Spok Holdings, Inc - Annual Report: 2010 (Form 10-K)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-K

 

 

FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

Commission file number 0-51027

 

USA Mobility, Inc.

(Exact name of Registrant as specified in its Charter)

 

 

(800) 611-8488

(Registrant’s telephone number, including area code)

 

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE
SECURITIES EXCHANGE ACT OF 1934:

 

 

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE
SECURITIES EXCHANGE ACT OF 1934:
None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES o     NO þ

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES o     NO þ

 

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 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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):

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES o     NO þ

 

The aggregate market value of the common stock held by non-affiliates of the Registrant was $282,975,171 based on the closing price of $12.92 per share on the NASDAQ National Market^® on June 30, 2010.

 

The number of shares of Registrant’s common stock outstanding on February 18, 2011 was 22,069,760.

 

Portions of the Registrant’s Definitive Proxy Statement for the 2011 Annual Meeting of Stockholders of the Registrant, which will be filed with the Securities and Exchange Commission pursuant to Regulation 14A no later than April 30, 2011, are incorporated by reference into Part III of this Report.

 

TABLE OF CONTENTS

 

Forward-Looking Statements

 

This Annual 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,” “Risk Factors,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (“MD&A”). 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.

 

 

General

 

USA Mobility is a leading provider of reliable and affordable wireless communications solutions to the healthcare, government, large enterprise and emergency response sectors. As a single-source provider, USA Mobility’s strategy is to focus on the business-to-business marketplace and to offer the Company’s wireless connectivity solutions. The Company operates nationwide networks for both one-way paging and advanced two-way messaging services. In addition, USA Mobility offers mobile voice and data services through third party providers, including BlackBerry^® devices and global positioning system (“GPS”) location applications. The Company’s product offerings include customized wireless connectivity systems for healthcare, government and other campus environments. USA Mobility also offers M2M (“machine to machine”) telemetry solutions for numerous applications that include asset tracking, utility meter reading and other remote device monitoring applications on a national scale.

 

USA Mobility is a holding company formed to effect the merger of Arch Wireless, Inc. and subsidiaries (“Arch”) and Metrocall Holdings, Inc. and subsidiaries (“Metrocall”), which occurred on November 16, 2004. The Company’s principal office is currently located at 6850 Versar Center, Suite 420, Springfield, Virginia 22151, and its telephone number is 800-611-8488. USA Mobility’s Internet address is http://www.usamobility.com/. The Company makes available free of charge through its web site its annual, quarterly and current reports, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as soon as reasonably practicable after such reports are filed or furnished to the United States Securities and Exchange Commission (the “SEC”). The information on the web site is not incorporated by reference into this Annual Report on Form 10-K and should not be considered a part of this report.

 

Industry Overview

 

The mobile wireless telecommunication industry consists of multiple voice and data providers that compete among one another, both directly and indirectly, for subscribers. Messaging carriers like USA Mobility provide customers with services such as numeric and alphanumeric messaging. Customers receive these messaging services through a small, handheld device. The device, often referred to as a pager, signals a subscriber when a message is received through a tone and/or vibration and displays the incoming message on a small screen. With numeric messaging services, the device displays numeric messages, such as a telephone number. With alphanumeric messaging services, the device displays numeric and/or text messages.

 

Some messaging carriers also provide two-way messaging services using devices that enable subscribers to respond to messages or create and send wireless e-mail messages to other messaging devices, including pagers, personal digital assistants (“PDAs”) and personal computers. These two-way messaging devices, often referred to as two-way pagers, are similar to one-way devices except that they have a small keyboard that enables subscribers to type messages which are sent to other devices as noted above. USA Mobility provides two-way messaging and other short messaging-based services and applications using its narrowband personal communication services networks. The narrowband nature of the personal communication services network limits the size and content of the messaging services more so than broadband personal communication services.

 

Mobile telephone service companies, such as cellular and broadband personal communication services (“PCS”) carriers, provide telephone voice services as well as wireless messaging services that compete with USA Mobility’s one-way and two-way messaging services. Customers subscribing to cellular, broadband PCS or other mobile phone services utilize a wireless handset through which they can make and receive voice telephone calls. These handsets are commonly referred to as cellular or PCS telephones or personal digital assistant or PDA devices and are generally also capable of receiving numeric, alphanumeric and e-mail messages as well as information services, such as stock quotes, news, weather and sports updates, voice mail, personalized greetings and message storage and retrieval.

Technological improvements in PCS telephones and PDAs, including their interoperability with the users’ electronic mail systems, declining prices, and the degree of similarity in messaging devices, coverage and battery life, have resulted in competitive messaging services continuing to attract subscribers away from USA Mobility’s paging subscriber base.

 

Although the U.S. traditional paging industry has several licensed paging companies, the overall number of one-way and two-way messaging subscribers has been declining as the industry faces intense competition from “broadband”/voice wireless services and other forms of wireless message delivery. As a result, demand for USA Mobility’s one-way and two-way messaging services has declined over the past several years, and the Company believes that it will continue to decline for the foreseeable future. The decline in demand for messaging services has largely been attributable to competition from cellular and broadband PCS carriers.

 

2011 Business Strategy

 

USA Mobility believes that paging, both one-way and two-way, is a cost-effective, reliable means of delivering messages and a variety of other information rapidly over a wide geographic area directly to a mobile person. Paging provides communication capabilities at lower cost than cellular and PCS telephones. For example, the messaging equipment and airtime required to transmit an average message costs less than the equipment and airtime for cellular and PCS telephones. Furthermore, paging devices operate for longer periods due to superior battery life, often exceeding one month on a single battery. Numeric and alphanumeric subscribers generally pay a flat monthly service fee. In addition, these messaging devices are unobtrusive and mobile.

 

During 2011 USA Mobility will continue to focus on serving the wireless communications needs of the Company’s customers with a variety of communications solutions and new product offerings, while operating an efficient, profitable and free cash flow-based business strategy. USA Mobility’s principal operating objectives and priorities for 2011 include the following:

 

 

Drive free cash flow through a low-cost operating platform — Throughout 2011 USA Mobility expects to continue to reduce its underlying cost structure. These reductions will come from all areas of operations but most significantly from the Company’s continuing network rationalization efforts that impact its site rent and telecommunication expenses. In addition, the Company expects to reduce its employee base as operational requirements dictate, which, in turn, reduces payroll and related expenses. These reductions in operating expenses are necessary in light of the Company’s declining revenue base. The Company defines free cash flow as operating income plus depreciation, amortization, accretion and goodwill impairment expenses (also known as “EBITDA”) less capital expenditures. (All determined in accordance with United States generally accepted accounting principles (“GAAP”.) This is also known as operating cash flow. See Item 7, Non-GAAP Financial Measures.)

 

Preserve average revenue per unit — The Company’s customer base continues to become more concentrated around larger customers, who are characterized by a large number of units in service per account, but due to volume discounting have lower average revenue per unit as compared to smaller accounts (those with fewer units in service) which are leaving at a faster rate. Over the past several years this concentration has had the effect of reducing the Company’s overall average revenue per unit. During 2011, USA Mobility intends to reinforce the valuable attributes of paging to the Company’s customers. In order to minimize the effects of the Company’s changing mix on revenue, the Company intends to hold firm on pricing of value-added features.

 

Reduce paging subscriber erosion — USA Mobility will continue the Company’s focus on network reliability and customer service to help minimize the rate of subscriber disconnects. The Company implemented a sales and

marketing reorganization intended to eliminate non-revenue generating activities by the sales staff and reinforce the focus on key accounts through a new centralized account management group. This reorganization will continue the Company’s focus on sales and marketing to produce high levels of sales productivity and gross unit placements, which mitigate the impact of subscriber disconnections.

 

Maximize revenue opportunities around the Company’s core subscriber and revenue segments, particularly healthcare — Healthcare customers are the most stable and loyal paging customers, and represented approximately 57% of the Company’s direct paging revenue and 63% of the direct subscriber base in 2010. USA Mobility offers a comprehensive suite of wireless messaging products and services focused on healthcare and “campus” type environments. The Company will use these advantages to target additional sales opportunities in the healthcare, government and large enterprise segments in 2011.

 

Seek revenue stability by potential business diversification  — From time to time the Company has looked at potential acquisitions of paging assets in the United States as a means of increasing revenue or as a means of slowing overall revenue declines. Because the Company anticipates it will be more difficult to continue to reduce expenses commensurate with revenue erosion in the paging industry generally, the Company may consider acquisitions of other businesses where the Company believes its operating structure can maintain and build margins, consistent with its strategy of returning cash to stockholders. The Company intends to look for acquisitions of paging assets that would present opportunities to support its operations, and the Company will also look at other businesses that may provide greater revenue stability over time.

 

Paging and Messaging Services, Products and Operations

 

USA Mobility provides one-way and two-way wireless messaging services including information services throughout the United States. These services are offered on a local, regional and nationwide basis employing digital networks.

 

The Company’s customers include businesses with employees who need to be accessible to their offices or customers, first responders who need to be accessible in emergencies, and third parties, such as other telecommunication carriers and resellers that pay the Company to use its networks. Customers include businesses, professionals, management personnel, medical personnel, field sales personnel and service forces, members of the construction industry and construction trades, real estate brokers and developers, sales and service organizations, specialty trade organizations, manufacturing organizations and government agencies.

 

USA Mobility markets and distributes its 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:

 

 

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:

 

 

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 weak United States economy and increased unemployment rates nationwide. To the extent that unemployment may 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.

 

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.

 

Messaging Networks and Licenses

 

USA Mobility holds licenses to operate on various frequencies in the 150 MHz, 450 MHz and 900 MHz narrowband. The Company is licensed by the Federal Communications Commission (the “FCC”) to operate Commercial Mobile Radio Services (“CMRS”). These licenses are required to provide one-way and two-way messaging services over the Company’s networks.

 

USA Mobility operates local, regional and nationwide one-way networks, which enable subscribers to receive messages over a desired geographic area. The majority of the messaging traffic that is transmitted on the Company’s 150 MHz and 450 MHz frequency bands utilize the Post Office Code Standardization Advisory Group (“POCSAG”) messaging protocol. This technology is an older and less efficient air interface protocol due to slower transmission speeds and minimal error correction. One-way networks operating in 900 MHz frequency bands predominantly utilize the FLEX^tm protocol developed by Motorola Mobility, Inc. (“Motorola”); some legacy POCSAG traffic also is broadcast in the 900 MHz frequency band. The FLEX^tm protocol is a newer technology having the advantages of functioning at higher network speeds (which increases the volume of messages that can be transmitted over the network) and of having more robust error correction (which facilitates message delivery to a device with fewer transmission errors).

 

The Company’s two-way networks utilize the ReFLEX 25^tm protocol, also developed by Motorola. ReFLEX 25^tm promotes spectrum efficiency and high network capacity by dividing coverage areas into zones and sub-zones. Messages are directed to the zone or sub-zone where the subscriber is located allowing the same frequency to be reused to carry different traffic in other zones or sub-zones. As a result, the ReFLEX 25^tm protocol allows the two-way network to transmit substantially more messages than a one-way network using either the POCSAG or FLEX^tm protocols. The two-way network also provides for assured message delivery. The network stores messages that could not be delivered to a device that is out of coverage for any reason, and when the unit returns to service, those messages are delivered. The two-way paging network operates under a set of licenses called narrowband PCS, which uses 900 MHz frequencies. These licenses require certain minimum five and ten-year build-out commitments established by the FCC, which have been satisfied.

 

Although the capacities of the Company’s networks vary by market, USA Mobility has a significant amount of excess capacity. The Company has implemented a plan to manage network capacity and to improve overall network efficiency by consolidating subscribers onto fewer, higher capacity networks with increased transmission speeds. This plan is referred to as network rationalization. Network rationalization will result in fewer networks and therefore fewer transmitter locations, which the Company believes will result in lower operating expenses due primarily to lower site rent expenses.

 

Sources of Equipment

 

USA Mobility does not manufacture the messaging devices its customers need to take advantage of its services or the network equipment it uses to provide messaging services. The Company has relationships with several vendors for new messaging devices. Used messaging devices are available in the secondary market from various sources. The Company believes existing inventory, returns of devices from customers that cancel service, and purchases from other available sources of new and reconditioned devices will be sufficient to meet expected messaging device requirements for the foreseeable future.

 

The Company currently has network equipment on hand that it believes will be sufficient to meet equipment requirements for the foreseeable future.

Competition

 

The wireless messaging industry is highly competitive. Companies compete on the basis of price, coverage area, services offered, transmission quality, network reliability and customer service.

 

USA Mobility competes by maintaining competitive pricing for its products and services, by providing broad coverage options through high-quality, reliable messaging networks and by providing quality customer service. Direct competitors for USA Mobility’s messaging services include American Messaging Service, LLC, SkyTel Corp. (the merged entity of SkyTel Corp. and Velocita Wireless, LLC and a wholly owned subsidiary of United Wireless Holdings, Inc.) and a variety of other regional and local providers. The products and services offered by the Company also compete with a broad array of wireless messaging services provided by mobile telephone companies, including AT&T Mobility LLC, Sprint Nextel Corporation, T-Mobile USA, Inc., and Verizon Wireless, Inc. This competition has intensified as prices for the services of mobile telephone companies have declined and as those companies have incorporated messaging capabilities into their mobile phone devices. Many of these companies possess financial, technical and other resources greater than those of USA Mobility.

 

While cellular, PCS and other mobile telephone services are, on average, more expensive than the one-way and two-way messaging services the Company provides, such mobile telephone service providers typically include one-way and two-way messaging service as an element of their basic service package. Most PCS and other mobile phone devices currently sold in the U.S. are capable of sending and receiving one-way and two-way messages. Most subscribers that purchase these services no longer need to subscribe to a separate messaging service. As a result, many one-way and two-way messaging subscribers can readily switch to cellular, PCS and other mobile telephone services. The decrease in prices and increase in capacity and functionality for cellular, PCS and other mobile telephone services have led many subscribers to select combined voice and messaging services from mobile telephone companies as an alternative to stand-alone messaging services.

 

Regulation

 

Federal Regulation

 

The FCC issues licenses to use radio frequencies necessary to conduct USA Mobility’s business and regulates many aspects of the Company’s operations. Licenses granted to the Company by the FCC have varying terms, generally of up to ten years, at which time the FCC must approve renewal applications. In the past, FCC renewal applications generally have been granted upon showing compliance with FCC regulations and adequate service to the public. Other than those still pending, the FCC has thus far granted each license renewal USA Mobility has filed.

 

The Communications Act of 1934, as amended (the “Act”), requires radio licensees such as USA Mobility to obtain prior approval from the FCC for the assignment or transfer of control of any construction permit or station license or authorization of any rights thereunder. The FCC has thus far granted each assignment or transfer request the Company has made in connection with a change of control.

 

The Act also places limitations on foreign ownership of CMRS licenses, which constitute the majority of licenses held by the Company. These foreign ownership restrictions limit the percentage of stockholders’ equity that may be owned or voted, directly or indirectly, by non-U.S. citizens or their representatives, foreign governments or their representatives, or foreign corporations. USA Mobility’s Amended and Restated Certificate of Incorporation permits the redemption of its equity from stockholders where necessary to ensure compliance with these requirements.

 

The FCC’s rules and regulations require the Company to pay a variety of fees that otherwise increase the Company’s costs of doing business. For example, the FCC requires licensees such as the Company to pay levies and fees, such as universal service fees, to cover the costs of certain regulatory programs and to promote various other societal goals. These requirements increase the cost of the services provided. By law, USA Mobility is permitted to bill its customers for these regulatory costs and typically does so.

 

Additionally, the Communications Assistance to Law Enforcement Act of 1994, (“CALEA”) and certain rules implementing CALEA require some telecommunication companies, including USA Mobility, to design and/or modify their equipment in order to allow law enforcement personnel to “wiretap” or otherwise intercept messages.

Other regulatory requirements restrict how the Company may use customer information and prohibit certain commercial electronic messages, even to the Company’s own customers.

 

In addition, the FCC’s rules require the Company to pay other carriers for the transport and termination of some telecommunication traffic. As a result of various FCC decisions over the last few years, the Company no longer pays fees for the termination of traffic originating on the networks of local exchange carriers providing wireline services interconnected with the Company’s services. In some instances, the Company received refunds for prior payments to certain local exchange carriers. USA Mobility has entered into a number of interconnection agreements with local exchange carriers in order to resolve various issues regarding charges imposed by local exchange carriers for interconnection.

 

Although these and other regulatory requirements have not, to date, had a material adverse effect on the Company’s operating results, such requirements could have a material adverse effect on USA Mobility’s operating results in the future. The Company monitors discussions at the FCC on pending changes in regulatory policy or regulations; however, the Company is unable to predict what changes, if any, may occur in 2011 to regulatory policy or regulations.

 

Failure to follow the FCC’s rules and regulations can result in a variety of penalties, ranging from monetary fines to the loss of licenses. Additionally, the FCC has the authority to modify licenses, or impose additional requirements through changes to its rules.

 

State Regulation

 

As a result of the enactment by Congress of the Omnibus Budget Reconciliation Act of 1993 (“OBRA”) in August 1993, states are now generally preempted from exercising rate or entry regulation over any of USA Mobility’s operations. States are not preempted, however, from regulating “other terms and conditions” of the Company’s operations, including consumer protection and similar rules of general applicability. Zoning requirements are also generally permissible; however, provisions of the OBRA prohibit local zoning authorities from unreasonably restricting wireless services. States that regulate the Company’s services also may require it to obtain prior approval of (1) the acquisition of controlling interests in other paging companies and (2) a change of control of USA Mobility. At this time, USA Mobility is not aware of any proposed state legislation or regulations that would have a material adverse impact on its existing operations.

 

Bankruptcy Proceedings

 

Certain holders of 123/4% senior notes of Arch Wireless Communications, Inc., a wholly owned subsidiary of Arch Wireless, Inc. (“Arch”), filed an involuntary petition against it on November 9, 2001 under Chapter 11 of the bankruptcy code in the United States Bankruptcy Court for the District of Massachusetts, Western Division (the “Bankruptcy Court”). On December 6, 2001, Arch Wireless Communications, Inc. consented to the involuntary petition and the Bankruptcy Court entered an order for relief under Chapter 11. Also on December 6, 2001, Arch and 19 of its wholly owned domestic subsidiaries filed voluntary petitions for relief under Chapter 11 with the Bankruptcy Court. These cases were jointly administered under the docket for Arch Wireless, Inc., et al., Case No. 01-47330-HJB. After the voluntary petition was filed, Arch and its domestic subsidiaries operated their businesses and managed their properties as debtors-in-possession under the bankruptcy code until May 29, 2002, when Arch emerged from bankruptcy. Arch and its domestic subsidiaries as direct or indirect wholly owned subsidiaries of USA Mobility are now operating their businesses and properties as a group of reorganized entities pursuant to the terms of the plan of reorganization. The Company filed a motion with the Bankruptcy Court for a final decree closing the Arch bankruptcy case. A summary of the distributions under the Arch plan of reorganization, including the final distributions of 218,782 shares of common stock to be made under the plan, was set forth in the motion. On February 17, 2010, the Bankruptcy Court closed the Arch bankruptcy case subject to the final distribution as authorized by the Bankruptcy Court. In the final distribution on June 23, 2010, the Company distributed 218,636 shares of common stock previously reserved for future issuance under the Arch plan of reorganization and increased the Company’s reported outstanding share balance. The remaining 146 unissued shares under the Arch plan of reorganization were returned to the status of authorized but unissued shares of the Company.

Trademarks

 

USA Mobility owns the service marks “USA Mobility” since November 16, 2004, “Arch” since December 17, 2002 and “Metrocall” since September 4, 1979, and holds Federal registrations for the service marks “Metrocall” and “Arch Wireless” as well as various other trademarks. The trademarks are fully amortized.

 

Employees

 

At December 31, 2010 and February 18, 2011 USA Mobility had 540 and 519 full time equivalent (“FTE”) employees, respectively. The Company has no employees that are represented by labor unions. USA Mobility believes that its employee relations are good.

 

 

The following important factors, among others, could cause USA Mobility’s actual operating results to differ materially from those indicated or suggested by forward-looking statements made in this Form 10-K or presented elsewhere by management from time to time.

 

The rate of subscriber and revenue erosion could exceed the Company’s ability to reduce its operating expenses in order to maintain positive operating cash flow.

 

USA Mobility’s revenues are dependent on the number of subscribers that use its paging devices. There is intense competition for these subscribers from other paging service providers and alternate wireless communications providers such as mobile phone and mobile data service providers. The Company expects its subscriber numbers and revenue to continue to decline into the foreseeable future. As this revenue erosion continues, maintaining positive cash flow is dependent on substantial and timely reductions in operating expenses. Reductions in operating expenses require both the reduction of internal costs and negotiation of lower costs from outside vendors. There can be no assurance that the Company will be able to reduce its operating expenses commensurate with the level of revenue erosion. The inability to reduce operating expenses would have a material adverse impact on the Company’s business, financial condition and results of operations, including the Company’s continued ability to remain profitable, produce positive operating cash flow, pay dividend distributions to stockholders and repurchase shares of its common stock.

 

Service to the Company’s customers could be adversely impacted by network rationalization.

 

The Company has an active program to consolidate its number of networks and related transmitter locations, which is referred to as network rationalization. Network rationalization is necessary to match the Company’s technical infrastructure to its smaller subscriber base and to reduce both site rent and telecommunication costs. The implementation of the network rationalization program could adversely impact service to the Company’s existing subscribers despite the Company’s efforts to minimize the impact on subscribers. This adverse impact could increase the rate of gross subscriber cancellations and/or the level of revenue erosion. Adverse changes in gross subscriber cancellations and/or revenue erosion could have a material adverse effect on the Company’s business, financial condition and results of operations, including the Company’s continued ability to remain profitable, produce positive operating cash flow, pay dividend distributions to stockholders and repurchase shares of its common stock.

 

If the Company is unable to retain key management personnel, it might not be able to find suitable replacements on a timely basis or, at all, and the Company’s business could be disrupted.

 

USA Mobility’s success is largely dependent upon the continued service of a relatively small group of experienced and knowledgeable key executive and management personnel. The Company believes that there is, and will continue to be, intense competition for qualified personnel in the telecommunication industry, and there is no assurance that the Company will be able to attract and retain the personnel necessary for the management and development of its business. Turnover, particularly among senior management, can also create distractions as the Company searches for replacement personnel, which could result in significant recruiting, relocation, training and other costs, and can cause operational inefficiencies as replacement personnel become familiar with the Company’s

business and operations. In addition, manpower in certain areas may be constrained, which could lead to disruptions over time. The loss or unavailability of one or more of the Company’s executive officers or the inability to attract or retain key employees in the future could have a material adverse effect on the Company’s business, financial condition and results of operations, including the Company’s continued ability to remain profitable, produce positive operating cash flow, pay dividend distributions to stockholders and repurchase shares of its common stock.

 

USA Mobility may be unable to find vendors able to supply it with paging equipment based on future demands.

 

The Company purchases paging equipment from third party vendors. This equipment is sold or leased to customers in order to provide wireless messaging services. The reduction in industry demand for paging equipment has caused various suppliers to cease manufacturing this equipment. There can be no assurance that the Company can continue to find vendors to supply paging equipment, or that the vendors will supply equipment at costs that allow the Company to remain a competitive alternative in the wireless messaging industry. A lack of paging equipment could impact the Company’s ability to provide certain wireless messaging services and could have a material adverse effect on the Company’s business, financial condition and results of operations, including the Company’s continued ability to remain profitable, produce positive operating cash flow, pay dividend distributions to stockholders and repurchase shares of its common stock.

 

USA Mobility may be unable to realize the benefits associated with its deferred income tax assets.

 

The Company has significant deferred income tax assets that are available to offset future taxable income and increase cash flows from operations. The use of these deferred income tax assets is dependent on the availability of taxable income in future periods. The availability of future taxable income is dependent on the Company’s ability to continue to reduce operating expenses and maintain profitability as both revenues and subscribers are expected to decline in the future. To the extent that anticipated reductions in operating expenses do not occur or sufficient revenues are not generated, the Company may not achieve sufficient taxable income to allow for use of its deferred income tax assets. The accounting for deferred income tax assets is based upon an estimate of future results, and the valuation allowance may be increased or decreased as conditions change or if the Company is unable to implement certain tax planning strategies. If the Company is unable to use these deferred income tax assets, the Company’s financial condition and results of operations may be materially affected and the Company’s after-tax net income could decrease.

 

USA Mobility is regulated by the FCC and, to a lesser extent, state and local regulatory authorities. Changes in regulation could result in increased costs to the Company and its customers.

 

USA Mobility is subject to regulation by the FCC and, to a lesser extent, by state and local authorities. Changes in regulatory policy could increase the fees the Company must pay to the government or to third parties and could subject the Company to more stringent requirements that could cause the Company to incur additional capital and/or operating costs. To the extent additional regulatory costs are passed along to customers those increased costs could adversely impact subscriber cancellations.

 

For example, the FCC issued an order in October 2007 that mandated paging carriers (such as the Company) along with all other CMRS providers serving a defined minimum number of subscribers to maintain an emergency back-up power supply at all cell sites to enable operation for a minimum of eight hours in the event of a loss of commercial power (the “Back-up Power Order”). Ultimately after a hearing by the DC Circuit Court and disapproval by the Office of Management and Budget (the “OMB”) of the information collection requirements of the Back-Up Power Order, the FCC indicated that it would not seek to override the OMB’s disapproval. Rather the FCC indicated that it would issue a Notice of Proposed Rulemaking with the goal of adopting revised back-up power rules. To date, there has been no Notice of Proposed Rulemaking by the FCC and the Company is unable to predict what impact, if any, a revised back-up power rule could have on the Company’s operations, cash flows, ability to continue payment of dividend distributions to stockholders and ability to repurchase shares of its common stock.

 

The FCC continues to consider changes to its rules governing the collection of universal service fees. The FCC is evaluating a flat monthly charge of $1.00 or more per assigned telephone number as opposed to assessing

universal service contributions based on telecommunication carriers’ interstate revenues. There is no timetable for any rulemaking to implement this numbers-based methodology. If the FCC adopts a numbers-based methodology, the Company’s attempt to recover the increased contribution costs from its customers could significantly diminish demand for the Company’s services, and the Company’s failure to recover such increased contribution costs could have a material adverse impact on the Company’s business, financial condition and results of operations, including the Company’s continued ability to remain profitable, produce positive operating cash flow, pay dividend distributions to stockholders and repurchase shares of its common stock.

 

USA Mobility has investigated potential acquisitions and may be unable to successfully integrate such acquisitions into the Company’s business and may not achieve all of the anticipated benefits of those acquisitions.

 

The Company has considered acquisitions of other businesses where the Company believes such acquisitions will yield increased cash flows, improved market penetration and/or identified operating efficiencies and synergies. The Company may face various challenges with its integration efforts, including the combination and simplification of product and service offerings, sales and marketing approaches and establishment of combined operations. Although acquired businesses may have significant operating histories, the Company may have a limited or no history of owning and operating these businesses. If the Company were to acquire these businesses, there can be no assurance that:

 

 

If the Company does not realize all of the anticipated benefits of an acquisition, it could have a material adverse effect on the Company’s business, financial condition and results of operations, including the Company’s continued ability to remain profitable, produce positive operating cash flow, pay dividend distributions to stockholders and repurchase shares of its common stock.

 

General economic conditions that are largely out of the Company’s control may adversely affect the Company’s financial condition and results of operations.

 

The Company’s paging services business is sensitive to changes in general economic conditions, both nationally and locally. Recessionary economic cycles, higher interest rates, inflation, higher levels of unemployment, higher consumer debt levels, higher tax rates and other changes in tax laws, or other economic factors that may affect business spending or buying habits could adversely affect the demand for the Company’s services. This adverse impact could increase the rate of gross subscriber cancellations and/or the level of revenue erosion. Adverse changes in gross subscriber cancellations and/or revenue erosion could have a material adverse effect on the Company’s business, financial condition and results of operations, including the Company’s continued ability to remain profitable, produce positive operating cash flow, pay dividend distributions to stockholders and repurchase shares of its common stock.

 

 

The Company had no unresolved SEC staff comments as of February 24, 2011.

 

 

At December 31, 2010, USA Mobility owned seven facilities in the United States, which include three office buildings. In addition, the Company leased facility space, including its executive headquarters, sales, technical, and storage facilities in approximately 87 locations in 32 states.

At December 31, 2010, USA Mobility leased transmitter sites on commercial broadcast towers, buildings and other fixed structures in approximately 5,098 locations throughout the United States. These leases are for various terms and provide for periodic lease payments at various rates.

 

At December 31, 2010, USA Mobility had 5,744 active transmitters on leased sites, which provide service to its customers.

 

 

USA Mobility, from time to time is involved in lawsuits arising in the normal course of business. USA Mobility believes that these pending lawsuits will not have a material adverse impact on the Company’s financial results or operations.

 

Settled Lawsuits

 

Nationwide.  In June 2002, Nationwide filed a three-count civil action in Massachusetts Superior Court (the “Court”) against defendants Arch Wireless Inc., and Paging Network, Inc. (collectively “AWI”) titled Nationwide Paging, Inc. v. Arch Wireless, Inc. and Paging Network, Inc. MICV2002-02329, Middlesex County Superior Court, Massachusetts (the “Action”). Nationwide sought a declaration of the amount of money it owed to AWI, and also claimed damages arising from alleged billing errors dating back to 1999 and 2000. AWI denied liability. An indirect AWI subsidiary, Arch Wireless Operating Company, Inc., filed counterclaims against Nationwide for more than $0.4 million for unpaid invoices.

 

In May 2009, the Court permitted Nationwide to file an amended complaint that added claims for breach of contract and for unfair trade practices, alleging that AWI supplied defective pagers in 2000 and 2001 which allegedly resulted in Nationwide losing $6.9 million. The amended complaint added USA Mobility, Inc. (the “Company”) as a defendant, based on its status as successor-in-interest to AWI. In June 2009, the Company filed its answer and denied liability to Nationwide. The Company filed counterclaims, which alleged that Nationwide was liable for unpaid invoices in an amount in excess of $0.5 million. Nationwide denied liability on the counterclaims.

 

Trial of the case was scheduled to commence in January 2011. In December 2010, the Company and Nationwide participated in mediation of their disputes, and all outstanding claims and counterclaims were settled on confidential terms mutually agreeable to the parties without admission of liability. The Action has been dismissed with prejudice. The Company’s settlement payment of $2.1 million was paid and recorded in general and administrative expenses in the Company consolidated statements of operations for the three months ended December 31, 2010.

 

Stored Communications Act Litigation.  In 2003, several individuals filed claims in the U.S. District Court for the Central District of California against Arch Wireless Operating Company, Inc. (“AWOC”) (which later was merged into USA Mobility Wireless, Inc., an indirect wholly-owned subsidiary of USA Mobility, Inc.), its customer, the City of Ontario (the “City”), and certain City employees. The claims arose from AWOC’s release of transcripts of archived text messages to the City at the City’s request. The plaintiffs claimed this release infringed upon their Fourth Amendment rights and violated the Stored Communications Act (the “SCA”) as well as state law. The district court dismissed a state law claim on the pleadings, and granted summary judgment to AWOC on all remaining claims, including the SCA claim, on August 15, 2006.

 

The plaintiffs appealed the district court’s judgment with respect to the Fourth Amendment and SCA claims in the United States Court of Appeals for the Ninth Circuit (the “Ninth Circuit Court”). On June 18, 2008, the Ninth Circuit Court reversed the district court’s summary judgment order and issued judgment against AWOC and the City. The Ninth Circuit Court held that AWOC violated the SCA by releasing the contents of stored communications without obtaining the consent of the users who sent or received the communications.

 

On July 9, 2008, the Company filed a petition in the Ninth Circuit Court for rehearing or rehearing en banc. The Company argued that the Ninth Circuit Court’s interpretation of the SCA was erroneous and conflicted with Ninth Circuit Court precedent, and that AWOC’s disclosure of the communications was in compliance with the law. On January 27, 2009, the Ninth Circuit Court denied the Company’s petition for rehearing. On February 2, 2009, at the

request of the City, the Ninth Circuit Court issued a stay of its mandate pending the filing of a petition for certiorari with the U.S. Supreme Court (the “Supreme Court”).

 

The City filed a petition for certiorari on April 29, 2009 seeking Supreme Court review of the Ninth Circuit’s Fourth Amendment ruling, and on May 29, 2009 the Company filed a conditional cross-petition for certiorari requesting review of the SCA ruling. On December 14, 2009, the Supreme Court granted the City’s petition for certiorari but denied the Company’s cross-petition. On January 7, 2010, the Company filed a petition for rehearing and asked that the Supreme Court defer a decision until issuing a ruling on the Fourth Amendment issues raised by the City.

 

On June 17, 2010, the Supreme Court issued a decision reversing the Ninth Circuit’s Fourth Amendment ruling and remanding for further proceedings. On July 26, 2010, the Ninth Circuit Court lifted its stay of its mandate, and the case was returned to the district court. The Company then participated in proceedings to determine whether the plaintiffs should be awarded damages or attorneys’ fees, including a court-ordered mediation, which resulted in a voluntary dismissal of the case. The parties have filed a Joint Stipulation of Dismissal with Prejudice and have petitioned the district court to have the case dismissed. The dismissal will not have a material impact on the Company’s financial condition or results of operations.

 

 

 

USA Mobility’s sole class of common equity is its $0.0001 par value common stock, which is listed on the NASDAQ National Market^® and is traded under the symbol “USMO.”

 

The following table sets forth the high and low intraday sales prices per share of USA Mobility’s common stock for the periods indicated, which corresponds to its quarterly fiscal periods for financial reporting purposes. Prices for the Company’s common stock are as reported on the NASDAQ National Market^® from January 1, 2009 through December 31, 2010.

 

 

USA Mobility sold no unregistered securities during 2010. During the first quarter of 2010, the Company acquired a total of 25,658 shares of the Company’s common stock from the Company’s CEO in payment of required tax withholdings for the common stock awarded in March 2010 related to the 2009 Short-Term Incentive Plan (“STIP”). These shares of common stock acquired were retired and excluded from the Company’s reported outstanding share balance as of December 31, 2010. For the year ended December 31, 2010, 697,768 shares of common stock repurchased by the Company under its common stock repurchase program were retired and excluded from the Company’s reported outstanding share balance as of December 31, 2010. (See Note 4 of the Notes to Consolidated Financial Statements).

 

As of February 18, 2011, there were 6,761 holders of record of USA Mobility common stock.

 

Cash Distributions to Stockholders

 

The following table details information on the Company’s cash distributions for each of the six years ended December 31, 2010. Cash distributions paid as disclosed in the statements of cash flows for the years ended December 31, 2010, 2009 and 2008 include previously declared cash distributions on restricted stock units

(“RSUs”) and shares of vested restricted common stock (“restricted stock”) issued under the Equity Plan to executives and non-executive members of the Company’s Board of Directors. Cash distributions on RSUs and restricted stock have been accrued and are paid when the applicable vesting conditions are met. Accrued cash distributions on forfeited RSUs and restricted stock are also forfeited.

 

 

 

 

On February 23, 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 March 17, 2011, and a payment date of March 31, 2011. This dividend distribution of approximately $5.6 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 on 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.

 

During the fourth quarter of 2010, the Company did not purchase shares of its common stock. For the year ended December 31, 2010, the Company purchased 697,768 shares of its common stock for approximately $8.9 million (excluding commissions). 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). 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.

 

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.

 

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.

 

Securities Authorized for Issuance Under Equity Compensation Plans

 

The following table sets forth, as of December 31, 2010, the number of securities outstanding under the Company’s equity compensation plan, the weighted average exercise price of such securities and the number of securities available for grant under this plan:

 

 

 

 

Performance Graph

 

The Company began trading on the NASDAQ National Market^® on November 17, 2004. The chart below compares the relative changes in the cumulative total return of the Company’s common stock for the period December 31, 2005 to December 31, 2010, against the cumulative total return of the NASDAQ Composite Index^® and the NASDAQ Telecommunications Index^® for the same period.

 

The chart below assumes that on December 31, 2005, $100 was invested in USA Mobility’s common stock and in each of the indices. The comparisons assume that all cash distributions were reinvested. The chart indicates the dollar value of each hypothetical $100 investment based on the closing price as of the last trading day of each quarter from December 31, 2005 to December 31, 2010.

 

 

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN
AMONG USA MOBILITY, THE NASDAQ COMPOSITE INDEX^®
AND THE NASDAQ TELECOMMUNICATIONS INDEX^®

 

 

Transfer Restrictions on Common Stock.

 

In order to reduce the possibility that certain changes in ownership could impose limitations on the use of the Company’s deferred income tax assets, USA Mobility’s Amended and Restated Certificate of Incorporation contains provisions which generally restrict transfers by or to any 5% stockholder of the Company’s common stock or any transfer that would cause a person or group of persons to become a 5% stockholder of the Company’s common stock. After a cumulative indirect shift in ownership of more than 45% since its emergence from bankruptcy proceedings in May 2002 (as determined by taking into account all relevant transfers of the stock of Arch prior to its acquisition, including transfers pursuant to the merger or during any relevant three-year period) through a transfer of the Company’s common stock, any transfer of USA Mobility’s common stock by or to a 5% stockholder of the Company’s common stock or any transfer that would cause a person or group of persons to become a 5% stockholder of such common stock, will be prohibited unless the transferee or transferor provides notice of the transfer to the Company and the Company’s Board of Directors determines in good faith that the transfer would not result in a cumulative indirect shift in ownership of more than 47%.

 

Prior to a cumulative indirect ownership change of more than 45%, transfers of the Company’s common stock will not be prohibited except to the extent that they result in a cumulative indirect shift in ownership of more than 47%, but any transfer by or to a 5% stockholder of the Company’s common stock or any transfer that would cause a person or group of persons to become a 5% stockholder of the Company’s common stock requires notice to USA Mobility. Similar restrictions apply to the issuance or transfer of an option to purchase the Company’s common

stock if the exercise of the option would result in a transfer that would be prohibited pursuant to the restrictions described above. These restrictions will remain in effect until the earliest of (1) the repeal of Section 382 of the Internal Revenue Code (“IRC”) (or any comparable successor provision) and (2) the date on which the limitation amount imposed by Section 382 of the IRC in the event of an ownership change would not be less than the tax attributes subject to these limitations. Transfers by or to USA Mobility and any transfer pursuant to a merger approved by the Company’s Board of Directors or any tender offer to acquire all of USA Mobility’s outstanding stock where a majority of the shares have been tendered will be exempt from these restrictions.

 

Based on publically available information and after considering any direct knowledge the Company may have, as of December 31, 2010, the Company has undergone a combined cumulative change in ownership of approximately 15.9% compared to 17.6% as of December 31, 2009.

 

 

The table below sets forth the selected historical consolidated financial and operating data for each of the five years ended December 31, 2010, which have been derived from the audited consolidated financial statements of USA Mobility.

 

The following consolidated financial information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and notes set forth below.

 

 

 

The following discussion and analysis should be read in conjunction with USA Mobility’s consolidated financial statements and related notes and the discussions under “Application of Critical Accounting Policies” (also under Item 7), which describes key estimates and assumptions the Company makes in the preparation of its consolidated financial statements and “Item 1A. Risk Factors”, which describes key risks associated with the Company’s operations and industry.

 

Overview

 

Sales and Marketing

 

USA Mobility markets and distributes its 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:

 

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

 

 

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:

 

 

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 weak United States economy and increased unemployment rates nationwide. To the extent that unemployment may increase throughout 2011, the Company could experience 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.

 

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:

 

 

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:

 

 

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:

 

 

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 increases in consolidated ARPU for the years ended December 31, 2010 and 2009 were due primarily to the positive impact to ARPU resulting from selected price increases implemented during the respective

years. In addition, in both 2010 and 2009, the Company implemented price increases in the indirect channel. 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.

 

 

Operating Expenses

 

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:

 

 

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 year ended December 31, 2010 and 2009, approximately 58% and 55% of the operating expenses referred to above were incurred in three expense categories: payroll and related expenses, site rent expenses, and telecommunication expenses. Payroll and related expenses for the year ended December 31, 2010 included a one-time benefit of $0.2 million for forfeitures related to the 2009 Long-Term Incentive Plan (“LTIP”) cash awards and $0.5 million of payroll and related expenses reclassified to intangible assets for a non-compete agreement with a former executive. Payroll and related expenses for the year ended December 31, 2009 also reflected $1.6 million related to the one-time payment of the 2006 LTIP Additional Target Award.

 

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 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 employee base by approximately 20% to 540 FTEs at December 31, 2010 from 672 FTEs at December 31, 2009. The Company anticipates continued staffing reductions in 2011.

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 its numbers of active transmitters by 19.4% to 5,744 active transmitters at December 31, 2010 from 7,123 active transmitters at December 31, 2009.

 

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, USA Mobility provides certain phone numbers to its customers that 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.

 

On December 7, 2010, the Company entered into a settlement of the outstanding litigation for a one-time cash payment of $2.1 million to Nationwide. The litigation settlement of $2.1 million was paid and recorded in general and administrative expenses in the Company consolidated statements of operations for the three months ended December 31, 2010.

 

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 $151.9 million, $190.4 million and $243.5 million for the years ended December 31, 2010, 2009 and 2008, 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 or generate continuing net cash from operating activities.

 

Other

 

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 Federal Communications Commission (“FCC”) license for $5.0 million (the “AMDS Agreement”). The $5.0 million consisted of a 3-year promissory note for $1.5 million and $3.5 million payable in the future through revenue sharing fees. On June 2, 2006, Sensus acquired substantially all of the assets and assumed certain liabilities of AMDS. Due to this change in control, the $1.5 million was paid in full. Sensus also assumed AMDS’s obligation to pay the balance of AMDS’s revenue sharing fees. The revenue sharing fees were recognized in Other Income when paid by Sensus. On August 24, 2010, the Company and Sensus executed an Amendment of Agreement to amend and complete the AMDS Agreement. In place of revenue sharing fees, the Company agreed to a one-time final payment of $2.0 million. The proceeds of $2.0 million were recognized in September 2010 in Other Income.

 

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 FCC 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 FCC 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 require FCC approval. After approval by the FCC, which could occur in 2011, the receipt of the $7.5 million will be recognized as a gain on sale of the FCC licenses 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. The Company expects that the receipt and recognition of the gain on sale of $7.5 million will reduce the deferred tax asset valuation allowance and income tax expense in 2011.

 

Results of Operations

 

Comparison of the Results of Operations for the Years Ended December 31, 2010 and 2009

 

 

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. The decrease in revenues reflected the decrease in demand for the Company’s wireless services. As indicated above, USA Mobility’s total revenues were $233.3 million and $289.7 million for the years

ended December 31, 2010 and 2009, respectively. The table below details total service, rental and maintenance revenues, net of service credits for the periods stated:

 

 

The table below sets forth units in service and service revenues, the changes in each between 2010 and 2009 and the changes in revenues associated with differences in ARPU and the number of units in service.

 

 

 

 

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. The selected price increases implemented in 2010 and 2009 mitigated, but did not completely offset, the expected declines in revenues resulting from the reduction in subscribers.

 

Operating Expenses

 

General.  Operating expenses in 2010, as noted below, included a net benefit of $0.7 million in payroll and related expenses for forfeitures related to the 2009 LTIP cash awards and reclassification of payroll and related expenses to intangible assets for a non-compete agreement with a former executive and a benefit of $0.2 million in

stock based compensation expenses for forfeited RSUs under the 2009 LTIP by this former executive. In addition, general and administrative expenses reflect $2.1 million for a one-time litigation settlement. In 2010, the Company received proceeds of $2.0 million from Sensus to complete the 2005 AMDS Agreement and recorded the proceeds as Other Income. The impact of these items was to increase selected operating expenses as a percentage of revenue to 65.5% from 65.1%.

 

Cost of Products Sold.  Cost of products sold consists primarily of the cost basis of devices sold to or lost by USA Mobility’s customers and costs associated with system sales. The decrease of $2.0 million for the year ended December 31, 2010 compared to the same period in 2009 was due primarily to a decrease in sales of management systems to customers.

 

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

 

 

As illustrated in the table above, service, rental and maintenance expenses for the year ended December 31, 2010 decreased $16.2 million or 18.9% from the same period in 2009. This decrease was primarily due to the following significant variances:

 

 

 

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

 

 

As indicated in the table above, selling and marketing expenses consist primarily of payroll and related expenses, which decreased $3.4 million, or 23.4%, for the year ended December 31, 2010 compared to the same period in 2009. While total FTEs declined by 43 FTEs to 128 FTEs at December 31, 2010 from 171 FTEs at December 31, 2009, 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 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. Payroll and related expenses for the year ended December 31, 2009 also reflected $0.3 million related to the one-time payment of the 2006 LTIP Additional Target Award.

 

While commission expenses decreased by $0.4 million for the year ended December 31, 2010 compared to the same period in 2009, commission expenses as a percentage of revenue increased during the period due to higher average commissions paid per commissioned FTEs reflecting the Company’s continued focus on maintaining gross placements. Stock based compensation expenses decreased by $0.1 million for the year ended December 31, 2010 compared to the same period in 2009 due to no compensation expense associated with the Additional Target Award under the 2006 LTIP during the period since the Additional Target Award was awarded and expensed in the first quarter of 2009 and due to lower amortization of compensation expense associated with the 2009 LTIP. The decrease of $1.0 million in other expenses was primarily due to reductions in rewards and recognition expenses of $0.4 million, reduction in other expenses of $0.2 million due to lower one-time expenses in 2010, and reductions of $0.1 million in each of the following expense categories: travel and entertainment, advertising, outside services and office; all of which resulted from continued headcount and office reductions.

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

 

 

As illustrated in the table above, general and administrative expenses for the year ended December 31, 2010 decreased $14.9 million, or 20.0%, from the same period in 2009 due primarily to lower payroll and related expenses, lower outside service expenses, lower facility rent expenses and lower other expenses due to less one-time expenses in 2010; all of which were partially offset by an increase in tax, license and permit expenses. The percentage of expense to revenue decreased for the year ended December 31, 2010 due to the following significant variances:

 

 

 

Severance and Restructuring.  Severance and restructuring expenses decreased to $2.2 million for the year ended December 31, 2010 from $2.7 million for the year ended December 31, 2009. The $2.2 million consisted of $2.0 million for severance charges recorded during the year ended December 31, 2010 for post-employment benefits for planned staffing reductions, compared to $2.3 million recorded for the same period in 2009; and $0.2 million for restructuring costs associated with the terminations of certain lease agreements for transmitter locations, compared to $0.4 million recorded for the year ended December 31, 2009 related to costs associated with exit or disposal activities. The Company accrued post-employment benefits if certain specified criteria are met. Post-employment benefits included salary continuation, severance benefits and continuation of health insurance benefits.

 

Depreciation, Amortization and Accretion.  Depreciation, amortization and accretion expenses decreased to $24.1 million for the year ended December 31, 2010 from $41.9 million for the year ended December 31, 2009. The decrease was primarily due to $6.9 million in lower depreciation expense for the period from fully depreciated paging infrastructure and other assets, $3.7 million in lower depreciation expense on paging devices resulting from fewer purchases of paging devices and from fully depreciated paging devices, $6.9 million in lower amortization expense and $0.3 million in lower accretion expense.

 

During the fourth quarter of 2010, the Company completed a review of the estimated useful life of its transmitter assets that are part of paging and computer equipment. This review was based on the results of the Company’s long-range planning and network rationalization process, which indicated that the expected useful life of the last tranche of the transmitter assets was no longer appropriate. As a result of that review, the expected useful life of the final tranche of transmitter assets was extended from 2014 to 2015. (See Note 2 of the Notes to Consolidated Financial Statements.) The impact in 2011 will be a reduction of depreciation expense of approximately $0.4 million.

 

Impairments.  The Company did not record any impairment of long-lived assets and intangible assets subject to amortization during the years ended December 31, 2010 and 2009.

Interest Income, Net and Income Tax Benefit

 

Interest Income, Net.  Net interest income decreased to $16.0 thousand for the year ended December 31, 2010 from $71.0 thousand for the same period in 2009. This decrease was primarily due to less interest income earned on investment of available cash in short-term interest bearing accounts for the year ended December 31, 2010 reflecting lower prevailing market interest rates in 2010.

 

Other Income, Net.  Net other income increased to $2.8 million for the year ended December 31, 2010 from $0.5 million for the same period in 2009. This increase was primarily due to the proceeds of $2.0 million received from Sensus in September 2010 to complete the 2005 AMDS Agreement.