Hawaiian Telcom Holdco, Inc.
Consolidated Statements of Income
(Dollars in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2013
|
|
2012
|
|
2011
|
|
Operating revenues
|
|
$
|
391,150
|
|
$
|
385,498
|
|
$
|
395,156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues (exclusive of depreciation and amortization)
|
|
|
163,749
|
|
|
160,226
|
|
|
159,822
|
|
Selling, general and administrative
|
|
|
114,875
|
|
|
108,508
|
|
|
120,390
|
|
Gain on sale of property
|
|
|
(6,546
|
)
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
77,301
|
|
|
70,908
|
|
|
63,806
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
349,379
|
|
|
339,642
|
|
|
344,018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
41,771
|
|
|
45,856
|
|
|
51,138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
(18,875
|
)
|
|
(22,183
|
)
|
|
(25,339
|
)
|
Loss on early extinguishment of debt
|
|
|
(3,660
|
)
|
|
(5,112
|
)
|
|
|
|
Interest income and other
|
|
|
34
|
|
|
59
|
|
|
65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense
|
|
|
(22,501
|
)
|
|
(27,236
|
)
|
|
(25,274
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before reorganization items and income tax provision (benefit)
|
|
|
19,270
|
|
|
18,620
|
|
|
25,864
|
|
Reorganization itemsexpense
|
|
|
|
|
|
|
|
|
1,050
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax provision (benefit)
|
|
|
19,270
|
|
|
18,620
|
|
|
24,814
|
|
Income tax provision (benefit)
|
|
|
8,782
|
|
|
(91,362
|
)
|
|
(1,341
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
10,488
|
|
$
|
109,982
|
|
$
|
26,155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.01
|
|
$
|
10.74
|
|
$
|
2.58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.95
|
|
$
|
10.32
|
|
$
|
2.41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used to compute net income per common share
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
10,337,339
|
|
|
10,242,573
|
|
|
10,147,561
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
11,093,931
|
|
|
10,660,647
|
|
|
10,843,542
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
50
Table of Contents
Hawaiian Telcom Holdco, Inc.
Consolidated Statements of Comprehensive Income (Loss)
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2013
|
|
2012
|
|
2011
|
|
Net income
|
|
$
|
10,488
|
|
$
|
109,982
|
|
$
|
26,155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss), net of tax
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding losses arising during period
|
|
|
(24
|
)
|
|
(3
|
)
|
|
(17
|
)
|
Retirement plan gain (loss)
|
|
|
38,459
|
|
|
11,490
|
|
|
(70,894
|
)
|
Net tax benefit (cost) on other comprehensive income
|
|
|
(14,701
|
)
|
|
17,581
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss), net of tax
|
|
|
23,734
|
|
|
29,068
|
|
|
(70,911
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$
|
34,222
|
|
$
|
139,050
|
|
$
|
(44,756
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
51
Table of Contents
Hawaiian Telcom Holdco, Inc.
Consolidated Balance Sheets
(Dollars in thousands, except per share information)
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2013
|
|
2012
|
|
Assets
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
49,551
|
|
$
|
66,993
|
|
Receivables, net
|
|
|
34,521
|
|
|
34,082
|
|
Material and supplies
|
|
|
15,939
|
|
|
11,352
|
|
Prepaid expenses
|
|
|
3,724
|
|
|
5,161
|
|
Deferred income taxes
|
|
|
8,146
|
|
|
5,727
|
|
Other current assets
|
|
|
2,851
|
|
|
2,181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
114,732
|
|
|
125,496
|
|
Property, plant and equipment, net
|
|
|
524,375
|
|
|
507,197
|
|
Intangible assets, net
|
|
|
40,225
|
|
|
39,075
|
|
Goodwill
|
|
|
12,104
|
|
|
1,569
|
|
Deferred income taxes
|
|
|
75,274
|
|
|
102,680
|
|
Other assets
|
|
|
11,305
|
|
|
9,075
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
778,015
|
|
$
|
785,092
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders' Equity
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
|
$
|
3,000
|
|
$
|
3,000
|
|
Accounts payable
|
|
|
40,228
|
|
|
36,351
|
|
Accrued expenses
|
|
|
18,787
|
|
|
20,537
|
|
Advance billings and customer deposits
|
|
|
16,122
|
|
|
15,185
|
|
Other current liabilities
|
|
|
6,412
|
|
|
3,961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
84,549
|
|
|
79,034
|
|
Long-term debt
|
|
|
291,679
|
|
|
292,410
|
|
Employee benefit obligations
|
|
|
80,321
|
|
|
132,004
|
|
Other liabilities
|
|
|
8,454
|
|
|
4,784
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
465,003
|
|
|
508,232
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 15)
|
|
|
|
|
|
|
|
Stockholders' equity
|
|
|
|
|
|
|
|
Common stock, par value of $0.01 per share, 245,000,000 shares authorized and 10,495,856 and 10,291,897 shares issued and outstanding at December 31,
2013 and 2012, respectively
|
|
|
105
|
|
|
103
|
|
Additional paid-in capital
|
|
|
167,869
|
|
|
165,941
|
|
Accumulated other comprehensive loss
|
|
|
(4,716
|
)
|
|
(28,450
|
)
|
Retained earnings
|
|
|
149,754
|
|
|
139,266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders' equity
|
|
|
313,012
|
|
|
276,860
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' equity
|
|
$
|
778,015
|
|
$
|
785,092
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
52
Table of Contents
Hawaiian Telcom Holdco, Inc.
Consolidated Statements of Cash Flows
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2013
|
|
2012
|
|
2011
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
10,488
|
|
$
|
109,982
|
|
$
|
26,155
|
|
Adjustments to reconcile net income to net cash provided by operating activities
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
77,301
|
|
|
70,908
|
|
|
63,806
|
|
Loss on early extinguishment of debt
|
|
|
3,660
|
|
|
5,112
|
|
|
|
|
Gain on sale of property
|
|
|
(6,546
|
)
|
|
|
|
|
|
|
Employee retirement benefits
|
|
|
(13,224
|
)
|
|
(11,933
|
)
|
|
(9,920
|
)
|
Provision for uncollectibles
|
|
|
3,455
|
|
|
716
|
|
|
2,940
|
|
Stock based compensation
|
|
|
2,736
|
|
|
1,872
|
|
|
2,135
|
|
Deferred income taxes
|
|
|
9,617
|
|
|
(90,827
|
)
|
|
|
|
Reorganization items
|
|
|
|
|
|
|
|
|
1,050
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
(3,409
|
)
|
|
(724
|
)
|
|
(2,930
|
)
|
Material and supplies
|
|
|
(4,587
|
)
|
|
(3,161
|
)
|
|
240
|
|
Prepaid expenses and other current assets
|
|
|
456
|
|
|
(1,109
|
)
|
|
4,039
|
|
Accounts payable and accrued expenses
|
|
|
(6,518
|
)
|
|
3,255
|
|
|
(6,058
|
)
|
Advance billings and customer deposits
|
|
|
138
|
|
|
424
|
|
|
(276
|
)
|
Other current liabilities
|
|
|
812
|
|
|
269
|
|
|
1,421
|
|
Other, net
|
|
|
2,582
|
|
|
1,676
|
|
|
(990
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities before reorganization items
|
|
|
76,961
|
|
|
86,460
|
|
|
81,612
|
|
Operating cash flows used by reorganization items
|
|
|
|
|
|
|
|
|
(2,393
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
76,961
|
|
|
86,460
|
|
|
79,219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(86,290
|
)
|
|
(77,713
|
)
|
|
(77,992
|
)
|
Acquisitions, net of cash acquired
|
|
|
(11,858
|
)
|
|
(8,343
|
)
|
|
|
|
Proceeds on sale of property
|
|
|
13,118
|
|
|
|
|
|
|
|
Proceeds on sale of investments
|
|
|
|
|
|
746
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(85,030
|
)
|
|
(85,310
|
)
|
|
(77,992
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
Repayment of debt including premium
|
|
|
(303,083
|
)
|
|
(306,750
|
)
|
|
|
|
Proceeds from borrowing
|
|
|
298,500
|
|
|
295,500
|
|
|
|
|
Loan refinancing costs
|
|
|
(3,442
|
)
|
|
(4,130
|
)
|
|
|
|
Proceeds from stock issuance
|
|
|
|
|
|
|
|
|
49
|
|
Repayments of capital lease
|
|
|
(542
|
)
|
|
(582
|
)
|
|
(582
|
)
|
Revolving loan refinancing costs
|
|
|
|
|
|
|
|
|
(253
|
)
|
Taxes paid related to net share settlement on equity awards
|
|
|
(806
|
)
|
|
(258
|
)
|
|
(25
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(9,373
|
)
|
|
(16,220
|
)
|
|
(811
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
(17,442
|
)
|
|
(15,070
|
)
|
|
416
|
|
Cash and cash equivalents, beginning of year
|
|
|
66,993
|
|
|
82,063
|
|
|
81,647
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
$
|
49,551
|
|
$
|
66,993
|
|
$
|
82,063
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
53
Table of Contents
Hawaiian Telcom Holdco, Inc.
Consolidated Statements of Changes in Stockholders' Equity
(Dollars in thousands, except share information)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
Accumulated
Other
Comprehensive
Income (Loss)
|
|
|
|
|
|
|
|
Additional
Paid-In
Capital
|
|
Retained
Earnings
|
|
Total
Stockholders'
Equity
|
|
|
|
Shares
|
|
Amount
|
|
Balance, January 1, 2011
|
|
|
10,135,063
|
|
$
|
101
|
|
$
|
162,169
|
|
$
|
13,393
|
|
$
|
3,129
|
|
$
|
178,792
|
|
Stock based compensation
|
|
|
|
|
|
|
|
|
2,135
|
|
|
|
|
|
|
|
|
2,135
|
|
Issuance of stock under warrant agreements
|
|
|
4,021
|
|
|
|
|
|
49
|
|
|
|
|
|
|
|
|
49
|
|
Common stock issued for stock compensation plans, net of shares withheld and withholding paid for employee taxes
|
|
|
51,442
|
|
|
1
|
|
|
(25
|
)
|
|
|
|
|
|
|
|
(24
|
)
|
For the year ended December 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,155
|
|
|
26,155
|
|
Other comprehensive loss, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
(70,911
|
)
|
|
|
|
|
(70,911
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2011
|
|
|
10,190,526
|
|
|
102
|
|
|
164,328
|
|
|
(57,518
|
)
|
|
29,284
|
|
|
136,196
|
|
Stock based compensation
|
|
|
|
|
|
|
|
|
1,872
|
|
|
|
|
|
|
|
|
1,872
|
|
Issuance of stock under warrant agreements
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for stock compensation plans, net of shares withheld and withholding paid for employee taxes
|
|
|
101,354
|
|
|
1
|
|
|
(259
|
)
|
|
|
|
|
|
|
|
(258
|
)
|
For the year ended December 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
109,982
|
|
|
109,982
|
|
Other comprehensive income, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
29,068
|
|
|
|
|
|
29,068
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2012
|
|
|
10,291,897
|
|
|
103
|
|
|
165,941
|
|
|
(28,450
|
)
|
|
139,266
|
|
|
276,860
|
|
Stock based compensation
|
|
|
|
|
|
|
|
|
2,736
|
|
|
|
|
|
|
|
|
2,736
|
|
Issuance of stock under warrant agreements
|
|
|
117,784
|
|
|
1
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
Common stock issued for stock compensation plans, net of shares withheld and withholding paid for employee taxes
|
|
|
86,175
|
|
|
1
|
|
|
(807
|
)
|
|
|
|
|
|
|
|
(806
|
)
|
For the year ended December 31, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,488
|
|
|
10,488
|
|
Other comprehensive income, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
23,734
|
|
|
|
|
|
23,734
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2013
|
|
|
10,495,856
|
|
$
|
105
|
|
$
|
167,869
|
|
$
|
(4,716
|
)
|
$
|
149,754
|
|
$
|
313,012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
54
Table of Contents
Hawaiian Telcom Holdco, Inc.
Notes to Consolidated Financial Statements
1. Description of Business
Business Description
Hawaiian Telcom Holdco, Inc. and subsidiaries (the "Company") is the incumbent local exchange carrier for the State of Hawaii
with an integrated telecommunications network. The Company offers a variety of telecommunication services to residential and business customers in Hawaii including local telephone, network access and
data transport, long distance, Internet, television and wireless phone service. The Company also provides communications equipment sales and maintenance, data center colocation and network managed
services.
The
communication services the Company provides are subject to regulation by the Public Utilities Commission of the State of Hawaii (HPUC) with respect to intrastate rates and services
and other matters, and the State of Hawaii Department of Commerce and Consumer Affairs with respect to television. Certain agreements with the HPUC limit the amount of dividends and other
distributions the Company may pay as well as place restrictions on certain transactions affecting the operations and capital structure of the Company. The Federal Communication Commission (FCC)
regulates rates that the Company charges long-distance carriers and other end-user subscribers for interstate access services and interstate traffic.
Organization
The Company has one direct wholly-owned subsidiary, Hawaiian Telcom Communications, Inc. which has two direct wholly-owned
subsidiariesHawaiian Telcom, Inc. and Hawaiian Telcom Services Company, Inc. Hawaiian Telcom, Inc. operates the regulated incumbent local exchange carrier and
Hawaiian Telcom Services Company, Inc. operates all other businesses.
2. Summary of Significant Accounting Policies
The accompanying consolidated financial statements of the Company have been prepared by the Company in accordance with accounting principles generally accepted in the United States of
America and pursuant to the rules and regulations of the U.S. Securities and Exchange Commission ("SEC") and, in the opinion of management, includes all adjustments necessary for a fair presentation
of the results of operations, comprehensive income (loss), financial position and cash flows for each period presented.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates.
Principles of Consolidation
The consolidated financial statements of the Company include the results of operations, financial position, and cash flows of Hawaiian
Telcom Holdco, Inc. and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
55
Table of Contents
Hawaiian Telcom Holdco, Inc.
Notes to Consolidated Financial Statements (Continued)
2. Summary of Significant Accounting Policies (Continued)
Revenue Recognition
Revenue is recognized when evidence of an arrangement exists, the earnings process is complete and collectibility is reasonably
assured. The prices for most services are filed in tariffs with the regulatory body that exercises jurisdiction over the services.
Basic
local service, enhanced calling features such as caller ID, special access circuits, long-distance flat rate calling plans, most data services, HSI, television, data center
colocation and wireless services are billed one month in advance. Revenue for these services is recognized in the month services are rendered. The portion of advance-billed services associated with
services that will be delivered in a subsequent period is deferred and recorded as a liability in advance billings and customer deposits.
Amounts
billed to customers for activating wireline service are deferred and recognized over the average customer relationship. The costs associated with activating such services are
deferred and recognized as an operating expense over the same period. Costs in excess of revenues are recognized as expense in the period in which activation occurs.
Revenues
for providing usage based services, such as per-minute long-distance service, access charges billed to long-distance companies for originating and terminating long-distance
calls on the Company's network and video on demand, are billed in arrears. Revenues for these services are based on actual rated usage and, where necessary, historical usage patterns, and are
recognized in the month services are rendered.
Universal
Service revenues are government-sponsored support received in association with providing service in mostly rural, high-cost areas. These revenues are typically based on
information provided by the Company and are calculated by the government agency responsible for administering the support program. These revenues are recognized in the period the service is provided.
Telecommunication
systems and structured cabling project revenues are recognized on a percentage completion basis, generally based on the relative portion of costs incurred to total
estimated costs of a project, except for short duration projects which are recognized upon completion of the project. Maintenance services are recorded when the service is provided.
With
respect to arrangements with multiple deliverables, the Company determines whether more than one unit of accounting exists in an arrangement. To the extent that the deliverables are
separable into multiple units of accounting, total consideration is allocated to the individual units of accounting based on their relative fair value, determined by the price of each deliverable when
it is regularly sold on a stand-alone basis. Revenue is recognized for each unit of accounting as delivered or as service is performed depending on the nature of the deliverable comprising the unit of
accounting.
Taxes Collected from Customers
The Company presents taxes collected from customers and remitted to governmental authorities on a gross basis, including such amounts
in the Company's reported operating revenues and selling, general and administrative expenses. Such amounts represent primarily Hawaii state general excise taxes and HPUC fees. Such taxes and fees
amounted to $7.4 million, $7.2 million and $6.8 million for the years ended December 31, 2013, 2012 and 2011, respectively.
56
Table of Contents
Hawaiian Telcom Holdco, Inc.
Notes to Consolidated Financial Statements (Continued)
2. Summary of Significant Accounting Policies (Continued)
Cash and Cash Equivalents
Cash and cash equivalents include cash and money market accounts with maturities at acquisition of three months or less. The majority
of cash balances at December 31, 2013 are held in one bank in demand deposit accounts.
Supplemental Non-Cash Investing and Financing Activities
Accounts payable included $14.2 million and $7.4 million at December 31, 2013 and 2012, respectively, for
additions to property, plant and equipment.
Receivables
The Company recognizes accounts receivable net of an allowance for doubtful accounts. The Company makes estimates of the
uncollectibility of its accounts receivable by specifically analyzing accounts receivable and historic bad debts, customer concentrations, customer creditworthiness, current economic trends and
changes in its customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. After multiple attempts at collection of delinquent accounts, the balance due is deemed
uncollectible and charged against the allowance.
Material and Supplies
Material and supplies which consist mainly of cable, supplies and replacement parts, are stated at the lower of cost, determined
principally by the average cost method, or net realizable value.
Property and Depreciation
Property, plant and equipment are carried at cost. Depreciation has been calculated using the composite remaining life methodology and
straight-line depreciation rates. The composite method depreciates the remaining net investment in telephone plant over remaining economic asset lives by asset category. This method requires periodic
review and revision of depreciation rates. The average economic lives utilized for assets recognized in conjunction with the Company's fresh-start accounting in October 2010 are as follows:
buildings18 years; cable and wire11 years; switching and circuit equipment3 years; and other property2 to 4 years. The
average economic lives for all other assets (i.e., primarily new
additions) are as follows: building34 years; cable and wire11 to 37 years; switching and circuit equipment6 to 15 years; and other
property5 to 17 years.
Software
The Company capitalizes the costs associated with externally acquired software for internal use. Project costs associated with
internally developed software are segregated into three project stages: preliminary project stage, application development stage and post-implementation stage. Costs associated with both the
preliminary project stage and post-implementation stage are expensed as incurred. Costs associated with the application development stage are capitalized. Software maintenance and training costs are
expensed as incurred. Capitalized software is generally amortized on a straight-line method basis over its useful life, not to exceed five years.
57
Table of Contents
Hawaiian Telcom Holdco, Inc.
Notes to Consolidated Financial Statements (Continued)
2. Summary of Significant Accounting Policies (Continued)
Goodwill and Other Intangible Assets
Goodwill and other indefinite-lived intangible assets are not amortized. Such assets are reviewed annually, or more frequently under
various conditions, for impairment. The goodwill impairment test involves a two-step process. The first step, identifying a potential impairment, compares the fair value of a reporting unit with its
carrying amount, including goodwill. If the carrying value of the reporting unit exceeds its fair value, the second step will need to be conducted. The second step, measuring the impairment loss,
compares the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. Any excess of the reporting unit goodwill carrying value over the respective implied fair
value is recognized as an impairment loss. The Company performs its annual impairment test during the fourth quarter, primarily using a market valuation and discounted cash flows methodology.
Intangible
assets with definite lives, including the value assigned to the customer base, are being amortized over the remaining estimated lives. For customer relationship intangibles,
amortization is calculated using a declining balance method in relation to estimated retention lives of acquired customers.
Impairment of Long-Lived Assets
The Company assesses 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 amount of an asset may not be recoverable. In such cases, if the sum of the expected cash flows, undiscounted and without
interest, resulting from use of the asset are less than the carrying amount, an impairment loss is recognized based on the difference between the carrying amount and the fair value of the assets.
Debt Issuance
Deferred financing costs, included in other assets on the consolidated balance sheet and original issue discount are amortized over the
term of the related debt issuance using the effective interest method.
Income Taxes
Deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and
liabilities at each balance sheet date using enacted tax rates expected to be in effect in the year the differences are expected to reverse. Valuation allowances are recognized to reduce deferred tax
assets to the amount that will more likely than not be realized.
The
Company recognizes interest and penalties related to unrecognized tax benefits within income tax expense in the accompanying consolidated statements of income.
Employee Benefit Plans
Pension and postretirement health and life insurance benefits earned during the year as well as interest on projected benefit
obligations are accrued currently. Actuarial gains and losses are amortized over the average remaining expected life of participants deemed inactive.
58
Table of Contents
Hawaiian Telcom Holdco, Inc.
Notes to Consolidated Financial Statements (Continued)
2. Summary of Significant Accounting Policies (Continued)
Maintenance and Repairs
The cost of maintenance and repairs, including the cost of replacing minor items not constituting substantial betterments, is charged
to expense as these costs are incurred.
Advertising
Advertising costs are expensed as incurred. Advertising expense amounted to $4.0 million, $4.2 million and
$4.4 million for the years ended December 31, 2013, 2012 and 2011, respectively.
Stock Based Compensation
The Company measures and recognizes the compensation expense for all share-based awards made to employees and directors based on
estimated fair values. The fair value of restricted stock units is generally based on share trading price on the date of grant. The fair value of market-based stock awards is estimated using a
statistical pricing model as of the date of grant.
Because share-based compensation expense is based on awards ultimately expected to vest, it has been reduced for forfeitures.
Earnings per Share
Basic earnings per share is based on the weighted effect of all common shares issued and outstanding, and is calculated by dividing
earnings by the weighted average shares outstanding during the period. Diluted earnings per share is calculated by dividing earnings, adjusted for the effect, if any, from assumed conversion of all
potentially dilutive common shares outstanding, by the weighted average number of common shares used in the basic earnings per share calculation plus the number of common shares that would be issued
assuming conversion of all potentially dilutive common shares outstanding. The denominator used to compute basic and diluted earnings per share is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2013
|
|
2012
|
|
2011
|
|
Basic earnings per shareweighted average shares
|
|
|
10,337,339
|
|
|
10,242,573
|
|
|
10,147,561
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
Employee and director restricted stock units
|
|
|
163,101
|
|
|
112,510
|
|
|
145,429
|
|
Warrants
|
|
|
593,491
|
|
|
305,564
|
|
|
550,552
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per shareweighted average shares
|
|
|
11,093,931
|
|
|
10,660,647
|
|
|
10,843,542
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
computation of weighted average dilutive shares outstanding excluded restricted stock units to acquire 7,511 shares of common stock for the year ended December 31, 2012. The
unrecognized compensation on a per unit basis for these restricted stock units was greater than the average market price of the Company's common stock for the period presented. Therefore, the effect
would be anti-dilutive. For the years ended December 31, 2013 and 2011, the restricted stock units excluded were not significant.
59
Table of Contents
Hawaiian Telcom Holdco, Inc.
Notes to Consolidated Financial Statements (Continued)
3. Acquisitions
SystemMetrics Corporation
On September 30, 2013, the Company completed its acquisition for all the voting stock of SystemMetrics Corporation
("SystemMetrics") for $16.3 million in cash, net of cash acquired and purchase price adjustments. Of the total purchase price, $11.9 million was paid at closing of the purchase with the
balance subject to an earn-out over a three year period. Payment of the earn-out is contingent on SystemMetrics meeting certain performance metrics and continued employment of the SystemMetrics' key
executive. For financial reporting purposes, the earn-out will be accounted for as compensation expense as earned.
SystemMetrics
provides virtual and physical data center colocation services in the State of Hawaii along with other telecommunication services that are complementary to the Company's
operations. Transaction costs amounted to $0.9 million, were primarily professional fees and were recognized as general and administrative expenses as incurred.
The
Company followed the acquisition method of accounting and allocated the purchase price to the tangible and intangible assets acquired and liabilities assumed based on their
provisional fair values, which estimates and assumptions are subject to change within the measurement period, which shall not be more than one year from the acquisition date. The measurement period
remains open as of December 31, 2013 as the Company continues to obtain additional information related to the amount recognized for certain assets and estimated liabilities. The excess of the
purchase price over the fair values was recorded as goodwill.
Subsequent
to the measurement date and within the measurement period, the Company obtained new information related to tax basis that allowed for refinements to provisional amounts. The
measurement period adjustments did not have a significant impact on the Company's consolidated statements of income for the year ended December 31, 2013. The adjustments are as follows (dollars
in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognized
as of
Acquisition
|
|
Measurement
Period
Adjustments
|
|
Recognized
as of
Acquisition
As Revised
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
$
|
3,781
|
|
$
|
|
|
$
|
3,781
|
|
Intangible assets
|
|
|
4,380
|
|
|
|
|
|
4,380
|
|
Goodwill
|
|
|
10,368
|
|
|
159
|
|
|
10,527
|
|
Other assets
|
|
|
643
|
|
|
|
|
|
643
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,172
|
|
|
159
|
|
|
19,331
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
3,684
|
|
|
(5
|
)
|
|
3,679
|
|
Non-current liabilities
|
|
|
2,304
|
|
|
332
|
|
|
2,636
|
|
Deferred income taxes
|
|
|
1,326
|
|
|
(168
|
)
|
|
1,158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,314
|
|
|
159
|
|
|
7,473
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net acquisition price
|
|
$
|
11,858
|
|
$
|
|
|
$
|
11,858
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60
Table of Contents
Hawaiian Telcom Holdco, Inc.
Notes to Consolidated Financial Statements (Continued)
3. Acquisitions (Continued)
The
fair value of property, plant and equipment was based on the highest and best use of the specific properties. To determine fair value, the Company considered and applied primarily
the cost approach. This approach considers the amount required to construct or purchase a new asset of equal utility at current prices with adjustments to the value for physical deterioration,
functional obsolescence and economic obsolescence. The fair value of intangible assets including the trade name and customer relationship intangibles were based on discounted cash flows from
projections of results of operations for SystemMetrics. The fair value of liabilities assumed, including future payments related to tenant improvements of $3.0 million, was based on the present
value of the expected future cash flows.
The
goodwill recognized is attributed to the anticipated growth opportunities for colocation services and from combining the operations of the Company and SystemMetrics. This includes
the ability of the Company to offer a complete data solution to its business customers with more robust virtual and physical colocation. In addition, as a significant component of colocation services
is data transmission, the Company can offer SystemMetrics customers multiple transmission options. The goodwill is not
deductible for income tax reporting purposes and is attributed to the newly formed data center colocation segment.
The
following unaudited pro forma results of operations are provided for the years ended December 31, 2013 and 2012 as if the acquisition of SystemMetrics occurred on
January 1, 2012. The pro forma combined results of operations have been prepared by adjusting the historical results of the Company to include the historical results of SystemMetrics.
Adjustments were made to the historical results for the purchase price allocation which primarily impacts depreciation and amortization, to eliminate the interest on certain debt financing which was
not assumed in the purchase, to eliminate certain intercompany revenue between the entities and to reallocate the transaction related expenses from the 2013 to the 2012 periods.
These
supplemental pro forma results of operations are provided for illustrative purposes only and do not purport to be indicative of the actual results that would have been achieved by
the combined company for the periods presented or that may be achieved by the combined company in the future. The pro forma results of operations do not include any costs savings or synergies that
resulted, or will result, from the acquisition or any estimated costs that will be incurred to integrate SystemMetrics. Future results may vary significantly from the results reflected in this pro
forma financial information because of future events and transactions as well as other factors.
The
pro forma results are as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
For the Year Ended
December 31,
|
|
|
|
2013
|
|
2012
|
|
Revenues
|
|
$
|
396,950
|
|
$
|
393,280
|
|
Net income
|
|
|
10,940
|
|
|
109,438
|
|
For
the year ended December 31, 2013, revenues and net loss for SystemMetrics since acquisition amounted to $2.2 million and $0.2 million, respectively.
Wavecom Solutions Corporation
On December 31, 2012, the Company completed its acquisition for all the voting stock of Wavecom Solutions Corporation
("Wavecom") for $8.7 million in cash, net of cash acquired and final
61
Table of Contents
Hawaiian Telcom Holdco, Inc.
Notes to Consolidated Financial Statements (Continued)
3. Acquisitions (Continued)
purchase
adjustments. Wavecom provides telecommunication services in the State of Hawaii which are complementary to the Company's operations. Transaction costs amounted to $0.8 million, were
primarily professional fees and were recognized as general and administrative expenses as incurred.
The
Company followed the acquisition method of accounting and allocated the purchase price to the tangible and intangible assets acquired and liabilities assumed based on their
provisional fair values. The excess of the purchase price over those fair values was recorded as goodwill. During the
measurement period, the Company recognized adjustments to the preliminary purchase price allocation based on new information as to the existence and value of certain assets and liabilities. The
measurement period adjustments did not have a significant impact on the Company's consolidated statements of income for the year ended December 31, 2013. In addition, these adjustments did not
have a significant impact on the Company's consolidated balance sheets as of December 31, 2012. Therefore, the Company has not retrospectively adjusted the comparative 2012 financial
information presented herein. The following table summarizes the assets acquired and the liabilities assumed (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognized
as of
Acquisition
|
|
Measurement
Period
Adjustments
|
|
Recognized
as of
Acquisition
As Revised
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
$
|
11,898
|
|
$
|
876
|
|
$
|
12,774
|
|
Intangible assets
|
|
|
1,060
|
|
|
(410
|
)
|
|
650
|
|
Goodwill
|
|
|
1,569
|
|
|
8
|
|
|
1,577
|
|
Deferred income taxes
|
|
|
|
|
|
488
|
|
|
488
|
|
Other assets
|
|
|
1,663
|
|
|
|
|
|
1,663
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,190
|
|
|
962
|
|
|
17,152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
2,360
|
|
|
|
|
|
2,360
|
|
Payable from Wavecom to the Company
|
|
|
4,037
|
|
|
|
|
|
4,037
|
|
Non-current liabilities
|
|
|
1,450
|
|
|
650
|
|
|
2,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,847
|
|
|
650
|
|
|
8,497
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net acquisition price
|
|
$
|
8,343
|
|
$
|
312
|
|
$
|
8,655
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Company had a receivable from Wavecom equal to the amount of the payable from Wavecom to the Company. These intercompany balances are now eliminated in the consolidated financial
statements of the Company. The Company had previously recognized an allowance reducing the carrying value of the receivable to zero because of concerns regarding collectability. With the acquisition
of Wavecom and effective settlement of the balance due, the Company recognized a gross settlement gain of $4.0 million for its pre-existing relationship with Wavecom. The Company estimates the
net impact the settlement gain offset by bad debt expense on Wavecom balances resulted in a net credit of $2.5 million to selling, general and administrative expenses in the consolidated
financial statements for the year ended December 31, 2012.
The
fair value of property, plant and equipment was based on the highest and best use of the specific properties. To determine fair value the Company considered and applied primarily the
cost
62
Table of Contents
Hawaiian Telcom Holdco, Inc.
Notes to Consolidated Financial Statements (Continued)
3. Acquisitions (Continued)
approach.
This approach considers the amount required to construct or purchase a new asset of equal utility at current prices with adjustments to the value for physical deterioration, functional
obsolescence and economic obsolescence. The fair value of intangible assets including the brand name and customer relationship intangibles were based on discounted cash flows from projections of
results for Wavecom's operations.
The
goodwill recognized is attributed to the anticipated synergies to be achieved by combining the operations of the Company and Wavecom. This includes the ability to provide the Company
and Wavecom customers a similar set of telecommunication offerings using a joint network composed of the best components of both organizations. All of the goodwill is deductible for income tax
reporting purposes and is attributed to the telecommunications segment.
The
following unaudited pro forma results of operations are provided for the years ended December 31, 2012 and 2011 as if the acquisition of Wavecom occurred on January 1,
2011. The pro forma combined results of operations have been prepared by adjusting the historical results of the Company to include the historical results of Wavecom. Adjustments were made to the
historical results for the purchase price allocation which primarily impacts depreciation and amortization, to eliminate the interest on certain debt financing which was not assumed in the purchase,
to eliminate certain intercompany revenue between the entities and to reallocate the transaction related expenses from the year ended December 31, 2012 to the year ended December 31,
2011.
These
supplemental pro forma results of operations are provided for illustrative purposes only and do not purport to be indicative of the actual results that would have been achieved by
the combined company for the periods presented or that may be achieved by the combined company in the future. The pro forma results of operations do not include any costs savings or synergies that
resulted, or will result, from the acquisition or any estimated costs the will be incurred to integrate Wavecom. Future results may vary significantly from the results reflected in this pro forma
financial information because of future events and transactions as well as other factors.
The
pro forma results are as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
For the Year Ended
December 31,
|
|
|
|
2012
|
|
2011
|
|
Revenues
|
|
$
|
394,159
|
|
$
|
408,714
|
|
Net income
|
|
|
106,124
|
|
|
23,944
|
|
4. Receivables
Receivables consisted of the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2013
|
|
2012
|
|
Customers and other
|
|
$
|
38,463
|
|
$
|
36,713
|
|
Allowance for doubtful accounts
|
|
|
(3,942
|
)
|
|
(2,631
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
34,521
|
|
$
|
34,082
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63
Table of Contents
Hawaiian Telcom Holdco, Inc.
Notes to Consolidated Financial Statements (Continued)
4. Receivables (Continued)
The Company grants credit to customers in the normal course of business. At December 31, 2013 and 2012, the Company did not have customer balances representing more than 10% of
total receivables. During the years ended December 31, 2013, 2012 and 2011, the Company had no customers that represented more than 10% of total revenues.
The
following is a summary of activity for the allowance for doubtful accounts (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
Balance
|
|
Additional
Charges to
Costs and
Expenses
|
|
Recoveries to
(Deductions
from)
Allowance
|
|
Ending
Balance
|
|
January 1 to December 31, 2013
|
|
$
|
2,631
|
|
$
|
3,455
|
|
$
|
(2,144
|
)
|
$
|
3,942
|
|
January 1 to December 31, 2012
|
|
|
2,924
|
|
|
716
|
|
|
(1,009
|
)
|
|
2,631
|
|
January 1 to December 31, 2011
|
|
|
802
|
|
|
2,940
|
|
|
(818
|
)
|
|
2,924
|
|
In
the summary above, the additional charges to costs and expenses for the year ended December 31, 2012 is net of a $4.0 million settlement gain relating to the preexisting
relationship with Wavecom. In 2011, the Company recovered $2.5 million on two large receivable balances previously assumed to be uncollectible.
5. Property, Plant and Equipment
Property, plant and equipment consisted of the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2013
|
|
2012
|
|
Land
|
|
$
|
67,278
|
|
$
|
73,227
|
|
Buildings
|
|
|
107,273
|
|
|
103,104
|
|
Central office equipment
|
|
|
149,940
|
|
|
124,482
|
|
Outside communications plant
|
|
|
290,201
|
|
|
244,770
|
|
Furniture, vehicles and other work equipment
|
|
|
42,613
|
|
|
33,663
|
|
Construction in progress
|
|
|
24,557
|
|
|
20,683
|
|
Software
|
|
|
42,645
|
|
|
34,597
|
|
Other
|
|
|
4,857
|
|
|
4,817
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
729,364
|
|
|
639,343
|
|
Less accumulated depreciation and amortization
|
|
|
204,989
|
|
|
132,146
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total property, plant and equipment, net
|
|
$
|
524,375
|
|
$
|
507,197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
expense amounted to $74.5 million, $68.2 million and $61.2 million for the years ended December 31, 2013, 2012 and 2011, respectively.
In
February 2013, the Company entered into an agreement to sell a parcel of land and warehouse not actively used in the Company's operations for a purchase price, as amended, of
$13.9 million. The sale was subject to due diligence by the buyer and approval of the HPUC. The HPUC approval was received in May 2013 and the sale was consummated in June 2013. The net
proceeds, net of commissions and other costs paid through escrow of $0.8 million, amounted to $13.1 million. A gain on
64
Table of Contents
Hawaiian Telcom Holdco, Inc.
Notes to Consolidated Financial Statements (Continued)
5. Property, Plant and Equipment (Continued)
the
sale of $6.5 million was recognized in 2013 as management concluded the land sold was not grouped with the assets subject to the composite depreciation method. The HPUC approval requires
the Company to spend $0.3 million on training employees on broadband telecommunication deployment and operation. In addition, the HPUC approval provides for the Company to make improvements to
its broadband network in an amount equal to the net proceeds less the training cost commitment. The planned training expenses and network capital spending will be recognized as the costs are incurred.
6. Goodwill and Other Intangible Assets
The gross carrying amount and accumulated amortization of the identifiable intangible assets are as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013
|
|
December 31, 2012
|
|
|
|
Gross
Carrying
Value
|
|
Accumulated
Amortization
|
|
Net Carrying
Value
|
|
Gross
Carrying
Value
|
|
Accumulated
Amortization
|
|
Net Carrying
Value
|
|
Subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
21,709
|
|
$
|
8,983
|
|
$
|
12,726
|
|
$
|
17,850
|
|
$
|
6,285
|
|
$
|
11,565
|
|
Trade name and other
|
|
|
320
|
|
|
121
|
|
|
199
|
|
|
210
|
|
|
|
|
|
210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,029
|
|
|
9,104
|
|
|
12,925
|
|
|
18,060
|
|
|
6,285
|
|
|
11,775
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Not subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brand name
|
|
|
27,300
|
|
|
|
|
|
27,300
|
|
|
27,300
|
|
|
|
|
|
27,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,300
|
|
|
|
|
|
27,300
|
|
|
27,300
|
|
|
|
|
|
27,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
49,329
|
|
$
|
9,104
|
|
$
|
40,225
|
|
$
|
45,360
|
|
$
|
6,285
|
|
$
|
39,075
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During
the year ended December 31, 2013, the Company recognized customer relationship intangibles amounting to $4.3 million and other intangibles amounting to
$0.1 million related to the acquisition of SystemMetrics. The estimated useful life of the customer relationship intangible assets acquired was 13 years. The determination of useful
lives for customer relationships was made based on historical and expected customer attrition rates. The Company uses an accelerated amortization method reflecting the rate of expected customer
attrition.
During
the year ended December 31, 2012, the Company recognized customer relationship intangibles amounting to $0.9 million and other intangibles amounting to
$0.2 million related to the acquisition of Wavecom. The estimated useful life of the customer relationship intangible assets acquired was 6 years. The determination of useful lives for
customer relationships was made based on historical and expected customer attrition rates. The Company uses an accelerated amortization method reflecting the rate of expected customer attrition.
65
Table of Contents
Hawaiian Telcom Holdco, Inc.
Notes to Consolidated Financial Statements (Continued)
6. Goodwill and Other Intangible Assets (Continued)
Amortization
expense amounted to $2.8 million, $2.7 million and $2.6 million for the years ended December 31 2013, 2012 and 2011, respectively. Estimated
amortization expense for the next five years and thereafter is as follows (dollars in thousands):
|
|
|
|
|
2014
|
|
$
|
2,896
|
|
2015
|
|
|
2,498
|
|
2016
|
|
|
2,101
|
|
2017
|
|
|
1,703
|
|
2018
|
|
|
1,308
|
|
Thereafter
|
|
|
2,419
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
12,925
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In
conjunction with the acquisition of SystemMetrics, the Company recognized goodwill of $10.5 million which will be attributed to the data center colocation segment. In
conjunction with the acquisition of Wavecom, the Company adjusted the carrying value of goodwill in 2013 as further discussed in Note 3. The revised goodwill amounted to $1.6 million and
is included in the telecommunications segment.
7. Accrued Expenses
Accrued expenses consisted of the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2013
|
|
2012
|
|
Salaries and benefits
|
|
$
|
15,160
|
|
$
|
15,642
|
|
Interest
|
|
|
2,576
|
|
|
3,607
|
|
Other taxes
|
|
|
1,051
|
|
|
1,288
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
18,787
|
|
$
|
20,537
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8. Long-Term Debt
Long-Term debt consists of the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
Interest Rate
at December 31,
2013
|
|
Final
Maturity
|
|
|
|
2013
|
|
2012
|
|
Term loan
|
|
|
5.00
|
%
|
|
June 6, 2019
|
|
$
|
299,138
|
|
$
|
299,250
|
|
Original issue discount
|
|
|
|
|
|
|
|
|
(4,459
|
)
|
|
(3,840
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
294,679
|
|
|
295,410
|
|
Current
|
|
|
|
|
|
|
|
|
3,000
|
|
|
3,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncurrent
|
|
|
|
|
|
|
|
$
|
291,679
|
|
$
|
292,410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
term loan outstanding at December 31, 2013 provides for interest at the Alternate Base Rate, a rate which is indexed to the prime rate with certain adjustments as defined,
plus a margin of 3.00% or a Eurocurrency rate on deposits of one, two, three or six months but no less than 1.00% per annum
66
Table of Contents
Hawaiian Telcom Holdco, Inc.
Notes to Consolidated Financial Statements (Continued)
8. Long-Term Debt (Continued)
plus
a margin of 4.00%. The Company has selected the Eurocurrency rate as of December 31, 2013 resulting in an interest rate currently at 5.00%.
The
term loan provides for interest payments no less than quarterly. In addition, quarterly principal payments of $0.8 million are required. The balance of the loan is due at
maturity on June 6, 2019. The Company must prepay, generally within three months after year end, 50% or 25% of excess cash flow, as defined. The percent of excess cash flow required is
dependent on the Company's leverage ratio. The excess cash flow payment for the year ended December 31, 2012 amounted to $2.1 million and was paid in March of 2013. No excess cash flow
payment is due for the year ended December 31, 2013. The Company must also make prepayments on loans in the case of certain events such as large asset sales.
The
Company also has a revolving credit facility which matures on October 3, 2015. The facility has an available balance of $30.0 million with no amounts drawn as of or for
the periods ended December 31, 2013 and 2012. A commitment fee is payable quarterly to the lender under the facility. Interest on amounts outstanding is based on, at the Company's option, the
bank prime rate plus a margin of 3.0% to 6.0% or the Eurocurrency rate for one, two, three or six month periods plus a margin of 4.0% to 5.5%. The margin is dependent on the Company's leverage, as
defined in the agreement, at the time of the borrowing.
The
obligations under the bank facilities are guaranteed by the Company and each subsidiary with certain exceptions. In addition, the bank credit facilities are collateralized by
substantially all of the Company's assets.
The
bank credit facilities contain various negative and affirmative covenants that restrict, among other things, incurrence of additional indebtedness, payment of dividends, redemptions
of stock, other distributions to shareholders and sales of assets. In addition, there are financial covenants consisting of an interest coverage ratio, leverage ratio and a maximum level of capital
expenditures.
Refinancing 2013
In June 2013, the Company refinanced its term loan debt. The Company paid a premium on the repayment of the old term loan of
$3.0 million. In addition, the Company paid $3.4 million in underwriting fees and legal costs. The premium on repayment of debt, existing original issue discount, existing deferred
financing costs, underwriting fees and legal costs were accounted for in accordance with accounting standards for modification of debt instruments with different terms. The Company compared each
syndicated lenders' loan under the old term loan with the syndicated lenders' loan under the new term loans. For loans under the new term loan that were substantially different, the Company recognized
the exchange of debt instruments as a debt extinguishment. For loans under the new term loan that were not substantially different, the Company accounted for the exchange of debt instruments as a
modification. As a result of the refinancing, the Company deferred $2.7 million of financing related costs and recognized a loss on early extinguishment of debt of $3.7 million.
Refinancing 2012
In connection with the February 2012 refinancing of the term loan debt, the Company paid a premium on the repayment of the old term
loan of $6.0 million. In addition, the Company paid $4.1 million in underwriting fees and legal costs. The premium on repayment of debt, and underwriting
67
Table of Contents
Hawaiian Telcom Holdco, Inc.
Notes to Consolidated Financial Statements (Continued)
8. Long-Term Debt (Continued)
fees
and legal costs were accounted for in accordance with accounting standards for modification of debt instruments with different terms. The Company compared each syndicated lenders' loan under the
old term loan with the syndicated lenders' loan under the new term loan. For loans under the new term loan that were substantially different, the Company recognized the exchange of debt instruments as
a debt extinguishment. For loans under the new term loan that were not substantially different, the Company accounted for the exchange of debt instruments as a modification. As a result of the
refinancing, the Company capitalized $5.0 million of the premium on the repayment of debt and refinancing fees and expensed the remainder resulting in a loss on early extinguishment of debt of
$5.1 million.
Capitalized Interest
Interest capitalized by the Company amounted to $1.2 million, $2.0 million and $2.3 million for the years ended
December 31, 2013, 2012 and 2011, respectively.
Maturities
The annual requirements for principal payments on long-term debt, assuming no defaults, as of December 31, 2013 are as follows
(dollars in thousands):
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
2014
|
|
$
|
3,000
|
|
2015
|
|
|
3,000
|
|
2016
|
|
|
3,000
|
|
2017
|
|
|
3,000
|
|
2018
|
|
|
3,000
|
|
Thereafter
|
|
|
284,138
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
299,138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9. Employee Benefit Plans
Pension and Other Postretirement Benefits
The Company sponsors a defined benefit pension plan, with benefits frozen as of March 1, 2012, and postretirement health and
life insurance benefits for union employees. The Company also sponsors a cash balance pension plan for nonunion employees, with benefits frozen as of April 1, 2007, and certain management
employees receive postretirement health and life insurance under grandfathered provisions of a terminated plan.
The
Company amended its union pension plan on January 24, 2012 for the freeze of benefits effective March 1, 2012. This resulted in a reduction of the projected benefit
obligation by $30.2 million which is the difference between the accumulated benefit obligation and projected benefit obligation at that date. The liability as of January 24, 2012 was
measured using a discount rate of 4.54%. The union pension trust assets were also measured as of this date. The reduction in the net recorded liability of $33.4 million was used to offset
actuarial losses previously recognized in the accumulated other comprehensive loss. In addition, the periodic benefit cost was reduced to reflect that there is no future service cost for the union
pension plan beginning March 1, 2012.
68
Table of Contents
Hawaiian Telcom Holdco, Inc.
Notes to Consolidated Financial Statements (Continued)
9. Employee Benefit Plans (Continued)
The change in projected benefit obligation, change in plan assets, funded status and weighted average actuarial assumptions were as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Postretirement Benefits
|
|
|
|
December 31,
|
|
December 31,
|
|
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
Change in projected benefit obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligation at beginning of period
|
|
$
|
245,211
|
|
$
|
249,851
|
|
$
|
53,630
|
|
$
|
49,731
|
|
Service cost
|
|
|
|
|
|
1,488
|
|
|
1,047
|
|
|
965
|
|
Interest cost
|
|
|
8,344
|
|
|
10,008
|
|
|
2,089
|
|
|
2,362
|
|
Actuarial (gain) loss
|
|
|
(16,236
|
)
|
|
25,014
|
|
|
(4,044
|
)
|
|
2,289
|
|
Curtailment
|
|
|
|
|
|
(30,150
|
)
|
|
|
|
|
|
|
Benefits paid
|
|
|
(16,989
|
)
|
|
(11,000
|
)
|
|
(1,734
|
)
|
|
(1,717
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligation at end of period
|
|
|
220,330
|
|
|
245,211
|
|
|
50,988
|
|
|
53,630
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of period
|
|
|
164,426
|
|
|
141,685
|
|
|
|
|
|
|
|
Actual return on plan assets
|
|
|
29,056
|
|
|
19,588
|
|
|
|
|
|
|
|
Employer contributions
|
|
|
11,893
|
|
|
14,153
|
|
|
1,734
|
|
|
1,717
|
|
Benefits paid
|
|
|
(16,989
|
)
|
|
(11,000
|
)
|
|
(1,734
|
)
|
|
(1,717
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of period
|
|
|
188,386
|
|
|
164,426
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan assets less than projected benefit obligation
|
|
$
|
(31,944
|
)
|
$
|
(80,785
|
)
|
$
|
(50,988
|
)
|
$
|
(53,630
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized on balance sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other current liabilities
|
|
$
|
|
|
$
|
|
|
$
|
(2,611
|
)
|
$
|
(2,411
|
)
|
Employee benefit obligation, noncurrent
|
|
|
(31,944
|
)
|
|
(80,785
|
)
|
|
(48,377
|
)
|
|
(51,219
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
(31,944
|
)
|
$
|
(80,785
|
)
|
$
|
(50,988
|
)
|
$
|
(53,630
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial gain (loss) recognized in accumulated other comprehensive income (loss)
|
|
$
|
(3,783
|
)
|
$
|
(37,844
|
)
|
$
|
(3,752
|
)
|
$
|
(8,151
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Measurement date
|
|
|
12/31/2013
|
|
|
12/31/2012
|
|
|
12/31/2013
|
|
|
12/31/2012
|
|
Discount rate
|
|
|
4.40% to 4.62
|
%
|
|
3.55% to 3.80
|
%
|
|
4.75% to 5.01
|
%
|
|
3.85% to 4.10
|
%
|
Assumed health care cost trend rate, current
|
|
|
NA
|
|
|
NA
|
|
|
7.00
|
%
|
|
7.50
|
%
|
Assumed health care cost trend rate, ultimate
|
|
|
NA
|
|
|
NA
|
|
|
5.00
|
%
|
|
5.00
|
%
|
Assumed health care cost trend rate, ultimate year
|
|
|
NA
|
|
|
NA
|
|
|
2022
|
|
|
2018
|
|
The
estimated amount of the actuarial loss to be amortized from accumulated other comprehensive income (loss) during 2014 is $0.1 million for pension benefits and
$0.1 million for other postretirement benefits.
69
Table of Contents
Hawaiian Telcom Holdco, Inc.
Notes to Consolidated Financial Statements (Continued)
9. Employee Benefit Plans (Continued)
The
Company accrues the costs of pension and postretirement benefits over the period from the date of hire until the date the employee becomes fully eligible for benefits. The following
provides the components of benefit costs and weighted average actuarial assumptions for the years ended December 31, 2013, 2012 and 2011 (dollars in thousands):
Pension Benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2013
|
|
2012
|
|
2011
|
|
Service cost
|
|
$
|
|
|
$
|
1,488
|
|
$
|
7,621
|
|
Interest cost
|
|
|
8,344
|
|
|
10,008
|
|
|
10,400
|
|
Expected asset return
|
|
|
(11,860
|
)
|
|
(11,491
|
)
|
|
(11,567
|
)
|
Amortization of net (gain) loss
|
|
|
628
|
|
|
429
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefit cost (income)
|
|
$
|
(2,888
|
)
|
$
|
434
|
|
$
|
6,473
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial assumptions:
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
3.55% to 3.80
|
%
|
|
4.44% to 4.59
|
%
|
|
5.47% to 5.64
|
%
|
Expected return on plan assets
|
|
|
7.50
|
%
|
|
7.75
|
%
|
|
8.00
|
%
|
Long-term rate of compensation increase
|
|
|
NA
|
|
|
3.50% to 5.00
|
%
|
|
3.50% to 5.00
|
%
|
Other Postretirement Benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2013
|
|
2012
|
|
2011
|
|
Service cost
|
|
$
|
1,047
|
|
$
|
965
|
|
$
|
947
|
|
Interest cost
|
|
|
2,089
|
|
|
2,362
|
|
|
2,053
|
|
Amortization of net (gain) loss
|
|
|
356
|
|
|
118
|
|
|
(367
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefit cost
|
|
$
|
3,492
|
|
$
|
3,445
|
|
$
|
2,633
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial assumptions:
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
3.85% to 4.10
|
%
|
|
4.85% to 5.09
|
%
|
|
5.65% to 5.96
|
%
|
Assumed health care cost trend rate, current
|
|
|
7.50
|
%
|
|
7.50
|
%
|
|
8.00
|
%
|
Assumed health care cost trend rate, ultimate
|
|
|
5.00
|
%
|
|
5.00
|
%
|
|
5.00
|
%
|
Assumed health care cost trend rate, ultimate year
|
|
|
2018
|
|
|
2018
|
|
|
2018
|
|
The
measurement date for all plans was December 31, 2013, 2012 and 2011. At December 31, 2013 and 2012, the accumulated benefit obligation was the same as the projected
benefit obligation.
The
Company based its selection of an assumed discount rate for 2014 net periodic benefit cost and December 31, 2013 disclosure on a cash flow matching analysis that utilized bond
information provided
from a published bond index for all non-callable, high quality bonds (i.e., rated AA- or better) as of December 31, 2013. The matching of bond income to anticipated benefit
cash flows and the basic methods of selecting the assumed discount rate and expected return on plan assets at December 31, 2013 did not change from December 31 2012.
70
Table of Contents
Hawaiian Telcom Holdco, Inc.
Notes to Consolidated Financial Statements (Continued)
9. Employee Benefit Plans (Continued)
In
selecting the expected rate of return on plan assets of 7.25% for 2014 net periodic benefit cost, the Company considered economic forecasts for the types of investments held by the
plans (primarily equity and fixed income investments), the plans' asset allocations and the past performance of the plans' assets. The expected rate of return on plan assets was based on various
factors including historical experience and long-term inflation assumptions. The Company's expected long-term rate of return on plan assets is determined using the target allocation of assets which is
based on the goal of earning the highest rate of return while maintaining risk at acceptable levels. The plan strives to have assets sufficiently diversified so that adverse or unexpected results from
a security class will not have a significant adverse impact on the entire portfolio.
The
Company's overall investment strategy is to primarily invest for long-term growth with sufficient investments available to fund near-term benefit payments. The Company aims for
diversification of asset types, fund strategies and fund managers. The target allocations for plan assets are 60 percent equity securities and 40 percent fixed income securities. Equity
securities primarily include investments in equity funds and common stock of individual companies. Together these investments are diversified in both large and small cap companies located in the
United States and internationally. Fixed income securities are in funds that invest in bonds of companies from diversified industries, mortgage-backed securities and U.S. Treasuries.
Accounting
standards establish a fair value hierarchy when measuring the fair value of pension plan assets. The three levels of inputs within the hierarchy are defined as follows.
Level 1 is quoted prices for identical assets or liabilities in active markets. Level 2 is significant other observable inputs other than level 1 prices such as quoted prices for
similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. Level 3 is significant
unobservable inputs that reflect the Company's own assumptions as to how market participants would price an asset.
71
Table of Contents
Hawaiian Telcom Holdco, Inc.
Notes to Consolidated Financial Statements (Continued)
9. Employee Benefit Plans (Continued)
The
fair values of the Company's pension plan assets at December 31, 2013 and 2012, based on trading values or fund net asset value, by asset category and basis of valuation are
as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Total
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stocksdomestic large cap
|
|
$
|
18,658
|
|
$
|
|
|
$
|
|
|
$
|
18,658
|
|
Equity fundslarge cap index
|
|
|
|
|
|
100,478
|
|
|
|
|
|
100,478
|
|
Fixed income fundsdiversified bond
|
|
|
|
|
|
68,242
|
|
|
|
|
|
68,242
|
|
Short term investment funds
|
|
|
|
|
|
1,008
|
|
|
|
|
|
1,008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
18,658
|
|
$
|
169,728
|
|
$
|
|
|
$
|
188,386
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stocksdomestic large cap
|
|
$
|
16,419
|
|
$
|
|
|
$
|
|
|
$
|
16,419
|
|
Equity fundslarge cap index
|
|
|
|
|
|
84,507
|
|
|
|
|
|
84,507
|
|
Fixed income fundsdiversified bond
|
|
|
|
|
|
63,050
|
|
|
|
|
|
63,050
|
|
Short term investment funds
|
|
|
|
|
|
450
|
|
|
|
|
|
450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
16,419
|
|
$
|
148,007
|
|
$
|
|
|
$
|
164,426
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
fair values of the financial instruments shown in the table above represent the Company's best estimates of the amounts that would be received upon sale of those assets or that would
be paid to transfer those liabilities in an orderly transaction between market participants at that date. Those fair value measurements maximize the use of observable inputs. However, in situations
where there is little, if any, market activity for the asset or liability at the measurement date, the fair value measurement reflects the Company's judgments about the assumptions that market
participants would use in pricing the asset or liability. Those judgments are developed by the Company based on the best information available in the circumstances.
The
Company used the following valuation methodologies for assets measured at fair value. There have been no changes in the methodologies used at December 31, 2013 and 2012.
Equity
securities (Level 1) were valued at the closing price reported on the active market on which the individual securities are traded.
Fixed
income securities, equity funds, and mutual funds (Level 2) were valued as follows. Fixed income securities are valued based on yields currently available on comparable
securities of issuers with similar credit ratings. Equity funds and mutual funds include commingled equity funds that are not open to public investment and are valued at the net asset value per share.
All
contributions made were as required by law. The Company expects to contribute $13.1 million to its defined benefit pension plans in 2014.
72
Table of Contents
Hawaiian Telcom Holdco, Inc.
Notes to Consolidated Financial Statements (Continued)
9. Employee Benefit Plans (Continued)
The
Company projects that it will make the following benefit payments for the years ended December 31 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
Pension Plans
Benefits Paid
|
|
Other
Postretirement
Benefits Paid
|
|
2014
|
|
$
|
40,235
|
|
$
|
2,673
|
|
2015
|
|
|
22,133
|
|
|
2,941
|
|
2016
|
|
|
19,930
|
|
|
3,015
|
|
2017
|
|
|
16,099
|
|
|
3,162
|
|
2018
|
|
|
16,480
|
|
|
3,384
|
|
2019 through 2023
|
|
|
64,422
|
|
|
17,957
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
179,299
|
|
$
|
33,132
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed
health care costs trend rates have a significant impact on the amounts reported for other postretirement benefits. A one-percentage point change in the assumed health care cost
trend rates would have the following annual effects (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
1-Percentage
Point Increase
|
|
1-Percentage
Point Decrease
|
|
Effect on total of service and interest costs components
|
|
$
|
220
|
|
$
|
(185
|
)
|
Effect on postretirement benefit obligation
|
|
|
2,660
|
|
|
(2,238
|
)
|
401(k) Plan
The Company participates in two 401(k) employee savings plans that allow for voluntary contributions into designated investment funds
by eligible employees with the Company matching employee contributions, up to a maximum of 10% of compensation for union employees after February 29, 2012 and 6% of compensation for non-union
employees. Prior to March 1, 2012, union employee matching was 5% of compensation for union employees hired before September 13, 2008 and 6% for union employees hired on or after
September 13, 2008. Company contributions were $4.9 million, $4.7 million and $3.9 million for the years ended December 31, 2013, 2012 and 2011, respectively.
73
Table of Contents
Hawaiian Telcom Holdco, Inc.
Notes to Consolidated Financial Statements (Continued)
10. Income Taxes
The components of the income tax expense (benefit) are as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
December 31,
|
|
|
|
2013
|
|
2012
|
|
2011
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
|
|
$
|
|
|
$
|
|
|
State and local
|
|
|
(835
|
)
|
|
(535
|
)
|
|
(1,341
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(835
|
)
|
|
(535
|
)
|
|
(1,341
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
8,346
|
|
|
(78,978
|
)
|
|
|
|
State and local
|
|
|
1,271
|
|
|
(11,849
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,617
|
|
|
(90,827
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense (benefit)
|
|
$
|
8,782
|
|
$
|
(91,362
|
)
|
$
|
(1,341
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
income tax expense (benefit) differs from the amounts determined by applying the statutory federal income tax rate of 34% to the income or loss before income taxes for the following
reasons (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
December 31,
|
|
|
|
2013
|
|
2012
|
|
2011
|
|
Income tax (benefit) at federal rate
|
|
$
|
6,552
|
|
$
|
6,331
|
|
$
|
8,437
|
|
Increase (decrease) resulting from:
|
|
|
|
|
|
|
|
|
|
|
State income taxes, net of federal income tax
|
|
|
814
|
|
|
774
|
|
|
1,105
|
|
Permanent differences
|
|
|
1,826
|
|
|
501
|
|
|
2,517
|
|
Capital goods excise tax credit
|
|
|
(836
|
)
|
|
(535
|
)
|
|
(1,341
|
)
|
Other, net
|
|
|
6
|
|
|
|
|
|
136
|
|
Change in valuation allowance
|
|
|
420
|
|
|
(98,433
|
)
|
|
(12,195
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense (benefit)
|
|
$
|
8,782
|
|
$
|
(91,362
|
)
|
$
|
(1,341
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During
the years ended December 31, 2013, 2012 and 2011, the permanent difference was attributed primarily to the Company recognizing adjustments to certain tax attributes for
income tax purposes.
74
Table of Contents
Hawaiian Telcom Holdco, Inc.
Notes to Consolidated Financial Statements (Continued)
10. Income Taxes (Continued)
Deferred
income taxes consisted of the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2013
|
|
2012
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
Property and equipment
|
|
$
|
37,319
|
|
$
|
36,940
|
|
Other basis differences
|
|
|
582
|
|
|
568
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,901
|
|
|
37,508
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
Net operating loss and credit carryforwards
|
|
|
25,730
|
|
|
19,126
|
|
Intangible assets
|
|
|
62,626
|
|
|
76,646
|
|
Expenses deferred for tax
|
|
|
7,278
|
|
|
7,508
|
|
Employee benefits
|
|
|
21,654
|
|
|
41,621
|
|
Other basis differences
|
|
|
4,453
|
|
|
1,014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
121,741
|
|
|
145,915
|
|
Valuation allowance
|
|
|
(420
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
121,321
|
|
|
145,915
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax asset, net
|
|
$
|
83,420
|
|
$
|
108,407
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of December 31, 2013, net operating losses available for carry forward through 2033 amounted to $60.0 million for federal purposes and $66.3 million for state purposes.
Availability of net operating losses in future periods may be subject to additional limitations if there is a deemed change in control for income tax reporting purposes. Such change in control will be
determined for income tax reporting purposes based on future changes in stock ownership.
As
of December 31, 2011, the Company maintained a full valuation allowance over its net deferred income tax assets. This situation resulted from the Company having a short history
as a new entity (post Chapter 11). From emergence in 2010 through 2012, the Company had generated earnings in all periods. As a result of its continued positive earnings for the year, as well
as positive forecasted earnings in the future, management concluded that it was more likely than not that the Company would realize its deferred income tax assets, and therefore, the Company released
its valuation allowance as of December 31, 2012. For the year ended December 31, 2013, the Company recognized a valuation allowance for $0.4 million for charitable loss carry
forwards subject to deduction limitations. If there is a decline in the level of actual future or forecasted earnings, the conclusion regarding the need for a valuation allowance may change in future
periods resulting in the establishment of a valuation allowance for some or all of the deferred income tax assets. The following is a summary of activity for the valuation allowance (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
Balance
|
|
Charge (Credit)
to Income Tax
Expense or
Equity
|
|
Ending
Balance
|
|
January 1 to December 31, 2013
|
|
$
|
|
|
$
|
420
|
|
$
|
420
|
|
January 1 to December 31, 2012
|
|
|
120,336
|
|
|
(120,336
|
)
|
|
|
|
January 1 to December 31, 2011
|
|
|
108,312
|
|
|
12,024
|
|
|
120,336
|
|
75
Table of Contents
Hawaiian Telcom Holdco, Inc.
Notes to Consolidated Financial Statements (Continued)
10. Income Taxes (Continued)
The
Company evaluates its tax positions for liability recognition. As of December 31, 2013, the Company had no unrecognized tax benefit. No interest or penalties related to tax
assessments were
recognized in the Company's consolidated statements of income for the years ended December 31, 2013, 2012 or 2011. All tax years from 2010 remain open for both federal and Hawaii state
purposes.
11. Stockholder's Equity
Warrants
In 2010, the Company issued warrants to purchase 1,481,055 shares of common stock for $14.00 per share. The warrants to purchase shares
may be exercised anytime from January 26, 2011 to the maturity on October 28, 2015. As of December 31, 2013, 1,245,040 warrants were outstanding.
Equity Incentive Plan
The Compensation Committee of the Company's Board of Directors may grant awards under the Company's equity incentive plan in the form
of incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock, restricted stock units and other stock-based awards. The maximum number of shares issuable under
the new equity incentive plan is 1,400,000 shares. All grants under the equity incentive plan will be issued to acquire shares at the fair value on date of grant.
As
of December 31, 2013, all awards were restricted stock units.
Restricted Stock Units
Restricted stock units are generally subject to forfeiture if employment terminates prior to release of the restrictions. The Company
expenses the cost of restricted stock units, which is determined to be the fair market value of the shares at the date of grant, ratably over the period during which the restrictions lapse.
Restricted
stock units have service, performance and market conditions for vesting. Those with service conditions vest in equal installments on each of the first through fourth
anniversaries of the date of grant except for those granted to directors which vest over three years. Those with performance and market conditions vest in installments over four years based on the
achievement of goals to be established by the Compensation Committee of the Company's Board of Directors.
76
Table of Contents
Hawaiian Telcom Holdco, Inc.
Notes to Consolidated Financial Statements (Continued)
11. Stockholder's Equity (Continued)
Activity
with respect to outstanding restricted stock units for the years ended December 31, 2013, 2012 and 2011 was as follows:
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted-
Average
Grant-Date
Fair Value
|
|
Nonvested at January 1, 2011
|
|
|
246,778
|
|
$
|
12
|
|
Granted
|
|
|
111,193
|
|
|
24
|
|
Vested
|
|
|
(53,096
|
)
|
|
12
|
|
Forfeited
|
|
|
(55,924
|
)
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at January 1, 2012
|
|
|
248,951
|
|
|
17
|
|
Granted
|
|
|
124,636
|
|
|
16
|
|
Vested
|
|
|
(116,711
|
)
|
|
20
|
|
Forfeited
|
|
|
(33,652
|
)
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at January 1, 2013
|
|
|
223,224
|
|
|
15
|
|
Granted
|
|
|
181,330
|
|
|
20
|
|
Vested
|
|
|
(120,902
|
)
|
|
15
|
|
Forfeited
|
|
|
(22,918
|
)
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at December 31, 2013
|
|
|
260,734
|
|
$
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of December 31, 2013, there was $2.0 million of unrecognized share-based compensation expense related to nonvested restricted stock unit awards expected to vest. The
cost is expected to be recognized over a weighted-average period of 3 years.
The
Company recognized compensation expense of $2.7 million, $1.9 million and $2.1 million for the years ended December 31, 2013, 2012 and 2011, respectively.
The
fair value as of the vesting date for the restricted stock units that vested during the years ended December 31, 2013, 2012 and 2011 was $2.5 million,
$1.8 million and $0.7 million, respectively. Upon vesting, unit holders have the option to net share-settle to cover the required withholding tax and the remaining amount is converted
into an equivalent number of shares of common stock. The total shares withheld were 34,730, 15,360 and 1,654 for the years ended December 31, 2013, 2012 and 2011, respectively, and were based
on the value of the restricted stock units as determined by the Company's closing stock price. Total payments for the employees' tax obligations to the tax authorities was $0.8 million,
$0.3 million and less than $0.1 million for the years ended December 31, 2013, 2012 and 2011, respectively. Other than reimbursements for tax withholdings, there was no cash
received under all share-based arrangements.
77
Table of Contents
Hawaiian Telcom Holdco, Inc.
Notes to Consolidated Financial Statements (Continued)
12. Restructuring and Reorganization
In 2011, the Company recorded a restructuring expense of $1.8 million included in selling, general and administrative expenses in conjunction with a cost reduction plan in the
telecommunications segment. The plan was primarily to align the Company's operations to its strategic plan and resulted in the termination of approximately six percent of the Company's workforce. The
related severance cost amounted to $1.4 million. The restructuring included closure of the Company's remaining retail stores, outsourcing of toll operators and downsizing of various other
legacy functions. In conjunction with
closure of the retail stores, the Company recognized a liability of $0.4 million for the termination of three retail space leases. All liabilities recognized have been settled with cash
payments.
Reorganization
items represent expense or income amounts that were recognized as a direct result of the Chapter 11 filing (the Company emerged in 2010) and are presented
separately in the consolidated statements of income. Such expense items consisted of $1.1 million in professional fees for the year ended December 31, 2011. Professional fees relate to
legal, financial advisory and other professional costs directly associated with the reorganization process. The Company emerged from Chapter 11 in October 2010 but continued to incur
reorganization related expenses until December 2011 as the Chapter 11 cases were not closed until January 2012.
Net
cash paid for reorganization items, consisting of professional and other fees, amounted to $2.4 million for the year ended December 31, 2011.
13. Leases
The Company leases certain facilities and equipment for use in the Company's operations under several operating agreements. Certain of the leases provide for escalation or renegotiation
of rental rates, and for extension of lease terms. Total rent expense for the Company amounted to $3.9 million, $2.7 million and $2.9 million for the years ended
December 31, 2013, 2012 and 2011, respectively.
Information
on the aggregate minimum rental commitments under non-cancelable operating leases is as follows (dollars in thousands):
|
|
|
|
|
Years ended, December 31:
|
|
|
|
|
2014
|
|
$
|
2,824
|
|
2015
|
|
|
2,508
|
|
2016
|
|
|
2,232
|
|
2017
|
|
|
2,086
|
|
2018
|
|
|
1,868
|
|
Thereafter
|
|
|
12,525
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
24,043
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
78
Table of Contents
Hawaiian Telcom Holdco, Inc.
Notes to Consolidated Financial Statements (Continued)
14. Accumulated Other Comprehensive Income (Loss)
The components of accumulated other comprehensive income (loss) are as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
Gain (Loss) on
Investments
|
|
Defined Benefit
Postretirement
Plans
|
|
Total
|
|
January 1, 2011
|
|
$
|
(16
|
)
|
$
|
13,409
|
|
$
|
13,393
|
|
Other comprehensive income (loss) for 2011
|
|
|
(17
|
)
|
|
(70,894
|
)
|
|
(70,911
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
|
(33
|
)
|
|
(57,485
|
)
|
|
(57,518
|
)
|
Other comprehensive income (loss) for 2012, net of tax
|
|
|
(3
|
)
|
|
29,071
|
|
|
29,068
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012
|
|
|
(36
|
)
|
|
(28,414
|
)
|
|
(28,450
|
)
|
Other comprehensive income (loss) for 2013, net of tax
|
|
|
(24
|
)
|
|
23,758
|
|
|
23,734
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013
|
|
$
|
(60
|
)
|
$
|
(4,656
|
)
|
$
|
(4,716
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassifications
out of accumulated other comprehensive income (loss) for the years ended December 31, 2013, 2012 and 2011 were as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2013
|
|
2012
|
|
2011
|
|
Retirement plans
|
|
|
|
|
|
|
|
|
|
|
Amortization of (gain) loss
|
|
$
|
984
|
|
$
|
547
|
|
$
|
(348
|
)
|
Income tax charge on other comprehensive income
|
|
|
374
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net of tax
|
|
$
|
610
|
|
$
|
547
|
|
$
|
(348
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
amortization of gain or loss was recognized primarily in selling, general and administrative expense for all three periods presented.
15. Commitments and Contingencies
Long-Term Fixed Supplier Commitments
The Company has entered into agreements with various entities under long-term fixed contractual commitments primarily for technology
related services. Annual fixed fee commitments for agreements in effect at December 31, 2013, amounted to the following (dollars in thousands):
|
|
|
|
|
Years ended, December 31:
|
|
|
|
|
2014
|
|
$
|
5,085
|
|
2015
|
|
|
1,765
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under
the long-term agreements, the Company incurred fees amounting to $12.8 million, $12.8 million and $14.7 million for the years ended December 31, 2013,
2012 and 2011, respectively.
79
Table of Contents
Hawaiian Telcom Holdco, Inc.
Notes to Consolidated Financial Statements (Continued)
15. Commitments and Contingencies (Continued)
Collective Bargaining Agreement
The Company has a collective bargaining agreement with the International Brotherhood of Electrical Workers Local 1357 ("IBEW") with an
effective date of January 1, 2013 for a term of five years. The agreement covers approximately half of the Company's workforce.
Third Party Claims
In the normal course of conducting its business, the Company is involved in various disputes with third parties, including vendors and
customers. The outcome of such disputes is generally uncertain and subject to commercial negotiations. The Company periodically assesses its liabilities in connection with these matters and records
reserves for those matters where it is probable that a loss has been incurred and the loss can be reasonably estimated. Based on management's most recent assessment, the Company believes that the risk
of loss in excess of liabilities recorded is not material for all outstanding claims and disputes and the ultimate outcome of such matters will not have a material adverse effect on the Company's
results of operations, cash flows or financial position.
Litigation
The Company is involved in litigation arising in the normal course of business. The outcome of litigation is not expected to have a
material adverse impact on the Company's consolidated financial statements.
16. Fair Value of Financial Instruments
The following method and assumptions were used to estimate the fair value of each class of financial instruments for which it is practical to estimate the fair value.
Cash and cash equivalents, accounts receivable and accounts payableThe carrying amount approximates fair value. The valuation is based on settlements
of similar financial instruments all of which are short-term in nature and generally settled at or near cost. Cash is measured at Level 1.
Investment securitiesThe fair value of investment securities is based on quoted market prices. Investment securities are included in other assets on
the consolidated balance sheets.
DebtThe fair value of debt is based on the value at which debt is trading among holders.
The
estimated fair value of financial instruments is as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
Carrying
Value
|
|
Fair
Value
|
|
December 31, 2013
|
|
|
|
|
|
|
|
Assetsinvestment in U.S. Treasury obligations
|
|
$
|
807
|
|
$
|
807
|
|
Liabilitieslong-term debt (carried at cost)
|
|
|
294,679
|
|
|
299,886
|
|
December 31, 2012
|
|
|
|
|
|
|
|
Assetsinvestment in U.S. Treasury obligations
|
|
$
|
905
|
|
$
|
905
|
|
Liabilitieslong-term debt (carried at cost)
|
|
|
295,410
|
|
|
302,000
|
|
80
Table of Contents
Hawaiian Telcom Holdco, Inc.
Notes to Consolidated Financial Statements (Continued)
16. Fair Value of Financial Instruments (Continued)
Fair Value Measurements
Fair value for accounting purposes is the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date (exit price).
Accounting
standards establish a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in
active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). Assets measured at fair value on a
recurring basis represent investment securities included in other assets. Liabilities carried at cost with fair value disclosure on a recurring basis represent long-term debt. A summary is as follows
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
2013
|
|
December 31,
2012
|
|
Asset value measurements using:
|
|
|
|
|
|
|
|
Quoted prices in active markets for identical assets (Level 1)
|
|
$
|
807
|
|
$
|
905
|
|
Significant other observable inputs (Level 2)
|
|
|
|
|
|
|
|
Significant unobservable inputs (Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
807
|
|
$
|
905
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability value measurements using:
|
|
|
|
|
|
|
|
Quoted prices in active markets for identical assets (Level 1)
|
|
$
|
|
|
$
|
|
|
Significant other observable inputs (Level 2)
|
|
|
299,886
|
|
|
302,000
|
|
Significant unobservable inputs (Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
299,886
|
|
$
|
302,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
and liabilities measured at fair value on a non-recurring basis for the year ended December 31, 2013 and 2012 represent those recognized in conjunction with the acquisition
of SystemMetrics and Wavecom, respectively. A summary of the valued assets and liabilities is included in Note 3 including a discussion of the valuation methodology. The majority of assets and
liabilities were valued using level 3 unobservable inputs.
17. Cash Flow Information
Supplemental cash flow information is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
December 31,
|
|
|
|
2013
|
|
2012
|
|
2011
|
|
Cash paid during the year:
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid, net of refunds
|
|
$
|
|
|
$
|
|
|
$
|
|
|
Interest paid, net of amounts capitalized
|
|
|
18,094
|
|
|
21,966
|
|
|
25,323
|
|
Non-cash investing activitiesreceipt of equipment for settlement of receivable or for capital lease
|
|
|
|
|
|
|
|
|
2,250
|
|
81
Table of Contents
Hawaiian Telcom Holdco, Inc.
Notes to Consolidated Financial Statements (Continued)
18. Segment Information
The Company operates in the two reportable segments of telecommunications and data center colocation. This conclusion is based on how resources are allocated and performance is assessed
by the Chief Executive Officer, the Company's chief operating decision maker. The telecommunications segment provides local voice services, long distance voice services, high-speed internet and video.
In addition, the segment provides network access which includes data transport. Various related telephony services are provided including equipment and managed services. The data center colocation
segment provides physical colocation, virtual colocation and various related telephony services.
In
2013, the Company reevaluated is reportable segments. This was prompted by the acquisition of SystemMetrics and the Company's current strategic focus. Previously, the Company
presented a wireline and other segment (which was primarily wireless services). With the diminishing significance of the wireless segment, the Company no longer provides separate wireless information
to the Company's chief operating decision maker. Both these segments are now combined into the telecommunications segment. Prior to the acquisition of SystemMetrics on September 30, 2013, the
Company did not have data center colocation operations. Hence, the Company was in a single segment prior to 2013 under the revised reportable segment structure.
The
following table provides operating financial information for the Company's reportable segments for the year ended and as of December 31, 2013 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tele-
communications
|
|
Data Center
Colocation
|
|
Intersegment
Elimination
|
|
Total
|
|
Operating revenues
|
|
$
|
389,168
|
|
$
|
2,188
|
|
$
|
(206
|
)
|
$
|
391,150
|
|
Depreciation and amortization
|
|
|
76,935
|
|
|
366
|
|
|
|
|
|
77,301
|
|
Operating income (loss)
|
|
|
41,907
|
|
|
(136
|
)
|
|
|
|
|
41,771
|
|
Capital expenditures
|
|
|
92,742
|
|
|
299
|
|
|
|
|
|
93,041
|
|
Assets
|
|
|
758,993
|
|
|
19,022
|
|
|
|
|
|
778,015
|
|
Intersegment
revenue represents network access services provided by the telecommunications segment for data center colocation. For the year ended December 31, 2013, total
operating income above reconciles to the consolidated statement of income as follows:
|
|
|
|
|
Operating income
|
|
$
|
41,771
|
|
Corporate other expense
|
|
|
22,501
|
|
|
|
|
|
|
|
|
|
|
Income before income tax provision
|
|
|
19,270
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
operating income of the telecommunications segment included the gain from the sale of property for $6.5 million for the year ended December 31, 2013.
82
Table of Contents
Hawaiian Telcom Holdco, Inc.
Notes to Consolidated Financial Statements (Continued)
18. Segment Information (Continued)
The
following table provides information on the Company's revenue, net of intersegment eliminations, by product group (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2013
|
|
2012
|
|
2011
|
|
Local voice and other retail services
|
|
$
|
258,604
|
|
$
|
255,592
|
|
$
|
262,744
|
|
Network access services
|
|
|
130,358
|
|
|
129,906
|
|
|
132,412
|
|
Data center colocation
|
|
|
2,188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
391,150
|
|
$
|
385,498
|
|
$
|
395,156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19. Quarterly Financial Information (Unaudited)
The Company's quarterly operating results are presented in the following table (dollars in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Revenues
|
|
Operating
Income
|
|
Net
Income
|
|
Earnings
per share -
basic
|
|
Earnings
per share -
diluted
|
|
Year Ended December 31, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
95,965
|
|
$
|
8,585
|
|
$
|
1,848
|
|
$
|
0.18
|
|
$
|
0.17
|
|
Second Quarter
|
|
|
96,997
|
|
|
15,226
|
|
|
3,951
|
|
|
0.38
|
|
|
0.36
|
|
Third Quarter
|
|
|
97,682
|
|
|
7,914
|
|
|
2,061
|
|
|
0.20
|
|
|
0.18
|
|
Fourth Quarter
|
|
|
100,506
|
|
|
10,046
|
|
|
2,628
|
|
|
0.25
|
|
|
0.23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
391,150
|
|
$
|
41,771
|
|
$
|
10,488
|
|
$
|
1.01
|
|
$
|
0.95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
97,574
|
|
$
|
11,161
|
|
$
|
207
|
|
$
|
0.02
|
|
$
|
0.02
|
|
Second Quarter
|
|
|
94,689
|
|
|
10,909
|
|
|
5,521
|
|
|
0.54
|
|
|
0.51
|
|
Third Quarter
|
|
|
96,647
|
|
|
10,901
|
|
|
5,615
|
|
|
0.55
|
|
|
0.52
|
|
Fourth Quarter
|
|
|
96,588
|
|
|
12,885
|
|
|
98,639
|
|
|
9.60
|
|
|
9.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
385,498
|
|
$
|
45,856
|
|
$
|
109,982
|
|
$
|
10.74
|
|
$
|
10.32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of December 31, 2012, management of the Company concluded that it was more likely than not that the Company would realize its deferred income tax assets and therefore, the
Company released it valuation allowance as of that date. That resulted in a total income tax benefit of $91.0 million in 2012.
20. Restricted Net Assets and Parent Company Condensed Financial Information
Agreements with the HPUC and the debt agreements of Hawaiian Telcom Communications, Inc. limit the ability of the Company's subsidiaries to pay dividends to the parent company and
restrict the net assets of all of the Company's subsidiaries.
The
following condensed financial information for Hawaiian Telcom Holdco, Inc. reflects parent company financial information only. Such financial information should be read in
conjunction with the consolidated financial statements of the Company.
83
Table of Contents
Hawaiian Telcom Holdco, Inc.
Notes to Consolidated Financial Statements (Continued)
20. Restricted Net Assets and Parent Company Condensed Financial Information (Continued)
The parent company has accounted for its investment in its consolidated subsidiary on the equity method of accounting. No dividends were paid by the subsidiaries to the parent company at
any time during the existence of the parent company.
Hawaiian Telcom Holdco, Inc.
(Parent Company Only)
Condensed Statements of Income and Comprehensive Income (Loss)
(Dollars in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2013
|
|
2012
|
|
2011
|
|
Equity in earnings of Hawaiian Telcom Communications, Inc.
|
|
$
|
10,488
|
|
$
|
109,982
|
|
$
|
26,155
|
|
Income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
10,488
|
|
|
109,982
|
|
|
26,155
|
|
Other comprehensive income (loss), net of tax
|
|
|
23,734
|
|
|
29,068
|
|
|
(70,911
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$
|
34,222
|
|
$
|
139,050
|
|
$
|
(44,756
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hawaiian Telcom Holdco, Inc.
(Parent Company Only)
Condensed Balance Sheets
(Dollars in Thousands)
|
|
|
|
|
|
|
|
|
|
December 31,
2013
|
|
December 31,
2012
|
|
Assets
|
|
|
|
|
|
|
|
Investment in Hawaiian Telcom Communications, Inc.
|
|
$
|
313,012
|
|
$
|
276,860
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
313,012
|
|
$
|
276,860
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' Equity
|
|
|
|
|
|
|
|
Common stock, par value $0.01 per share, 245,000,000 shares authorized and 10,495,856 and 10,291,897 shares issued and outstanding
|
|
$
|
105
|
|
$
|
103
|
|
Additional paid-in capital
|
|
|
167,869
|
|
|
165,941
|
|
Accumulated other comprehensive loss
|
|
|
(4,716
|
)
|
|
(28,450
|
)
|
Retained earnings
|
|
|
149,754
|
|
|
139,266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders' equity
|
|
$
|
313,012
|
|
$
|
276,860
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
84
Table of Contents
Hawaiian Telcom Holdco, Inc.
Notes to Consolidated Financial Statements (Continued)
20. Restricted Net Assets and Parent Company Condensed Financial Information (Continued)
Hawaiian Telcom Holdco, Inc.
(Parent Company Only)
Condensed Statements of Cash Flows
(Dollars in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2013
|
|
2012
|
|
2011
|
|
Net income
|
|
$
|
10,488
|
|
$
|
109,982
|
|
$
|
26,155
|
|
Undistributed earnings of Hawaiian Telcom Communications, Inc.
|
|
|
(10,488
|
)
|
|
(109,982
|
)
|
|
(26,155
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities,net change in cash and ending balance of cash
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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85
Table of Contents