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EX-31.2 - EXHIBIT 31.2 - Spok Holdings, Incspok-ex312_6302014xq2.htm
EX-32.1 - EXHIBIT 32.1 - Spok Holdings, Incspok-ex321_6302014xq2.htm
 
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, 2014
 
¨
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
  
SPŌK HOLDINGS, 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)
USA Mobility, Inc.
(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
21,675,735 shares of the registrant’s common stock ($0.0001 par value per share) were outstanding as of July 25, 2014.
 




SPŌK HOLDINGS, INC.
QUARTERLY REPORT ON FORM 10-Q
INDEX
 
 
Page  
PART I.
 
 
Item 1.
 
 
 
Condensed Consolidated Balance Sheets as of June 30, 2014 (Unaudited) and December 31, 2013
 
 
Condensed Consolidated Statements of Income for the Three and Six Months Ended June 30, 2014 and 2013 (Unaudited)
 
 
Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2014 and 2013 (Unaudited)
 
 
 
Item 2.
 
Item 3.
 
Item 4.
PART II.
 
 
Item 1.
 
Item 1A.
 
Item 6.
 




PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
SPŌK HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
 
 
June 30, 2014
 
December 31, 2013
 
(In thousands)
 
(Unaudited)
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
97,035

 
$
89,075

Accounts receivable, net
22,964

 
18,084

Prepaid expenses and other
6,681

 
7,399

Inventory
2,070

 
2,221

Deferred income tax assets, net
3,389

 
3,389

Total current assets
132,139

 
120,168

Property and equipment, net
20,936

 
21,122

Goodwill
133,031

 
133,031

Other intangible assets, net
22,653

 
25,368

Deferred income tax assets, net
20,542

 
25,494

Other assets
1,586

 
1,715

TOTAL ASSETS
$
330,887

 
$
326,898

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable and accrued liabilities
$
9,796

 
$
9,885

Accrued compensation and benefits
11,287

 
13,919

Deferred revenue
24,571

 
23,023

Total current liabilities
45,654

 
46,827

Deferred revenue
645

 
862

Other long-term liabilities
9,231

 
9,259

TOTAL LIABILITIES
55,530

 
56,948

Commitments and contingencies


 


Stockholders’ equity:
 
 
 
Preferred stock

 

Common stock
2

 
2

Additional paid-in capital
128,988

 
127,264

Retained earnings
146,367

 
142,684

TOTAL STOCKHOLDERS’ EQUITY
275,357

 
269,950

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
330,887

 
$
326,898



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

2



SPŌK HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
 
2014
 
2013
 
2014
 
2013
 
 
(Unaudited and in thousands except share and per share amounts)
Revenue:
 
 
 
 
 
 
 
 
Wireless revenue
 
$
33,518

 
$
37,771

 
$
67,869

 
$
76,550

Software revenue
 
15,576

 
14,497

 
31,344

 
28,848

Total revenue
 
49,094

 
52,268

 
99,213

 
105,398

Operating expenses:
 
 
 
 
 
 
 
 
Cost of revenue
 
7,180

 
6,961

 
13,985

 
13,628

Service, rental and maintenance
 
11,420

 
12,018

 
23,212

 
24,209

Selling and marketing
 
7,780

 
6,538

 
15,026

 
12,932

General and administrative
 
10,990

 
11,022

 
23,125

 
23,353

Severance and restructuring
 
4

 
2

 
24

 
2

Depreciation, amortization and accretion
 
4,352

 
3,822

 
8,381

 
7,629

Total operating expenses
 
41,726

 
40,363

 
83,753

 
81,753

Operating income
 
7,368

 
11,905

 
15,460

 
23,645

Interest expense, net
 
(64
)
 
(64
)
 
(131
)
 
(128
)
Other income, net
 
(194
)
 
(75
)
 
(178
)
 
6

Income before income tax expense
 
7,110

 
11,766

 
15,151

 
23,523

Income tax expense
 
(2,819
)
 
(4,938
)
 
(5,970
)
 
(9,770
)
Net income
 
$
4,291

 
$
6,828

 
$
9,181

 
$
13,753

Basic net income per common share
 
$
0.20

 
$
0.32

 
$
0.42

 
$
0.63

Diluted net income per common share
 
$
0.19

 
$
0.31

 
$
0.42

 
$
0.63

Basic weighted average common shares outstanding
 
21,642,163

 
21,644,281

 
21,640,191

 
21,666,096

Diluted weighted average common shares outstanding
 
22,099,791

 
21,827,149

 
22,073,254

 
21,921,742

Cash dividends declared per common share
 
$
0.125

 
$
0.125

 
$
0.250

 
$
0.250





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

3



SPŌK HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 
For the Six Months Ended June 30,
 
 
2014
 
2013
 
 
(Unaudited and
in thousands)
Cash flows from operating activities:
 
 
 
 
Net income
 
$
9,181

 
$
13,753

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation, amortization and accretion
 
8,381

 
7,629

Amortization of deferred financing costs
 
129

 
129

Deferred income tax expense
 
4,952

 
8,849

Amortization of stock based compensation
 
1,710

 
1,254

Provision for doubtful accounts, service credits and other
 
597

 
833

Adjustment of non-cash transaction taxes
 
(229
)
 
(251
)
Loss on disposals of property and equipment
 
3

 
167

Changes in assets and liabilities:
 
 
 
 
Accounts receivable
 
(5,478
)
 
2,812

Prepaid expenses and other assets
 
850

 
(367
)
Accounts payable, accrued liabilities and accrued compensation and benefits
 
(3,076
)
 
(7,578
)
Deferred revenue
 
1,331

 
(4,088
)
Net cash provided by operating activities
 
18,351

 
23,142

Cash flows from investing activities:
 
 
 
 
Purchase of property and equipment
 
(5,036
)
 
(5,268
)
Proceeds from disposals of property and equipment
 
59

 
9

Net cash used in investing activities
 
(4,977
)
 
(5,259
)
Cash flows from financing activities:
 
 
 
 
Cash dividends to stockholders
 
(5,414
)
 
(6,900
)
Net cash used in financing activities
 
(5,414
)
 
(6,900
)
Net increase in cash and cash equivalents
 
7,960

 
10,983

Cash and cash equivalents, beginning of period
 
89,075

 
61,046

Cash and cash equivalents, end of period
 
$
97,035

 
$
72,029

Supplemental disclosure:
 
 
 
 
Interest paid
 
$
3

 
$
6

Income taxes paid
 
$
884

 
$
831




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

4

SPŌK HOLDINGS, INC.
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



(1) Business — On July 8, 2014, the Company changed its name from USA Mobility, Inc. to Spōk Holdings, Inc.
Spōk Holdings, Inc. and its subsidiaries (collectively, “SPŌK” or the “Company”), through its indirect wholly-owned subsidiary, Spōk, Inc., is a comprehensive provider of critical communication solutions for the enterprise. As a single source provider, the Company operates the largest one-way paging and advanced two-way paging networks in the United States and provides mission critical unified communication software solutions nationally and internationally (in Europe, Australia, Asia and the Middle East).
Effective January 1, 2014 the legal entity, Amcom Software, Inc. ("Amcom"), was merged into Spōk, Inc. (formerly USA Mobility Wireless, Inc.), an indirect wholly-owned subsidiary of Spōk Holdings, Inc. Our sole operating subsidiary is now Spōk, Inc. In addition, management was reorganized to consolidate the separate management structures for the wireless and software segments into one integrated management structure. Effective January 1, 2014 the Company is structured as one operating (and reportable) segment, a unified communication business.
(2) Preparation of Interim Financial Statements — Our condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and the rules and regulations of the United States Securities and Exchange Commission (the “SEC”). Amounts shown on the condensed consolidated statements of income within the operating expense categories of cost of revenue; service, rental and maintenance; selling and marketing; and general and administrative are recorded exclusive of severance and restructuring costs, depreciation, amortization and accretion. These items are shown separately on the condensed consolidated statements of income within operating expenses. Foreign currency translation adjustments were deemed immaterial and consequently, no statements of comprehensive income are presented.
The financial information included herein, other than the condensed consolidated balance sheet as of December 31, 2013, is unaudited. The condensed consolidated balance sheet at December 31, 2013 has been derived from, but does not include all the disclosures contained in the audited consolidated financial statements as of and for the year ended December 31, 2013. In management’s opinion, our unaudited condensed consolidated statements include all adjustments and accruals that are necessary for a fair presentation of the results of all interim periods reported herein.
These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2013 (the “2013 Annual Report”). The condensed consolidated statements of income 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.
Due to the integration of the management structure and consolidation of certain sales support functions effective January 1, 2014, certain prior year's interim revenue and operating expenses were reclassified to conform to the current year's presentation. In 2014, we will report wireless and software revenue, and have reclassified the revenue previously reported in the Quarterly Report on Form 10Q for the quarterly period ended June 30, 2013 (the "Second Quarter 2013 Form 10-Q") to conform with the current year's presentation. In the second quarter of 2013, wireless revenue of $37.771 million was reported as $36.370 million in service, rental and maintenance, net of service credits and $1.401 million of software revenue and other, net. Also, in the second quarter of 2013, software revenue of $14.497 million was reported in software revenue and other, net. We reclassified payroll and related expenses among functional departments and eliminated general and administrative overhead expenses previously allocated to cost of revenue, service, rental and maintenance and selling and marketing. The reclassifications resulted in the following increases and (decreases) to the Second Quarter 2013 Form 10-Q reported operating expenses: Cost of revenue of $1.476 million; service, rental and maintenance of ($0.804) million; selling and marketing of $0.191 million and general and administrative of ($0.863) million. The changes had no impact on previously reported total operating expenses and operating income.
The preparation of these condensed consolidated financial statements requires management to make judgments and estimates that affect the amounts reported in our condensed consolidated financial statements and accompanying notes. Actual results may differ from these estimates under different assumptions or conditions.
(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 "Item 1A. Risk Factors" of Part I of the 2013 Annual Report, which describes key risks associated with our operations and industry. 
(4) Recent and New Accounting Pronouncements — In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers. ASU 2014-09 creates a five-step model that requires companies to exercise judgment when considering all relevant facts and circumstances in the determination

5

SPŌK HOLDINGS, INC.
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


of when and how revenue is recognized. ASU No. 2014-09 is effective for annual reporting periods beginning after December 15, 2016, and any interim periods that fall within that reporting period. Early application is not permitted. For us the new standard will be effective in the first quarter of 2017. The two permitted transition methods under the new standard are the full retrospective method, in which case the standard would be applied to each prior reporting period presented, or the modified retrospective method, in which case the cumulative effect of applying the standard would be recognized at the date of initial application. We have not selected a transition method. We are currently evaluating the potential impact from this ASU on our consolidated financial statements.
(5) Prepaid Expenses and Other — Prepaid expenses and other consisted of the following:
 
 
June 30,
2014
 
December 31,
2013
 
 
(Dollars in thousands)
Other receivables
 
$
758

 
$
748

Tax receivables
 
177

 
158

Deposits
 
424

 
597

Prepaid insurance
 
236

 
524

Prepaid rent
 
134

 
259

Prepaid repairs and maintenance
 
832

 
687

Prepaid taxes
 
809

 
641

Prepaid commissions
 
2,564

 
2,696

Prepaid expenses
 
747

 
1,089

Total prepaid expenses and other
 
$
6,681

 
$
7,399

(6) Inventory — Inventory of $2.1 million and $2.2 million at June 30, 2014 and December 31, 2013, respectively, consisted of third-party hardware and software held for resale. We use the first in, first out cost method.
(7) Depreciation, Amortization and Accretion — The total depreciation, amortization and accretion expenses related primarily to property and equipment, amortizable intangible assets, and asset retirement obligations for the three months ended June 30, 2014 and 2013 were $4.4 million and $3.8 million, respectively; and for the six months ended June 30, 2014 and 2013 were $8.4 million and $7.6 million, respectively. 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,
 

2014
 
2013
 
2014
 
2013
 

(Dollars in thousands)
Depreciation

$
2,665

 
$
2,405

 
$
5,291

 
$
4,827

Amortization

1,499

 
1,252

 
2,715

 
2,497

Accretion

188

 
165

 
375

 
305

Total depreciation, amortization and accretion

$
4,352

 
$
3,822

 
$
8,381

 
$
7,629

(8) Goodwill and Amortizable Intangible Assets — Goodwill at June 30, 2014 and December 31, 2013 was $133.0 million. Goodwill is not amortized but is 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. There were no indicators of impairment for the three months ended June 30, 2014.
Amortizable intangible assets at June 30, 2014 include customer related intangibles, technology based intangibles, contract based intangibles and marketing intangibles and resulted from our acquisition of Amcom in 2011 and IMCO Technologies Corporation (“IMCO”) in 2012. Such intangibles are being amortized over periods ranging from two to ten years.
The gross carrying amount of amortizable intangible assets was $41.5 million at June 30, 2014 and the accumulated amortization was $18.9 million. The net consolidated balance of amortizable intangible assets consisted of the following:

6

SPŌK HOLDINGS, INC.
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


 
 
 
 
June 30, 2014
 
 
Useful Life
(In Years)
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Net Balance
 
 
 
 
(Dollars in thousands)
Customer relationships
 
10
 
$
25,002

 
$
(8,334
)
 
$
16,668

Acquired technology
 
2 - 4
 
8,452

 
(6,803
)
 
1,649

Non-compete agreements
 
5
 
2,370

 
(2,187
)
 
183

Trademarks
 
3
 
5,702

 
(1,549
)
 
4,153

Total amortizable intangible assets
 

 
$
41,526

 
$
(18,873
)
 
$
22,653

Estimated amortization of intangible assets for future periods was as follows:
 
(Dollars  in thousands)
For the remaining six months ending December 31, 2014
$
2,998

For the year ending December 31:

2015
4,718

2016
4,142

2017
2,878

2018
2,500

Thereafter
5,417

Total amortizable intangible assets
$
22,653

(9) Other Assets — Other assets were as follows:

 
June 30,
2014
 
December 31,
2013
 
 
(Dollars in thousands)
Deferred financing costs
 
$
327

 
$
456

Deposits
 
197

 
195

Prepaid royalty
 
244

 
245

Other assets
 
818

 
819

Total other assets
 
$
1,586

 
$
1,715

(10) Accounts Payable and Accrued Liabilities — Accounts payable and accrued liabilities were as follows:

 
June 30,
2014
 
December 31,
2013
 
 
(Dollars in thousands)
Accounts payable
 
$
1,905

 
$
1,726

Accrued network costs
 
1,122

 
1,169

Accrued taxes
 
3,076

 
3,959

Asset retirement obligations
 
428

 
358

Accrued outside services
 
899

 
1,049

Accrued accounting and legal
 
373

 
212

Accrued recognition awards
 
195

 
327

Accrued other
 
1,009

 
851

Deferred rent
 
77

 
77

Escheat liability
 
26

 
5

Lease incentive
 
189

 
152

Dividends payable - 2011 Long-Term Incentive Plan ("LTIP")
 
497

 

Total accounts payable and accrued liabilities
 
$
9,796

 
$
9,885

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. The issuance of restricted stock units (“RSUs”) awarded under the 2011 LTIP is expected

7

SPŌK HOLDINGS, INC.
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


to be made during the first quarter of 2015. Therefore, the related dividends payable (the line item Dividends payable - 2011 LTIP) was reclassified from other long-term liabilities to accounts payable and accrued liabilities in 2014 based on the expected payment in the first quarter of 2015.
(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 January 1, 2014, we had recognized cumulative asset retirement costs of $3.8 million. During the six months ended June 30, 2014, we recorded an increase of $0.1 million in asset retirement costs for a total of $3.9 million at June 30, 2014. The asset retirement cost additions during the six months ended June 30, 2014 increased paging equipment assets and are being depreciated over the related estimated lives of 54 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 were:
 
 
Short-Term
Portion
 
Long-Term
Portion
 
Total
 
 
(Dollars in thousands)
Balance at January 1, 2014
 
$
358

 
$
7,599

 
$
7,957

Accretion
 
14

 
361

 
375

Additions
 

 
105

 
105

Reclassifications
 
238

 
(238
)
 

Amounts paid
 
(182
)
 

 
(182
)
Balance at June 30, 2014
 
$
428

 
$
7,827

 
$
8,255

The balances above were included with accounts payable and accrued liabilities and other long-term liabilities, respectively, at June 30, 2014.
(12) Deferred Revenue — Deferred revenue at June 30, 2014 was $24.6 million for the current portion and $0.6 million for the non-current portion. Deferred revenue at December 31, 2013 was $23.0 million for the current portion and $0.9 million for the non-current portion. Deferred revenue at June 30, 2014 primarily consisted of unearned maintenance, software license and professional services revenue. Unearned maintenance revenue represented a contractual liability to provide maintenance support over a defined period of time for which payment has generally been received. Unearned software license and professional services revenue represented a contractual liability to provide professional services more substantive than post contract support for which not all payments have been received. We will recognize revenue when the service or software is provided or otherwise meets our revenue recognition criteria.
(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”) 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 loans in effect at any given time. We may only exercise the LIBOR rate election for an amount of at least $1.0 million.
Borrowings under this facility are secured by a lien on substantially all of our existing assets, interests in assets and proceeds owned or acquired by us.
As of June 30, 2014, we had no outstanding debt and the Amended Credit Agreement remains in effect with approximately $40.0 million of available borrowing capacity subject to maintaining a minimum liquidity threshold of $25.0 million and to reductions for outstanding letters of credit. 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. The definitive extent of the interest rate risk is not quantifiable or predictable because of the variability of future interest rates and business financing requirements. We do not customarily use derivative instruments to manage our interest rate risk profile.
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, 2014.

8

SPŌK HOLDINGS, INC.
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


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. 
(14) Other Long-Term Liabilities — Other long-term liabilities consisted of the following:
 
 
June 30, 2014
 
December 31, 2013
 
 
(Dollars in thousands)
Asset retirement obligations
 
$
7,827

 
$
7,599

Dividends payable — 2011 LTIP
 

 
409

Escheat liability
 
239

 
509

Capital lease payable
 
15

 
23

Lease incentive
 
489

 
180

Deferred rent
 
388

 
259

Royalty payable
 
273

 
280

Total other long-term liabilities
 
$
9,231

 
$
9,259

The issuance of RSUs awarded under the 2011 LTIP is expected to be made during the first quarter of 2015. Therefore, the related dividends payable (the line item Dividends payable - 2011 LTIP) was reclassified to accounts payable and accrued liabilities from other long-term liabilities in 2014 based on the expected payment in the first quarter of 2015. The increase in the lease incentive liability during the first six months of 2014 relates to a new office lease located in New York.
(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, 2014 consisted of:
 
(Dollars in thousands)
Balance at January 1, 2014
$
269,950

Net income for the six months ended June 30, 2014
9,181

Cash dividends declared
(5,503
)
Amortization of stock based compensation
1,710

Other
19

Balance at June 30, 2014
$
275,357

General. At June 30, 2014 and December 31, 2013, there were 21,663,909 and 21,652,341 shares of common stock outstanding, respectively, and no shares of preferred stock outstanding.
The following table summarizes the activities under the 2012 Equity Plan from inception through June 30, 2014:
 
Activity
Total equity securities available at May 16, 2012
2,194,986

Add: 2011 LTIP RSUs forfeited by eligible employees
209,382

Add: Restricted stock forfeited by non-executive member of the Board of Directors
3,189

Less: 2011 LTIP RSUs awarded to eligible employees
(557,484
)
Less: Restricted stock awarded to non-executive members of the Board of Directors
(41,849
)
Less: Short-Term Incentive Plan (“STIP”) common stock awarded to an eligible employee
(41,702
)
Total equity securities available at June 30, 2014
1,766,522


The following table details activities with respect to outstanding RSUs under the 2011 LTIP for the three months ended June 30, 2014:

9

SPŌK HOLDINGS, INC.
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


 
 
Shares
 
Weighted-
Average Grant
Date Fair Value
 
Total Unrecognized Compensation Cost (net of estimated forfeitures)
(In thousands)
 
Weighted-Average
Period Over Which
Cost is  Expected to
be Recognized
(In months)
Non-vested RSUs at April 1, 2014
 
617,027

 
$
12.30

 
 
 
 
Granted
 

 

 
 
 
 
Vested
 

 

 
 
 
 
Forfeited
 
(57,338
)
 
11.20

 
 
 
 
Non-vested RSUs at June 30, 2014
 
559,689

 
$
12.41

 
$
1,859

 
6
The following table reflects the stock based compensation expense for the awards under the Equity Plans:
 
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
Equity Awards
 
2014
 
2013
 
2014
 
2013
 
 
 (Dollars in thousands)
2011 LTIP
 
$
542

 
$
568

 
1,556

 
1,134

Board of Directors Compensation
 
82

 
60

 
154

 
120

Total stock based compensation
 
$
624

 
$
628

 
$
1,710

 
$
1,254

The increase in stock based compensation for the six months ended June 30, 2014 compared to 2013 was due to an increase in outstanding RSUs to 559,689 RSUs compared to 508,118 RSUs at June 30, 2013.
Cash Dividends to Stockholders. The following table details our cash dividend payments made in 2014. Cash dividends paid as disclosed in the statements of cash flows for the six months ended June 30, 2014 and 2013 included previously declared cash dividends on shares of vested restricted stock issued to our non-executive directors. Cash dividends on the RSUs and restricted stock have been accrued and are paid when the applicable vesting conditions are met. Accrued cash dividends on forfeited restricted stock and RSUs are also forfeited.
Declaration Date
 
Record Date
 
Payment Date
 
Per Share Amount
 
Total  Payment(1)
 
 
 
 
 
 
 
 
(Dollars in thousands)
March 5
 
March 18
 
March 28
 
$
0.125

 
$
2,707

April 30
 
May 22
 
June 25
 
$
0.125

 
$
2,707


 
Total
 
 
 
$
0.250

 
$
5,414

 
 
(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, 2014, our Board of Directors declared a regular quarterly cash dividend of $0.125 per share of common stock, with a record date of August 19, 2014, and a payment date of September 10, 2014. This cash dividend of approximately $2.7 million will be paid from available cash on hand.
Additional Paid-in Capital. For the six months ended June 30, 2014, additional paid-in capital increased by $1.7 million to $129.0 million at June 30, 2014 from $127.3 million at December 31, 2013. The increase in the six months ended June 30, 2014 was due primarily to recognition of stock based compensation.
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 and RSUs, which are treated as contingently issuable shares, using the “treasury stock” method. The components of basic and diluted net income per common share were as follows for the periods stated:

10

SPŌK HOLDINGS, INC.
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


 
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
 
2014
 
2013
 
2014
 
2013
 
 
(Dollars in thousands, except share and per share amounts)
Net income
 
$
4,291

 
$
6,828

 
$
9,181

 
$
13,753

Weighted average shares of common stock outstanding
 
21,642,163

 
21,644,281

 
21,640,191

 
21,666,096

Dilutive effect of restricted stock and RSUs
 
457,628

 
182,868

 
433,063

 
255,646

Weighted average shares of common stock and common stock equivalents
 
22,099,791

 
21,827,149

 
22,073,254

 
21,921,742

Net income per common share
 
 
 
 
 
 
 
 
Basic
 
$
0.20

 
$
0.32

 
$
0.42

 
$
0.63

Diluted
 
$
0.19

 
$
0.31

 
$
0.42

 
$
0.63

(16) Stock Based Compensation — Compensation expense associated with RSUs and restricted stock was recognized based on the fair value of the instruments, over the instruments’ vesting period. The following table reflects the statements of income 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
 
2014
 
2013
 
2014
 
2013
 
 
(Dollars in thousands)
Cost of revenue
 
$
81

 
$
49

 
$
162

 
$
98

Service, rental and maintenance
 
(17
)
 
20

 
$
22

 
$
40

Selling and marketing
 
131

 
119

 
262

 
238

General and administrative
 
429

 
440

 
1,264

 
878

Total stock based compensation
 
$
624

 
$
628

 
$
1,710

 
$
1,254


The decrease of compensation expense associated with service, rental and maintenance during the three months ended June 30, 2014 compared to the same period in 2013 was due to forfeitures of eligible RSUs in the second quarter of 2014.
(17) Income Taxes — We file a consolidated U.S. Federal income tax return and income tax returns in state, local and foreign jurisdictions (Canada and Australia) as required.
At June 30, 2014, we had total deferred income tax assets of $143.2 million and a valuation allowance of $119.3 million resulting in an estimated recoverable amount of deferred income tax assets of $23.9 million. This reflected a change from the December 31, 2013 balance of deferred income tax assets of $148.2 million and a valuation allowance of $119.3 million resulting in an estimated recoverable amount of $28.9 million. The change reflects the expected usage of the deferred income tax assets based on estimated 2014 taxable income.
We consider both positive and negative evidence when evaluating 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. During the fourth quarter of each year, we prepare a multi-year forecast of taxable income for our operations. The forecasts of taxable income are not sufficient to result in the full realization of our deferred income tax assets due to the continuing decline in our revenue and taxable income as customers switch to other communication solutions and delay purchasing and implementation decisions.
The anticipated effective income tax rate is expected to continue to differ from the Federal statutory rate of 35% primarily due to the effect of state income taxes, the effect of changes to the deferred income tax asset valuation allowance, permanent differences between book and taxable income and certain discrete items.
As of January 1, 2014, we had approximately $343.8 million of Federal net operating losses (“NOLs”) available to offset future taxable income. The Internal Revenue Code Section 382 limited NOLs as of January 1, 2014 totaled $50.4 million which may be used at a rate of $6.1 million per year. The 2013 NOLs utilized is expected to be approximately $44.7 million and this amount will be confirmed when we file our 2013 Federal Income Tax Return.
(18) Related Party Transactions — A member of our Board of Directors also served as a director for an entity that leases transmission tower sites to the Company. During the fourth quarter of 2013, this entity acquired one of our vendors, Global Tower Partners. For the three months ended June 30, 2014 and 2013, we incurred $1.1 million and $1.0 million, respectively, and for the

11

SPŌK HOLDINGS, INC.
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


six months ended June 30, 2014 and 2013, we incurred $2.1 million and $2.0 million, respectively, to that entity in site rent expenses that were included in service, rental and maintenance expenses.
(19) Commitments and Contingencies — There have been no material changes during the six months ended June 30, 2014 to the commitments and contingencies previously reported in the 2013 Annual Report except as noted below.
In March 2014, we entered into an exclusive agreement with a vendor to purchase a minimum number of paging devices over a three-year period. We have a purchase commitment of $8.3 million over this three year contractual term.
In April 2014, we entered into an agreement with a vendor for certain information technology services over a three-year contract term. The total contractual obligation is $1.6 million.
In April 2014, we amended an existing agreement with a vendor for our headquarters office space in Springfield, Virginia. We extended the original lease term for an additional 3 years with the new lease term expiring on March 31, 2018. In addition, we retained an adjacent office space for a lease period of 4 years also expiring on March 31, 2018. The additional rent expense, net of rent abatement, associated with the amendment is estimated to be approximately $1.2 million over the amended lease terms.
(20) Segment Reporting — On March 3, 2011, the Company (formerly USA Mobility, Inc.) acquired Amcom. From that date the Company determined, pursuant to Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 280 - Segment Reporting (“ASC 280”) that the Company had two reportable segments, a wireless segment and a software segment that were also the Company’s operating segments. Generally through December 31, 2013, the Company maintained two separate operations with distinct operating structures. Starting in 2013, the Company undertook an internal reorganization and reorientation. That reorganization was designed to unify the Company's wireless and software product offerings under one brand identity and to establish one company dedicated to operational excellence, customer focus and creative problem solving. Our approach was to maximize favorable operational attributes and eliminate redundancies to affect: one integrated sales force selling software and wireless solutions; one set of overhead; one customer message and experience; one platform for future acquisitions; and to grow our revenue on a profitable basis to create long-term stockholder value. A key element of this strategy included consolidation of our legal entities and management. Effective January 1, 2014 the legal entity, Amcom Software, Inc., was merged into Spōk, Inc. (formerly USA Mobility Wireless, Inc.), an indirect wholly owned subsidiary of the Company. Our sole operating subsidiary is now Spōk, Inc. In addition, management was reorganized to consolidate the separate management structures for the wireless and software segments into one integrated management structure. Effective January 1, 2014, the Company is structured as one operating (and reportable) segment, a unified communication business. The Chief Executive Officer (who is also the chief operating decision maker as defined by ASC 280) views the business as one operation and assesses performance and allocates resources on the basis of our consolidated operations.

12



Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
This Quarterly Report contains forward-looking statements and information relating to Spōk Holdings, Inc. and its subsidiaries (“SPŌK” or the “Company”) (formerly USA Mobility, Inc.) 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 SPŌK 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 Statements of Income (“MD&A”),” and “Part I – Item 1A – Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2013, filed with the United States Securities and Exchange Commission (the “SEC”) on March 11, 2014 (the “2013 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, intended, targeted or forecasted. 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 disclosed in the Company’s 2013 Annual Report, 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 anticipated, believed, estimated, expected, intended, targeted or forecasted. 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 SPŌK’s business, statement of income or financial condition, subsequent to the filing of this Quarterly Report.
Overview
The following MD&A is intended to help the reader understand the statements of income and financial position of SPŌK. The MD&A is provided as a supplement to, and should be read in conjunction with, our 2013 Annual Report and our condensed consolidated financial statements and accompanying notes. A reference to a “Note” in this section refers to the accompanying Unaudited Notes to the Condensed Consolidated Financial Statements.
Effective January 1, 2014, the Company is structured as one operating (and reportable) segment, a unified communication business as more fully described in Note 20. The Chief Executive Officer (who is also the chief operating decision maker as defined by ASC 280) views the business as one operation and assesses performance and allocates resources on the basis of our consolidated operations.
SPŌK, acting through our indirect wholly-owned operating subsidiary, Spōk, Inc., is a comprehensive provider of critical communication solutions for the enterprise. As a single source provider the Company operates the largest one-way paging and advanced two-way paging networks in the United States and provides mission critical unified communication software solutions nationally and internationally (in Europe, Australia, Asia and the Middle East) to such key market segments as healthcare, government and large enterprises. Software solutions include critical smartphone communication solutions, secure texting, contact center optimization, emergency management and clinical workflow improvement. For both the three and six months ended June 30, 2014 and 2013, wireless and software revenue represent approximately 70% and 30%, respectively of our consolidated revenue.
The following tables indicate the wireless and software revenue by key market segments for the periods stated and illustrate the relative significance of these market segments to our operations.

13



 

For the Three Months Ended 
 June 30, 2014

For the Three Months Ended 
 June 30, 2013
Market Segment

Wireless

Software

Total

% of Total

Wireless

Software

Total

% of Total
 

 

 

 

(Dollars in thousands)

 

 

 
Healthcare

$
22,616


$
10,589


$
33,205


67.7
%

$
24,462


$
10,041


$
34,503


66.0
%
Government

2,437


1,757


4,194


8.5
%

3,020


1,698


4,718


9.0
%
Large Enterprise

3,603


476


4,079


8.3
%

4,330


507


4,837


9.3
%
Other (1)

3,762


751


4,513


9.2
%

4,542


715


5,257


10.1
%
Total Direct

32,418


13,573


45,991


93.7
%

36,354


12,961


49,315


94.4
%
Total Indirect

1,100


2,003


3,103


6.3
%

1,417


1,536


2,953


5.6
%
Total

$
33,518


$
15,576


$
49,094


100.0
%

$
37,771


$
14,497


$
52,268


100.0
%

(1) 
Other includes hospitality, resort and billable travel revenue.
 
 
For the Six Months Ended 
 June 30, 2014
 
For the Six Months Ended 
 June 30, 2013
Market Segment
 
Wireless
 
Software
 
Total
 
% of Total
 
Wireless
 
Software
 
Total
 
% of Total
 
 
 
 
 
 
 
 
(Dollars in thousands)
 
 
 
 
 
 
Healthcare
 
$
46,022

 
$
20,556

 
$
66,578

 
67.1
%
 
$
48,995

 
$
19,370

 
$
68,365

 
64.9
%
Government
 
4,949

 
3,477

 
8,426

 
8.5
%
 
6,361

 
3,049

 
9,410

 
8.9
%
Large Enterprise
 
7,335

 
1,017

 
8,352

 
8.4
%
 
8,888

 
1,680

 
10,568

 
10.0
%
Other (1)
 
7,320

 
1,165

 
8,485

 
8.6
%
 
9,324

 
1,349

 
10,673

 
10.1
%
Total Direct
 
65,626

 
26,215

 
91,841

 
92.6
%
 
73,568

 
25,448

 
99,016

 
93.9
%
Total Indirect
 
2,243

 
5,129

 
7,372

 
7.4
%
 
2,982

 
3,400

 
6,382

 
6.1
%
Total
 
$
67,869

 
$
31,344

 
$
99,213

 
100.0
%
 
$
76,550

 
$
28,848

 
$
105,398

 
100.0
%

(1) 
Other includes hospitality, resort and billable travel revenue.
The following table indicates the percentage of our paging units in service by key market segments as of the dates stated and illustrates the relative significance of these market segments to our wireless revenue:
Market Segment
 
As of June 30, 2014
 
As of March 31, 2014
 
As of June 30, 2013
Healthcare
 
73.0
%
 
72.0
%
 
70.9
%
Government
 
8.3
%
 
8.6
%
 
9.1
%
Large Enterprise
 
7.8
%
 
8.2
%
 
8.1
%
Other
 
6.6
%
 
6.8
%
 
7.3
%
Total Direct
 
95.7
%
 
95.6
%
 
95.4
%
Total Indirect
 
4.3
%
 
4.4
%
 
4.6
%
Total
 
100.0
%
 
100.0
%
 
100.0
%
Revenue
We offer a focused suite of unified critical communication solutions that include call center operations, clinical alerting and notifications, one-way and advanced two-way wireless messaging services, mobile communications and public safety solutions.
We develop, sell, and support enterprise-wide systems for hospitals and other organizations needing to automate, centralize, and standardize mission critical communication solutions. Given the focused nature of our software products, our primary market has been the healthcare industry, particularly hospitals. We have identified hospitals with 200 or more beds as the primary targets for our software solutions.
We have established solutions for:
Hospital Call Centers - These solutions encompass operator and answering services along with call recording, scheduling and selective additional support modules.
Clinical Workflow Communication - These solutions address hospital code processing as well as physician support tools.

14



Communication Applications - These solutions support hospital notification and appointment support.
Communications Infrastructure - These solutions support the wireless messaging infrastructure and offer a software product that can link disparate communications software (“middleware”).
Public Safety - These solutions implement and support emergency communication systems.
Revenue generated by wireless messaging services (including voice mail, personalized greeting, message storage and retrieval) and equipment loss and/or maintenance protection to both one-way and two-way messaging subscribers are presented as wireless revenue in our statements of income. In addition, we sell software solutions, professional services (installation and training), equipment (to be used in conjunction with the software) and post-contract support (on-going maintenance). Revenue generated by these communication solutions are reflected as software revenue in our statements of income. Our software is licensed to end users under an industry standard software license agreement.
We market and distribute our communication services and solutions through a direct sales force and an indirect sales channel.
Direct. The direct sales force rents or sells products, solutions, messaging services and other 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 will continue to market to commercial enterprises, especially healthcare organizations, that are interested in our communication solutions. We maintain a sales presence in key markets throughout the United States in an effort to gain new customers and to retain and increase sales to existing customers. We also maintain several corporate groups, such as our Key Account Management team, focused on retaining and selling additional products and services to our key healthcare accounts as well as a team selling to government and national accounts. The direct sales force targets unified communications leadership such as chief information officers, information technology directors, telecommunications directors and contact center managers. Additionally, for certain of our software solutions, we target clinical leadership including chief medical officers and chief nursing officers. The timing for a direct sale varies by the type of service or solution that is being offered, but a software solution sale may take from 6 to 18 months depending on the type of software solution.
Indirect. The direct sales force is complimented by an indirect sales channel. This channel coordinates relationships with alliance partners or third-party service providers that are ultimately responsible for the delivery of our services or solutions to the customer.
The following details additional information on our revenue.
Wireless Revenue
Our core offering includes subscriptions to one-way or two-way messaging services for a periodic (monthly, quarterly, semi-annual, or annual) service fee. This 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. A subscriber to one-way messaging services may select coverage on a local, regional or nationwide basis to best meet their messaging needs. Two-way messaging is generally offered on a nationwide basis. 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 offer ancillary services, such as voicemail and equipment loss or maintenance protection, which help increase the monthly recurring revenue we receive along with these traditional messaging services.
Wireless revenue consists of two primary components: paging revenue and product and other revenue. The breakout of wireless revenue by component was as follows for the periods stated:

 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
Revenue
 
2014
 
2013
 
2014
 
2013
 
 
(Dollars in thousands)
Paging revenue
 
$
31,458

 
$
36,064

 
$
64,354

 
$
73,115

Product and other revenue
 
2,060

 
1,707

 
3,515

 
3,435

Total wireless revenue
 
$
33,518

 
$
37,771

 
$
67,869

 
$
76,550

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

15



 
 
As of June 30, 2014
 
As of March 31, 2014
 
As of June 30, 2013
Distribution Channel
 
Units
 
% of Total
 
Units
 
% of Total
 
Units
 
% of Total
 
 
 
 
 
 
(Units in thousands)
 
 
 
 
Direct
 
1,243

 
95.7
%
 
1,269

 
95.6
%
 
1,380

 
95.4
%
Indirect
 
56

 
4.3
%
 
58

 
4.4
%
 
65

 
4.6
%
Total
 
1,299

 
100.0
%
 
1,327

 
100.0
%
 
1,445

 
100.0
%
The following table summarizes the breakdown of our one-way and two-way units in service at specified dates:
 
 
As of June 30, 2014
 
As of March 31, 2014
 
As of June 30, 2013
Service Type
 
Units    
 
% of Total    
 
Units    
 
% of Total    
 
Units    
 
% of Total    
 
 
(Units in thousands)
One-way messaging
 
1,208

 
93.0
%
 
1,230

 
92.7
%
 
1,343

 
92.9
%
Two-way messaging
 
91

 
7.0
%
 
97

 
7.3
%
 
102

 
7.1
%
Total
 
1,299

 
100.0
%
 
1,327

 
100.0
%
 
1,445

 
100.0
%
The demand for one-way and two-way messaging 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 uncertainty in the United States economy and unemployment rates nationwide.
As demand for one and two messaging has declined, we have developed or added service offerings such as Mobile Connect with a pager number in order to increase our revenue potential and mitigate the decline in our wireless revenue. We will continue to look for ways to innovate and provide customers the highest value possible.
Wireless revenue is 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 revenue 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, 2014
 
March 31, 2014
 
June 30, 2013
Distribution Channel
 
Gross
Placements
 
Disconnects
 
Gross
Placements
 
Disconnects
 
Gross
Placements
 
Disconnects
 
 
 
 
 
 
(Units in thousands)
 
 
 
 
Direct
 
50

 
76

 
38

 
84

 
54

 
71

Indirect
 
1

 
3

 
1

 
4

 
1

 
19

Total
 
51

 
79

 
39

 
88

 
55

 
90

The following table sets forth information on our direct units in service by account size for the periods stated:
 
 
As of June 30, 2014
 
As of March 31, 2014
 
As of June 30, 2013
Account Size
 
Units
 
% of Total
 
Units
 
% of Total
 
Units
 
% of Total
 
 
(Units in thousands)
1 to 3 Units
 
39

 
3.1
%
 
41

 
3.2
%
 
47

 
3.4
%
4 to 10 Units
 
23

 
1.8
%
 
24

 
1.9
%
 
28

 
2.0
%
11 to 50 Units
 
56

 
4.5
%
 
57

 
4.5
%
 
67

 
4.8
%
51 to 100 Units
 
38

 
3.1
%
 
41

 
3.2
%
 
45

 
3.2
%
101 to 1000 Units
 
275

 
22.1
%
 
282

 
22.3
%
 
305

 
22.1
%
> 1000 Units
 
812

 
65.4
%
 
824

 
64.9
%
 
888

 
64.5
%
Total direct units in service
 
1,243

 
100.0
%
 
1,269

 
100.0
%
 
1,380

 
100.0
%

16



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, 2014
 
March 31, 2014
 
June 30, 2013
1 to 3 Units
 
(4.1
)%
 
(4.9
)%
 
(5.1
)%
4 to 10 Units
 
(5.4
)%
 
(4.1
)%
 
(5.3
)%
11 to 50 Units
 
(3.2
)%
 
(5.3
)%
 
(6.4
)%
51 to 100 Units
 
(8.7
)%
 
(1.2
)%
 
(5.3
)%
101 to 1000 Units
 
(2.5
)%
 
(1.7
)%
 
(5.0
)%
> 1000 Units
 
(1.2
)%
 
(4.0
)%
 
1.1
 %
Total direct net unit loss %
 
(2.0
)%
 
(3.5
)%
 
(1.3
)%
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 revenue 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, 2014
 
March 31, 2014
 
June 30, 2013
Direct
 
$
8.06

 
$
8.19

 
$
8.33

Indirect
 
6.39

 
6.37

 
6.31

Total
 
7.98

 
8.11

 
8.22

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 revenue 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 revenue. The decrease in consolidated ARPU for the quarter ended June 30, 2014 from the quarter ended June 30, 2013 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 the remainder of 2014 and that price increases could mitigate, but not completely offset, the expected declines in both ARPU and revenue.
The following table sets forth information on direct ARPU by account size for the periods stated:
 
 
For the Three Months Ended June 30,
Account Size
 
June 30, 2014
 
March 31, 2014
 
June 30, 2013
1 to 3 Units
 
$
14.86

 
$
14.96

 
$
15.12

4 to 10 Units
 
14.12

 
14.22

 
14.29

11 to 50 Units
 
12.00

 
12.07

 
11.96

51 to 100 Units
 
10.18

 
10.27

 
10.42

101 to 1000 Units
 
8.58

 
8.76

 
8.84

> 1000 Units
 
7.00

 
7.11

 
7.19

Total direct ARPU
 
$
8.06

 
$
8.19

 
$
8.33

Software Revenue
Software revenue consists of two primary components: operations revenue and maintenance revenue.
Operations revenue consists of license revenue, professional services revenue, and equipment sales. Maintenance revenue is for ongoing support of a software application or equipment (typically for one year). We recognize equipment revenue when it

17



is delivered to the customer. License revenue, professional services revenue and maintenance revenue are recognized ratably over the longer of the period of professional services delivery to the customer or the contractual term of the maintenance agreement. If the period of delivery to the customer is not known, license revenue and professional services revenue will be recognized when software and professional services are fully delivered to the customer and maintenance revenue is recognized ratably over the contractual term of the agreement.
The breakout of software revenue by component was as follows for the periods stated:

 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
Revenue
 
2014
 
2013
 
2014
 
2013
 
 
(Dollars in thousands)
Operations revenue
 
$
8,046

 
$
7,552

 
$
16,438

 
$
15,141

Maintenance revenue
 
7,530

 
6,945

 
14,906

 
13,707

Total software revenue
 
$
15,576

 
$
14,497

 
$
31,344

 
$
28,848

On a regular basis, we engage in contractual arrangements with our customers to provide software licenses, professional services, and equipment sales. In addition, we enter into contractual arrangements for maintenance with our customers on new solutions or renewals on existing solutions. These contractual arrangements are reported as bookings and represent future revenue. Bookings increased by 21.3% and 20.1% for the three and six months ended June 30, 2014 compared to the same periods in 2013 due to an increase in maintenance and subscription renewals in the second quarter of 2014 and in the first six months of 2014.
The following table summarizes total bookings for the periods stated:

 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
Bookings
 
2014
 
2013
 
2014
 
2013
 
 
(Dollars in thousands)
Operations and new maintenance orders
 
$
11,018

 
$
8,566

 
$
19,706

 
$
17,380

Maintenance and subscription renewals
 
7,941

 
7,060

 
16,174

 
12,499

Total bookings
 
$
18,959


$
15,626

 
$
35,880

 
$
29,879

We reported a software backlog of $40.2 million at June 30, 2014, which represented all purchase orders received from customers not yet recognized as revenue.
Backlog
(Dollars in thousands)
 
 
Beginning balance at January 1, 2014
$
40,211

Operations bookings
19,706

Maintenance and subscription renewals
16,174

Available backlog
$
76,091

Operations revenue
(16,438
)
Maintenance revenue
(14,906
)
Other(1) 
(4,565
)
Total backlog at June 30, 2014
$
40,182

(1) 
Other reflects cancellations and adjustments to backlog.
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 revenue. These are expenses primarily for hardware, third-party software, outside service expenses and payroll and related expenses for our professional services, logistics, customer support and maintenance staff.
Service, rental, and maintenance. These are expenses associated with the operation of our paging networks and development of our software. Expenses consist largely of site rent expenses for transmitter locations, telecommunication expenses to deliver messages over our paging networks, and payroll and related expenses for our engineering, pager repair functions and development and maintenance of our software products.

18



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.
General and administrative. These are expenses associated with information technology and administrative functions. This classification consists primarily of payroll and related expenses, outside service expenses, taxes, licenses and permit expenses, and facility rent expenses.
We review the percentages of these operating expenses to revenue 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 the three and six months ended June 30, 2014 and 2013, respectively.
Our largest expense, payroll and related expenses, include wages, commissions, incentives, employee benefits and related taxes. On a monthly basis, we review the number of employees in major functional categories and 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 Company. We have 615 full-time equivalent employees (“FTEs”) at June 30, 2014, a decrease of 14.6% from 659 FTEs at June 30, 2013. The change in the number of FTEs reflects adjustments to our workforce to reflect the changing nature of our revenues. Software revenue is anticipated to increase while the wireless revenue is expected to continue to decrease reflecting the changing technology expectations of our customer base.
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. 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 wireless revenue declines. In order to reduce these expenses, we have an active program to consolidate the number of paging networks, and thus transmitter locations, which we refer to as network rationalization. We have reduced the number of active transmitters by 3.7% to 4,431 active transmitters at June 30, 2014 from 4,601 active transmitters at June 30, 2013.
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 are dependent on the number of units in service, the number of customers we support and the number of office and network locations that we maintain. 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 or customers, which could cause telecommunication expenses to vary.
Due to the integration of the management structure and consolidation of certain sales support functions effective January 1, 2014, certain prior year's interim revenue and operating expenses were reclassified to conform to the current year's presentation. In 2014, we will report wireless and software revenue, and have reclassified the revenue previously reported in the Second Quarter 2013 Form 10-Q to conform to the current year's presentation. In the second quarter of 2013, wireless revenue of $37.771 million was reported as $36.370 million in service, rental and maintenance, net of service credits and $1.401 million of software revenue and other, net. Also, in the second quarter of 2013, software revenue of $14.497 million was reported in software revenue and other, net. We reclassified payroll and related expenses amongst functional departments and eliminated general and administrative overhead expenses previously allocated to cost of revenue, service, rental and maintenance and selling and marketing. The reclassifications resulted in the following increases and (decreases) to the Second Quarter 2013 Form 10-Q reported operating expenses: Cost of revenue of $1.476 million; service, rental and maintenance of ($0.804) million; selling and marketing of $0.191 million and general and administrative of ($0.863) million. The changes had no impact to previously reported total operating expenses and operating income.

19



Statements of Income
Comparison of the Statements of Income for the Three Months Ended June 30, 2014 and 2013
 
 
For the Three Months Ended June 30,
 
Change Between 2014 and 2013
 
 
2014
 
2013
 
Total
 
%
 
 
(Dollars in thousands)
Revenue:
 
 
 
 
 
 
 
 
Wireless revenue
 
$
33,518

 
$
37,771

 
$
(4,253
)
 
(11.3
)%
Software revenue
 
15,576

 
14,497

 
1,079

 
7.4
 %
Total
 
$
49,094

 
$
52,268

 
$
(3,174
)
 
(6.1
)%
Selected operating expenses:
 
 
 
 
 
 
 
 
Cost of revenue
 
$
7,180

 
$
6,961

 
$
219

 
3.1
 %
Service, rental and maintenance
 
11,420

 
12,018

 
(598
)
 
(5.0
)%
Selling and marketing
 
7,780

 
6,538

 
1,242

 
19.0
 %
General and administrative
 
10,990

 
11,022

 
(32
)
 
(0.3
)%
Severance and restructuring
 
4

 
2

 
2

 
100.0
 %
Total
 
$
37,374

 
$
36,541

 
$
833

 
2.3
 %
FTEs
 
615

 
659

 
(44
)
 
(6.7
)%
Active transmitters
 
4,431

 
4,601

 
(170
)
 
(3.7
)%
Revenue — Wireless
Our wireless revenue was $33.5 million and $37.8 million for the three months ended June 30, 2014 and 2013, respectively. The decrease in wireless revenue reflects the decrease in demand for our wireless services. Paging revenue consists 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 other revenue reflects system sales, the sale of devices and charges for leased devices that are not returned and are net of anticipated credits. The table below details total wireless revenue for the periods stated:
 
 
For the Three Months Ended June 30,
 
 
2014
 
2013
 
 
(Dollars in thousands)
Paging revenue:
 
 
 
 
One-way messaging
 
$
27,415

 
$
31,202

Two-way messaging
 
4,043

 
4,862

Total paging revenue
 
31,458

 
36,064

Product and other revenue
 
2,060

 
1,707

Total wireless revenue
 
$
33,518

 
$
37,771

The table below sets forth units in service and paging revenue, the changes in each between the three months ended June 30, 2014 and 2013 and the changes in revenue associated with differences in ARPU and the number of units in service:
 
 
Units in Service
 
Revenue
 
 
 
 
As of June 30,
 
For the Three Months Ended June 30,
 
Change Due To:
 
 
2014
 
2013
 
Change    
 
2014 (1)      
 
2013 (1)      
 
Change      
 
ARPU    
 
Units    
 
 
(Units in thousands)
 
(Dollars in thousands)
One-way messaging
 
1,208

 
1,343

 
(135
)
 
$
27,415

 
$
31,202

 
$
(3,787
)
 
$
(762
)
 
$
(3,025
)
Two-way messaging
 
91

 
102

 
(11
)
 
4,043

 
4,862

 
(819
)
 
(51
)
 
(768
)
Total
 
1,299

 
1,445

 
(146
)
 
$
31,458

 
$
36,064

 
$
(4,606
)
 
$
(813
)
 
$
(3,793
)
 
(1) 
Amounts shown exclude non-paging revenue.
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 wireless revenue due to the lower number of subscribers and related units in service.

20



Revenue — Software
Our software revenue was $15.6 million and $14.5 million for the three months ended June 30, 2014 and 2013, respectively, which consisted of operations revenue (from licenses, professional services and equipment sales) and maintenance revenue. The table below details total software revenue for the periods stated:

 
For the Three Months Ended June 30,
 
 
2014
 
2013
 
 
(Dollars in thousands)
Operations revenue
 
$
8,046

 
$
7,552

Maintenance revenue
 
7,530

 
6,945

Total software revenue
 
$
15,576

 
$
14,497

The increase in operations revenue primarily reflects an increase in the number of customer implementations compared to the comparable period in 2013. The increase in maintenance revenue reflects our continuing success in renewals of our maintenance support for existing software solutions and in maintenance support for sales of new solutions. The maintenance renewal rate for both the three months ended June 30, 2014 and 2013 was 99.5%.
Operating Expenses — Consolidated
Cost of revenue. Cost of revenue consisted primarily of the following items:
 
 
For the Three Months Ended June 30,
 
Change Between 2014 and 2013
 
 
2014
 
2013
 
Total
 
%
 
 
(Dollars in thousands)
Payroll and related
 
$
3,827

 
$
3,743

 
$
84

 
2.2
 %
Cost of sales
 
2,232

 
2,133

 
99

 
4.6
 %
Stock based compensation
 
81

 
49

 
32

 
65.3
 %
Other
 
1,040

 
1,036

 
4

 
0.4
 %
Total cost of revenue
 
$
7,180