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EX-31.1 - EX-31.1 - Spok Holdings, Incw82598exv31w1.htm
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
 
Form 10-Q
 
 
     
(Mark One)    
þ
  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the quarterly period ended March 31, 2011
     
o
  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: 0-51027
 
 
USA MOBILITY, INC.
(Exact name of registrant as specified in its charter)
 
 
     
DELAWARE   16-1694797
(State or other jurisdiction of incorporation)   (I.R.S. Employer Identification No.)
     
6850 Versar Center, Suite 420
Springfield, Virginia
(Address of principal executive offices)
  22151-4148
(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 þ     No o
 
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 o     No o
 
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. (Check one):
 
Large accelerated filer o Accelerated filer þ Non-accelerated filer o Smaller reporting company o
(Do not check if a 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 o     No þ
 
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.  Yes þ     No o
 
22,100,815 shares of the registrant’s common stock ($0.0001 par value per share) were outstanding as of April 29, 2011.
 


 

 
USA MOBILITY, INC.
 
QUARTERLY REPORT ON FORM 10-Q
 
Index
 
             
        Page
 
  Financial Statements        
    Unaudited Condensed Consolidated Balance Sheets as of March 31, 2011 and December 31, 2010     2  
    Unaudited Condensed Consolidated Results of Operations for the Three Months Ended March 31, 2011 and 2010     3  
    Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2011 and 2010     4  
    Unaudited Notes to Condensed Consolidated Financial Statements     5  
  Management’s Discussion and Analysis of Financial Condition and Results of Operations     19  
  Quantitative and Qualitative Disclosures About Market Risk     36  
  Controls and Procedures     37  
 
PART II. OTHER INFORMATION
  Legal Proceedings     38  
  Risk Factors     38  
  Unregistered Sales of Equity Securities and Use of Proceeds     38  
  Exhibits     38  
    39  


1


 

 
PART I. FINANCIAL INFORMATION
 
Item 1.   Financial Statements
 
USA MOBILITY, INC.
 
 
                 
    March 31,
    December 31,
 
    2011     2010  
    (In thousands)  
    (Unaudited)        
 
ASSETS
Current assets:
               
Cash and cash equivalents
  $ 23,383     $ 129,220  
Accounts receivable, net
    21,134       13,419  
Prepaid expenses and other
    4,412       2,638  
Inventory, net
    2,432       160  
Tax receivables
    8,050       5,004  
Escrow receivables
    7,500        
Deferred income tax assets, net
    7,907       3,915  
                 
Total current assets
    74,818       154,356  
Tax receivables
    191       191  
Property and equipment, net
    26,248       27,135  
Goodwill
    131,172        
Other intangible assets, net
    43,477       511  
Deferred income tax assets, net
    55,046       47,390  
Escrow receivables
    7,500        
Deferred financing costs, net
    1,294        
Other assets
    1,150       1,075  
                 
TOTAL ASSETS
  $ 340,896     $ 230,658  
                 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
               
Current portion of long-term debt
  $ 12,500     $  
Consideration payable
    7,500        
Accounts payable and accrued liabilities
    18,321       17,527  
Accrued compensation and benefits
    8,600       9,968  
Customer deposits
    3,266       718  
Deferred revenue
    10,493       6,268  
                 
Total current liabilities
    60,680       34,481  
Long-term debt, net of current portion
    39,447        
Consideration payable
    7,500        
Deferred revenue
    487        
Other long-term liabilities
    12,657       11,787  
                 
TOTAL LIABILITIES
    120,771       46,268  
                 
Commitments and contingencies
               
Stockholders’ equity:
               
Preferred stock
           
Common stock
    2       2  
Additional paid-in capital
    130,355       129,696  
Retained earnings
    89,768       54,692  
                 
TOTAL STOCKHOLDERS’ EQUITY
    220,125       184,390  
                 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
  $ 340,896     $ 230,658  
                 
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


2


 

USA MOBILITY, INC.
 
 
                 
    For the Three Months Ended
 
    March 31,  
    2011     2010  
    (In thousands, except share and
 
    per share amounts)
 
    (Unaudited)  
 
Revenues:
               
Service, rental and maintenance, net of service credits
  $ 50,192     $ 59,426  
Product sales, net of credits
    7,143       3,358  
                 
Total revenues
    57,335       62,784  
                 
Operating expenses:
               
Cost of products sold
    2,425       1,209  
Service, rental and maintenance
    16,462       18,941  
Selling and marketing
    4,921       4,557  
General and administrative
    15,627       15,812  
Severance and restructuring
    33       314  
Depreciation, amortization and accretion
    4,540       7,304  
                 
Total operating expenses
    44,008       48,137  
                 
Operating income
    13,327       14,647  
Interest (expense) income, net
    (256)       3  
Other income, net
    203       78  
                 
Income before income tax (benefit) expense
    13,274       14,728  
Income tax (benefit) expense
    (27,377)       5,843  
                 
Net income
  $ 40,651     $ 8,885  
                 
Basic net income per common share
  $ 1.84     $ 0.39  
                 
Diluted net income per common share
  $ 1.82     $ 0.39  
                 
Basic weighted average common shares outstanding
    22,063,393       22,654,240  
                 
Diluted weighted average common shares outstanding
    22,333,399       22,967,192  
                 
Cash dividends declared per common share
  $ 0.25     $ 0.25  
                 
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


3


 

USA MOBILITY, INC.
 
 
                 
    For the Three Months
 
    Ended  
    2011     2010  
    (In thousands and unaudited)  
 
Cash flows from operating activities:
               
Net income
  $ 40,651     $ 8,885  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation, amortization and accretion
    4,540       7,304  
Amortization of deferred financing costs
    45        
Deferred income tax expense
    (27,929)       5,777  
Amortization of stock based compensation
    225       263  
Provisions for doubtful accounts, service credits and other
    700       1,225  
Settlement of non-cash transaction taxes
    (119)       (350)  
(Loss)/Gain on disposals of property and equipment
    (13)       59  
Changes in assets and liabilities:
               
Accounts receivable
    (49)       472  
Prepaid expenses, intangibles and other assets
    (154)       (31)  
Accounts payable and accrued liabilities
    (5,047)       (5,273)  
Customer deposits
    (797)       (51)  
Deferred revenue
    636       (387)  
                 
Net cash provided by operating activities
    12,689       17,893  
                 
Cash flows from investing activities:
               
Purchases of property and equipment
    (1,494)       (1,725)  
Proceeds from disposals of property and equipment
    11       38  
Acquisitions, net of cash acquired
    (134,217)        
                 
Net cash used in investing activities
    (135,700)       (1,687)  
                 
Cash flows from financing activities:
               
Issuance of debt
    24,044        
Deferred financing costs
    (1,339)        
Cash dividends to stockholders
    (5,531)       (5,619)  
Purchase of common stock
          (4,623)  
                 
Net cash provided (used) in financing activities
    17,174       (10,242)  
                 
Net (decrease) increase in cash and cash equivalents
    (105,837)       5,964  
Cash and cash equivalents, beginning of period
    129,220       109,591  
                 
Cash and cash equivalents, end of period
  $ 23,383     $ 115,555  
                 
Supplemental disclosure:
               
Interest paid
  $ 263     $ 1  
                 
Income taxes paid (state and local)
  $     $  
                 
Non-cash financing activities
  $ 27,750     $  
                 
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


4


 

USA MOBILITY, INC.
 
 
(1) Preparation of Interim Financial Statements — The condensed consolidated financial statements of USA Mobility, Inc. and subsidiaries (“USA Mobility” or the “Company”) have been prepared in accordance with the rules and regulations of the United States Securities and Exchange Commission (the “SEC”). Amounts shown on the condensed consolidated results of operations within the operating expense categories of cost of products sold; service, rental and maintenance; selling and marketing; and general and administrative are recorded exclusive of severance and restructuring and depreciation, amortization and accretion. These items are shown separately on the condensed consolidated results of operations within operating expenses.
 
The financial information included herein, other than the condensed consolidated balance sheet as of December 31, 2010, has been prepared without audit. The condensed consolidated balance sheet at December 31, 2010 has been derived from, but does not include all the disclosures contained in the audited consolidated financial statements for the year ended December 31, 2010. In the opinion of management, these unaudited statements include all adjustments and accruals that are necessary for a fair presentation of the results of all interim periods reported herein. All adjustments are of a normal recurring nature except for adjustments related to the acquisition of Amcom Software, Inc. and subsidiary (“Amcom”) (see Note 5 and Note 17).
 
These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in USA Mobility’s Annual Report on Form 10-K for the year ended December 31, 2010 (the “2010 Annual Report”). The results of operations for the interim periods presented are not necessarily indicative of the results that may be expected for a full year.
 
(2) Business — USA Mobility is a leading provider of wireless messaging, mobile voice and data and unified communications solutions in the United States. Currently, USA Mobility provides one-way and two-way messaging services. One-way messaging consists of numeric and alphanumeric messaging services. Numeric messaging services enable subscribers to receive messages that are composed entirely of numbers, such as a phone number, while alphanumeric messages may include numbers and letters which enable subscribers to receive text messages. Two-way messaging services enable subscribers to send and receive messages to and from other wireless messaging devices, including pagers, personal digital assistants and personal computers. USA Mobility also offers voice mail, personalized greeting, message storage and retrieval and equipment loss and/or maintenance protection to both one-way and two-way messaging subscribers. These services are commonly referred to as wireless messaging and information services. On March 3, 2011, the Company acquired Amcom (see Note 5 for more details). In addition, through Amcom, the Company provides mission critical unified communications solutions for contact centers, emergency management, mobile event notification and messaging.
 
(3) Risks and Other Important Factors — See “Item 1A. Risk Factors” of Part II of this Quarterly Report on Form 10-Q (“Quarterly Report”), which describes key risks associated with USA Mobility’s operations and industry, which incorporates by reference information from the 2010 Annual Report.
 
Based on current and anticipated levels of operations, USA Mobility’s management believes that the Company’s net cash provided by operating activities, together with cash on hand, should be adequate to meet its cash requirements for the foreseeable future.
 
In the event that net cash provided by operating activities and cash on hand are not sufficient to meet future cash requirements, USA Mobility may be required to reduce planned capital expenses, reduce or eliminate its cash dividends to stockholders, and/or sell assets or seek additional financing. USA Mobility can provide no assurance that reductions in planned capital expenses or proceeds from asset sales would be sufficient to cover shortfalls in available cash or that additional financing would be available or, if available, offered on acceptable terms.
 
USA Mobility believes that future fluctuations in its revenues and operating results may occur due to many factors, particularly the decreased demand for its messaging services and unsuccessfully integrating Amcom into its business. If the rate of decline for the Company’s messaging services exceeds its expectations, revenues may be negatively impacted, and such impact could be material. USA Mobility’s plan to consolidate its networks may also negatively impact revenues as customers may experience a reduction in, and possible disruptions of, service in


5


 

USA MOBILITY, INC.
 
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
certain areas. USA Mobility may also not achieve all of the anticipated benefits of the Amcom acquisition. Under these circumstances, USA Mobility may be unable to adjust spending in a timely manner to compensate for any future revenue shortfall. It is possible that, due to these fluctuations, USA Mobility’s revenue or operating results may not meet the expectations of investors, which could reduce the value of USA Mobility’s common stock and impact the Company’s ability to make future cash dividends to stockholders.
 
(4) Recent and New Accounting Pronouncements — Pronouncements issued during the three months ended March 31, 2011 were not applicable to the Company and are not anticipated to have an effect on the Company’s financial position or results of operations.
 
(5) Acquisition — For the acquisition described below, the results of operations and the estimated fair value of the assets acquired and liabilities assumed have been included in the Company’s condensed consolidated financial statements from the date of the acquisition, March 3, 2011.
 
Amcom Software, Inc.
 
On March 3, 2011, the Company acquired Amcom pursuant to an Agreement and Plan of Merger (the “Merger Agreement”) by and among the Company, Arch Wireless, Inc., a Delaware corporation and a wholly owned subsidiary of the Company (“Arch”), USMO Acquisition Co., a Delaware corporation (“Merger Sub”), Amcom, a Delaware corporation, the stockholders of Amcom named therein and Norwest Equity Partners IX, L.P., as the stockholders’ representative.
 
The Company believes the acquisition will greatly expand its product portfolio and the value offered to existing and prospective customers. Amcom specializes in solutions for call center automation, emergency management, mobile event notification, and Smartphone messaging. The combined product offering is capable of addressing a customer’s mission critical communication needs.
 
Pursuant to the terms and subject to the conditions of the Merger Agreement, the Merger Sub merged with and into Amcom, with Amcom surviving the merger and becoming an indirect wholly owned subsidiary of the Company. The aggregate merger consideration the Company paid to the stockholders and stock option holders of Amcom was approximately $141.6 million, $15.0 million of which was placed into an escrow fund to satisfy potential working capital adjustments and indemnification liabilities of Amcom and its stockholders. The acquisition was funded by approximately $117.5 million of cash on hand and new debt of $24.1 million through a credit facility provided by Wells Fargo Capital Finance, LLC (“Wells Fargo”). The acquisition also resulted in the assumption of an existing Wells Fargo debt of $27.8 million (see Note 12). The Company also acquired net cash of $6.1 million from Amcom.
 
The purchase price is allocated to underlying assets and liabilities based on their estimated fair values at the date of acquisition. The preliminary purchase price allocation includes goodwill and other intangible assets. Recognition of goodwill is largely attributed to the assembled workforce of Amcom and other factors. Goodwill is currently assigned to the Company’s software operations, which is not a reportable segment for the quarter ended March 31, 2011 (see Note 19). None of the goodwill recognized from the Amcom acquisition is expected to be deductible for income tax purposes. The Company is in the process of identifying potential adjustments related to the working capital adjustment to be included in the purchase price and the fair value of assets acquired and liabilities assumed. The Company anticipates finalizing the purchase price as soon as practicable but no later than


6


 

USA MOBILITY, INC.
 
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
one-year from the acquisition date or March 3, 2012. The following table represents the preliminary purchase price allocation:
 
         
    (Dollars in thousands)  
 
Cash and cash equivalents
  $ 15,758  
Receivables
    8,366  
Inventory
    1,965  
Prepaids and other current assets
    5,023  
Property and equipment
    1,358  
Other intangibles
    43,539  
Goodwill
    131,172  
Other assets
    70  
Accounts payable and accrued expenses
    (13,884)  
Customer deposits
    (3,347)  
Deferred revenue
    (4,074)  
Deferred income tax liabilities
    (16,161)  
Long-term debt
    (27,750)  
Other liabilities
    (440)  
         
Preliminary acquisition consideration
  $ 141,595  
         
 
The amount of revenue and net income of Amcom included in the Company’s condensed consolidated results of operations for the three months ended March 31, 2011 were $4.8 million and $0.2 million, respectively.
 
The purchase includes the assumption of gross customer accounts receivable totaling $8.7 million. The Company estimates that approximately $0.3 million of these receivables will not be collected. Therefore, the receivables are recorded at the estimated fair value of $8.4 million. Cash and cash equivalents include $8.4 million transferred to Amcom by the Company on March 3, 2011 to redeem outstanding stock options and settle other expenses on March 11, 2011. Accounts payable and accrued expenses include a liability of $8.4 million for the redemption of these stock options and other expenses.
 
In allocating the purchase price, the Company considered, among other factors, analyses of historical financial performance and estimates of future performance of Amcom’s contracts. The components of intangible assets associated with the acquisition were customer-related, marketing-related, contract-based and technology-based valued preliminarily at $25.0 million, $5.7 million, $5.7 million and $7.1 million, respectively. Customer-related intangible assets represent the underlying relationships and agreements with Amcom’s existing customers. Marketing-related intangible assets represent the fair value of the Amcom trade name. Contract-based intangible assets are for non-compete agreements with two executives and represent the amount of lost business that could occur if the executives, in the absence of non-compete agreements, were to compete with the Company. Technology-based intangible assets represent internally developed software applications that are used in Amcom’s operations.
 
The following unaudited pro forma summary presents consolidated information of the Company as if the acquisition had occurred at the beginning of the periods presented. The pro forma financial information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition and borrowings with Wells Fargo had occurred at the beginning of the periods presented. These amounts have been calculated after applying the Company’s accounting policies and adjusting the results of Amcom to


7


 

USA MOBILITY, INC.
 
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
reflect the additional amortization expense resulting from recognizing intangible assets, the interest expense effect of the financing necessary to complete the acquisition and the consequential tax effects.
 
                 
    For the Three Months
    Ended March 31,
    2011   2010
    (Dollars in thousands)
 
Revenues
  $ 61,003     $ 72,892  
Net income
    37,627       38,704  
Basic net income per common share
    1.71       1.71  
Diluted net income per common share
    1.68       1.69  
 
During the three months ended March 31, 2011, the Company expensed $2.4 million in transaction costs related to the acquisition. These costs were included in general and administrative expenses in the accompanying condensed consolidated results of operations. The pro forma net income presented does not include these non-recurring expenses for transaction costs.
 
(6) Goodwill and Amortizable Intangible Assets — There were no changes in the carrying amount of the goodwill recognized as a result of the Amcom acquisition during the period ended March 31, 2011. Goodwill is not amortized. The Company is required to evaluate goodwill of a reporting unit for impairment at least annually and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount. The Company has selected the fourth quarter to perform its annual impairment test. For this determination, the Company as a whole is considered the reporting unit. If the fair value of the reporting unit is less than its carrying value, an impairment loss is required to be recorded to the extent that the implied value of goodwill within the reporting unit is less than the carrying value. The fair value of the reporting unit is determined based on discounted cash flows, market multiples or appraised values as appropriate.
 
Declines in the Company’s stock price could indicate that a potential impairment has occurred. Such a decline could require an evaluation of impairment more frequently than annually.
 
Other intangible assets were recorded at fair value at the date of acquisition and amortized over periods generally ranging from two to twenty years.
 
The gross carrying amount of amortizable intangible assets for the wireless operations was $0.6 million, and $43.5 million for software operations. The accumulated amortization for wireless operations was $0.1 million, and $0.5 million for software operations. The net consolidated balance of amortizable intangible assets consisted of the following:
 
                             
        March 31, 2011  
    Useful Life
  Gross Carrying
    Accumulated
       
    (In Years)   Amount     Amortization     Net Balance  
        (Dollars in thousands)  
 
Customer relationships
  10   $ 25,002     $ (208)     $ 24,794  
Acquired technology
  2 - 4     7,083       (167)       6,916  
Non-compete
  1 - 5     6,281       (192)       6,089  
Trademark
  20     5,702       (24)       5,678  
                             
Total amortizable intangible assets
      $ 44,068     $ (591)     $ 43,477  
                             


8


 

USA MOBILITY, INC.
 
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Estimated amortization of intangible assets for future periods is as follows:
 
         
    (Dollars in thousands)  
 
For the remaining nine months ending December 31, 2011
  $ 4,640  
For the year ending:
       
December 31, 2012
    6,087  
December 31, 2013
    5,695  
December 31, 2014
    5,469  
December 31, 2015
    4,319  
Thereafter
    17,267  
 
(7) Depreciation, Amortization and Accretion — The total depreciation, amortization and accretion expenses related to property and equipment, amortizable intangible assets, and asset retirement obligations for the three months ended March 31, 2011 and 2010 were $4.0 million and $7.3 million, respectively, for wireless operations, and $0.5 million for software operations for the three months ended March 31, 2011. The following table shows the consolidated balances:
 
                 
    For the Three
 
    Months Ended
 
    March 31,  
    2011     2010  
    (Dollars in thousands)  
 
Depreciation
  $ 3,784     $ 6,801  
Amortization
    554       188  
Accretion
    202       315  
                 
Total depreciation, amortization and accretion
  $ 4,540     $ 7,304  
                 
 
(8) Prepaid Expenses and Other — Prepaid expenses and other at March 31, 2011 were $4.4 million. The consolidated balances consisted of the following for the periods stated:
 
                 
    March 31,
    December 31,
 
    2011     2010  
    (Dollars in thousands)  
 
Other receivables
  $ 778     $ 767  
Deposits
    69       82  
Prepaid insurance
    631       616  
Prepaid rent
    160       282  
Prepaid repairs and maintenance
    579       690  
Prepaid taxes
    306       111  
Prepaid expenses
    1,878       53  
Other
    11       37  
                 
Total prepaid expenses and other
  $ 4,412     $ 2,638  
                 


9


 

USA MOBILITY, INC.
 
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
(9) Inventory — Net inventory at March 31, 2011 was $2.4 million. The consolidated balances consisted of the following for the periods stated:
 
                 
    March 31,
    December 31,
 
    2011     2010  
    (Dollars in thousands)  
 
Purchased hardware and software, net
  $ 2,082     $ 160  
Work in process
    350        
                 
Total inventory, net
  $ 2,432     $ 160  
                 
 
(10) Other Assets — Other assets at March 31, 2011 were $1.2 million. The consolidated balances consisted of the following for the periods stated:
 
                 
    March 31,
    December 31,
 
    2011     2010  
    (Dollars in thousands)  
 
Deposits
  $ 333     $ 256  
Other assets
    817       819  
                 
Total other assets
  $ 1,150     $ 1,075  
                 
 
(11) Accounts Payable and Accrued Liabilities — Accounts payable and accrued liabilities at March 31, 2011 were $18.3 million. The consolidated balances consisted of the following for the periods stated:
 
                 
    March 31,
    December 31,
 
    2011     2010  
    (Dollars in thousands)  
 
Accounts payable
  $ 2,692     $ 3,284  
Accrued network costs
    1,612       1,695  
Accrued taxes
    5,895       4,547  
Accrued severance and restructuring
    2,025       2,733  
Asset retirement obligations — short-term
    1,671       2,027  
Accrued outside services
    2,420       1,473  
Accrued other
    1,146       1,110  
Escheat liability — short-term
    425       548  
Accrued interest
    209        
Deferred rent — short-term
    205       83  
Dividends payable
    21       27  
                 
Total accounts payable and accrued liabilities
  $ 18,321     $ 17,527  
                 
 
Accrued taxes are based on the Company’s estimate of outstanding state and local taxes. This balance may be adjusted in the future as the Company settles with various taxing jurisdictions.
 
(12) Long-Term Debt — The Company entered into an Amended and Restated Credit Agreement (“Credit Agreement”) with Wells Fargo to finance a portion of the consideration to acquire Amcom. The Credit Agreement provides for a maximum term loan amount of $42.5 million and a maximum revolver amount of $10.0 million. Both the term loan and revolver are subject to mandatory repayments commencing on June 30, 2011 with full repayment of both the term loan and revolver by September 3, 2014. As of March 31, 2011 the total debt outstanding was $51.9 million. The Company also had outstanding a letter of credit of $0.6 million in support of a customer.


10


 

USA MOBILITY, INC.
 
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Both the term loan and revolver are subject to variable interest rates. The Company may elect to pay interest at:
 
1. the LIBOR Rate (as defined in the Credit Agreement) plus 3.75% or
 
2. the Base Rate (as defined in the Credit Agreement) plus 3.75%.
 
The LIBOR Rate is defined as the greater of (a) 1.5% and (b) the published rate per annum for LIBOR from a designated reporting service. The Base Rate means the greatest of (a) 2.5% per annum, (b) the Base LIBOR Rate (as defined), (c) the Federal Funds rate plus 1/2%, and (d) Wells Fargo’s announced prime rate.
 
The Company may make a LIBOR Rate election for any amount of its debt for a period of 1, 2 or 3 months at a time; however, the Company may not have more than 5 individual LIBOR Rate loans in effect at any given time. The Company may only exercise the LIBOR Rate election for an amount of at least $1.0 million.
 
As of March 31, 2011 the Company has elected the LIBOR Rate option and owes interest on its outstanding debt at 5.25% (the LIBOR Rate floor of 1.5% plus 3.75%). Based on currently prevailing interest rates the Company expects that it will continue to elect the LIBOR Rate option for amounts outstanding under the Credit Agreement.
 
The Company is exposed to changes in interest rates, primarily as a result of using bank debt to finance its acquisition of Amcom. The floating interest rate debt exposes the Company to interest rate risk, with the primary interest rate exposure resulting from changes in the LIBOR Rate should the LIBOR Rate exceed the floor of 1.5%. As of March 31, 2011, the Company has no derivative financial instruments outstanding to manage its interest rate risk.
 
Future payments on long-term debt at March 31, 2011 and for the succeeding years are as follows:
 
         
Twelve Months Ended March 31,
  (Dollars in thousands)  
 
2012
  $ 12,500  
2013
    10,000  
2014
    7,500  
2015
    21,947  
         
Total debt
  $ 51,947  
         
 
The Company will be subject to certain financial covenants on a quarterly basis under the terms of its Credit Agreement. These financial covenants consist of a leverage ratio, a fixed charge coverage ratio, and minimum maintenance fee revenue. The Company is not required to comply with these covenants until June 30, 2011.
 
(13) Asset Retirement Obligations — The Company recognizes liabilities and corresponding assets for future obligations associated with the retirement of assets. USA Mobility has paging equipment assets, principally transmitters, which are located on leased locations. The underlying leases generally require the removal of equipment at the end of the lease term; therefore, a future obligation exists.
 
At December 31, 2010, the Company had recognized cumulative asset retirement costs of $2.3 million. During the first quarter of 2011, the Company recorded an increase of $36,900 in asset retirement costs. At March 31, 2011 cumulative asset retirement costs were $2.4 million. The asset retirement cost additions in the first quarter of 2011 increased paging equipment assets and are being depreciated over the related estimated life of 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.


11


 

USA MOBILITY, INC.
 
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
The components of the changes in the asset retirement obligation liabilities were as follows:
 
                         
    Short-Term
    Long-Term
       
    Portion     Portion     Total  
    (Dollars in thousands)  
 
Balance at December 31, 2010
  $ 2,027     $ 8,194     $ 10,221  
Accretion
    27       175       202  
Additions
          37       37  
Reclassifications
    314       (314)        
Amounts paid
    (697)             (697)  
                         
Balance at March 31, 2011
  $ 1,671     $ 8,092     $ 9,763  
                         
 
The balances above were included with accounts payable and accrued liabilities and other long-term liabilities, respectively, at March 31, 2011.
 
(14) Other Long-Term Liabilities — Other long-term liabilities at March 31, 2011 were $12.7 million. The consolidated balances consisted of the following for the periods stated:
 
                 
    March 31,
    December 31,
 
    2011     2010  
    (Dollars in thousands)  
 
Asset retirement obligations — long-term
  $ 8,092     $ 8,194  
Cash award — 2009 LTIP
    1,612       1,453  
Dividends payable — 2009 LTIP
    1,072       1,021  
Escheat liability — long-term
    732       730  
Deferred rent
    706       298  
State income tax
    443       91  
                 
Total other long-term liabilities
  $ 12,657     $ 11,787  
                 
 
(15) Stockholders’ Equity — The authorized capital stock of the Company 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 three months ended March 31, 2011 consisted of:
 
         
    (Dollars in thousands)  
 
Balance at January 1, 2011
  $ 184,390  
Net income for the three months ended March 31, 2011
    40,651  
Cash dividends declared
    (5,575)  
Issued, purchased and retired common stock, net
    434  
Amortization of stock based compensation
    225  
         
Balance at March 31, 2011
  $ 220,125  
         
 
General.  At March 31, 2011 and December 31, 2010, there were 22,097,188 and 22,066,805 shares of common stock outstanding, respectively, and no shares of preferred stock outstanding.
 
At March 31, 2011, the Company had no stock options outstanding.
 
In connection with and prior to the November 2004 merger of Arch and Metrocall Holdings, Inc. (“Metrocall”) and subsidiaries, the Company established the USA Mobility, Inc. Equity Incentive Plan (the “Equity Plan”). Under the Equity Plan, the Company has the ability to issue up to 1,878,976 shares of its common stock to eligible


12


 

USA MOBILITY, INC.
 
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
employees and non-executive members of its Board of Directors in the form of shares of common stock, stock options, shares of restricted common stock (“restricted stock”), restricted stock units (“RSUs”) or stock grants. Restricted stock awarded under the Equity Plan entitles the stockholder to all rights of common stock ownership except that the restricted stock may not be sold, transferred, exchanged, or otherwise disposed of during the restriction period, which will be determined by the Compensation Committee of the Board of Directors of the Company. RSUs are generally convertible into shares of common stock pursuant to the Restricted Stock Unit Agreement when the appropriate vesting conditions have been satisfied.
 
The following table summarizes the activities under the Equity Plan from inception through March 31, 2011:
 
         
    Activity  
 
Equity securities approved
    1,878,976  
Less: Equity securities issued to eligible employees
       
2005 LTIP
    (103,937)  
2006 LTIP(1)
    (183,212)  
2009 LTIP
    (337,147)  
STIP(2)
    (108,254)  
Less: Equity securities issued to non-executive members of the Board of Directors
       
Restricted stock
    (67,487)  
Common stock(3)
    (28,696)  
Add: Equity securities forfeited by eligible employees
       
2005 LTIP
    22,488  
2006 LTIP
    21,358  
2009 LTIP
    80,104  
Add: Restricted stock forfeited by the non-executive members of the Board of Directors
    3,985  
         
Total available at March 31, 2011
    1,178,178  
         
 
 
(1) On November 14, 2008, the Company’s Board of Directors approved an additional grant of 7,129 shares of restricted stock under the 2006 LTIP Initial Target Award to eligible employees. In March 2009, the Company’s Board of Directors approved an additional grant of 43,511 shares of common stock as an Additional Target Award under the 2006 LTIP to eligible employees.
 
(2) Pursuant to his employment agreement, Mr. Vincent D. Kelly, the Company’s President and Chief Executive Officer (“CEO”), received 50 percent of his Short-Term Incentive Plan (“STIP”) award in common stock of the Company. In relation to his 2009 STIP award, on March 4, 2010 Mr. Kelly received 60,799 shares of common stock based on the closing stock price on February 26, 2010 of $11.26 per share. In relation to his 2010 STIP award, on March 4, 2011 Mr. Kelly received 47,455 shares of common stock based on the closing stock price on February 25, 2011 of $15.21 per share.
 
(3) 19,605 existing RSUs were converted into shares of the Company’s common stock and issued to the non-executive members of the Company’s Board of Directors on March 17, 2008. In addition, 9,091 shares of common stock have been issued in lieu of cash payments to the non-executive members of the Company’s Board of Directors for services performed.
 
2009 Long-Term Incentive Plan (“LTIP”).  On January 6, 2009, the Company’s Board of Directors approved a long-term incentive program that included a cash component and a stock component in the form of RSUs based upon achievement of expense reduction and earnings before interest, taxes, depreciation, amortization and accretion goals during the Company’s 2012 calendar year and continued employment with the Company. RSUs were granted


13


 

USA MOBILITY, INC.
 
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
under the Equity Plan pursuant to a Restricted Stock Unit Agreement based upon the closing price per share of the Company’s common stock on January 15, 2009 of $12.01. The Company’s Board of Directors awarded 329,416 RSUs to certain eligible employees and also approved that future cash dividends related to the existing RSUs will be set aside and paid in cash to each eligible employee when the RSUs are converted into shares of common stock. Existing RSUs would be converted into shares of common stock on the earlier of a change in control of the Company (as defined in the Equity Plan) or on or after the third business day following the day that the Company files its 2012 Annual Report on Form 10-K (“2012 Annual Report”) with the SEC but in no event later than December 31, 2013.
 
Any unvested RSUs granted under the Equity Plan and the related cash dividends are forfeited if the participant terminates employment with USA Mobility. As of December 31, 2010, a total of 76,707 RSUs and the related cash dividends have been forfeited offset by new grants of 7,731 RSUs resulting in an outstanding balance of 260,440 RSUs. During the first quarter of 2011, 3,397 RSUs and the related cash dividends were forfeited. As of March 31, 2011, a total of 80,104 RSUs have been forfeited resulting in an outstanding balance of 257,043 RSUs.
 
The Company used the fair-value based method of accounting for the 2009 LTIP and is amortizing $3.0 million (prior to effect of forfeitures) to expense over the 48-month vesting period. A total of $0.2 million was included in stock based compensation expense for the three months ended March 31, 2011 and 2010, respectively, in relation to the 2009 LTIP.
 
Also on January 6, 2009, the Company provided for long-term cash performance awards to the same certain eligible employees under the 2009 LTIP. Similar to the RSUs, the vesting period for these long-term cash performance awards is 48 months upon attainment of the established performance goals and would be paid on the earlier of a change in control of the Company (as defined in the Equity Plan); or on or after the third business day following the day that the Company files its 2012 Annual Report with the SEC but in no event later than December 31, 2013.
 
The Company is ratably recognizing $2.8 million (prior to effect of forfeitures) to expense over the 48-month vesting period. A total of $0.2 million was included in payroll and related expense for the three months ended March 31, 2011 and 2010, respectively in relation to the 2009 LTIP.
 
2011 LTIP.  On March 15, 2011, the Company’s Board of Directors adopted a long-term incentive program that included a stock component in the form of RSUs. The 2011 LTIP provides eligible employees the opportunity to earn RSUs based upon achievement of performance goals, established by the Company’s Board of Directors for revenue and operating cash flows for the Company (including Amcom) during the period from January 1, 2011 through December 31, 2014 (the “performance period”), and continued employment with the Company. For the purpose of the 2011 LTIP as it relates to Amcom, the performance period is considered as April 1, 2011 through December 31, 2014. On April 7, 2011, the Company’s Board of Directors granted eligible employees from Amcom RSUs under the Equity Plan pursuant to a Restricted Stock Unit Agreement based upon the closing price per share of the Company’s common stock on April 6, 2011 of $15.41. The Company’s Board of Directors awarded 211,587 RSUs to certain eligible employees at Amcom and also approved that future cash dividends related to the existing RSUs will be set aside and paid in cash to each eligible employee when the RSUs are converted into shares of common stock. Existing RSUs would be converted into shares of common stock on the earlier of a change in control of the Company (as defined in the Equity Plan) or on or after the third business day following the day that the Company files its 2014 Annual Report on Form 10-K (“2014 Annual Report”) with the SEC but in no event later than December 31, 2015. Any unvested RSUs granted under the Equity Plan and the related cash dividends are forfeited if the participant terminates employment with USA Mobility. The Company will use the fair-value based method of accounting for the 2011 LTIP for Amcom and will amortize the $3.3 million to expense over the 45-month vesting period beginning on April 1, 2011.
 
Board of Directors Equity Compensation.  On August 1, 2007, for periods of service beginning on July 1, 2007, the Company’s Board of Directors approved that, in lieu of RSUs, each non-executive director will be granted


14


 

USA MOBILITY, INC.
 
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
in arrears on the first business day following the quarter of service, restricted stock under the Equity Plan for their service on the Board of Directors and committees thereof. The restricted stock would be granted quarterly based upon the closing price per share of the Company’s common stock at the end of each quarter, such that each non-executive director would receive $40,000 per year of restricted stock ($50,000 for the Chair of the Audit Committee). The restricted stock will vest on the earlier of a change in control of the Company (as defined in the Equity Plan) or one year from the date of grant, provided, in each case, that the non-executive director maintains continuous service on the Board of Directors. Future cash dividends related to the restricted stock will be set aside and paid in cash to each non-executive director on the date the restricted stock vests. In addition to the quarterly restricted stock grants, the non-executive directors would be entitled to cash compensation of $40,000 per year ($50,000 for the Chair of the Audit Committee), also payable quarterly. These sums are payable, at the election of the non-executive director, in the form of cash, shares of common stock, or any combination thereof.
 
The following table details information on the restricted stock vested by or awarded to the Company’s non-executive directors in 2011.
 
                                                 
                              Restricted
       
              Restricted
    Restricted
        Stock
    Cash
 
Service for the
      Price Per
    Stock
    Stock
        Awarded and
    Dividends
 
Three Months Ended
  Grant Date   Share(1)     Awarded     Vested     Vesting Date   Outstanding     Paid(2)  
 
December 31, 2009
  January 2, 2010     11.01       4,767       (4,767)     January 3, 2011         $ 9,534  
March 31, 2010
  April 1, 2010     12.67       4,143       (4,143)     April 1, 2011           4,143  
June 30, 2010
  July 1, 2010     12.92       4,063           July 1, 2011     4,063        
September 30, 2010
  October 1, 2010     16.03       3,276           October 1, 2011     3,276        
December 31, 2010
  January 3, 2011     17.77       2,955           January 2, 2012     2,955        
March 31, 2011
  April 1, 2010     12.67       3,627           April 2, 2012     3,627        
                                                 
Total
                22,831       (8,910)           13,921     $ 13,677  
                                                 
 
 
(1) The quarterly restricted stock awarded is based on the price per share of the Company’s common stock on the last trading day prior to the quarterly grant date.
 
(2) Amount excludes interest earned and paid upon vesting of shares of restricted stock.
 
The shares of restricted stock will vest one year from the date of grant and the related cash dividends on the vested restricted stock will be paid to the Company’s non-executive directors. These grants of shares of restricted stock will reduce the number of shares eligible for future issuance under the Equity Plan.
 
The Company used the fair-value based method of accounting for the equity awards. A total of $52,500 was included in stock based compensation expense for each of the three months ended March 31, 2011 and 2010, respectively.
 
The following table details information on the cash dividends declared in 2011 relating to the restricted stock issued to the Company’s non-executive directors:
 
                             
    Declaration
      Payment
  Per Share
    Total
 
Year
  Date   Record Date   Date   Amount     Amount  
 
2011
  February 23   March 17   March 31   $ 0.25     $ 3,609  
                             
Total
              $ 0.25     $ 3,609  
                             
 
Board of Directors Common Stock.  As of March 31, 2011, a cumulative total of 9,091 shares of common stock have been issued in lieu of cash payments to the non-executive directors for services performed. These shares of common stock reduced the number of shares eligible for future issuance under the Equity Plan.


15


 

USA MOBILITY, INC.
 
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Cash Dividends to Stockholders.  The following table details the Company’s cash dividend payments made during the three months ended March 31, 2011. Cash dividends paid as disclosed in the statements of cash flows for the three months ended March 31, 2011 and 2010 include previously declared cash dividends on shares of vested restricted stock issued to the non-executive directors of the Company’s Board of Directors. Cash dividends on RSUs and restricted stock have been accrued and are paid when the applicable vesting conditions are met. Accrued cash dividends on forfeited RSUs and restricted stock are also forfeited.
 
                             
    Declaration
  Record
  Payment
  Per Share
    Total
 
Year
  Date   Date   Date   Amount     Payment(1)  
                      (Dollars in
 
                      thousands)  
 
2011
  February 23   March 17   March 31   $ 0.25     $ 5,531  
                             
Total
              $ 0.25     $ 5,531  
                             
 
 
(1) The total payment reflects the cash dividends paid in relation to common stock and vested restricted stock.
 
Future Cash Dividends to Stockholders.  On May 4, 2011, the Company’s Board of Directors declared a regular quarterly dividend distribution of $0.25 per share of common stock, with a record date of May 20, 2011, and a payment date of June 24, 2011. This dividend distribution of approximately $5.5 million will be paid from available cash on hand.
 
Common Stock Repurchase Program.  On July 31, 2008, the Company’s Board of Directors approved a program for the Company to repurchase up to $50.0 million of its common stock in the open market during the twelve-month period commencing on or about August 5, 2008. Credit Suisse Securities (USA) LLC will administer such purchases. The Company expects to use available cash on hand and net cash provided by operating activities to fund the common stock repurchase program.
 
The Company’s Board of Directors approved a supplement to the common stock repurchase program effective March 3, 2009. The supplement reset the repurchase authority to $25.0 million as of January 1, 2009 and extended the purchase period through December 31, 2009.
 
On November 30, 2009, the Company’s Board of Directors approved a further extension of the purchase period from December 31, 2009 to March 31, 2010. On March 3, 2010, the Company’s Board of Directors approved an additional supplement effective March 3, 2010 which reset the repurchase authority to $25.0 million as of January 1, 2010 and extended the purchase period through December 31, 2010.
 
On December 6, 2010, the Company’s Board of Directors approved another supplement to the common stock repurchase program effective on January 3, 2011. The supplement reset the repurchase authority to $25.0 million as of January 3, 2011 and extended the purchase period through December 31, 2011.
 
From the inception of the common stock repurchase program through December 31, 2010, the Company has repurchased a total of 5,556,331 shares of its common stock under this program for approximately $51.7 million (excluding commissions). Repurchased shares of the Company’s common stock were accounted for as a reduction to common stock and additional paid-in-capital in the period in which the repurchase occurred. There was approximately $16.1 million of common stock repurchase authority remaining under the program as of December 31, 2010. This repurchase authority allows the Company, at management’s discretion, to selectively repurchase shares of its common stock from time to time in the open market depending upon market price and other factors. All repurchased shares of common stock are returned to the status of authorized but unissued shares of the Company.
 
During the first quarter of 2011, the Company incurred debt associated with the acquisition of Amcom. The Company plans to aggressively repay the debt while maintaining its long-standing policy of returning capital to stockholders. To accelerate the payment of debt, the Company temporarily suspended its common stock repurchase program and will subsequently review this program by December 31, 2011.


16


 

USA MOBILITY, INC.
 
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Additional Paid-in Capital.  For the three months ended March 31, 2011, additional paid-in capital increased by $0.7 million. The increase in the first quarter of 2011 was due primarily to amortization of stock based compensation and a net issuance of common stock under the 2010 STIP to the Company’s CEO after purchase of common stock from the executive for tax withholdings.
 
Net Income per Common Share.  Basic net income per common share is computed on the basis of the weighted average common shares outstanding. Diluted net income per common share is computed on the basis of the weighted average common shares outstanding plus the effect of all potentially dilutive common shares including outstanding restricted stock using the “treasury stock” method plus the effect of outstanding RSUs, which are treated as contingently issuable shares. During the first quarter of 2011, the Company acquired a total of 20,027 shares of the Company’s common stock from the Company’s CEO in payment of required tax withholdings for the common stock awarded on March 4, 2011 related to the 2010 STIP. These shares of common stock acquired were retired and excluded from the Company’s reported outstanding share balance as of March 31, 2011. The components of basic and diluted net income per common share for the three months ended March 31, 2011 and 2010, respectively, were as follows:
 
                 
    For the Three Months Ended
 
    March 31,  
    2011     2010  
    (Dollars in thousands, except share and per share amounts)  
 
Net income
  $ 40,651     $ 8,885  
                 
Weighted average shares of common stock outstanding
    22,063,393       22,654,240  
Dilutive effect of restricted stock and RSUs
    270,006       312,952  
                 
Weighted average shares of common stock and common stock equivalents
    22,333,399       22,967,192  
                 
Net income per common share
               
Basic
  $ 1.84     $ 0.39  
                 
Diluted
  $ 1.82     $ 0.39  
                 
 
(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 results of operations line items for stock based compensation expense for the periods stated.
 
                 
    For the Three Months Ended
 
    March 31,  
Operating Expense Category
  2011     2010  
    (Dollars in thousands)  
 
Service, rental and maintenance
  $ 5     $ 6  
Selling and marketing
    17       17  
General and administrative
    203       240  
                 
Total stock based compensation
  $ 225     $ 263  
                 
 
(17) Income Taxes — The Company files its income tax returns as prescribed by the tax laws of the jurisdictions in which it operates. The Internal Revenue Service (“IRS”) is auditing the Company’s 2007 and 2008 Federal income tax returns. The IRS began its audits in October 2010 and has not communicated any deficiencies. The IRS Joint Committee Review Staff has begun their review of the Company’s 2005 net operating


17


 

USA MOBILITY, INC.
 
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
loss carry-back claim of $4.2 million (excluding interest). Once this review is completed, a report is prepared which is sent to the Joint Committee on Taxation, which is required by law to review refunds in excess of $2 million.
 
Amcom has received a no change IRS report on the audit of its fiscal year ended March 31, 2009 Federal income tax return. This finding is tentative until confirmed by the Director of Field Operations. As a new subsidiary of USMO, Amcom will conform its fiscal year end to that of the Company’s fiscal year end at December 31, 2011.
 
The Company is required to evaluate the recoverability of its 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 future periods. Based on the acquisition of Amcom in the first quarter of 2011, management concluded that an additional amount of its deferred income tax assets was more likely than not recoverable. Management evaluated the forecasted future taxable income of Amcom and USMO based on a five-year projection and reduced the valuation allowance through March 31, 2011 by $32.4 million.
 
At March 31, 2011, the Company had deferred income tax assets of $202.1 million and a valuation allowance of $139.1 million resulting in an estimated recoverable amount of deferred income tax assets of $63.0 million. This reflects a net reduction of the valuation allowance of $31.8 million (which was offset by other net changes of $0.6 million) from the December 31, 2010 balance of $170.9 million.
 
The balances of the valuation allowance as of March 31, 2011 and December 31, 2010 were $139.1 million and $170.9 million, respectively. Included in the valuation allowance for both periods is approximately $0.7 million for foreign operations at March 31, 2011 and December 31, 2010.
 
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, permanent differences between book and taxable income, changes to the valuation allowance and certain discrete items.
 
(18) Related Party Transactions — Since November 16, 2004, a member of the Company’s Board of Directors also served as a director for an entity that leases transmission tower sites to the Company. For each of the three months ended March 31, 2011 and 2010, the Company paid $2.7 million, respectively, in site rent expenses to this entity that were included in service, rental and maintenance expenses.
 
(19) Segment Reporting — With the acquisition of Amcom on March 3, 2011, USA Mobility currently has two operating segments: the Wireless segment and the Software segment, but no reportable segments, as the Software operations are immaterial to the consolidated entity as of March 31, 2011. Beginning with the periods ending June 30, 2011, the Company will have two reportable segments, which the Company operates and manages as strategic business units and organizes by products and services. The Company measures and evaluates its reportable segments based on segment operating income, consistent with the chief operating decision maker’s assessment of segment performance.
 
The Company’s segments and their principal activities consist of the following:
 
     
Wireless
  Provides local, regional and nationwide one-way paging and advanced two-way messaging services and mobile voice and data services through third party providers.
Software
  Provides mission critical unified communications solutions for contact centers, emergency management, mobile event notification and messaging.
 
(20) Commitments and Contingencies — USA Mobility, from time to time, is involved in lawsuits arising in the normal course of business. As of March 31, 2011, USA Mobility does not have any outstanding lawsuits.
 
There were no material changes during the quarter ended March 31, 2011 to the legal contingencies previously reported in the 2010 Annual Report.


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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 USA Mobility, Inc. and its subsidiaries (“USA Mobility” or the “Company”) that are based on management’s beliefs as well as assumptions made by and information currently available to management. 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” and similar expressions, as they relate to USA Mobility, Inc. and its subsidiaries or its management are forward-looking statements. Although these statements are based upon assumptions management considers reasonable, they are subject to certain risks, uncertainties and assumptions, including but not limited to those factors set forth below and under the captions “Business,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”),” and “Part I — Item 1A — Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010, filed with the United States Securities and Exchange Commission (the “SEC”) on February 24, 2011 (the “2010 Annual Report”). Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results or outcomes may vary materially from those described herein as anticipated, believed, estimated, expected or intended. Investors are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their respective dates. The Company undertakes no obligation to update or revise any forward-looking statements. All subsequent written or oral forward-looking statements attributable to USA Mobility, Inc. and its subsidiaries or persons acting on their behalf are expressly qualified in their entirety by the discussion under “Item 1A. Risk Factors” section.
 
Overview
 
For the discussion and analysis below, the Company presumes that readers have read or have access to the discussion and analysis contained in the 2010 Annual Report. In addition, the following discussion and analysis should be read in conjunction with USA Mobility’s condensed consolidated financial statements and related notes and “Part I — Item 1A — Risk Factors”, which describe key risks associated with the Company’s operations and industry, and “Part II — Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of the 2010 Annual Report.
 
On March 3, 2011 the Company acquired all of the outstanding common stock and redeemed all of the outstanding stock options of Amcom Software, Inc. and subsidiary (“Amcom”). Amcom provides mission critical unified communications solutions for contact centers, emergency management, mobile event notification and messaging. Amcom’s market focus on healthcare, government and large enterprise customers is complimentary to the wireless operations of the Company. USA Mobility continues to own, operate and maintain the largest one-way and advanced two-way paging networks in the United States. The acquisition of Amcom provides customers in the healthcare, government, large enterprise and emergency response sectors with both a software management and wireless solution to their mission critical communication requirements.
 
The operations of Amcom have been included in the consolidated results of the Company from March 3, 2011. In addition, the Company has reflected the preliminary purchase price allocation for Amcom as of March 3, 2011 (See Note 5 of the Unaudited Notes to Condensed Consolidated Financial Statements). For the quarter ended March 31, 2011, the software operations of Amcom have not been reflected as a reportable segment as the results are immaterial to the consolidated results of operations. Effective with the periods ending June 30, 2011, the Company expects to reflect the software operations as a separate reportable segment.
 
Software Operations
 
Amcom’s primary business is the sale of software, professional services (consulting and training), equipment sales (to be used in conjunction with the software) and post-contract support (on-going maintenance). The software is licensed to end users under an industry standard software license agreement. The Company’s software products are considered to be “off-the-shelf software” as software marketed as a stock item that customers can use with little or no customization. Such sales generate license fees (or revenues). In addition to the license fees, Amcom


19


 

generates revenue through the delivery of implementation services and training, annual maintenance revenues and the sale of third party equipment for use with the software.
 
Specifically, Amcom develops, sells and supports enterprise-wide systems for organizations needing to automate, centralize and standardize mission critical communications. These solutions are used for contact centers, emergency management, mobile event notification and messaging. Amcom is focused on marketing these solutions to the healthcare, government and large enterprise sectors. These areas of market focus compliment the market focus of the Company’s Wireless operations outlined below.
 
The software operations reported total revenues of $4.8 million, of which $3.9 million was for operations revenue and $0.9 million was for maintenance revenue. Maintenance revenues for the period March 3 through March 31, 2011 included a reduction of $0.9 million required by acquisition accounting to reflect fair value. Operations revenue is recognized when the application is installed and operational at the customer location. It consists of software license revenue, professional services revenue and equipment sales. Maintenance revenue is for ongoing support of a software application and is recognized ratably over the period of coverage, typically one year. Software operations reported bookings of $3.3 million for March 2011 which represented all purchase orders received from customers in the month (irrespective of revenue type). Software operations reported a backlog of $19.3 million at March 31, 2011 which represented all purchase orders received from customers not yet recognized as revenue. The total cost of products sold; service, rental and maintenance; selling and marketing; and general and administrative for software operations was $3.9 million for March 2011 and total depreciation and amortization expenses were $0.5 million in March 2011.
 
Wireless Operations
 
USA Mobility markets and distributes its wireless communication services through a direct sales force and a small indirect sales channel.
 
Direct.  The direct sales force rents or sells products and messaging services directly to customers ranging from small and medium-sized businesses to companies in the Fortune 1000, healthcare and related businesses and Federal, state and local government agencies. USA Mobility intends to continue to market to commercial enterprises utilizing its direct sales force as these commercial enterprises have typically disconnected service at a lower rate than individual consumers. USA Mobility sales personnel maintain a sales presence throughout the United States. In addition, the Company maintains several corporate sales groups focused on medical sales; Federal government accounts; large enterprises; advanced wireless services; systems sales applications; emergency/mass notification services and other product offerings.
 
Indirect.  Within the indirect channel, the Company contracts with and invoices an intermediary for airtime services (which includes telemetry services). The intermediary or “reseller” in turn markets, sells, and provides customer service to the end user. Generally, there is no contractual relationship that exists between USA Mobility and the end subscriber. Therefore, operating costs per unit to provide these services are lower than those required in the direct distribution channel. Indirect units in service typically have lower average revenue per unit than direct units in service. The rate at which subscribers disconnect service in the indirect distribution channel has generally been higher than the rate experienced with direct customers, and USA Mobility expects this trend to continue in the foreseeable future.
 
The following table summarizes the breakdown of the Company’s direct and indirect units in service at specified dates:
 
                                                 
    As of
    As of
    As of
 
    March 31,
    December 31,
    March 31,
 
    2011     2010     2010  
Distribution Channel
  Units     % of Total     Units     % of Total     Units     % of Total  
    (Units in thousands)  
 
Direct
    1,699       92.9%       1,751       92.7%       1,930       91.9%  
Indirect
    129       7.1%       138       7.3%       169       8.1%  
                                                 
Total
    1,828       100.0%       1,889       100.0%       2,099       100.0%  
                                                 


20


 

The following table sets forth information on the Company’s direct units in service by account size for the periods stated:
 
                                                 
    As of
    As of
    As of
 
    March 31,
    December 31,
    March 31,
 
    2011     2010     2010  
Account Size
  Units     % of Total     Units     % of Total     Units     % of Total  
    (Units in thousands)  
 
1 to 3 Units
    79       4.7%       84       4.8%       101       5.2%  
4 to 10 Units
    48       2.8%       52       3.0%       62       3.2%  
11 to 50 Units
    114       6.7%       123       7.0%       149       7.7%  
51 to 100 Units
    72       4.2%       76       4.3%       92       4.8%  
101 to 1000 Units
    424       25.0%       436       24.9%       499       25.9%  
> 1000 Units
    962       56.6%       980       56.0%       1,027       53.2%  
                                                 
Total direct units in service
    1,699       100.0%       1,751       100.0%       1,930       100.0%  
                                                 
 
Customers may subscribe to one-way or two-way messaging services for a periodic (monthly, quarterly or annual) service fee which is generally based upon the type of service provided, the geographic area covered, the number of devices provided to the customer and the period of commitment. Voice mail, personalized greeting and equipment loss and/or maintenance protection may be added to either one-way or two-way messaging services, as applicable, for an additional monthly fee. Equipment loss protection allows subscribers who lease devices to limit their cost of replacement upon loss or destruction of a messaging device. Maintenance services are offered to subscribers who own their device.
 
A subscriber to one-way messaging services may select coverage on a local, regional or nationwide basis to best meet their messaging needs. Local coverage generally allows the subscriber to receive messages within a small geographic area, such as a city. Regional coverage allows a subscriber to receive messages in a larger area, which may include a large portion of a state or sometimes groups of states. Nationwide coverage allows a subscriber to receive messages in major markets throughout the United States. The monthly fee generally increases with coverage area. Two-way messaging is generally offered on a nationwide basis.
 
The following table summarizes the breakdown of the Company’s one-way and two-way units in service at specified dates:
 
                                                 
    As of
    As of
    As of
 
    March 31,
    December 31,
    March 31,
 
    2011     2010     2010  
Service Type
  Units     % of Total     Units     % of Total     Units     % of Total  
    (Units in thousands)  
 
One-way messaging
    1,675       91.6%       1,713       90.7%       1,894       90.2%  
Two-way messaging
    153       8.4%       176       9.3%       205       9.8%  
                                                 
Total
    1,828       100.0%       1,889       100.0%       2,099       100.0%  
                                                 
 
The demand for one-way and two-way messaging services declined at each specified date and USA Mobility believes demand will continue to decline for the foreseeable future. Demand for the Company’s services has also been impacted by the changes in United States economy resulting from increased unemployment rates nationwide. To the extent that unemployment may significantly increase throughout 2011, the Company anticipates an unfavorable impact on the level of subscriber cancellations.
 
USA Mobility provides wireless messaging services to subscribers for a periodic fee, as described above. In addition, subscribers either lease a messaging device from the Company for an additional fixed monthly fee or they own a device, having purchased it either from the Company or from another vendor. USA Mobility also sells devices to resellers who lease or resell devices to their subscribers and then sell messaging services utilizing the Company’s networks.


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USA Mobility derives the majority of its revenues from fixed monthly or other periodic fees charged to subscribers for wireless messaging services. Such fees are not generally dependent on usage. As long as a subscriber maintains service, operating results benefit from recurring payment of these fees. Revenues are generally based upon the number of units in service and the monthly charge per unit. The number of units in service changes based on subscribers added, referred to as gross placements, less subscriber cancellations, or disconnects. The net of gross placements and disconnects is commonly referred to as net gains or losses of units in service. 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 the Company’s success at retaining subscribers, which is important in order to maintain recurring revenues and to control operating expenses.
 
The following table sets forth the Company’s gross placements and disconnects for the periods stated:
 
                                                 
    For the Three Months Ended  
    March 31, 2011     December 31, 2010     March 31, 2010  
    Gross
          Gross
          Gross
       
Distribution Channel
  Placements     Disconnects     Placements     Disconnects     Placements     Disconnects  
    (Units in thousands)  
 
Direct
    50       102       51       101       58       142  
Indirect
    2       11       3       14       18       17  
                                                 
Total
    52       113       54       115       76       159  
                                                 
 
The following table sets forth information on the direct net disconnect rate by account size for the Company’s direct customers for the periods stated:
 
                         
    For the Three Months Ended  
    March 31,
    December 31,
    March 31,
 
Account Size
  2011     2010     2010  
 
1 to 3 Units
    (6.2%)       (4.8%)       (7.6%)  
4 to 10 Units
    (6.2%)       (5.0%)       (5.3%)  
11 to 50 Units
    (7.7%)       (5.1%)       (5.8%)  
51 to 100 Units
    (5.7%)       (4.2%)       (4.4%)  
101 to 1000 Units
    (2.7%)       (4.2%)       (3.7%)  
> 1000 Units
    (1.8%)       (1.5%)       (3.7%)  
                         
Total direct net unit loss %
    (3.0%)       (2.8%)       (4.2%)  
                         
 
The other factor that contributes to revenue, in addition to the number of units in service, is the monthly charge per unit. As previously discussed, the monthly charge per unit is dependent on the subscriber’s service, extent of geographic coverage, whether the subscriber leases or owns the messaging device and the number of units the customer has in the account. The ratio of revenues for a period to the average units in service for the same period, commonly referred to as average revenue per unit (“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
    March 31,
  December 31,
  March 31,
Distribution Channel
  2011   2010   2010
 
Direct
  $ 8.89     $ 8.92     $ 9.17  
Indirect
    6.49       6.48       7.04  
Consolidated
    8.72       8.74       9.00  


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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 the Company’s services. Gross revenues decreased year over year, and the Company expects future sequential annual revenues to decline in line with recent trends. The decrease in consolidated ARPU for the quarter ended March 31, 2011 from the quarter ended March 31, 2010 was due to the change in composition of the Company’s customer base as the percentage of units in service attributable to larger customers continues to increase and no selected price increases were implemented in the first quarter of 2011 while there were selected price increases implemented during the first quarter of 2010. The change in ARPU in the direct distribution channel is the most significant indicator of rate-related changes in the Company’s revenues. The Company believes without further price adjustments, ARPU would trend lower for both the direct and indirect distribution channels in 2011 and that price increases could mitigate, but not completely offset, the expected declines in both ARPU and revenues.
 
The following table sets forth information on direct ARPU by account size for the period stated:
 
                         
    For the Three Months Ended  
    March 31,
    December 31,
    March 31,
 
Account Size
  2011     2010     2010  
 
1 to 3 Units
  $ 15.57     $ 15.57     $ 15.28  
4 to 10 Units
    14.53       14.56       14.37  
11 to 50 Units
    12.19       12.26       11.86  
51 to 100 Units
    10.59       10.72       10.67  
101 to 1000 Units
    9.00       9.00       9.00  
> 1000 Units
    7.47       7.43       7.80  
                         
Total direct ARPU
  $ 8.89     $ 8.92     $ 9.17  
                         
 
Operations — Consolidated
 
USA Mobility’s operating expenses are presented in functional categories. Certain of the Company’s functional categories are especially important to overall expense control; these operating expenses are categorized as follows:
 
  •  Service, rental and maintenance.  These are expenses associated with the operation of the Company’s networks and the provision of messaging services. Expenses consist largely of site rent expenses for transmitter locations, telecommunication expenses to deliver messages over the Company’s networks and payroll and related expenses for the Company’s engineering and pager repair functions. Expenses related to the development and maintenance of the Company’s software products are included in this category.
 
  •  Selling and marketing.  These are expenses associated with the Company’s direct sales force and indirect sales channel and marketing expenses in support of those sales groups. This classification consists primarily of payroll and related expenses and commission expenses. These expenses also include expenses associated with selling and marketing the Company’s software products.
 
  •  General and administrative.  These are expenses associated with customer service, inventory management, billing, collections, bad debt and other administrative functions. This classification consists primarily of payroll and related expenses, facility rent expenses, tax, license and permit expenses and outside service expenses.
 
USA Mobility reviews the percentages of these operating expenses to revenues on a regular basis. Even though the operating expenses are classified as described above, expense controls are also performed by expense category. For the three months ended March 31, 2011 and 2010, approximately 70% and 75% of the operating expenses, respectively, referred to above were incurred in the following expense categories, payroll and related expenses, site and facility rent expenses, and telecommunication expenses for wireless operations.
 
Payroll and related expenses include wages, incentives, employee benefits and related taxes. USA Mobility reviews the number of employees in major functional categories such as direct sales, engineering and technical


23


 

staff, customer service, collections and inventory on a monthly basis. The Company also reviews the design and physical locations of functional groups to continuously improve efficiency, to simplify organizational structures and to minimize the number of physical locations. The Company has reduced its wireless employee base by approximately 21.2% to 495 full-time equivalent employees (“FTEs”) at March 31, 2011 from 628 FTEs at March 31, 2010 for wireless operations. The software operations had 245 FTEs at March 31, 2011. The Company anticipates continued staffing reductions in 2011 for wireless operations.
 
Site rent expenses for transmitter locations are largely dependent on the Company’s paging networks. USA Mobility operates local, regional and nationwide one-way and two-way paging networks. These networks each require locations on which to place transmitters, receivers and antennae. Generally, site rent expenses are incurred for each transmitter location. Therefore, site rent expenses for transmitter locations are highly dependent on the number of transmitters, which in turn is dependent on the number of networks. In addition, these expenses generally do not vary directly with the number of subscribers or units in service, which is detrimental to the Company’s operating margin as revenues decline. In order to reduce these expenses, USA Mobility has an active program to consolidate the number of networks and thus transmitter locations, which the Company refers to as network rationalization. The Company has reduced the number of active transmitters by 17.5% to 5,594 active transmitters at March 31, 2011 from 6,777 active transmitters at March 31, 2010.
 
Telecommunication expenses are incurred to interconnect USA Mobility’s paging networks and to provide telephone numbers for customer use, points of contact for customer service and connectivity among the Company’s offices. These expenses are dependent on the number of units in service and the number of office and network locations the Company maintains. The dependence on units in service is related to the number of telephone numbers provided to customers and the number of telephone calls made to the Company’s call centers, though this is not always a direct dependency. For example, the number or duration of telephone calls to call centers may vary from period to period based on factors other than the number of units in service, which could cause telecommunication expenses to vary regardless of the number of units in service. In addition, certain phone numbers USA Mobility provides to its customers may have a usage component based on the number and duration of calls to the subscriber’s messaging device. Telecommunication expenses do not necessarily vary in direct relationship to units in service. Therefore, based on the factors discussed above, efforts are underway to review and reduce telephone circuit inventories.
 
The total of USA Mobility’s cost of products sold; service, rental and maintenance; selling and marketing; general and administrative; and severance and restructuring expenses was $35.6 million for wireless operations and $3.9 million for software operations, and $40.8 million for wireless operations for the three months ended March 31, 2011 and 2010, respectively. Since the Company believes the demand for, and the Company’s revenues from, one-way and two-way messaging will continue to decline in future years, expense reductions will continue to be necessary in order for USA Mobility to mitigate the financial impact of such revenue declines on its cash from operating activities. However, there can be no assurance that the Company will be able to maintain margins as experienced in the past or generate continuing net cash from operating activities.
 
Other Income — Wireless Operations
 
On June 8, 2005, the predecessor to Sensus USA, Inc. (“Sensus”), Advanced Metering Data Systems, LLC (“AMDS”), and the Company signed an Asset Purchase Agreement for the sale of a narrowband personal communications service license for $5.0 million (the “AMDS Agreement”). On August 24, 2010, the Company and Sensus executed an Amendment of Agreement to amend and complete the AMDS Agreement. The Company agreed to a one-time final payment of $2.0 million.
 
Also on August 24, 2010, the Company and Sensus executed the Asset Purchase Agreement (“Purchase Agreement”), which called for the sale, transfer, assignment and delivery of certain licenses to Sensus in exchange for $8.0 million. The Company and Sensus also executed Long Term De Facto Spectrum Transfer Lease Agreements (“Lease Agreements”) for the use of the licenses pending the sale to Sensus in exchange for a combined lease payment of $0.5 million, which will be applied towards the purchase price of $8.0 million. Both the Purchase Agreement and the Lease Agreements required Federal Communications Commission (“FCC”) approval. After approval by the FCC, in 2011 the receipt of the $7.5 million will be recognized as a gain on sale of the licenses


24


 

through Other Income as all elements required for gain recognition will have been met. Revenue relating to the lease payment of $0.5 million will be recognized ratably as earned as part of Service, Rental and Maintenance revenue throughout the lease period. After approval by the FCC, on April 11, 2011 the Company received the final payment of $7.5 million and will recognize the gain on sale as other non-operating income in the second quarter of 2011. The gain on sale of $7.5 million was considered in the review of the deferred income tax asset valuation allowance and income tax expense for the first quarter of 2011.
 
Results of Operations
 
Comparison of Revenues and Selected Operating Expenses for the Three Months Ended March 31, 2011 and 2010
 
                                                 
    For the Three Months Ended March 31,              
    2011     2010     Change Between
 
          % of
          % of
    2011 and 2010  
    Amount     Revenue     Amount     Revenue     Amount     %  
    (Dollars in thousands)  
 
Revenues:
                                               
Service, rental and maintenance, net
  $ 50,192       87.5%     $ 59,426       94.7%     $ (9,234)       (15.5%)  
Product sales, net
    7,143       12.5%       3,358       5.3%       3,785       112.7%  
                                                 
Total
  $ 57,335       100.0%     $ 62,784       100.0%     $ (5,449)       (8.7%)  
                                                 
Selected operating expenses:
                                               
Cost of products sold
  $ 2,425       4.2%     $ 1,209       1.9%     $ 1,216       100.6%  
Service, rental and maintenance
    16,462       28.7%       18,941       30.2%       (2,479)       (13.1%)  
Selling and marketing
    4,921       8.6%       4,557       7.3%       364       8.0%  
General and administrative
    15,627       27.3%       15,812       25.2%       (185)       (1.2%)  
Severance and restructuring
    33       0.0%       314       0.5%       (281)       (89.5%)  
                                                 
Total
  $ 39,468       68.8%     $ 40,833       65.0%     $ (1,365)       (3.3%)  
                                                 
FTEs
    740               628               112       17.8%  
                                                 
Active transmitters
    5,594               6,777               (1,183)       (17.5%)  
                                                 
 
Revenues
 
Service, rental and maintenance revenues consist primarily of recurring fees associated with the provision of messaging services and rental of leased units and is net of a provision for service credits. Product sales consist primarily of revenues associated with the sale of devices and charges for leased devices that are not returned and are net of anticipated credits. Product sales also include revenue from software operations which includes software license revenue, professional services revenue, equipment sales and maintenance revenue. The decrease in revenues reflected the decrease in demand for the Company’s wireless services. USA Mobility’s total revenues were


25


 

$57.3 million and $62.8 million for the three months ended March 31, 2011 and 2010, respectively. The table below details total service, rental and maintenance revenues, net of service credits for the periods stated:
 
                 
    For the Three Months Ended
 
    March 31,  
    2011     2010  
    (Dollars in thousands)  
 
Service, rental and maintenance revenues, net:
               
Paging:
               
Direct:
               
One-way messaging
  $ 39,205     $ 45,115  
Two-way messaging
    6,824       9,155  
                 
      46,029       54,270  
                 
Indirect:
               
One-way messaging
    1,786       2,483  
Two-way messaging
    813       1,079  
                 
    $ 2,599     $ 3,562  
                 
Total paging:
               
One-way messaging
  $ 40,991     $ 47,598  
Two-way messaging
    7,637       10,234  
                 
Total paging revenue
    48,628       57,832  
Non-paging revenue
    1,564       1,594  
                 
Total service, rental and maintenance revenues, net
  $ 50,192     $ 59,426  
                 
 
The table below sets forth units in service and service revenues, the changes in each between the three months ended March 31, 2011 and 2010 and the changes in revenues associated with differences in ARPU and the number of units in service.
 
                                                                 
    Units in Service     Revenues              
    As of March 31,     For the Three Months Ended March 31,     Change Due To:  
    2011     2010     Change     2011(1)     2010(1)     Change     ARPU     Units  
    (Units in thousands)           (Dollars in thousands)              
 
One-way messaging
    1,675       1,894       (219)     $ 40,991     $ 47,598     $ (6,607)     $ (615)     $ (5,992)  
Two-way messaging
    153       205       (52)       7,637       10,234       (2,597)       (670)       (1,926)  
                                                                 
Total
    1,828       2,099       (271)     $ 48,628     $ 57,832     $ (9,204)     $ (1,285)     $ (7,918)  
                                                                 
 
 
(1) Amounts shown exclude non-paging and product sales revenues.
 
As previously discussed, demand for messaging services has declined over the past several years and the Company anticipates that it will continue to decline for the foreseeable future, which would result in reductions in service, rental and maintenance revenues due to the lower number of subscribers and related units in service.
 
Product sales, net reflects 29 days of software operations or $4.8 million. Product revenue for software operations reflects software license revenue, professional services revenue, equipment sales and maintenance revenue. Revenue from software licenses, professional services and equipment sales was $3.9 million. Maintenance revenue was $0.9 million. Maintenance revenue for software operations is recognized as earned over the maintenance contract period. For the period March 3 through March 31, 2011, maintenance revenue has been reduced by $0.9 million to reflect the required reduction to fair value as required by acquisition accounting.


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Operating Expenses
 
General.  The total of software operations cost of products sold; service, rental and maintenance; selling and marketing; and general and administrative expenses was $3.9 million for the period of March 3, 2011 through March 31, 2011. Such amounts have been reflected in the various categories as noted below.
 
Cost of Products Sold.  Cost of products sold consists primarily of the cost basis of devices sold to or lost by wireless segment’s customers and costs associated with software sales and installation costs. The increase of $1.2 million for the three months ended March 31, 2011 compared to the same period in 2010 was due primarily to an increase in sales of management systems to customers. (Cost of products sold for software operations represented $1.8 million of the total $2.4 million of cost of products sold expense.)
 
Service, Rental and Maintenance.  Service, rental and maintenance expenses consist primarily of the following significant items:
 
                                                 
    For the Three Months Ended March 31,              
    2011     2010     Change Between
 
          % of
          % of
    2011 and 2010  
    Amount     Revenue     Amount     Revenue     Amount     %  
    (Dollars in thousands)  
 
Site rent
  $ 6,881       12.0%     $ 9,079       14.5%     $ (2,198)       (24.2%)  
Telecommunications
    3,099       5.4%       3,831       6.1%       (732)       (19.1%)  
Payroll and related
    4,293       7.5%       4,586       7.3%       (293)       (6.4%)  
Stock based compensation
    5       0.0%       6       0.0%       (1)       (16.7%)  
Other
    1,538       2.7%       1,439       2.3%       99       6.9%  
Software
    646       1.1%                   646       100.0%  
                                                 
Total service, rental and maintenance
  $ 16,462       28.7%     $ 18,941       30.2%     $ (2,479)       (13.1%)  
                                                 
FTEs — Wireless
    185               219               (34)       (15.5%)  
                                                 
FTEs — Software
    98                             98        
                                                 
 
As illustrated in the table above, service, rental and maintenance expenses for the three months ended March 31, 2011 decreased $2.5 million or 13.1% from the same period in 2010 due to the following variances:
 
  •  Site rent — The decrease of $2.2 million in site rent expenses is primarily due to the rationalization of the Company’s networks which has decreased the number of transmitters required to provide service to the Company’s customers which, in turn, has reduced the number of lease locations. Active transmitters declined 17.5% in the first quarter of 2011 from the prior year quarter. In addition, the expiration of a master lease agreement (“MLA”) has resulted in the Company paying at the lower default rent per site, which has favorably impacted site rent expenses.
 
  •  Telecommunications — The decrease of $0.7 million in telecommunication expenses was due to the consolidation of the Company’s networks. The Company believes continued reductions in these expenses will occur as the Company’s networks continue to be consolidated as anticipated throughout 2011.
 
  •  Payroll and related — Payroll and related expenses are incurred largely for field technicians, their managers and in-house repair personnel. The field technical staff does not vary as closely to direct units in service as other work groups since these individuals are a function of the number of networks the Company operates rather than the number of units in service on its networks. The decrease in payroll and related expenses of $0.3 million was due primarily to a reduction in headcount for the three months ended March 31, 2011 compared to the same period in 2010. While total FTEs declined by 34 FTEs to 185 FTEs at March 31, 2011 from 219 FTEs at March 31, 2010 for the wireless operations, payroll and related expenses as a percentage of revenue increased during the period due to the use of the Company’s employees to repair paging devices as opposed to use of a third party vendor. The Company believes it is cost beneficial to perform the repair functions in-house.


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  •  Stock based compensation — Stock based compensation expenses decreased for the three months ended March 31, 2011 compared to the same period in 2010 due to lower amortization of compensation expense for the restricted stock units (“RSUs”) awarded to certain eligible employees under the 2009 LTIP.
 
  •  Other — The increase of $0.1 million in other expenses was due to an increase in office expenses of $0.4 million for office equipment, partially offset by lower repairs and maintenance expenses of $0.2 million due to lower contractor costs as Company employees now perform repairs and lower outside service expenses of $0.1 million.
 
  •  Software — The increase reflects expenses associated with product development and technical operations support for software operations from March 3 through March 31, 2011.
 
Selling and Marketing.  Selling and marketing expenses consist of the following major items:
 
                                                 
    For the Three Months Ended March 31,              
    2011     2010     Change Between
 
          % of
          % of
    2011 and 2010  
    Amount     Revenue     Amount     Revenue     Amount     %  
    (Dollars in thousands)  
 
Payroll and related
  $ 2,494       4.4%     $ 2,964       4.8%     $ (470)       (15.9%)  
Commissions
    1,002       1.7%       1,164       1.9%       (162)       (13.9%)  
Stock based compensation
    17       0.0%       17       0.0%              
Other
    320       0.6%       412       0.7%       (92)       (22.3%)  
Software
    1,088       1.9%                   1,088       100.0%  
                                                 
Total selling and marketing
  $ 4,921       8.6%     $ 4,557       7.3%     $ 364       8.0%  
                                                 
FTEs — Wireless
    120               153               (33)       (21.6%)  
                                                 
FTEs — Software
    121                             121        
                                                 
 
As indicated in the table above, selling and marketing expenses consisted primarily of payroll and related expenses, which decreased $0.5 million or 15.9%, for the three months ended March 31, 2011 compared to the same period in 2010. While total FTEs declined by 33 FTEs to 120 FTEs at March 31, 2011 from 153 FTEs at March 31, 2010 for wireless operations, the Company has continued to focus on marketing its services. The sales and marketing staff are all involved in selling the Company’s paging products and services throughout the United States as well as reselling other wireless products and services such as cellular phones and e-mail devices under authorized agent agreements. These expenses support the Company’s efforts to maintain gross placements of units in service, which mitigate the impact of disconnects on the Company’s revenue base. The Company has reduced the overall cost of its wireless selling and marketing activities by focusing on the most productive sales and marketing employees. This has allowed for a reduction in both FTEs and expenses as a percentage of revenue.
 
Commission expenses decreased by $0.2 million for the three months ended March 31, 2011 compared to the same period in 2010. The decrease of $0.1 million in other expenses was primarily due to reductions in travel and entertainment expenses and advertising expenses.
 
Software expenses reflect costs of selling and marketing for software operations. These expenses reflect payroll and related, commissions and other marketing expenses such as travel and entertainment and advertising expenses.


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General and Administrative.  General and administrative expenses consist of the following significant items:
 
                                                 
    For the Three Months Ended March 31,              
    2011     2010     Change Between
 
          % of
          % of
    2011 and 2010  
    Amount     Revenue     Amount     Revenue     Amount     %  
    (Dollars in thousands)  
 
Payroll and related
  $ 5,677       9.9%     $ 6,912       11.0%     $ (1,235)       (17.9%)  
Stock based compensation
    203       0.4%       240       0.5%       (37)       (15.4%)  
Bad debt
    393       0.7%       713       1.1%       (320)       (44.9%)  
Facility rent
    726       1.3%       1,354       2.2%       (628)       (46.4%)  
Telecommunications
    443       0.8%       657       1.0%       (214)       (32.6%)  
Outside services
    5,186       9.0%       3,267       5.2%       1,919       58.7%  
Taxes, licenses and permits
    1,332       2.3%       1,591       2.5%       (259)       (16.3%)  
Other
    1,280       2.2%       1,078       1.7%       202       18.7%  
Software
    387       0.7%                   387       100.0%  
                                                 
Total general and administrative
  $ 15,627       27.3%     $ 15,812       25.2%     $ (185)       (1.2%)  
                                                 
FTEs — Wireless
    190               256               (66)       (25.8%)  
                                                 
FTEs — Software
    26                             26        
                                                 
 
As illustrated in the table above, general and administrative expenses for the three months ended March 31, 2011 decreased $0.2 million, or 1.2%, from the same period in 2010 due primarily to lower payroll and related expenses, lower facility rent expenses and lower bad debt expenses; partially offset by higher outside service expenses and software operation expenses. The percentage of expense to revenue increased for the three months ended March 31, 2011 compared to the same period in 2010 due to the following significant variances:
 
  •  Payroll and related — Payroll and related expenses are incurred mainly for employees in customer service, inventory, collections, finance and other support functions as well as executive management. Payroll and related expenses decreased $1.2 million due primarily to a reduction in headcount for the three months ended March 31, 2011 compared to the same period in 2010. Total wireless FTEs declined by 66 FTEs to 190 FTEs at March 31, 2011 from 256 FTEs at March 31, 2010.
 
  •  Stock based compensation — Stock based compensation expenses consist primarily of amortization of compensation expense associated with RSUs awarded to certain eligible employees and amortization of compensation expense for restricted stock awarded to non-executive members of the Company’s Board of Directors under the Equity Plan. Stock based compensation expenses decreased by $37,000 for the three months ended March 31, 2011 compared to the same period in 2010 due to lower amortization of compensation expense related to the 2009 LTP.
 
  •  Bad debt — The decrease of $0.3 million in bad debt expenses reflected the Company’s bad debt experience due to the change in the composition of the Company’s customer base to accounts with a large number of units in service.
 
  •  Facility rent — The decrease of $0.6 million in facility rent expenses was primarily due to the closure of office facilities as part of the Company’s continued rationalization of its operating requirements to meet lower revenue and customer demand.
 
  •  Telecommunications — The decrease of $0.2 million in telecommunication expenses reflected continued office and staffing reductions as the Company continues to streamline its operations and reduce its telecommunication requirements.
 
  •  Outside services — Outside service expenses consist primarily of costs associated with printing and mailing invoices, outsourced customer service, temporary help and various professional fees. The increase of $1.9 million in outside service expenses was due primarily to transaction and integration costs related to the


29


 

  acquisition of Amcom of $2.9 million during the first quarter of 2011 which resulted in an increase of expenses as a percentage of revenue. These costs were partially offset by reductions in audit-related and tax service fees of $0.5 million, legal fees of $0.2 million, outsourced customer service of $0.2 million, and all other expenses net of $0.1 million.
 
  •  Taxes, licenses and permits — Tax, license and permit expenses consist of property, franchise, gross receipts and transactional taxes. The decrease in tax, license and permit expenses of $0.3 million was primarily due to lower gross receipts taxes, transactional and property taxes for the three months ended March 31, 2011 compared to the same period in 2010. These taxes are based on the lower revenue and property base resulting from the Company’s operations.
 
  •  Other — The increase of $0.2 million in other expenses and as a percentage of revenue was due primarily to an increase in miscellaneous expenses of $0.7 million due to less one-time benefits recorded during the three months ended March 31, 2011 compared to the same period in 2010; partially offset by reductions in repairs and maintenance expenses of $0.2 million, insurance expenses of $0.2 million and office expenses of $0.1 million.
 
  •  Software — The increase of $0.4 million reflects expenses associated with software operations for the period March 3 through March 31, 2011. The amount primarily reflects payroll and related expenses, outside service expenses, facility rent expenses, finance and other support functions as well as executive management of software operations.
 
Severance and Restructuring.  Severance and restructuring expenses decreased to $33,000 for the three months ended March 31, 2011 for restructuring costs associated with the terminations of certain lease agreements for transmitter locations. This was a decrease from $0.3 million recorded for the three months ended March 31, 2010 primarily for severance charges for post-employment benefits for planned staffing reductions. The Company accrues post-employment benefits if certain specified criteria are met. Post-employment benefits include salary continuation, severance benefits and continuation of health insurance benefits.
 
Depreciation, Amortization and Accretion.  Depreciation, amortization and accretion expenses decreased to $4.5 million for the three months ended March 31, 2011 from $7.3 million for the three months ended March 31, 2010. The decrease was primarily due to $1.7 million in lower depreciation expense for the period from fully depreciated paging infrastructure and other assets, $1.3 million in lower depreciation expense on paging devices resulting from fewer purchases of paging devices and from fully depreciated paging devices, $0.1 million in lower accretion expense, offset by an increase of $0.3 million in amortization expense due to the increase in intangible assets from the Amcom acquisition.
 
Interest Expense, Net; Other Income, Net; and Income Tax (Benefit) Expense
 
Interest Expense, Net.  Net interest expense increased to $0.3 million for the three months ended March 31, 2011 from $3,000 of net interest income for the same period in 2010. This increase was primarily due to interest on debt associated with the Amcom acquisition.
 
Other Income, Net.  Net other income increased to $0.2 million for the three months ended March 31, 2011 from $0.1 million for the same period in 2010.
 
Income Tax (Benefit) Expense.  Income tax benefit for the three months ended March 31, 2011 was $27.4 million, a decrease of $33.2 million from the $5.8 million income tax expense for the three months ended March 31, 2010. Income tax benefit for the three months ended March 31, 2011 reflects a net favorable adjustment of $32.4 million due to the reduction of the deferred income tax asset valuation allowance, which reflects a change


30


 

in management’s assessment of 2011 through 2015 taxable income. The following summarizes the key items impacting income tax (benefit) expense for the three months ended March 31, 2011 and 2010, respectively:
 
                                 
    For the Three Months Ended March 31,  
    2011     2010  
    (Dollars in thousands)  
 
Income before income tax expense
  $ 13,274             $ 14,728          
                                 
Income tax expense at the Federal statutory rate
  $ 4,646       35.00%     $ 5,155       35.00%  
State income taxes, net of Federal benefit
    429       3.23%       595       4.04%  
Change in valuation allowance
    (32,365)       (243.82%)       (3)       (0.02%)  
Other
    (87)       (0.65%)       96       0.65%  
                                 
Income tax (benefit) expense
  $ (27,377)       (206.24%)     $ 5,843       39.67%  
                                 
 
Liquidity and Capital Resources
 
Cash and Cash Equivalents
 
At March 31, 2011, the Company had cash and cash equivalents of $23.4 million. These available cash and cash equivalents are held in accounts managed by third party financial institutions and consist of invested cash and cash in the Company’s operating accounts. The invested cash is invested in interest bearing funds managed by third party financial institutions. These funds invest in direct obligations of the government of the United States. To date, the Company has experienced no loss or lack of access to its invested cash or cash equivalents; however, the Company can provide no assurance that access to its invested cash and cash equivalents will not be impacted by adverse conditions in the financial markets.
 
At any point in time, the Company has approximately $6.0 to $7.0 million in its operating accounts that are with third party financial institutions. While the Company monitors daily the cash balances in its operating accounts and adjusts the cash balances as appropriate, these cash balances could be impacted if the underlying financial institutions fail or are subject to other adverse conditions in the financial markets. To date, the Company has experienced no loss or lack of access to cash in its operating accounts.
 
The Company intends to use its cash on hand to provide working capital, to support operations, repay debt, and to return value to stockholders by cash dividends. The Company may also consider using cash to fund acquisitions of paging assets or assets of other businesses that the Company believes will provide a measure of revenue stability while supporting its operating structure and its goal of maintaining margins.
 
The significant decrease in cash and cash equivalents reflects the use of available cash (along with proceeds from debt financing) to acquire all of the outstanding common stock of Amcom and redeem all outstanding stock options of Amcom.
 
Overview
 
Based on current and anticipated levels of operations, USA Mobility anticipates net cash provided by operating activities, together with the available cash on hand at March 31, 2011 should be adequate to meet anticipated cash requirements for the foreseeable future.
 
In the event that net cash provided by operating activities and cash on hand are not sufficient to meet future cash requirements, the Company may be required to reduce planned capital expenses, reduce or eliminate its cash dividends to stockholders, reduce or eliminate its common stock repurchase program, and/or sell assets or seek additional financing. USA Mobility can provide no assurance that reductions in planned capital expenses or proceeds from asset sales would be sufficient to cover shortfalls in available cash or that additional financing would be available on acceptable terms.


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The following table sets forth information on the Company’s net cash flows from operating, investing and financing activities for the periods stated:
 
                         
    For the
       
    Three Months Ended
    Change
 
    March 31,     Between
 
    2011     2010     2011 and 2010  
    (Dollars in thousands)  
 
Net cash provided by operating activities
  $ 12,689     $ 17,893     $ (5,204)  
Net cash used in investing activities
    (135,700)       (1,687)       (134,013)  
Net cash provided (used) in financing activities
    17,174       (10,242)       27,416  
 
Net Cash Provided by Operating Activities.  As discussed above, USA Mobility is dependent on cash flows from operating activities to meet its cash requirements. Cash from operations varies depending on changes in various working capital items including deferred revenues, accounts payable, accounts receivable, prepaid expenses and various accrued expenses. The following table includes the significant cash receipt and expenditure components of the Company’s cash flows from operating activities for the periods indicated, and sets forth the change between the indicated periods:
 
                         
    For the
    Change
 
    Three Months Ended March 31,     Between
 
    2011     2010     2011 and 2010  
    (Dollars in thousands)  
 
Cash received from customers
  $ 57,598     $ 63,980     $ (6,382)  
                         
Cash paid for —
                       
Payroll and related costs
    17,792       19,832       (2,040)  
Site rent costs
    6,963       8,528       (1,565)  
Telecommunications costs
    3,390       4,055       (665)  
Interest costs
    263       1       262  
Other operating costs
    16,501       13,671       2,830  
                         
      44,909       46,087       (1,178)  
                         
Net cash provided by operating activities
  $ 12,689     $ 17,893     $ (5,204)  
                         
 
Net cash provided by operating activities decreased $5.2 million for the three months ended March 31, 2011 compared to the three months ended March 31, 2010. Cash received from customers decreased $6.4 million, or 10.0%, for the three months ended March 31, 2011 from the same period in 2010. This measure consists of revenues and direct taxes billed to customers adjusted for changes in accounts receivable, deferred revenue and tax withholding amounts. The decrease was due to a revenue decrease of $5.4 million and a decrease of $1.0 million in accounts receivable.
 
The decline in cash received from customers was offset by the following reductions in cash paid for operating activities:
 
  •  Cash payments for payroll and related costs decreased $2.0 million due primarily to a reduction in headcount. The lower payroll and related costs in 2011 resulted from the Company’s consolidation and expense reduction activities.
 
  •  Cash payments for site rent costs decreased $1.6 million. This decrease was due primarily to lower site rent expenses for leased locations as the Company rationalized its network and incurred lower payments in 2011 due to the expiration of a MLA which resulted in a lower default rent per site in 2011.
 
  •  Cash payments for telecommunication costs decreased $0.7 million. This decrease was due primarily to the consolidation of the Company’s networks and reflects continued office and staffing reduction to support its smaller customer base.


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  •  Cash payments for interest costs increased $0.3 million due to the debt acquired related to the acquisition of Amcom on March 3, 2011.
 
  •  Cash payments for other operating costs increased $2.8 million. The increase in these payments was primarily due to an increase in outside service expenses of $1.8 million due to transaction costs related to the acquisition of Amcom, $0.3 million increase in office expenses and $0.7 million in various other operating expenses.
 
Net Cash Used In Investing Activities.  Net cash used in investing activities increased $134.0 million for the three months ended March 31, 2011 compared to the same period in 2010 primarily due to the consideration paid, net of cash to acquire related to the Amcom acquisition during the three months ended March 31, 2011 (See Note 5 of Unaudited Notes to Condensed Consolidating Financial Statements).
 
Net Cash Provided (Used) In Financing Activities.  Net cash provided (used) in financing activities increased $27.4 million for the three months ended March 31, 2011 from the same period in 2010 primarily due to the issuance of debt of $24.1 million offset by deferred financing costs of $1.3 million associated with the Amcom acquisition and no cash used for the common stock repurchase program during the three months ended March 31, 2011 compared to the same period in 2010.
 
Cash Dividends to Stockholders.  For the three months ended March 31, 2011, the Company paid a total of $5.5 million (or $0.25 per share of common stock) in cash dividends compared to $5.6 million (or $0.25 per share of common stock) in cash dividends for the same period in 2010.
 
Future Cash Dividends to Stockholders.  On May 4, 2011, the Company’s Board of Directors declared a regular quarterly dividend distribution of $0.25 per share of common stock, with a record date of May 20, 2011, and a payment date of June 24, 2011. This dividend distribution of approximately $5.5 million will be paid from available cash on hand.
 
Common Stock Repurchase Program.  On July 31, 2008, the Company’s Board of Directors approved a program for the Company to repurchase up to $50.0 million of its common stock in the open market during the twelve-month period commencing on or about August 5, 2008. Credit Suisse Securities (USA) LLC will administer such purchases. The Company expects to use available cash on hand and net cash provided by operating activities to fund the common stock repurchase program.
 
The Company’s Board of Directors approved a supplement to the common stock repurchase program effective March 3, 2009. The supplement reset the repurchase authority to $25.0 million as of January 1, 2009 and extended the purchase period through December 31, 2009.
 
On November 30, 2009, the Company’s Board of Directors approved a further extension of the purchase period from December 31, 2009 to March 31, 2010. On March 3, 2010, the Company’s Board of Directors approved an additional supplement effective March 3, 2010 which reset the repurchase authority to $25.0 million as of January 1, 2010 and extended the purchase period through December 31, 2010.
 
On December 6, 2010, the Company’s Board of Directors approved another supplement to the common stock repurchase program effective on January 3, 2011. The supplement reset the repurchase authority to $25.0 million as of January 3, 2011 and extended the purchase period through December 31, 2011.
 
From the inception of the common stock repurchase program through December 31, 2010, the Company has repurchased a total of 5,556,331 shares of its common stock under this program for approximately $51.7 million (excluding commissions). Repurchased shares of the Company’s common stock were accounted for as a reduction to common stock and additional paid-in-capital in the period in which the repurchase occurred. There was approximately $16.1 million of common stock repurchase authority remaining under the program as of December 31, 2010. This repurchase authority allows the Company, at management’s discretion, to selectively repurchase shares of its common stock from time to time in the open market depending upon market price and other factors. All repurchased shares of common stock are returned to the status of authorized but unissued shares of the Company.
 
During the first quarter of 2011, the Company incurred debt associated with the acquisition of Amcom. The Company plans to aggressively repay the debt while maintaining its long-standing policy of returning capital to


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stockholders. To accelerate the payment of debt, the Company temporarily suspended its repurchase program and will subsequently review this program by December 31, 2011.
 
Borrowings.  At March 31, 2011, the Company had outstanding debt financing and related debt covenants associated with the acquisition of Amcom. The acquisition was funded by approximately $117.5 million of cash on hand and new debt of $24.1 million through a credit facility provided by Wells Fargo Capital Finance, LLC (“Wells Fargo”) and the assumption of existing Wells Fargo debt of $27.8 million. The Company entered into an Amended and Restated Credit Agreement (“Credit Agreement”) by and among the Company, the Holding Company, USA Mobility Wireless, Inc., a Delaware corporation, and Amcom (collectively, the borrowers), the lenders and Wells Fargo as the arranger and administrative agent. The Credit Agreement provides for a total credit facility of $52.5 million, including a $42.5 million term loan and a $10.0 million revolving loan. Of the $10.0 million revolving loan, the Company has an outstanding letter of credit (“LOC”) under this Credit Agreement in the amount of $0.6 million that is being maintained for an Amcom customer. As of March 31, 2011, there is a total of $51.9 million in debt outstanding at an interest rate of 5.25%. (See Note 12 of Unaudited Notes to Condensed Consolidating Financial Statements.)
 
The Company is subject to three financial covenants under the Credit Agreement (See Note 12 of Unaudited Notes to Condensed Consolidating Financial Statements). The financial covenants are measured at each quarter-end commencing on June 30, 2011.
 
The Company is also in the process of establishing control agreements with the financial institutions that maintain its cash and investment accounts. These agreements permit Wells Fargo to exercise control over the Company’s cash and investment accounts should the Company default under provisions of the Credit Agreement. The Company is not in default under the Credit Agreement and does not anticipate that Wells Fargo would need to exercise its rights under these control agreements during the term of the Credit Agreement.
 
Commitments and Contingencies
 
Operating Leases.  USA Mobility has operating leases for office and transmitter locations. Substantially all of these leases have lease terms ranging from one month to five years. USA Mobility continues to review its office and transmitter locations, and intends to replace, reduce or consolidate leases, where possible. Total rent expense under operating leases for the three months ended March 31, 2011 and 2010 was approximately $7.5 million (of which $0.1 million was for software operations) and $10.0 million, respectively.
 
Other Commitments.  USA Mobility also has various LOCs outstanding with multiple state agencies. The LOCs typically have one to three-year contract requirements and contain automatic renewal terms. The deposits related to the LOCs are included within other assets on the condensed consolidated balance sheets. The Company also has a $0.6 million LOC outstanding under the Credit Agreement maintained for an Amcom customer. This LOC reduced the credit available under the revolver portion of the Credit Agreement.
 
Off-Balance Sheet Arrangements.  USA Mobility does not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such, the Company is not exposed to any financing, liquidity, market or credit risk that could arise if it had engaged in such relationships.
 
Contingencies.  USA Mobility, from time to time, is involved in lawsuits arising in the normal course of business. As of March 31, 2011, USA Mobility does not have any outstanding lawsuits.
 
There were no material changes during the quarter ended March 31, 2011 to the legal contingencies previously reported in the 2010 Annual Report.
 
Related Party Transactions
 
Since November 16, 2004, a member of the Company’s Board of Directors also served as a director for an entity that leases transmission tower sites to the Company. For each of the three months ended March 31, 2011 and


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2010, the Company paid $2.7 million and $2.7 million, respectively, in site rent expenses to that entity that were included in service, rental and maintenance expenses.
 
Application of Critical Accounting Policies
 
The preceding discussion and analysis of financial condition and results of operations are based on USA Mobility’s condensed consolidated financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of these condensed consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. On an on-going basis, the Company evaluates estimates and assumptions, including but not limited to those related to the impairment of long-lived assets and intangible assets subject to amortization, accounts receivable allowances, revenue recognition, depreciation expense, asset retirement obligations, severance and restructuring and income taxes. USA Mobility bases its estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
 
USA Mobility believes the critical accounting policies reported in the 2010 Annual Report affect its more significant judgments and estimates used in the preparation of its consolidated financial statements with the exception of revenue recognition which applies to wireless operations only. The revenue recognition below affects the software operations that were acquired on March 3, 2011.
 
For the software operations, revenue consists primarily of the sale of software, professional services (consulting and training), equipment (to be used in conjunction with the software) and post-contract support (on-going maintenance). The software is licensed to end users under an industry standard software license agreement. The Company’s software products are considered to be “off-the-shelf software” as software marketed as a stock item that customers can use with little or no customization. Such sales generate license fees (or revenues). In addition to the license fees, the software operations generates revenue through the delivery of implementation services and training, annual maintenance revenues and the sale of third party equipment for use with the software.
 
For software requiring significant production, modification or customization, the Company appropriately recognizes software license revenue on the completed contract method for these arrangements as the contract period is short in duration and the dollar value per contract is relatively small (less than $250,000). For software not requiring significant production, modification or customization, the Company will have a purchase or sales order with the fee fixed or determinable. This order has generally been executed by the customer, which establishes collectability. Based on these criteria, the Company will recognize the software license revenue and equipment revenue when the product is shipped. If services have been ordered that are not an integral component of the solution (service revenues less than $20,000), the service revenue will be recognized in the period in which the services are delivered.
 
With respect to revenue recognition for multiple deliverables, the Company first allocates the revenue to professional services (consulting and training) based upon vendor specific evidence of fair value of the services; second to maintenance (support); and third to the software license revenue for any remaining contract fees. Annual maintenance fees are typically billed in advance under annual or quarterly maintenance contracts for which a customer is invoiced an up-front fee in order to receive software support or equipment maintenance. Amounts invoiced under these maintenance arrangements are deferred and recognized on a straight-line basis over the contract support period.
 
The Company for its wireless operations recognizes revenue when four basic criteria have been met: (1) persuasive evidence of an arrangement exists, (2) delivery has occurred or services rendered, (3) the fee is fixed or determinable and (4) collectability is reasonably assured. Amounts billed but not meeting these recognition criteria are deferred until all four criteria have been met. The Company has a variety of billing arrangements with its customers resulting in deferred revenue in advance billing and accounts receivable for billing in-arrears arrangements.


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Non-GAAP Financial Measure — Consolidated
 
The Company uses a non-GAAP financial measure as a key element in determining performance for purposes of incentive compensation under the Company’s annual Short-Term Incentive Plan (“STIP”). That non-GAAP financial measure is operating cash flow (“OCF”) defined as earnings before interest, taxes, depreciation, amortization and accretion (“EBITDA”) less purchases of property and equipment. (EBITDA is defined as operating income plus depreciation, amortization and accretion, each determined in accordance with GAAP). Purchases of property and equipment are also determined in accordance with GAAP. For purposes of STIP performance, OCF was as follows:
 
                 
    For the Three Months
 
    Ended March 31,  
    2011     2010  
    (Dollars in thousands)  
 
Operating income
  $ 13,327     $ 14,647  
Plus: Depreciation, amortization and accretion
    4,540       7,304  
                 
EBITDA (as defined by the Company)
    17,867       21,951  
Less: Purchases of property and equipment
    (1,494)       (1,725)  
                 
OCF (as defined by the Company)
  $ 16,373     $ 20,226  
                 
 
Item 3.   Quantitative and Qualitative Disclosures about Market Risk
 
Market Risks
 
Long-term Debt
 
The Company entered into a Credit Agreement with Wells Fargo to finance a portion of the consideration to acquire Amcom. The Credit Agreement provides for a maximum term loan amount of $42.5 million and a maximum revolver amount of $10.0 million. Both the term loan and revolver are subject to mandatory repayments commencing on June 30, 2011 with full repayment of both the term loan and revolver by September 3, 2014. As of March 31, 2011 the total debt outstanding was $51.9 million. The Company also had outstanding a LOC of $0.6 million in support of a customer.
 
Both the term loan and revolver are subject to variable interest rates. The Company may elect to pay interest at:
 
1. the LIBOR Rate (as defined in the Credit Agreement) plus 3.75% or
 
2. the Base Rate (as defined in the Credit Agreement) plus 3.75%.
 
The LIBOR Rate is defined as the greater of (a) 1.5% and (b) the published rate per annum for LIBOR from a designated reporting service. The Base Rate means the greatest of (a) 2.5% per annum, (b) the Base LIBOR Rate (as defined), (c) the Federal Funds rate plus 1/2%, and (d) Wells Fargo’s announced prime rate.
 
The Company may make a LIBOR Rate election for any amount of its debt for a period of 1, 2 or 3 months at a time; however, the Company may not have more than 5 individual LIBOR Rate loans in effect at any given time. The Company may only exercise the LIBOR Rate election for an amount of at least $1.0 million.
 
As of March 31, 2011 the Company has elected the LIBOR Rate option and owes interest on its outstanding debt at 5.25% (the LIBOR Rate floor of 1.5% plus 3.75%). Based on currently prevailing interest rates the Company expects that it will continue to elect the LIBOR Rate option for amounts outstanding under the Credit Agreement.
 
The Company is exposed to changes in interest rates, primarily as a result of using bank debt to finance its acquisition of Amcom. The floating interest debt exposes the Company to interest rate risk, with the primary interest rate exposure resulting from changes in the LIBOR Rate should the LIBOR Rate exceed the floor of 1.5%. It is assumed in the table below that the LIBOR Rate will remain constant in the future. Adverse changes in the interest rates, which the Company believes is not probable during the term of the loans, or the Company’s inability to refinance their long-term obligations may have a material negative impact on their results of operations and financial condition.


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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. The Company does not customarily use derivative instruments to adjust its interest rate risk profile. As of March 31, 2011 the Company has no derivative financial instruments outstanding to manage its interest rate risk.
 
The information below summarizes the Company’s sensitivity to market risks as of March 31, 2011. The table presents principal cash flows and related interest rates by year of maturity of the Company’s debt. The carrying value of debt approximately equals the fair value of the debt. Note 12 of Unaudited Notes to Condensed Consolidating Financial Statements contains descriptions of debt and should be read in conjunction with the table below.
 
         
    March 31, 2011  
    (Dollars in thousands)  
 
Revolving Loan at LIBOR with a minimum rate of 1.5% and margin rate of 3.75%. Interest rate at March 31, 2011 of 5.25%.
       
Due March 31, 2012
  $ 5,000  
Due September 3, 2014
    4,447  
         
Total Revolver
    9,447  
Term Loan at LIBOR with a minimum rate of 1.5% and margin rate of 3.75%. Interest rate at March 31, 2011 of 5.25%.
       
Due March 31, 2012
    7,500  
Due March 31, 2013
    10,000  
Due March 31, 2014
    7,500  
Due September 3, 2014
    17,500  
         
Total Term Loan
    42,500  
         
Total debt outstanding
  $ 51,947  
         
 
The Company conducts a limited amount of business overseas. At the present, all transactions are billed and denominated in U.S. dollars and consequently, the Company does not currently have any material exposure to foreign exchange rate fluctuation risk.
 
Item 4.   Controls and Procedures
 
Evaluation of Disclosure Controls and Procedures
 
The Company’s management carried out an evaluation, as required by Rule 13a-15(b) of the Securities Exchange Act of 1934 (the “Exchange Act”), with the participation of its President and Chief Executive Officer (“CEO”) and Chief Financial Officer and Chief Accounting Officer (“CFO”), the Company’s principal financial officer, of the effectiveness of the Company’s disclosure controls and procedures, as of the end of the Company’s last fiscal quarter. Based upon this evaluation, the CEO and the CFO concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report on Form 10-Q, such that the information relating to the Company required to be disclosed in its Exchange Act reports filed with the SEC (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to the Company’s management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.
 
Changes in Internal Control Over Financial Reporting
 
In addition, the Company’s management carried out an evaluation, as required by Rule 13a-15(d) of the Exchange Act, with the participation of the CEO and CFO, of changes in the Company’s internal control over financial reporting. As a result of the Company’s acquisition of Amcom on March, 3, 2011, internal control over financial reporting, subsequent to the date of acquisition, includes certain additional internal controls relating to Amcom. Except as described above, the CEO and CFO concluded that there were no other changes in the Company’s internal control over financial reporting that occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. The Company believes that its disclosure controls and procedures were operating effectively as of March 31, 2011.


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PART II. OTHER INFORMATION
 
Item 1.   Legal Proceedings
 
USA Mobility, from time to time, is involved in lawsuits arising in the normal course of business. As of March 31, 2011, USA Mobility does not have any outstanding lawsuits.
 
Information regarding reportable legal proceedings is contained in “Part I — Item 3 — Legal Proceedings” in the 2010 Annual Report and has not materially changed during the quarter ended March 31, 2011.
 
Item 1A.   Risk Factors
 
The risk factors included in “Part I — Item 1A — Risk Factors” of the 2010 Annual Report have not materially changed during the three months ended March 31, 2011.
 
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds
 
The following table presents information with respect to purchases made by the Company of its common stock during the three months ended March 31, 2011:
 
                                 
                      Approximate
 
                Total Number of
    Dollar Value of
 
                Shares Purchased
    Shares That May
 
                as Part of
    Yet Be Purchased
 
    Total Number of
    Average Price
    Publicly
    Under the Publicly
 
    Shares
    Paid Per
    Announced Plans or
    Announced Plans or
 
Period
  Purchased(1)     Share     Programs     Programs(2)  
                      (Dollars in thousands)  
 
Beginning Balance
                          $  
January 1 through January 31, 2011
        $              
February 1 through February 28, 2011
                       
March 1 through March 31, 2011
    20,027       15.21              
                                 
Total
    20,027     $ 15.21                
                                 
 
 
(1) The Company purchased common stock from the Company’s CEO at a price of $15.21 per share in payment of required tax withholdings for common stock issued on March 4, 2011 related to the 2010 STIP.
 
(2) On July 31, 2008, the Company’s Board of Directors approved a program for the Company to repurchase up to $50.0 million of its common stock in the open market during the twelve month period commencing on or about August 5, 2008. The Company’s Board of Directors approved a supplement effective March 3, 2009 which reset the repurchase authority to $25.0 million as of January 1, 2009 and extended the purchase period through December 31, 2009. On November 30, 2009, the Company’s Board of Directors approved a further extension of the purchase period from December 31, 2009 to March 31, 2010. On March 3, 2010, the Company’s Board of Directors approved an additional supplement effective March 3, 2010 which reset the repurchase authority to $25.0 million as of January 1, 2010 and extended the purchase period through December 31, 2010. On December 6, 2010, the Company’s Board of Directors approved another supplement effective on January 3, 2011 which reset the repurchase authority to $25.0 million as of January 3, 2011 and extended the purchase period through December 31, 2011. On March 3, 2011, in connection with the financing for the acquisition of Amcom, the Company’s Board of Directors temporarily suspended the common stock repurchase program.
 
Item 6.   Exhibits
 
The exhibits listed in the accompanying Exhibit Index are filed as part of this Quarterly Report on Form 10-Q and such Exhibit Index is incorporated herein by reference.


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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
USA MOBILITY, INC.
 
/s/  Shawn E. Endsley
Shawn E. Endsley
Chief Financial Officer
 
Dated: May 5, 2011


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EXHIBIT INDEX
 
         
Exhibit No.
 
Description
 
  31 .1   Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended, dated May 5, 2011(1)
  31 .2   Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended, dated May 5, 2011(1)
  32 .1   Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 dated May 5, 2011(1)
  32 .2   Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 dated May 5, 2011(1)
 
 
(1) Filed herewith.