Spok Holdings, Inc - Quarter Report: 2011 March (Form 10-Q)

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

 

 

 

Form 10-Q

 

 

 

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)

 

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):

 

(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

 

 

 

USA MOBILITY, INC.

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

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

USA MOBILITY, INC.

 

CONDENSED CONSOLIDATED RESULTS OF OPERATIONS

 

 

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

USA MOBILITY, INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

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

USA MOBILITY, INC.

 

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

(1) Preparation of Interim Financial Statements — The condensed consolidated financial statements of USA Mobility, Inc. and subsidiaries (“USA Mobility” or the “Company”) have been prepared in accordance with the rules and regulations of the United States Securities and Exchange Commission (the “SEC”). Amounts shown on the condensed consolidated results of operations within the operating expense categories of cost of products sold; service, rental and maintenance; selling and marketing; and general and administrative are recorded exclusive of severance and restructuring and depreciation, amortization and accretion. These items are shown separately on the condensed consolidated results of operations within operating expenses.

 

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

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

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:

 

 

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

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.

 

 

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:

 

USA MOBILITY, INC.

 

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

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

 

 

(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:

 

 

(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:

 

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:

 

 

(10) Other Assets — Other assets at March 31, 2011 were $1.2 million. The consolidated balances consisted of the following for the periods stated:

 

 

(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:

 

 

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.

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:

 

 

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.

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:

 

 

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:

 

 

(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:

 

 

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

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:

 

 

 

 

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

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

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.

 

 

 

 

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:

 

 

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.

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.

 

 

 

 

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.

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:

 

 

(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.

 

 

(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

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:

 

 

(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.

 

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

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:

 

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 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.

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 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:

 

 

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:

 

 

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

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

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

 

 

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

$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:

 

 

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.