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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2012

 

¨ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from          to         

Commission File Number: 001-32358

 

 

USA MOBILITY, INC.

(Exact name of registrant as specified in its charter)

 

 

 

DELAWARE   16-1694797

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

6850 Versar Center, Suite 420

Springfield, Virginia

  22151-4148
(Address of principal executive offices)   (Zip Code)

(800) 611-8488

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year if changed since last report)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

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

 

Large accelerated filer    ¨    Accelerated filer    x
Non-accelerated filer    ¨  (Do not check if a smaller reporting company)    Smaller reporting company    ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

22,149,533 shares of the registrant’s common stock ($0.0001 par value per share) were outstanding as of July 27, 2012.

 

 

 


USA MOBILITY, INC.

QUARTERLY REPORT ON FORM 10-Q

INDEX

 

          Page  

PART I.

   FINANCIAL INFORMATION   
   Item 1.    Financial Statements   
      Condensed Consolidated Balance Sheets as of June 30, 2012 (Unaudited) and December 31, 2011      2   
     

Condensed Consolidated Results of Operations for the Three and Six Months Ended June 30, 2012 and 2011 (Unaudited)

     3   
     

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2012 and 2011 (Unaudited)

     4   
      Unaudited Notes to Condensed Consolidated Financial Statements      5   
   Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations      24   
   Item 3.    Quantitative and Qualitative Disclosures About Market Risk      53   
   Item 4.    Controls and Procedures      53   
PART II.    OTHER INFORMATION   
   Item 1.    Legal Proceedings      53   
   Item 1A    Risk Factors      54   
   Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds      54   
   Item 3.    Defaults Upon Senior Securities      54   
   Item 4.    Mine Safety Disclosures      55   
   Item 5.    Other Information      55   
   Item 6.    Exhibits      55   
Signatures      


PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

USA MOBILITY, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

     June 30, 2012      December 31, 2011  
     (In thousands)  
     (Unaudited)         
ASSETS      

Current assets:

     

Cash and cash equivalents

   $ 40,968       $ 53,655   

Accounts receivable, net

     20,629         20,523   

Prepaid expenses and other

     3,995         4,338   

Inventory

     2,799         2,268   

Escrow receivables

     7,693         14,819   

Deferred income tax assets, net

     3,733         8,617   
  

 

 

    

 

 

 

Total current assets

     79,817         104,220   

Tax receivables

     5         213   

Property and equipment, net

     21,262         22,421   

Goodwill

     132,561         130,968   

Other intangible assets, net

     37,116         38,757   

Deferred income tax assets, net

     45,756         51,600   

Deferred financing costs, net

     844         973   

Other assets

     1,034         908   
  

 

 

    

 

 

 

TOTAL ASSETS

   $ 318,395       $ 350,060   
  

 

 

    

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY      

Current liabilities:

     

Accounts payable and accrued liabilities

   $ 12,939       $ 12,394   

Accrued compensation and benefits

     13,101         12,854   

Consideration payable

     7,693         14,819   

Customer deposits

     1,938         1,806   

Deferred revenue

     14,546         14,693   
  

 

 

    

 

 

 

Total current liabilities

     50,217         56,566   

Long-term debt, net of current portion

     —           28,250   

Deferred revenue

     511         581   

Other long-term liabilities

     8,641         12,223   
  

 

 

    

 

 

 

TOTAL LIABILITIES

     59,369         97,620   
  

 

 

    

 

 

 

Commitments and contingencies

     

Stockholders’ equity:

     

Preferred stock

     —           —     

Common stock

     2         2   

Additional paid-in capital

     132,473         131,612   

Retained earnings

     126,551         120,826   
  

 

 

    

 

 

 

TOTAL STOCKHOLDERS’ EQUITY

     259,026         252,440   
  

 

 

    

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

   $ 318,395       $ 350,060   
  

 

 

    

 

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

2


USA MOBILITY, INC.

CONDENSED CONSOLIDATED RESULTS OF OPERATIONS

 

     For the Three Months Ended
June 30,
    For the Six Months Ended
June 30,
 
     2012     2011     2012     2011  
     (In thousands, except share and per share amounts)  
     (Unaudited)  

Revenues:

        

Service, rental and maintenance, net of service credits

   $ 41,114      $ 49,286      $ 83,592      $ 99,478   

Product and related sales, net

     14,847        15,885        29,104        23,028   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     55,961        65,171        112,696        122,506   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

Cost of products sold

     5,216        7,078        10,032        9,508   

Service, rental and maintenance

     13,892        16,187        28,195        32,652   

Selling and marketing

     5,919        6,588        11,572        11,512   

General and administrative

     12,494        13,840        25,663        29,408   

Severance and restructuring

     24        17        46        50   

Depreciation, amortization and accretion

     4,606        5,298        9,121        9,837   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     42,151        49,008        84,629        92,967   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     13,810        16,163        28,067        29,539   

Interest expense, net

     (66     (862     (254     (1,118

Other income, net

     436        7,666        374        7,820   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income tax (expense) benefit

     14,180        22,967        28,187        36,241   

Income tax (expense) benefit

     (5,733     (4,372     (11,279     23,005   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 8,447      $ 18,595      $ 16,908      $ 59,246   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic net income per common share

   $ 0.38      $ 0.84      $ 0.76      $ 2.68   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted net income per common share

   $ 0.37      $ 0.82      $ 0.75      $ 2.64   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic weighted average common shares outstanding

     22,130,397        22,086,848        22,118,470        22,075,185   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted weighted average common shares outstanding

     22,613,517        22,551,862        22,601,603        22,443,417   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash dividends declared per common share

   $ 0.25      $ 0.25      $ 0.50      $ 0.50   
  

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

3


USA MOBILITY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

     For the Six Months Ended
June 30,
 
     2012     2011  
     (In thousands and unaudited)  

Cash flows from operating activities:

    

Net income

   $ 16,908      $ 59,246   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation, amortization and accretion

     9,121        9,837   

Amortization of deferred financing costs

     129        273   

Deferred income tax expense (benefit)

     10,728        (23,371

Amortization of stock based compensation

     442        679   

Provisions for doubtful accounts, service credits and other

     780        490   

Settlement of non-cash transaction taxes

     (243     308   

Gain on disposals of property and equipment

     (146     (37

Gain on disposals of narrow band PCS licenses

     —          (7,500

Changes in assets and liabilities:

    

Accounts receivable

     (876     (1,600

Prepaid expenses, intangibles and other assets

     161        1,669   

Accounts payable and accrued liabilities

     (3,160     (8,935

Customer deposits and deferred revenue

     (85     1,777   
  

 

 

   

 

 

 

Net cash provided by operating activities

     33,759        32,836   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Purchases of property and equipment

     (4,439     (3,355

Proceeds from disposals of property and equipment

     318        35   

Proceeds from disposals of narrow band PCS licenses

     —          7,500   

Acquisitions, net of cash acquired

     (3,000     (134,217
  

 

 

   

 

 

 

Net cash used in investing activities

     (7,121     (130,037
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Issuance of debt

     —          24,044   

Repayment of debt

     (28,250     (14,125

Deferred financing costs

     —          (1,408

Cash dividends to stockholders

     (11,075     (11,060
  

 

 

   

 

 

 

Net cash used in financing activities

     (39,325     (2,549
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (12,687     (99,750

Cash and cash equivalents, beginning of period

     53,655        129,220   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 40,968      $ 29,470   
  

 

 

   

 

 

 

Supplemental disclosure:

    

Interest paid

   $ 283      $ 685   
  

 

 

   

 

 

 

Income taxes paid

   $ 936      $ 817   
  

 

 

   

 

 

 

Non-cash financing activities

   $ —        $ 27,750   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

4


USA MOBILITY, INC.

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

(1) Preparation of Interim Financial Statements

(1) Preparation of Interim Financial Statements – The condensed consolidated financial statements of USA Mobility, Inc. and subsidiaries (“USA Mobility” or the “Company”) have been prepared in accordance with the rules and regulations of the United States Securities and Exchange Commission (the “SEC”). Amounts shown on the condensed consolidated results of operations within the operating expense categories of cost of products sold; service, rental and maintenance; selling and marketing; and general and administrative are recorded exclusive of severance and restructuring and depreciation, amortization and accretion. These items are shown separately on the condensed consolidated results of operations within operating expenses. Foreign currency translation adjustments were deemed immaterial and were not presented separately in our condensed consolidated balance sheets.

The financial information included herein, other than the condensed consolidated balance sheet as of December 31, 2011, has been prepared without audit. The condensed consolidated balance sheet at December 31, 2011 has been derived from, but does not include all the disclosures contained in the audited consolidated financial statements for the year ended December 31, 2011. In our management’s opinion, our unaudited statements include all adjustments and accruals that are necessary for a fair presentation of the results of all interim periods reported herein. Certain prior year’s amounts in our indirect wholly owned subsidiary, Amcom Software, Inc. (“Amcom” or “software operations”), have been reclassified to conform to the current year’s presentation.

These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in USA Mobility’s Annual Report on Form 10-K for the year ended December 31, 2011 (the “2011 Annual Report”). The results of operations for the interim periods presented are not necessarily indicative of the results that may be expected for a full year.

The accompanying condensed consolidated financial statements include our accounts and the accounts of our wholly owned direct and indirect subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

The preparation of financial statements in conformity with United States generally accepted accounting principles (“GAAP”) requires our management to make judgments, estimates and assumptions that affect the amounts reported in our condensed consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates.

 

(2) Business

(2) Business – USA Mobility, through its indirect wholly owned subsidiary, USA Mobility Wireless, Inc. (“wireless operations”) is a leading provider of wireless messaging, mobile voice and data and unified communications solutions in the United States. We provide one-way and two-way messaging services. One-way messaging consists of numeric and alphanumeric messaging services. Numeric messaging services enable subscribers to receive messages that are composed entirely of numbers, such as a phone number, while alphanumeric messages may include numbers and letters which enable subscribers to receive text messages. Two-way messaging services enable subscribers to send and receive messages to and from other wireless messaging devices, including pagers, personal digital assistants and personal computers. We also offer voice mail, personalized greeting, message storage and retrieval and equipment loss and/or maintenance protection to both one-way and two-way messaging subscribers. These services are commonly referred to as wireless messaging and information services.

In addition, the Company, through Amcom, provides mission critical unified communications solutions for contact centers, emergency management, mobile event notification and Smartphone messaging. The combined product offering is capable of addressing a customer’s mission critical communication needs. Amcom delivers software solutions, which enable seamless, critical communications. Amcom’s unified communications suite (includes solutions for contact centers, emergency management, mobile event notification, and messaging) connects people across a changing complement of communication devices.

 

5


 

(3) Risks and Other Important Factors

(3) Risks and Other Important Factors – See “Item 1A. Risk Factors” of Part II of this Quarterly Report on Form 10-Q (“Quarterly Report”) and the 2011 Annual Report, which describes key risks associated with our operations and industry.

Based on current and anticipated levels of operations, we believe that our net cash provided by operating activities, together with cash on hand, should be adequate to meet our cash requirements for the foreseeable future.

In the event that net cash provided by operating activities and cash on hand are not sufficient to meet future cash requirements, we may be required to reduce planned capital expenses, reduce or eliminate our cash dividends to stockholders, reduce or eliminate our common stock repurchase program, and/or sell assets or seek additional financing beyond the availability in our revolving credit facility. We can provide no assurance that reductions in planned capital expenses or proceeds from asset sales would be sufficient to cover shortfalls in available cash or that additional financing beyond the availability in our revolving credit facility would be available or, if available, offered on acceptable terms.

We believe that future fluctuations in our revenues and operating results may occur due to many factors, particularly the decreased demand for our messaging services. If the rate of decline for our messaging services exceeds our expectations, revenues may be negatively impacted, and such impact could be material. Our plan to consolidate our networks may also negatively impact revenues as customers may experience a reduction in, and possible disruptions of, service in certain areas. Under these circumstances, we may be unable to adjust spending in a timely manner to compensate for any future revenue shortfall. It is possible that, due to these fluctuations, our revenue or operating results may not meet the expectations of investors, which could reduce the value of our common stock and impact our ability to make future cash distributions to stockholders or repurchase shares of our common stock.

 

(4) Recent and New Accounting Pronouncements

(4) Recent and New Accounting Pronouncements – In December 2011, the Financial Accounting Standards Board (the “FASB”) issued FASB Accounting Standards Update (“ASU”) 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update Number 2011-05, which addresses the presentation of comprehensive income. This standard was deemed not applicable to us as foreign currency translation adjustments were deemed immaterial and were not presented separately in our consolidated statements of stockholders’ equity in our 2011 Annual Report.

Pronouncements issued or effective during the six months ended June 30, 2012 were not applicable to us and are not anticipated to have an effect on our financial position or results of operations.

 

6


 

(5) Prepaid Expenses and Other

(5) Prepaid Expenses and Other – Prepaid expenses and other were as follows for the periods stated:

 

     June 30,
2012
     December 31,
2011
 
     (Dollars in thousands)  

Other receivables

   $ 862       $ 1,282   

Deposits

     39         35   

Prepaid insurance

     350         534   

Prepaid rent

     280         230   

Prepaid repairs and maintenance

     498         662   

Prepaid taxes

     355         130   

Prepaid commissions

     347         312   

Prepaid inventory

     574         609   

Prepaid expenses

     681         527   

Other

     9         17   
  

 

 

    

 

 

 

Total prepaid expenses and other

   $ 3,995       $ 4,338   
  

 

 

    

 

 

 

 

(6) Inventory

(6) Inventory – Inventory consisted of third party hardware and software held for resale. Included in inventory at June 30, 2012 was $0.3 million of labor costs associated with implementation services, software integration, and training services for contracts in progress as of June 30, 2012 related to our software operations. Such costs will be recognized as expense in the period the revenue is recognized. The consolidated balances consisted of the following for the periods stated:

 

     June 30,
2012
     December 31,
2011
 
     (Dollars in thousands)  

Purchased hardware and software, net

   $ 2,549       $ 2,093   

Work in process

     250         175   
  

 

 

    

 

 

 

Total inventory

   $ 2,799       $ 2,268   
  

 

 

    

 

 

 

 

(7) Depreciation, Amortization and Accretion

(7) Depreciation, Amortization and Accretion – The total depreciation, amortization and accretion expenses related to property and equipment, amortizable intangible assets, and asset retirement obligations for the three months ended June 30, 2012 and 2011 were $2.9 million and $3.6 million, respectively, and for the six months ended June 30, 2012 and 2011 were $5.7 million and $7.6 million, respectively, for wireless operations; and $1.7 million for each of the three months ended June 30, 2012 and 2011, respectively, and $3.4 million and $2.2 million for the six months ended June 30, 2012 and 2011, respectively, for software operations. The consolidated balances consisted of the following for the periods stated:

 

     For the Three Months
Ended June 30,
     For the Six Months
Ended June 30,
 
     2012      2011      2012      2011  
     (Dollars in thousands)  

Depreciation

   $ 2,813       $ 3,466       $ 5,598       $ 7,250   

Amortization

     1,607         1,629         3,153         2,183   

Accretion

     186         203         370         404   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total depreciation, amortization and accretion

   $ 4,606       $ 5,298       $ 9,121       $ 9,837   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(8) Goodwill and Amortizable Intangible Assets

(8) Goodwill and Amortizable Intangible Assets – Goodwill at June 30, 2012 was $132.6 million which is all attributed to our software operations. During the second quarter of 2012, we increased goodwill by $1.6 million due to the

 

7


acquisition of certain assets and technology from IMCO Technologies Corporation (“IMCO”). Goodwill is not amortized but evaluated for impairment at least annually, or when events or circumstances suggest a potential impairment has occurred. We have selected the fourth quarter to perform this annual impairment test. We will evaluate goodwill for impairment between annual tests if indicators of impairment exist. GAAP requires the comparison of the fair value of the reporting unit to the carrying amount to determine if there is potential impairment. For this determination, our software segment is considered the reporting unit. If the fair value of the reporting unit is less than its carrying value, an impairment loss is required to be recorded to the extent that the implied value of goodwill within the reporting unit is less than the carrying value. The fair value of the reporting unit is determined based upon generally accepted valuation methodologies such as market capitalization, discounted cash flows or other methods as deemed appropriate.

Other intangible assets for wireless operations consisted of a non-compete agreement with a former executive which is being amortized over a three year period. Other intangible assets for software operations were recorded at fair value on the date of acquisition and are being amortized over periods ranging from two to fifteen years. During the second quarter of 2012, our software operations acquired amortizable intangible assets of $1.5 million from IMCO. These intangible assets are being amortized over a four year period.

We will continue to identify potential adjustments to the purchase price and the fair value of the assets acquired from IMCO. We anticipate finalizing the purchase price as soon as practicable but no later than one-year from the acquisition date or May 2, 2013.

The gross carrying amount of amortizable intangible assets for the wireless operations was $0.4 million, and $45.1 million for software operations at June 30, 2012. The accumulated amortization for wireless operations was $0.3 million and $8.1 million for software operations. The net consolidated balance of amortizable intangible assets consisted of the following:

 

          June 30, 2012  
     Useful Life    Gross Carrying
Amount
     Accumulated
Amortization
    Net Balance  
     (In years)    (Dollars in thousands)  

Customer relationships

   10    $ 25,002       $ (3,334   $ 21,668   

Acquired technology

   2 - 4      8,598         (2,742     5,856   

Non-compete agreements

   3 - 5      6,182         (1,785     4,397   

Trademarks

   15      5,702         (507     5,195   
     

 

 

    

 

 

   

 

 

 

Total amortizable intangible assets

      $ 45,484       $ (8,368   $ 37,116   
     

 

 

    

 

 

   

 

 

 

 

8


Estimated amortization of intangible assets for future periods is as follows:

 

     (Dollars in
thousands)
 

For the remaining six months ending December 31, 2012

   $ 3,280   

For the year ending December 31:

  

2013

     6,129   

2014

     5,942   

2015

     4,665   

2016

     3,198   

Thereafter

     13,902   
  

 

 

 

Total amortizable intangible assets

   $ 37,116   
  

 

 

 

 

9


 

(9) Other Assets

(9) Other Assets – Other assets were as follows for the periods stated:

 

     June 30,
2012
     December 31,
2011
 
     (Dollars in thousands)  

Deposits

   $ 308       $ 432   

Prepaid royalties

     242         —     

Other assets

     484         476   
  

 

 

    

 

 

 

Total other assets

   $ 1,034       $ 908   
  

 

 

    

 

 

 

 

(10) Accounts Payable and Accrued Liabilities

(10) Accounts Payable and Accrued Liabilities – Accounts payable and accrued liabilities were as follows for the periods stated:

 

     June 30,
2012
     December 31,
2011
 
     (Dollars in thousands)  

Accounts payable

   $ 1,424       $ 1,793   

Accrued network costs

     1,278         1,530   

Accrued taxes

     4,588         4,722   

Asset retirement obligations

     1,068         794   

Accrued outside services

     1,016         1,002   

Accrued accounting and legal

     611         462   

Accrued recognition awards

     204         320   

Accrued interest

     —           156   

Accrued other

     546         1,019   

Deferred rent

     121         117   

Escheat liability

     400         361   

Lease incentive

     275         110   

Dividends payable - 2009 Long-Term Incentive Plan (“LTIP”)

     1,395         —     

Dividends payable - Board of Directors

     13         8   
  

 

 

    

 

 

 

Total accounts payable and accrued liabilities

   $ 12,939       $ 12,394   
  

 

 

    

 

 

 

Accrued taxes are based on our estimate of outstanding state and local taxes. This balance may be adjusted in the future as we settle with various taxing jurisdictions. Accrued taxes at June 30, 2012 include state income tax liabilities which were reclassified from other long-term liabilities to accounts payable and accrued liabilities in the first quarter of 2012 based on our assessment of the timing of payment of the liabilities. The restricted stock units (“RSUs”) awarded under the 2009 LTIP are expected to vest in December 2012. Therefore, the line item dividends payable – 2009 LTIP was reclassified from other long-term liabilities to accounts payable and accrued liabilities in the second quarter of 2012 based on the expected vesting in December 2012.

 

(11) Asset Retirement Obligations

(11) Asset Retirement Obligations – We recognize liabilities and corresponding assets for future obligations associated with the retirement of assets. We have paging equipment assets, principally transmitters, which are located on leased locations. The underlying leases generally require the removal of equipment at the end of the lease term; therefore, a future obligation exists.

At December 31, 2011, we had recognized cumulative asset retirement costs of $1.9 million. During the first quarter of 2012, we recorded an increase of $0.1 million in asset retirement costs. During the second quarter of 2012, we recorded an increase of $0.1 million in asset retirement costs. At June 30, 2012, cumulative asset

 

10


retirement costs were $2.1 million. The asset retirement cost additions during the six months ended June 30, 2012 increased paging equipment assets and are being depreciated over the related estimated lives of 54 to 57 months. The asset retirement costs and the corresponding liabilities that have been recorded to date generally relate to either current plans to consolidate networks or to the removal of assets at an estimated future terminal date.

The components of the changes in the asset retirement obligation liabilities:

 

     Short-Term
Portion
    Long-Term
Portion
    Total  
     (Dollars in thousands)  

Balance at December 31, 2011

   $ 794      $ 7,557      $ 8,351   

Accretion

     32        338        370   

Additions

     —          172        172   

Reclassifications

     793        (793     —     

Amounts paid

     (551     —          (551
  

 

 

   

 

 

   

 

 

 

Balance at June 30, 2012

   $ 1,068      $ 7,274      $ 8,342   
  

 

 

   

 

 

   

 

 

 

The balances above were included with accounts payable and accrued liabilities and other long-term liabilities, respectively, at June 30, 2012.

 

(12) Deferred Revenue

(12) Deferred Revenue – Deferred revenue on a consolidated basis at June 30, 2012 was $14.6 million for the current portion and $0.5 million for the non-current portion. Deferred revenue at June 30, 2012 consisted primarily of unearned maintenance revenue and customer deposits for installation services. Unearned maintenance revenue represented a contractual liability to provide maintenance support over a defined period of time for which payment has generally been received. Customer deposits for installation represented a contractual liability to provide installation services for which payments have been received. At June 30, 2012, we had received $1.9 million in customer deposits for future installation services. We will recognize revenue when the service or software is provided or otherwise meets our revenue recognition criteria.

The following table outlines the expected future recognition of deferred revenue at June 30, 2012:

 

     (Dollars in
thousands)
 

For the quarter ending:

  

September 30, 2012

   $ 7,642   

December 31, 2012

     3,931   

March 31, 2013

     1,888   

June 30, 2013

     1,085   

Thereafter

     511   
  

 

 

 

Total deferred revenue

   $ 15,057   
  

 

 

 

 

(13) Long-Term Debt

(13) Long-Term Debt – On November 8, 2011, we executed the First Amendment to our Amended and Restated Credit Agreement (“Amended Credit Agreement”) with Wells Fargo Capital Finance, LLC (“Wells Fargo”). The Amended Credit Agreement increased the amount of the revolving credit facility to $40.0 million. The maturity date for the revolving credit facility is September 3, 2015. We may make a London Interbank Offered Rate (“LIBOR”) rate election for any amount of our debt for a period of 1, 2 or 3 months at a time; however, we may not have more than 5 individual LIBOR rate loans in effect at any given time. We may only exercise the LIBOR rate election for an amount of at least $1.0 million.

The debt is secured by a lien on substantially all of our existing assets, interests in assets and proceeds owned or acquired by us.

 

11


On April 6, 2012, we repaid the $3.3 million that was outstanding under the Amended Credit Agreement. As of June 30, 2012, the Amended Credit Agreement remains in effect with $40.0 million of available borrowing capacity subject to maintaining a minimum liquidity threshold of $25.0 million. The $25.0 million liquidity threshold can be satisfied by maintaining cash on hand or borrowing capacity under the Amended Credit Agreement.

We are exposed to changes in interest rates should we have borrowings under the Amended Credit Agreement. The floating interest rate debt exposes us to interest rate risk, with the primary interest rate exposure resulting from changes in LIBOR. As of June 30, 2012, we have no debt outstanding or derivative financial instruments outstanding to manage our interest rate risk.

We are subject to certain financial covenants on a quarterly basis under the terms of the Amended Credit Agreement. These financial covenants consist of a leverage ratio and a fixed charge coverage ratio. We are in compliance with all of the required financial covenants as of June 30, 2012.

We have also established control agreements with the financial institutions that maintain our cash and investment accounts. These agreements permit Wells Fargo to exercise control over our cash and investment accounts should we default under provisions of the Amended Credit Agreement. We are not in default under the Amended Credit Agreement and do not anticipate that Wells Fargo would need to exercise its rights under these control agreements during the term of the Amended Credit Agreement.

 

12


 

(14) Other Long-Term Liabilities

(14) Other Long-Term Liabilities – Other long-term liabilities consisted of the following for the periods stated:

 

     June 30,
2012
     December 31,
2011
 
     (Dollars in thousands)  

Asset retirement obligations

   $ 7,274       $ 7,557   

Cash award - 2009 LTIP

     —           2,106   

Dividends payable

     138         1,424   

Escheat liability

     306         387   

Lease incentive

     184         208   

Deferred rent

     376         448   

State income tax

     —           93   

Royalty payable

     363         —     
  

 

 

    

 

 

 

Total other long-term liabilities

   $ 8,641       $ 12,223   
  

 

 

    

 

 

 

Cash award – 2009 LTIP was reclassified to accrued compensation and benefits from other long-term liabilities in the second quarter of 2012 since the award is expected to vest in December 2012. The RSUs awarded under the 2009 LTIP are also expected to vest in December 2012. Therefore, the related dividends payable was also reclassified in the second quarter of 2012 to accounts payable and accrued liabilities from other long-term liabilities based on the expected vesting in December 2012. State income tax was reclassified to accounts payable and accrued liabilities from other long-term liabilities in the first quarter of 2012 based on our assessment of the timing of payment of the liabilities.

 

13


 

(15) Stockholders' Equity

(15) Stockholders’ Equity – Our authorized capital stock consists of 75 million shares of common stock, par value $0.0001 per share, and 25 million shares of preferred stock, par value $0.0001 per share.

Changes in Stockholders’ Equity. Changes in stockholders’ equity for the six months ended June 30, 2012 consisted of:

 

     (Dollars in
thousands)
 

Balance at January 1, 2012

   $ 252,440   

Net income for the six months ended June 30, 2012

     16,908   

Cash dividends declared

     (11,184

Amortization of stock based compensation

     442   

Issued, purchased, retired common stock, and other

     420   
  

 

 

 

Balance at June 30, 2012

   $ 259,026   
  

 

 

 

General. At June 30, 2012 and December 31, 2011, there were 22,145,449 and 22,108,233 shares of common stock outstanding, respectively, and no shares of preferred stock outstanding.

At June 30, 2012, we had no stock options outstanding.

We established the USA Mobility, Inc. Equity Incentive Award Plan (the “2004 Equity Plan”) in connection with and prior to the November 2004 merger of Arch Wireless, Inc. (“Arch”) and Metrocall Holdings, Inc. (“Metrocall”) and subsidiaries. Under the 2004 Equity Plan, we had the ability to issue up to 1,878,976 shares of our common stock to eligible employees and non-executive members of the Board of Directors in the form of shares of common stock, stock options, shares of restricted common stock (“restricted stock”), RSUs or stock grants. Restricted stock awarded under the 2004 Equity Plan entitled the stockholder to all rights of common stock ownership except that the restricted stock may not be sold, transferred, exchanged, or otherwise disposed of during the restriction period, which will be determined by the Compensation Committee of the Board of Directors. RSUs are generally convertible into shares of common stock pursuant to the Restricted Stock Unit Agreement when the appropriate vesting conditions have been satisfied.

 

14


The following table summarizes the activities under the 2004 Equity Plan from inception through May16, 2012:

 

      Activity  

Equity securities approved

     1,878,976   

Less: Equity securities issued to eligible employees

  

2005 LTIP

     (103,937

2006 LTIP (1)

     (183,212

2009 LTIP

     (338,834

2011 LTIP

     (211,587

Short-Term Incentive Plan (“STIP”) (2)

     (159,573

Less: Equity securities issued to non-executive members of the Board of Directors

  

Restricted stock

     (86,086

Common stock (3)

     (28,696

Add: Equity securities forfeited by eligible employees

  

2005 LTIP

     22,488   

2006 LTIP

     21,358   

2009 LTIP

     80,104   

Add: Restricted stock forfeited by the non-executive members of the Board of Directors

     3,985   

Transfer of available equity securities to 2012 Equity Plan

     (894,986
  

 

 

 

Total available at May 16, 2012

     —     
  

 

 

 

 

(1)

On November 14, 2008, our Board of Directors approved an additional grant of 7,129 shares of restricted stock under the 2006 LTIP Initial Target Award to eligible employees. In March 2009, our Board of Directors approved an additional grant of 43,511 shares of common stock as an Additional Target Award under the 2006 LTIP to eligible employees.

(2)

Pursuant to his employment agreement, Mr. Vincent D. Kelly, our CEO received 50 percent of his STIP award in our common stock. In relation to his 2009 STIP award, on March 4, 2010 Mr. Kelly received 60,799 shares of common stock based on the closing stock price on February 26, 2010 of $11.26 per share. In relation to his 2010 STIP award, on March 4, 2011 Mr. Kelly received 47,455 shares of common stock based on the closing stock price on February 25, 2011 of $15.21 per share. In relation to his 2011 STIP award, on March 2, 2012 Mr. Kelly received 51,319 shares of common stock based on the closing stock price on February 24, 2012 of $14.10 per share.

(3)

19,605 existing RSUs were converted into shares of our common stock and issued to the non-executive members of our Board of Directors on March 17, 2008. In addition, 9,091 shares of common stock have been issued in lieu of cash payments to the non-executive members of our Board of Directors for services performed.

On March 23, 2012, our Board of Directors adopted the USA Mobility, Inc. 2012 Equity Incentive Award Plan (the “2012 Equity Plan”) subject to our stockholder’s approval. On May 16, 2012, our stockholders approved the 2012 Equity Plan. The 2012 Equity Plan is intended to replace the 2004 Equity Plan. No further grants will be made under the 2004 Equity Plan. However, the 2004 Equity Plan will continue to govern all outstanding awards thereunder. Any shares which were available for grant under the 2004 Equity Plan including awards that were forfeited or lapsed unexercised as of the date of stockholders’ approval will be available for grant under the 2012 Equity Plan. As of May 16, 2012, 894,986 shares available under the 2004 Equity Plan will be available for grant under the 2012 Equity Plan along with 1,300,000 shares for which stock awards may be granted under the 2012 Equity Plan. As of May 16, 2012, the maximum number of shares available for grant under the 2012 Equity Plan (excluding any shares that are subsequently forfeited or lapse unexercised under the 2004 Equity Plan, which shares will again be available for grant under 2012 Equity Plan) is 2,194,986. The shares available for grant under the 2012 Equity Plan were registered with the SEC on June 29, 2012.

Awards under the 2012 Equity Plan may be in the form of stock options, restricted common stock (“restricted stock”), RSUs, performance awards (a cash bonus award, a stock bonus award, a performance award or an incentive award that is paid in cash), dividends equivalents, stock payment awards, deferred stock, deferred stock units, or stock appreciation rights.

 

15


The following table summarizes the activities under the 2012 Equity Plan from May 16, 2012 through June 30, 2012:

 

     Activity  

Equity securities approved

     1,300,000   

Transfer of:

  

Equity securities available under the 2004 Equity Plan

     894,986   

Add: Equity securities forfeited by eligible employees under the 2011 LTIP

     101,294   
  

 

 

 

Total equity securities available at June 30, 2012

     2,296,280   
  

 

 

 

2009 LTIP. On January 6, 2009, our Board of Directors approved a long-term incentive program that included a cash component and a stock component in the form of RSUs based upon achievement of expense reduction and earnings before interest, taxes, depreciation, amortization and accretion goals during our 2012 calendar year and continued employment with the Company. RSUs were granted under the 2004 Equity Plan pursuant to a Restricted Stock Unit Agreement based upon the closing price per share of our common stock on January 15, 2009 of $12.01. Our Board of Directors awarded 329,416 RSUs to certain eligible employees and also approved that future cash dividends related to the existing RSUs will be set aside and paid in cash to each eligible employee when the RSUs are converted into shares of common stock. Existing RSUs would be converted into shares of common stock on the earlier of a change in control of the Company (as defined in the 2004 Equity Plan) or on or after the third business day following the day that we file our 2012 Annual Report on Form 10-K (“2012 Annual Report”) with the SEC but in no event later than December 31, 2013.

Any unvested RSUs granted under the 2004 Equity Plan and the related cash dividends are forfeited if the participant terminates employment with USA Mobility. As of December 31, 2011 a total of 80,104 RSUs have been forfeited offset by new grants of 9,418 RSUs resulting in an outstanding balance of 258,730 RSUs as of June 30, 2012. There were no forfeitures or additional grants in the first quarter and second quarter of 2012.

We used the fair-value based method of accounting for the 2009 LTIP and are amortizing $3.1 million to expense over the 48-month vesting period. A total of $0.2 million was included in stock based compensation expense for each of the three months ended June 30, 2012 and 2011, respectively, and a total of $0.4 million was included in stock based compensation expense for each of the six months ended June 30, 2012 and 2011, respectively, in relation to the 2009 LTIP.

Also on January 6, 2009, we provided for long-term cash performance awards to the same certain eligible employees under the 2009 LTIP. Similar to the RSUs, the vesting period for these long-term cash performance awards is 48 months upon attainment of the established performance goals and would be paid on the earlier of a change in control of the Company (as defined in the 2004 Equity Plan); or on or after the third business day following the day that we file our 2012 Annual Report with the SEC but in no event later than December 31, 2013.

We are ratably recognizing $3.0 million to expense over the 48-month vesting period. A total of $0.2 million was included in payroll and related expense for each of the three months ended June 30, 2012 and 2011, respectively, and a total of $0.4 million was included in payroll and related expense for each of the six months ended June 30, 2012 and 2011, respectively, for these long-term cash performance awards. Any unvested long-term cash performance awards are forfeited if the participant terminates employment with USA Mobility.

2011 LTIP. On March 15, 2011, our Board of Directors adopted a long-term incentive program that included a stock component in the form of RSUs. The 2011 LTIP provides eligible employees the opportunity to earn RSUs based upon achievement of performance goals, established by our Board of Directors for our revenue and operating cash flows (including software operations) during the period from January 1, 2011 through December 31, 2014

 

16


(the “performance period”), and continued employment with the Company. For the purpose of the 2011 LTIP as it relates to software operations, the performance period is considered as April 1, 2011 through December 31, 2014. On April 7, 2011, our Board of Directors granted eligible employees from Amcom RSUs under the 2004 Equity Plan pursuant to a Restricted Stock Unit Agreement based upon the closing price per share of our common stock on April 6, 2011 of $15.41. Our Board of Directors awarded 211,587 RSUs to certain eligible employees at Amcom and also approved that future cash dividends related to the existing RSUs will be set aside and paid in cash to each eligible employee when the RSUs are converted into shares of common stock. Existing RSUs would be converted into shares of common stock on the earlier of a change in control of the Company (as defined in the 2004 Equity Plan for RSUs granted before May 16, 2012 or the 2012 Equity Plan for future grants on or after May 16, 2012) or on or after the third business day following the day that we file our 2014 Annual Report on Form 10-K (“2014 Annual Report”) with the SEC but in no event later than December 31, 2015.

Any unvested RSUs granted and the related cash dividends are forfeited if the participant terminates employment with USA Mobility. During the second quarter of 2012, 101,294 RSUs and the related cash dividends were forfeited by two former executives resulting in an outstanding balance of 110,293 RSUs as of June 30, 2012. On July 1, 2012, our Board of Directors awarded an additional grant of 36,795 RSUs to certain eligible employees based on the closing price per share of our common stock on June 29, 2012 of $12.86 and also approved that future cash dividends relating to the existing RSUs will be set aside and paid in cash to each eligible employee when the RSUs are converted into shares of common stock. This resulted in an outstanding balance of 147,088 RSUs under the 2011 LTIP as of July 31, 2012.

We used the fair-value based method of accounting for the 2011 LTIP and are amortizing $1.5 million (after the effect of estimated forfeitures) to expense over the 45-month vesting period beginning on April 1, 2011 for the April 1, 2011 grant of RSUs and $0.4 million (after the effect of estimated forfeitures) to expense over the 30-month vesting period beginning on July 1, 2012 for the additional grant of RSUs awarded on July 1, 2012. A total of $0.2 million was included in stock based compensation expense for each of the three months ended June 30, 2012 and 2011, respectively, and a total of $0.4 million and $0.2 million was included in stock based compensation expense for the six months ended June 30, 2012 and 2011, respectively, in relation to the 2011 LTIP. Stock based compensation expense for the three months and six months ended June 30, 2012 included a net one-time benefit of $0.4 million for forfeitures under the 2011 LTIP associated with the departure of two former executives in our software operations.

Board of Directors Equity Compensation. On August 1, 2007, for periods of service beginning on July 1, 2007, our Board of Directors approved that, in lieu of RSUs, each non-executive director will be granted in arrears on the first business day following the quarter of service, restricted stock under the 2004 Equity Plan or the 2012 Equity Plan for their service on the Board of Directors and committees thereof. The restricted stock will be granted quarterly based upon the closing price per share of our common stock at the end of each quarter, such that each non-executive director will receive $40,000 per year of restricted stock ($50,000 for the Chair of the Audit Committee). The restricted stock will vest on the earlier of a change in control of the Company (as defined in the 2004 Equity Plan for restricted stock granted before May 16, 2012 or the 2012 Equity Plan for future grants on or after May 16, 2012) or one year from the date of grant, provided, in each case, that the non-executive director maintains continuous service on the Board of Directors. Future cash dividends related to the restricted stock will be set aside and paid in cash to each non-executive director on the date the restricted stock vests. In addition to the quarterly restricted stock grants, the non-executive directors will be entitled to cash compensation of $40,000 per year ($50,000 for the Chair of the Audit Committee), also payable quarterly. These sums are payable, at the election of the non-executive director, in the form of cash, shares of common stock, or any combination thereof.

 

17


The following table details information on the restricted stock vested or awarded to our non-executive directors in 2011 and 2012:

 

Service for the three months ended

   Grant Date    Price  Per
Share(1)
     Restricted
Stock
Awarded
     Restricted
Stock Vested
    Vesting Date    Restricted
Stock Awarded
and
Outstanding
     Cash
Dividends
Paid(2)
 

December 31, 2010

   January 3, 2011    $ 17.77         2,955         (2,955   January 3, 2012      —         $ 2,955   

March 31, 2011

   April 1, 2011      14.48         3,627         (3,627   April 2, 2012      —           3,627   

June 30, 2011

   July 1, 2011      15.26         3,439         (3,439   July 2, 2012      —           3,439   

September 30, 2011

   October 3, 2011      13.20         3,979         —        October 1, 2012      3,979         —     

December 31, 2011

   January 3, 2012      13.87         3,785         —        January 2, 2013      3,785         —     

March 31, 2012

   April 2, 2012      13.93         3,769         —        April 1, 2013      3,769         —     

June 30, 2012

   July 2, 2012      12.86         4,084         —        July 1, 2013      4,084         —     
        

 

 

    

 

 

      

 

 

    

 

 

 

Total

           25,638         (10,021        15,617       $ 10,021   
        

 

 

    

 

 

      

 

 

    

 

 

 

 

(1)

The quarterly restricted stock awarded is based on the price per share of our common stock on the last trading day prior to the quarterly award date.

(2) 

Amount excludes interest earned and paid upon vesting of shares of restricted stock.

The shares of restricted stock will vest one year from the date of grant and the related cash dividends on the vested restricted stock will be paid to our non-executive directors at vesting. Grants of shares of restricted stock made after May 16, 2012 will reduce the number of shares eligible for future issuance under the 2012 Equity Plan.

We used the fair-value based method of accounting for the equity awards. A total of $52,500 was included in stock based compensation expense for each of the three months ended June 30, 2012 and 2011, respectively, and a total of $0.1 million was included in stock based compensation expense for each of the six months ended June 30, 2012 and 2011, respectively, in relation to the restricted stock issued to our non-executive directors.

The following table details information on the cash dividends declared in 2012 relating to the restricted stock issued to our non-executive directors:

 

Year

 

Declaration

Date

 

Record Date

 

Payment Date

 

Per Share

Amount

 

Total Amount

2012

  February 22   March 16   March 30   $0.25   $3,708
  May 3   May 18   June 22   0.25   3,743
       

 

 

 

Total

        $0.50   $7,451
       

 

 

 

Board of Directors Common Stock. As of June 30, 2012, a cumulative total of 9,091 shares of common stock have been issued under the 2004 Equity Plan in lieu of cash payments to the non-executive directors for services performed. These shares of common stock reduced the number of shares eligible for future issuance under the 2004 Equity Plan.

Cash Dividends to Stockholders. The following table details our cash dividend payments made in 2012. Cash dividends paid as disclosed in the statements of cash flows for the six months ended June 30, 2012 and 2011 include previously declared cash dividends on shares of vested restricted stock issued to our non-executive directors. Cash dividends on RSUs and restricted stock have been accrued and are paid when the applicable vesting conditions are met. Accrued cash dividends on forfeited RSUs and restricted stock are also forfeited.

 

18


 

Year

 

Declaration

Date

 

Record Date

 

Payment Date

  Per Share
Amount
    Total
Payment(1)
 
                      (Dollars in thousands)  

2012

  February 22   March 16   March 30   $ 0.25      $ 5,535   
  May 3   May 18   June 22     0.25        5,540   
       

 

 

   

 

 

 

Total

        $ 0.50      $ 11,075   
       

 

 

   

 

 

 

 

(1)

The total payment reflects the cash dividends paid in relation to common stock and vested restricted stock.

Future Cash Dividends to Stockholders. On July 30, 2012, our Board of Directors reset the quarterly dividend distribution rate to $0.125 per share of common stock from $0.25 per share of common stock and declared a regular quarterly dividend distribution of $0.125 per share of common stock, with a record date of August 17, 2012, and a payment date of September 7, 2012. This dividend distribution of approximately $2.8 million will be paid from available cash on hand.

Common Stock Repurchase Program. On July 31, 2008, our Board of Directors approved a program to repurchase up to $50.0 million of our common stock in the open market during the twelve-month period commencing on or about August 5, 2008. As discussed below, this program has been extended. Credit Suisse Securities (USA) LLC will administer such purchases. We used available cash on hand and net cash provided by operating activities to fund the common stock repurchase program.

Repurchased shares of our common stock are accounted for as a reduction to common stock and additional paid-in-capital in the period in which the repurchase occurs.

The Company’s stock repurchase program has been extended at various dates between 2009 through 2012 by our Board of Directors. On July 24, 2012, our Board of Directors approved a fifth supplement to the common stock repurchase program effective August 1, 2012 which reset the repurchase authority to $25.0 million as of August 1, 2012 and extended the purchase period through December 31, 2013. This repurchase authority allows, at

 

19


management’s discretion, to selectively repurchase shares of our common stock from time to time in the open market depending upon market price and other factors. Without exceeding the $25.0 million repurchase authority during the purchase period (August 1, 2012 through December 31, 2013), the maximum repurchase authority for the period August 1, 2012 through December 31, 2012 is $13.5 million and the maximum repurchase authority for the calendar year 2013 is $19.1 million.

Through June 30, 2012 a total of 5,556,331 shares of our common stock has been repurchased under this program for approximately $51.7 million (excluding commissions).

Additional Paid-in Capital. For the six months ended June 30, 2012, additional paid-in capital increased by $0.9 million. The increase in 2012 was due primarily to amortization of stock based compensation and a net issuance of common stock under the 2011 STIP to our CEO after purchase of common stock from the CEO for his tax withholdings.

Net Income per Common Share. Basic net income per common share is computed on the basis of the weighted average common shares outstanding. Diluted net income per common share is computed on the basis of the weighted average common shares outstanding plus the effect of all potentially dilutive common shares including outstanding restricted stock using the “treasury stock” method plus the effect of outstanding RSUs, which are treated as contingently issuable shares. During the first quarter of 2012, we acquired a total of 21,657 shares of our common stock from our CEO in payment of required tax withholdings for the common stock awarded to him on March 2, 2012 related to the 2011 STIP. These shares of common stock acquired were retired and excluded from our reported outstanding share balance as of June 30, 2012. For the six months ended June 30, 2012, no shares of common stock were repurchased under our common stock repurchase program. For the six months ended June 30, 2012, the effect of 246 potential dilutive common shares was not included in the calculation for diluted net income per share as the impact was anti-dilutive. The components of basic and diluted net income per common share were as follows for the periods stated:

 

     For the Three Months Ended
June 30,
     For the Six Months Ended
June 30,
 
     2012      2011      2012      2011  
     (Dollars in thousands, except share and per share amounts)  

Net income

   $ 8,447       $ 18,595       $ 16,908       $ 59,246   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average shares of common stock outstanding

     22,130,397         22,086,848         22,118,470         22,075,185   

Dilutive effect of restricted stock and RSUs

     483,120         465,014         483,132         368,232   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average shares of common stock and common stock equivalents

     22,613,517         22,551,862         22,601,603         22,443,417   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income per common share

           

Basic

   $ 0.38       $ 0.84       $ 0.76       $ 2.68   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted

   $ 0.37       $ 0.82       $ 0.75       $ 2.64   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(16) Stock Based Compensation

(16) Stock Based Compensation – Compensation expense associated with RSUs and restricted stock is recognized based on the fair value of the instruments, over the instruments’ vesting period. Stock based compensation expense for wireless operations was $0.3 million for each of the three months ended June 30, 2012 and 2011, respectively, and $0.5 million for each of the six months ended June 30, 2012 and 2011, respectively. Stock based compensation expense for software operations was a net benefit of $0.3 million for the three months ended June 30, 2012 and a net expense of $0.2 million for the three months ended June 30, 2011, respectively, and a net benefit of $0.1 million for the six months ended June 30, 2012 and a net expense of $0.2 million for the six months ended June 30, 2011, respectively. Stock based compensation expense for software operations for the three

 

20


months and six months ended June 30, 2012 included a benefit of $0.4 million for forfeitures under the 2011 LTIP associated with the departure of two former executives. The following table reflects the results of operations line items for stock based compensation expense for the periods stated:

 

     For the Three Months Ended
June 30,
     For the Six Months  Ended
June 30,
 

Operating Expense Category

   2012     2011      2012      2011  
     (Dollars in thousands)  

Service, rental and maintenance

   $ 6      $ 6       $ 12       $ 11   

Selling and marketing

     18        16         34         33   

General and administrative

     (19     432         396         635   
  

 

 

   

 

 

    

 

 

    

 

 

 

Total stock based compensation

   $ 5      $ 454       $ 442       $ 679   
  

 

 

   

 

 

    

 

 

    

 

 

 

 

(17) Research and Product Development

(17) Research and Product Development – Research and product development costs are expensed as incurred and are reflected in service, rental and maintenance expenses. Costs eligible for capitalization were not material to the consolidated financial statements.

 

(18) Advertising Costs

(18) Advertising Costs – Advertising costs are charged to operations when incurred because they occur in the same period as the benefit is derived. These costs are included in selling and marketing. We do not incur any direct response advertising costs. Advertising expenses were $13,000 and $7,100 for the three months ended June 30, 2012 and 2011, respectively, and $18,100 and $12,400 for the six months ended June 30, 2012 and 2011, respectively, for wireless operations. Advertising expenses were $0.2 million and $0.1 million for the three months ended June 30, 2012 and 2011, respectively, and $0.3 million and $0.2 million for the six months ended June 30, 2012 and 2011, respectively, for software operations.

 

(19) Income Taxes

(19) Income Taxes – We file our income tax returns as prescribed by the tax laws of the jurisdictions in which we operate. Our Federal income tax returns have been examined by the IRS through the year ended December 31, 2008. Amcom’s separate Federal income tax returns have been audited through the fiscal year ended March 31, 2010 (2009 return). Amcom’s final separate company Federal income tax return was filed for the stub period ended on March 2, 2011 (2010 return) on August 15, 2011.

We are required to evaluate the recoverability of our deferred income tax assets. The assessment is required to determine whether based on all available evidence, it is more likely than not (i.e., greater than a 50% probability) whether all or some portion of the deferred income tax assets will be realized in the future. At June 30, 2012, we had total deferred income tax assets of $165.3 million and a valuation allowance of $115.8 million resulting in an estimated recoverable amount of deferred income tax assets of $49.5 million. This reflected a change from the December 31, 2011 balance of deferred income tax assets of $175.9 million and a valuation allowance of $115.7 million resulting in an estimated recoverable amount of $60.2 million. The change reflected the expected usage of the deferred income tax assets based on the estimates of 2012 taxable income.

At June 30, 2012 and December 31, 2011, the balance of the valuation allowance was $115.8 million and $115.7 million, respectively. Included in the valuation allowance were $0.6 million and $0.7 million for foreign operations at June 30, 2012 and December 31, 2011, respectively.

The anticipated effective income tax rate is expected to continue to differ from the Federal statutory rate of 35% due to the effect of changes to the deferred income tax asset valuation allowance, the effect of state income taxes, foreign rate differential, permanent differences between book and taxable income, and certain discrete items.

As of December 31, 2011, we had approximately $421.6 million of Federal net operating losses (“NOLs”) available to offset future taxable income after considering estimated NOLs of $63.6 million to be utilized in preparing the 2011 Federal income tax return, which must be filed by September 15, 2012. This amount is net of the Internal Revenue Code Section 382 (“IRC Section 382”) limitation. The IRC Section 382 limited NOLs as of January 1, 2012 totaled $61.0 million which may be used at a rate of $6.1 million per year.

 

21


 

(20) Related Party Transactions

(20) Related Party Transactions – A member of our Board of Directors also served as a director for an entity that leases transmission tower sites to our Company. For the three months ended June 30, 2012 and 2011, we paid that entity $1.0 million and $2.0 million, respectively, and for the six months ended June 30, 2012 and 2011, we paid that entity $2.4 million and $4.7 million, respectively, in site rent expenses for wireless operations that were included in service, rental and maintenance expenses.

 

(21) Commitments and Contingencies

(21) Commitments and Contingencies – In May 2012, we contracted for a managed service-hosting provider for certain computer support services over a three-year contract term for $0.5 million.

We are involved, from time to time, in lawsuits arising in the normal course of business. We believe these pending lawsuits will not have a material adverse impact on our financial results or operations.

The following amends and restates the description of previously reported legal contingencies in the 2011 Annual Report for which there has been a material development during the quarter ended June 30, 2012.

Filed Litigation. On June 25, 2012, Mr. and Mrs. Andre C. Franco (collectively the “Plaintiffs”) filed a lawsuit in the Circuit Court for Montgomery County, Maryland against Metrocall, Inc. (now USA Mobility Wireless, Inc. “Wireless”), and an employee of Wireless (collectively “the Defendants”). The lawsuit arose from a vehicle accident involving the employee in December 2009. The Plaintiffs seek damages of $21.0 million jointly and severally from the Defendants.

We are fully insured for these damages and our defense against this claim has been assumed by the insurance carrier who has designated legal counsel to handle this lawsuit on our behalf. We do not expect the monetary settlement of this lawsuit, if any, would have a material impact on our financial condition or results of operations.

 

(22) Segment Reporting

(22) Segment Reporting – With the acquisition of Amcom on March 3, 2011, we currently have two reportable operating segments: a Wireless segment and a Software segment. These segments are operated and managed as strategic business units and are organized by products and services. We measure and evaluate our segments based on segment operating income, consistent with the chief operating decision maker’s assessment of segment performance.

Our segments and their principal activities consist of the following:

 

  Wireless    Provides local, regional and nationwide one-way paging and advanced two-way messaging services and mobile voice and data services through third party providers.
  Software    Provides mission critical unified communications solutions for contact centers, emergency management, mobile event notification and messaging.

We use a non-GAAP financial measure as a key element in determining performance for purposes of incentive compensation under our annual STIP. That non-GAAP financial measure is operating cash flow (“OCF”) defined as earnings before interest, taxes, depreciation, amortization and accretion (“EBITDA”) less purchases of property and equipment. (EBITDA is defined as operating income plus depreciation, amortization and accretion, each determined in accordance with GAAP). Purchases of property and equipment are also determined in accordance with GAAP.

 

22


The following table presents the key financial metrics of our segments for the periods stated:

 

     For the Three Months
Ended June 30,
    For the Six Months
Ended June 30,
 
     2012     2011     2012     2011(1)  
     (Dollars in thousands)  

Revenues:

        

Wireless

   $ 42,783      $ 52,091      $ 87,048      $ 104,627   

Software

     13,178        13,080        25,648        17,879   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     55,961        65,171        112,696        122,506   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

Wireless

     28,872        35,314        58,459        74,931   

Software

     13,279        13,694        26,170        18,036   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     42,151        49,008        84,629        92,967   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss):

        

Wireless

     13,911        16,777        28,589        29,696   

Software

     (101     (614     (522     (157
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating income

   $ 13,810      $ 16,163      $ 28,067      $ 29,539   
  

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA (as defined by the Company):

        

Wireless

   $ 16,765      $ 20,395      $ 34,258      $ 37,346   

Software

     1,651        1,066        2,930        2,030   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total EBITDA

     18,416        21,461        37,188        39,376   
  

 

 

   

 

 

   

 

 

   

 

 

 

% of revenue

     32.9     32.9     33.0     32.1

Capital expenditures:

        

Wireless

     2,854        1,721        4,373        3,215   

Software

     34        133        66        140   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total capital expenditures

     2,888        1,854        4,439        3,355   
  

 

 

   

 

 

   

 

 

   

 

 

 

OCF (as defined by the Company):

        

Wireless

     13,911        18,674        29,885        34,131   

Software

     1,617        933        2,864        1,890   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total OCF

   $ 15,528      $ 19,607      $ 32,749      $ 36,021   
  

 

 

   

 

 

   

 

 

   

 

 

 

% of revenue

     27.7     30.1     29.1     29.4

 

(1) 

Software operations reflect financial results from March 3, 2011 to June 30, 2011 and are net of reduction to maintenance revenue as required by acquisition accounting to reflect fair value.

Segment information for total assets is not presented as such information is not used in measuring segment performance or allocating resources among segments.

 

23


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This Quarterly Report on Form 10-Q (“Quarterly Report”) contains forward-looking statements and information relating to USA Mobility, Inc. and its subsidiaries (“USA Mobility” or the “Company”) that set forth anticipated results based on management’s current plans, known trends and assumptions. These statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Statements that are predictive in nature, that depend upon or refer to future events or conditions, or that include words such as “anticipate”, “believe”, “estimate”, “expect”, “intend”, “will”, “target”, “forecast” and similar expressions, as they relate to USA Mobility are forward-looking statements.

Although these statements are based upon current plans, known trends and assumptions that management considers reasonable, they are subject to certain risks, uncertainties and assumptions, including but not limited to those discussed below and under the captions “Business,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”),” and “Part I – Item 1A –Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2011, filed with the United States Securities and Exchange Commission (the “SEC”) on February 23, 2012 (the “2011 Annual Report”). Should known or unknown risks or uncertainties materialize, known trends change, or underlying assumptions prove inaccurate, actual results or outcomes may differ materially from past results and those described herein as anticipated, believed, estimated, expected or intended. Investors are cautioned not to place undue reliance on these forward-looking statements.

The Company undertakes no obligation to update forward-looking statements. Investors are advised to consult all further disclosures the Company makes in its subsequent reports on Form 10-Q and Form 8-K that it will file with the SEC. Also note that, in the risk factors, the Company provides a cautionary discussion of risks, uncertainties and possibly inaccurate assumptions relevant to its business. These are factors that, individually or in the aggregate, could cause the Company’s actual results to differ materially from past results as well as those results that may be forecasted, anticipated, believed, estimated, expected or intended. It is not possible to predict or identify all such risk factors. Consequently, investors should not consider the risk factor discussion to be a complete discussion of all of the potential risks or uncertainties that could affect USA Mobility’s business, results of operations or financial condition, subsequent to the filing of this Quarterly Report.

Overview

The following MD&A is intended to help the reader understand the results of operations and financial condition of USA Mobility. The MD&A is provided as a supplement to, and should be read in conjunction with, our 2011 Annual Report and our condensed consolidated financial statements and accompanying notes.

USA Mobility, a holding company, which, acting through our indirect wholly-owned subsidiary, USA Mobility Wireless, Inc. (“wireless operations”), is a leading provider of wireless messaging, mobile voice and data and unified communications solutions in the United States. In addition, through our indirect wholly-owned subsidiary, Amcom Software, Inc. (“Amcom” or “software operations”), we provide mission critical unified communications solutions for contact centers, emergency management, mobile event notification, and Smartphone messaging. Our combined product offerings are capable of addressing a customer’s mission critical communications needs. We offer our services and products in the United States and abroad primarily to three major market segments: healthcare, government and large enterprise.

We generate revenue by providing paging services, developing, licensing, and supporting a wide range of software products and services. Our most significant expenses are related to compensating employees, site rents, telecommunications and income taxes.

 

24


Wireless Operations

Our wireless operations provide one-way and advanced two-way wireless messaging services including information services throughout the United States. We also offer voice mail, personalized greeting, message storage and retrieval, and equipment loss and/or maintenance protection to both one-way and two-way messaging subscribers. We market and distribute these wireless messaging and information services through a direct sales force and a small indirect sales channel.

Direct. The direct sales force rents or sells products and messaging services directly to customers ranging from small and medium-sized businesses to companies in the Fortune 1000, healthcare and related businesses, and Federal, state and local government agencies. We intend to continue to market to commercial enterprises utilizing our direct sales force as these commercial enterprises have typically disconnected service at a lower rate than individual consumers. Our sales personnel maintain a sales presence throughout the United States. In addition, we maintain several corporate sales groups focused on medical sales, Federal government accounts, large enterprises, advanced wireless services, emergency/mass notification services, and other product offerings.

Indirect. Within the indirect channel, we contract with and invoice an intermediary for airtime services (which includes telemetry services). The intermediary or “reseller” in turn markets, sells, and provides customer service to the end user. Generally, there is no contractual relationship that exists between us and the end subscriber. Therefore, operating costs per unit to provide these services are lower than those required in the direct distribution channel. Indirect units in service typically have lower average revenue per unit (“ARPU”) than direct units in service. The rate at which subscribers disconnect service in the indirect distribution channel has generally been higher than the rate experienced with direct customers, and we expect this trend to continue in the foreseeable future.

The following table summarizes the breakdown of our direct and indirect units in service at specified dates:

 

     As of June 30, 2012     As of March 31, 2012     As of June 30, 2011  

Distribution Channel

   Units      % of Total     Units      % of Total     Units      % of Total  
     (Units in thousands)  

Direct

     1,477         93.3     1,508         93.2     1,656         93.1

Indirect

     106         6.7     109         6.8     123         6.9
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

     1,583         100.0     1,617         100.0     1,779         100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

The following table sets forth information on our direct units in service by account size for the periods stated:

 

     As of June 30, 2012     As of March 31, 2012     As of June 30, 2011  

Account Size

   Units      % of Total     Units      % of Total     Units      % of Total  
     (Units in thousands)  

1 to 3 Units

     58         3.9     61         4.1     74         4.5

4 to 10 Units

     35         2.3     37         2.5     45         2.7

11 to 50 Units

     82         5.6     86         5.7     106         6.4

51 to 100 Units

     52         3.6     54         3.6     68         4.1

101 to 1000 Units

     356         24.1     373         24.7     411         24.8

> 1000 Units

     894         60.5     897         59.4     952         57.5
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total direct units in service

     1,477         100.0     1,508         100.0     1,656         100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Customers may subscribe to one-way or two-way messaging services for a periodic (monthly, quarterly, semi-annual, or annual) service fee which is generally based upon the type of service provided, the geographic area covered, the number of devices provided to the customer and the period of commitment. Voice mail, personalized greeting, and equipment loss and/or maintenance protection may be added to either one-way or two-way messaging services, as applicable, for an additional monthly fee. Equipment loss protection allows subscribers who lease devices to limit their cost of replacement upon loss or destruction of a messaging device. Maintenance services are offered to subscribers who own their device.

 

25


A subscriber to one-way messaging services may select coverage on a local, regional or nationwide basis to best meet their messaging needs. Local coverage generally allows the subscriber to receive messages within a small geographic area, such as a city. Regional coverage allows a subscriber to receive messages in a larger area, which may include a large portion of a state or sometimes groups of states. Nationwide coverage allows a subscriber to receive messages in major markets throughout the United States. The monthly fee generally increases with the size of the coverage area. Two-way messaging is generally offered on a nationwide basis.

The following table summarizes the breakdown of our one-way and two-way units in service at specified dates:

 

     As of June 30, 2012     As of March 31, 2012     As of June 30, 2011  

Service Type

   Units      % of Total     Units      % of Total     Units      % of Total  
     (Units in thousands)  

One-way messaging

     1,453         91.8     1,483         91.7     1,630         91.6

Two-way messaging

     130         8.2     134         8.3     149         8.4
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

     1,583         100.0     1,617         100.0     1,779         100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

The demand for one-way and two-way messaging services declined at each specified date and we believe demand will continue to decline for the foreseeable future. Demand for our services has also been impacted by the weak United States economy and high unemployment rates nationwide. To the extent that unemployment rates may remain high or increase for the remainder of 2012, we anticipate an unfavorable impact on the level of subscriber cancellations.

We provide wireless messaging services to subscribers for a periodic fee, as described above. In addition, subscribers either lease a messaging device from us for an additional fixed monthly fee or they own a device, having purchased it either from us or from another vendor. We also sell devices to resellers who lease or resell devices to their subscribers and then sell messaging services utilizing our networks.

We derive the majority of our revenues from fixed monthly or other periodic fees, charged to subscribers for wireless messaging services. Such fees are not generally dependent on usage. As long as a subscriber maintains service, operating results benefit from recurring payment of these fees. Revenues are generally based upon the number of units in service and the monthly charge per unit. The number of units in service changes based on subscribers added, referred to as gross placements, less subscriber cancellations, or disconnects. The net of gross placements and disconnects is commonly referred to as net gains or losses of units in service or net disconnect rate. The absolute number of gross placements as well as the number of gross placements relative to average units in service in a period, referred to as the gross placement rate, is monitored on a monthly basis. Disconnects are also monitored on a monthly basis. The ratio of units disconnected in a period to average units in service for the same period, called the disconnect rate, is an indicator of our success at retaining subscribers, which is important in order to maintain recurring revenues and to control operating expenses.

The following table sets forth our gross placements and disconnects for the periods stated:

 

     For the Three Months Ended  
     June 30, 2012      March 31, 2012      June 30, 2011  

Distribution Channel

   Gross
Placements
     Disconnects      Gross
Placements
     Disconnects      Gross
Placements
     Disconnects  
     (Units in thousands)  

Direct

     53         84         44         91         61         104   

Indirect

     2         5         1         5         5         11   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     55         89         45         96         66         115   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

26


The following table sets forth information on the direct net disconnect rate by account size for our direct customers for the periods stated:

 

     For the Three Months Ended  

Account Size

   June 30, 2012     March 31, 2012     June 30, 2011  

1 to 3 Units

     (5.7%     (6.2%     (6.3%

4 to 10 Units

     (6.2%     (6.2%     (6.8%

11 to 50 Units

     (4.1%     (7.1%     (6.5%

51 to 100 Units

     (2.4%     (3.9%     (5.4%

101 to 1000 Units

     (4.7%     (1.7%     (3.3%

> 1000 Units

     (0.3%     (2.7%     (1.0%
  

 

 

   

 

 

   

 

 

 

Total direct net unit loss %

     (2.0%     (3.0%     (2.6%
  

 

 

   

 

 

   

 

 

 

The other factor that contributes to revenue, in addition to the number of units in service, is the monthly charge per unit. As previously discussed, the monthly charge per unit is dependent on the subscriber’s service, extent of geographic coverage, whether the subscriber leases or owns the messaging device and the number of units the customer has in the account. The ratio of revenues for a period to the average units in service for the same period, commonly referred to as ARPU, is a key revenue measurement as it indicates whether charges for similar services and distribution channels are increasing or decreasing. ARPU by distribution channel and messaging service are monitored regularly.

The following table sets forth ARPU by distribution channel for the periods stated:

 

     ARPU For the Three Months Ended  

Distribution Channel

   June 30,
2012
     March 31,
2012
     June 30,
2011
 

Direct

   $ 8.62       $ 8.67       $ 8.92   

Indirect

     5.97         6.14         6.40   

Consolidated

     8.45         8.50         8.74   

While ARPU for similar services and distribution channels is indicative of changes in monthly charges and the revenue rate applicable to new subscribers, this measurement on a consolidated basis is affected by several factors, including the mix of units in service and the pricing of the various components of our services. We expect future sequential annual revenues to decline in line with recent trends. The change in ARPU in the direct distribution channel is the most significant indicator of rate-related changes in our revenues. The decrease in consolidated ARPU for the quarter ended June 30, 2012 from the previous quarters was due to the change in composition of our customer base as the percentage of units in service attributable to larger customers continues to increase. These larger customers benefit from lower pricing associated with their larger number of units-in-service. We believe that without further price adjustments, ARPU would trend lower for both the direct and indirect distribution channels in 2012 and that price increases could mitigate, but not completely offset, the expected declines in both ARPU and revenues.

 

27


The following table sets forth information on direct ARPU by account size for the periods stated:

 

     For the Three Months Ended  

Account Size

   June 30, 2012      March 31, 2012      June 30, 2011  

1 to 3 Units

   $ 15.49       $ 15.49       $ 15.74   

4 to 10 Units

     14.40         14.45         14.65   

11 to 50 Units

     12.24         12.15         12.38   

51 to 100 Units

     10.35         10.52         10.68   

101 to 1000 Units

     9.01         9.04         9.10   

> 1000 Units

     7.34         7.35         7.49   
  

 

 

    

 

 

    

 

 

 

Total direct ARPU

   $ 8.62       $ 8.67       $ 8.92   
  

 

 

    

 

 

    

 

 

 

Software Operations

Our primary business in the software operations is the sale of software, professional services (consulting and training), equipment sales (to be used in conjunction with the software) and post-contract support (on-going maintenance). The software is licensed to end users under an industry standard software license agreement. Our software products are considered to be “off-the-shelf software” with the software marketed as a stock item that customers can use with little or no customization. Such sales generate license fees (or revenues). In addition to the license fees, we generate revenue through the delivery of implementation services and training, annual maintenance revenues and the sale of third party equipment for use with the software.

Specifically, we develop, sell, and support enterprise-wide systems for hospitals and other organizations needing to automate, centralize, and standardize mission critical communications. These solutions are used for contact centers, emergency management, mobile event notification and messaging. We are focused on marketing these solutions primarily to the healthcare sector and to a lesser extent the government and large enterprise sectors. These areas of market focus compliment the market focus of our wireless operations outlined above. We have a sales presence and customer base both domestically and internationally, specifically in Europe, Australia and Asia.

Our software operations are organized as follows to support this business:

Marketing. We have a centralized marketing function which is focused on supporting our software products and vertical sales efforts by strengthening our Amcom brand, generating sales leads, and facilitating the sales process. These marketing functions are accomplished through targeted email campaigns, webinars, regional and national user conferences, monthly newsletters, and participation at industry trade shows.

Sales. We sell our software products through a direct and channel sales force. The direct sales effort is geographically focused with the exception of dedicated government and certain large enterprise sales specialists. The direct sales force targets unified communication executives such as chief information officers, information technology directors, telecommunications directors and contact center managers. The timing for a direct sale from initial contact to final sale ranges from 6 to 18 months depending on the type of software solution. The average size for a new sale is approximately $135,000, with the sale of additional modules or software upgrades estimated at $80,000.

The direct sales force is complemented by a channel sales force consisting of a dedicated team of managers. These managers coordinate relationships with telecommunication focused alliance partners who provide sales introductions for our direct sales force.

Professional Services. We offer implementation services for our software products. These implementation services are provided by a dedicated group of professional service employees. Our professional services staff uses a branded, consistent methodology that provides a comprehensive phased work plan for both new software installations and/or upgrades. In support of our implementation methodology, we manage the various aspects of the process through a professional services automation tool. A typical implementation process ranges from 60 to 90 days depending on the type of implementation.

 

28


Customer Support. To support our software products, we have established a dedicated customer support organization. Due to the mission critical nature of our software products, we provide 24 hours a day, 7 days a week, 365 days a year customer support that customers can access via telephone, email or the Internet.

Product Development. We maintain a product development group focused on developing new software products and enhancing existing products. Our product development group, supported by a limited group of external developers, uses a methodology that balances enhancement requests from a number of sources including customers, the professional services staff, customer support incidents, known defects, market and technology trends, and competitive requirements. These requests are reviewed and prioritized based on criteria that include the potential for increased revenues, customer/employee satisfaction, possible cost savings and development time and expense.

We recognize operations revenue when the application is installed and operational at the customer location. It consists of software license revenue, professional services revenue and equipment sales. Maintenance revenue is for ongoing support of a software application and is recognized ratably over the period of coverage, typically one year. The maintenance renewal rates for the three months ended June 30, 2012 and 2011 were 98.8% and 99.9%, respectively. Revenue from software operations is included in product and related sales, net in the condensed consolidated results of operations and reflects results from March 3, 2011, the acquisition date. The detailed breakout of revenues by component from software operations was as follows for the periods stated below. Revenue from software operations for the three months and six months ended June 30, 2011 included a reduction of $2.6 million and $3.5 million, respectively, required by acquisition accounting to reflect fair value.

 

Revenue

   For the Three Months Ended
June 30,
     For the Six Months Ended
June 30,
 
     2012      2011 (1)      2012      2011 (2)  
     (Dollars in thousands)  

Software licenses

   $ 2,517       $ 4,557       $ 4,467       $ 6,293   

Professional services

     2,568         2,787         5,019         4,138   

Equipment sales

     1,610         2,574         3,266         3,370   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total operations revenue

     6,695         9,918         12,752         13,801   

Maintenance revenue

     6,483         3,162         12,896         4,078   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total software operations revenue

   $ 13,178       $ 13,080       $ 25,648       $ 17,879   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

Maintenance revenues for the three months ended June 30, 2011 included a reduction of $2.6 million required by acquisition accounting to reflect fair value.

(2)

Software operations revenue reflected results from March 3, 2011 to June 30, 2011. Maintenance revenues for the six months ended June 30, 2011 included a reduction of $3.5 million required by acquisition accounting to reflect fair value.

Each month our software operations receive purchase orders from customers (irrespective of revenue type). These purchase orders are reported as bookings. The following table summarizes total bookings for the periods stated:

 

Bookings

   For the Three Months Ended
June 30,
     For the Six Months Ended
June 30,
 
     2012      2011      2012      2011 (1)  
     (Dollars in thousands)  

Operations revenue

   $ 7,250       $ 7,900       $ 14,294       $ 10,141   

Maintenance renewals

     7,836         7,258         13,208         8,344   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total bookings

   $ 15,086       $ 15,158       $ 27,502       $ 18,485   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

Bookings reflected operations from March 3, 2011 to June 30, 2011.

 

29


Software operations reported a backlog of $25.4 million at June 30, 2012, which represented all purchase orders received from customers not yet recognized as revenue. The following table reconciles our reported backlog at June 30, 2012:

 

Backlog

   June 30, 2012  
     (Dollars in
thousands)
 

Beginning balance at January 1, 2012

   $ 23,712   

Operations bookings for six months

     14,294   

Maintenance renewals for six months

     13,208   
  

 

 

 

Available backlog

   $ 51,214   

Operations revenue for six months

     (12,752

Maintenance revenue for six months

     (12,896

Other (1)

     (213
  

 

 

 

Total backlog at June 30, 2012

   $ 25,353   
  

 

 

 

 

(1)

Other reflects cancellations and other adjustments.

Operations - Consolidated

Our operating expenses are presented in functional categories. Certain of our functional categories are especially important to overall expense control and management; these operating expenses are categorized as follows:

 

   

Cost of product sold. These are expenses associated with costs for pagers for the wireless operations and hardware, third-party software, professional services, payroll and related expenses, and various other expenses associated with the software operations.

 

   

Service, rental, and maintenance. These are expenses associated with the operation of our networks and the provision of messaging services. Expenses consist largely of site rent expenses for transmitter locations, telecommunication expenses to deliver messages over our networks, and payroll and related expenses for our engineering and pager repair functions. Expenses related to the development and maintenance of our software products are included in this category.

 

   

Selling and marketing. These are expenses associated with our direct sales force and indirect sales channel and marketing expenses in support of those sales groups. This classification consists primarily of payroll and related expenses and commission expenses. These expenses also include expenses associated with selling and marketing our software products.

 

   

General and administrative. These are expenses associated with customer service, inventory management, billing, collections, bad debt, and other administrative functions. This classification consists primarily of payroll and related expenses, facility rent expenses, tax, license and permit expenses, and outside service expenses.

We review the percentages of these operating expenses to revenues on a regular basis. Even though the operating expenses are classified as described above, expense control and management are also performed by expense category. Approximately 70% of the operating expenses referred to above were incurred in payroll and related expenses, site and facility rent expenses and telecommunication expenses for both the three months and six months ended June 30, 2012 and 2011, respectively.

 

30


Payroll and related expenses include wages, incentives, employee benefits and related taxes. On a monthly basis, we review the number of employees in major functional categories such as direct sales, engineering and technical staff, customer service, collections and inventory. We also review the design and physical locations of functional groups to continuously improve efficiency, to simplify organizational structures, and to minimize the number of physical locations for the wireless operations. We have reduced our wireless employee base by approximately 13.5% to 411 full-time equivalent employees (“FTEs”) at June 30, 2012 from 475 FTEs at June 30, 2011. We anticipate continued staffing reductions in 2012 for wireless operations, consistent with the subscriber and revenue trends, and we have accrued post-employment benefits for these anticipated staffing reductions. We expect staffing increases associated with our software operations to support our software revenue growth. The software operations had 275 FTEs at June 30, 2012, an increase of 10.9% from 248 FTEs at June 30, 2011.

Site rent expenses for transmitter locations are largely dependent on our paging networks. We operate local, regional, and nationwide one-way and two-way paging networks. These networks each require locations on which to place transmitters, receivers, and antennae. Generally, site rent expenses are incurred for each transmitter location. Therefore, site rent expenses for transmitter locations are highly dependent on the number of transmitters, which in turn is dependent on the number of networks. In addition, these expenses generally do not vary directly with the number of subscribers or units in service, which is detrimental to our operating margins as revenues decline. In order to reduce these expenses, we have an active program to consolidate the number of networks, and thus transmitter locations, which we refer to as network rationalization. We have reduced the number of active transmitters by 8.7% to 4,795 active transmitters at June 30, 2012 from 5,253 active transmitters at June 30, 2011.

Telecommunication expenses are incurred to interconnect our paging networks and to provide telephone numbers for customer use, points of contact for customer service, and connectivity among our offices. These expenses for wireless operations are dependent on the number of units in service and the number of office and network locations that we maintain. The dependence on units in service is related to the number of telephone numbers provided to customers and the number of telephone calls made to our call centers, though this is not always a direct dependency. For example, the number or duration of telephone calls to call centers may vary from period to period based on factors other than the number of units in service, which could cause telecommunication expenses to vary regardless of the number of units in service. In addition, certain phone numbers we provide to our customers may have a usage component based on the number and duration of calls to the subscriber’s messaging device. Telecommunication expenses do not necessarily vary in direct relationship to units in service. Therefore, based on the factors discussed above, efforts are underway to review and reduce telephone circuit inventories for wireless operations. Telecommunication expenses are also incurred for our offices and call centers for software operations.

 

31


Results of Operations

Comparison of Revenues and Selected Operating Expenses for the Three Months Ended June 30, 2012 and 2011

 

     For the Three Months Ended June 30,      Change Between  
     2012      2011      2012 and 2011  
     Wireless      Software      Total      Wireless      Software(1)      Total      Total     %  
     (Dollars in thousands)  

Revenues:

                      

Service, rental and maintenance, net

   $ 41,114       $ —         $ 41,114       $ 49,286       $ —         $ 49,286       $ (8,172     (16.6%

Product and related sales, net

     1,669         13,178         14,847         2,805         13,080         15,885         (1,038     (6.5%
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 42,783       $ 13,178       $ 55,961       $ 52,091       $ 13,080       $ 65,171       $ (9,210     (14.1%
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Selected operating expenses:

                      

Cost of products sold

   $ 156       $ 5,060       $ 5,216       $ 1,171       $ 5,907       $ 7,078       $ (1,862     (26.3%

Service, rental and maintenance

     11,464         2,428         13,892         14,211         1,976         16,187         (2,295     (14.2%

Selling and marketing

     2,972         2,947         5,919         3,946         2,642         6,588         (669     (10.2%

General and administrative

     11,426         1,068         12,494         12,351         1,489         13,840         (1,346     (9.7%

Severance and restructuring

     —           24         24         17         —           17         7        41.2%   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 26,018       $ 11,527       $ 37,545       $ 31,696       $ 12,014       $ 43,710       $ (6,165     (14.1%
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

FTEs

     411         275         686         475         248         723         (37     (5.1%
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Active transmitters

     4,795         —           4,795         5,253         —           5,253         (458     (8.7%
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

(1) 

Software operations are net of a reduction to maintenance revenue required by acquisition accounting to reflect fair value.

Revenues - Wireless

Our total revenues were $42.8 million and $52.1 million for the three months ended June 30, 2012 and 2011, respectively. Service, rental and maintenance revenues, net consist primarily of recurring fees associated with the provision of messaging services and rental of leased units and is net of a provision for service credits. Product and related sales, net consist primarily of revenues associated with the sale of devices and charges for leased devices that are not returned and are net of anticipated credits. The decrease in revenues reflected the decrease in demand for our wireless services. The table below details total service, rental and maintenance revenues, net for the periods stated:

 

     For the Three Months Ended
June 30,
 
     2012      2011  
     (Dollars in thousands)  

Service, rental and maintenance revenues, net:

     

Paging:

     

Direct:

     

One-way messaging

   $ 33,353       $ 38,357   

Two-way messaging

     5,264         6,542   
  

 

 

    

 

 

 
   $ 38,617       $ 44,899   
  

 

 

    

 

 

 

Indirect:

     

One-way messaging

   $ 1,308       $ 1,666   

Two-way messaging

     623         754   
  

 

 

    

 

 

 
   $ 1,931       $ 2,420   
  

 

 

    

 

 

 

Total paging:

     

One-way messaging

   $ 34,661       $ 40,023   

Two-way messaging

     5,887         7,296   
  

 

 

    

 

 

 

Total paging revenue

     40,548         47,319   

Non-paging revenue

     566         1,967   
  

 

 

    

 

 

 

Total service, rental and maintenance revenues, net

   $ 41,114       $ 49,286   
  

 

 

    

 

 

 

 

32


The table below sets forth units in service and service revenues, the changes in each between the three months ended June 30, 2012 and 2011 and the changes in revenues associated with differences in ARPU and the number of units in service:

 

     Units in Service     Revenues        
     As of June 30,     For the Three Months Ended
June 30,
    Change Due To:  
     2012      2011      Change     2012(1)      2011(1)      Change     ARPU     Units  
     (Units in thousands)     (Dollars in thousands)  

One-way messaging

     1,453         1,630         (177   $ 34,661       $ 40,023       $ (5,362   $ (875   $ (4,487

Two-way messaging

     130         149         (19     5,887         7,296         (1,409     (540     (869
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total

     1,583         1,779         (196   $ 40,548       $ 47,319       $ (6,771   $ (1,415   $ (5,356
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

(1)

Amounts shown exclude non-paging and product and related sales.

As previously discussed, demand for messaging services has declined over the past several years and we anticipate that it will continue to decline for the foreseeable future, which will result in reductions in service, rental and maintenance revenues, net due to the lower number of subscribers and related units in service.

Revenues - Software

Product and related sales for software operations were $13.2 million and $13.1 million for the three months ended June 30, 2012 and 2011, respectively, which reflect software license revenue, professional services revenue, equipment sales, and maintenance revenue. Operations revenue from software licenses, professional services, and equipment sales was $6.7 million and $9.9 million for the three months ended June 30, 2012 and 2011, respectively. Operations revenue decreased by $3.2 million during the three months ended June 30, 2012 compared to the same period in 2011 due to a significant sale that was recognized during the three months ended June 30, 2011. Maintenance revenue for software operations is recognized as earned over the maintenance contract period. Maintenance revenue was $6.5 million and $3.2 million for the three months ended June 30, 2012 and 2011, respectively. For the three months ended June 30, 2011, maintenance revenue was reduced by $2.6 million to reflect the reduction to fair value as required by acquisition accounting. The table below details total product and related sales, net for software operations for the periods stated:

 

Revenue

   For the Three Months Ended
June 30,
 
     2012      2011 (1)  
     (Dollars in thousands)  

Software licenses

   $ 2,517       $ 4,557   

Professional services

     2,568         2,787   

Equipment sales

     1,610         2,574   
  

 

 

    

 

 

 

Total operations revenue

     6,695         9,918   

Maintenance revenue

     6,483         3,162   
  

 

 

    

 

 

 

Total software operations revenue

   $ 13,178       $ 13,080   
  

 

 

    

 

 

 

 

(1)

Revenue is net of a reduction of $2.6 million to maintenance revenue required by acquisition accounting to reflect fair value.

 

33


Operating Expenses - Consolidated

Cost of Products Sold. Cost of products sold consisted primarily of the following significant items:

 

     For the Three Months Ended June 30,      Change Between  
     2012      2011      2012 and 2011  
     Wireless      Software
     Total      Wireless      Software      Total      Total     %  
     (Dollars in thousands)  

Payroll and related

   $ —         $ 2,324       $ 2,324       $ —         $ 2,156       $ 2,156       $ 168        7.8%   

Cost of sales

     156         2,278         2,434         1,171         3,092         4,263         (1,829     (42.9%

Other

     —           458         458         —           659         659         (201     (30.5%
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total cost of products sold

   $ 156       $ 5,060       $ 5,216       $ 1,171       $ 5,907       $ 7,078       $ (1,862     (26.3%
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

FTEs

     —           115         115         —           112         112         3        2.7%   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

As illustrated in the table above, cost of products sold for the three months ended June 30, 2012 decreased $1.8 million from the same period in 2011 due to the following variances:

 

   

Payroll and related — The increase of $0.2 million in payroll and related expenses was due to installation costs associated with the software operations. Total FTEs who performed software installations as of June 30, 2012 and 2011 were 115 FTEs and 112 FTEs, respectively.

 

   

Cost of sales — The decrease of $1.8 million in cost of sales was mainly due to lower cost basis of devices sold to or lost by wireless operations’ customers of $1.0 million and due to lower cost of sales of hardware and third-party software of $0.8 million for software operations.

 

   

Other — The decrease of $0.2 million in other expenses was primarily due to lower miscellaneous expenses associated with installation services in the software operations.

 

34


Service, Rental and Maintenance. Service, rental and maintenance expenses consisted primarily of the following significant items:

 

     For the Three Months Ended June 30,      Change Between  
     2012      2011      2012 and 2011  
     Wireless      Software      Total      Wireless      Software      Total      Total     %  
     (Dollars in thousands)  

Site rent

   $ 4,421       $ —         $ 4,421       $ 5,962       $ —         $ 5,962       $ (1,541     (25.8%

Telecommunications

     2,346         —           2,346         2,868         12         2,880         (534     (18.5%

Payroll and related

     3,625         1,735         5,360         4,124         1,438         5,562         (202     (3.6%

Stock based compensation

     6         —           6         6         —           6         —          —     

Other

     1,066         693         1,759         1,251         526         1,777         (18     (1.0%
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total service, rental and maintenance

   $ 11,464       $ 2,428       $ 13,892       $ 14,211       $ 1,976       $ 16,187       $ (2,295     (14.2%
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

FTEs

     157         64         221         179         56         235         (14     (6.0%
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

As illustrated in the table above, service, rental and maintenance expenses for the three months ended June 30, 2012 decreased $2.3 million or 14.2% from the same period in 2011 due to the following variances:

 

   

Site rent — The decrease of $1.5 million in site rent expenses was primarily due to the rationalization of our networks, which has decreased the number of transmitters required to provide service to our customers. The reduction in transmitters has, in turn, reduced the number of lease locations for the wireless operations. Active transmitters declined 8.7% in 2012 from the same period in 2011.

 

   

Telecommunications — The decrease of $0.5 million in telecommunication expenses was due to the consolidation of our networks. We believe continued reductions in these expenses will occur as our networks continue to be consolidated as anticipated throughout 2012 for our wireless operations.

 

35


   

Payroll and related — Payroll and related expenses for wireless operations were incurred largely for field technicians, their managers, and in-house repair personnel, and payroll and related expenses for software operations were incurred for product development and technical support personnel. The decrease in payroll and related expenses of $0.2 million was due primarily to the reduction of $0.5 million in payroll and related costs for wireless operations due to headcount reductions of 22 FTEs to 157 FTEs at June 30, 2012 from 179 FTEs at June 30, 2011, partially offset by the increase of $0.3 million of payroll and related costs for software operations. Software operations FTEs increased by 8 FTEs to 64 FTEs at June 30, 2012 from 56 FTEs at June 30, 2011.

 

   

Stock based compensation — Stock based compensation expenses during the three months ended June 30, 2012 were consistent with the same period in 2011. Stock based compensation expenses represented amortization of compensation expense for the restricted stock units (“RSUs”) awarded to certain eligible employees under the 2009 Long-Term Incentive Plan (“LTIP”).

 

   

Other — The decrease of $18,000 in other expenses was primarily due to a decrease of $0.2 million in wireless operations mainly due to a reduction in repairs and maintenance expenses, offset by an increase in outside service expenses of $0.2 million for external product development support for software operations.

Selling and Marketing. Selling and marketing expenses consisted of the following major items:

 

     For the Three Months Ended June 30,      Change Between  
     2012      2011      2012 and 2011  
     Wireless      Software      Total      Wireless      Software      Total      Total     %  
     (Dollars in thousands)  

Payroll and related

   $ 1,912       $ 1,632       $ 3,544       $ 2,293       $ 1,274       $ 3,567       $ (23     (0.6%

Commissions

     824         519         1,343         1,285         663         1,948         (605     (31.1%

Stock based compensation

     18         —           18         16         —           16         2        12.5%   

Other

     218         796         1,014         352         705         1,057         (43     (4.1%
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total selling and marketing

   $ 2,972       $ 2,947       $ 5,919       $ 3,946       $ 2,642       $ 6,588       $ (669     (10.2%
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

FTEs

     88         66         154         113         53         166         (12     (7.2%
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

As indicated in the table above, selling and marketing expenses for the three months ended June 30, 2012 decreased by $0.7 million, or 10.2%, from the same period in 2011. Selling and marketing expenses consisted primarily of payroll and related expenses, which decreased slightly for the three months ended June 30, 2012 compared to the same period in 2011 primarily due to a reduction of $0.4 million in payroll and related costs for wireless operations due to headcount reductions of 25 FTEs to 88 FTEs at June 30, 2012 from 113 FTEs at June 30, 2011, offset by an increase of payroll and related costs of $0.4 million for software operations. Software operations FTEs increased by 13 FTEs to 66 FTEs at June 30, 2012 from 53 FTEs at June 30, 2011. The sales and

 

36


marketing staff are all involved in selling our paging and software products and services domestically and internationally, as well as reselling other wireless products and services such as cellular phones and e-mail devices under authorized agent agreements. These expenses support our efforts to maintain gross placements of units in service, which mitigated the impact of disconnects on our revenue base for wireless operations, and to identify business opportunities for additional or future software sales. We have a centralized marketing function which is focused on supporting our software products and vertical sales efforts by strengthening our brand, generating sales leads and facilitating the sales process. These marketing functions are accomplished through targeted email campaigns, webinars, regional and national user conferences, monthly newsletters and participation at industry trade shows. We sell our software products through a direct and channel sales force that consists of a dedicated team of managers. Due to the longer sales cycle for our software products we have increased the number of software sales and marketing staff with the intention of increasing our potential sales opportunities. We have reduced the overall cost of our selling and marketing activities on the wireless operations by focusing on the most productive sales and marketing employees.

Commission expenses decreased by $0.6 million for the three months ended June 30, 2012 compared to the same period in 2011 due primarily to a reduction of commission expenses for wireless operations of $0.5 million in line with the revenue and subscriber erosion and a reduction in commission expenses for software operations of $0.1 million. Stock based compensation expenses increased slightly due to higher amortization of compensation expense for the RSUs awarded to certain eligible employees under the 2009 LTIP. The decrease of $43,000 in other expenses for the three months ended June 30, 2012 compared to the same period in 2011 was primarily due to a reduction in outside service expenses of $67,000 and rewards and recognition expenses of $65,000 in our wireless operations, partially offset by an increase in advertising expenses of $0.1 million in our software operations.

 

37


General and Administrative. General and administrative expenses consisted of the following significant items:

 

     For the Three Months Ended June 30,     Change Between  
     2012     2011     2012 and 2011  
     Wireless      Software     Total     Wireless     Software     Total     Total     %  
     (Dollars in thousands)  

Payroll and related

   $ 5,148       $ 824      $ 5,972      $ 5,397      $ 1,384      $ 6,781      $ (809     (11.9%

Stock based compensation

     254         (273     (19     215        217        432        (451     (104.4%

Bad debt

     171         99        270        (150     70        (80     350        437.5%   

Facility rent

     542         326        868        723        312        1,035        (167     (16.1%

Telecommunications

     341         102        443        394        96        490        (47     (9.6%

Outside services

     2,347         111        2,458        2,427        106        2,533        (75     (3.0%

Taxes, licenses and permits

     1,367         59        1,426        2,190        —          2,190        (764     (34.9%

Other

     1,256         (180     1,076        1,155        (696     459        617        134.4%   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total general and administrative

   $ 11,426       $ 1,068      $ 12,494      $ 12,351      $ 1,489      $ 13,840      $ (1,346     (9.7%
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

FTEs

     166         30        196        183        27        210        (14     (6.7%
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

As illustrated in the table above, general and administrative expenses for the three months ended June 30, 2012 decreased $1.3 million, or 9.7%, from the same period in 2011 due primarily to lower payroll and related expenses, tax, license and permit expenses and stock based compensation expenses. Total general and administrative expenses decreased for the three months ended June 30, 2012 compared to the same period in 2011 due to the following variances:

 

   

Payroll and related — Payroll and related expenses were incurred mainly for employees in customer service, information technology, inventory, collections, finance and other support functions as well as executive management. Payroll and related expenses decreased by $0.8 million due primarily to lower payroll and related expenses of $0.6 million for software operations and lower payroll and related expenses of $0.2 million for wireless operations reflecting headcount reductions of 17 FTEs to 166 FTEs at June 30, 2012 from 183 FTEs at June 30, 2011 for wireless operations. Software operations FTEs increased by 3 FTEs to 30 FTEs at June 30, 2012 from 27 FTEs at June 30, 2011. The lower payroll and related expenses for software operations was due primarily to a one-time benefit of $0.3 million for forfeitures under the 2012 Short-Term Incentive Plan (“STIP”) associated with the departure of two former executives.

 

   

Stock based compensation — Stock based compensation expenses consisted primarily of amortization of compensation expense associated with RSUs awarded to certain eligible employees for both wireless and software operations and amortization of compensation expense for restricted stock awarded to non-executive members of our Board of Directors under the Equity Plans. Stock based compensation expenses decreased by $0.5 million primarily due to a net one-time benefit of $0.4 million for forfeitures under the 2011 LTIP associated with the departure of two former executives in our software operations.

 

38


   

Bad debt — The increase of $0.4 million in bad debt expenses is primarily due to a one-time benefit of $0.5 million in the bad debt allowance account during the three months ended June 30, 2011, partially offset by a reduction of $0.1 million for the three months ended June 30, 2012, which reflected our bad debt experience due to the change in the composition of the wireless operations customer base to accounts with a large number of units in service.

 

   

Facility rent — The decrease of $0.2 million in facility rent expenses was primarily due to lower facility rent expenses of $0.2 million related to the closure of office facilities in the wireless operations as we continue to rationalize our operating requirements to meet lower revenue and customer demand for the wireless operations.

 

   

Telecommunications — The decrease of $47,000 in telecommunication expenses reflected continued office and staffing reductions as we continue to streamline our operations and reduce our telecommunication requirements for the wireless operations.

 

   

Outside services — Outside service expenses consisted primarily of costs associated with printing and mailing invoices, outsourced customer service, temporary help, and various professional fees. The decrease of $0.1 million in outside service expenses was primarily due to lower external legal service expenses for wireless operations for the three months ended June 30, 2012 compared to the same period in 2011.

 

   

Taxes, licenses and permits — Tax, license and permit expenses consist of property, franchise, gross receipts and transactional taxes. The decrease in tax, license and permit expenses of $0.8 million was primarily due to one-time resolution of various state and local tax audits for wireless operations for the three months ended June 30, 2011 at amounts higher than the originally estimated liabilities.

 

   

Other — The increase of $0.6 million in other expenses was primarily due to an increase of $0.1 million in financial service expenses for the wireless operations and an increase of $0.5 million for the software operations, which consisted of office expenses of $0.1 million and various other miscellaneous expenses of $0.4 million.

Severance and Restructuring. Severance and restructuring expenses increased to $24,000 for the three months ended June 30, 2012 compared to $17,000 for the same period in 2011, which consisted of lease restructuring costs associated with the terminations of certain lease agreements for transmitter locations for wireless operations. Severance and restructuring expenses of $24,000 for the three months ended June 30, 2012 were all related to severance expenses for software operations due to involuntary terminations.

Depreciation, Amortization and Accretion. Depreciation, amortization and accretion expenses were $4.6 million for the three months ended June 30, 2012 compared to $5.3 million for the same period in 2011. There were $0.4 million in lower depreciation expense for the period from fully depreciated paging infrastructure and other assets, $0.3 million in lower depreciation expense on paging devices resulting from fewer purchases of paging devices and from fully depreciated paging devices, $22,000 decrease in amortization expenses and $17,000 decrease in accretion expenses for the three months ended June 30, 2012 compared to the same period in 2011. Depreciation, amortization and accretion expenses for software operations represented $1.7 million of the total $4.6 million in depreciation, amortization and accretion expenses for the three months end June 30, 2012 and $1.7 million of the total $5.3 million in depreciation, amortization and accretion expenses for the three months ended June 30, 2011.

Interest Expense, Net; Other Income, Net and Income Tax Expense

Interest Expense, Net. Net interest expense decreased to $0.1 million for the three months ended June 30, 2012 from $0.9 million for the same period in 2011. This decrease was primarily due to minimal interest on debt for the three months ended June 30, 2012 associated with the Amcom acquisition as the debt was completely repaid on April 6, 2012. As of June 30, 2012, we have no debt outstanding.

 

39


Other Income, Net. Net other income decreased to $0.4 million for the three months ended June 30, 2012 from $7.7 million of other income, net, for the same period in 2011. The other income recorded during the three months ended June 30, 2011 was primarily related to the gain on the sale of narrowband personal communications service licenses to Sensus USA, Inc. (“Sensus”) in 2011 of $7.5 million.

Income Tax Expense. Income tax expense for the three months ended June 30, 2012 was $5.7 million, an increase of $1.3 million from $4.4 million of income tax expense for the three months ended June 30, 2011. The following is the effective tax rate reconciliation for the three months ended June 30, 2012 and 2011, respectively:

 

     For the Three Months Ended June 30,  
     2012     2011  
     (Dollars in thousands)  

Income before income tax expense

   $ 14,180        $ 22,967     
  

 

 

     

 

 

   

Income tax expense at the Federal statutory rate

   $ 4,963        35.00%      $ 8,038        35.00%   

State income taxes, net of Federal benefit

     444        3.13%        731        3.18%   

Change in valuation allowance

     (27     (0.19%     (4,884     (21.27%

State income tax audit

     248        1.75%        —          —     

Other

     105        0.74%        487        2.13%   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income tax expense

   $ 5,733        40.43%      $ 4,372        19.04%   
  

 

 

   

 

 

   

 

 

   

 

 

 

Results of Operations

Comparison of Revenues and Selected Operating Expenses for the Six Months Ended June 30, 2012 and 2011

 

     For the Six Months Ended June 30,      Change Between  
     2012      2011      2012 and 2011  
     Wireless      Software      Total      Wireless      Software(1)      Total      Total     %  
     (Dollars in thousands)  

Revenues:

                      

Service, rental and maintenance, net

   $ 83,592       $ —         $ 83,592       $ 99,478       $ —         $ 99,478       $ (15,886     (16.0%

Product and related sales, net

     3,456         25,648         29,104         5,149         17,879         23,028         6,076        26.4%   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 87,048       $ 25,648       $ 112,696       $ 104,627       $ 17,879       $ 122,506       $ (9,810     (8.0%
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Selected operating expenses:

                      

Cost of products sold

   $ 329       $ 9,703       $ 10,032       $ 1,834       $ 7,674       $ 9,508       $ 524        5.5%   

Service, rental and maintenance

     23,498         4,697         28,195         30,027         2,625         32,652         (4,457     (13.7%

Selling and marketing

     6,020         5,552         11,572         7,779         3,733         11,512         60        0.5%   

General and administrative

     22,934         2,729         25,663         27,591         1,817         29,408         (3,745     (12.7%

Severance and restructuring

     9         37         46         50         —           50         (4     (8.0%
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 52,790       $ 22,718       $ 75,508       $ 67,281       $ 15,849       $ 83,130       $ (7,622     (9.2%
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

FTEs

     411         275         686         475         248         723         (37     (5.1%
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Active transmitters

     4,795         —           4,795         5,253         —           5,253         (458     (8.7%
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

(1) 

Software operations reflect financial results from March 3, 2011 to June 30, 2011 and are net of the reduction to maintenance revenue required by acquisition accounting to reflect fair value.

Revenues - Wireless

Our total revenues were $87.0 million and $104.6 million for the six months ended June 30, 2012 and 2011, respectively. Service, rental and maintenance revenues, net consist primarily of recurring fees associated with

 

40


the provision of messaging services and rental of leased units and is net of a provision for service credits. Product and related sales, net consist primarily of revenues associated with the sale of devices and charges for leased devices that are not returned and are net of anticipated credits. The decrease in revenues reflected the decrease in demand for our wireless services. The table below details total service, rental and maintenance revenues, net for the periods stated:

 

     For the Six Months Ended
June 30,
 
     2012      2011  
     (Dollars in thousands)  

Service, rental and maintenance revenues, net:

     

Paging:

     

Direct:

     

One-way messaging

   $ 67,615       $ 77,562   

Two-way messaging

     10,824         13,366   
  

 

 

    

 

 

 
   $ 78,439       $ 90,928   
  

 

 

    

 

 

 

Indirect:

     

One-way messaging

   $ 2,711       $ 3,451   

Two-way messaging

     1,273         1,568   
  

 

 

    

 

 

 
   $ 3,984       $ 5,019   
  

 

 

    

 

 

 

Total paging:

     

One-way messaging

   $ 70,326       $ 81,013   

Two-way messaging

     12,097         14,934   
  

 

 

    

 

 

 

Total paging revenue

     82,423         95,947   

Non-paging revenue

     1,169         3,531   
  

 

 

    

 

 

 

Total service, rental and maintenance revenues, net

   $ 83,592       $ 99,478   
  

 

 

    

 

 

 

The table below sets forth units in service and service revenues, the changes in each between the six months ended June 30, 2012 and 2011 and the changes in revenues associated with differences in ARPU and the number of units in service:

 

     Units in Service     Revenues        
     As of June 30,     For the Six Months Ended June 30,     Change Due To:  
     2012      2011      Change     2012(1)      2011(1)      Change     ARPU     Units  
     (Units in thousands)     (Dollars in thousands)  

One-way messaging

     1,453         1,630         (177   $ 70,326       $ 81,013       $ (10,687   $ (1,887   $ (8,800

Two-way messaging

     130         149         (19     12,097         14,934         (2,837     (376     (2,461
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total

     1,583         1,779         (196   $ 82,423       $ 95,947       $ (13,524   $ (2,263   $ (11,261
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

(1) 

Amounts shown exclude non-paging and product and related sales.

As previously discussed, demand for messaging services has declined over the past several years and we anticipate that it will continue to decline for the foreseeable future, which would result in reductions in service, rental and maintenance revenues, net due to the lower number of subscribers and related units in service.

 

41


Revenues - Software

Product and related sales for software operations were $25.6 million and $17.9 million for the six months ended June 30, 2012 and 2011, respectively, which reflect software license revenue, professional services revenue, equipment sales, and maintenance revenue. Revenue recognized for the software operations in 2011 reflects results from March 3, 2011, the date of acquisition. Operations revenue from software licenses, professional services, and equipment sales was $12.7 million and $13.8 million for the six months ended June 30, 2012 and 2011, respectively. Operations revenue decreased by $1.1 million during the six months ended June 30, 2012 compared to the same period in 2011 primarily due to a significant sale that was recognized during the six months ended June 30, 2011. Maintenance revenue for software operations is recognized as earned over the maintenance contract period. Maintenance revenue was $12.9 million and $4.1 million for the six months ended June 30, 2012 and 2011, respectively. For the period of March 3, 2011 through June 30, 2011, maintenance revenue was reduced by $3.5 million to reflect the reduction to fair value as required by acquisition accounting. The table below details total product and related sales, net for software operations for the periods stated:

 

Revenue

   For the Six Months Ended
June 30,
 
     2012          2011  (1)      
     (Dollars in thousands)  

Software licenses

   $ 4,467       $ 6,293   

Professional services

     5,019         4,138   

Equipment sales

     3,266         3,370   
  

 

 

    

 

 

 

Total operations revenue

     12,752         13,801   

Maintenance revenue

     12,896         4,078   
  

 

 

    

 

 

 

Total software operations revenue

   $ 25,648       $ 17,879   
  

 

 

    

 

 

 

 

(1)

Software operations revenue reflects results from March 3, 2011 to June 30, 2011. Revenue is net of a reduction to maintenance revenue of $3.5 million required by acquisition accounting to reflect fair value.

Operating Expenses - Consolidated

General. Software operations results for the six months ended June 30, 2011 reflect operations from March 3, 2011 to June 30, 2011.

Cost of Products Sold. Cost of products sold consisted primarily of the following significant items:

 

     For the Six Months Ended June 30,      Change Between  
     2012      2011      2012 and 2011  
     Wireless      Software      Total      Wireless      Software      Total      Total     %  
     (Dollars in thousands)  

Payroll and related

   $ —         $ 4,692       $ 4,692       $ —         $ 2,833       $ 2,833       $ 1,859        65.6%   

Cost of sales

     329         4,142         4,471         1,834         3,965         5,799         (1,328     (22.9%

Other

     —           869         869         —           876         876         (7     (0.8%
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total cost of products sold

   $ 329       $ 9,703       $ 10,032       $ 1,834       $ 7,674       $ 9,508       $ 524        5.5%   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

FTEs

     —           115         115         —           112         112         3        2.7%   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

As illustrated in the table above, cost of products sold for the six months ended June 30, 2012 increased $0.5 million from the same period in 2011 due to the following variances:

 

   

Payroll and related — The increase of $1.9 million in payroll and related expenses was due to installation costs associated with the software operations. Total FTEs who performed software installations as of June 30, 2012 and 2011 were 115 FTEs and 112 FTEs, respectively.

 

42


   

Cost of sales — The decrease of $1.3 million in cost of sales was due to $1.5 million reduction to wireless operations’ costs due to the lower cost basis of devices sold to or lost by wireless operations’ customers, partially offset by an increase in cost of sales of hardware and third-party software of $0.2 million for software operations.

 

   

Other — Other expenses associated with installation services costs in the software operations for the six months ended June 30, 2012 decreased slightly compared to the same period in 2011.

Service, Rental and Maintenance. Service, rental and maintenance expenses consisted primarily of the following significant items:

 

     For the Six Months Ended June 30,      Change Between  
     2012      2011      2012 and 2011  
     Wireless