Forward-Looking Statements

This quarterly report contains forward-looking statements. These statements relate to future events or our future financial performance (including our anticipated cost structure) and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as "may," "should," "expects," "intends," "plans," "anticipates," "believes," "estimates," "predicts," "potential," "continues," "assumption" or the negative of these terms or other comparable terminology. These statements (including statements related to our anticipated cost structure) are only predictions. Actual events or results may differ materially from those anticipated or projected due to a number of factors. These factors include, but are not limited to:

†

†          our ability to execute our strategic plan;

†          failures in critical back-office systems and IT infrastructure;

†          our ability to operate as a stand-alone telecommunications provider;

†††††††††††††††††† our ability to close and integrate the pending Wavecom acquisition;

†          our ability to maintain arrangements with third-party service
providers;

†          changes in regulations and legislation applicable to providers of
telecommunications services;

†          changes in demand for our products and services;

†          technological changes affecting the telecommunications industry; and

†          our indebtedness could adversely affect our financial condition.

These and other factors may cause our actual results to differ materially from any forward-looking statement. Refer to our Annual Report on Form 10-K for a detailed discussion of risks that could materially adversely affect our business, financial condition or results of operations. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially adversely affect our business operations.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. These forward-looking statements are made as of the date of issuance of these quarterly condensed consolidated financial statements, we assume no obligation to update or revise them or to provide reasons why actual results may differ.

We do not undertake any responsibility to release any revisions to these forward-looking statements to take into account events or circumstances that occur after the date of issuance of these quarterly condensed consolidated financial statements. Additionally, we do not undertake any responsibility to update you on the occurrence of any unanticipated events which may cause actual results to differ from those expressed or implied by the forward-looking statements contained in this quarterly report.

Background

In the following discussion and analysis of financial condition and results of operations, unless the context otherwise requires, "we," "us" or the "Company" refers, collectively, to Hawaiian Telcom Holdco, Inc. and its subsidiaries.

Segments and Sources of Revenue

We operate in two reportable segments (Wireline Services and Wireless) based on how resources are allocated and performance is assessed by our chief operating decision maker. Our chief operating decision maker is our Chief Executive Officer.

Wireline Services

The Wireline Services segment derives revenue from the following sources:

Local Voice Services - We receive revenue from providing local exchange telephone services. These revenues include monthly charges for basic service, local private line services and enhanced calling features such as voice mail, caller ID and 3-way calling.

Network Access Services - We receive revenue for access to our network for wholesale carrier data, business customer data including Dedicated Internet Access, switched carrier access and subscriber line charges imposed on end users. Switched carrier access revenue compensates us for origination, transport and termination of calls for long distance and other interexchange carriers.

Long Distance Services - We receive revenue from providing long distance services to our customers.

High-Speed Internet ("HSI") Services - We provide HSI to our residential and business customers.

Video Services - Our video services marketed as Hawaiian Telcom TV is an advanced entertainment service offered to customers in select areas.

Equipment and managed services - We provide installation and maintenance of customer premise equipment as well as managed service for customer telephone and IT networks.

Wireless

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

Wavecom Acquistion

On July 12, 2012, we entered into a share purchase agreement with Wavecom Solutions Corporation ("Wavecom") to acquire all outstanding shares for $13.0 million in cash with certain adjustments determined at the time of closing. Wavecom provides telecommunication services in the State of Hawaii which are complementary to our operations. After elimination of certain intercompany and non-recurring transactions, Wavecom's annual revenues are estimated at $7 million. After certain transition costs, we do not expect the acquisition to significantly impact our cost structure. Closing of this transaction is subject to regulatory approval which is expected to take 90 to 120 days.

Results of Operations for the Three and Six Months Ended June 30, 2012 and 2011

Operating Revenues

The following tables summarize our volume information as of June 30, 2012 and 2011, and our operating revenues for the three and six months ended June 30, 2012 and 2011. For comparability, we also present customer activity as of June 30, 2012 compared to March 31, 2012.

                               Volume Information



June 2012 compared to June 2011



                            June 30,   June 30,          Change
                              2012       2011     Number    Percentage

Voice access lines
Residential                  212,668    232,344   (19,676 )       -8.5 %
Business                     185,574    191,466    (5,892 )       -3.1 %
Public                         4,493      4,717      (224 )       -4.7 %
                             402,735    428,527   (25,792 )       -6.0 %

High-Speed Internet lines
Residential                   86,021     83,242     2,779          3.3 %
Business                      17,990     16,934     1,056          6.2 %
Wholesale                      1,122      1,173       (51 )       -4.3 %
                             105,133    101,349     3,784          3.7 %

Long distance lines
Residential                  131,082    142,416   (11,334 )       -8.0 %
Business                      75,763     77,775    (2,012 )       -2.6 %
                             206,845    220,191   (13,346 )       -6.1 %

Video
Subscribers                    6,354          -     6,354           NA
Homes Enabled                 50,149          -    50,149           NA

June 2012 compared to March 2012

                            June 30,   March 31,         Change
                              2012       2012      Number   Percentage

Voice access lines
Residential                  212,668     217,470   (4,802 )       -2.2 %
Business                     185,574     186,854   (1,280 )       -0.7 %
Public                         4,493       4,559      (66 )       -1.4 %
                             402,735     408,883   (6,148 )       -1.5 %

High-Speed Internet lines
Residential                   86,021      85,518      503          0.6 %
Business                      17,990      17,714      276          1.6 %
Wholesale                      1,122       1,126       (4 )       -0.4 %
                             105,133     104,358      775          0.7 %

Long distance lines
Residential                  131,082     133,648   (2,566 )       -1.9 %
Business                      75,763      76,197     (434 )       -0.6 %
                             206,845     209,845   (3,000 )       -1.4 %

Video
Subscribers                    6,354       3,866    2,488         64.4 %
Homes Enabled                 50,149      41,200    8,949         21.7 %

                   Operating Revenues (dollars in thousands)



For Three Months



                                   Three Months Ended
                                        June 30,                 Change
                                    2012        2011       Amount    Percentage

Wireline Services
Local voice services             $   35,730   $  36,690   $   (960 )       -2.6 %
Network access services
Business data                         4,791       4,562        229          5.0 %
Wholesale carrier data               15,457      15,892       (435 )       -2.7 %
Subscriber line access charge         9,756      10,043       (287 )       -2.9 %
Switched carrier access               2,251       2,475       (224 )       -9.1 %
                                     32,255      32,972       (717 )       -2.2 %
Long distance services                7,159       8,013       (854 )      -10.7 %
High-Speed Internet                   8,959       8,779        180          2.1 %
Video                                 1,035           -      1,035           NA
Equipment and managed services        6,380      10,689     (4,309 )      -40.3 %
Other                                 2,316       2,504       (188 )       -7.5 %
                                     93,834      99,647     (5,813 )       -5.8 %
Wireless                                855       1,097       (242 )      -22.1 %
                                 $   94,689   $ 100,744   $ (6,055 )       -6.0 %

Channel
Business                         $   39,766   $  44,392   $ (4,626 )      -10.4 %
Consumer                             34,044      34,384       (340 )       -1.0 %
Wholesale                            17,708      18,367       (659 )       -3.6 %
Other                                 3,171       3,601       (430 )      -11.9 %
                                 $   94,689   $ 100,744   $ (6,055 )       -6.0 %

For Six Months



                                   Six Months Ended
                                       June 30,                 Change
                                   2012        2011       Amount    Percentage

Wireline Services
Local voice services             $  71,427   $  74,078   $ (2,651 )       -3.6 %
Network access services
Business data                        9,552       8,926        626          7.0 %
Wholesale carrier data              31,634      32,679     (1,045 )       -3.2 %
Subscriber line access charge       19,592      20,263       (671 )       -3.3 %
Switched carrier access              4,635       5,041       (406 )       -8.1 %
                                    65,413      66,909     (1,496 )       -2.2 %
Long distance services              14,607      16,651     (2,044 )      -12.3 %
High-Speed Internet                 17,935      17,546        389          2.2 %
Video                                1,532           -      1,532           NA
Equipment and managed services      14,889      16,586     (1,697 )      -10.2 %
Other                                4,696       5,274       (578 )      -11.0 %
                                   190,499     197,044     (6,545 )       -3.3 %
Wireless                             1,764       2,206       (442 )      -20.0 %
                                 $ 192,263   $ 199,250   $ (6,987 )       -3.5 %

Channel
Business                         $  81,863   $  84,341   $ (2,478 )       -2.9 %
Consumer                            67,671      69,709     (2,038 )       -2.9 %
Wholesale                           36,269      37,720     (1,451 )       -3.8 %
Other                                6,460       7,480     (1,020 )      -13.6 %
                                 $ 192,263   $ 199,250   $ (6,987 )       -3.5 %

The operating revenue information above for 2012 includes additional detail not previously provided for 2011 including components of network access services revenue, television revenue, and equipment and managed services revenue. These changes were made to provide additional insight into our operations and to reflect the strategic emphasis on potential growth products such as business data and video. Certain reclassifications were made to the 2011 information to conform to the 2012 presentation. To provide further insight, we have provided revenue information by channel as well.

The decrease in local services revenues was caused primarily by the decline in voice access lines of 6.0%. Continued competition in the telecommunications industry has increasingly resulted in customers using technologies other than traditional phone lines for voice and data. Residential customers are increasingly moving local voice service to VoIP technology offered by cable providers, as well as using wireless services in place of traditional wireline phone service. Generally, VoIP technology offered by competitors is less expensive than traditional wireline phone service, requiring us to respond with more competitive pricing. Additionally, Competitive Local Exchange Carriers (CLECs) and our cable competitor continue to focus on business customers and selling services to our customer base.

In an effort to slow the rate of line loss, we are continuing retention and acquisition programs, and are increasingly focusing efforts on bundling of services. We have instituted various "saves" campaigns designed to focus on specific circumstances where we believe customer churn is controllable. These campaigns include targeted offers to "at risk" customers as well as other promotional tools designed to enhance customer retention. We are also continuing to emphasize win-back and employee referral programs. Additionally, we are intensifying our efforts relative to developing tools and training to enhance our customer service capability to improve customer retention.

Network access services revenue for the three and six months ended June 30, 2012 decreased as compared to the same periods in the prior year because certain wireless carriers disconnected lower bandwidth circuits replaced with new more efficient higher bandwidth circuits resulting in a $0.4 million and $1.0 million reduction in wholesale carrier data revenue. We anticipate the data volume and related revenue will increase in future periods as wireless carriers deploy their enhanced wireless networks. In addition, the impact of the decline in voice access lines is reflected in subscriber line access charges and switched carrier access revenue. These reductions were partially offset by growth in business data revenue.

The decrease in long distance revenue was primarily because of the decline in long distance lines and customers moving to wireless and VoIP based technologies for long distance calling.

HSI revenues increased when compared to the prior year primarily because an approximate 3.7% growth in our HSI subscribers ($0.3 million and $0.6 million of the increase in revenue for the three and six month periods, respectively) offset by the impact of certain promotional rates. We are continuing to focus on upgrading our network to expand the reach of our higher bandwidth premium services.

On July 1, 2011, we commercially launched our video service on the island of Oahu. We are deploying Hawaiian Telcom TV gradually to selected areas to ensure delivery of superior service and an ongoing excellent customer experience. We have initiated targeted marketing efforts resulting in subscriber penetration rates exceeding expectations. Our volume is anticipated to continue to ramp up as more homes become enabled for video service. We expect to expand both the availability and the capabilities of our Hawaiian Telcom TV service over the next several years through additional capital investment and innovation.

Equipment and managed services sales have decreased because of fewer sales and installations of customer premise equipment for certain large government customers during the three and six months ended June 30, 2012 compared to the same periods in the prior year. Revenue from equipment sales varies from period to period based on the volume of large installation projects. The volume of such projects in future periods is uncertain.

Wireless revenues decreased as we attempted to focus our marketing efforts on other segments of our business.

Operating Costs and Expenses

The following tables summarize our costs and expenses for the three and six months ended June 30, 2012 compared to the costs and expenses for the three and six months ended June 30, 2011 (dollars in thousands):

For Three Months



                                     Three Months Ended
                                          June 30,                       Change
                                     2012           2011          Amount       Percentage

Cost of revenues (exclusive
of depreciation and
amortization)                    $     39,432    $    41,960    $    (2,528 )        -6.0 %
Selling, general and
administrative expenses                26,994         30,382         (3,388 )       -11.2 %
Depreciation and amortization          17,354         15,212          2,142          14.1 %

                                 $     83,780    $    87,554    $    (3,774 )        -4.3 %

For Six Months



                                    Six Months Ended
                                        June 30,                      Change
                                  2012           2011          Amount       Percentage

Cost of revenues (exclusive
of depreciation and
amortization)                  $    80,231    $    82,530    $    (2,299 )        -2.8 %
Selling, general and
administrative expenses             56,020         60,518         (4,498 )        -7.4 %
Depreciation and
amortization                        33,942         30,517          3,425          11.2 %

                               $   170,193    $   173,565    $    (3,372 )        -1.9 %

The Company's total headcount as of June 30, 2012 was 1,345 compared to 1,382 as of June 30, 2011. Employee related costs are included in both cost of revenues and selling, general and administrative expenses.

Cost of revenues consists of costs we incur to provide our products and services including those for operating and maintaining our networks, installing and maintaining customer premise equipment, and cost of goods sold directly associated with various products. The decrease for the three and six months ended June 30, 2012 compared to the same period in the prior year was because of lower customer premise equipment costs of $4.4 million and $2.3 million, respectively, as a result of reduced customer premise equipment installations and revenue. In addition, for the three months ended June 30, 2012, this was offset by increased operational costs such as video content costs of $0.8 million with additional subscribers and electricity costs of $0.3 million.

Selling, general and administrative expenses include costs related to sales and marketing, information systems and other administrative functions. The decrease for the three and six months ended June 30, 2012 compared to the same period in the prior year was because of reduced labor costs on lower headcount of $0.9 and $3.4 million, respectively. In addition, in the second quarter of 2011, we incurred restructuring expense of $1.9 million included in selling, general and administrative expenses in conjunction with a cost reduction plan.

Depreciation and amortization increased because of new property additions placed into service.

Other Income and (Expense)

The following tables summarize other income (expense) for the three and six months ended June 30, 2012 and 2011 (dollars in thousands):

For Three Months



                              Three Months Ended
                                   June 30,                 Change
                               2012         2011      Amount    Percentage

Interest expense            $    (5,414 ) $ (6,235 ) $    821        -13.2 %
Interest income and other             6         17        (11 )      -64.7 %

                            $    (5,408 ) $ (6,218 ) $    810        -13.0 %

For Six Months



                                         Six Months Ended
                                             June 30,                 Change
                                         2012        2011       Amount    Percentage

Interest expense                       $ (11,400 ) $ (12,494 ) $  1,094         -8.8 %
Loss on early extinguishment of debt      (5,112 )         -     (5,112 )         NA
Interest income and other                     18          30        (12 )      -40.0 %

                                       $ (16,494 ) $ (12,464 ) $ (4,030 )       32.3 %

Interest expense decreased for the three and six months ended June 30, 2012 compared to the same periods in the prior year primarily because of the lower interest rates on the refinanced debt.

In connection with the refinancing of debt in the first quarter of 2012, we incurred a $5.1 million charge to income which consisted of the premium on the repayment of the old debt and certain refinancing costs.

Income Tax Benefit

A valuation allowance has been provided at June 30, 2012 and December 31, 2011 for our deferred tax assets because of the uncertainty as to the realization of such assets. We will continue to assess the recoverability of deferred tax assets and the related valuation allowance. To the extent that we generate taxable income in future years and it is determined that such valuation allowance is no longer required, the tax benefit of the remaining deferred tax assets will be recognized at such time.

Liquidity and Capital Resources

As of June 30, 2012, we had cash of $65.8 million. From an ongoing operating perspective, our cash requirements in 2012 consist of supporting the development and introduction of new products, our purchase of Wavecom, capital expenditure projects, pension funding obligations and other changes in working capital. A combination of cash-on-hand and cash generated from operating activities will be used to fund our cash requirements.

We have continued to take actions to conserve cash and improve liquidity. Efforts have also been taken to generate further operating efficiencies and focus on expense management. We have focused on improving operating results, including efforts to simplify product offerings, improve our customer service experience and increase our revenue enhancement activities. There can be no assurance that these additional actions will result in improved overall cash flow. We continue to have sizable retirement obligations for our existing employee base. Sustained declines in the value of pension trust assets and relatively high levels of pension lump sum benefit payments will increase the magnitude of future plan contributions.

Agreements with the Hawaii Public Utilities Commission and the debt agreements of Hawaiian Telcom Communications, Inc. limit the ability of our subsidiaries to pay dividends to the parent company and restrict the net assets of all of our subsidiaries. This can limit our ability to pay dividends to our shareholders. As the parent company has no operations, debt or other obligations, this restriction has no other immediate impact on our operations.

Cash Flows for Six Months Ended June 30, 2012 and 2011

Our primary source of funds continues to be cash generated from operations. We use the net cash generated from operations to fund network expansion and modernization. We expect that our capital spending requirements will continue to be financed through internally generated funds. We also expect to use cash generated in future periods for debt service. Additional debt or equity financing may be needed to fund additional development activities or to maintain our capital structure to ensure financial flexibility.

Net cash provided by operations amounted to $39.6 million for the six months ended June 30, 2012. Our cash flows from operations are impacted by our results of operations, changes in working capital and payments on certain long-term liabilities. Net cash provided by operations amounted to $31.0 million for the six months ended June 30, 2011. The increase in cash provided by operations was because of improved management of working capital.

Cash used in investing activities was comprised of $41.2 million and $35.4 million of capital expenditures for the six months ended June 30, 2012 and 2011, respectively. The level of capital expenditures for 2012 is expected to be comparable to 2011 as we invest in our network and systems to support new product introductions and to enable next-generation technologies.

Cash used in financing activities for the six months ended June 30, 2012 was related primarily to the refinancing of our debt. Cash provided by financing activities for the six months ended June 30, 2011 was related to proceeds from the sale of common stock under our warrant agreements.

Outstanding Debt and Financing Arrangements

As of June 30, 2012, we had outstanding $300.0 million in aggregate long-term debt. The term loan has a maturity date of 2017. We do not expect to generate the necessary cash flow from operations to repay the facility in its entirety by the maturity date and repayment is dependent on our ability to refinance the credit facility at reasonable terms. The ability to refinance the indebtedness at reasonable terms before maturity cannot be assured.

Contractual Obligations

. . .