares,  Units or  Other  Rights  That  Have Not** | ** ** | **Equity  Incentive  Plan  Awards:  Market  or Payout  Value of  Unearned  Shares,  Units or  Other  Rights  That  Have Not** | ** ** |
| **Name**                                             | ** ** | **(#)  Exercisable**                                             | ** ** | **(#)(6)  Unexercisable**                                        | ** ** | **Options  (#)** | ** ** | **Price  ($)** | ** ** | **Expiration  Date** | ** ** | **Vested  (#)** | ** ** | **Vested  ($)** | ** ** | **Vested  (#)** | ** ** | **Vested  ($)** | ** ** |
| **(a)**                                              | ** ** | **(b)**                                                          | ** ** | **(c)**                                                          | ** ** | **(d)** | ** ** | **(e)** | ** ** | **(f)** | ** ** | **(g)** | ** ** | **(h)** | ** ** | **(i)** | ** ** | **(j)** | ** ** |
| Michael S.  Ruley(1)                                 |       | 3,170                                                            |       | 1,057                                                            |       | 6,340 |   | 1,000 |   | 9/30/2014 |   | N/A |   | N/A |   | N/A |   | N/A |   |
| Chief Executive  Officer and Director                |       |                                                             |       |                                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                 |       |                                                             |       |                                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Paul H. Sunu(2)                                      |       |        0                      |       |    783                                            |       | 2,348 |   | 1,000 |   | 4/06/2008 |   | N/A |   | N/A |   | N/A |   | N/A |   |
| Senior Vice  President and Chief Financial Officer   |       |                                                             |       |                                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                 |       |                                                             |       |                                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Daniel P.  O’Brien(3)                           |       |      —                             |       |      —                             |       |      — |   |      — |   |            — |   |   — |   |   — |   |   — |   |   — |   |
| Senior Vice  President and Chief Financial Officer   |       |                                                             |       |                                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                 |       |                                                             |       |                                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| David A.  Torline(4)                                 |       |      —                             |       |      —                             |       |      — |   |      — |   |            — |   |   — |   |   — |   |   — |   |   — |   |
| Senior Vice  President and Chief Information Officer |       |                                                             |       |                                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                 |       |                                                             |       |                                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Alan M. Oshima.                                      |       |    587                                            |       |    548                                            |       | 1,996 |   | 1,000 |   | 5/01/2015 |   |   — |   |   — |   |   — |   |   — |   |
| Senior Vice  President and General Counsel           |       |        0                      |       |    196                                            |       |    587 |   | 1,000 |   | 5/21/2017 |   |   |   |   |   |   |   |   |   |
|                                                 |       |                                                             |       |                                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Michael T. Brown.                                    |       |    117                                            |       |      39                                 |       |    235 |   | 1,000 |   | 5/01/2015 |   |   — |   |   — |   |   — |   |   — |   |
| Senior Vice  President, Sales and                    |       |      19                                 |       |      78                                 |       |    294 |   | 1,000 |   | 3/07/2016 |   |   |   |   |   |   |   |   |   |
| Marketing                                            |       |      78                                 |       |    313                                            |       | 1,175 |   | 1,000 |   | 2/21/2017 |   |   |   |   |   |   |   |   |   |
|                                                 |       |                                                             |       |                                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Harvey A.  Plummer(5).                               |       |    704                                            |       |    235                                            |       | 1,409 |   | 1,000 |   | 4/20/2008 |   |   — |   |   — |   |   — |   |   — |   |
| Senior Vice  President, Engineering and Operations   |       |      39                                 |       |    157                                            |       |    587 |   | 1,000 |   | 4/20/2008 |   |   |   |   |   |   |   |   |   |
|                                                      |            |                                                                  |            |                                                                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)             Alloptions held by Mr. Ruley expired 30 days following his termination ofemployment effective February 4, 2008.

(2)             Alloptions held by Mr. Sunu expire 30 days following his termination ofemployment effective March 7, 2008.

(3)             Alloptions held by Mr. O’Brien expired 30 days following his termination ofemployment effective May 14, 2007.

(4)             Alloptions held by Mr. Torline expired 30 days following his termination ofemployment effective April 20, 2007.

(5)             Alloptions held by Mr. Plummer expire 30 days following his termination ofemployment effective March 21, 2008.

(6)             25% of each option issubject to time vesting (5% on each anniversary of the hire date or, in the caseof additional options awarded subsequent to date of hire, the award date), andthe other 75% is performance-based and becomes exercisable when certain EBITDA,revenue, and free cash flow targets are met (up to 15% each year beginning withthe year of grant). The grant dates for these options are: Mr. Ruley -10/01/2004, Mr. Sunu - 5/22/2007, Mr. Oshima - 5/02/2005 (for theoption expiring 5/01/2015) and 5/22/2007 (for the option expiring 5/21/2017), Mr. Brown- 5/02/2005 (for the option expiring 5/01/2015), 3/08/2006 (for the optionexpiring 3/07/2016), and 2/22/2007 (for the option expiring 2/21/2017), and Mr. Plummer- 5/02/2005 and 3/08/2006.

 

89

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**Option Exercises and Stock Vested**

 

There were no exercisesof stock options or vesting of stock by the Named Executive Officers during2007.

 

**Pension Benefits**

 

Our Named Executive Officers are eligible to participate in the Hawaiian Telcom Management Pension Plan asdescribed below. The following tablecontains information concerning pension benefits for the Named ExecutiveOfficers at December 31, 2007.

 

**PensionBenefits**

 
| **Name**                                                                   | ** ** | **Plan Name**                       | ** ** | **Number of  Years Credited**

**Service  (#)** | ** ** | **Present  Value of  Accumulated**

**Benefit  ($) (1)** | ** ** | **Payments  During Last  Fiscal Year  ($)**   | ** ** |
|----------------------------------------------------------------------------|------------|------------------------------------------|------------|-----------------------------------------------------------|------------|--------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| **(a)**                                                                    | ** ** | **(b)**                                  | ** ** | **(c)**                                                   | ** ** | **(d)**                                                            | ** ** | **(e)**                                                 | ** ** |
| Michael S. Ruley  Chief Executive Officer and Director                     |       | Hawaiian Telcom  Management Pension Plan |       | 1.9                                                       |       | 22,780                                                             |       |          0 |       |
|                                                                       |       |                                     |       |                                                      |       |                                                               |       |                                                    |       |
| Paul H. Sunu  Senior Vice President and Chief Financial  Officer           |       | Hawaiian Telcom  Management Pension Plan |       |    0                                       |       |          0            |       |          0 |       |
|                                                                       |       |                                     |       |                                                      |       |                                                               |       |                                                    |       |
| Daniel P. O’Brien  Senior Vice President and Chief Financial  Officer |       | Hawaiian Telcom  Management Pension Plan |       |  —                                              |       |        —                   |       | 26,589                                                  |       |
|                                                                       |       |                                     |       |                                                      |       |                                                               |       |                                                    |       |
| David A. Torline  Senior Vice President and Chief Information  Officer     |       | Hawaiian Telcom  Management Pension Plan |       |  —                                              |       |        —                   |       | 26,595                                                  |       |
|                                                                       |       |                                     |       |                                                      |       |                                                               |       |                                                    |       |
| Alan M. Oshima.  Senior Vice President and General Counsel                 |       | Hawaiian Telcom  Management Pension Plan |       | 1.9                                                       |       | 27,156                                                             |       |          0 |       |
|                                                                       |       |                                     |       |                                                      |       |                                                               |       |                                                    |       |
| Michael T. Brown  Senior Vice President, Sales and Marketing               |       | Hawaiian Telcom  Management Pension Plan |       | 1.9                                                       |       | 19,273                                                             |       |          0 |       |
|                                                                       |       |                                     |       |                                                      |       |                                                               |       |                                                    |       |
| Harvey A. Plummer  Senior Vice President, Engineering and  Operations      |       | Hawaiian Telcom  Management Pension Plan |       | 1.9                                                       |       | 27,130                                                             |       |          0 |       |

 

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(1)          The Hawaiian TelcomManagement Pension Plan is a cash balance plan, therefore, no assumptions areused to determine the present value, and the amounts shown in this column arethe total cash balances of the Named Executive Officers’ accounts under thePlan as of December 31, 2007.

 

The Hawaii Telcom Management Pension Plan is anoncontributory, tax-qualified pension plan for salaried employees that provides for distribution of benefits in alump sum or an annuity, at the participant’s election. Pension benefits under this plan are calculated using a cash balance formula that provides for paycredits equal to four to seven percent(depending on age and service) of annual eligible pay up to the IRS limit on compensation ($230,000 in 2008).

 

90

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Priorto the freezing of the plan as described below, the pay credits accrued to participants’accounts on a monthly basis. Eligible pay included base salary, certain sales commissions and bonuses, certain short term incentive pay, differentials, premiums,single sum merit payments, corporate profit sharing awards, and any back pay awards. The amounts do not give effect tosocial security offsets.

 

Additionally,monthly interest credits are made to theparticipant’s account balance basedupon the prevailing market yields on certain U.S. Treasury obligations. In orderto record these pay and interest credits, the plan administratormaintains a hypothetical account balance for each participant.

 

TheHawaii Telcom Management Pension Plan was “frozen” effective April 1,2007.  As a result, plan participants donot earn any additional contributions to their cash balance accounts followingthat date, and the plan is closed to employees hired on or after thatdate.  Participants became 100% vested intheir pension benefits accrued through April 1, 2007, and will continue toearn interest credits on account balances as long as such balances remain inthe plan.

 

**Nonqualified Deferred Compensation**

 

None of the Named Executive Officers participate in orhave account balances in a non-qualified defined contribution plan or otherdeferred compensation plans maintained by the Company.

 

**Potential Payments on Termination orChange in Control**

 

Theemployment agreement of each Named Executive Officer provides that upon termination of the executive’s employment, he will be entitled to receive the sumof his unpaid annual base salary through the date of termination, and bonus if declaredor earned but not yet paid, any unpaidexpenses, any unpaid accrued vacation pay, andany amount arising from hisparticipation in, or benefits under, any of our employee benefits plans, programs or arrangements. The quantities stated below assumetermination as of December 31, 2007 unless the executive is no longeremployed by the Company, in which case the stated quantities are the amountsactually paid or estimated to be paid.

 

Upon terminationof Mr. Ruley’s employment effective February 4, 2008, hereceived certain amounts under the terms of a severance agreement dated as of February 22, 2008 (total of$1,235,112), consisting of a lump sum payment of $1,117,272 equivalent to two times annual base salary, a COLA paymentfor 2007 ($71,340), a lump sum payment withrespect to accrued but unused personal travel airfare ($20,000), reimbursementof attorney’s fees ($4,500), and, fortwelve months following termination, continued coverage under all of our group health benefit plans in whichhe and any of his dependents wereentitled to participate immediatelyprior to termination ($22,000).  In addition, Mr. Ruley is entitled toreimbursement for relocation expenses back to the U.S. mainland and up to a sixpercent real estate broker commission on the sale of his Hawaii home, togetherwith a tax gross-up amount such that, after payment by him of all income taxes imposed on the reimbursement andthe tax gross-up amount, he wouldretain an amount equal to the original reimbursement.

 

Upon termination of Mr. Sunu’s employment effectiveFebruary 28, 2008, he did not receive any payments under hisemployment agreement as a result of the voluntary termination, other than forhousing allowance through the end of April 2008 together with a tax gross-up amount on the housing allowance payments($18,500) and salary continuation through the end of April 2008($52,000), totaling $70,500.

 

Upon termination of Mr. O’Brien’s employmenteffective May 14, 2007, he received the amounts to which he wasentitled under the terms of his employment agreement for termination without cause(total of $912,969), consisting of alump sum payment of his pro-rated target level bonus ($182,800), reimbursement of relocation expenses togetherwith a tax gross-up amount on the reimbursement ($344,169), and, for twelvemonths following termination,continuation of his base salary ($365,600)and continued coverage under all of our grouphealth benefit plans in which he andany of his dependents were entitled to participate immediately prior to termination ($20,400).

 

Upon termination of Mr. Torline’s employmenteffective April 20, 2007, he received the amounts to which he wasentitled under the terms of his employment agreement for termination without cause(total of $672,025), consisting of alump sum equal to his base salary fortwelve months ($370,400), a lump sum bonus payment ($200,000), continuedhousing allowance for seven months together with a tax gross-up amount on the housingallowance payments ($78,609), reimbursement of his relocation expenses togetherwith a tax gross-up amount on the reimbursement ($7,581), and, for twelvemonths following termination, continued coverage under all of our group healthbenefit plans in which he andany of his dependents were entitled to participate immediately prior to termination ($15,435).

 

91

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Upon termination of Mr. Oshima’s employment either by us without cause or by him for good reason,he is entitled, under the terms of his employment agreement, to continueto receive his base salary for six monthsfollowing termination ($156,000) andcontinue to have coverage for six months under all of our group health benefitplans in which he and any of his dependents were entitled to participateimmediately prior to termination($5,572), or a total of $161,572. The agreement also provides that, upon termination of Mr. Oshima’s employment due to his death or disability, he or his estate shall be entitled to six monthsof his base salary ($156,000) and the pro rata portion of his annualbonus, to be determined in good faith by our Compensation Committee.

 

Upon termination of Mr. Brown’s employment either by us without cause or by him for good reason,he is entitled, under the terms of his employment agreement, to continueto receive his base salary for six monthsfollowing termination ($114,750).

 

Upon termination of Mr. Plummer’s employmenteffective March 21, 2008, he is entitled to receive, subject tocertain conditions, certain amounts under the terms of his employment agreement for termination without cause (total of $162,766), consisting of,  for six months following termination, continuation of his basesalary ($156,000) and continued coverage under all of our group healthbenefit plans in which he andany of his dependents were entitled to participate immediately prior to termination ($6,766).

 

Eachemployment agreement prohibits the executive from competing withus during the term of his employment and for one year following the termination of his employment or the expiration of his term of employment, whichever is longer. Each employment agreement also places restrictions on the dissemination by the executive of proprietary information and establishes our exclusiveproperty right in intellectualproperty directly related to the Company which is discovered,invented or originated by the executiveduring his term of employment.

 

**Director Compensation**

 

Directorswho are employed either by us or byCarlyle are not separately compensated for their service as directors.Independent directors receive an annualcash retainer of $50,000 and anadditional $5,000 if also serving asChairperson of a Committee of the Board of Directors. The independent directors also receive anattendance fee of $1,500 per Board meeting attended in person and, if longer than three hours, $1,000 per Board meeting attendedtelephonically. In addition, we granted non-qualified stock optionsto purchase shares of common stock of Hawaiian Telcom Holdco, Inc. to eachindependent director upon commencement of service pursuant to our stock option plan. The exercise price per sharefor these options is greater than or equal tothe fair market value of the common stock of Hawaiian Telcom Holdco, Inc. on the grant date, and each option will expire 10 yearsfrom the date of grant, or earlier if the optionee ceasesto be a director. Each option currently outstanding becomes exercisable in equalannual installments through 2010, beginning one year after the grant date.

 

92

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The following table sets forth a summary of the compensation we paid to our directors during 2007.

 

**Director Compensation**

 
| **Name**                   | ** ** | **Fees Earned  or Paid  in Cash  ($)**   | ** ** | **Stock  Awards  ($)** | ** ** | **Option  Awards  ($)** | ** ** | **Non-Equity  Incentive  Plan  Compensation  ($)** | ** ** | **Change in  Pension  Value  and  Nonqualified  Deferred  Compensation  Earnings** | ** ** | **All  Other  Compensation  ($)** | ** ** | **Total  ($)**                                          | ** ** |
|----------------------------|------------|---------------------------------------------------------|------------|------------------------|------------|-------------------------|------------|----------------------------------------------------|------------|-----------------------------------------------------------------------------------------|------------|-----------------------------------|------------|---------------------------------------------------------|------------|
| **(a)**                    | ** ** | **(b)**                                                 | ** ** | **(c)**                | ** ** | **(d)**                 | ** ** | **(e)**                                            | ** ** | **(f)**                                                                                 | ** ** | **(g)**                           | ** ** | **(h)**                                                 | ** ** |
| Daniel F. Akerson          |       |          0 |       | —                 |       |    0     |       | —                                             |       | —                                                                                  |       | 0                                 |       |          0 |       |
| James A. Attwood, Jr. |       |          0 |       | —                 |       |    0     |       | —                                             |       | —                                                                                  |       | 0                                 |       |          0 |       |
| Matthew P. Boyer           |       |          0 |       | —                 |       |    0     |       | —                                             |       | —                                                                                  |       | 0                                 |       |          0 |       |
| Walter A. Dods, Jr.   |       | 56,000                                                  |       | —                 |       |    0     |       | —                                             |       | —                                                                                  |       | 0                                 |       | 56,000                                                  |       |
| Stephen C. Gray            |       | 56,000                                                  |       | —                 |       | 9,734(1)                |       | —                                             |       | —                                                                                  |       | 0                                 |       | 65,734                                                  |       |
| William E. Kennard         |       |          0 |       | —                 |       |    0     |       | —                                             |       | —                                                                                  |       | 0                                 |       |          0 |       |
| Raymond A. Ranelli         |       | 60,500                                                  |       | —                 |       |    0     |       | —                                             |       | —                                                                                  |       | 0                                 |       | 60,500                                                  |       |

 

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(1) Represents the dollar value recognized for financial statement reportingpurposes for the fiscal year identified in column (b) in accordance withSFAS No. 123R. The assumptions used in this calculation are set forth inNote 13 to the Company’s consolidated financial statements included inthis annual report on Form 10-K. The grant date fair value of the optionis $62,800. The aggregate number of option shares outstanding at year-end is157.

 

**CompensationCommittee Interlocks and InsiderParticipation**

 

The current members of our Compensation Committee are Messrs. Kennard (Chairman),Attwood, Boyer, and Dods. None of the members of our Compensation Committeeserves, or has served, as an officer or employee ofthe Company. None of our executiveofficers currently serves, or in the past year has served, as a member of the Board of Directors orCompensation Committee of any entity thathas one or more executive officers who serve on our Board ofDirectors or Compensation Committee. Messrs. Kennard, Attwood, andBoyer are associated with Carlyle. Affiliates of Carlyle control a majority of the common stock of Hawaiian Telcom Holdco, Inc. and therefore have the power to control our affairs and policies. In addition, Carlyle and its affiliatesentered into a management agreement with us relating to the provision ofcertain financial and strategic advisory services and consulting services. See Item 13, “Certain Relationships and Related Transactions, and Director Independence.”

 

**Item 12. Security Ownership of Certain Beneficial Owners andManagement and Related Stockholder Matters**

 

All ofour common stock is held by Hawaiian Telcom Holdco, Inc. and its address is c/o TheCarlyle Group, 520 Madison Avenue, 41st Floor, New York, NY 10022. The following table sets forthinformation with respect to thebeneficial ownership of the common stock of Hawaiian Telcom Holdco, Inc., as of March 15, 2008, by:

 

·                  each person that is a beneficialowner of more than 5% of the commonstock;

 

·                  each of our directors and Named Executive Officers; and

 

·                  all of our directors and executive officers as a group.

 

The amounts and percentages of common stock beneficially owned are reported on the basis ofregulations of the SEC governing the determination of beneficial ownership of securities. Under the rules of the SEC, a person is deemed to be a “beneficial owner” of a security if that person has or sharesvoting power, which includes the power to vote or direct the voting of a security, or investment power, which includes thepower to dispose ofor to direct the disposition of a security. A person is also deemed tobe a beneficial owner of any securities of which that person has a right to acquire beneficial ownership within 60 days. Securities that can be so acquired are deemed to be outstanding for purposes of computing such person’sownership percentage, but not for purposes of computing any other person’s percentage. Under these rules, more thanone person may be deemed a beneficial owner of the same securities and a personmay be deemed to be a beneficial owner of securities as to whichsuch person has no economic interest.

 

93

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Except as otherwiseindicated in these footnotes, each ofthe beneficial owners listed has, to our knowledge, sole voting andinvestment power with respect to the indicated shares of common stock.

 
| ** **                                                             | ** ** | **Beneficial Ownership of Holdings**                       | ** ** |
|------------------------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|
| **Name of Beneficial Owner**                            | ** ** | **Number of  Shares of  Common Stock**                     | ** ** | **Percentage of  Outstanding  Common Stock** | ** ** |
| TCG Holdings,  L.L.C. (1)(2)                                      |       |  428,000                                                             |       | 100 |   |
| Michael S. Ruley (4)                                              |       |          —              |       |  — |   |
| Paul H. Sunu (3) (4)                                              |       |             0 |       |     0 |   |
| Daniel P.  O’Brien (4)                                       |       |          —              |       |  — |   |
| David A. Torline (4)                                              |       |          —              |       |  — |   |
| Alan M. Oshima (3) (4)                                            |       |        743                             |       |     * |   |
| Michael T. Brown  (3) (4)                                         |       |        234                             |       |     * |   |
| Harvey A.  Plummer (3) (4)                                   |       |        782                             |       |     * |   |
| Daniel F.  Akerson (5)                                                 |       |          —              |       |  — |   |
| James A.  Attwood, Jr. (5)                                   |       |          —              |       |  — |   |
| Matthew P. Boyer (5)                                              |       |          —              |       |  — |   |
| Walter A.  Dods, Jr.  (3) (6)                                |       |          117                 |       |     * |   |
| Stephen C. Gray (3) (4)                                           |       |           39            |       |     * |   |
| William E.  Kennard (5)                                           |       |          —              |       |  — |   |
| Raymond A.  Ranelli (3) (4)                                  |       |          117                 |       |     * |   |
| All executive  officers and directors as a group (10 persons) (3) |       |       2,045                                 |       |     * |   |

 

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*Signifies less than 1%.

(1)                  Sharesshown as beneficially owned by TCG Holdings, L.L.C. are held directly byCarlyle Partners III Hawaii, L.P., CP III Coinvestment, L.P. and Carlyle HawaiiPartners, L.P., which we collectively refer to as the Carlyle Funds. TC Group,L.L.C. exercises investment discretion and control over the shares indirectlyheld by each of the Carlyle Funds through its indirect subsidiary TC Group III,L.P., which is the sole general partner of each the Carlyle Funds. TCGHoldings, L.L.C. is the sole managing member of TC Group, L.L.C. TC GroupL.L.C. is the sole managing member of TC Group III, L.L.C. TC Group III, L.L.C.is the sole general partner of TC Group III, L.P. TCG Holdings, L.L.C., aDelaware limited liability company, in the capacity as sole managing member ofTC Group, L.L.C., exercises investment discretion and control of the sharesbeneficially owned by TC Group, L.L.C. TCG Holdings, L.L.C. is managed by athree-person managing board, and all board action relating to the voting ordisposition of these shares requires approval of a majority of the board. Themembers of the managing board are William E. Conway, Jr., Daniel A. D’Anielloand David Rubenstein, all of whom disclaim beneficial ownership of theseshares.

(2)                  Eachof Carlyle Partners III Hawaii, L.P., CP III Coinvestment, L.P. and CarlyleHawaii Partners, L.P. has an address c/o The Carlyle Group, 520 Madison Avenue,41st Floor, New York, New York 10022.

(3)                  Representsshares of common stock that are issuable upon the exercise of options or willbecome vested within 60 days of March 15, 2008.

(4)                  Thebusiness address for Michael S. Ruley, Paul H. Sunu, Daniel P. O’Brien,David A. Torline, Alan M. Oshima, Michael T. Brown, Harvey A. Plummer, StephenC. Gray, and Raymond A. Ranelli is c/o General Counsel, Hawaiian TelcomCommunications, Inc., 1177 Bishop Street, Honolulu, Hawaii 96813.

(5)                  Thebusiness address for each such person is c/o The Carlyle Group 520 MadisonAvenue, 41st Floor, New York, New York 10022.

(6)                  Thebusiness address for such person is c/o First Hawaiian Bank, 999 Bishop Street,Suite 2828, Honolulu HI 96813.

 

**Securities Authorized for Issuance Under Equity CompensationPlans**

 

We donot have any compensation plans underwhich our equity securities are authorized for issuance.

 

94

----

 

**Item 13. CertainRelationships and RelatedTransactions, and Director Independence**

 

The Company’s Code ofBusiness Conduct requires employees to disclose any actual or perceivedconflict of interest and any material transaction that could be expected togive rise to a conflict of interest, including a potential related partytransaction. Any potential conflict of interest must be approved by the ChiefExecutive Officer, or if the conflict of interest involves a material amount,by the Board of Directors. Directors also are required, pursuant to the Code ofConduct for the Directors of the Company, to disclose any situation thatinvolves, or may reasonably be expected to involve, a conflict of interest withthe Company.  Such disclosure must bemade promptly to the Chairman of the Nominating and Governance Committee.  In addition, the Charter of the AuditCommittee requires the Audit Committee to review reports and disclosures ofrelated party transactions.

 

**ServicesAgreement**

 

On February 4, 2008, the Company entered into aServices Agreement with Stephen F. Cooper, Kevin J. Nystrom and Kroll ZolfoCooper LLC (KZC) pursuant to which Messrs. Cooper and Nystrom and KZCperform management services for the Company.  The retention of KZCincludes the Company’s retention of Mr. Cooper as Chief Executive Officerof the Company and Mr. Nystrom as Chief Operating Officer of theCompany.  Pursuant to the terms of the Services Agreement, Messrs. Cooperand Nystrom have agreed to devote approximately 75% of their working time andefforts to the business and affairs of the Company and its subsidiaries. KZC also will assign associate directors of KZC to serve in various capacitieswith the Company and to perform other services required of KZC or the Companyunder the Services Agreement.  The Company has agreed to pay KZC a monthlyfee of $600,000 for the services of Messrs. Cooper and Nystrom and anyassociate directors and a success fee based upon improvements in the Company’searnings before interest, taxes, depreciation and amortization (EBITDA) fromactual results for the 12-month period ending December 31, 2007,calculated as a sliding scale percentage of the amount of the improvement inEBITDA.  The term of the Services Agreement continues on a month-to-monthbasis until terminated by either party at the end of any month upon writtennotice to the other party given at least ten days prior to the end of suchmonth.

 

**Management Agreement**

 

In connection with the 2005 Acquisition, weentered into a management consulting agreement with Carlyle for the provision of certain financial and strategic advisory servicesand consulting services. Wehave agreed to pay Carlyle an annual monitoring fee equal to $1.0 million commencing in 2005 and continuing until such time as the agreement is terminated. In addition, wepaid Carlyle a one-time transaction fee for structuring the 2005 Acquisition and related transactions. The agreement also provides forreimbursement of fees and expensespaid by Carlyle for our account.In addition, under the terms of the agreement, Carlyle has the right toact, in return for additional fees, as our financial advisor or investment banker forany merger, acquisition, disposition,finance or the like if we decide we need to engage someone to fill such a role.We have agreed to indemnify Carlyle and its officers and representatives for losses relating to theservices contemplated by the agreementand the engagement of affiliates of Carlyle pursuant to, and theperformance by them of the services contemplated by, the agreement. Theagreement shall continue until such time as Carlyle or one or more of its affiliates collectivelycontrol, in the aggregate, less than 10% of our equity interests, or such earlier time as we and Carlyle may mutually agree.

 

**Management Rights Agreement**

 

Inconnection with the 2005 Acquisition, the Company, Hawaiian Telcom Holdco, Inc., affiliates of Carlyle, and our two directsubsidiaries (Hawaiian Telcom, Inc. and Hawaiian Telcom Services Company, Inc.), entered into a management rights agreement. Among other things, theCompany and Hawaiian Telcom Holdco, Inc.agreed to the following:

 

·                  to grant Carlyle the right to nominate onedirector to serve on the Board of Directors of Hawaiian Telcom Holdco, Inc.;

 

·                  to grant Carlyle the right to nominate one director to serve onthe Board of Directors of each of Hawaiian Telcom, Inc. andHawaiian Telcom Services Company, Inc.;

 

·                  to vote all of their beneficially owned voting securities in Hawaiian Telcom, Inc. and Hawaiian Telcom Services Company, Inc. to elect the director nominated by Carlyle toserve as a member of each of the Board of Directors of Hawaiian Telcom, Inc. and Hawaiian Telcom Services Company, Inc.; and

 

·                  to grant an irrevocable proxy to Carlyle to vote their voting securities in Hawaiian Telcom, Inc. and Hawaiian TelcomServices Company, Inc. to elect the director nominated by Carlyle to serve as a member of each of the Board ofDirectors of Hawaiian Telcom, Inc.and Hawaiian Telcom ServicesCompany, Inc.

 

95

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The term of the management rights agreementwith respect to our two direct subsidiaries will terminate when Carlyle and its affiliates collectively no longer beneficially own anyvoting securities of such subsidiaries. The termof the management rights agreementwith respect to Hawaiian Telcom Holdco, Inc.will terminate when Carlyle and its affiliates collectively no longer beneficially own any voting securities of Hawaiian Telcom Holdco, Inc.

 

**Director Independence**

 

The Board of Directorshas determined that Messrs. Ranelli and Dods are independent based on theNASDAQ rules.  In making suchdetermination, the Board considered the Company’s banking relationship withFirst Hawaiian Bank, of which Mr. Dods is the non-executive Chairman of the Board.

 

**Item 14. Principal Accountant Fees and Services**

 

Deloitte & Touche LLP serves as our independent registered publicaccounting firm. The following table presents fees for professional servicesrendered by Deloitte & ToucheLLP for the audit of our annual financial statementsfor the years ended December 31, 2007and December 31, 2006, and fees forother services rendered by Deloitte & Touche LLP during those periods.

 
| ** **              | ** ** | **(In Thousands)** | ** ** |
|-------------------------|------------|-------------------------|------------|
| ** **              | ** ** | **2007**                | ** ** | **2006** | ** ** |
| Audit  fees (1)         |       | $                       | 981        |   | $ | 807 |   |
| Audit-related  fees (2) |       | 425                     |       | 339 |   |
| Tax  fees (3)           |       | 6                       |       | 5 |   |
| Total  fees             |       | $                       | 1,412      |   | $ | 1,151 |   |

 

----

(1)           Audit fees consistedprincipally of fees for the audit of the annual financial statements andreviews of the quarterly financial statements, including fees relating to thefiling of our Registration Statement on Form S-4 in 2006.

(2)           Audit-related feesconsisted principally of fees for other audits (i.e., publishing division,benefit plans and insurance subsidiary audits) not included under audit fees,and fees for SOX readiness assistance.

(3)           Tax fees consistedprincipally of fees for tax compliance, tax advice and tax planning.

 

**Engagementof the Independent Registered Public Accounting Firm and Pre-approval Policy**

 

Inaccordance with its Charter, the Audit Committee has the sole authority andresponsibility to appoint, compensate, oversee, and if necessary, replace theindependent registered public accounting firm. The Audit Committee also has the sole authority to approve all auditengagement fees and terms.  In addition,the Audit Committee must pre-approve all services provided to the Company bythe Company’s independent registered public accounting firm.

 

Pursuant to Section 202 of the Sarbanes-Oxley Actof 2002, the Audit Committee pre-approved every engagement of the Company’sindependent registered public accounting firm, Deloitte & Touche LLP,to perform audit or non-audit services on behalf of the Company or any of itssubsidiaries since May 2005.

 

96

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**PART IV**

 

**Item 15. Exhibitsand Financial Statement Schedule**

 

(a) The following documents arebeing filed as part of this report.

 

1.               Consolidated Financial Statements. Financial statements and supplementary data requiredby this Item 15 are set forth at the pages indicated in Item 8above.

 

2.               Financial Statement Schedules. All schedules for which provision is made in theapplicable accounting regulations of the SEC are not required under the related instructions, are inapplicable or not material, or theinformation called for thereby isotherwise included in the financial statements and therefore has been omitted.

 

3.               Exhibits required by Item 601 of Regulation S-K.

 
| Exhibit No. | ** ** | **Description  of Exhibit**                                                                                                                                                                                                                                                                                                                                                                                  |
|------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                         |
| 2.1              |       | Amended  and Restated Agreement of Merger  among GTE Corporation, Verizon  HoldCo LLC and Hawaiian Telcom Holdco, Inc. and Hawaiian Telcom  Communications, Inc.’s, dated  as of April 8, 2005  (incorporated by reference to  Exhibit 2.1 on Hawaiian Telcom Communications, Inc. Form S-4, filed with the SEC on January 19, 2006).                                |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                         |
| 2.2              |       | Purchase  Agreement, dated as of April 29, 2007, by and among Hawaiian Telcom  Communications, Inc., Hawaiian Telcom Services Company, Inc. and  CBD Investor, Inc. (incorporated by  reference to Exhibit 10.1 on  Hawaiian Telcom Communications, Inc.’s Form 8-K, filed with the SEC on May 3, 2007).                                                        |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                         |
| 3.1              |       | Certificate of Incorporation  of Hawaiian Telcom Communications, Inc. (f/k/a Paradise MergerSub, Inc.), filed May 19,2004 (incorporated by  reference to Exhibit 3.1 on  Hawaiian Telcom Communications, Inc.’s  Form S-4, filed with the SEC on  January 19, 2006).                                                                                                 |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                         |
| 3.2              |       | Certificate of Amendment  to Certificate of Incorporation of Hawaiian Telcom Communications, Inc. (f/k/a Paradise MergerSub, Inc.), filed October 27, 2004 (incorporated by reference to Exhibit 3.2  on Hawaiian Telcom Communications, Inc.’s Form S-4, filed with the SEC on January 19, 2006).                                                                   |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                         |
| 3.3              |       | Certificate of Amendment  to Certificate of Incorporation of Hawaiian Telcom Communications, Inc. (f/k/a Hawaiian Telcom MergerSub, Inc.), filed March 1,  2005 (incorporated by reference to  Exhibit 3.3 on Hawaiian Telcom Communications, Inc.’s  Form S-4, filed with the SEC on January 19,  2006).                                                            |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                         |
| 3.4              |       | Certificate  of Correction to Certificate of Amendment to Certificate of Incorporation  of Hawaiian Telcom Communications, Inc. (f/k/a Hawaiian Telcom MergerSub, Inc.) filed October 27 2004, filed April 15, 2005 (incorporated by reference to Exhibit 3.4  on Hawaiian Telcom Communications, Inc.’s Form S-4, filed with the SEC on January 19, 2006).     |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                         |
| 3.5              |       | Bylaws of Hawaiian  Telcom Communications, Inc. (f/k/a Paradise MergerSub, Inc.),  adopted on May 19, 2004 (incorporated  by reference to Exhibit 3.12 on Hawaiian Telcom  Communications, Inc.’s Form S-4, filed with the SEC on  January 19, 2006).                                                                                                                |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                         |
| 3.6              |       | Certificate of Merger  of Verizon HoldCo LLC into Hawaiian Telcom Communications, Inc., filed  May 2, 2005 (incorporated by reference to Exhibit 3.5  on Hawaiian Telcom Communications, Inc.’s Form S-4, filed with the SEC on January 19, 2006).                                                                                                                        |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                         |
| 4.1              |       | Indenture with respect to the Senior Floating Rate Notes due 2013 and the 9.75% Senior Fixed Rate Notes due 2013 between Hawaiian Telcom  Communications, Inc. and U.S. Bank National Association, as trustee, dated May 2, 2005 (incorporated  by reference to Exhibit 4.1 on Hawaiian Telcom  Communications, Inc.’s Form S-4, filed with the SEC on January 19, 2006). |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                         |
| 4.2              |       | Form of  Senior Floating Rate Notes  due 2013 (included in exhibit 4.1) (incorporated by reference to  Exhibit 4.2 on Hawaiian Telcom Communications, Inc.’s Form S-4, filed with the SEC on  January 19, 2006).                                                                                                                                                               |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                         |
| 4.3              |       | Form of 9.75% Senior Fixed Rate Notes due 2013 (included in exhibit 4.1)  (incorporated by reference to Exhibit 4.3 on Hawaiian Telcom Communications, Inc.’s Form S-4, filed with the SEC on  January 19, 2006).                                                                                                                                                              |

 

97

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| 4.4    |   | Indenture  with respect to the 12 1/2% Senior Subordinated Notes due  2015 between Hawaiian Telcom  Communications, Inc. and U.S.  Bank National Association, as trustee, dated May 2, 2005 (incorporated by reference  to Exhibit 4.4 on Hawaiian  Telcom Communications, Inc.’s Form S-4, filed with the SEC on January 19, 2006).                                                                                                                                                                                  |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 4.5    |   | Form of  12 1/2% Senior  Subordinated Notes due 2015 (included in exhibit 4.4) (incorporated by reference to Exhibit 4.5 on Hawaiian Telcom Communications, Inc.’s  Form S-4, filed with the SEC on January 19,  2006).                                                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.1   |   | Amended  and Restated Credit Agreement, dated as of June 1, 2007, among Hawaiian Telcom Holdco, Inc., Hawaiian Telcom Communications, Inc.,  the lenders party thereto, Lehman Commercial Paper Inc., as administrative  agent and collateral agent, JPMorgan Chase Bank, N.A., as syndication agent,  and CoBank, ACB and Wachovia Bank, N.A., as co-documentation agents (incorporated by reference to  Exhibit 10.1 on Hawaiian Telcom  Communications, Inc.’s Form 8-K, filed with the SEC on June 7, 2007). |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.2   |   | Amended  and Restated Guarantee and Collateral  Agreement, dated as of June 1, 2007, among Hawaiian Telcom Holdco, Inc., Hawaiian Telcom  Communications, Inc., Hawaiian Telcom, Inc., Hawaiian Telcom Services Company, Inc. and Lehman Commercial  Paper Inc., as collateral agent  (incorporated by reference to  Exhibit 10.2 on Hawaiian Telcom Communications, Inc.’s Form 8-K, filed with the  SEC on June 7, 2007).                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.3   |   | Supply  Chain Services Agreement by and between Hawaiian Telcom Communications, Inc. (f/k/a Hawaiian Telcom MergerSub, Inc.) and Sprint North Supply Company, dated December 10, 2004 (incorporated by  reference to Exhibit 10.6 on Hawaiian Telcom Communications, Inc.’s Amendment No. 1 to Form S-4, filed with the SEC on March 31, 2006).                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.4   |   | Amendment One effective  April 28, 2005 to Supply Chain Services Agreement by and between  Hawaiian Telcom Communications, Inc. (f/k/a Hawaiian Telcom  MergerSub, Inc.) and Sprint North Supply Company, dated  December 10, 2004 (incorporated by reference  to Exhibit 10.31 on Hawaiian Telcom Communications, Inc.’s  Form 10-Q for the quarter ended June 30, 2006).                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.5   |   | Amendment Two effective  June 5, 2006 to Supply Chain Services Agreement by and between Hawaiian  Telcom Communications, Inc. (f/k/a Hawaiian Telcom MergerSub, Inc.)  and Sprint North Supply Company, dated December 10, 2004 (incorporated by reference to  Exhibit 10.32 on Hawaiian Telcom Communications, Inc.’s  Form 10-Q for the quarter ended June 30, 2006).                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.6   |   | Intellectual  Property Agreement between GTE  Corporation, Hawaiian Telcom Holdco, Inc., Verizon HoldCo LLC and Hawaiian Telcom Communications, Inc., dated May 2, 2005 (incorporated  by reference to Exhibit 10.11 on Hawaiian  Telcom Communications, Inc.’s Form S-4, filed with the SEC on January 19, 2006).                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.7   |   | Verizon  Proprietary Software License Agreement between GTE Corporation and Hawaiian Telcom Communications, Inc., effective  as of May 2, 2005 (incorporated by reference to Exhibit 10.12  on Hawaiian Telcom Communications, Inc.’s Form S-4, filed with the SEC on January 19, 2006).                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.8   |   | Amendment No. 1,  dated March 5, 2007, to the Verizon  Proprietary Software License Agreement between GTE Corporation and Hawaiian Telcom Communications, Inc., effective  as of May 2, 2005 (incorporated  by reference to Exhibit 10.17 on Hawaiian Telcom  Communications, Inc.’s Form 10-K, filed with the SEC on April 2,  2007).                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.9   |   | Management  Consulting Agreement between Hawaiian Telcom  Communications, Inc. and TC  Group, L.L.C., dated as of April 13, 2005 (incorporated by reference to Exhibit 10.22 on Hawaiian Telcom Communications, Inc.’s Form S-4, filed  with the SEC on January 19, 2006).                                                                                                                                                                                                                                            |

 

98

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| 10.10       |   | Management  Rights Agreement among Carlyle  Partners III Hawaii, L.P., CP III  Coinvestment, L.P., Carlyle Hawaii Partners, L.P., Hawaiian Telcom Holdco, Inc., Hawaiian Telcom Communications, Inc., Hawaiian Telcom, Inc.  and Hawaiian Telcom Services  Company, Inc. (incorporated by reference to Exhibit 10.23 on Hawaiian Telcom Communications, Inc.’s  Form S-4, filed with the SEC on January 19,  2006). |
|-------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.11       |   | Services Agreement  between Hawaiian Telcom Communications, Inc. and Stephen F. Cooper,  Kevin J. Nystrom and Kroll Zolfo Cooper LLC, dated as of February 4,  2008.                                                                                                                                                                                                                                                                                   |
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.12       |   | Production Agreement between Dataprose, Inc. and Hawaiian Telcom Communications, Inc., dated as of October 15, 2005 (incorporated by reference to Exhibit 10.24 on Hawaiian Telcom Communications, Inc.’s Form S-4, filed with the SEC on January 19, 2006).                                                                                                                                                             |
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.13       |   | Amendment  No. 1 to the Production Agreement  between Dataprose, Inc. and  Hawaiian Telcom Communications, Inc., dated February 1, 2006 (incorporated  by reference to Exhibit 10.29  on Hawaiian Telcom  Communications, Inc.’s Amendment No. 1 to Form S-4,  filed with the SEC on March 31,  2006).                                                                                                         |
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.14       |   | Sprint Wholesale Master Services Agreement between Sprint Communications Company L.P. and Hawaiian Telcom  Communications, Inc., dated December 5, 2005 (incorporated by reference to Exhibit 10.21 on Hawaiian Telcom Communications, Inc.’s  Amendment No. 1 to Form S-4, filed with the SEC on March 31, 2006).                                                                                                       |
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.15       |   | First Amendment dated  March 16, 2006 to Sprint Wholesale Master Services Agreement between  Sprint Communications Company L.P. and Hawaiian Telcom  Communications, Inc., dated December 5, 2005 (incorporated by reference to Exhibit 10.35 on Hawaiian  Telcom Communications, Inc.’s Form 10-Q for the quarter ended  June 30, 2006).                                                                                |
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.16       |   | Second Amendment dated  March 16, 2007 to Sprint Wholesale Master Services Agreement between  Sprint Communications Company L.P. and Hawaiian Telcom  Communications, Inc., dated December 5, 2005 (incorporated by reference to  Exhibit 10.45 on Hawaiian Telcom Communications, Inc.’s  Form 10-Q for the quarter ended March 31, 2007).                                                                              |
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.17       |   | Settlement Agreement  effective as of February 6, 2007, by and among Hawaiian Telcom  Communications, Inc, TC Group III, L.P., and BearingPoint, Inc. (incorporated by reference to  Exhibit 10.1 on Hawaiian Telcom Communications, Inc.’s  Form 8-K, filed with the SEC on  February 8, 2007).                                                                                                                         |
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.18       |   | Transition Agreement  effective as of February 6, 2007, by and between Hawaiian Telcom  Communications, Inc. and BearingPoint, Inc. (incorporated by reference to Exhibit 10.2 on Hawaiian  Telcom Communications, Inc.’s Form 8-K, filed with the SEC on February 8, 2007).                                                                                                                                             |
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.19       |   | Application Services  Agreement effective as of February 5, 2007, by and between Hawaiian  Telcom Communications, Inc. and Accenture LLP (incorporated by reference to Exhibit 10.3 on Hawaiian  Telcom Communications, Inc.’s Form 8-K, filed with the SEC on February 8, 2007).                                                                                                                                             |
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.20       |   | Amendment Number One effective as of March 12, 2007 to Application  Services Agreement effective as of February 5, 2007, by and between  Hawaiian Telcom Communications, Inc. and Accenture LLP.                                                                                                                                                                                                                                                  |
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.21† |   | Amendment Number Two effective as of July 19, 2007 to Application  Services Agreement effective as of February 5, 2007, by and between  Hawaiian Telcom Communications, Inc. and Accenture LLP.                                                                                                                                                                                                                                                   |
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.22† |   | Amendment Number Three effective as of August 13, 2007 to Application  Services Agreement effective as of February 5, 2007, by and between  Hawaiian Telcom Communications, Inc. and Accenture LLP.                                                                                                                                                                                                                                               |
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.23       |   | Amendment Number Four effective as of August 31, 2007 to Application  Services Agreement effective as of February 5, 2007, by and between  Hawaiian Telcom Communications, Inc. and Accenture LLP.                                                                                                                                                                                                                                                |

 

99

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| 10.24       |   | Amendment Number Five effective as of September 15, 2007 to Application  Services Agreement effective as of February 5, 2007, by and between  Hawaiian Telcom Communications, Inc. and Accenture LLP.                                                                                                                                         |
|-------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |   |                                                                                                                                                                                                                                                                                                                                                         |
| 10.25       |   | Amendment Number Six effective as of November 2, 2007 to Application  Services Agreement effective as of February 5, 2007, by and between  Hawaiian Telcom Communications, Inc. and Accenture LLP.                                                                                                                                            |
|        |   |                                                                                                                                                                                                                                                                                                                                                         |
| 10.26       |   | Amendment Number Seven effective as of November 15, 2007 to Application  Services Agreement effective as of February 5, 2007, by and between  Hawaiian Telcom Communications, Inc. and Accenture LLP.                                                                                                                                         |
|        |   |                                                                                                                                                                                                                                                                                                                                                         |
| 10.27† |   | Amendment Number Nine effective as of January 1, 2008 to Application  Services Agreement effective as of February 5, 2007, by and between  Hawaiian Telcom Communications, Inc. and Accenture LLP.                                                                                                                                            |
|        |   |                                                                                                                                                                                                                                                                                                                                                         |
| 10.28       |   | Extension of Amendment Number Nine to Application Services Agreement  effective as of March 31, 2008, by and between Hawaiian Telcom  Communications, Inc. and Accenture LLP.                                                                                                                                                                      |
|        |   |                                                                                                                                                                                                                                                                                                                                                         |
| 10.29† |   | Amendment Number Ten effective as of January 1, 2008 to Application  Services Agreement effective as of February 5, 2007, by and between  Hawaiian Telcom Communications, Inc. and Accenture LLP.                                                                                                                                             |
|        |   |                                                                                                                                                                                                                                                                                                                                                         |
| 10.30*      |   | Employment  Agreement, effective as of October 1, 2004, by and between Michael S. Ruley and Hawaiian Telcom Holdco, Inc. (f/k/a Paradise HoldCo, Inc.) (incorporated by reference to  Exhibit 10.27 on Hawaiian Telcom Communications, Inc.’s  Form S-4, filed with the SEC on January 19,  2006).                   |
|        |   |                                                                                                                                                                                                                                                                                                                                                         |
| 10.31*      |   | Employment  Agreement, effective as of September 29, 2004, by and between David A. Torline and Hawaiian Telcom Holdco, Inc. (f/k/a Paradise HoldCo, Inc.) (incorporated by  reference to Exhibit 10.28 on Hawaiian Telcom Communications, Inc.’s  Form S-4, filed with the SEC on January 19,  2006).                |
|        |   |                                                                                                                                                                                                                                                                                                                                                         |
| 10.32*      |   | Employment  Agreement, effective as of February 1,  2005, by and between Alan M. Oshima and  Hawaiian Telcom Communications, Inc. (f/k/a Hawaiian Telcom MergerSub, Inc.) (incorporated by reference to Exhibit 10.29 on Hawaiian Telcom Communications, Inc.’s Form S-4, filed with the SEC on January 19, 2006).   |
|        |   |                                                                                                                                                                                                                                                                                                                                                         |
| 10.33*      |   | Employment  Agreement, effective as of May 3,  2005, by and between Daniel P. O’Brien  and Hawaiian Telcom Communications, Inc.  (incorporated by reference to Exhibit 10.30 on Hawaiian Telcom Communications, Inc.’s  Form S-4, filed with the SEC on January 19,  2006).                                          |
|        |   |                                                                                                                                                                                                                                                                                                                                                         |
| 10.34*      |   | Employment Agreement, effective as of December 13, 2004, by and between Harvey A. Plummer and Hawaiian Telcom Communications, Inc. (f/k/a Hawaiian Telcom  MergerSub, Inc.) (incorporated by reference to Exhibit 10.31 on Hawaiian Telcom Communications, Inc.’s Form S-4, filed with the SEC on January 19, 2006). |
|        |   |                                                                                                                                                                                                                                                                                                                                                         |
| 10.35*      |   | Employment  letter agreement, effective as of March 8,  2007, by and between Robert F. Reich and  Hawaiian Telcom Communications, Inc. (incorporated by reference to Exhibit 10.1 on Hawaiian Telcom Communications, Inc.’s Form 8-K, filed with the SEC on March 28, 2007).                                              |
|        |   |                                                                                                                                                                                                                                                                                                                                                         |
| 10.36*      |   | Employment Agreement,  dated as of March 28, 2007, by and between Paul H. Sunu and Hawaiian  Telcom Communications, Inc.  (incorporated by reference to Exhibit 10.1  on Hawaiian Telcom  Communications, Inc.’s Form 8-K, filed with the SEC on April 2,  2007).                                                         |
|        |   |                                                                                                                                                                                                                                                                                                                                                         |
| 10.37*      |   | Mutual Release and  Severance Agreement dated as of February 22, 2008, by and between  Hawaiian Telcom Holdco, Inc. and Michael S. Ruley.                                                                                                                                                                                                          |
|        |   |                                                                                                                                                                                                                                                                                                                                                         |
| 10.38*      |   | Consulting Agreement  dated as of February 22, 2008, by and between Hawaiian Telcom  Holdco, Inc. and Michael S. Ruley.                                                                                                                                                                                                                            |

 

100

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| 10.39* |   | Stock Option Plan of Hawaiian Telcom Holdco, Inc., dated as of  November 8, 2005 (incorporated by reference to Exhibit 10.33 on Hawaiian Telcom Communications, Inc.’s Form S-4, filed with the SEC on January 19, 2006).                                                                       |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                               |
| 10.40* |   | Amendment No. 1,  dated September 22, 2006, to the Stock Option Plan of Hawaiian Telcom  Holdco, Inc. dated as of November 8, 2005 (incorporated by reference to Exhibit 10.1 on Hawaiian  Telcom Communications, Inc.’s Form 8-K, filed with the SEC on September 27, 2006).         |
|   |   |                                                                                                                                                                                                                                                                                                                               |
| 10.41* |   | Form of  Non-Qualified Stock Option Agreement pursuant to the Stock Option Plan of  Hawaiian Telcom Holdco, Inc. dated as of November 8, 2005 (incorporated by reference to  Exhibit 10.2 on Hawaiian Telcom Communications, Inc.’s  Form 8-K, filed with the SEC on  September 27, 2006). |
|   |   |                                                                                                                                                                                                                                                                                                                               |
| 12.1   |   | Statement  Regarding Computation of Ratio of  Earnings to Fixed Charges.                                                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                               |
| 21.1   |   | List of Subsidiaries  (incorporated by reference to  Exhibit 21.1 on Hawaiian Telcom  Communications, Inc.’s Form S-4, filed with the SEC on January 19, 2006).                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                               |
| 31.1   |   | Certification of Chief  Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of  2002.                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                               |
| 31.2   |   | Certification of  Interim Chief Financial Officer pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                               |
| 32.1   |   | Certification of Chief  Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of  2002.                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                               |
| 32.2   |   | Certification of  Interim Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002.                                                                                                                                                                                                                      |

 

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†  Portions of the exhibits have been omittedpursuant to a request for confidential treatment.

* Identifies each management contract or compensatory plan or arrangement.

 

101

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**SIGNATURES**

 

Pursuant to therequirements of Section 13 or 15(d) ofthe Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by theundersigned, thereunto dulyauthorized.

 
|                             | HAWAIIAN  TELCOM COMMUNICATIONS,  INC. |
|-----------------------------|----------------------------------------|
|                        |                                   |   |
| Dated:  March 28, 2008 | By:                                    | /s/  Stephen F. Cooper |
|                        |                                   | Stephen  F. Cooper |
|                        |                                   | Chief Executive Officer |

 

Pursuant to therequirements of the SecuritiesExchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:

 
| Signature                       | ** ** | **Title**                                     | ** ** | **Date**             |
|---------------------------------|------------|-----------------------------------------------|------------|----------------------|
|                            |       |                                          |       |                 |
| /s/  Stephen F. Cooper          |       | Chief  Executive Officer                      |       | March 28,  2008 |
| Stephen  F. Cooper              |       | (Principal  Executive Officer)                |       |                 |
|                            |       |                                          |       |                 |
| /s/  Robert F. Reich            |       | Interim  Chief Financial Officer              |       | March 28,  2008 |
| Robert  F. Reich                |       | (Principal  Financial and Accounting Officer) |       |                 |
|                            |       |                                          |       |                 |
| /s/  Daniel F. Akerson          |       | Director                                      |       | March 28,  2008 |
| Daniel  F. Akerson              |       |                                          |       |                 |
|                            |       |                                          |       |                 |
| /s/  James A. Attwood, Jr. |       | Director                                      |       | March 28,  2008 |
| James  A. Attwood, Jr.     |       |                                          |       |                 |
|                            |       |                                          |       |                 |
| /s/  Matthew P. Boyer           |       | Director                                      |       | March 28,  2008 |
| Matthew  P. Boyer               |       |                                          |       |                 |
|                            |       |                                          |       |                 |
| /s/  Walter A. Dods, Jr.   |       | Director                                      |       | March 28,  2008 |
| Walter  A. Dods, Jr.       |       |                                          |       |                 |
|                            |       |                                          |       |                 |
| /s/  Stephen C. Gray            |       | Director                                      |       | March 28,  2008 |
| Stephen C. Gray                 |       |                                          |       |                 |
|                            |       |                                          |       |                 |
| /s/  William E. Kennard         |       | Director                                      |       | March 28,  2008 |
| William  E. Kennard             |       |                                          |       |                 |
|                            |       |                                          |       |                 |
| /s/  Raymond A. Ranelli         |       | Director                                      |       | March 28,  2008 |
| Raymond  A. Ranelli             |       |                                          |       |                 |

 

102

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**SUPPLEMENTAL INFORMATIONTO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(D) OFTHE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT**

 

The registrant has not sent to itssole security holder an annual reportto security holders covering theregistrant’s last fiscal year or any proxystatement, form of proxy or other proxy soliciting material with respectto any annual or other meeting of security holders.

 

103

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