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EX-32.1 - EXHIBIT 32.1 - Spok Holdings, Incspok-ex321_9302014xq3.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 September 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)
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
21,682,845 shares of the registrant’s common stock ($0.0001 par value per share) were outstanding as of October 24, 2014.
 




SPŌK HOLDINGS, INC.
QUARTERLY REPORT ON FORM 10-Q
INDEX
 
 
Page  
PART I.
 
 
Item 1.
 
 
 
Condensed Consolidated Balance Sheets as of September 30, 2014 (Unaudited) and December 31, 2013
 
 
Condensed Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2014 and 2013 (Unaudited)
 
 
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 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
 
 
September 30, 2014
 
December 31, 2013
 
(In thousands)
 
(Unaudited)
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
106,940

 
$
89,075

Accounts receivable, net
21,823

 
18,084

Prepaid expenses and other
7,518

 
7,399

Inventory
2,676

 
2,221

Deferred income tax assets, net
3,545

 
3,389

Total current assets
142,502

 
120,168

Property and equipment, net
19,703

 
21,122

Goodwill
133,031

 
133,031

Other intangible assets, net
21,201

 
25,368

Deferred income tax assets, net
17,517

 
25,494

Other assets
1,219

 
1,715

TOTAL ASSETS
$
335,173

 
$
326,898

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable and accrued liabilities
$
11,163

 
$
9,885

Accrued compensation and benefits
11,258

 
13,919

Deferred revenue
24,507

 
23,023

Total current liabilities
46,928

 
46,827

Deferred revenue
642

 
862

Other long-term liabilities
9,321

 
9,259

TOTAL LIABILITIES
56,891

 
56,948

Commitments and contingencies


 


Stockholders’ equity:
 
 
 
Preferred stock

 

Common stock
2

 
2

Additional paid-in capital
130,040

 
127,264

Retained earnings
148,240

 
142,684

TOTAL STOCKHOLDERS’ EQUITY
278,282

 
269,950

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
335,173

 
$
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 September 30,
 
For the Nine Months Ended September 30,
 
 
2014
 
2013
 
2014
 
2013
 
 
(Unaudited and in thousands except share and per share amounts)
Revenue:
 
 
 
 
 
 
 
 
Wireless revenue
 
$
32,855

 
$
37,067

 
$
100,724

 
$
113,617

Software revenue
 
16,936

 
12,602

 
48,280

 
41,450

Total revenue
 
49,791

 
49,669

 
149,004

 
155,067

Operating expenses:
 
 
 
 
 
 
 
 
Cost of revenue
 
8,000

 
6,787

 
21,985

 
20,415

Service, rental and maintenance
 
10,988

 
11,820

 
34,200

 
36,029

Selling and marketing
 
7,072

 
6,388

 
22,098

 
19,320

General and administrative
 
10,866

 
11,282

 
33,991

 
34,635

Severance and restructuring
 
545

 

 
569

 
2

Depreciation, amortization and accretion
 
4,247

 
3,858

 
12,628

 
11,487

Total operating expenses
 
41,718

 
40,135

 
125,471

 
121,888

Operating income
 
8,073

 
9,534

 
23,533

 
33,179

Interest expense, net
 
(63
)
 
(68
)
 
(194
)
 
(196
)
Other income, net
 
(2
)
 
84

 
(180
)
 
90

Income before income tax expense
 
8,008

 
9,550

 
23,159

 
33,073

Income tax expense
 
(3,356
)
 
(3,788
)
 
(9,326
)
 
(13,558
)
Net income
 
$
4,652

 
$
5,762

 
$
13,833

 
$
19,515

Basic net income per common share
 
$
0.21

 
$
0.27

 
$
0.64

 
$
0.90

Diluted net income per common share
 
$
0.21

 
$
0.26

 
$
0.63

 
$
0.89

Basic weighted average common shares outstanding
 
21,651,347

 
21,629,289

 
21,643,951

 
21,653,692

Diluted weighted average common shares outstanding
 
22,135,554

 
21,919,238

 
22,089,892

 
21,916,063

Cash dividends declared per common share
 
$
0.125

 
$
0.125

 
$
0.375

 
$
0.375





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 Nine Months Ended September 30,
 
 
2014
 
2013
 
 
(Unaudited and
in thousands)
Cash flows from operating activities:
 
 
 
 
Net income
 
$
13,833

 
$
19,515

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation, amortization and accretion
 
12,628

 
11,487

Amortization of deferred financing costs
 
194

 
194

Deferred income tax expense
 
7,726

 
12,226

Amortization of stock based compensation
 
2,816

 
2,200

Provision for doubtful accounts, service credits and other
 
875

 
1,337

Adjustment of non-cash transaction taxes
 
(259
)
 
(354
)
(Gain) Loss on disposals of property and equipment
 
(2
)
 
172

Changes in assets and liabilities:
 
 
 
 
Accounts receivable
 
(4,615
)
 
3,129

Prepaid expenses and other assets
 
(240
)
 
(285
)
Accounts payable, accrued liabilities and accrued compensation and benefits
 
(1,968
)
 
(8,025
)
Deferred revenue
 
1,264

 
(2,292
)
Net cash provided by operating activities
 
32,252

 
39,304

Cash flows from investing activities:
 
 
 
 
Purchase of property and equipment
 
(6,327
)
 
(7,772
)
Proceeds from disposals of property and equipment
 
63

 
10

Net cash used in investing activities
 
(6,264
)
 
(7,762
)
Cash flows from financing activities:
 
 
 
 
Cash dividends to stockholders
 
(8,123
)
 
(9,606
)
Net cash used in financing activities
 
(8,123
)
 
(9,606
)
Net increase in cash and cash equivalents
 
17,865

 
21,936

Cash and cash equivalents, beginning of period
 
89,075

 
61,046

Cash and cash equivalents, end of period
 
$
106,940

 
$
82,982

Supplemental disclosure:
 
 
 
 
Interest paid
 
$
7

 
$
9

Income taxes paid
 
$
1,327

 
$
926




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 enterprises. 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. To allow for the comparability of financial results, certain interim revenue and operating expenses were reclassified to conform to the current year's presentation of reports within one segment.
(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 of America (“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 10-Q for the quarterly period ended September 30, 2013 (the "Third Quarter 2013 Form 10-Q") to conform with the current year's presentation. In the third quarter of 2013, wireless revenue of $37.07 million was reported as $35.54 million in service, rental and maintenance, net of service credits and $1.53 million of software revenue and other, net. Also, in the third quarter of 2013, software revenue of $12.60 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 Third Quarter 2013 Form 10-Q reported operating expenses: Cost of revenue of $1.43 million; service, rental and maintenance of ($0.73) million; selling and marketing of $0.15 million and general and administrative of ($0.85) 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-

5

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


step model that requires companies to exercise judgment when considering all relevant facts and circumstances in the determination of when and how revenue is recognized. For publicly held companies, 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. The new standard will be effective on January 1, 2017 for SPŌK. 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 also 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:
 
 
September 30,
2014
 
December 31,
2013
 
 
(Dollars in thousands)
Other receivables
 
$
751

 
$
748

Tax receivables
 
169

 
158

Deposits
 
428

 
597

Prepaid insurance
 
187

 
524

Prepaid rent
 
153

 
259

Prepaid repairs and maintenance
 
1,163

 
687

Prepaid taxes
 
475

 
641

Prepaid commissions
 
3,208

 
2,696

Prepaid expenses
 
984

 
1,089

Total prepaid expenses and other
 
$
7,518

 
$
7,399

Prepaid repairs and maintenance increased by $0.5 million during the nine months ended September 30, 2014 due primarily to the annual renewal of maintenance contracts associated with information technology services. Prepaid commissions increased by $0.5 million during the nine months ended September 30, 2014 due primarily to the increase in sales orders.
(6) Inventory — Inventory of $2.7 million and $2.2 million at September 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. Inventory increased by $0.5 million during the nine months ended September 30, 2014 due primarily to the increase in the purchase of third party hardware associated with sales orders and the volume of orders processed.
(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 September 30, 2014 and 2013 were $4.2 million and $3.9 million, respectively; and for the nine months ended September 30, 2014 and 2013 were $12.6 million and $11.5 million, respectively. The consolidated balances consisted of the following for the periods stated:
 

For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 

2014
 
2013
 
2014
 
2013
 

(Dollars in thousands)
Depreciation

$
2,555

 
$
2,451

 
$
7,846

 
$
7,278

Amortization

1,503

 
1,252

 
4,218

 
3,749

Accretion

189

 
155

 
564

 
460

Total depreciation, amortization and accretion

$
4,247

 
$
3,858

 
$
12,628

 
$
11,487

(8) Goodwill and Amortizable Intangible Assets — Goodwill at September 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 as of September 30, 2014.
Amortizable intangible assets at September 30, 2014 primarily include customer related intangibles, technology based intangibles, contract based intangibles and marketing intangibles that 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.

6

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


The gross carrying amount of amortizable intangible assets was $41.6 million at September 30, 2014 and the accumulated amortization was $20.4 million. The net consolidated balance of amortizable intangible assets consisted of the following:
 
 
 
 
September 30, 2014
 
 
Useful Life
(In Years)
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Net Balance
 
 
 
 
(Dollars in thousands)
Customer relationships
 
10
 
$
25,002

 
$
(8,959
)
 
$
16,043

Acquired technology
 
2 - 4
 
8,452

 
(7,272
)
 
1,180

Non-compete agreements
 
5
 
2,370

 
(2,215
)
 
155

Trademarks
 
3
 
5,754

 
(1,931
)
 
3,823

Total amortizable intangible assets
 

 
$
41,578

 
$
(20,377
)
 
$
21,201

Estimated amortization of intangible assets for future periods was as follows:
 
(Dollars  in thousands)
For the remaining three months ending December 31, 2014
$
1,503

For the year ending December 31:

2015
4,735

2016
4,160

2017
2,886

2018
2,500

Thereafter
5,417

Total amortizable intangible assets
$
21,201

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

 
September 30,
2014
 
December 31,
2013
 
 
(Dollars in thousands)
Deferred financing costs
 
$
262

 
$
456

Deposits
 
195

 
195

Prepaid royalty
 
244

 
245

Other assets
 
518

 
819

Total other assets
 
$
1,219

 
$
1,715

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

 
September 30,
2014
 
December 31,
2013
 
 
(Dollars in thousands)
Accounts payable
 
$
2,531

 
$
1,726

Accrued network costs
 
1,146

 
1,169

Accrued taxes
 
3,938

 
3,959

Asset retirement obligations
 
410

 
358

Accrued outside services
 
993

 
1,049

Accrued accounting and legal
 
177

 
212

Accrued recognition awards
 
262

 
327

Accrued other
 
871

 
851

Deferred rent
 
77

 
77

Escheat liability
 
23

 
5

Lease incentive
 
168

 
152

Dividends payable - 2011 Long-Term Incentive Plan ("LTIP")
 
567

 

Total accounts payable and accrued liabilities
 
$
11,163

 
$
9,885


7

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


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 our common stock associated with the vesting of restricted stock units (“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 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 nine months ended September 30, 2014, we recorded an increase of $0.1 million in asset retirement costs for a total of $3.9 million at September 30, 2014. The asset retirement cost additions during the nine months ended September 30, 2014 increased paging equipment assets and are being depreciated over the related estimated lives of 51 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 were:
 
 
Short-Term
Portion
 
Long-Term
Portion
 
Total
 
 
(Dollars in thousands)
Balance at January 1, 2014
 
$
358

 
$
7,599

 
$
7,957

Accretion
 
21

 
543

 
564

Additions
 

 
141

 
141

Reclassifications
 
373

 
(373
)
 

Amounts paid
 
(342
)
 

 
(342
)
Balance at September 30, 2014
 
$
410

 
$
7,910

 
$
8,320

The balances above were included with accounts payable and accrued liabilities and other long-term liabilities, respectively, at September 30, 2014.
(12) Deferred Revenue — Deferred revenue at September 30, 2014 was $24.5 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 September 30, 2014 primarily consisted of unearned maintenance, software license and professional services revenue. Unearned maintenance revenue represents 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 represents 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 September 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 with 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.

8

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


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 September 30, 2014.
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:
 
 
September 30, 2014
 
December 31, 2013
 
 
(Dollars in thousands)
Asset retirement obligations
 
$
7,910

 
$
7,599

Dividends payable — 2011 LTIP
 

 
409

Escheat liability
 
239

 
509

Capital lease payable
 
11

 
23

Lease incentive
 
461

 
180

Deferred rent
 
422

 
259

Royalty payable
 
278

 
280

Total other long-term liabilities
 
$
9,321

 
$
9,259

The issuance of our common stock for vested 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 nine months ended September 30, 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 nine months ended September 30, 2014 consisted of:
 
(Dollars in thousands)
Balance at January 1, 2014
$
269,950

Net income for the nine months ended September 30, 2014
13,833

Cash dividends declared
(8,283
)
Amortization of stock based compensation
2,816

Other
(34
)
Balance at September 30, 2014
$
278,282

General. At September 30, 2014 and December 31, 2013, there were 21,675,735 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 Incentive Award Plan (the "2012 Equity Plan") from inception through September 30, 2014:

9

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


 
Activity
Total equity securities available at May 16, 2012
2,194,986

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

Add: Restricted shares of common stock ("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: Common stock awarded to eligible employees
(5,820
)
Less: Restricted stock awarded to non-executive members of the Board of Directors
(47,855
)
Less: Short-Term Incentive Plan (“STIP”) common stock awarded to an eligible employee
(41,702
)
Total equity securities available at September 30, 2014
1,754,696

On July 8, 2014, our Board of Directors granted 5,820 shares of common stock to certain eligible employees under the 2012 Equity Plan. The grant date fair value was $0.1 million based upon the closing price per share of our common stock of $15.74.
The following table details activities with respect to outstanding RSUs under the 2011 LTIP for the three months ended September 30, 2014:
 
 
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 July 1, 2014
 
559,689

 
$
12.41

 
 
 
 
Granted
 

 

 
 
 
 
Vested
 

 

 
 
 
 
Forfeited
 

 

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

 
$
12.41

 
$
930

 
3
The following table reflects the stock based compensation expense for the awards under the 2012 Equity Plan and predecessor equity plan:
 
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
Equity Awards
 
2014
 
2013
 
2014
 
2013
 
 
 (Dollars in thousands)
Common stock
 
$
85

 
$

 
$
85

 
$

2011 LTIP
 
930

 
906

 
2,486

 
2,040

Board of Directors Compensation
 
91

 
40

 
245

 
160

Total stock based compensation
 
$
1,106

 
$
946

 
$
2,816

 
$
2,200

The increase in 2011 LTIP stock based compensation expense for the nine months ended September 30, 2014 compared to the same period in 2013 was due to the issuance of additional RSUs in the third quarter of 2013. The increase in stock based compensation expense was offset by forfeitures in the second quarter of 2014, which decreased the outstanding RSUs to 559,689 on September 30, 2014 as compared to 642,582 RSUs on September 30, 2013. The increase in stock based compensation expense related to the Board of Directors for the nine months ended September 30, 2014 compared to the same period in 2013 reflects the compensation increase for Board of Director members effective in the third quarter of 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 nine months ended September 30, 2014 and 2013 included 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 restricted stock and RSUs are also forfeited.

10

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


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

July 30
 
August 19
 
September 10
 
0.125

 
2,707


 
Total
 
 
 
$
0.375

 
$
8,121

 
 
(1) 
The total payment reflects the cash dividends paid in relation to common stock and vested restricted stock.
Future Cash Dividends to Stockholders. On October 29, 2014, our Board of Directors declared a regular quarterly cash dividend of $0.125 per share of common stock, with a record date of November 18, 2014, and a payment date of December 10, 2014. This cash dividend of approximately $2.7 million will be paid from available cash on hand.
Common Stock Repurchase Program. The Board of Directors on October 29, 2014 extended the common stock repurchase program through December 31, 2015. In extending the common stock repurchase plan, the Board of Directors also maintained the repurchase authority of $15.0 million as of January 1, 2015. In addition for 2015, the Board of Directors intends to return a total of $26.0 million to stockholders in the form of dividends and/or common stock repurchases.
Additional Paid-in Capital. For the nine months ended September 30, 2014, additional paid-in capital increased by $2.7 million to $130.0 million at September 30, 2014 from $127.3 million at December 31, 2013. The increase in the nine months ended September 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:
 
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
 
2014
 
2013
 
2014
 
2013
 
 
(Dollars in thousands, except share and per share amounts)
Net income
 
$
4,652

 
$
5,762

 
$
13,833

 
$
19,515

Weighted average shares of common stock outstanding
 
21,651,347

 
21,629,289

 
21,643,951

 
21,653,692

Dilutive effect of restricted stock and RSUs
 
484,207

 
289,949

 
445,941

 
262,371

Weighted average shares of common stock and common stock equivalents
 
22,135,554

 
21,919,238

 
22,089,892

 
21,916,063

Net income per common share
 
 
 
 
 
 
 
 
Basic
 
$
0.21

 
$
0.27

 
$
0.64

 
$
0.90

Diluted
 
$
0.21

 
$
0.26

 
$
0.63

 
$
0.89

(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 September 30,
 
For the Nine Months Ended September 30,
Operating Expense Category
 
2014
 
2013
 
2014
 
2013
 
 
(Dollars in thousands)
Cost of revenue
 
$
108

 
$
64

 
$
270

 
$
162

Service, rental and maintenance
 
56

 
59

 
$
78

 
$
99

Selling and marketing
 
151

 
122

 
413

 
360

General and administrative
 
791

 
701

 
2,055

 
1,579

Total stock based compensation
 
$
1,106

 
$
946

 
$
2,816

 
$
2,200



11

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


The increase in stock based compensation expense during the three and nine months ended September 30, 2014, respectively, compared to the same periods in 2013, was primarily due to higher amortization expenses associated with new RSUs granted in the third quarter of 2013 and common stock granted in the third 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 September 30, 2014, we had total deferred income tax assets of $140.3 million and a valuation allowance of $119.3 million resulting in an estimated recoverable amount of deferred income tax assets of $21.0 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 September 30, 2014, we had approximately $345.7 million of Federal net operating losses (“NOLs”) available to offset future taxable income. Section 382 of the Internal Revenue Code limited NOLs, as of January 1, 2014, to a total of $50.4 million which may be used at a rate of $6.1 million per year, and is included in the total Federal NOLs.
(18) Related Party Transactions — A member of our Board of Directors also serves as a director for an entity that leases transmission tower sites to the Company. During the fourth quarter of 2013, this entity acquired another one of our vendors, Global Tower Partners. For the three months ended September 30, 2014 and 2013, we incurred $1.0 million and $1.0 million, respectively, and for the nine months ended September 30, 2014 and 2013, we incurred $3.2 million and $3.0 million, respectively, from the entity on which the individual serves as a director, 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 nine months ended September 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 term.
In October 2014, we amended an existing agreement with a vendor for our office space in Plano, Texas. We extended the original lease term for an additional 2 years with the new lease term expiring on September 30, 2018. The additional rent expense, net of rent abatement, associated with the amendment is estimated to be approximately $1.1 million over the amended lease terms.
(20) Segment Reporting — On March 3, 2011, the Company (formerly USA Mobility, Inc.) acquired Amcom, and after this acquisition, the Company determined, pursuant to Financial Accounting Standards Board (“FASB”) Accounting Standards Codification 280 - Segment Reporting (“ASC 280”), that the Company had two reportable segments, a wireless segment and a software segment, which 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

12

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


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 consolidated operations.



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 its indirect wholly-owned operating subsidiary, Spōk, Inc., is a comprehensive provider of critical communication solutions for enterprises. 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 nine months ended

13



September 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.
 

For the Three Months Ended 
 September 30, 2014

For the Three Months Ended 
 September 30, 2013
Market Segment

Wireless

Software

Total

% of Total

Wireless

Software

Total

% of Total
 

 

 

 

(Dollars in thousands)

 

 

 
Healthcare

$
22,130


$
10,871


$
33,001


66.4
%

$
24,545


$
8,502


$
33,047


66.6
%
Government

2,298


2,609


4,907


9.9
%

2,873


1,163


4,036


8.1
%
Large Enterprise

3,314


533


3,847


7.7
%

4,157


490


4,647


9.4
%
Other (1)

4,060


1,026


5,086


10.2
%

4,205


1,031


5,236


10.5
%
Total Direct

31,802


15,039


46,841


94.1
%

35,780


11,186


46,966


94.6
%
Total Indirect

1,053


1,897


2,950


5.9
%

1,287


1,416


2,703


5.4
%
Total

$
32,855


$
16,936


$
49,791


100.0
%

$
37,067


$
12,602


$
49,669


100.0
%

(1) 
Other includes hospitality, resort and billable travel revenue.
 
 
For the Nine Months Ended 
 September 30, 2014
 
For the Nine Months Ended 
 September 30, 2013
Market Segment
 
Wireless
 
Software
 
Total
 
% of Total
 
Wireless
 
Software
 
Total
 
% of Total
 
 
 
 
 
 
 
 
(Dollars in thousands)
 
 
 
 
 
 
Healthcare
 
$
68,152

 
$
31,427

 
$
99,579

 
66.8
%
 
$
73,540

 
$
27,872

 
$
101,412

 
65.3
%
Government
 
7,248

 
6,087

 
13,335

 
8.9
%
 
9,234

 
4,212

 
13,446

 
8.7
%
Large Enterprise
 
10,649

 
1,550

 
12,199

 
8.2
%
 
13,045

 
2,171

 
15,216

 
9.8
%
Other (1)
 
11,380

 
2,191

 
13,571

 
9.1
%
 
13,530

 
2,379

 
15,909

 
10.3
%
Total Direct
 
97,429

 
41,255

 
138,684

 
93.1
%
 
109,349

 
36,634

 
145,983

 
94.1
%
Total Indirect
 
3,295

 
7,025

 
10,320

 
6.9
%
 
4,268

 
4,816

 
9,084

 
5.9
%
Total
 
$
100,724

 
$
48,280

 
$
149,004

 
100.0
%
 
$
113,617

 
$
41,450

 
$
155,067

 
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 September 30, 2014
 
As of June 30, 2014
 
As of September 30, 2013
Healthcare
 
73.6
%
 
73.0
%
 
71.4
%
Government
 
7.9
%
 
8.3
%
 
8.8
%
Large Enterprise
 
7.8
%
 
7.8
%
 
8.2
%
Other
 
6.4
%
 
6.6
%
 
7.1
%
Total Direct
 
95.7
%
 
95.7
%
 
95.5
%
Total Indirect
 
4.3
%
 
4.3
%
 
4.5
%
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.

14



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.
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 September 30,
 
For the Nine Months Ended September 30,
Revenue
 
2014
 
2013
 
2014
 
2013
 
 
(Dollars in thousands)
Paging revenue
 
$
30,776

 
$
35,141

 
$
95,130

 
$
108,256

Product and other revenue
 
2,079

 
1,926

 
5,594

 
5,361

Total wireless revenue
 
$
32,855

 
$
37,067

 
$
100,724

 
$
113,617

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

15



 
 
As of September 30, 2014
 
As of June 30, 2014
 
As of September 30, 2013
Distribution Channel
 
Units
 
% of Total
 
Units
 
% of Total
 
Units
 
% of Total
 
 
 
 
 
 
(Units in thousands)
 
 
 
 
Direct
 
1,220

 
95.8
%
 
1,243

 
95.7
%
 
1,345

 
95.5
%
Indirect
 
54

 
4.2
%
 
56

 
4.3
%
 
63

 
4.5
%
Total
 
1,274

 
100.0
%
 
1,299

 
100.0
%
 
1,408

 
100.0
%
The following table summarizes the breakdown of our one-way and two-way units in service at specified dates:
 
 
As of September 30, 2014
 
As of June 30, 2014
 
As of September 30, 2013
Service Type
 
Units    
 
% of Total    
 
Units    
 
% of Total    
 
Units    
 
% of Total    
 
 
(Units in thousands)
One-way messaging
 
1,185

 
93.0
%
 
1,208

 
93.0
%
 
1,310

 
93.0
%
Two-way messaging
 
89

 
7.0
%
 
91

 
7.0
%
 
98

 
7.0
%
Total
 
1,274

 
100.0
%
 
1,299

 
100.0
%
 
1,408

 
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 shift from narrow band wireless service offerings to broad band technology services.
As demand for one-way and two-way 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 explore 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
 
 
September 30, 2014
 
June 30, 2014
 
September 30, 2013
Distribution Channel
 
Gross
Placements
 
Disconnects
 
Gross
Placements
 
Disconnects
 
Gross
Placements
 
Disconnects
 
 
 
 
 
 
(Units in thousands)
 
 
 
 
Direct
 
44

 
67

 
50

 
76

 
43

 
78

Indirect
 
1

 
3

 
1

 
3

 
1

 
3

Total
 
45

 
70

 
51

 
79

 
44

 
81

The following table sets forth information on our direct units in service by account size for the periods stated:
 
 
As of September 30, 2014
 
As of June 30, 2014
 
As of September 30, 2013
Account Size
 
Units
 
% of Total
 
Units
 
% of Total
 
Units
 
% of Total
 
 
(Units in thousands)
1 to 3 Units
 
37

 
3.0
%
 
39

 
3.1
%
 
45

 
3.3
%
4 to 10 Units
 
22

 
1.8
%
 
23

 
1.8
%
 
26

 
2.0
%
11 to 50 Units
 
53

 
4.3
%
 
56

 
4.5
%
 
64

 
4.8
%
51 to 100 Units
 
36

 
3.0
%
 
38

 
3.1
%
 
43

 
3.2
%
101 to 1000 Units
 
267

 
21.9
%
 
275

 
22.1
%
 
293

 
21.8
%
> 1000 Units
 
805

 
66.0
%
 
812

 
65.4
%
 
874

 
64.9
%
Total direct units in service
 
1,220

 
100.0
%
 
1,243

 
100.0
%
 
1,345

 
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
 
September 30, 2014
 
June 30, 2014
 
September 30, 2013
1 to 3 Units
 
(4.8
)%
 
(4.1
)%
 
(4.6
)%
4 to 10 Units
 
(4.0
)%
 
(5.4
)%
 
(5.3
)%
11 to 50 Units
 
(5.2
)%
 
(3.2
)%
 
(3.9
)%
51 to 100 Units
 
(5.2
)%
 
(8.7
)%
 
(2.8
)%
101 to 1000 Units
 
(2.9
)%
 
(2.5
)%
 
(4.0
)%
> 1000 Units
 
(1.0
)%
 
(1.2
)%
 
(1.7
)%
Total direct net unit loss %
 
(1.9
)%
 
(2.0
)%
 
(2.5
)%
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
 
September 30, 2014
 
June 30, 2014
 
September 30, 2013
Direct
 
$
8.05

 
$
8.06

 
$
8.29

Indirect
 
6.32

 
6.39

 
6.57

Total
 
7.97

 
7.98

 
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 September 30, 2014 from the quarter ended September 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. 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 September 30,
Account Size
 
September 30, 2014
 
June 30, 2014
 
September 30, 2013
1 to 3 Units
 
$
14.65

 
$
14.86

 
$
15.13

4 to 10 Units
 
14.04

 
14.12

 
14.38

11 to 50 Units
 
11.95

 
12.00

 
12.06

51 to 100 Units
 
10.16

 
10.18

 
10.66

101 to 1000 Units
 
8.69

 
8.58

 
8.85

> 1000 Units
 
6.99

 
7.00

 
7.17

Total direct ARPU
 
$
8.05

 
$
8.06

 
$
8.29

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 shipped or delivered to the customer depending on delivery method of Free on Board ("FOB") shipping or FOB destination, respectively. As of January 1, 2014, license, professional services and maintenance revenue is 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 and professional services revenue will be recognized when software and professional services are fully delivered to the customer and the maintenance revenue will be recognized ratably over the remaining contractual term of the agreement. Prior to January 1, 2014, license and professional services revenue was recognized when the services were fully delivered to the customer and maintenance revenue was recognized ratably over the term of the maintenance agreement.
The breakout of software revenue by component was as follows for the periods stated:

 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
Revenue
 
2014
 
2013
 
2014
 
2013
 
 
(Dollars in thousands)
Operations revenue
 
$
9,067

 
$
5,551

 
$
25,505

 
$
20,693

Maintenance revenue
 
7,869

 
7,051

 
22,775

 
20,757

Total software revenue
 
$
16,936

 
$
12,602

 
$
48,280

 
$
41,450

On a regular basis, we enter into 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 17.7% and 19.2% for the three and nine months ended September 30, 2014 compared to the same periods in 2013. The increase reflects the continuing success of our software sales force in closing business and expanding market penetration with new customers, as well as selling additional solutions to our installed customer base.
The following table summarizes total bookings for the periods stated:

 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
Bookings
 
2014
 
2013
 
2014
 
2013
 
 
(Dollars in thousands)
Operations and new maintenance orders
 
$
12,474

 
$
9,086

 
$
32,180

 
$
26,466

Maintenance and subscription renewals
 
7,888

 
8,216

 
24,062

 
20,715

Total bookings
 
$
20,362


$
17,302

 
$
56,242

 
$
47,181

We reported a software backlog of $42.1 million at September 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
32,180

Maintenance and subscription renewals
24,062

Available backlog
$
96,453

Operations revenue
(25,505
)
Maintenance revenue
(22,775
)
Other(1) 
(6,056
)
Total backlog at September 30, 2014
$
42,117

(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.

18



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.
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 nine months ended September 30, 2014 and 2013, respectively.
Our largest expense, payroll and related expenses, includes 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 606 full-time equivalent employees (“FTEs”) at September 30, 2014, a decrease of 7.1% from 652 FTEs at September 30, 2013. The change in the number of FTEs reflects adjustments to our workforce resulting from 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 4.7% to 4,355 active transmitters at September 30, 2014 from 4,572 active transmitters at September 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 Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2013 (the "Third Quarter 2013 Form 10-Q") to conform with the current year's presentation. In the third quarter of 2013, wireless revenue of $37.07 million was reported as $35.54 million in service, rental and maintenance, net of service credits and $1.53 million of software revenue and other, net. Also, in the third quarter of 2013, software revenue of $12.60 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 Third Quarter 2013 Form 10-Q reported operating expenses: Cost of revenue of $1.43 million; service, rental and maintenance of ($0.73) million; selling and marketing of $0.15 million and general and administrative of ($0.85) 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 September 30, 2014 and 2013
 
 
For the Three Months Ended September 30,
 
Change Between 2014 and 2013
 
 
2014
 
2013
 
Total
 
%
 
 
(Dollars in thousands)
Revenue:
 
 
 
 
 
 
 
 
Wireless revenue
 
$
32,855

 
$
37,067

 
$
(4,212
)
 
(11.4
)%
Software revenue
 
16,936

 
12,602

 
4,334

 
34.4
 %
Total
 
$
49,791

 
$
49,669

 
$
122

 
0.2
 %
Selected operating expenses:
 
 
 
 
 
 
 
 
Cost of revenue
 
$
8,000

 
$
6,787

 
$
1,213

 
17.9
 %
Service, rental and maintenance
 
10,988

 
11,820

 
(832
)
 
(7.0
)%
Selling and marketing
 
7,072

 
6,388

 
684

 
10.7
 %
General and administrative
 
10,866

 
11,282

 
(416
)
 
(3.7
)%
Severance and restructuring
 
545

 

 
545

 
 %
Total
 
$
37,471

 
$
36,277

 
$
1,194

 
3.3
 %
FTEs
 
606

 
652

 
(46
)
 
(7.1
)%
Active transmitters
 
4,355

 
4,572

 
(217
)
 
(4.7
)%
Revenue — Wireless
Our wireless revenue was $32.9 million and $37.1 million for the three months ended September 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 September 30,
 
 
2014
 
2013
 
 
(Dollars in thousands)
Paging revenue:
 
 
 
 
One-way messaging
 
$
26,897

 
$
30,466

Two-way messaging
 
3,879

 
4,675

Total paging revenue
 
30,776

 
35,141

Product and other revenue
 
2,079

 
1,926

Total wireless revenue
 
$
32,855

 
$
37,067

The table below sets forth units in service and paging revenue, the changes in each between the three months ended September 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 September 30,
 
For the Three Months Ended September 30,
 
Change Due To:
 
 
2014
 
2013
 
Change    
 
2014 (1)      
 
2013 (1)      
 
Change      
 
ARPU    
 
Units    
 
 
(Units in thousands)
 
(Dollars in thousands)
One-way messaging
 
1,185

 
1,310

 
(125
)
 
$
26,897

 
$
30,466

 
$
(3,569
)
 
$
(626
)
 
$
(2,943
)
Two-way messaging
 
89

 
98

 
(9
)
 
3,879

 
4,675

 
(796
)
 
(302
)
 
(494
)
Total
 
1,274

 
1,408

 
(134
)
 
$
30,776

 
$
35,141

 
$
(4,365
)
 
$
(928
)
 
$
(3,437
)
 
(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 $16.9 million and $12.6 million for the three months ended September 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 September 30,
 
 
2014
 
2013
 
 
(Dollars in thousands)
Operations revenue
 
$
9,067

 
$
5,551

Maintenance revenue
 
7,869

 
7,051

Total software revenue
 
$
16,936

 
$
12,602

The increase in operations revenue primarily reflects an increase in the average revenue per project compared to the same 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 rates for the three months ended September 30, 2014 and 2013 were 99.6% and 99.0%, respectively.
Operating Expenses — Consolidated
Cost of revenue. Cost of revenue consisted primarily of the following items:
 
 
For the Three Months Ended September 30,
 
Change Between 2014 and 2013
 
 
2014
 
2013
 
Total
 
%
 
 
(Dollars in thousands)
Payroll and related
 
$
3,743

 
$
3,744

 
$
(1