UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K/A
FOR ANNUAL AND TRANSITION
REPORTS PURSUANT TO SECTIONS 13
OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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(Mark One)
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þ
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the Fiscal Year Ended
December 31, 2004
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file number 0-51027
USA Mobility, Inc.
(Exact name of Registrant as
specified in its Charter)
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DELAWARE
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16-1694797
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(State of
incorporation)
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(I.R.S. Employer Identification
No.)
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6677 Richmond Highway
Alexandria, Virginia
(address of principal
executive offices)
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22306
(Zip Code)
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(703) 660-6677
(Registrants telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF
THE
SECURITIES EXCHANGE ACT OF 1934:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF
THE
SECURITIES EXCHANGE ACT OF 1934:
Class A Common Stock Par Value $0.0001 Per Share
(Title of class)
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
If this report is an annual or transition report, indicate by
check mark if the registrant is not required to file reports
pursuant to Section 13 or 15(d) of the Securities Exchange
Act of
1934. 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 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 registrants 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, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Securities Exchange Act of 1934. (Check one):
Large Accelerated
Filer
þ
Accelerated
Filer
o
Non-accelerated
Filer
o
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
The aggregate market value of the common stock held by
non-affiliates of the predecessor was $501,535,000 based on the
closing price of $28.49 per share on the NASDAQ National
Market on June 30, 2004.
The number of shares of Registrants common stock
outstanding on March 1, 2005 was 26,827,971
Portions of the Registrants Definitive Proxy Statement for
the 2005 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 29,
2005, are incorporated by reference into Part III of this
Report.
RESTATEMENT
Overview
As discussed in Note 1 of the Notes to the Consolidated
Financials Statements, USA Mobility, Inc. (USA
Mobility, the Company or we) is
filing this amendment to its Annual Report on
Form 10-K/A
for the year ended December 31, 2004. The purpose of this
amended filing is to restate the 2002, 2003 and 2004 financial
statements and the respective interim quarterly periods for 2003
and 2004 to reflect certain adjustments described below. In
connection with the described restatement, the Company has
concluded that material weaknesses in the Companys
internal control over financial reporting exist as of
December 31, 2004.
The determination to restate these consolidated financial
statements and other financial information was made as a result
of managements assessment of accounting errors it
discovered during the preparation of the 2005 financial
statements. The Companys assessment of certain identified
accounting errors resulted in the following adjustments to
previously reported periods:
1. Asset retirement obligations were incorrectly
calculated in 2002, 2003 and 2004.
The Company
adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 143,
Accounting for
Asset Retirement Obligations
(SFAS No. 143) in 2002. The Company did
not record the initial asset retirement obligation and related
asset retirement cost upon emergence from bankruptcy; therefore,
the Company understated subsequent accretion expense related to
the asset retirement obligation and depreciation expense of the
asset retirement cost in 2002. In addition, in 2002, 2003 and
2004 the Company did not correctly use the fair value of costs
to deconstruct transmitters to determine the fair value of the
asset retirement obligation, which understated reported
liabilities and assets. The Companys expected timing of
cash flows of the transmitter deconstructions have also been
revised to coincide with their depreciable lives that were
estimated during the applicable time period.
Accordingly, the restated financial statements as of
December 31, 2002 include increases of $9.3 million in
property and equipment, at cost, $4.6 million in
accumulated depreciation, $6.3 million in depreciation,
amortization and accretion expense, $2.9 million in current
liabilities and $5.4 million in long-term liabilities, and
a decrease of $2.7 million in service, rental and
maintenance expense. The restated financial statements for 2003
include a decrease of $2.2 million in property and
equipment, at cost, increases of $0.2 million in
accumulated depreciation, $2.8 million in depreciation,
amortization and accretion expense, decreases of
$2.2 million in current liabilities, $0.05 million in
long-term liabilities, and $2.5 million in service, rental
and maintenance expense. The restated financial statements for
2004 include a decrease of $0.05 million in property and
equipment, at cost, increases of $0.9 million in
accumulated depreciation, $2.7 million in depreciation,
amortization and accretion expense, $0.2 million in current
liabilities, $1.1 million in long-term liabilities, and a
decrease of $0.5 million in service, rental and maintenance
expense. During the first, second and third quarters of 2004
accumulated depreciation increased by less than
$0.2 million in each quarter. Current liabilities decreased
by less than $0.1 million in each of the first, second and
third quarters of 2004. Long-term liabilities increased by
$0.4 million in each of the first, second and third
quarters of 2004. Depreciation, amortization and accretion
expense increased by $0.6 million in each of the first,
second and third quarters of 2004 while service, rental and
maintenance expense decreased by $0.1 million in the first
quarter of 2004 and decreased by $0.2 million in each of
the second and third quarters of 2004.
2.
Certain adjustments to the value of the deferred tax
asset for 2003 and 2004 were not calculated
appropriately.
In 2003, the deferred tax asset
attributable to state income tax net operating losses
(NOLs) was overstated due to the misapplication, for
accounting purposes, of state laws which govern the realization
of NOLs. Previously, the Company valued its 2003 state
income tax NOLs based on an erroneous state income tax rate and
a single NOL utilization rule rather than on an evaluation of
each applicable jurisdictions rate and rules. The Company
also determined that its 2003 deferred tax asset for certain
fixed assets and intangibles was misstated due to errors in the
accounting for tax basis and in the application of a federal
limitation. The federal limitation may restrict certain tax
depreciation and amortization deductions for a limited time.
Accordingly, the restated financial statements include a net
$11.9 million decrease in deferred tax assets and
additional paid-in capital as of December 31, 2003.
2
In addition to the impact of the matters described above, in
2004, an erroneous calculation was used to determine the
applicable state income tax rate used to value deferred tax
assets. The 2004 calculation did not properly consider the
Companys state income tax apportionment. Accordingly, the
restated financial statements include a $19.6 million
decrease in deferred tax assets and a $7.5 million increase
to income tax expense for the year ended December 31, 2004.
In addition, this error impacted the value attributed to
acquired assets resulting in an increase of $1.7 million to
goodwill in 2004.
3.
Certain state and local transactional taxes were not
recorded in the appropriate periods.
The
Companys process for identifying and recording state and
local transactional taxes failed to recognize a
$2.8 million liability for certain transactional taxes
imposed by certain jurisdictions in which the Company operates.
These errors were initially noted and recognized by the Company
in the second and third quarters of 2005 through recognition of
additional expense. However, during the preparation of the
Companys 2005 financial statements, the Company determined
that it is appropriate to restate previous years financial
statements because only $0.6 million of the liability
relates to 2005 and the remaining $2.2 million was incurred
in prior years. To correct these errors, the restated financial
statements reflect the recognition of these expenses in the
appropriate accounting periods. Accordingly, the restated
financial statements include a $0.5 million,
$0.8 million and $0.7 million increase in general and
administrative expense in 2002, 2003 and 2004, respectively, and
a $2.2 million decrease in general and administrative
expense in 2005. In addition, this error impacted the value
attributed to acquired assets resulting in an increase of
$0.2 million to goodwill in 2004.
4.
Adjustments were required to assets and liabilities
acquired as part of the November 2004 acquisition of
Metrocall.
As a result of a failure to accurately
and completely apply cash receipts at Metrocall, the Company
incorrectly allocated the purchase price consideration to other
accounts receivable recorded in the historical Metrocall
financial statements. This error resulted in an overstatement of
other accounts receivable of $0.7 million at
December 31, 2004. Accordingly, the restated financial
statements include a decrease in accounts receivable of
$0.7 million with a corresponding increase to goodwill at
December 31, 2004.
5. Depreciation expense was incorrectly calculated in
2003 and 2004.
Depreciation expense did not
accurately reflect the expected economic usage of the
Companys paging network infrastructure assets. The Company
previously established an overall depreciable life of
60 months for its paging infrastructure and accelerated
depreciation on specified asset groups. In 2003, the
depreciation expense related to certain specified asset groups
that were removed from service was not properly calculated.
Accordingly, the restated financial statements for 2003 include
an increase in depreciation, amortization and accretion expense
and accumulated depreciation of $7.6 million. The restated
financial statements for 2004 reflect a $9.9 million
decrease in depreciation, amortization and accretion expense and
accumulated depreciation. The interim quarterly financial
statements for the first, second and third quarters of 2004
reflect a decrease in depreciation, amortization and accretion
expense and accumulated depreciation of $0.7 million,
$3.5 million and $1.2 million, respectively.
6.
Employee severance was not recorded during
2004.
During 2004 certain Arch key executives
were terminated, triggering potential future payment of
severance benefits. The Company did not appropriately accrue the
fair value of certain one-time future termination benefits due
to those executives, resulting in an understatement of severance
expense and accrued liabilities for the quarter and year ended
December 31, 2004 of $0.9 million. Accordingly, the
restated financial statements include an increase in accrued
liabilities and severance expense in the fourth quarter of 2004
of $0.9 million.
7.
Other income was not recorded
properly.
The Company determined that a
correction of its minority interest in GTES LLC, a consolidated
subsidiary, originally recorded in the first quarter of 2005,
should be recorded in the fourth quarter of 2004. Accordingly,
the restated financial statements include an increase to other
income by $0.2 million and a decrease to other long-term
liabilities by $0.2 million in the fourth quarter
of 2004.
3
Effects
of Restatements
Summary
of Adjustments to
Operating Income, Net Income, and Earnings per Share
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Seven Months
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Ended
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December 31,
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Year Ended
December 31,
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2002
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2003
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2004
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(In thousands except share
amounts)
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Operating
income as previously reported
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$
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25,326
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$
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46,115
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$
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29,046
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Increase (decrease) due to changes
in:
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Service, rental and maintenance
expense
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2,684
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2,549
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504
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General and administrative expense
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(536
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)
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(781
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)
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(747
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Depreciation, amortization and
accretion
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(6,317
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(10,421
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)
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7,161
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Severance and restructuring
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(856
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)
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Operating
income as restated
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$
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21,157
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$
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37,462
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$
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35,108
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Net income as
previously reported
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$
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827
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$
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16,128
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$
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13,481
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Adjustments to operating income,
net
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(4,169
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)
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(8,653
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)
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6,062
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Other income,
net increase
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156
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Income tax
expense (increase) decrease
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5,533
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(7,532
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)
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Net income
(loss) as restated
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$
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(3,342
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)
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$
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13,008
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$
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12,167
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Seven Months
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Ended
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December 31,
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Year Ended
December 31,
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2002
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2003
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2004
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Diluted net income per common
share
as previously reported
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0.04
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$
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0.81
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$
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0.64
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Effect of adjustments to net
income (loss)
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(0.21
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)
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(0.16
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)
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(0.06
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Diluted net income (loss) per
common share
as restated
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$
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(0.17
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)
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$
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0.65
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$
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0.58
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4
Summary
of Adjustments to Assets and Liabilities
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December 31,
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2002
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2003
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2004
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(In thousands)
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Assets
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Increase (decrease) in:
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Accounts receivable, net
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$
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$
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$
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(740
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)
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Property and equipment, net
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4,710
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(5,367
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)
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3,520
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Goodwill
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2,578
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Deferred income tax assets
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(11,883
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)
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(19,588
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Total impact on Assets
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$
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4,710
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$
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(17,250
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)
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$
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(14,230
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)
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Total Assets, as restated
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$
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442,634
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$
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495,495
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$
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782,147
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Liabilities
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Increase (decrease) in:
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Accrued taxes
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$
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536
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$
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1,317
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$
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2,235
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Accrued restructuring
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856
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Accrued other
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2,939
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780
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951
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Other long-term liabilities
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5,404
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9,012
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9,025
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Total impact on Liabilities
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$
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8,879
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$
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11,109
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$
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13,067
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Total Liabilities, as restated
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$
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328,410
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$
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169,231
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$
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226,107
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Equity
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Increase (decrease) in:
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Additional paid-in capital
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$
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$
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(21,070
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)
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$
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(18,694
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Retained earnings
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(4,169
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)
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(7,289
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)
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(8,603
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)
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Total impact on Equity
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(4,169
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)
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$
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(28,359
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)
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$
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(27,297
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)
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|
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|
|
|
|
|
|
|
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Total Equity, as restated
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$
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114,224
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|
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$
|
326,264
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$
|
556,040
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|
|
|
|
|
|
|
|
|
|
|
|
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Total Liabilities and Equity, as
restated
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$
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442,634
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$
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495,495
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$
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782,147
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None of the restatement items discussed above impacted reported
revenues, cash balances or cash flows. For additional
information relating to the effect of the restatement, see
Note 1 of the Notes to Consolidated Financial Statements.
Only those items affected by the restatement have been changed
in this
Form 10-K/A.
Those areas include Item 6, 7, 8, 9A and 15. Other
information in this
Form 10-K/A
has not been updated to reflect the impact of any other items
occurring subsequent to the original
10-K
filing
date.
Forward-Looking
Statements
This annual report contains forward-looking statements and
information relating to USA Mobility and its subsidiaries that
are based on managements 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 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 under the captions Business,
Managements Discussion and Analysis of Financial
Condition and Results of Operations and Risk Factors
Affecting Future Operating Results. 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. We undertake no
obligation to update or revise any forward-looking statements.
All subsequent written or oral forward-looking statements
attributable to us or persons acting on our behalf are expressly
qualified in their entirety by the discussion under Risk
Factors Affecting Future Operating Results.
5
PART I
General
USA Mobility, Inc. a Delaware corporation is a leading provider
of local, regional and nationwide one-way messaging and two-way
messaging services. Through our nationwide wireless networks, we
provide messaging services to over 1,000 U.S. cities,
including the top 100 Standard Metropolitan Statistical Areas
(SMSAs). At December 31, 2004, we had
approximately 5.7 million and 0.5 million one and
two-way messaging units in service, respectively.
Our principal office is located at 6677 Richmond Highway,
Alexandria, Virginia 22306, and our telephone number is
(703) 660-6677.
Our Internet address is
www.usamobility.com.
We make available free of
charge through our web site our 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 Securities and
Exchange Commission. The information on our web site is not
incorporated by reference into this amended Annual Report on
Form 10-K/A
and should not be considered a part of this report.
Merger of
Arch Wireless, Inc. and Metrocall Holdings, Inc.
We are a holding company formed on March 5, 2004 to effect
the merger of Arch Wireless, Inc. and subsidiaries
(Arch) and Metrocall Holdings, Inc. and subsidiaries
(Metrocall) which occurred on November 16,
2004. Prior to the merger, we had not conducted any activities
other than those incidental to our formation. The following
describes the consideration issued in the merger:
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We issued one share of our common stock for each outstanding
share of Arch common stock totaling approximately
19.6 million shares;
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We paid $75 per share for 2.0 million Metrocall shares
and issued 1.876 shares of our common stock for each share
of the remaining Metrocall common shares totaling approximately
7.2 million new shares;
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|
All options to purchase shares of Arch common stock and any
previously issued and outstanding Arch restricted stock that was
not repurchased were exchanged for an equal number of options or
restricted shares of our common stock on the same terms and
restrictions previously applicable;
|
|
|
|
Holders of unexercised options to purchase Metrocall common
stock received options to purchase 1.876 shares of our
common stock per share at an exercise price equal to the
exercise price per share of Metrocall common stock divided by
1.876.
|
In order to consummate the transaction, we borrowed
$140.0 million to fund a portion of the $150.0 million
cash consideration paid to holders of Metrocall common stock.
After the merger was completed, former holders of Arch common
stock and options held approximately 72.5% of the fully diluted
shares of our common stock and holders of former Metrocall
common stock and options held 27.5% of our fully diluted common
stock. The merger was accounted for under the purchase method of
accounting pursuant to Statement of Financial Accounting
Standards No. 141, (SFAS No. 141),
Business Combinations.
Arch was deemed the
acquiring entity due primarily to its former shareholders
holding a majority of our common stock. Accordingly, the basis
of the Arch assets and liabilities were reflected at their
historical basis and amounts allocated to Metrocalls
assets and liabilities were based upon the purchase price and
estimated fair values of such assets and liabilities as of the
merger date. Since Arch was deemed the acquiring entity,
Archs historical financial results prior to the merger are
reflected throughout this
Form 10-K/A.
Industry
Overview
The mobile wireless telecommunications industry consists of
multiple voice and data providers which compete among one
another, both directly and indirectly, for subscribers.
Messaging carriers like us provide customers with
6
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 email messages to other messaging
devices, including pagers, 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
QWERTY keyboard that enables subscribers to type messages which
are sent to other devices as noted above. We provide two-way
messaging and other short messaging based services and
applications using our narrowband PCS networks.
Mobile telephone service, such as cellular and broadband
personal communication services (PCS), carriers
provide telephone voice services as well as services that are
functionally identical to the one and two-way messaging services
provided by wireless messaging carriers such as us. 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. These handsets are
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 outside of one-way and two-way paging
have generally contributed to the market for wireless messaging
services and the provision of better quality services at lower
prices to subscribers. These improvements have enhanced the
capability and capacity of non-paging mobile wireless messaging
networks and devices while lowering equipment and airtime costs.
These technological improvements, and the degree of similarity
in messaging devices, coverage and battery life, have resulted
in competitive messaging services continuing to take market
share from our paging subscriber base.
Although the U.S. traditional paging industry has hundreds
of licensed paging companies, the overall number of one and
two-way messaging subscribers has been declining as the industry
continues to face intense competition from
broadband/voice wireless services and other forms of
wireless message delivery. We believe demand for our one and
two-way messaging services has declined over the past several
years and that it will continue to decline for the foreseeable
future. The decline in demand for our messaging services has
largely been attributable to competition from cellular and
broadband PCS carriers.
2005
Business Strategy
We believe that one-way messaging 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.
One-way messaging is a method to communicate at lower cost than
current two-way communication methods, such as cellular and PCS
telephones. For example, our messaging equipment and airtime
required to transmit an average message costs less than the
equipment and airtime for cellular and PCS telephones.
Furthermore, our one-way messaging 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.
We believe the combination of Arch and Metrocall provides us
with potential to generate stronger operating and financial
results than either company could have achieved separately. We
anticipate the combination will result in substantial synergies
and cost reductions compared to the costs that would have been
incurred to operate the companies on a stand-alone basis due to
the expected elimination of duplicative or redundant operations,
functions and locations. We also anticipate the net cash flows
from operating activities should allow the combined company to
repay the borrowings required to complete the merger within
twelve months following November 16, 2004.
7
Our business objectives and operating strategy for 2005 will
focus on maximizing cash flows provided by our operating
activities while integrating the operations of Arch and
Metrocall. Key elements of this strategy are:
|
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|
Customer and revenue retention;
|
|
|
|
Sales of new products and services; and
|
|
|
|
Cost efficiencies and integration synergies.
|
Customer and Revenue Retention
Our customer
and revenue retention efforts focus on customer service and
sales efforts to existing and prospective business, medical and
government customers. Retention efforts are supported through
our national sales force and customer service model designed to
provide support to customers based on their account size. Our
customer service representatives assist customers in managing
their account activity. In addition, they address customer
inquiries from existing or potential customers. We continue to
provide customer service at both the field and national level to
address the demands and expectations of our customers. Despite
our emphasis on customer and revenue retention, we expect that
our customers and revenue will continue to decline for the
foreseeable future, due to technological competition from the
mobile phone/PDA service providers as they continue to lower
cost while adding functionality.
Sales of New Products and Services
We sell
wireless phones, through alliance and dealer agreements with
several carriers including Nextel and Cingular, to subscribers
that require wireless messaging beyond the capabilities of
traditional paging. These offerings partially offset revenue
losses associated with subscriber erosion and enable us to
satisfy customer demands for a broader range of wireless
products and services. However, this represents a very small
percentage of our revenues.
Cost Efficiencies and Integration Efforts
Given the redundant nature of the Arch and
Metrocall messaging operations, we expect the combination of
sales, customer service, technical and back-office functions
will enable us to eliminate a significant amount of operating
expenses. From the merger date, our integration efforts have
focused and will continue to focus on five major areas
including:
Technical Infrastructure and Network
Operations
Integration efforts in this area
include, among other things, consolidation of our one-way
networks; the deconstruction of one of our two-way networks, the
combination of our satellite resources into one common
transmission platform and the elimination of approximately
one-third of the combined companys switch locations. As of
December 31, 2004, we had 18,718 transmitters servicing the
Arch and Metrocall networks, 15 percent of which we expect
to eliminate during 2005 as a result of our integration efforts.
As a result of fewer transmitters, we expect to incur lower
telecommunications and other utility costs and payroll related
expenses. The related reduction in transmitter lease expenses
will result over time as the leases expire during 2005, 2006,
2007 and beyond.
Selling and Marketing
Both Arch and
Metrocall operate sales offices in most major cities in the
United States. The merger will enable us to combine sales
offices and service our subscriber base with fewer sales
positions in markets where overlapping operations exist. As a
result of the merger, we eliminated over 300 selling and
marketing positions prior to December 31, 2004. In
addition, we expect to close between 45 and 60 of our 141 field
sales office locations in 2005. Although we plan to close
certain offices, our ability to reduce rent expense will depend
on our success negotiating buyout settlements or securing
subtenants, otherwise savings will not occur until the
underlying leases expire.
Billing System Consolidation
Both Arch
and Metrocall have a separate, stand-alone billing system and
related support staff utilized to monitor and prepare invoices,
manage customer service and track subscriber equipment. Each
company incurs payroll, license fees and other expenses to
operate their billing system. We expect to convert the Metrocall
billing system into the Arch billing system by the close of the
third quarter 2005. However, due to contractual agreements, much
of the cost benefit from this consolidation will not occur until
2006.
Inventory Fulfillment
As of the merger
date, Arch and Metrocall operated four distribution centers. In
late 2004, we consolidated one of these facilities and expect to
consolidate an additional facility in 2005.
Back-office Operations
These operations
include accounting and finance; human resources; customer
service, credit and collections; information technology and
other overhead functions. We expect to administer the
8
accounting and finance, human resources and other executive
functions from our Alexandria, Virginia headquarters. We expect
to further consolidate our customer service operations once we
consolidate to a single billing system.
Paging
and Messaging Services, Products and Operations
We provide one and two-way messaging services and wireless
information services throughout the United States, including the
100 largest markets and Puerto Rico. These services are offered
on a local, regional and nationwide basis employing digital
networks that cover more than 90% of the United States
population.
Our 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 telecommunications carriers and resellers that pay us to
use our networks. Our 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.
We market and distribute our services through a direct sales
force and a small indirect sales force.
Direct.
Our direct sales force leases or sells
devices directly to customers ranging from small and
medium-sized businesses to Fortune 1000 companies, health
care and related businesses and government agencies. We intend
to continue to market to commercial enterprises utilizing our
direct sales force as these commercial enterprises have
typically disconnected service at a lower rate than individual
consumers. As of December 2004, our sales personnel were located
in 141 offices in 35 states throughout the United States.
In addition, we maintain several corporate sales groups focused
on national business accounts; local, state and Federal
government accounts; advanced wireless services; systems
applications; telemetry and other product offerings.
Indirect.
Within our indirect channel we
contract with and invoice an intermediary for airtime services.
The intermediary or reseller in turn markets, sells,
and provides customer service to the end-user. There is no
contractual relationship that exists between us and the end
subscriber. Therefore, operating costs per unit to provide these
services are significantly below that required in the direct
distribution channel. Indirect units in service typically have
lower average monthly revenue per unit than direct units in
service. The rate at which subscribers disconnect service in our
indirect distribution channel has been higher than the rate
experienced with our direct customers and we expect this to
continue in the foreseeable future.
The following tables set forth units in service and revenue
associated with our two channels of distribution:
|
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|
|
|
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|
|
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|
|
|
|
|
|
As of
December 31,
|
|
|
|
2002(a)
|
|
|
2003(a)
|
|
|
2004(b)
|
|
|
|
Units
|
|
|
%
|
|
|
Units
|
|
|
%
|
|
|
Units
|
|
|
%
|
|
|
|
(Units in thousands)
|
|
|
Direct
|
|
|
4,312
|
|
|
|
76
|
%
|
|
|
3,674
|
|
|
|
83
|
%
|
|
|
5,003
|
|
|
|
81
|
%
|
Indirect
|
|
|
1,328
|
|
|
|
24
|
|
|
|
763
|
|
|
|
17
|
|
|
|
1,199
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
5,640
|
|
|
|
100
|
%
|
|
|
4,437
|
|
|
|
100
|
%
|
|
|
6,202
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
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(a)
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Includes units in service of Arch only.
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(b)
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|
Includes units in service of Arch and Metrocall.
|
9
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
December 31,
|
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2002(a)
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|
2003(a)
|
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|
2004(b)
|
|
|
|
Revenue
|
|
|
%
|
|
|
Revenue
|
|
|
%
|
|
|
Revenue
|
|
|
%
|
|
|
|
(Dollars in thousands)
|
|
|
Direct
|
|
$
|
746,462
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|
|
|
91
|
%
|
|
$
|
554,345
|
|
|
|
93
|
%
|
|
$
|
457,789
|
|
|
|
93
|
%
|
Indirect
|
|
|
72,267
|
|
|
|
9
|
|
|
|
43,133
|
|
|
|
7
|
|
|
|
32,371
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total
|
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$
|
818,729
|
|
|
|
100
|
%
|
|
$
|
597,478
|
|
|
|
100
|
%
|
|
$
|
490,160
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
Includes revenues of Arch only.
|
|
(b)
|
|
Includes revenues of Arch for the twelve months ended
December 31, 2004 and Metrocall for the period
November 16, 2004 to December 31, 2004.
|
Our customers may subscribe to one or two-way messaging services
for a monthly 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 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 his or her
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 our one and
two-way units in service at specified dates:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2002(a)
|
|
|
2003(a)
|
|
|
2004(b)
|
|
|
|
Units
|
|
|
%
|
|
|
Units
|
|
|
%
|
|
|
Units
|
|
|
%
|
|
|
|
(Units in thousands)
|
|
|
One-way messaging
|
|
|
5,288
|
|
|
|
94
|
%
|
|
|
4,147
|
|
|
|
93
|
%
|
|
|
5,673
|
|
|
|
91
|
%
|
Two-way messaging
|
|
|
352
|
|
|
|
6
|
|
|
|
290
|
|
|
|
7
|
|
|
|
529
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
5,640
|
|
|
|
100
|
%
|
|
|
4,437
|
|
|
|
100
|
%
|
|
|
6,202
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
Includes one and two-way messaging units in service of Arch.
|
|
(b)
|
|
Includes one and two-way messaging units in service of Arch and
Metrocall.
|
We provide wireless messaging services to subscribers for a
monthly fee, as described above. In addition, subscribers either
lease a messaging device from us for an additional fixed monthly
fee or they own a device, having purchased it either from us or
from another vendor. We also sell devices to resellers who lease
or resell devices to their subscribers and then sell messaging
services utilizing our networks.
10
The following table summarizes the number of units in service
owned by us, our subscribers and our indirect customers at
specified dates:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2002(a)
|
|
|
2003(a)
|
|
|
2004(b)
|
|
|
|
Units
|
|
|
%
|
|
|
Units
|
|
|
%
|
|
|
Units
|
|
|
%
|
|
|
|
(Units in thousands)
|
|
|
Owned and leased
|
|
|
4,005
|
|
|
|
71
|
%
|
|
|
3,310
|
|
|
|
75
|
%
|
|
|
4,755
|
|
|
|
77
|
%
|
Owned by subscribers
|
|
|
307
|
|
|
|
5
|
|
|
|
364
|
|
|
|
8
|
|
|
|
248
|
|
|
|
4
|
|
Owned by indirect customers or
their subscribers
|
|
|
1,328
|
|
|
|
24
|
|
|
|
763
|
|
|
|
17
|
|
|
|
1,199
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
5,640
|
|
|
|
100
|
%
|
|
|
4,437
|
|
|
|
100
|
%
|
|
|
6,202
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
Includes units in service of Arch.
|
|
(b)
|
|
Includes units in service of Arch and Metrocall.
|
Messaging
Networks and Licenses
We hold licenses to operate on various frequencies in the
150 MHz, 450 MHz and 900 MHz bands. We are
licensed by the Federal Communications Commission (the
FCC) to operate Commercial Mobile Radio Services
(CMRS) messaging services. These licenses are
utilized to provide one-way and two-way messaging services over
our networks.
We operate local, regional and nationwide one-way networks,
which enable our subscribers to receive messages over a desired
geographic area. The majority of the messaging traffic that is
transmitted on our 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 along with some legacy POCSAG
traffic that is broadcast in this band as well. The
FLEX
tm
protocol is a newer technology having the advantage of
functioning at higher network speeds which increases the volume
of messages that can be transmitted over the network as well as
having more robust error correction which facilitates message
delivery to a device with fewer transmission errors.
Our two-way messaging 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 messaging network operates under a set of
licenses, called narrowband PCS, which as noted above, use
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 capacity of our networks vary by market, we have a
significant amount of excess capacity. We have 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 we believe will result in
lower operating expenses.
Sources
of Equipment
We do not manufacture any of the messaging devices our customers
need to take advantage of our services or any of the network
equipment we utilize to provide messaging services. We
historically purchased messaging devices primarily from
Motorola, which discontinued production of messaging devices in
2002. Since then, we have developed relationships with several
vendors for new equipment. Additionally, used equipment is
available in
11
the secondary market from various sources. We believe our
existing inventory of Motorola devices, returns of devices from
our lease customers that cancel service and purchases from other
available sources of new and reconditioned devices will be
sufficient to meet our expected device requirements for the
foreseeable future.
We currently have network equipment that we believe will be
sufficient to meet our equipment requirements for the
foreseeable future. In addition, we currently receive
maintenance and support services for our network infrastructure
components from GTES, LLC (GTES) through a support
service contract, which will expire in May 2007. We expect that
infrastructure and equipment components will continue to be
readily available for the foreseeable future, consistent with
normal manufacturing and delivery lead times; but cannot provide
any assurance that we will not experience unexpected delays in
obtaining equipment in the future. In February 2004, GTES was
formed as a venture between our wholly owned subsidiary,
Metrocall Ventures, Inc., and the former management and
employees of Glenayre Technologies, Inc. paging and
infrastructure operations. This venture should provide USA
Mobility with access to software and hardware support for
critical messaging infrastructure 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.
We compete by maintaining competitive pricing for our products
and services, by providing broad coverage options through
high-quality, reliable messaging networks and by providing
quality customer service. Direct competitors for our messaging
services include Verizon Wireless Messaging, LLC, Ameritech
Mobile Services, Inc. (a subsidiary of SBC Communications,
Inc.), Skytel, Inc. (a division of MCI, Inc.) and a variety of
other regional and local providers. The products and services we
offer also compete with a broad array of wireless messaging
services provided by mobile telephone companies. This
competition has intensified as prices for these services have
declined, and these providers have incorporated messaging
capability into their mobile phone devices. Many of these
companies possess financial, technical and other resources
greater than ours. Such providers currently competing with us in
one or more markets include Cingular, Sprint PCS, Verizon
Wireless,
T-Mobile
and
Nextel.
While cellular, PCS and other mobile telephone services are, on
average, more expensive than the one and two-way messaging
services we provide, such mobile telephone service providers
typically provide one and two-way messaging service as an
element of their basic service package. Most PCS and other
mobile phone devices currently sold in the United States are
capable of sending and receiving one and two-way messages.
Subscribers that purchase these services no longer need to
subscribe to a separate messaging service. As a result, one 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 has led many subscribers to
select combined voice and messaging services as an alternative
to stand alone messaging services.
Regulation
Federal
Regulation
The FCC issues licenses to use radio frequencies necessary to
conduct our business and regulates many aspects of our
operations. Licenses granted to us 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 we have filed.
The Communications Act of 1934, as amended (the
Act), requires radio licensees such as us 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 there under. The FCC has thus far
granted each assignment or transfer request we have 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 we hold.
These foreign ownership restrictions limit the percentage of our
stockholders equity that may be
12
owned or voted, directly or indirectly, by aliens or their
representatives, foreign governments or their representatives,
or foreign corporations. Our Amended and Restated Certificate of
Incorporation permits the redemption of our equity from
stockholders where necessary to protect compliance with these
requirements.
Failure to follow the FCCs 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.
As a result of various FCC decisions over the last few years, we
no longer pay fees for the termination of traffic originating on
the networks of local exchange carriers providing wire-line
services interconnected with our services and in some instances
we received refunds for prior payments to certain local exchange
carriers. We have 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. We may be liable to local exchange
carriers for costs associated with delivering traffic that does
not originate on that local exchange carriers network,
referred to as transit traffic, resulting in some increased
interconnection costs for us, depending on further FCC
disposition of these issues and the agreements reached between
us and the local exchange carriers. If these issues are not
ultimately decided through settlement negotiations or via the
FCC in our favor, we may be required to pay past due contested
transit traffic charges not addressed by existing agreements or
offset against payments due from local exchange carriers and may
also be assessed interest and late charges for amounts withheld.
Other legislative or regulatory requirements may impose
additional costs on our business. For example, the FCC requires
companies such as us 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 we provide. By law, we are permitted to pass through
most of these regulatory costs to customers and typically do so.
Additionally, the Communications Assistance to Law Enforcement
Act, and certain rules implementing that Act, requires some
telecommunications companies, including us, to design and/or
modify their equipment in order to allow law enforcement
personnel to wiretap or otherwise intercept messages
on our networks. Other regulatory requirements restrict how we
may use customer information and prohibit certain commercial
electronic messages, even to our own customers. Although these
requirements have not, to date, had a material adverse effect on
our operating results, these or similar requirements could have
a material adverse effect on our operating results in the future.
State
Regulation
As a result of the enactment by Congress of the Omnibus Budget
Reconciliation Act of 1993 in August 1993, states are now
generally preempted from exercising rate or entry regulation
over any of our operations. States are not preempted, however,
from regulating other terms and conditions of our
operations, including consumer protection and similar rules of
general applicability. Zoning requirements are also generally
permissible; however, provisions of the Act prohibit local
zoning authorities from unreasonably restricting wireless
services. States that regulate our services also may require us
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, we are not
aware of any proposed state legislation or regulations that
would have a material adverse impact on our existing operations.
Arch
Chapter 11 Proceeding
Certain holders of
12
3
/
4
% senior
notes of Arch Wireless Communications, Inc., a wholly-owned
subsidiary of Arch Wireless, Inc., 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. 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
13
domestic subsidiaries are now operating their businesses and
properties as a group of reorganized entities pursuant to the
terms of the plan of reorganization.
Trademarks
We own the service marks USA Mobility,
Arch, Arch Paging, and
Metrocall, and we hold federal registrations for the
service marks Metrocall, Arch Wireless
and PageNet as well as various other trademarks.
Employees
At March 1, 2005, we employed 2,234 persons. None of our
employees is represented by a labor union. We believe our
employee relations are good.
At December 31, 2004, we owned four office buildings in the
United States. In addition, we leased facility space, including
our executive headquarters, sales, technical, and storage
facilities in approximately 320 locations in 44 states.
We lease transmitter sites on commercial broadcast towers,
buildings and other fixed structures in approximately 14,000
locations in all 50 states and Puerto Rico. These leases
are for various terms and provide for monthly lease payments at
various rates.
|
|
ITEM 3.
|
LEGAL
PROCEEDINGS
|
USA Mobility, Inc. was named as a defendant, along with Arch,
Metrocall and Metrocalls former board of directors, in two
lawsuits filed in the Court of Chancery of the State of
Delaware, New Castle County, on June 29, 2004 and
July 28, 2004. Each action was brought by a Metrocall
shareholder on his own behalf and purportedly on behalf of all
public shareholders of Metrocalls common stock, excluding
the defendants and their affiliates and associates. Each
complaint alleges, among other things, that the Metrocall
directors violated their fiduciary duties to Metrocall
shareholders in connection with the proposed merger between Arch
and Metrocall and that USA Mobility and Arch aided and abetted
the Metrocall directors alleged breach of their fiduciary
duties. The complaints seek compensatory relief as well as an
injunction to prevent consummation of the merger. USA Mobility
believes the allegations made in the complaints are without
merit. However, given the uncertainties and expense of
litigation, we and the other defendants have entered into a
memorandum of understanding with the plaintiffs to settle these
actions. The proposed settlement, which must be approved by the
court, required, among other things, Arch and Metrocall to issue
a supplement to the joint proxy/prospectus (which was first
mailed to Metrocall and Arch shareholders on October 22,
2004) and to announce their respective operating results
for the three months ended September 30, 2004 in advance of
the shareholder meeting that occurred on November 8, 2004.
Plaintiffs counsel of record in the actions will apply to
the Court for an award of attorneys fees and expenses not
to exceed $275,000, and defendants have agreed to not oppose
such application. Metrocall, Arch and USA Mobility have agreed
to bear the costs of providing any notice to Metrocall
stockholders regarding the proposed settlement.
On November 10, 2004, former Arch senior executives (the
Former Executives) filed a Notice of Claim before
the JAMS/Endispute in Boston, Massachusetts, asserting that they
were terminated from their employment by the Company pursuant to
a Change in Control as defined in their respective
Executive Employment Agreements (the Claim). The
Former Executives filed the Claim against Arch Wireless, Inc.,
Arch Wireless Holdings, Inc., Arch Wireless Operating Co., Inc.,
MobileMedia Communications, Inc. and Mobile Communications
Corporation of America (collectively, the
Respondents). The Former Executives asserted in
their Claim, entitlement to additional compensation under the
Arch Long-Term Incentive Plan and their respective Restricted
Stock Agreements, attorneys fees and costs and unspecified other
and further relief. In the event that the Former Executives were
to prevail on their Claim they could be awarded additional
compensation under the Arch Long-Term Incentive Plan and their
respective Restricted Stock Agreements up to approximately
$8.5 million plus the costs of attorneys fees and other
costs. We and the Former Executives mutually selected an
arbitrator to preside over the case. Discovery is underway and
the trial is scheduled to take place in May 2005. We are
disputing the Claim
14
vigorously. We do not believe that a Change in Control as
defined in the Former Executives Executive Employment Agreements
has occurred and believe that we will ultimately prevail in the
arbitration proceeding.
Certain holders of
12
3
/
4
% senior
notes of Arch Wireless Communications, Inc., a wholly owned
subsidiary of Arch Wireless, Inc., 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. 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 are
now operating their businesses and properties as a group of
reorganized entities pursuant to the terms of the plan of
reorganization.
In the course of our operations we have become involved as a
defendant and occasionally as a plaintiff in a number of
commercial tort and employment related lawsuits and proceedings.
We do not believe that any of the litigation in which we are
currently involved or that has been overtly threatened against
us will have individually or in the aggregate a material adverse
effect on our financial condition, results of operations or cash
flows.
|
|
ITEM 4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
|
At the Special Meeting of Arch Stockholders held on
November 8, 2004, the following proposal was adopted by the
vote specified below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Withheld/
|
|
|
|
|
|
Broker
|
|
Proposal
|
|
For
|
|
|
Against
|
|
|
Abstain
|
|
|
Non-Votes
|
|
|
To approve agreement and plan of
merger with Metrocall Holdings, Inc.
|
|
|
15,927,855
|
|
|
|
7,854
|
|
|
|
6,180
|
|
|
|
0
|
|
PART II
|
|
ITEM 5.
|
MARKET
FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
|
Our sole class of common equity is our $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 our common stock for the period indicated,
which corresponds to our quarterly fiscal periods for financial
reporting purposes. Prices for our common stock are as reported
on the NASDAQ National Market from November 18, 2004
through December 31, 2004. Prior to November 18, 2004,
our common stock was not publicly traded.
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
2004 4th Quarter
beginning November 18, 2004
|
|
$
|
37.60
|
|
|
$
|
33.25
|
|
We did not declare dividends on our common stock during 2004.
Under the terms of our credit facility, we are prohibited from
paying dividends. We sold no unregistered securities during 2004
and made no repurchases of our common stock during the fourth
quarter of 2004.
As of March 1, 2005, there were 6,950 holders of record of
our common stock.
Transfer Restrictions on Common Stock
In
order to reduce the possibility that certain changes in
ownership could impose limitations on the use of our tax
attributes, our Amended and Restated Certificate of
Incorporation contains provisions which generally restrict
transfers by or to any 5% shareholder of our common stock or any
transfer that would cause a person or group of persons to become
a 5% shareholder of our 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 our acquisition,
15
including transfers pursuant to the merger or during any
relevant three-year period) through a transfer of our common
stock, any transfer of our common stock by or to a 5%
shareholder of our common stock or any transfer that would cause
a person or group of persons to become a 5% shareholder of our
common stock, will be prohibited unless the transferee or
transferor provides notice of the transfer to us and our 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 our 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%
shareholder of our common stock or any transfer that would cause
a person or group of persons to become a 5% shareholder of our
common stock requires a notice to us. Similar restrictions apply
to the issuance or transfer of an option to purchase our 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 (a) the repeal of Section 382 of the
Internal Revenue Code of 1986, as amended (the IRC),
(or any comparable successor provision) and (b) 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
our tax attributes subject to these limitations. Transfers by or
to us and any transfer pursuant to a merger approved by our
board of directors or any tender offer to acquire all of our
outstanding stock where a majority of the shares have been
tendered will be exempt from these restrictions.
|
|
ITEM 6.
|
SELECTED
CONSOLIDATED FINANCIAL AND OPERATING DATA
|
We are a holding company formed to effect the merger of Arch and
Metrocall, which occurred on November 16, 2004. Prior to
these acquisitions, USA Mobility had conducted no operations
other than those that were incidental to its formation. For
financial reporting purposes, Arch was deemed the acquiring
entity and is the predecessor registrant of USA Mobility.
Accordingly, the consolidated historical information and
operating data for the year ended December 31, 2004
reflects that of Arch for the twelve months ended
December 31, 2004 and Metrocall for the period
November 16, 2004 to December 31, 2004. Historical
financial information and operating data as of December 31,
2000, 2001, 2002 and 2003, and for the four years ended
December 31, 2003 reflect that of Arch. The table below
sets forth the selected historical consolidated financial and
operating data for each of the five years ended
December 31, 2004.
On May 29, 2002, Arch emerged from proceedings under
Chapter 11 of the bankruptcy code. For financial statement
purposes, Archs results of operations and cash flows have
been separated as pre and post-May 31, 2002 due to a change
in basis of accounting in the underlying assets and liabilities.
See Note 2 of Notes to Consolidated Financial Statements.
For purposes of the selected data below, we refer to Archs
results prior to May 31, 2002 as results for Archs
predecessor company and we refer to ours and Archs results
after May 31, 2002 as results for the reorganized company.
However, for the reasons described in Note 2, certain
aspects of the predecessor company financial statements for the
periods before we emerged from bankruptcy are not comparable to
the reorganized companys financial statements.
The selected financial data set forth in this Item 6 have
been restated to reflect adjustments to the Companys
consolidated financial statements and other financial
information contained in our Annual Report on
Form 10-K
for the year ended December 31, 2004, originally filed with
the U.S. Securities and Exchange Commission on
March 17, 2005. See Note 1 of the Notes to
Consolidated Financial Statements for additional information
regarding the restatement. Financial and operating data as of
December 31, 2000, 2001, 2002, 2003 and 2004 and for each
of the two years ended December 31, 2001, for the five
months ended May 31, 2002, the seven months ended
December 31, 2002 and the two years ended December 31,
2004 have been derived from the audited consolidated financial
statements of USA Mobility or its predecessor, Arch. The
consolidated financial statements of Arch for the two years
ended 2001 were audited by Arthur Andersen LLP, which has ceased
operations.
As described in this Annual Report on Form 10 K/A for
the year ended December 31, 2004, the Company restated its
financial statements for the seven months ended
December 31, 2002 and for the years ended December 31,
2003 and 2004.
16
The following consolidated financial information should be read
in conjunction with Managements Discussion and
Analysis of Financial Condition and Results of Operations
and the consolidated financial statements and notes set forth
below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arch Predecessor
Company
|
|
|
|
Reorganized Company
|
|
|
|
|
|
|
|
|
|
Five Months
|
|
|
|
Seven Months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
May 31,
|
|
|
|
December 31,
|
|
|
Year Ended
December 31,
|
|
|
|
2000
|
|
|
2001
|
|
|
2002
|
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Restated)
|
|
|
(Restated)
|
|
|
(Restated)
|
|
|
|
(Dollars in thousands except per
share amounts)
|
|
Statements of Operations
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service, rental and maintenance
|
|
$
|
794,997
|
|
|
$
|
1,101,762
|
|
|
$
|
351,721
|
|
|
|
$
|
432,445
|
|
|
$
|
571,989
|
|
|
$
|
470,751
|
|
Product sales
|
|
|
56,085
|
|
|
|
61,752
|
|
|
|
13,639
|
|
|
|
|
20,924
|
|
|
|
25,489
|
|
|
|
19,409
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
851,082
|
|
|
|
1,163,514
|
|
|
|
365,360
|
|
|
|
|
453,369
|
|
|
|
597,478
|
|
|
|
490,160
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of products sold
|
|
|
35,861
|
|
|
|
42,301
|
|
|
|
10,426
|
|
|
|
|
7,740
|
|
|
|
5,580
|
|
|
|
4,347
|
|
Service, rental and maintenance
|
|
|
182,993
|
|
|
|
306,256
|
|
|
|
105,990
|
|
|
|
|
132,611
|
|
|
|
189,290
|
|
|
|
160,144
|
|
Selling and marketing
|
|
|
107,208
|
|
|
|
138,341
|
|
|
|
35,313
|
|
|
|
|
37,897
|
|
|
|
45,639
|
|
|
|
36,085
|
|
General and administrative
|
|
|
263,901
|
|
|
|
388,979
|
|
|
|
116,668
|
|
|
|
|
136,793
|
|
|
|
166,948
|
|
|
|
130,046
|
|
Depreciation, amortization and
accretion (2)
|
|
|
500,831
|
|
|
|
1,584,482
|
|
|
|
82,720
|
|
|
|
|
110,192
|
|
|
|
129,658
|
|
|
|
107,629
|
|
Stock-based and other compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,979
|
|
|
|
6,218
|
|
|
|
4,863
|
|
Reorganization expense
|
|
|
|
|
|
|
154,927
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and restructuring
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,683
|
|
|
|
11,938
|
|
Restructuring charges
|
|
|
5,425
|
|
|
|
7,890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(245,137
|
)
|
|
|
(1,459,662
|
)
|
|
|
14,243
|
|
|
|
|
21,157
|
|
|
|
37,462
|
|
|
|
35,108
|
|
Interest and non-operating
expenses, net
|
|
|
(169,252
|
)
|
|
|
(258,870
|
)
|
|
|
(2,178
|
)
|
|
|
|
(18,340
|
)
|
|
|
(19,237
|
)
|
|
|
(5,914
|
)
|
Gain (loss) on extinguishment of
debt
|
|
|
58,603
|
|
|
|
34,229
|
|
|
|
1,621,355
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,031
|
)
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
110
|
|
|
|
|
(1,129
|
)
|
|
|
516
|
|
|
|
814
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before reorganization
items, net and fresh start accounting adjustments
|
|
|
(355,786
|
)
|
|
|
(1,684,303
|
)
|
|
|
1,633,530
|
|
|
|
|
1,688
|
|
|
|
18,741
|
|
|
|
28,977
|
|
Reorganization items, net
|
|
|
|
|
|
|
|
|
|
|
(22,503
|
)
|
|
|
|
(2,765
|
)
|
|
|
(425
|
)
|
|
|
|
|
Fresh start accounting adjustments,
net
|
|
|
|
|
|
|
|
|
|
|
47,895
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
and cumulative effect of change in accounting principle
|
|
|
(355,786
|
)
|
|
|
(1,684,303
|
)
|
|
|
1,658,922
|
|
|
|
|
(1,077
|
)
|
|
|
18,316
|
|
|
|
28,977
|
|
Income tax benefit (expense)
|
|
|
46,006
|
|
|
|
121,994
|
|
|
|
|
|
|
|
|
(2,265
|
)
|
|
|
(5,308
|
)
|
|
|
(16,810
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before cumulative
effect of change in accounting principle
|
|
|
(309,780
|
)
|
|
|
(1,562,309
|
)
|
|
|
1,658,922
|
|
|
|
|
(3,342
|
)
|
|
|
13,008
|
|
|
|
12,167
|
|
Change in accounting principle
|
|
|
|
|
|
|
(6,794
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(309,780
|
)
|
|
$
|
(1,569,103
|
)
|
|
$
|
1,658,922
|
|
|
|
$
|
(3,342
|
)
|
|
$
|
13,008
|
|
|
$
|
12,167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per common
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) before accounting
change
|
|
$
|
(4.10
|
)
|
|
$
|
(8.79
|
)
|
|
$
|
9.09
|
|
|
|
$
|
(0.17
|
)
|
|
$
|
0.65
|
|
|
$
|
0.58
|
|
Accounting change
|
|
|
|
|
|
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(4.10
|
)
|
|
$
|
(8.83
|
)
|
|
$
|
9.09
|
|
|
|
$
|
(0.17
|
)
|
|
$
|
0.65
|
|
|
$
|
0.58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per
common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) before accounting
change
|
|
$
|
(4.10
|
)
|
|
$
|
(8.79
|
)
|
|
$
|
9.09
|
|
|
|
$
|
(0.17
|
)
|
|
$
|
0.65
|
|
|
$
|
0.58
|
|
Accounting change
|
|
|
|
|
|
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(4.10
|
)
|
|
$
|
(8.83
|
)
|
|
$
|
9.09
|
|
|
|
$
|
(0.17
|
)
|
|
$
|
0.65
|
|
|
$
|
0.58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures, excluding
acquisitions
|
|
$
|
140,285
|
|
|
$
|
109,485
|
|
|
$
|
44,474
|
|
|
|
$
|
39,935
|
|
|
$
|
25,446
|
|
|
$
|
19,232
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arch Predecessor
Company
|
|
|
|
Reorganized Company
|
|
|
|
|
|
|
|
|
|
2000
|
|
|
2001
|
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Restated)
|
|
|
(Restated)
|
|
|
(Restated)
|
|
|
|
|
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
211,443
|
|
|
$
|
244,453
|
|
|
|
$
|
115,231
|
|
|
$
|
110,567
|
|
|
$
|
128,058
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
2,309,609
|
|
|
|
651,633
|
|
|
|
|
442,634
|
|
|
|
495,495
|
|
|
|
782,147
|
|
|
|
|
|
|
|
|
|
Long-term debt, less current
maturities (1)
|
|
|
1,679,219
|
|
|
|
|
|
|
|
|
162,185
|
|
|
|
40,000
|
|
|
|
47,500
|
|
|
|
|
|
|
|
|
|
Liabilities subject to
compromise (1)
|
|
|
|
|
|
|
2,096,280
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable preferred stock (1)
|
|
|
30,505
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity (deficit)
|
|
|
(94,264
|
)
|
|
|
(1,656,911
|
)
|
|
|
|
114,224
|
|
|
|
326,264
|
|
|
|
556,040
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
In accordance with AICPA Statement of
Position 90-7,
Financial Reporting by Entities in Reorganization under the
Bankruptcy Code
,
(SOP 90-7),
at December 2001, Arch classified substantially all of its
pre-petition liabilities and redeemable preferred stock as
Liabilities Subject to Compromise. See Note 2
to the Notes to Consolidated Financial Statements.
|
|
(2)
|
|
Depreciation amortization and accretion expense increased in
2001 primarily due to an impairment charge of
$976.2 million related to Archs long-lived assets.
|
|
|
ITEM 7.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
Restatement
for the Years Ending December 31, 2003 and 2004
The Company has filed this amendment to its Annual Report on
Form 10-K/A
for the year ended December 31, 2004. The purpose of this
amended filing is to restate financial statements and other
financial information for the periods 2002, 2003 and 2004 to
reflect certain adjustments. All amounts contained within
managements discussion and analysis have been corrected to
reflect the impact of the restatement. See Note 1 to the
Notes to Consolidated Financials Statements.
Operations
Merger
of Arch and Metrocall
We are a holding company formed to effect the merger of Arch and
Metrocall, which occurred on November 16, 2004. Prior to
the merger, we had not conducted any activities other than those
incidental to our formation. The following describes the
consideration issued in the merger:
|
|
|
|
|
We issued one share of our common stock for each outstanding
share of Arch common stock totaling approximately
19.6 million shares;
|
|
|
|
We paid $75 per share for two million Metrocall shares and
issued 1.876 shares of our common stock for each share of
the remaining Metrocall common shares totaling approximately
7.2 million new shares;
|
|
|
|
All options to purchase shares of Arch common stock and any
previously issued and outstanding restricted stock, that was not
repurchased, were exchanged for an equal number of options or
restricted shares of our common stock on the same terms and
restrictions previously applicable;
|
|
|
|
Holders of unexercised options to purchase Metrocall common
stock received options to purchase 1.876 shares of our
common stock per share at an exercise price equal to the
exercise price per share of Metrocall common stock divided by
1.876.
|
In order to consummate the merger, we borrowed
$140.0 million to fund a portion of the $150.0 million
cash consideration paid to holders of Metrocall common stock.
18
After the transactions were completed, former holders of Arch
common stock and options held approximately 72.5% of the fully
diluted shares of our common stock and holders of former
Metrocall common stock and options held 27.5% of our fully
diluted common stock. The merger was accounted for under the
purchase method of accounting pursuant to
SFAS No. 141,
Business Combinations
. Arch was
deemed the acquiring entity due primarily to its former
shareholders holding a majority of our common stock.
Accordingly, the basis of the Arch assets and liabilities were
reflected at their historical basis and amounts allocated to
Metrocalls assets and liabilities were based upon the
purchase price and the estimated fair values of such assets and
liabilities as of the merger date. Since Arch was deemed the
acquiring entity, Archs historical financial results prior
to the merger are reflected throughout this
Form 10-K/A.
Overview
We derive the majority of our 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 driven by 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 our
success retaining subscribers which is important in order to
maintain recurring revenues and to control operating expenses.
The following table sets forth our gross placements and
disconnects for the periods stated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
December 31,
|
|
|
|
|
|
|
2002(a)
|
|
|
2003(a)
|
|
|
2004(b)
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Placements
|
|
|
Disconnects
|
|
|
Placements
|
|
|
Disconnects
|
|
|
Placements
|
|
|
Disconnects
|
|
|
|
|
|
|
(Units in thousands)
|
|
|
|
|
|
Direct
|
|
|
907
|
|
|
|
2,327
|
|
|
|
584
|
|
|
|
1,223
|
|
|
|
540
|
|
|
|
1,179
|
|
|
|
|
|
Indirect
|
|
|
530
|
|
|
|
1,694
|
|
|
|
242
|
|
|
|
806
|
|
|
|
205
|
|
|
|
545
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,437
|
|
|
|
4,021
|
|
|
|
826
|
|
|
|
2,029
|
|
|
|
745
|
|
|
|
1,724
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Includes gross placements and disconnects of Arch only.
|
|
|
(b)
|
Includes gross placements and disconnects of Arch for the year
ended December 31, 2004 and Metrocall for the period
November 16, 2004 to December 31, 2004.
|
The demand for one-way messaging services declined during the
three years ended December 31, 2004, and we believe demand
will continue to decline for the foreseeable future. During
2002, units in service decreased by 2,860,000 units, of
which 2,584,000 were due to subscriber cancellations and 276,000
were due to the partial divestiture of Archs interest in
two Canadian subsidiaries, which resulted in the financial
results of these subsidiaries no longer being consolidated into
our financial statements commencing in December 2002. During
2003, units in service decreased by 1,452,000 units as a
result of operations. This decrease does not include the
addition of 249,000 units which resulted from the reversal
of the remaining portion of the one-time, 1,000,000 unit
reduction recorded in the fourth quarter of 2000 for
definitional differences and potential unit reductions
associated with the conversion and cleanup of accounts acquired
in the PageNet acquisition. Since Arch completed the conversion
and final review of these accounts, the remainder of this prior
unit reduction was recorded as a one-time increase in the fourth
quarter, which increased units in service at December 31,
2003.
During 2004, units in service increased 1,765,000 units due
to the addition of 2,744,000 units associated with the
Metrocall merger partially offset by the decrease of
979,000 units as a result of operations.
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 is dependent on the
subscribers service, extent of geographic
19
coverage, whether the subscriber leases or owns the messaging
device and the number of units the customer has on his or her
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, is a key revenue measurement as it indicates
whether monthly charges for similar services and distribution
channels are increasing or decreasing. Average revenue per unit
by distribution channel and messaging service are monitored
regularly. The following table sets forth our average revenue
per unit by distribution channel for the periods stated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
December 31,
|
|
|
|
2002(a)
|
|
|
2003(a)
|
|
|
2004(b)
|
|
|
Direct
|
|
$
|
11.73
|
|
|
$
|
11.50
|
|
|
$
|
10.17
|
|
Indirect
|
|
|
3.12
|
|
|
|
3.53
|
|
|
|
4.00
|
|
Consolidated
|
|
|
9.40
|
|
|
|
9.85
|
|
|
|
9.17
|
|
|
|
(a)
|
Includes average revenue per unit for Arch only.
|
|
|
(b)
|
Includes average revenue per unit for Arch for the year ended
December 31, 2004 and Metrocall for the period
November 16, 2004 to December 31, 2004.
|
While average revenue per unit 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, most notably the mix of units in service. Consolidated
average revenue per unit decreased $0.68 in 2004 from 2003. The
249,000 unit adjustment Arch made in the fourth quarter of
2003 contributed $0.45 of this decrease. The remainder of the
decrease was due primarily to the change in composition of our
customer base as the percentage of units in service attributable
to larger customers continues to increase. The decrease in
average revenue per unit in our direct distribution channel is
the most significant indicator of rate-related changes in our
revenues. We anticipate that average revenue per unit for our
direct units in service will decline in future periods and the
decline will be primarily due to the mix of messaging services
demanded by our customers, the percentage of customers with
fewer units in service and, to a lesser extent, changes in
monthly charges.
As discussed earlier, customers with more units in service
generally have lower monthly charges for similar services due to
volume discounts and historically have had lower disconnect
rates. Therefore, as the percentage of our direct units in
service becomes more concentrated with customers that have more
units in service, disconnect rates should decline and our
average revenue per unit may also decline as new placements may
generally have lower revenue per unit than units that disconnect.
Our revenues were $818.7 million, $597.5 million and
$490.2 million for the years ended December 31, 2002,
2003 and 2004, respectively. The 2004 revenue includes
$38.5 million of Metrocall revenue for the period from
November 16 to December 31, 2004. As noted above, the
demand for our messaging services has declined over this
three-year period and, as a result, operating expense management
and control are important to our financial results. Certain of
our operating expenses are especially important to overall
expense control; these operating expenses are categorized as
follows:
|
|
|
|
|
Service, rental and maintenance.
These are
expenses associated with the operation of our networks and the
provision of messaging services and consist largely of telephone
charges to deliver messages over our networks, lease payments
for transmitter locations and payroll expenses for our
engineering and pager repair functions.
|
|
|
|
Selling and marketing.
These are expenses
associated with our direct and indirect sales forces. This
classification consists primarily of salaries and commissions
related to our gross placements.
|
|
|
|
General and administrative.
These are expenses
associated with customer service, inventory management, billing,
collections, bad debts and other administrative functions.
|
We review 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 on a functional expense
20
basis. In 2004, we incurred approximately 74% of the three
expense categories listed above, in three functional expense
categories: payroll and related expenses, lease payments for
transmitter locations and telephone expense.
Payroll and related expenses include wages, commissions,
incentives, employee benefits and related taxes. We review the
number of employees in major functional categories such as
direct sales, customer service, collections and inventory on a
monthly basis. We also review the design and physical locations
of functional groups to continuously improve efficiency, to
simplify organizational structures and to minimize physical
locations.
Lease payments for transmitter locations are largely dependent
on our messaging networks. As described in Messaging
Networks and Licenses, we operate local, regional and
nationwide one and two-way messaging networks. These networks
each require locations on which to place transmitters, receivers
and antennae. Generally, lease payments are incurred for each
transmitter location. Therefore, lease payments for transmitter
locations are highly dependent on the number of transmitters,
which, in turn, is dependent on the number of networks. In
addition, these expenses generally do not vary directly with the
number of subscribers or units in service, which is detrimental
to our operating margin as revenues decline. In order to reduce
this expense, we have an active program to consolidate the
number of networks and thus transmitter locations, which we
refer to as network rationalization. In 2003 and 2004, we
removed 4,536 and 1,040 transmitters from various networks,
respectively. As previously discussed, we plan to remove
approximately 15% of our 18,718 transmitters in 2005 in
conjunction with our integration activities.
Telephone expenses are incurred to interconnect our messaging
networks and to provide telephone numbers for customer use,
points of contact for customer service and connectivity among
our offices. These expenses are dependent on the number of units
in service and the number of office and network locations we
maintain. 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 our call centers, though this is not
always a direct dependency. For example, the number or duration
of telephone calls to our call centers may vary from period to
period based on factors other than the number of units in
service, which could cause telephone expense to vary regardless
of the number of units in service. In addition, certain phone
numbers we provide to our customers may have a usage component
based on the number and duration of calls to the
subscribers messaging device. Therefore, based on the
factors discussed above, absent efforts that are underway to
review telephone circuit inventories and capacities and to
reduce the number of transmitter and office locations at which
we operate, telephone expenses do not necessarily vary in direct
relationship to units in service.
The total of our cost of products sold; service, rental and
maintenance; selling and marketing and general and
administrative expenses was $315.0 million (restated),
$407.5 million (restated) and $330.6 million
(restated) for the years ended December 31, 2002, 2003 and
2004, respectively. Since it is anticipated that demand for one
and two-way messaging will continue to decline, expense
reductions will continue to be necessary in order for us to
maintain operating margins at current levels.
Results
of Operations
As previously discussed, Arch and Metrocall merged on
November 16, 2004. The results of operations and cash flows
discussed below for 2004 include the operating results and cash
flows of Arch for the twelve months ended December 31, 2004
and Metrocall for the period November 16, 2004 to
December 31, 2004. For periods prior to 2004, the operating
results and cash flows of Arch or its predecessor company are
presented. In addition, the results of operations discussed
below also include certain adjustments associated with the
Companys restatement, which are described in detail in
Note 1 of the Notes to Consolidated Financial Statements.
21
Comparison
of the Results of Operations for the Years Ended
December 31, 2004 and 2003
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
December 31,
|
|
|
|
|
|
|
|
|
|
2003
|
|
|
2004
|
|
|
Change Between
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
2003 and 2004
|
|
|
|
Amount
|
|
|
Revenue
|
|
|
Amount
|
|
|
Revenue
|
|
|
Amount
|
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%
|
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|
(Amounts in thousands)
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|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Service, rental &
maintenance
|
|
$
|
571,989
|
|
|
|
95.7
|
%
|
|
$
|
470,751
|
|
|
|
96.0
|
%
|
|
$
|
(101,238
|
)
|
|
|
(17.7
|
)%
|
Product sales
|
|
|
25,489
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|
|
|
4.3
|
|
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|
19,409
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|
|
|
4.0
|
|
|
|
(6,080
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)
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(23.9
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)
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|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
597,478
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|
|
|
100.0
|
|
|
|
490,160
|
|
|
|
100.0
|
|
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|
(107,318
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)
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(18.0
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)
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|
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Selected operating expenses:
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|
|
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|
Cost of products sold
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|
$
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5,580
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|
|
|
0.9
|
|
|
$
|
4,347
|
|
|
|
0.9
|
|
|
$
|
(1,233
|
)
|
|
|
(22.1
|
)
|
Service, rental &
maintenance (restated)
|
|
|
189,290
|
|
|
|
31.7
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|
|
|
160,144
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|
|
|
32.7
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|
|
|
(29,146
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)
|
|
|
(15.4
|
)
|
Selling and marketing
|
|
|
45,639
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|
|
|
7.6
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|
|
|
36,085
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|
|
|
7.4
|
|
|
|
(9,554
|
)
|
|
|
(20.9
|
)
|
General and administrative
(restated)
|
|
|
166,948
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|
|
|
27.9
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|
|
|
130,046
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|
|
|
26.5
|
|
|
|
(36,902
|
)
|
|
|
(22.1
|
)
|
Revenues
Service, rental and maintenance revenues consist primarily of
recurring fees associated with the provision of messaging
services and rental of leased units. Product sales consist
largely of revenues associated with the sale of devices and
charges for leased devices that are not returned. We do not
differentiate between service and rental revenues. The decrease
in total revenues consisted of a $137.5 million decrease in
recurring fees associated with the provision of messaging
services and a $8.3 million decrease in revenues from
device transactions related to the operations of Arch partially
offset by recurring fees associated with the provision of
messaging services of $36.3 million and revenues from
device and other sales transactions of $2.2 million related
to the operations of Metrocall from November 16, 2004 to
December 31, 2004. The table below sets forth units in
service and recurring fees, the changes in each between 2003 and
2004 and the change in revenue associated with differences in
the numbers of units in service and the average revenue per
unit, known as ARPU.
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|
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|
|
|
|
|
|
|
|
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|
|
|
Units in Service
|
|
|
Revenue
|
|
|
Change
|
|
|
|
2003
|
|
|
2004
|
|
|
Change
|
|
|
2003
|
|
|
2004
|
|
|
Due to ARPU
|
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|
Due to Units
|
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|
One-way messaging
|
|
|
4,147
|
|
|
|
5,673
|
|
|
|
1,526
|
|
|
$
|
468,954
|
|
|
$
|
380,311
|
|
|
$
|
(22,098
|
)
|
|
$
|
(66,545
|
)
|
Two-way messaging
|
|
|
290
|
|
|
|
529
|
|
|
|
239
|
|
|
|
103,035
|
|
|
|
90,440
|
|
|
|
(6,703
|
)
|
|
|
(5,892
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
4,437
|
|
|
|
6,202
|
|
|
|
1,765
|
|
|
$
|
571,989
|
|
|
$
|
470,751
|
|
|
$
|
(28,801
|
)
|
|
$
|
(72,437
|
)
|
|
|
|
|
|
|
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|
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|
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|
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|
As previously discussed, demand for messaging services has
declined over the past several years and we anticipate that it
will continue to decline for the foreseeable future, which will
result in reductions in recurring fees due to the lower volume
of subscribers. Although we are focused on customer retention,
we cannot provide assurance that we will be able to slow the
rate of revenue erosion experienced by Arch or Metrocall in past
periods.
Operating
Expenses
Cost of Products Sold.
Cost of products sold
consists primarily of the cost basis of devices sold to or lost
by our customers. The $1.2 million decrease in 2004 was due
primarily to lower numbers of device transactions due to lower
units in service in 2004; partially offset by $938,000 of costs
of products sold related to Metrocall operations.
22
Service, Rental and Maintenance.
Service,
rental and maintenance expenses consist primarily of the
following significant items:
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|
For the Year Ended
December 31,
|
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|
|
|
|
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|
|
|
2003
|
|
|
2004
|
|
|
Change Between
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
2003 and 2004
|
|
|
|
Amount
|
|
|
Revenue
|
|
|
Amount
|
|
|
Revenue
|
|
|
Amount
|
|
|
%
|
|
|
|
(Dollars in thousands)
|
|
|
Lease payments for transmitter
locations
|
|
$
|
101,150
|
|
|
|
16.9
|
%
|
|
$
|
85,530
|
|
|
|
17.4
|
%
|
|
$
|
(15,620
|
)
|
|
|
(15.4
|
)%
|
Telephone related expenses
|
|
|
36,708
|
|
|
|
6.1
|
|
|
|
28,587
|
|
|
|
5.8
|
|
|
|
(8,121
|
)
|
|
|
(22.1
|
)
|
Payroll and related expenses
|
|
|
30,350
|
|
|
|
5.1
|
|
|
|
26,415
|
|
|
|
5.4
|
|
|
|
(3,935
|
)
|
|
|
(13.0
|
)
|
Fees paid to other network
providers
|
|
|
2,585
|
|
|
|
0.4
|
|
|
|
2,196
|
|
|
|
0.4
|
|
|
|
(389
|
)
|
|
|
(15.0
|
)
|
Operator dispatch fees
|
|
|
4,434
|
|
|
|
0.7
|
|
|
|
3,481
|
|
|
|
0.7
|
|
|
|
(953
|
)
|
|
|
(21.5
|
)
|
Other (restated)
|
|
|
14,063
|
|
|
|
2.4
|
|
|
|
13,935
|
|
|
|
2.8
|
|
|
|
(128
|
)
|
|
|
(0.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
189,290
|
|
|
|
31.7
|
%
|
|
$
|
160,144
|
|
|
|
32.7
|
%
|
|
$
|
29,146
|
|
|
|
(15.4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As illustrated in the table above, service, rental and
maintenance expenses decreased $29.1 million or 15.4% from
2003, however the percentage of these costs to revenues
increased as our revenue decreased 18.0%. Following is a
discussion of each significant item listed above:
|
|
|
|
|
The decrease in lease payments for transmitter locations
consists of a decrease of $21.8 million partially offset by
$6.2 million of lease expenses from Metrocall operations.
As discussed earlier, we have reduced the number of transmitters
in service in conjunction with network consolidation plans.
However, lease payments are subject to underlying obligations
contained in each lease agreement, some of which do not allow
for immediate savings when our equipment is removed. Further,
leases may consist of payments for multiple sets of
transmitters, antenna structures or network infrastructures on a
particular site. In some cases, we remove only a portion of the
equipment to which the lease payment relates. Under these
circumstances, reduction of future rent payments is often
subject to negotiation and our success is dependent on many
factors, including the number of other sites we lease from the
lessor, the amount and location of equipment remaining at the
site and the remaining term of the lease. Therefore, lease
payments for transmitter locations are generally fixed in the
short term, and as a result, to date, we have not been able to
reduce these payments at the same rate as the rate of decline in
units in service and revenues, resulting in an increase in these
expenses as a percentage of revenues.
|
|
|
|
The decrease in telephone expenses reflected a decrease of
$10.0 million partially offset by $1.9 million of
telephone expenses associated with Metrocall operations. The
decrease related to Arch operations was related to the
consolidation of network facilities, lower usage-based charges
due to declining units in service and rationalization of
telephone trunk capacities. The decrease in fees paid to other
network providers was due primarily to our efforts to migrate
customers from other network providers to our networks and, to a
lesser extent, lower units in service. The decrease in operator
dispatch fees was due primarily to lower units in service and,
to a lesser extent, the utilization of other means to contact
alphanumeric subscribers, such as the Internet.
|
|
|
|
Service, rental and maintenance payroll consist largely of field
technicians and their managers. This functional work group does
not vary as closely to direct units in service as other work
groups since these individuals are a function of the number of
networks we operate rather than the number of units in service
on our networks. Payroll for this category decreased
$5.8 million due primarily to 65 fewer employees in 2004
and lower overtime due to less network consolidation activity in
2004, partially offset by $1.9 million from Metrocall
operations.
|
|
|
|
Other expenses include a decrease of $2.5 million in 2003
and a decrease of $0.5 million in 2004 due to a gain on
deconstructing transmitters at a cost less than the estimated
fair value of the related asset retirement obligation liability.
|
Selling and Marketing.
Selling and marketing
expenses consist primarily of payroll and related expense.
Selling and marketing payroll and related expenses decreased
$9.6 million or 20.9% over 2003. This decrease was
23
due primarily to a decrease in the number of sales
representatives and sales management which resulted from our
continuing efforts to maintain or improve sales force
productivity throughout the year, and staffing reductions
completed after the merger closing.
General and Administrative Expenses.
General
and administrative expenses consist of the following significant
items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
December 31,
|
|
|
|
|
|
|
|
|
|
2003
|
|
|
2004
|
|
|
Change Between
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
2003 and 2004
|
|
|
|
Amount
|
|
|
Revenue
|
|
|
Amount
|
|
|
Revenue
|
|
|
Amount
|
|
|
%
|
|
|
|
(Dollars in thousands)
|
|
|
Payroll and related expenses
|
|
$
|
81,518
|
|
|
|
13.6
|
%
|
|
$
|
56,132
|
|
|
|
11.5
|
%
|
|
$
|
(25,386
|
)
|
|
|
(31.1
|
)%
|
Bad debt
|
|
|
8,247
|
|
|
|
1.4
|
|
|
|
3,789
|
|
|
|
0.8
|
|
|
|
(4,458
|
)
|
|
|
(54.1
|
)
|
Facility expenses
|
|
|
17,529
|
|
|
|
2.9
|
|
|
|
15,873
|
|
|
|
3.2
|
|
|
|
(1,656
|
)
|
|
|
(9.4
|
)
|
Telephone
|
|
|
10,076
|
|
|
|
1.7
|
|
|
|
7,065
|
|
|
|
1.4
|
|
|
|
(3,011
|
)
|
|
|
(29.9
|
)
|
Outside services
|
|
|
13,642
|
|
|
|
2.3
|
|
|
|
14,316
|
|
|
|
2.9
|
|
|
|
674
|
|
|
|
4.9
|
|
Taxes and permits (restated)
|
|
|
9,595
|
|
|
|
1.6
|
|
|
|
12,716
|
|
|
|
2.6
|
|
|
|
3,121
|
|
|
|
32.5
|
|
Other
|
|
|
26,341
|
|
|
|
4.4
|
|
|
|
20,155
|
|
|
|
4.1
|
|
|
|
(6,186
|
)
|
|
|
(23.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
166,948
|
|
|
|
27.9
|
%
|
|
$
|
130,046
|
|
|
|
26.5
|
%
|
|
$
|
(36,902
|
)
|
|
|
(22.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As illustrated in the table above, general and administrative
expenses decreased $36.9 million from the year ended
December 31, 2003 and the percentage of these costs to
revenue also decreased, primarily due to lower payroll and
related expenses and bad debt expense. Following is a discussion
of each significant item listed above:
|
|
|
|
|
General and administrative payroll and related expenses include
employees in customer service, inventory, collections, finance
and other administrative functions as well as executive
management. Certain of these functions vary with direct units in
service and therefore we anticipate staffing reductions over the
next several quarters in conjunction with the integration of
Arch and Metrocall. The decrease in this category was primarily
due to lower average number of employees. In addition, bonus
expense was $7.9 million less due to changes in the 2004
bonus plan and a lower number of participants in the current
year.
|
|
|
|
The decrease in bad debt expenses reflected a decrease of
$5.3 million related partially offset by $818,000 related
to Metrocall operations. The decrease in bad debt expense was
due to improved collections and lower levels of overall accounts
receivable, which resulted from decreases in revenues as
described above.
|
|
|
|
The decrease in telephone expenses consists of a
$3.7 million decrease partially offset by $678,000 related
to Metrocall operations. The decrease in telephone expenses was
due primarily to fewer calls to call centers due to fewer units
in service and the reduction of physical locations at which we
operated.
|
|
|
|
Outside services consists primarily of costs associated with
printing and mailing invoices, outsourced customer service,
temporary help and various professional fees. The increase in
2004 was due primarily to higher outsourced customer service of
$2.1 million as we moved additional smaller accounts to our
third-party provider during 2004 and professional fees of
$1.0 million associated with the documentation and testing
requirements of section 404 of the Sarbanes-Oxley Act of
2002 and the additional audit work required due to the merger.
These increases were partially offset by lower billing costs of
$889,000 due to fewer customers.
|
|
|
|
Taxes and permits increased by $0.8 million and
$0.7 million for 2003 and 2004, respectively, as a result
of the restatement described in Note 1 of the Notes to
Consolidated Financial Statements. Taxes and permits consist
primarily of property, franchise and gross receipts taxes. The
change from 2003 to 2004 consists primarily of expenses of
$1.8 million related to Metrocall operations, and an
increase of $1.3 million due primarily to gross receipts
taxes enacted in several jurisdictions in 2004.
|
|
|
|
Other expenses consist primarily of postage and express mail
costs associated with the shipping and receipt of messaging
devices, repairs and maintenance associated with computer
hardware and software, insurance
|
24
|
|
|
|
|
and bank fees associated with lockbox and other activities. The
largest components of the reduction in other expense in 2004
related to insurance of $2.2 million and express mail and
supply costs of $2.4 million. The reduction related to
insurance expense was due primarily to lower premiums in the
current year. The reduction in express mail and supplies was due
to fewer shipments of messaging devices as a result of lower
numbers of units in service.
|
Depreciation, Amortization and
Accretion.
Depreciation, amortization and
accretion expense for 2004 includes $7.2 million decrease
in expense associated with this restatement. See Note 1 of
the Notes to Consolidated Financial Statements for further
information. Depreciation, amortization and accretion expense
decreased to $107.6 million (restated) for the year ended
December 31, 2004 from $129.7 million (restated) for
the same period in 2003. The decrease in depreciation,
amortization and accretion expense of $22.1 million between
2003 and 2004 primarily consisted of the following: (a) a
reduction of $11.0 million due to fully depreciated paging
infrastructure assets, (b) a reduction of $0.7 million
due to the change in the expected useful life of the Arch paging
infrastructure, (c) an increase of $1.9 million due to
addition of Metrocalls paging infrastructure as of
November 16, 2004, (d) an $11.4 million reduction
in depreciation expense primarily due to lower paging device
depreciation reselling from reduced subscriptions, and
(e) a $0.7 million reduction in accretion expense due
to the change in network timing of the expected deconstruction
of the combined paging network infrastructure.
Stock Based Compensation.
Stock-based
compensation decreased to $4.9 million for the year ended
December 31, 2004 from $6.2 million for the same
period in 2003. The decrease is primarily the result of lower
compensation costs associated with the long-term management
incentive plan and lower compensation expense associated with
common stock and options to purchase common stock previously
issued to management and the board of directors. The decrease in
compensation cost related to restricted stock was due largely to
the repurchase of restricted stock previously issued to certain
members of management in conjunction with their termination.
Severance and Restructuring.
Severance
expenses decreased from $16.7 million in 2003 to
$11.9 million in 2004 primarily because of staff reductions
undertaken by Arch in conjunction with its merger with
Metrocall. Restructuring charges of $11.5 million and
$3.0 million for 2003 and 2004, respectively, relate to
certain lease agreements for transmitter locations. Under the
terms of these agreements, we are required to pay minimum
amounts for a designated number of transmitter locations.
However, we determined the designated number of transmitter
locations were in excess of current and anticipated needs and we
ceased to use these locations. The remaining balance of this
reserve for lease obligation costs of $3.5 million will be
paid over the next two quarters.
Interest Expense.
Interest expense decreased
to $6.4 million for the year ended December 31, 2004
from $19.8 million for the same period in 2003. This
decrease was due to the repayment of Archs 12% notes
on May 28, 2004 partially offset by $1.2 million of
expense associated with the $140.0 million of debt incurred
to partially fund the cash election to former Metrocall
shareholders in accordance with the terms of the merger
agreement. On December 20, 2004, we repaid
$45.0 million of the $140.0 million and have made
additional principal payments subsequent to December 31,
2004 of $28.5 million through March 1, 2005.
Income Tax Expense.
For the years ended
December 31, 2003 and December 31, 2004, the Company
recognized an income tax provision of $5.3 million
(restated) and $16.8 million (restated), respectively. As
described in Note 1 of the Notes to Consolidated Financial
Statements, these provisions were restated to include
adjustments to state NOLs, a change in the expected applicable
tax rate, the correction of errors made concerning the tax basis
of depreciable and amortizable assets some of which were subject
to limitations imposed by the IRC, and other miscellaneous
adjustments. See Note 7 of the Notes to Consolidated
Financial Statements for a detailed discussion of the provision
calculations and the associated applicable tax rates. We
anticipate recognition of provisions for income taxes to be
required for the foreseeable future.
Comparison
of the Results of Operations for the Years Ended
December 31, 2002 and 2003
On May 29, 2002, Arch emerged from proceedings under
Chapter 11 of the bankruptcy code. Pursuant to its plan of
reorganization, all of Archs former equity securities were
cancelled and the holders of approximately $1.8 billion of
its former indebtedness received securities which represented
substantially all of its consolidated capitalization, consisting
of $200 million aggregate principal amount of
10% senior subordinated secured notes (which was fully
repaid by Arch by September 30, 2003), $100 million
aggregate principal amount of
25
12% subordinated secured compounding notes (which was fully
repaid by Arch by May 28, 2004) and approximately 95%
of new Arch common stock.
For financial statement purposes, Archs results of
operations and cash flows have been separated as pre- and
post-May 31, 2002 due to a change in basis of accounting in
the underlying assets and liabilities. See Note 2 of Notes
to Consolidated Financial Statements. For purposes of the
following discussion we refer to Archs results prior to
May 31, 2002 as results for Archs predecessor company
and we refer to Archs results after May 31, 2002 as
results for Archs reorganized company. The results of the
reorganized company and the predecessor company for the two
years ended December 31, 2003 are discussed below. However,
for the reasons described in Note 2 and due to other
non-recurring adjustments, certain aspects of the predecessor
company financial statements for the periods before Arch emerged
from bankruptcy are not comparable to the reorganized
companys financial statements. The following items are
particularly noteworthy:
|
|
|
|
|
a gain of $1.6 billion was recognized in May 2002 from the
discharge and termination of debt upon emergence from bankruptcy;
|
|
|
|
a gain of $47.9 million was recognized in May 2002 due to
fresh start accounting adjustments;
|
|
|
|
reorganization expenses of $22.5 million and
$2.8 million were recognized in the five months ended
May 31, 2002 and the seven months ended December 31,
2002, respectively, and;
|
|
|
|
Arch did not accrue $76.0 million of contractual interest
while it operated in bankruptcy for the five months ended
May 31, 2002.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended,
|
|
|
|
|
|
|
|
|
|
2002
|
|
|
2003
|
|
|
Change Between
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
2002 and 2003
|
|
|
|
Amount
|
|
|
Revenue
|
|
|
Amount
|
|
|
Revenue
|
|
|
Amount
|
|
|
%
|
|
|
|
Restated
|
|
|
Restated
|
|
|
|
|
|
|
|
|
|
(Amounts in thousands)
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service, rental &
maintenance
|
|
$
|
784,166
|
|
|
|
95.8
|
%
|
|
$
|
571,989
|
|
|
|
95.7
|
%
|
|
$
|
(212,178
|
)
|
|
|
(27.0
|
)%
|
Product sales
|
|
|
34,563
|
|
|
|
4.2
|
|
|
|
25,489
|
|
|
|
4.3
|
|
|
|
(9,073
|
)
|
|
|
(26.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
818,729
|
|
|
|
100.0
|
|
|
$
|
597,478
|
|
|
|
100.0
|
|
|
$
|
(221,251
|
)
|
|
|
(27.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of products sold
|
|
$
|
18,166
|
|
|
|
2.2
|
|
|
$
|
5,580
|
|
|
|
0.9
|
|
|
$
|
(12,586
|
)
|
|
|
(69.3
|
)
|
Service, rental &
maintenance (restated)
|
|
|
238,601
|
|
|
|
29.1
|
|
|
|
189,290
|
|
|
|
31.7
|
|
|
|
(49,311
|
)
|
|
|
(20.7
|
)
|
Selling and marketing
|
|
|
73,210
|
|
|
|
8.9
|
|
|
|
45,639
|
|
|
|
7.6
|
|
|
|
(27,571
|
)
|
|
|
(37.7
|
)
|
General and administrative
(restated)
|
|
|
253,461
|
|
|
|
31.0
|
|
|
|
166,948
|
|
|
|
27.9
|
|
|
|
(86,513
|
)
|
|
|
(34.1
|
)
|
Revenues
Service, rental and maintenance revenues consist primarily of
recurring fees associated with the provision of messaging
services and rental of leased units. Product sales consist
largely of revenues associated with the sale of devices and
charges for leased devices that are not returned. Device sales
represented less than 10% of total revenues for the years ended
December 31, 2002 and 2003. The decrease in revenues
consisted of a $212.2 million decrease in recurring fees
associated with the provision of messaging services and a
$9.1 million decrease in revenues from device transactions.
The table below sets forth units in service and recurring fees,
the changes in each
26
between 2002 and 2003 and the change in revenue associated with
differences in the numbers of units in service and the average
revenue per unit, known as ARPU.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
Units in Service
|
|
|
|
|
|
|
|
|
|
|
|
Change due
|
|
|
Change due
|
|
|
|
2002
|
|
|
2003
|
|
|
Change
|
|
|
2002
|
|
|
2003
|
|
|
Change
|
|
|
to ARPU
|
|
|
to Units
|
|
|
One-way messaging
|
|
|
5,288
|
|
|
|
4,147
|
|
|
|
(1,141
|
)
|
|
$
|
660,694
|
|
|
$
|
468,954
|
|
|
$
|
(191,740
|
)
|
|
$
|
5,774
|
|
|
$
|
(197,514
|
)
|
Two-way messaging
|
|
|
352
|
|
|
|
290
|
|
|
|
(62
|
)
|
|
|
123,472
|
|
|
|
103,035
|
|
|
|
(20,437
|
)
|
|
|
(14,065
|
)
|
|
|
(6,372
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
5,640
|
|
|
|
4,437
|
|
|
|
(1,203
|
)
|
|
$
|
784,166
|
|
|
$
|
571,989
|
|
|
$
|
(212,177
|
)
|
|
$
|
(8,291
|
)
|
|
$
|
(203,886
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses
Cost of Products Sold.
Cost of products sold
consists of the cost basis of devices sold to or lost by our
customers. The $12.6 million decrease in this expense in
2003 was due to the revaluation of device basis that occurred
upon Archs emergence from Chapter 11 in May 2002 and
to lower numbers of device transactions due to fewer units in
service in 2003.
Service, Rental and Maintenance.
Service,
rental and maintenance expenses consisted primarily of the
following significant items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended,
|
|
|
|
|
|
|
|
|
|
2002
|
|
|
2003
|
|
|
Change Between
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
2002 and 2003
|
|
|
|
Amount
|
|
|
Revenue
|
|
|
Amount
|
|
|
Revenue
|
|
|
Amount
|
|
|
%
|
|
|
Lease payments for transmitter
locations
|
|
$
|
115,910
|
|
|
|
14.2
|
%
|
|
$
|
101,150
|
|
|
|
16.9
|
%
|
|
$
|
(14,760
|
)
|
|
|
(12.7
|
)%
|
Telephone related expenses
|
|
|
55,181
|
|
|
|
6.7
|
|
|
|
36,708
|
|
|
|
6.2
|
|
|
|
(18,473
|
)
|
|
|
(33.5
|
)
|
Payroll and related expenses
|
|
|
37,088
|
|
|
|
4.5
|
|
|
|
30,350
|
|
|
|
5.1
|
|
|
|
(6,738
|
)
|
|
|
(18.2
|
)
|
Fees paid to other network
providers
|
|
|
7,672
|
|
|
|
0.9
|
|
|
|
2,585
|
|
|
|
0.4
|
|
|
|
(5,087
|
)
|
|
|
(66.3
|
)
|
Operator dispatch fees
|
|
|
5,751
|
|
|
|
0.7
|
|
|
|
4,434
|
|
|
|
0.7
|
|
|
|
(1,317
|
)
|
|
|
(22.9
|
)
|
Other (restated)
|
|
|
16,999
|
|
|
|
2.1
|
|
|
|
14,063
|
|
|
|
2.4
|
|
|
|
(2,936
|
)
|
|
|
(17.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
238,601
|
|
|
|
29.1
|
%
|
|
$
|
189,290
|
|
|
|
31.7
|
%
|
|
$
|
(49,311
|
)
|
|
|
(20.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As illustrated in the table above, service, rental and
maintenance expenses decreased $49.3 million from 2002 to
2003, however the percentage of these costs to revenues
increased, primarily due to lease payments for transmitter
locations. As discussed earlier, Arch reduced the number of
transmitters in service in conjunction with its network
consolidation plans. Following is a discussion of each
significant item listed above:
|
|
|
|
|
The decrease in telephone expenses resulted from savings
associated with the consolidation of network facilities, lower
usage-based charges due to declining units in service and
rationalization of telephone trunk capacities.
|
|
|
|
The decrease in fees paid to other network providers was due
primarily to Archs efforts to migrate customers from other
network providers to its networks and, to a lesser extent, lower
units in service.
|
|
|
|
The decrease in operator dispatch fees was due primarily to
lower units in service and, to a lesser extent, the utilization
of other means to contact alphanumeric subscribers, such as the
Internet.
|
|
|
|
Service, rental and maintenance payroll and related expenses
consist largely of field technicians and their managers. This
functional work group does not vary as closely to direct units
in service as other work groups since these individuals are a
function of the number of networks Arch operates rather than the
number of units in service on the networks. In 2003, Arch
maintained higher staffing levels as they removed
4,536 transmitters in conjunction with its network
consolidation efforts.
|
Selling and Marketing.
Selling and marketing
consists primarily of payroll and related expenses. The decrease
in selling and marketing payroll expenses was due primarily to a
decrease in the number of sales
27
representatives and sales management which resulted from
Archs continuing efforts to maintain or improve sales
force productivity.
General and Administrative.
General and
administrative expenses consist of the following significant
items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended,
|
|
|
Change Between
|
|
|
|
2002
|
|
|
2003
|
|
|
2002 and 2003
|
|
|
|
Amount
|
|
|
% of Revenue
|
|
|
Amount
|
|
|
% of Revenue
|
|
|
Amount
|
|
|
%
|
|
|
Payroll and related expenses
|
|
$
|
123,272
|
|
|
|
15.1
|
%
|
|
$
|
81,518
|
|
|
|
13.6
|
%
|
|
$
|
(41,754
|
)
|
|
|
(33.9
|
)%
|
Bad debt
|
|
|
35,256
|
|
|
|
4.3
|
|
|
|
8,247
|
|
|
|
1.4
|
|
|
|
(27,009
|
)
|
|
|
(76.6
|
)
|
Facility expenses
|
|
|
21,711
|
|
|
|
2.7
|
|
|
|
17,529
|
|
|
|
2.9
|
|
|
|
(4,182
|
)
|
|
|
(19.3
|
)
|
Telephone
|
|
|
15,385
|
|
|
|
1.9
|
|
|
|
10,076
|
|
|
|
1.7
|
|
|
|
(5,309
|
)
|
|
|
(34.5
|
)
|
Outside services
|
|
|
14,455
|
|
|
|
1.8
|
|
|
|
13,642
|
|
|
|
2.3
|
|
|
|
(813
|
)
|
|
|
(5.6
|
)
|
Taxes and permits (restated)
|
|
|
6,540
|
|
|
|
0.8
|
|
|
|
9,595
|
|
|
|
1.6
|
|
|
|
3,055
|
|
|
|
46.7
|
|
Other
|
|
|
36,842
|
|
|
|
4.4
|
|
|
|
26,341
|
|
|
|
4.4
|
|
|
|
(10,501
|
)
|
|
|
(28.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
253,461
|
|
|
|
31.0
|
%
|
|
$
|
166,948
|
|
|
|
27.9
|
%
|
|
$
|
(86,513
|
)
|
|
|
(34.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As illustrated in the table above, general and administrative
expenses decreased $86.5 million from the year ended
December 31, 2002 and the percentage of these costs to
revenue also decreased, primarily due to lower payroll and
related expenses and bad debt expense. Following is a discussion
of each significant item listed above:
|
|
|
|
|
The decrease in payroll and related expenses was due to a lower
number of employees in this category at December 31, 2003.
In particular, the 1,141 fewer employees was due primarily
to the improvement in the ratio of direct units in service per
employee, in various work groups, such as customer service,
collections and inventory.
|
|
|
|
The decrease in bad debt expense was due to improved collections
and lower levels of overall accounts receivable, which resulted
from decreases in revenues as described above.
|
|
|
|
The $4.2 million decrease in facilities expense was due to
the closure of various office facilities in conjunction with
Archs efforts to reduce the number of physical locations
at which it operated.
|
|
|
|
The decrease in telephone expense was due primarily to fewer
calls to Archs call centers due to less units in service
and the reduction of physical locations at which it operated.
|
|
|
|
Taxes and permits is mostly represented by property, franchise
and gross receipts taxes. The increase in 2003 was due primarily
to Archs 2002 operating expenses including approximately
$14.9 million of items that either did not recur or
occurred at lower rates in 2003. During the fourth quarter of
2003, Arch reduced its estimates for future sales and property
tax liabilities by $1.1 million and $2.0 million,
respectively, which resulted in lower taxes and permits expense
for the quarterly and annual results. In addition, taxes and
permits increased by $0.8 million in 2003 and by
$0.5 million in 2002 as a result of the restatement
described in Note 1 to the Notes to Consolidated Financial
Statements. These restated amounts reduced the net change in
general and administrative expenses from year to year from
$86.8 million before the restatement to $86.5 million
as shown above.
|
Depreciation, Amortization and
Accretion.
Depreciation, amortization and
accretion expense for 2003 includes $10.4 million increase
in expense associated with this restatement. See Note 1 of
the Notes to Consolidated Financial Statements for further
information. Depreciation, amortization and accretion expense
decreased to $129.7 million for the year ended
December 31, 2003 from $192.9 million for the same
period in 2002. This decrease was due primarily to the change in
fixed asset values recorded in fresh-start accounting and
certain assets becoming fully depreciated. At fresh-start
messaging devices were recorded with various estimated useful
lives and in November 2002 and May 2003, two of these layers
became fully-depreciated resulting in a reduction in
depreciation expense of approximately $21.3 million in
2003. In addition to this decrease, 2003 depreciation expense
was $12.1 million lower than 2002 due to the effect of a
change in estimated useful lives of certain one-way transmission
equipment recorded in 2002. The remaining decrease was due to
the reduction in gross depreciable bases, which occurred upon
fresh-start accounting, and lower amounts of capital
expenditures. In addition, changes
28
in accounting for the ARO associated with this restatement
resulted in an increase in depreciation, amortization and
accretion expense of $4.1 million.
Stock Based Compensation.
Stock-based and
other compensation decreased to $6.2 million for the year
ended December 31, 2003 from $7.0 million for the same
period in 2002. The decrease is primarily the result of lower
compensation costs associated with the long-term management
incentive plan and lower compensation expense associated with
common stock and options to purchase common stock previously
issued to management and the board of directors.
Severance and Restructuring.
In the year ended
December 31, 2003 we recorded severance and restructuring
costs of $16.7 million, of which $11.5 million is
related to certain lease agreements for transmitter locations.
Under the terms of these agreements, we are required to pay
minimum amounts for a designated number of transmitter
locations. However, we determined the designated number of
transmitter locations was in excess of our current and
anticipated needs and we ceased to use the locations. The
remaining balance of the transmitter lease reserve of
$3.5 million will be paid over the next two quarters.
Severance and restructuring costs also consist of
$5.2 million of severance charges resulting from staff
reductions as the Company continued to match its employee levels
to operational requirements.
Interest Expense.
Interest expense decreased
to $19.8 million for the year ended December 31, 2003
from $20.9 million for the same period in 2002. Due to
Archs filing for protection under Chapter 11, it did
not record interest expense on its debt from December 6,
2001 through May 31, 2002. Contractual interest that was
neither accrued nor recorded on debt incurred by Arch before its
emergence from bankruptcy was $76.0 million for the five
months ended May 31, 2002. During the year ended
December 31, 2003, Arch completed the redemption of its
10% notes and entered into several transactions to reduce
the balance of its 12% notes, including:
|
|
|
|
|
in October 2003, the repurchase and retirement of notes with
$22.4 million aggregate compounded value,
|
|
|
|
the mandatory redemption of $2.7 million compounded value
on November 15, 2003,
|
|
|
|
the optional redemption of $11.8 million and
$15 million compounded value on November 20 and
December 31, 2003, respectively,
|
|
|
|
the announcement on December 31, 2003 of the optional
redemption of $10 million compounded value which was made
on January 30, 2004, and
|
|
|
|
subsequent to December 31, 2003, announced the optional
redemption of an additional $10 million compounded value to
be made in March 2004.
|
The completion of the repayment of its 10% notes and the
transactions described above resulted in lower average debt
during 2003.
Reorganization Items.
Reorganization items
were $25.3 million and $0.4 million for the years
ended December 31, 2002 and 2003, respectively. These
expenses consisted of professional and other fees associated
with Archs bankruptcy proceedings. Arch did not incur
significant reorganization items in the year ended
December 31, 2003 due to its emergence from Chapter 11
in May 2002.
Income Tax Expense.
For the year ended
December 31, 2003, the Company recognized a
$5.3 million (restated) income tax provision. As noted in
this restatement, this provision includes adjustments to state
NOLs and depreciable & amortizable asset bases, some of
which are subject to federal limitations. Note 7 of the
Notes to Consolidated Financial Statements includes a detailed
discussion of the provision calculation and the expected
applicable tax rate. The income tax provision for the period
ended December 31, 2002, was $2.3 million.
Liquidity
and Capital Resources
Overview
Based on current and anticipated levels of operations, we
anticipate net cash provided by operating activities, together
with $47.0 million of cash on hand at December 31,
2004, will be adequate to meet our anticipated cash requirements
for the foreseeable future.
29
In the event that net cash provided by operating activities and
cash on hand is not sufficient to meet future cash requirements,
we may be required to reduce planned capital expenditures, sell
assets or seek additional financing. We can provide no assurance
that reductions in planned capital expenditures or proceeds from
asset sales would be sufficient to cover shortfalls in available
cash or that additional financing would be available on
acceptable terms.
Sources
of Funds
Our principal sources of cash are net cash provided by operating
activities plus cash on hand.
CASH
FLOWS
Our net cash flows from operating, investing and financing
activities for the periods indicated in the table below were as
follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
|
(Dollars in millions)
|
|
|
Net cash provided by operating
activities
|
|
$
|
206.7
|
|
|
$
|
181.2
|
|
|
$
|
114.3
|
|
Net cash (used in) provided by
investing activities
|
|
$
|
(85.7
|
)
|
|
$
|
(22.0
|
)
|
|
$
|
(133.7
|
)
|
Net cash provided by/ (used in)
financing activities
|
|
$
|
(156.0
|
)
|
|
$
|
(161.9
|
)
|
|
$
|
31.9
|
|
Net Cash Provided by Operating Activities.
As
discussed above, we are dependent on cash flows from operating
activities to meet our cash requirements. Cash from operating
activities varies depending on changes in various working
capital items including deferred revenues, accounts payable,
accounts receivable, prepaid expenses and various accrued
expenses. The following table includes the significant cash
receipt and expenditure components of our cash flows from
operating activities for the periods indicated and sets forth
the change between the indicated periods (in thousands):
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|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
|
|
|
2003
|
|
|
2004
|
|
|
Increase (Decrease)
|
|
|
Cash received from customers
|
|
$
|
606,174
|
|
|
$
|
492,710
|
|
|
$
|
(113,464
|
)
|
Cash paid for
|
|
|
|
|
|
|
|
|
|
|
|
|
Payroll and related expenses
|
|
|
163,395
|
|
|
|
132,672
|
|
|
|
(30,723
|
)
|
Lease payments for tower locations
|
|
|
101,438
|
|
|
|
96,284
|
|
|
|
(5,154
|
)
|
Telephone expenses
|
|
|
49,969
|
|
|
|
37,290
|
|
|
|
12,679
|
|
Interest expense
|
|
|
15,033
|
|
|
|
6,966
|
|
|
|
8,067
|
|
Other operating expenses
|
|
|
95,094
|
|
|
|
105,233
|
|
|
|
10,139
|
|
Net cash provided by operating activities for the twelve months
ended December 31, 2004 decreased $67.0 million from
the same period in 2003 due primarily to the following:
|
|
|
|
|
Cash received from customers decreased $113.5 million in
2004 compared to the same period in 2003. This measure consists
of revenues and direct taxes billed to customers adjusted for
changes in accounts receivable, deferred revenue and tax
withholding amounts. The decrease was due primarily to revenue
declines of $107.3 million, as discussed earlier, and a
lower change in accounts receivable of $16.4 million in
2003 compared to $11.7 million in 2004. The change in
accounts receivable was due to lower billings resulting from
fewer units in service, lower revenue and more timely payments
from our customers.
|
|
|
|
Cash payments for payroll and related expenses decreased
$30.7 million due primarily to lower payroll expenses of
$39.4 million, as discussed above, partially offset by
$5.0 million of lower accruals for incentives and other
payroll amounts and higher severance expenses of
$3.7 million.
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|
|
|
Lease payments for tower locations decreased $5.2 million.
This decrease was due primarily to savings associated with
network rationalization discussed above, offset by rent payments
applied to the previously established restructuring reserve. As
discussed earlier, the remaining balance of the restructuring
reserve will be paid over the next two quarters.
|
30
|
|
|
|
|
Cash used for telephone related expenditures decreased
$12.7 million in 2004 compared to the same period in 2003.
This decrease was due primarily to factors presented above in
the discussions of service, rental and maintenance expense and
general and administrative expenses.
|
|
|
|
The decrease in interest payments for the twelve months ended
December 31, 2004 compared to the same period in 2003 was
due to the repayment of Archs 12% notes in May 2004.
From June 2004 through November 16, 2004 we had no
long-term debt outstanding. On November 16, 2004 we
borrowed $140.0 million to partially fund a portion of the
cash election in conjunction with the merger. Prior to
December 31, 2004, we repaid $45.0 million of
principal and subsequent to December 31, 2004 and through
March 1, 2005 we repaid $28.5 million of principal. We
anticipate repaying the remaining balance of the long-term debt
during 2005.
|
|
|
|
Cash payments for other expenses primarily includes repairs and
maintenance, outside services, facility rents, taxes and
permits, office and various other expenses. The increase in
these payments was primarily related to lower balances of
accounts payable and other accrued expenses in the current year
and higher payments for taxes and permits of $3.1 million
partially offset by lower office expenses of $2.0 million
and insurance expense of $1.9 million.
|
We believe net cash provided by operating activities will
increase in 2005 as our results will reflect the results of
Metrocall for the full period. However, cash provided by
operating activities is significantly impacted by cash received
from customers and the level of payments of our various
operating expenses. As previously discussed, we believe demand
for our messaging services will continue to decline for the
foreseeable future and therefore our ability to reduce operating
expenses through our various cost reduction and integration
activities will be a significant determinant in the level of our
future cash provided by operating activities.
Net Cash (Used In) Provided By Investing
Activities.
Net cash (used in) provided by
investing activities in 2004 increased $111.7 million from
the same period in 2003 due primarily to recording the Metrocall
merger as previously discussed. Our business requires funds to
finance capital expenditures which primarily include the
purchase and repair of paging and messaging devices, system and
transmission equipment and information systems. Capital
expenditures for 2004 of $19.2 million consisted primarily
of the purchase of messaging devices and expenditures related to
transmission and information systems equipment offset by
$3.0 million of net proceeds from the sale of buildings and
other assets. Capital expenditures decreased $6.2 million
from 2003 due primarily to fewer purchases of messaging devices
and a decrease in the average cost per unit. The amount of
capital we will require in the future will depend on a number of
factors, including the number of existing subscriber devices to
be replaced, the number of gross placements, technological
developments, competitive conditions and the nature and timing
of our strategy to integrate and consolidate our networks. In
2005, we expect capital expenditures of $25.0 to
$30.0 million and expect to fund such requirements from net
cash provided by operating activities. Investing activities in
2003 consisted primarily of capital expenditures of
$25.4 million net of proceeds from the sale of buildings
and other assets of approximately $3.2 million.
Net Cash Provided By (Used In) Financing
Activities.
Net cash provided by (used in)
financing activities in 2004 increased $193.8 million from
the same period in 2003. In November 2004 as discussed below, we
borrowed $140.0 million to fund the cash consideration
related to the Metrocall merger. Also in 2004, Arch used
$60.0 million of net cash provided by operating activities
to redeem its 12% notes and $3.1 million for the
purchase of treasury shares. In December, we repaid
$45 million of the amount borrowed in conjunction with the
merger. Archs financing activities in 2003 consisted
solely of repayment of debt of $161.9 million.
Borrowings.
In connection with the merger, we
borrowed $140.0 million under a credit agreement that
matures in November 2006. These proceeds along with cash that
Arch and Metrocall generated from operating activities prior to
the effective date of the merger was used to fund the
$150.0 million cash consideration distributed to purchase
Metrocall common stock. We repaid $45.0 million of the
aggregate principal amount outstanding on December 20, 2004
and as of December 31, 2004, we had $95.0 million
outstanding. Subsequent to December 31, 2004 and through
March 1, 2005, we made additional optional principal
prepayments of $18.5 million and a mandatory principal
prepayment of $10.0 million reducing the outstanding
principal amount to $66.5 million as of
31
March 1, 2005. The following table describes our principal
borrowings at December 31, 2004 and associated debt service
requirements.
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|
|
|
|
|
|
|
|
|
|
|
Required
|
Value
|
|
Interest
|
|
Maturity Date
|
|
Repayments
|
|
$95.0 million
|
|
London InterBank Offered Rate
plus 250 basis points
|
|
November 16,
2006
|
|
See below
|
We are required to make mandatory prepayments of principal
amounts outstanding at least once a quarter and under certain
circumstances. Mandatory prepayments are required:
|
|
|
|
|
Once each quarter on or about February 16, May 16,
July 16, and November 16, 2005 and 2006; the amount of
prepayment is equal to the remaining principal outstanding under
the credit agreement on the mandatory prepayment date divided by
the number of quarterly prepayments remaining prior to the
maturity date.
|
|
|
|
out of the net proceeds of asset sales;
|
|
|
|
out of the net cash proceeds from the issuance of debt or
preferred stock;
|
|
|
|
out of 50% of the net cash proceeds from our issuance of common
equity;
|
|
|
|
out of specified kinds of insurance (to the extent net cash
proceeds exceed $5.0 million) and condemnation proceeds in
excess of replacement amounts; and
|
|
|
|
50% of excess cash flows, as defined in the term loan agreement,
as determined December 31, 2005.
|
We are also permitted to make optional prepayments, without
prepayment penalty, provided that each optional prepayment
exceeds $1.0 million.
The credit agreement includes certain provisions which impose
restrictions or requirements on us, including the following:
|
|
|
|
|
prohibition on restricted payments, including cash dividends;
|
|
|
|
prohibition on incurring additional indebtedness;
|
|
|
|
prohibition on liens on our assets;
|
|
|
|
prohibition on making or maintaining investments, loans and
advances except for permitted cash-equivalent type instruments;
|
|
|
|
prohibition on certain sales and leaseback transactions;
|
|
|
|
prohibition on mergers and consolidations or sales of assets
outside the ordinary course of business or unrelated to the
integration of Arch and Metrocall;
|
|
|
|
prohibition on transactions with affiliates; and
|
|
|
|
Compliance with certain quarterly and financial covenants
including, but not limited to: (1) maximum total leverage;
(2) minimum interest coverage and (3) maximum annual
capital expenditures.
|
We were in compliance with our financial covenants at
December 31, 2004.
Commitments
Contractual Obligations.
As of
December 31, 2004, our contractual payment obligations
under our long-term debt agreements and operating leases for
office and transmitter locations are indicated in the table
below. For purposes of the table below, purchase obligations are
defined as agreements to purchase goods or services that are
enforceable and legally binding and that specify all significant
terms, including: fixed or minimum quantities to be purchased;
fixed, minimum or variable pricing provisions; and the
approximate timing of transactions. These obligations primarily
relate to devices and certain telephone expenses. The amounts
are based on our contractual
32
commitments; however, it is possible we may be able to negotiate
lower payments if we choose to exit these contracts before their
expiration date.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
Less than
|
|
|
|
|
|
|
|
|
More than
|
|
|
|
Total
|
|
|
1 year
|
|
|
1-3 years
|
|
|
4-5 years
|
|
|
5 years
|
|
|
|
(Dollars in thousands)
|
|
|
Long-term debt obligations and
accrued interest
|
|
$
|
95,547
|
|
|
$
|
48,047
|
|
|
$
|
47,500
|
|
|
$
|
|
|
|
$
|
|
|
Operating lease obligations
|
|
|
286,440
|
|
|
|
111,122
|
|
|
|
129,693
|
|
|
|
40,768
|
|
|
|
4,857
|
|
Purchase obligations
|
|
|
24,483
|
|
|
|
12,805
|
|
|
|
11,678
|
|
|
|
|
|
|
|
|
|
Other GAAP liabilities
|
|
|
19,971
|
|
|
|
6,371
|
|
|
|
8,993
|
|
|
|
1,236
|
|
|
|
3,371
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
426,441
|
|
|
$
|
178,345
|
|
|
$
|
197,864
|
|
|
$
|
42,004
|
|
|
$
|
8,228
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off-Balance Sheet Arrangements.
We do not have
any relationships with unconsolidated entities or financial
partnerships, such as entities often referred to as structured
finance or special purpose entities, which would have been
established for the purpose of facilitating off-balance sheet
arrangements or other contractually narrow or limited purposes.
As such, we are not exposed to any financing, liquidity, market
or credit risk that could arise if we had engaged in such
relationships.
Inflation
Inflation has not had a material effect on our operations to
date. System equipment and operating costs have not increased in
price and the price of wireless messaging devices has tended to
decline in recent years. This reduction in costs has generally
been reflected in lower prices charged to subscribers who
purchase their wireless messaging devices. Our general operating
expenses, such as salaries, lease payments for transmitter
locations, employee benefits and occupancy costs, are subject to
normal inflationary pressures.
Application
of Critical Accounting Policies
The preceding discussion and analysis of financial condition and
results of operations are based on our consolidated financial
statements, which have been prepared in conformity with
accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires
management to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues, expenses and
related disclosures. On an on-going basis, we evaluate estimates
and assumptions, including but not limited to those related to
the impairment of long-lived assets, allowances for doubtful
accounts and service credits, revenue recognition, asset
retirement obligations, restructuring reserves and income taxes.
We base our estimates on historical experience and various other
assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities.
Actual results may differ from these estimates under different
assumptions or conditions.
Impairment
of Long-Lived Assets
In accordance with SFAS No. 144,
Accounting for the
Impairment or Disposal of Long-Lived Assets
, known as
SFAS No. 144, we are required to evaluate the carrying
value of our long-lived assets and certain intangible assets.
SFAS No. 144 first requires an assessment of whether
circumstances currently exist which suggest the carrying value
of long-lived assets may not be recoverable. At
December 31, 2004, we did not believe any such conditions
existed. Had these conditions existed, we would assess the
recoverability of the carrying value of our long-lived assets
and certain intangible assets based on estimated undiscounted
cash flows to be generated from such assets. In assessing the
recoverability of these assets, we would have projected
estimated enterprise-level cash flows based on various operating
assumptions such as average revenue per unit, disconnect rates,
and sales and workforce productivity ratios. If the projection
of undiscounted cash flows did not exceed the carrying value of
the long-lived assets, we would be required to record an
impairment charge to the extent the carrying value exceeded the
fair value of such assets.
33
Intangible assets were recorded in accordance with
SFAS No. 141 and are being amortized over periods
generally ranging from one to five years. Goodwill was also
recorded in conjunction with the Metrocall merger. The goodwill
will not be amortized but will be tested for impairment
annually. In accordance with SFAS No. 142,
Goodwill
and Other Intangible Assets
, USA Mobility has selected the
fourth quarter to perform this annual impairment test which
requires the comparison of the fair value of the reporting unit
to its carrying amount to determine if there is potential
impairment. 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 of the excess of the carrying value over
the implied value of goodwill. The fair value for the reporting
unit will be determined based upon discounted cash flows, market
multiples or appraised values as appropriate.
Allowances
for Doubtful Accounts and Service Credits
We record two allowances against our gross accounts receivable
balance: an allowance for doubtful accounts and an allowance for
service credits. Provisions for these allowances are recorded on
a monthly basis and are included as a component of general and
administrative expense and a reduction of revenue, respectively.
Estimates are used in determining the allowance for doubtful
accounts and are based on historical collection experience,
current trends and a percentage of the accounts receivable aging
categories. In determining these percentages we review
historical write-offs, including comparisons of write-offs to
provisions for doubtful accounts and as a percentage of
revenues. We compare the ratio of the reserve to gross
receivables to historical levels and we monitor amounts
collected and related statistics. Our allowance for doubtful
accounts was $5.0 million and $3.8 million at
December 31, 2003 and 2004, respectively. While write-offs
of customer accounts have historically been within our
expectations and the provisions established, we cannot guarantee
that future write-off experience will be consistent with
historical experience, which could result in material
differences in the allowance for doubtful accounts and related
provisions.
The allowance for service credits and related provisions are
based on historical credit percentages, current credit and aging
trends and days billings outstanding. Days billings outstanding
is determined by dividing the daily average of amounts billed to
customers into the accounts receivable balance. This approach is
used because it more accurately represents the amounts included
in accounts receivable and minimizes fluctuations that occur in
days sales outstanding due to the billing of quarterly,
semi-annual and annual contracts and the associated revenue that
is deferred. A range is developed and an allowance is recorded
within that range based on our assessment of trends in days
billings outstanding, aging characteristics and other operating
factors. Our allowance for service credits was $3.6 million
and $4.5 million at December 31, 2003 and 2004,
respectively. While credits issued have been within our
expectations and the provisions established, we cannot guarantee
that future credit experience will be consistent with historical
experience, which could result in material differences in the
allowance for service credits and related provisions.
Revenue
Recognition
Our revenue consists primarily of monthly service and lease fees
charged to customers on a monthly, quarterly, semi-annual or
annual basis. Revenue also includes the sale of messaging
devices directly to customers and other companies that resell
our services. In accordance with the provisions of Emerging
Issues Task Force Issue
No. 00-21,
Revenue Arrangements with Multiple Deliverables
, known as
EITF
No. 00-21,
we evaluated these revenue arrangements and determined that two
separate units of accounting exist, messaging service revenue
and device sale revenue. Accordingly, we recognize messaging
service revenue over the period the service is performed and
revenue from device sales is recognized at the time of shipment.
We recognize revenue when four basic criteria have been met:
(1) persuasive evidence of an arrangement exists,
(2) delivery has occurred or services rendered,
(3) the fee is fixed or determinable and
(4) collectibility is reasonably assured.
Prior to July 1, 2003, in accordance with SAB 101,
Revenue Recognition in Financial Statements,
known as
SAB 101, we bundled the sale of two-way messaging devices
with the related service, since we had determined the sale of
the service was essential to the functionality of the device.
Therefore, revenue from two-way device sales and the related
cost of sales were recognized over the expected customer
relationship, which was estimated to be two years. In accordance
with the transition provisions of EITF
No. 00-21,
we will continue to recognize previously
34
deferred revenue and expense from the sale of two-way devices
based upon the amortization schedules in place at the time of
deferral. At December 31, 2004, we had approximately
$139,000 of deferred revenue and $39,000 of deferred expense
that will be recognized in future periods, principally over the
next two quarters.
Asset
Retirement Obligations
Asset retirement obligations were not recorded correctly in
2002, 2003 and 2004. This restatement includes corrected
amounts. See Note 1 of Notes to Consolidated Financial
Statements for further information. We adopted the provisions of
SFAS No. 143,
Accounting for Asset Retirement
Obligations,
( SFAS No. 143), in 2002.
SFAS No. 143 requires the recognition of liabilities
and corresponding assets for future obligations associated with
the retirement of assets. USA Mobility has network assets that
are located on leased transmitter locations. The underlying
leases generally require the removal of our equipment at the end
of the lease term, therefore a future obligation exists. The
Company has recognized cumulative asset retirement costs of
$17.4 million (as restated) through December 31, 2004,
of which $5.6 million (as restated) was recorded in 2004.
Network assets have been increased to reflect these costs and
depreciation is being recognized over their estimated lives,
which range between one and ten years. Depreciation,
amortization and accretion expense in 2004 included
$1.6 million (as restated) related to depreciation of these
assets. The asset retirement costs, and the corresponding
liabilities, that have been recorded to date, relate to either
current plans to consolidate networks or to the removal of
assets at an estimated future terminal date.
At December 31, 2003 and 2004, accrued expenses included
$1.8 million (as restated) and $3.4 million (as
restated), respectively, of asset retirement liabilities related
to USA Mobilitys efforts to reduce the number of networks
it operates; other long-term liabilities included
$6.2 million (as restated) and $11.0 million (as
restated), respectively, related primarily to an estimate of
assets to be removed through 2013. The primary variables
associated with these estimates are the number of transmitters
and related equipment to be removed, the timing of removal, and
a fair value estimate of the outside contractor fees to remove
each asset. In November 2004, this liability was increased to
reflect the merger with Metrocall and the increased transmitters
acquired, the extension of the economic life of the paging
network and the Companys plans to rationalize the Arch
two-way network in 2005.
The long-term cost associated with the original assessment, the
additional amount recorded due to the Metrocall merger, and the
change in estimated removal cost timing refinements due to the
Metrocall merger will accrete to a total liability of
$24.4 million through 2013. The accretion will be recorded
on the interest method utilizing a 24% discount rate for the
original assessment and 13% for the 2004 incremental estimates.
This estimate is based on the transmitter locations remaining
after USA Mobility has consolidated the number of networks it
operates and assumes the underlying leases continue to be
renewed to that future date. Depreciation, amortization, and
accretion expense in 2002, 2003 and 2004 included
$1.7 million (as restated), $2.9 million (as restated)
and $2.2 million (as restated), respectively, for accretion
expense on the asset retirement obligation liabilities.
USA Mobility believes these estimates are reasonable at the
present time, but the Company can give no assurance that changes
in technology, its financial condition, the economy or other
factors would not result in higher or lower asset retirement
obligations. Any variations from the Companys estimates
would generally result in a change in the assets and liabilities
in equal amounts and operating results would differ in the
future by any difference in depreciation expense and accreted
operating expense.
Restructuring
Charges
From time to time, we cease to use certain facilities, such as
office buildings and transmitter locations, including available
capacity under certain agreements, prior to expiration of the
underlying lease agreements. We review exit costs in each of
these circumstances on a
case-by-case
basis to determine whether a restructuring charge is required to
be recorded in accordance with SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal
Activities,
known as SFAS No. 146. The provisions
of SFAS No. 146 require us to record an estimate of
the fair value of the exit costs based on certain facts,
circumstances and assumptions, including remaining minimum lease
payments, potential sublease income and specific provisions
included in the underlying lease agreements. Subsequent to
recording a reserve, changes in market or other conditions may
result in changes to assumptions
35
upon which the original reserve was recorded that could result
in an adjustment to the reserve and, depending on the
circumstances, such adjustment could be material.
Income
Taxes
The preparation of consolidated financial statements in
conformity with generally accepted accounting principles
requires us to make estimates and assumptions that affect the
reported amount of tax-related assets and liabilities and income
tax provisions. We assess the recoverability of our deferred tax
assets on an on-going basis. In making this assessment, we are
required to consider all available positive and negative
evidence to determine whether, based on such evidence, it is
more likely than not that some portion or all of our net
deferred tax assets will be realized. This assessment requires
significant judgment. We do not recognize current and future tax
benefits until it is probable that our tax positions will be
sustained.
During 2002, Arch established a valuation allowance against its
net deferred tax assets existing at its emergence from
bankruptcy because, based on information available at that time,
it was considered unlikely that deferred tax assets would be
realized. However, during the quarter ended December 31,
2003, Arch management evaluated new facts and based on operating
income for the prior two years, repayment of notes well ahead of
schedule and anticipated operating income and cash flows for
future periods, concluded it was more likely than not that
deferred tax assets would be realized. Accordingly, Arch
management determined it was appropriate to release the
valuation allowance. Since results for the year ended
December 31, 2004 were consistent with Arch
managements anticipated results, including additional
incremental income to be generated due to the merger with
Metrocall, no valuation allowance against deferred tax assets is
required as of December 31, 2004.
In 2002, when the Arch operating company emerged from
bankruptcy, a change in its ownership occurred that established
limitations on the usability of income tax attributes that
become NOLs. Individual state laws potentially restrict the use
of NOLs. The analysis differs from state to state. Previously,
Archs analysis of NOL usability was based on a single
composite income tax rate and a single set of NOL utilization
rules rather than an evaluation of each individual jurisdiction.
The Company discovered that its 2003 deferred tax asset was
originally miscalculated due to errors in the tax bases of
assets both in the gross statement of basis and in relation to
limitations imposed by the IRC which may restrict certain
depreciation and amortization expense. The Companys
restatement includes adjustments to the 2003 and 2004 deferred
tax assets to reflect the correction of these and other
miscellaneous matters.
Under the provisions of SFAS No. 109,
Accounting
for Income Taxes
, and related interpretations, reductions in
a deferred tax asset valuation allowance that existed as of the
date of fresh start accounting are first credited against an
asset established for reorganization value in excess of amounts
allocable to identifiable assets, then to other identifiable
intangible assets existing at the date of fresh start accounting
and then, once these assets have been reduced to zero, credited
directly to additional paid-in capital. The release of the
valuation allowance reduced the carrying value of intangible
assets by $2.3 million and $13.4 million for the
seven-month period ended December 31, 2002 and the year
ended December 31, 2003, respectively. After reduction of
intangibles recorded in conjunction with fresh start accounting,
the remaining reduction of the valuation allowance of $195.9
million (as restated) was recorded as an increase to
stockholders equity as of December 31, 2003
.
We believe we are more likely than not to utilize our net
deferred tax assets of $232.6 million through reductions in
tax liabilities in future periods. However, recovery is
dependent on achieving our forecast of future operating income
over a protracted period of time. As of December 31, 2004,
we would require approximately $592.9 million in cumulative
future operating income to be generated to utilize our net
deferred tax assets. We will review our forecast in relation to
actual results and expected trends on an ongoing basis. Failure
to achieve our operating income targets may change our
assessment regarding the recoverability of our net deferred tax
assets and such change could result in a valuation allowance
being recorded against some or all of our deferred tax assets.
Any increase in a valuation allowance would result in additional
income tax expense, reduced stockholders equity and could
have a significant impact on our earnings in future periods.
In accordance with provisions of the IRC, Arch was required to
apply the cancellation of debt income arising in conjunction
with its plan of reorganization against tax attributes existing
as of its emergence from bankruptcy date.
36
The method utilized to allocate the cancellation of debt income
is subject to varied interpretations of tax law and it has a
material effect on the tax attributes remaining after
allocation, and thus our future tax position. As a result of the
method used to allocate cancellation of debt income, Arch had no
net operating losses remaining and the tax bases of certain
other tax assets were reduced as of the May 29, 2002 date
of emergence from the Chapter 11 proceedings. Other methods
of allocating the cancellation of debt income are possible based
on different interpretations of tax law and if such other
methods were applied, the amount of deductions available to
offset future taxable income might be further limited, possibly
resulting in an increased income tax liability.
Recent
and Pending Accounting Pronouncements
New Accounting Pronouncements
In November
2004, the Financial Accounting Standards Board
(FASB) issued SFAS No. 151,
Inventory
Costs
(SFAS No. 151), which is an
amendment of ARB No. 43, Chapter 4. The primary
purpose of SFAS No. 151 is to clarify the accounting
for abnormal amounts of idle facility expense, freight, handling
costs, and wasted material (spoilage). SFAS No. 151
requires that those items be recognized as current-period
charges regardless of whether they meet the criterion of
so abnormal. In addition, SFAS No. 151
requires that allocation of fixed production overheads to the
costs of conversion be based on the normal capacity of the
production facilities. SFAS No. 151 is effective for
inventory costs incurred during fiscal years beginning after
June 15, 2005. The Company is reviewing the impact of
SFAS No. 151 but does not expect adoption to have a
material impact on its consolidated financial statements.
In December 2004, the FASB issued a revision to Statement
No. 123,
Accounting for Stock-Based Compensation
(SFAS No. 123R),
Share-Based
Payment.
SFAS No. 123R supersedes APB Opinion
No. 25,
Accounting for Stock Issued to Employees,
and its related implementation guidance.
SFAS No. 123R establishes standards for the accounting
for transactions in which an entity exchanges its equity
instruments for goods or services. It also addresses
transactions in which an entity incurs liabilities in exchange
for goods or services that are based on the fair value of the
entitys equity instruments or that may be settled by the
issuance of those equity instruments. SFAS No. 123R
focuses primarily on accounting for transactions in which an
entity obtains employee services in share-based payment
transactions. This Statement does not change the accounting
guidance for share-based payment transactions with parties other
than employees provided in Statement 123 as originally
issued and EITF Issue
No. 96-18,
Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services.
This statement is effective as of the
first interim or annual period that begins after June 15,
2005. We have elected to adopt SFAS 123R on January 1,
2006. Since we previously adopted the fair value provisions of
SFAS No. 123 and the transition provisions of
SFAS No. 148, this adoption will not have a material
impact on our financial statements.
Risk
Factors Affecting Future Operating Results
The following important factors, among others, could cause our
actual operating results to differ materially from those
indicated or suggested by forward-looking statements made in
this
Form 10-K/A
or presented elsewhere by management from time to time.
The
rate of revenue erosion may not improve, or may
deteriorate.
We continue to face intense competition for subscribers due to
technological competition from the mobile phone and PDA service
providers as they continue to lower device prices while adding
functionality. A key factor in our ability to be profitable and
produce net cash flow from monthly subscription fees and
operations is realizing improvement in the rate of revenue
erosion from historical levels. If no improvement is realized it
will have a material adverse effect on our ability to be
profitable and produce positive cash flow. We are dependent on
net cash provided by operations as our principal source of
liquidity. If our revenue continues to decline at the same or at
an accelerated rate relative to the past, it could outpace our
ability to reduce costs, and adversely affect our ability to
produce positive net cash flow from operations.
37
We may
fail to successfully integrate the operations of Arch and
Metrocall and therefore may not achieve the anticipated cost
benefits of the merger.
We face significant challenges in the integration of the
operations of Arch and Metrocall. Some of the key issues include
managing the combined companys networks, maintaining
adequate focus on existing business and operations while working
to integrate the two companies, managing marketing and sales
efforts, integrating Metrocalls existing billing system
into the Arch billing system and integrating other key redundant
systems for the combined operations.
The integration of Arch and Metrocall will require substantial
attention from our management, particularly in light of the
companies geographically dispersed operations, different
business cultures and compensation structures. The diversion of
our managements attention and any difficulties associated
with integrating operations could have a material adverse effect
on our revenues, level of expenses and results of operations. We
may not succeed in the system and operations integration efforts
that we are striving to achieve without incurring substantial
additional costs or achieve the integration efforts within a
reasonable time and thus may not realize the anticipated cost
benefits of the merger.
We may
fail to achieve the cost savings expected from the
merger.
The anticipated cost savings resulting from the merger are based
on a number of assumptions, including implementation of cost
saving programs such as headcount reductions, consolidation of
geographically dispersed operations and elimination of
duplicative administrative systems and processes within a
projected period. In addition, the cost savings estimates assume
that we will be able to realize efficiencies such as leverage in
procuring messaging devices and other goods and services
resulting from the increased size of the combined company.
Failure to successfully implement cost saving programs or
otherwise realize efficiencies could materially adversely affect
our cash flows, our results of operations and, ultimately, the
value of our common stock.
If we
are unable to retain key management personnel, we might not be
able to find suitable replacements on a timely basis or at all
and our business could be disrupted.
Our success will depend, to a significant extent, upon the
continued service of a relatively small group of key executive
and management personnel. We have an employment agreement with
our president and chief executive officer and have issued
restricted stock or stock options to most of our other key
executives that vest in May 2005. Additionally, we expect our
board to implement a long-term incentive plan for senior
management utilizing the equity incentive program approved by
our shareholders in connection with our merger. The loss or
unavailability of one or more of our executive officers or the
inability to attract or retain key employees in the future could
have a material adverse effect on our future operating results,
financial position and cash flows.
The
completion of the merger has given rise to claims for damages
under the Arch long-term management incentive plan and
restricted stock agreements of certain former Arch senior
executives, which may adversely affect our cash flows and
results of operations and the value of our common
stock.
Under documents governing Archs long-term incentive plan,
a change in control of Arch may accelerate payment
obligations to certain Arch employees participating in such
plan. If the acquisition were to constitute a change in
control, the total additional payment obligations
triggered under the terms of documents governing such plan could
be as high as $9.0 million in the aggregate as of the
completion of the merger on November 16, 2004, based on an
average closing price of $31.70 for Arch common stock over the
preceding ten trading days. The total amount of these payment
obligations would, if the merger is determined to constitute a
change in control, be payable in full within thirty
days after such determination.
Under the documents governing Archs obligations with
respect to 184,230 shares of Arch restricted stock issued
to the three most senior former executives of Arch, whose
employment was terminated prior to the merger, a change in
control resulting from the merger might give rise to
claims for damages notwithstanding Archs repurchase at a
nominal price of all restricted stock issued to those executives
prior to consummation of the merger.
38
While we do not believe that any change in control
of Arch occurred as a result of the merger, three former Arch
executives filed an arbitration claim against Arch and certain
of its subsidiaries asserting that the acquisition by USA
Mobility constitutes a change in control under
Archs long-term management incentive plan. The arbitration
claim filed also seeks damages relating to the
184,230 shares of Arch restricted stock that were
repurchased by Arch prior to the acquisition at a nominal price.
If the claims made by the three former executives are
successful, or any other Arch employees make similar claims
under the long-term management incentive plan and are
successful, Arch, as our subsidiary, would be required to make
additional payments under Archs long-term management
incentive plan and/or the restricted stock agreements in
accordance with any applicable rulings or settlements. Such
additional payments could materially increase the costs and
expenses associated with the merger and may adversely affect our
cash flows and results of operations and the value of our common
stock.
Future
changes in ownership of our stock could prevent us from using
our consolidated tax assets to offset future taxable income,
which would materially reduce our expected after-tax net income
and cash flows from operations. Actions available to us to
preserve our consolidated tax assets could result in less
liquidity for our common stock and/or depress the market value
of our stock.
If we were to undergo an ownership change, as that
term is defined in Section 382 of the IRC, our use of tax
assets would be significantly restricted, which would reduce our
after-tax net income and cash flow. This in turn could reduce
our ability to fund our operations.
Generally, an ownership change will occur if a cumulative shift
in ownership of more than 50% of our common stock occurs during
a rolling three year period. The cumulative shift in ownership
is a measurement of the shift in ownership of our stock held by
stockholders that own 5% or more of our stock. In general terms,
it will equal the aggregate of any increases in the percentage
of stock owned by each stockholder that owns 5% or more of our
stock at any time during the testing period over the lowest
percentage of stock owned by each such shareholder during the
testing period. The testing period generally is the prior three
years, but begins no earlier than May 30, 2002, the day
after Arch emerged from bankruptcy.
As of December 31, 2004, Arch had a combined cumulative
change in ownership of approximately 40%. The determination of
our percentage ownership change is dependent on provisions of
the tax law that are subject to varying interpretations and on
facts that are not precisely determinable by us at this time.
Therefore, our cumulative shift in ownership may be more or less
than approximately 40% and, in any event, may increase by reason
of subsequent transactions in our stock by stockholders who own
5% or more of our stock and certain other transactions affecting
the direct or indirect ownership of stock.
Please refer to Item 5,
Market for Registrants
Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities,
for a description of the transfer
restrictions that are available to us in our Amended and
Restated Certificate of Incorporation which permit us to
restrict transfers by or to any 5% shareholder of our common
stock or any transfer that would cause a person or group of
persons to become a 5% shareholder of our common stock. We
intend to enforce these restrictions in order to preserve our
tax assets, and such enforcement by us may result in less
liquidity for our common stock and/or depress the market price
for our shares.
We
have material weaknesses in internal control over financial
reporting and can provide no assurance that additional material
weaknesses will not be identified in the future. Our failure to
implement and maintain effective internal control over financial
reporting could result in material misstatements in the
financial statements.
Management has identified material weaknesses in our internal
control over financial reporting that affected USA
Mobilitys financial statements for the periods ended
December 31, 2002, 2003, 2004 and 2005 and the first three
quarters of the calendar years ended December 31, 2004 and
2005. See Item 9A. Controls and Procedures.
The material weaknesses in our internal control over financial
reporting during these periods related to ineffective controls
over the accuracy and valuation of income taxes and related
deferred income tax balances; over the completeness and accuracy
of transactional taxes and over the completeness and accuracy of
depreciation expense and accumulated depreciation and over the
completeness, accuracy and valuation of asset retirement costs,
asset retirement obligation liabilities and the related
depreciation, amortization and accretion expense.
39
We cannot assure you that additional material weaknesses in our
internal control over financial reporting will not be identified
in the future. Any failure to maintain or implement required new
or improved controls, or any difficulties that may be
encountered in their implementation, could result in additional
material weaknesses, cause the Company to fail to meet its
periodic reporting obligations or result in material
misstatements in the Companys financial statements. Any
such failure could also adversely affect the results of periodic
management evaluations and annual auditor reports regarding the
effectiveness of the Companys internal control over
financial reporting required under Section 404 of the
Sarbanes-Oxley Act of 2002 and the rules promulgated under
Section 404. The existence of a material weakness could
result in errors in our financial statements that could result
in a restatement of financial statements.
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ITEM 7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
At December 31, 2004, our debt financing consisted
primarily of amounts outstanding under our credit facility.
Senior
Secured Debt, Variable Rate Debt
The borrowings outstanding under our credit facility are secured
by substantially all of our assets. The credit facility debt is
closely held by a group of lenders. Borrowings under our credit
facility are sensitive to changes in interest rates. Given the
existing level of debt of $95.0 million, as of
December 31, 2004, a
1
/
2
%
change in the weighted-average interest rate would have an
interest expense impact of approximately $40,000 each month.
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|
|
|
|
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|
|
|
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Weighted-Average
|
|
|
|
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Principal Balance
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Fair Value
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Interest Rate
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Scheduled Maturity
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$95.0 million
|
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$
|
95.0 million
|
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4.9
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%
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November 2006
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ITEM 8.
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CONSOLIDATED
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|
The financial statements and schedules listed in
Item 15(a)(1) and (2) are included in this Report
beginning on
Page F-1.
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ITEM 9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
|
On November 16, 2004, the audit committee of USA
Mobilitys board of directors recommended to the board of
directors of USA Mobility the engagement of
PricewaterhouseCoopers LLP (PwC) as its independent
registered public accounting firm for the fiscal year ending
December 31, 2004 to replace Ernst & Young, LLP
(E&Y) who, as recommended by the audit committee
of the board of directors of USA Mobility, was dismissed by the
board of directors of USA Mobility as its independent registered
public accounting firm. On November 16, 2004, USA Mobility
notified E&Y that they were dismissed as its independent
registered public accounting firm.
E&Ys audit report on USA Mobilitys consolidated
balance sheet as of May 31, 2004 did not contain an adverse
opinion or a disclaimer of opinion, nor was such report
qualified or modified as to uncertainty, audit scope or
accounting principles. Because USA Mobility was recently formed
in connection with the merger of Metrocall and Arch, E&Y has
provided an audit report only on USA Mobilitys
consolidated balance sheet as of May 31, 2004. During the
period from USA Mobilitys formation on March 5, 2004,
through November 16, 2004, there were no disagreements
between USA Mobility and E&Y on any matter of accounting
principles or practices, financial statement disclosure or
auditing scope or procedures, which disagreements, if not
resolved to E&Ys satisfaction, would have caused
E&Y to make reference to the subject matter of the
disagreement in connection with its audit report.
During the period from USA Mobilitys formation through
May 31, 2004, and the subsequent period through
November 16, 2004, the date on which E&Y was dismissed,
none of the reportable events described under
Item 304(a)(1)(v) of
Regulation S-K
under the Securities Exchange Act of 1934, as amended (the
Exchange Act), occurred. During the period from USA
Mobilitys formation through May 31, 2004, and the
subsequent period through November 16, 2004, the date on
which PwC was engaged, USA Mobility did not consult with PwC
regarding any of the matters or events described in
Item 304(a)(2)(i) and (ii) of
Regulation S-K
under the Exchange Act.
40
Management requested E&Y to furnish us with a letter
addressed to the Securities and Exchange Commission stating
whether or not it agreed with the above statements. A copy of
that letter, dated November 17, 2004, was included with our
current report on
Form 8-K,
filed with the Securities and Exchange Commission on
November 22, 2004.
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ITEM 9A.
|
CONTROLS
AND PROCEDURES
|
Restatement
The Company is filing this amendment to its Annual Report on
Form 10-K/A
for the year ended December 31, 2004. The purpose of the
amended filing is to restate financial statements and other
financial information for the periods 2002, 2003 and 2004 and
interim quarterly periods for 2003 and 2004 to reflect certain
adjustments described below. In connection with the restatement
described, the Company has concluded that material weaknesses in
the Companys internal control over financial reporting
exist as of December 31, 2004.
The determination to restate these consolidated financial
statements and other financial information was made as a result
of managements assessment of accounting errors it
discovered during the preparation of the 2005 annual financial
statements. The Companys assessment of certain identified
accounting errors resulted in the following adjustments to
previously reported periods:
1. Asset retirement obligations were incorrectly
calculated in 2002, 2003 and 2004.
The Company
adopted the provisions of SFAS No. 143 in 2002. The
Company did not record the initial asset retirement obligation
and related asset retirement cost upon emergence from
bankruptcy; therefore, the Company understated subsequent
accretion expense related to the asset retirement obligation and
depreciation expense of the asset retirement cost in 2002. In
addition, in 2002, 2003 and 2004 the Company did not correctly
use the fair value of costs to deconstruct transmitters to
determine the fair value of the asset retirement obligation,
which understated reported liabilities and assets. The
Companys expected timing of cash flows of the transmitter
deconstructions have also been revised to coincide with their
depreciable lives that were estimated during the applicable time
period.
Accordingly, the restated financial statements as of
December 31, 2002 include increases of $9.3 million in
property and equipment, at cost, $4.6 million in
accumulated depreciation, $6.3 million in depreciation,
amortization and accretion expense, $2.9 million in current
liabilities and $5.4 million in long-term liabilities, and
a decrease of $2.7 million in service, rental and
maintenance expense. The restated financial statements for 2003
include a decrease of $2.2 million in property and
equipment, at cost, increases of $0.2 million in
accumulated depreciation, $2.8 million in depreciation,
amortization and accretion expense, decreases of
$2.2 million in current liabilities, $0.05 million in
long-term liabilities, and $2.5 million in service, rental
and maintenance expense. The restated financial statements for
2004 include a decrease of $0.05 million in property and
equipment, at cost, increases of $0.9 million in
accumulated depreciation, $2.7 million in depreciation,
amortization and accretion expense, $0.2 million in current
liabilities, $1.1 million in long-term liabilities, and a
decrease of $0.5 million in service, rental and maintenance
expense. During the first, second and third quarters of 2004
accumulated depreciation increased by less than
$0.2 million in each quarter. Current liabilities decreased
by less than $0.1 million in each of the first, second and
third quarters of 2004. Long-term liabilities increased by
$0.4 million in each of the first, second and third
quarters of 2004. Depreciation, amortization and accretion
expense increased by $0.6 million in each of the first,
second and third quarters of 2004 while service, rental and
maintenance expense decreased by $0.1 million in the first
quarter of 2004 and decreased by $0.2 million in each of
the second and third quarters of 2004.
2.
Certain adjustments to the value of the deferred tax
asset for 2003 and 2004 were not calculated
appropriately.
In 2003, the deferred tax asset
attributable to income tax NOLs was overstated due to the
misapplication, for accounting purposes, of state laws which
govern the realization of NOLs. Previously, the Company valued
its 2003 state income tax NOLs based on an erroneous state
income tax rate and a single NOL utilization rule rather than on
an evaluation of each applicable jurisdictions rate and
rules. The Company also determined that its 2003 deferred tax
asset for certain fixed assets and intangibles was misstated due
to errors in the accounting for tax basis and in the application
of a federal limitation. The federal limitation may restrict
certain tax depreciation and amortization deductions for a
limited time. Accordingly, the restated financial
41
statements include a net $11.9 million decrease in deferred
tax assets and additional paid-in capital as of
December 31, 2003.
In addition to the impact of the matters described above, in
2004, an erroneous calculation was used to determine the
applicable state income tax rate used to value deferred tax
assets. The 2004 calculation did not properly consider the
Companys state income tax apportionment. Accordingly, the
restated financial statements include a $19.6 million
decrease in deferred tax assets and a $7.5 million increase
to income tax expense for the year ended December 31, 2004.
In addition, this error impacted the value attributed to
acquired assets resulting in an increase of $1.7 million to
goodwill in 2004.
3.
Certain state and local transactional taxes were not
recorded in the appropriate periods.
The
Companys process for identifying and recording state and
local transactional taxes failed to recognize a
$2.8 million liability for certain transactional taxes
imposed by certain jurisdictions in which the Company operates.
These errors were initially noted and recognized by the Company
in the second and third quarters of 2005 through recognition of
additional expense. However, during the preparation of the
Companys 2005 financial statements, the Company determined
that it is appropriate to restate previous years financial
statements because only $0.6 million of the liability
relates to 2005 and the remaining $2.2 million was incurred
in prior years. To correct these errors, the restated financial
statements reflect the recognition of these expenses in the
appropriate accounting periods. Accordingly, the restated
financial statements include a $0.5 million,
$0.8 million and $0.7 million increase in general and
administrative expense in 2002, 2003 and 2004, respectively, and
a $2.2 million decrease in general and administrative
expense in 2005. In addition, this error impacted the value
attributed to acquired assets resulting in an increase of
$0.2 million to goodwill in 2004.
4.
Adjustments were required to assets and liabilities
acquired as part of the November 2004 acquisition of
Metrocall.
As a result of a failure to accurately
and completely apply cash receipts at Metrocall, the Company
incorrectly allocated the purchase price consideration to other
accounts receivable recorded in the historical Metrocall
financial statements. This error resulted in an overstatement of
other accounts receivable of $0.7 million at
December 31, 2004. Accordingly, the restated financial
statements include a decrease in accounts receivable of
$0.7 million with a corresponding increase to goodwill at
December 31, 2004.
5.
Depreciation expense was incorrectly calculated in
2003 and 2004.
Depreciation expense did not
accurately reflect the expected economic usage of the
Companys paging network infrastructure assets. The Company
previously established an overall depreciable life of
60 months for its paging infrastructure and accelerated
depreciation on specified asset groups. In 2003, the
depreciation expense related to certain specified asset groups
that were removed from service was not properly calculated.
Accordingly, the restated financial statements for 2003 include
an increase in depreciation, amortization and accretion expense
and accumulated depreciation of $7.6 million. The restated
financial statements for 2004 reflect a $9.9 million
decrease in depreciation, amortization and accretion expense and
accumulated depreciation. The interim quarterly financial
statements for the first, second and third quarters of 2004
reflect a decrease in depreciation, amortization and accretion
expense and accumulated depreciation of $0.7 million,
$3.5 million and $1.2 million, respectively.
6.
Employee severance was not recorded during
2004.
During 2004 certain Arch key executives
were terminated, triggering potential future payment of
severance benefits. The Company did not appropriately accrue the
fair value of certain one-time future termination benefits due
to those executives, resulting in an understatement of severance
expense and accrued liabilities for the quarter and year ended
December 31, 2004 of $0.9 million. Accordingly, the
restated financial statements include an increase in accrued
liabilities and severance expense in the fourth quarter of 2004
of $0.9 million.
7.
Other income was not recorded
properly.
The Company determined that a
correction of its minority interest in GTES LLC, a consolidated
subsidiary, originally recorded in the first quarter of 2005,
should be recorded in the fourth quarter of 2004. Accordingly,
the restated financial statements include an increase to
42
other income of $0.2 million and a decrease to other
long-term liabilities by $0.2 million in the fourth quarter
of 2004.
Evaluation
of Disclosure Controls and Procedures
As required by
Rules 13a-15(e)
and
15d-15(e)
under the Securities Exchange Act of 1934, as amended
(Exchange Act), management has evaluated, with the
participation of our chief executive officer and chief financial
officer, the effectiveness of our disclosure controls and
procedures as of the end of the period covered by this report.
Disclosure controls and procedures refer to controls and other
procedures designed to ensure that information required to be
disclosed in the reports we file or submit under the Exchange
Act is recorded, processed, summarized and reported within the
time periods specified in the rules and forms of the Securities
and Exchange Commission. Disclosure controls and procedures
include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by us in our
reports that we file or submit under the Exchange Act is
accumulated and communicated to management, including our chief
executive officer and chief financial officer, as appropriate to
allow timely decisions regarding our required disclosure. In
designing and evaluating our disclosure controls and procedures,
management recognizes that any controls and procedures, no
matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control
objectives, and management was required to apply its judgment in
evaluating and implementing possible controls and procedures.
As described below, management has identified material
weaknesses in our internal control over financial reporting. As
a result of the material weaknesses, our chief executive officer
and chief financial officer have concluded that, as of
December 31, 2004, the end of the period covered by this
report, our disclosure controls and procedures were not
effective at a reasonable assurance level.
Notwithstanding the material weaknesses described below, we
believe our consolidated financial statements presented in this
Annual Report on
Form 10-K/A
fairly present, in all material respects, the Companys
financial position, results of operations and cash flows for all
periods presented herein in conformity with generally accepted
accounting principles.
Managements
Report on Internal Control Over Financial Reporting
(Restated)
Management is responsible for establishing and maintaining
adequate internal control over our financial reporting.
Internal control over financial reporting refers to a process
designed by, or under the supervision of, our chief executive
officer and chief financial officer and effected by our board of
directors, management and other personnel, to provide reasonable
assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles and
includes those policies and procedures that:
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pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions
of our assets;
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provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and
that our receipts and expenditures are being made only in
accordance with authorizations of our management and members of
our board of directors; and
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provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of
our assets that could have a material effect on our financial
statements.
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Internal control over financial reporting cannot provide
absolute assurance of achieving financial reporting objectives
because of its inherent limitations. Internal control over
financial reporting is a process that involves human diligence
and compliance and is subject to lapses in judgment and
breakdowns resulting from human failures. Internal control over
financial reporting also can be circumvented by collusion or
improper management override. Because of such limitations, there
is a risk that material misstatements may not be prevented or
detected on a timely basis by internal control over financial
reporting. However, these inherent limitations are known
features of
43
the financial reporting process. Therefore, it is possible to
design into the process safeguards to reduce, though not
eliminate, this risk.
Management evaluated the effectiveness of our internal control
over financial reporting as of December 31, 2004 using the
criteria set forth in the report of the Treadway
Commissions Committee of Sponsoring Organizations (COSO),
Internal Control Integrated Framework.
A material weakness is a control deficiency, or combination of
control deficiencies, that results in more than a remote
likelihood that a material misstatement of the annual or interim
financial statements will not be prevented or detected.
As a result of this evaluation, management identified the
following material weaknesses in our internal control over
financial reporting. Specifically, management concluded as of
December 31, 2004:
1.
The Company did not maintain effective controls over
the accuracy and valuation of the provision for income taxes and
the related deferred income tax
balances.
Specifically, the Company did not
maintain effective controls to review and monitor the accuracy
of the components of the income tax provision calculation and
related deferred income taxes and to monitor the differences
between the income tax basis and the financial reporting basis
of assets and liabilities to effectively reconcile the deferred
income tax balances; the Company lacked effective controls to
accurately determine the effective overall income tax rate to
use in tax provision computations; the Company lacked effective
controls to appropriately analyze, review and assess the impact
of state laws on the recoverability of the Companys state
net operating losses; and, the Company lacked controls over the
valuation of deferred tax assets to ensure the appropriate
application of federal limitations. This control deficiency
resulted in the restatement of the Companys consolidated
financial statements for 2002, 2003 and 2004, restatement of
each of the first three interim periods in 2004 and 2005 and
audit adjustments to the Companys 2005 financial
statements to correct income tax expense, deferred tax assets,
additional paid-in capital and goodwill accounts. Additionally,
this control deficiency could result in a misstatement of the
aforementioned accounts that would result in a material
misstatement to the annual or interim consolidated financial
statements that would not be prevented or detected. Accordingly,
management determined that this control deficiency constitutes a
material weakness.
2.
The Company did not maintain effective controls over
the completeness and accuracy of transactional
taxes.
Specifically, the Company lacked effective
controls to ensure state and local transactional taxes,
including surcharges and sales and use taxes, were completely
and accurately recorded in accordance with generally accepted
accounting principles. This control deficiency resulted in the
restatement of the Companys consolidated financial
statements for 2002, 2003 and 2004 and restatement of each of
the first three interim periods in 2004 and 2005 to correct
general and administrative expenses and accrued taxes liability
accounts. Additionally, this control deficiency could result in
a misstatement of the aforementioned accounts that would result
in a material misstatement to the annual or interim consolidated
financial statements that would not be prevented or detected.
Accordingly, management determined that this control deficiency
constitutes a material weakness.
3.
The Company did not maintain effective controls over
the completeness and accuracy of depreciation expense and
accumulated depreciation.
Specifically, the
Company lacked effective controls to ensure the:
(i) application of the appropriate useful lives for certain
asset groups when calculating depreciation expense and
(ii) timely preparation and review of account
reconciliations and analyses, and manual journal entries related
to the determination of depreciation expense and accumulated
depreciation for the paging infrastructure assets. This control
deficiency resulted in the restatement of the Companys
consolidated financial statements for 2003 and 2004, each of the
first three interim periods in 2004 and 2005 and audit
adjustments to the Companys 2005 financial statements to
correct depreciation expense and accumulated depreciation
balances. Additionally, this control deficiency could result in
a misstatement of the aforementioned accounts that would result
in a material misstatement to the annual or interim consolidated
financial statements that would not be prevented or detected.
Accordingly, management determined that this control deficiency
constitutes a material weakness.
4.
The Company did not maintain effective controls over
the completeness, accuracy and valuation of asset retirement
cost, asset retirement obligation and the related depreciation,
amortization and accretion expense.
Specifically,
the Company did not maintain effective controls to ensure that
the asset retirement cost and asset retirement obligation were
calculated utilizing the fair value of costs to deconstruct
network assets, in accordance
44
with generally accepted accounting principles. The Company also
lacked effective controls to consistently apply their
expectations of the usage of assets for recording depreciation
expense with the estimates of transmitter deconstructions for
the asset retirement obligation. This control deficiency
resulted in the restatement of the Companys consolidated
financial statements for 2002, 2003 and 2004, each of the first
three interim periods in 2004 and 2005 and audit adjustments to
the Companys 2005 financial statements to correct the
asset retirement cost and asset retirement obligation and the
related depreciation, amortization and accretion expense.
Additionally, this control deficiency could result in a
misstatement of the aforementioned accounts that would result in
a material misstatement to the annual or interim consolidated
financial statements that would not be prevented or detected.
Accordingly, management determined that this control deficiency
constitutes a material weakness.
Management has excluded Metrocall Holdings, Inc. from its
assessment of internal control over financial reporting as of
December 31, 2004 because it was acquired by the Company in a
purchase business combination during 2004. Metrocall Holdings,
Inc. is a wholly-owned subsidiary whose total assets and total
revenues represent 50 percent and 8 percent,
respectively, of the related consolidated financial statements
amounts as of and for the year ended December 31, 2004.
In the Annual Report on
Form 10-K
for the year ended December 31, 2004, filed on
March 17, 2005, management concluded that our internal
control over financial reporting was effective as of
December 31, 2004. In connection with the restatement,
management has subsequently concluded that the material
weaknesses described above existed as of December 31, 2004
and that as a result the Company did not maintain effective
internal control over financial reporting as of
December 31, 2004 based on criteria established in
Internal Control Integrated Framework
issued by the COSO. Accordingly, management has restated this
report on internal control over financial reporting.
Our managements assessment of the effectiveness of the
Companys internal control over financial reporting as of
December 31, 2004 has been audited by
PricewaterhouseCoopers LLP, an independent registered public
accounting firm, as stated in their report which appears herein.
Managements
Consideration of the Restatement
In coming to the conclusion that the Companys disclosure
controls and procedures and internal control over financial
reporting were not effective as of December 31, 2004,
management considered the restatement and material weaknesses in
the Companys internal control over financial reporting
described above. In addition to the restatement adjustments that
were a result of the material weaknesses described above, there
were other misstatements corrected as part of the restatement
(related to goodwill associated with the November 2004
acquisition of Metrocall, the recognition of additional
severance expenses during 2004 and minority interest as
disclosed in Note 1 to the accompanying consolidated
financial statements included in this Annual Report on
Form 10-K/A
) that were considered by management. Management has evaluated
these misstatements and concluded that these misstatements were
the result of control deficiencies, which did not constitute a
material weakness, individually, or in the aggregate, in the
Companys internal control over financial reporting as of
December 31, 2004.
Managements
Remediation Initiatives
During 2005, the Company consolidated its accounting operations
into one corporate center in Alexandria, Virginia. In addition,
the Company converted to one common accounting system and one
common billing system. These conversion and integration
activities were largely completed in the third quarter of 2005.
Management has taken the following steps to strengthen the
Companys internal control over financial reporting.
(1) With respect to the material weakness in controls over
the income taxes and related deferred income tax balances:
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We have engaged an experienced third party consultant,
knowledgeable in
SFAS No. 109, Accounting for
Income Taxes
, and related guidance to supplement Company
resources in the preparation and analysis of the income tax
provision and related deferred income tax accounts;
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45
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We have increased our tax support staff by hiring an experienced
senior tax manager to analyze, review and approve the income tax
provision calculation, related deferred income tax accounts and
income tax payable accounts, to monitor the differences between
the income tax basis and the financial reporting basis of assets
and liabilities and to reconcile effectively the deferred income
tax balances; and
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We have also engaged a third party accounting firm to analyze
and review our interim and annual income tax accounting to
ensure compliance with generally accepted accounting principles.
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(2) With respect to the material weakness in controls over
the completeness and accuracy of transactional taxes:
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We have engaged a third party professional firm to provide our
tax staff with monthly updates on state and local transactional
taxes impacting our business; and
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We have wholly dedicated a tax director and supporting staff to
focus solely on state and local transactional taxes. The tax
director and related staff receive periodic updates of changes
in state and local transactional rates from a third party
provider and update the Companys billing system with this
information.
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(3) With respect to the material weakness in controls over
the completeness and accuracy of depreciation expense and
accumulated depreciation:
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We have assigned an experienced staff accountant focused solely
on the controls over the property and depreciation balances; and
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We have analyzed our depreciation policies and procedures and
will be instituting accounting procedures for depreciating our
paging infrastructure that will conform with the ongoing
operational rationalization of our network.
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(4) With respect to the material weakness in controls over
the completeness, accuracy and valuation of asset retirement
cost, asset retirement obligation and the related depreciation,
amortization and accretion expenses:
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We have hired a senior director of financial reporting that will
work with our operational staff to determine the fair value of
removal costs.
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We have established procedures to accurately calculate the
related depreciation on the asset retirement cost and the
accretion expense on the asset retirement obligation.
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Notwithstanding such efforts, the material weaknesses described
above will not be remediated until the new controls operate for
a sufficient period of time and are tested to enable management
to conclude that the controls are effective. Management will
consider the design and operating effectiveness of these actions
and will make any changes management determines appropriate.
Changes
in Internal Control Over Financial Reporting
There were no changes made in the Companys internal
control over financial reporting during the three months ended
December 31, 2004 that have materially affected, or are
reasonably likely to materially affect, the Companys
internal control over financial reporting.
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ITEM 9B.
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OTHER
INFORMATION
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None.
PART III
Certain information called for by
Items 10-14
is incorporated by reference from our definitive Proxy Statement
for our 2005 Annual Meeting of Stockholders, which we filed with
the Securities and Exchange Commission on April 28, 2005.
46
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ITEM 10.
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DIRECTORS
AND EXECUTIVE OFFICERS
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The information required by this item with respect to directors
and executive officers is incorporated by reference to the
information set forth under the captions Election of
Directors and Executive Officers in our
definitive Proxy Statement for our 2005 Annual Meeting of
Stockholders. The information required by this item with respect
to compliance with Section 16(a) of the Exchange Act is
incorporated by reference to the section of our definitive Proxy
Statement for our 2005 Annual Meeting of Stockholders entitled
Section 16(a) Beneficial Ownership Reporting
Compliance.
We have adopted a code of ethics that applies to all of our
senior officers including our principal financial officer,
accounting officer and controller. Our code of ethics may be
found at www.usamobility.com. During the period covered by this
report the Company did not request a waiver of our code of
ethics and did not grant any such waivers.
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ITEM 11.
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EXECUTIVE
COMPENSATION
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The information required by this item is incorporated by
reference to the sections of our definitive Proxy Statement for
our 2004 Annual Meeting of Stockholders entitled:
Executive Compensation and Employment
Agreements. The sections entitled Compensation
Committee Report on Executive Compensation and Performance
Graph in the Proxy Statement are not incorporated herein
by reference.
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ITEM 12.
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SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
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The Information required by this item is incorporated by
reference to the sections of our definitive Proxy Statement for
our 2005 Annual Meeting of Stockholders entitled: Security
Ownership of Certain Beneficial Owners and Management.
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ITEM 13.
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CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
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The Information required by this item is incorporated by
reference to the section of our definitive Proxy Statement for
our 2005 Annual Meeting of Stockholders entitled Certain
Relationships and Related Transactions.
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ITEM 14.
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PRINCIPAL
ACCOUNTING FEES AND SERVICES
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The information required by this item is incorporated by
reference to the section of our definitive Proxy Statement for
our 2005 Annual Meeting of Stockholders entitled Principal
Accounting Fees and Services.
PART IV
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ITEM 15.
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EXHIBITS AND
FINANCIAL STATEMENT SCHEDULES
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(a)(1)
Reports of Independent Registered Public
Accounting Firm
Consolidated Balance Sheets as of December 31, 2003 and 2004
Consolidated Income Statements for the Five Months Ended
May 31, 2002 (Predecessor Company), Seven Months Ended
December 31, 2002 and the Years Ended December 31,
2003 and 2004 (Reorganized Company)
Consolidated Statements of Stockholders Equity (Deficit)
for the Five Months Ended May 31, 2002 (Predecessor
Company), Seven Months Ended December 31, 2002 and the
Years Ended December 31, 2003 and 2004 (Reorganized Company)
Consolidated Statements of Cash Flows for the Five Months Ended
May 31, 2002 (Predecessor Company), Seven Months Ended
December 31, 2002 and the years Ended December 31,
2003 and 2004 (Reorganized Company)
Notes to Consolidated Financial Statements
(a)(2)
Financial Statement Schedule
Schedule II Valuation and Qualifying
Accounts
(b)
Exhibits
The exhibits listed in the accompanying index to exhibits are
filed as part of this Annual Report on
Form 10-K/A.
47
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
USA MOBILITY, INC.
Vincent D. Kelly
President and Chief Executive Officer
May 24, 2006
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the
dates indicated.
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Signature
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Title
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Date
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/s/
Vincent
D. Kelly
Vincent
D. Kelly
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President and Chief Executive
Officer
(principal executive officer)
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May 24, 2006
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/s/
Thomas
L. Schilling
Thomas
L. Schilling
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Chief Financial Officer
(principal financial officer)
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May 24, 2006
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/s/
Shawn
E. Endsley
Shawn
E. Endsley
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Chief Accounting Officer
(principal accounting officer)
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May 24, 2006
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/s/
Royce
Yudkoff
Royce
Yudkoff
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Chairman of the Board
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May 24, 2006
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/s/
David
C. Abrams
David
C. Abrams
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Director
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May 24, 2006
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/s/
James
V. Continenza
James
V. Continenza
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Director
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May 24, 2006
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/s/
Nicholas
A. Gallopo
Nicholas
A. Gallopo
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Director
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May 24, 2006
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/s/
Brian
OReilly
Brian
OReilly
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Director
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May 24, 2006
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/s/
Matthew
Oristano
Matthew
Oristano
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Director
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May 24, 2006
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/s/
Samme
L. Thompson
Samme
L. Thompson
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Director
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May 24, 2006
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48
INDEX TO
FINANCIAL STATEMENTS
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Page
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F-2
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F-6
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F-7
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F-8
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F-9
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F-10
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F-1
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
USA Mobility, Inc.:
We have completed an integrated audit of USA Mobility,
Inc.s (formerly Arch Wireless, Inc.) 2004 consolidated
financial statements and of its internal control over financial
reporting as of December 31, 2004 and audits of its 2003
and 2002 consolidated financial statements in accordance with
the standards of the Public Company Accounting Oversight Board
(United States). Our opinions, based on our audits, are
presented below.
Consolidated
financial statements and financial statement
schedule
In our opinion, the accompanying consolidated balance sheets and
the related consolidated statements of income,
stockholders equity and cash flows present fairly, in all
material respects, the financial position of USA Mobility, Inc.
and its subsidiaries (formerly Arch Wireless Inc.) (Reorganized
Company) at December 31, 2004 and 2003, and the results of
their operations and their cash flows for the years then ended
and the seven months ended December 31, 2002 in conformity
with accounting principles generally accepted in the United
States of America. In addition, in our opinion, the financial
statement schedule as of and for the years ended
December 31, 2004 and 2003 and the seven months ended
December 31, 2002 listed in the index appearing under
Item 15(a)(2) presents fairly, in all material respects,
the information set forth therein when read in conjunction with
the related consolidated financial statements. These financial
statements and financial statement schedule are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits.
We conducted our audits of these statements in accordance with
the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit of financial statements includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used
and significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As discussed in Note 1 to the consolidated financial
statements, the Company restated its 2004, 2003 and 2002
consolidated financial statements.
As discussed in Note 2 to the consolidated financial
statements, the United States Bankruptcy Court for the District
of Massachusetts, Western Division confirmed the Companys
First Amended Joint Plan of Reorganization (the
plan) on May 15, 2002. Confirmation of the plan
resulted in the discharge of all claims against the Company that
arose before December 6, 2001 and terminates all rights and
interests of equity security holders as provided for in the
plan. The plan was substantially consummated on May 29,
2002 and the Company emerged from bankruptcy. In connection with
its emergence from bankruptcy, the Company adopted fresh start
accounting as of May 31, 2002.
Internal
control over financial reporting
Also, we have audited managements assessment, included in
Managements Report on Internal Control Over Financial
Reporting appearing under Item 9A, that USA Mobility, Inc.
did not maintain effective internal control over financial
reporting as of December 31, 2004, due to the effect of
material weakness related to managements failure to
maintain effective controls over (1) the accuracy and
valuation of the provision for income taxes and the related
deferred income tax balances; (2) the completeness and
accuracy of transactional taxes; (3) the completeness and
accuracy of accumulated depreciation and depreciation expense
and (4) the completeness, accuracy and valuation of asset
retirement cost, asset retirement obligation and the related
depreciation, amortization and accretion expenses, based on
criteria established in
Internal
Control Integrated Framework
issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO). The Companys management is responsible for
maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control
over financial reporting. Our responsibility is to express
opinions on managements assessment and on the
effectiveness of the Companys internal control over
financial reporting based on our audit.
F-2
We conducted our audit of internal control over financial
reporting in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over
financial reporting was maintained in all material respects. An
audit of internal control over financial reporting includes
obtaining an understanding of internal control over financial
reporting, evaluating managements assessment, testing and
evaluating the design and operating effectiveness of internal
control, and performing such other procedures as we consider
necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinions.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
A material weakness is a control deficiency, or combination of
control deficiencies, that results in more than a remote
likelihood that a material misstatement of the annual or interim
financial statements will not be prevented or detected. The
following material weaknesses have been identified and included
in managements assessment of internal control over
financial reporting as of December 31, 2004:
1.
The Company did not maintain effective controls over
the accuracy and valuation of the provision for income taxes and
the related deferred income tax
balances.
Specifically, the Company did not
maintain effective controls to review and monitor the accuracy
of the components of the income tax provision calculation and
related deferred income taxes and to monitor the differences
between the income tax basis and the financial reporting basis
of assets and liabilities to effectively reconcile the deferred
income tax balances; the Company lacked effective controls to
accurately determine the effective overall income tax rate to
use in tax provision computations; the Company lacked effective
controls to appropriately analyze, review and assess the impact
of state laws on the recoverability of the Companys state
net operating losses; and, the Company lacked controls over the
valuation of deferred tax assets to ensure the appropriate
application of federal limitations. This control deficiency
resulted in the restatement of the Companys consolidated
financial statements for 2002, 2003 and 2004, restatement of
each of the first three interim periods in 2004 and 2005 and
audit adjustments to the Companys 2005 financial
statements to correct income tax expense, deferred tax assets,
additional paid-in capital and goodwill accounts. Additionally,
this control deficiency could result in a misstatement of the
aforementioned accounts that would result in a material
misstatement to the annual or interim consolidated financial
statements that would not be prevented or detected. Accordingly,
management determined that this control deficiency constitutes a
material weakness.
2.
The Company did not maintain effective controls over
the completeness and accuracy of transactional
taxes.
Specifically, the Company lacked effective
controls to ensure state and local transactional taxes,
including surcharges and sales and use taxes, were completely
and accurately recorded in accordance with generally accepted
accounting principles. This control deficiency resulted in the
restatement of the Companys consolidated financial
statements for 2002, 2003 and 2004 and restatement of each of
the first three interim periods in 2004 and 2005 to correct
general and administrative expenses and accrued taxes liability
accounts. Additionally, this control deficiency could result in
a misstatement of the aforementioned accounts that would result
in a material misstatement to the annual or interim consolidated
financial statements that would not be prevented or detected.
Accordingly, management determined that this control deficiency
constitutes a material weakness.
F-3
3.
The Company did not maintain effective controls over
the completeness and accuracy of depreciation expense and
accumulated depreciation.
Specifically, the
Company lacked effective controls to ensure the:
(i) application of the appropriate useful lives for certain
asset groups when calculating depreciation expense and
(ii) timely preparation and review of account
reconciliations and analyses, and manual journal entries related
to the determination of depreciation expense and accumulated
depreciation for the paging infrastructure assets. This control
deficiency resulted in the restatement of the Companys
consolidated financial statements for 2003 and 2004, each of the
first three interim periods in 2004 and 2005 and audit
adjustments to the Companys 2005 financial statements to
correct depreciation expense and accumulated depreciation
balances. Additionally, this control deficiency could result in
a misstatement of the aforementioned accounts that would result
in a material misstatement to the annual or interim consolidated
financial statements that would not be prevented or detected.
Accordingly, management determined that this control deficiency
constitutes a material weakness.
4.
The Company did not maintain effective controls over
the completeness, accuracy and valuation of asset retirement
cost, asset retirement obligation and the related depreciation,
amortization and accretion expense.
Specifically,
the Company did not maintain effective controls to ensure that
the asset retirement cost and asset retirement obligation were
calculated utilizing the fair value of costs to deconstruct
network assets, in accordance with generally accepted accounting
principles. The Company also lacked effective controls to
consistently apply their expectations of the usage of assets for
recording depreciation expense with the estimates of transmitter
deconstructions for the asset retirement obligation. This
control deficiency resulted in the restatement of the
Companys consolidated financial statements for 2002, 2003
and 2004, each of the first three interim periods in 2004 and
2005 and audit adjustments to the Companys 2005 financial
statements to correct the asset retirement cost and asset
retirement obligation and the related depreciation,
amortization, and accretion expense. Additionally, this control
deficiency could result in a misstatement of the aforementioned
accounts that would result in a material misstatement to the
annual or interim consolidated financial statements that would
not be prevented or detected. Accordingly, management determined
that this control deficiency constitutes a material weakness.
These material weaknesses were considered in determining the
nature, timing, and extent of audit tests applied in our audit
of the 2004 consolidated financial statements, and our opinion
regarding the effectiveness of the Companys internal
control over financial reporting does not affect our opinion on
those consolidated financial statements.
As described in Managements Report on Internal Control
Over Financial Reporting, management has excluded Metrocall
Holdings, Inc. from its assessment of internal control over
financial reporting as of December 31, 2004 because it was
acquired by the Company in a purchase business combination
during 2004. We have also excluded Metrocall Holdings, Inc. from
our audit of internal control over financial reporting.
Metrocall Holdings, Inc. is a wholly-owned subsidiary whose
total assets and total revenues represent 50 percent and
8 percent, respectively, of the related consolidated
financial statement amounts as of and for the year ended
December 31, 2004.
Management and we previously concluded that the Company
maintained effective internal control over financial reporting
as of December 31, 2004. In connection with the restatement
of the Companys consolidated financial statements
discussed in Note 1 to the consolidated financial
statements management has subsequently determined that the
material weaknesses described above existed as of
December 31, 2004. Accordingly, Managements Report on
Internal Control Over Financial Reporting has been restated and
our opinion on internal control over financial reporting, as
presented herein, is different from that expressed in our
previous report.
In our opinion, managements assessment that USA Mobility,
Inc. did not maintain effective internal control over financial
reporting as of December 31, 2004, is fairly stated, in all
material respects, based on criteria established in
Internal
Control Integrated Framework
issued by the
COSO. Also, in our opinion, because of the effects of the
material weaknesses described above on the achievement of the
objectives of the control criteria, USA Mobility Inc. has not
maintained effective internal control over financial reporting
as of December 31, 2004, based on criteria established in
Internal Control Integrated Framework
issued by the COSO.
PricewaterhouseCoopers LLP
Boston, Massachusetts
March 16, 2005, except for the restatement discussed in
Note 1 to the consolidated financial statements and the
matter discussed in the penultimate paragraph of
Managements Report on Internal Control Over Financial
Reporting, as to which the date is May 24, 2006
F-4
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
USA Mobility, Inc.
In our opinion, the accompanying consolidated statements of
income, of cash flows and of stockholders equity for the
period from January 1, 2002 to May 31, 2002 present
fairly, in all material respects, the results of operations and
cash flows of USA Mobility, Inc. (formerly Arch Wireless, Inc.)
(Predecessor Company) for the period from January 1, 2002
to May 31, 2002 in conformity with accounting principles
generally accepted in the United States of America. These
financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audit. We
conducted our audit of these statements in accordance with
standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant
estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
As discussed in Note 2 to the consolidated financial
statements, the Company filed a petition on December 6,
2001 with the United States Bankruptcy Court for the District of
Massachusetts, Western Division for reorganization under the
provisions of Chapter 11 of the Bankruptcy Code. The
Companys First Amended Joint Plan of Reorganization was
substantially consummated on May 29, 2002 and the Company
emerged from bankruptcy. In connection with its emergence from
bankruptcy, the Company adopted fresh start accounting.
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 26, 2004
F-5
USA
MOBILITY, INC.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2003
|
|
|
2004
|
|
|
|
(Restated)
|
|
|
(Restated)
|
|
|
|
(In thousands)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
34,582
|
|
|
$
|
46,995
|
|
Accounts receivable, less reserves
of $8,645 and $8,293 in 2003 and 2004, respectively
|
|
|
28,925
|
|
|
|
40,078
|
|
Deposits
|
|
|
6,776
|
|
|
|
117
|
|
Prepaid expenses and other
|
|
|
7,895
|
|
|
|
15,343
|
|
Deferred income tax
|
|
|
32,389
|
|
|
|
25,525
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
110,567
|
|
|
|
128,058
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, at cost:
|
|
|
|
|
|
|
|
|
Land, buildings and improvements
|
|
|
19,601
|
|
|
|
17,190
|
|
Paging and computer equipment
|
|
|
375,875
|
|
|
|
464,967
|
|
Furniture, fixtures and vehicles
|
|
|
6,006
|
|
|
|
8,737
|
|
|
|
|
|
|
|
|
|
|
|
|
|
401,482
|
|
|
|
490,894
|
|
Less accumulated depreciation and
amortization
|
|
|
192,976
|
|
|
|
270,866
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
208,506
|
|
|
|
220,028
|
|
Goodwill
|
|
|
|
|
|
|
154,369
|
|
Assets held for sale
|
|
|
1,139
|
|
|
|
|
|
Intangible assets, less
accumulated amortization of $5,666 and $10,791 in 2003 and 2004
respectively
|
|
|
|
|
|
|
67,129
|
|
Deferred income tax assets
|
|
|
175,280
|
|
|
|
207,046
|
|
Other assets
|
|
|
3
|
|
|
|
5,517
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
495,495
|
|
|
$
|
782,147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Current maturities of long-term
debt
|
|
$
|
20,000
|
|
|
$
|
47,558
|
|
Accounts payable
|
|
|
8,836
|
|
|
|
6,011
|
|
Accrued compensation and benefits
|
|
|
16,759
|
|
|
|
10,329
|
|
Accrued network costs
|
|
|
7,893
|
|
|
|
8,956
|
|
Accrued taxes
|
|
|
11,393
|
|
|
|
30,097
|
|
Accrued interest
|
|
|
1,520
|
|
|
|
547
|
|
Accrued severance and restructuring
|
|
|
12,542
|
|
|
|
16,241
|
|
Accrued other
|
|
|
11,757
|
|
|
|
14,297
|
|
Customer deposits
|
|
|
5,126
|
|
|
|
4,316
|
|
Deferred revenue
|
|
|
20,351
|
|
|
|
23,623
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
116,177
|
|
|
|
161,975
|
|
Long-term debt, less current
maturities
|
|
|
40,000
|
|
|
|
47,500
|
|
Other long-term liabilities
|
|
|
13,054
|
|
|
|
16,632
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES
|
|
|
169,231
|
|
|
|
226,107
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS EQUITY:
|
|
|
|
|
|
|
|
|
Preferred stock
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
2
|
|
|
|
3
|
|
Additional paid-in capital
|
|
|
318,858
|
|
|
|
538,107
|
|
Deferred stock compensation
|
|
|
(2,682
|
)
|
|
|
(1,855
|
)
|
Retained earnings
|
|
|
10,086
|
|
|
|
19,785
|
|
|
|
|
|
|
|
|
|
|
Total Stockholders equity
|
|
|
326,264
|
|
|
|
556,040
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND
STOCKHOLDERS EQUITY
|
|
$
|
495,495
|
|
|
$
|
782,147
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
USA
MOBILITY, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
Reorganized Company
(Note 2)
|
|
|
|
Company
|
|
|
|
Seven Months
|
|
|
|
|
|
|
|
|
|
(Note 2)
|
|
|
|
Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
Five Months
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
Ended May 31,
|
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
|
2002
|
|
|
|
(Restated)
|
|
|
(Restated)
|
|
|
(Restated)
|
|
|
|
(In thousands, except share and
per share amounts)
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service, rental and maintenance
|
|
$
|
351,721
|
|
|
|
$
|
432,445
|
|
|
$
|
571,989
|
|
|
$
|
470,751
|
|
Product sales
|
|
|
13,639
|
|
|
|
|
20,924
|
|
|
|
25,489
|
|
|
|
19,409
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
365,360
|
|
|
|
|
453,369
|
|
|
|
597,478
|
|
|
|
490,160
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of products sold (exclusive
of depreciation, amortization, accretion and stock based
compensation shown separately below)
|
|
|
10,426
|
|
|
|
|
7,740
|
|
|
|
5,580
|
|
|
|
4,347
|
|
Service, rental and maintenance
(exclusive of depreciation, amortization, accretion and stock
based compensation shown separately below)
|
|
|
105,990
|
|
|
|
|
132,611
|
|
|
|
189,290
|
|
|
|
160,144
|
|
Selling and marketing (exclusive
of stock based compensation shown separately below)
|
|
|
35,313
|
|
|
|
|
37,897
|
|
|
|
45,639
|
|
|
|
36,085
|
|
General and administrative
(exclusive of depreciation, amortization, accretion and stock
based compensation shown separately below)
|
|
|
116,668
|
|
|
|
|
136,793
|
|
|
|
166,948
|
|
|
|
130,046
|
|
Depreciation, amortization and
accretion
|
|
|
82,720
|
|
|
|
|
110,192
|
|
|
|
129,658
|
|
|
|
107,629
|
|
Stock based compensation
|
|
|
|
|
|
|
|
6,979
|
|
|
|
6,218
|
|
|
|
4,863
|
|
Severance and restructuring
|
|
|
|
|
|
|
|
|
|
|
|
16,683
|
|
|
|
11,938
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
351,117
|
|
|
|
|
432,212
|
|
|
|
560,016
|
|
|
|
455,052
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
14,243
|
|
|
|
|
21,157
|
|
|
|
37,462
|
|
|
|
35,108
|
|
Interest expense
|
|
|
(2,254
|
)
|
|
|
|
(18,717
|
)
|
|
|
(19,788
|
)
|
|
|
(6,365
|
)
|
Interest income
|
|
|
76
|
|
|
|
|
377
|
|
|
|
551
|
|
|
|
451
|
|
Gain (loss) on extinguishment of
debt
|
|
|
1,621,355
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,031
|
)
|
Other income (expense)
|
|
|
110
|
|
|
|
|
(1,129
|
)
|
|
|
516
|
|
|
|
814
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before reorganization
items, net and fresh start accounting adjustments
|
|
|
1,633,530
|
|
|
|
|
1,688
|
|
|
|
18,741
|
|
|
|
28,977
|
|
Reorganization adjustments, net
|
|
|
(22,503
|
)
|
|
|
|
(2,765
|
)
|
|
|
(425
|
)
|
|
|
|
|
Fresh start accounting adjustments
|
|
|
47,895
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax
(expense)
|
|
|
1,658,922
|
|
|
|
|
(1,077
|
)
|
|
|
18,316
|
|
|
|
28,977
|
|
Income tax (expense)
|
|
|
|
|
|
|
|
(2,265
|
)
|
|
|
(5,308
|
)
|
|
|
(16,810
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
1,658,922
|
|
|
|
$
|
(3,342
|
)
|
|
$
|
13,008
|
|
|
$
|
12,167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per common
share
|
|
$
|
9.09
|
|
|
|
$
|
(0.17
|
)
|
|
$
|
0.65
|
|
|
$
|
0.58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per
common share
|
|
$
|
9.09
|
|
|
|
$
|
(0.17
|
)
|
|
$
|
0.65
|
|
|
$
|
0.58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average common
shares outstanding
|
|
|
182,434,590
|
|
|
|
|
20,000,000
|
|
|
|
20,000,000
|
|
|
|
20,839,959
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average common
shares outstanding
|
|
|
182,434,590
|
|
|
|
|
20,000,000
|
|
|
|
20,034,476
|
|
|
|
20,966,405
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-7
USA
MOBILITY, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
Retained
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
Other
|
|
|
Earnings
|
|
|
Total
|
|
|
|
Common
|
|
|
Paid-In
|
|
|
Treasury
|
|
|
Deferred Stock
|
|
|
Comprehensive
|
|
|
(Accumulated
|
|
|
Stockholders
|
|
|
|
Stock
|
|
|
Capital
|
|
|
Stock
|
|
|
Compensation
|
|
|
Income (loss)
|
|
|
Deficit)
|
|
|
Equity (Deficit)
|
|
|
|
(In thousands, except share
amounts)
|
|
|
|
|
|
Predecessor Company
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2001
|
|
$
|
1,824
|
|
|
$
|
1,107,233
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,991
|
|
|
$
|
(2,767,959
|
)
|
|
$
|
(1,656,911
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,658,922
|
|
|
|
1,658,922
|
|
Foreign currency translation
adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,011
|
)
|
|
|
|
|
|
|
(2,011
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,656,911
|
|
Cancellation of predecessor equity
interests upon emergence from bankruptcy
|
|
|
(1,824
|
)
|
|
|
(1,107,233
|
)
|
|
|
|
|
|
|
|
|
|
|
20
|
|
|
|
1,109,037
|
|
|
|
|
|
Issuance of 20,000,000 shares
of Reorganized Company common stock upon emergence from
bankruptcy
|
|
|
20
|
|
|
|
121,456
|
|
|
|
|
|
|
|
(5,375
|
)
|
|
|
|
|
|
|
|
|
|
|
116,101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, May 31, 2002
|
|
$
|
20
|
|
|
$
|
121,456
|
|
|
$
|
|
|
|
$
|
(5,375
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
116,101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reorganized Company
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 1, 2002
|
|
$
|
20
|
|
|
$
|
121,456
|
|
|
$
|
|
|
|
$
|
(5,375
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
116,101
|
|
Net (loss) (Restated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,342
|
)
|
|
|
(3,342
|
)
|
Foreign currency translation
adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,119
|
|
|
|
|
|
|
|
1,119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,223
|
)
|
Partial divestiture of Canadian
subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,119
|
)
|
|
|
420
|
|
|
|
(699
|
)
|
Amortization of deferred stock
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,045
|
|
|
|
|
|
|
|
|
|
|
|
1,045
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2002
(Restated)
|
|
|
20
|
|
|
|
121,456
|
|
|
|
|
|
|
|
(4,330
|
)
|
|
|
|
|
|
|
(2,922
|
)
|
|
|
114,224
|
|
Net income (Restated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,008
|
|
|
|
13,008
|
|
Change in par value of common stock
|
|
|
(18
|
)
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common shares to
management pursuant to plan of reorganization
|
|
|
|
|
|
|
197
|
|
|
|
|
|
|
|
(197
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of compensation
expense associated with stock options issued to the board of
directors
|
|
|
|
|
|
|
1,304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,304
|
|
Amortization of deferred stock
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,845
|
|
|
|
|
|
|
|
|
|
|
|
1,845
|
|
Reversal of valuation allowance
previously recorded against deferred income tax assets
|
|
|
|
|
|
|
195,883
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
195,883
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2003
(Restated)
|
|
|
2
|
|
|
|
318,858
|
|
|
|
|
|
|
|
(2,682
|
)
|
|
|
|
|
|
|
10,086
|
|
|
|
326,264
|
|
Net income (Restated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,167
|
|
|
|
12,167
|
|
Issuance of 7,236,868 shares
of common stock and 317,044 options to purchase common stock in
conjunction with the Metrocall merger
|
|
|
1
|
|
|
|
216,567
|
|
|
|
|
|
|
|
(2,332
|
)
|
|
|
|
|
|
|
|
|
|
|
214,236
|
|
Issuance of common shares to
management pursuant to plan of reorganization
|
|
|
|
|
|
|
669
|
|
|
|
|
|
|
|
(669
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of compensation
expense associated with stock options
|
|
|
|
|
|
|
358
|
|
|
|
|
|
|
|
614
|
|
|
|
|
|
|
|
|
|
|
|
972
|
|
Amortization of deferred stock
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,094
|
|
|
|
|
|
|
|
|
|
|
|
1,094
|
|
Purchase of treasury stock
|
|
|
|
|
|
|
|
|
|
|
(3,113
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,113
|
)
|
Treasury stock recorded from
unrecognized compensation expense of terminated management
participating in the restricted stock plan
|
|
|
|
|
|
|
|
|
|
|
(2,120
|
)
|
|
|
2,120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement of treasury stock
|
|
|
|
|
|
|
(2,765
|
)
|
|
|
5,233
|
|
|
|
|
|
|
|
|
|
|
|
(2,468
|
)
|
|
|
|
|
Recognition of deferred tax asset
for excess stock compensation deduction
|
|
|
|
|
|
|
4,420
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,420
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2004
(Restated)
|
|
$
|
3
|
|
|
$
|
538,107
|
|
|
$
|
|
|
|
$
|
(1,855
|
)
|
|
$
|
|
|
|
$
|
19,785
|
|
|
$
|
556,040
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-8
USA
MOBILITY, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
|
|
|
|
Company
|
|
|
|
|
|
|
|
(Note 2)
|
|
|
|
Reorganized Company
(Note 2)
|
|
|
|
Five Months
|
|
|
|
Seven Months
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
|
Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
May 31,
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2002
|
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
|
|
|
|
|
(Restated)
|
|
|
(Restated)
|
|
|
(Restated)
|
|
|
|
(In thousands)
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
1,658,922
|
|
|
|
$
|
(3,342
|
)
|
|
$
|
13,008
|
|
|
$
|
12,167
|
|
Adjustments to reconcile net income
to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation, amortization and
accretion
|
|
|
82,720
|
|
|
|
|
110,192
|
|
|
|
129,658
|
|
|
|
107,629
|
|
Fresh start accounting adjustments
|
|
|
(47,895
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax expense
|
|
|
|
|
|
|
|
2,265
|
|
|
|
1,655
|
|
|
|
17,766
|
|
Loss (gain) on extinguishment of
debt
|
|
|
(1,622,642
|
)
|
|
|
|
|
|
|
|
|
|
|
|
1,036
|
|
Amortization of deferred financing
costs
|
|
|
|
|
|
|
|
7,185
|
|
|
|
4,681
|
|
|
|
372
|
|
Deferred stock compensation
|
|
|
|
|
|
|
|
6,979
|
|
|
|
6,218
|
|
|
|
4,863
|
|
Provisions for doubtful accounts
and service adjustments
|
|
|
34,355
|
|
|
|
|
35,048
|
|
|
|
22,958
|
|
|
|
13,565
|
|
(Gain) loss on disposals of
property and equipment
|
|
|
|
|
|
|
|
|
|
|
|
(16
|
)
|
|
|
(93
|
)
|
Changes in assets and liabilities,
net of effects of merger:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(2,827
|
)
|
|
|
|
(22,848
|
)
|
|
|
(6,861
|
)
|
|
|
(2,158
|
)
|
Prepaid expenses and other
|
|
|
(17,225
|
)
|
|
|
|
12,820
|
|
|
|
14,080
|
|
|
|
4,745
|
|
Other long-term assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,962
|
)
|
Accounts payable and accrued
expenses
|
|
|
(11,843
|
)
|
|
|
|
(11,906
|
)
|
|
|
652
|
|
|
|
(28,451
|
)
|
Customer deposits and deferred
revenue
|
|
|
4,325
|
|
|
|
|
(5,777
|
)
|
|
|
(10,227
|
)
|
|
|
(8,790
|
)
|
Other long-term liabilities
|
|
|
(727
|
)
|
|
|
|
(1,124
|
)
|
|
|
5,439
|
|
|
|
(3,424
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
77,163
|
|
|
|
|
129,492
|
|
|
|
181,245
|
|
|
|
114,265
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to property and
equipment, net
|
|
|
(44,474
|
)
|
|
|
|
(39,935
|
)
|
|
|
(25,446
|
)
|
|
|
(19,232
|
)
|
Proceeds from disposals of property
and equipment
|
|
|
|
|
|
|
|
|
|
|
|
3,176
|
|
|
|
2,998
|
|
Issuance of long-term note
receivable
|
|
|
|
|
|
|
|
(450
|
)
|
|
|
|
|
|
|
|
|
Receipts of long-term note
receivable
|
|
|
|
|
|
|
|
|
|
|
|
286
|
|
|
|
271
|
|
Cash balance related to partial
divestiture of Canadian subsidiaries
|
|
|
|
|
|
|
|
(870
|
)
|
|
|
|
|
|
|
|
|
Merger of companies, net of cash
acquired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(117,759
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities
|
|
|
(44,474
|
)
|
|
|
|
(41,255
|
)
|
|
|
(21,984
|
)
|
|
|
(133,722
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of long-term debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
140,000
|
|
Repayment of long-term debt
|
|
|
(65,394
|
)
|
|
|
|
(90,580
|
)
|
|
|
(161,866
|
)
|
|
|
(105,017
|
)
|
Purchase of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,113
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
financing activities
|
|
|
(65,394
|
)
|
|
|
|
(90,580
|
)
|
|
|
(161,866
|
)
|
|
|
31,870
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on
cash
|
|
|
32
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and
cash equivalents
|
|
|
(32,673
|
)
|
|
|
|
(2,340
|
)
|
|
|
(2,605
|
)
|
|
|
12,413
|
|
Cash and cash equivalents,
beginning of period
|
|
|
72,200
|
|
|
|
|
39,527
|
|
|
|
37,187
|
|
|
|
34,582
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of
period
|
|
$
|
39,527
|
|
|
|
$
|
37,187
|
|
|
$
|
34,582
|
|
|
$
|
46,995
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
2,257
|
|
|
|
$
|
10,065
|
|
|
$
|
15,033
|
|
|
$
|
6,966
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset retirement obligation and cost
|
|
$
|
|
|
|
|
$
|
11,743
|
|
|
$
|
|
|
|
$
|
5,617
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayment of debt with restricted
cash
|
|
$
|
36,899
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid
|
|
$
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,729
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock and options issued in
Metrocall merger
|
|
$
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
214,236
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities assumed in merger
|
|
$
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
57,214
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of new debt and common
stock in exchange for liabilities
|
|
$
|
416,101
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reorganization expenses paid
|
|
$
|
22,503
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-9
USA
MOBILITY, INC.
|
|
1
|
Organization
and Significant Accounting Policies
|
Restatement of Prior Year Financial
Statements
During 2005, USA Mobility, Inc.
(USA Mobility, the Company or
we) identified adjustments related to certain
assets, liabilities, and expenses of the 2002, 2003 and 2004
consolidated financial statements and the respective quarterly
financial information. Accordingly, the Company has restated the
seven months ended December 31, 2002 and the annual 2003
and 2004 consolidated financial statements and the respective
quarterly financial information. The Companys assessment
of certain identified accounting errors resulted in the
following adjustments to previously reported periods:
1. Asset retirement obligations were incorrectly
calculated in 2002, 2003 and 2004.
The Company
adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 143,
Accounting for
Asset Retirement Obligations
(SFAS No. 143) in 2002. The Company did
not record the initial asset retirement obligation and related
asset retirement cost upon emergence from bankruptcy; therefore,
the Company understated subsequent accretion expense related to
the asset retirement obligation and depreciation expense of the
asset retirement cost in 2002. In addition, in 2002, 2003 and
2004 the Company did not correctly use the fair value of costs
to deconstruct transmitters to determine the fair value of the
asset retirement obligation, which understated reported
liabilities and assets. The Companys expected timing of
cash flows of the transmitter deconstructions have also been
revised to coincide with their depreciable lives that were
estimated during the applicable time period.
Accordingly, the restated financial statements as of
December 31, 2002 include increases of $9.3 million in
property and equipment, at cost, $4.6 million in
accumulated depreciation, $6.3 million in depreciation,
amortization and accretion expense, $2.9 million in current
liabilities and $5.4 million in long-term liabilities, and
a decrease of $2.7 million in service, rental and
maintenance expense. The restated financial statements for 2003
include a decrease of $2.2 million in property and
equipment, at cost, increases of $0.2 million in
accumulated depreciation, $2.8 million in depreciation,
amortization and accretion expense, decreases of
$2.2 million in current liabilities, $0.05 million in
long-term liabilities, and $2.5 million in service, rental
and maintenance expense. The restated financial statements for
2004 include a decrease of $0.05 million in property and
equipment, at cost, increases of $0.9 million in
accumulated depreciation, $2.7 million in depreciation,
amortization and accretion expense, $0.2 million in current
liabilities, $1.1 million in long-term liabilities, and a
decrease of $0.5 million in service, rental and maintenance
expense. During the first, second and third quarters of 2004
accumulated depreciation increased by less than
$0.2 million in each quarter. Current liabilities decreased
by less than $0.1 million in each of the first, second and
third quarters of 2004. Long-term liabilities increased by
$0.4 million in each of the first, second and third
quarters of 2004. Depreciation, amortization and accretion
expense increased by $0.6 million in each of the first,
second and third quarters of 2004 while service, rental and
maintenance expense decreased by $0.1 million in the first
quarter of 2004 and decreased by $0.2 million in each of
the second and third quarters of 2004.
2.
Certain adjustments to the value of the deferred tax
asset for 2003 and 2004 were not calculated
appropriately.
In 2003, the deferred tax asset
attributable to state income tax net operating losses
(NOLs) was overstated due to the misapplication, for
accounting purposes, of state laws which govern the realization
of NOLs. Previously, the Company valued its 2003 state
income tax NOLs based on an erroneous state income tax rate and
a single NOL utilization rule rather than on an evaluation of
each applicable jurisdictions rate and rules. The Company
also determined that its 2003 deferred tax asset for certain
fixed assets and intangibles was misstated due to errors in the
accounting for tax basis and in the application of a federal
limitation. The federal limitation may restrict certain tax
depreciation and amortization deductions for a limited time.
Accordingly, the restated financial statements include a net
$11.9 million decrease in deferred tax assets and
additional paid-in capital as of December 31, 2003.
In addition to the impact of the matters described above, in
2004, an erroneous calculation was used to determine the
applicable state income tax rate used to value deferred tax
assets. The 2004 calculation did not properly consider the
Companys state income tax apportionment. Accordingly, the
restated financial statements include a $19.6 million
decrease in deferred tax assets and a $7.5 million increase
to income tax expense
F-10
USA
MOBILITY, INC.
NOTES TO
CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
for the year ended December 31, 2004. In addition, this
error impacted the value attributed to acquired assets resulting
in an increase of $1.7 million to goodwill in 2004.
3.
Certain state and local transactional taxes were not
recorded in the appropriate periods.
The
Companys process for identifying and recording state and
local transactional taxes failed to recognize a
$2.8 million liability for certain transactional taxes
imposed by certain jurisdictions in which the Company operates.
These errors were initially noted and recognized by the Company
in the second and third quarters of 2005 through recognition of
additional expense. However, during the preparation of the
Companys 2005 financial statements, the Company determined
that it is appropriate to restate previous years financial
statements because only $0.6 million of the liability
relates to 2005 and the remaining $2.2 million was incurred
in prior years. To correct these errors, the restated financial
statements reflect the recognition of these expenses in the
appropriate accounting periods. Accordingly, the restated
financial statements include a $0.5 million,
$0.8 million and $0.7 million increase in general and
administrative expense in 2002, 2003 and 2004, respectively, and
a $2.2 million decrease in general and administrative
expense in 2005. In addition, this error impacted the value
attributed to acquired assets resulting in an increase of
$0.2 million to goodwill in 2004.
4.
Adjustments were required to assets and liabilities
acquired as part of the November 2004 acquisition of
Metrocall.
As a result of a failure to accurately
and completely apply cash receipts at Metrocall, the Company
incorrectly allocated the purchase price consideration to other
accounts receivable recorded in the historical Metrocall
financial statements. This error resulted in an overstatement of
other accounts receivable of $0.7 million at
December 31, 2004. Accordingly, the restated financial
statements include a decrease in accounts receivable of
$0.7 million with a corresponding increase to goodwill at
December 31, 2004.
5. Depreciation expense was incorrectly calculated in
2003 and 2004.
Depreciation expense did not
accurately reflect the expected economic usage of the
Companys paging network infrastructure assets. The Company
previously established an overall depreciable life of
60 months for its paging infrastructure and accelerated
depreciation on specified asset groups. In 2003, the
depreciation expense related to certain specified asset groups
that were removed from service was not properly calculated.
Accordingly, the restated financial statements for 2003 include
an increase in depreciation, amortization and accretion expense
and accumulated depreciation of $7.6 million. The restated
financial statements for 2004 reflect a $9.9 million
decrease in depreciation, amortization and accretion expense and
accumulated depreciation. The interim quarterly financial
statements for the first, second and third quarters of 2004
reflect a decrease in depreciation, amortization and accretion
expense and accumulated depreciation of $0.7 million,
$3.5 million and $1.2 million, respectively.
6.
Employee severance was not recorded during
2004.
During 2004 certain Arch key executives
were terminated, triggering potential future payment of
severance benefits. The Company did not appropriately accrue the
fair value of certain one-time future termination benefits due
to those executives, resulting in an understatement of severance
expense and accrued liabilities for the quarter and year ended
December 31, 2004 of $0.9 million. Accordingly, the
restated financial statements include an increase in accrued
liabilities and severance expense in the fourth quarter of 2004
of $0.9 million.
7.
Other income was not recorded
properly.
The Company determined that a
correction of its minority interest in GTES LLC, a consolidated
subsidiary, originally recorded in the first quarter of 2005,
should be recorded in the fourth quarter of 2004. Accordingly,
the restated financial statements include an increase to other
income by $0.2 million and a decrease to other long-term
liabilities by $0.2 million in the fourth quarter
of 2004.
None of the restatement items discussed above impacted reported
revenues, cash balances or cash flows.
F-11
USA
MOBILITY, INC.
NOTES TO
CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
The following tables provide a summary of the restatement
adjustments:
Summary
of Adjustments to
Operating Income, Net Income, and Earnings per Share
(In thousands except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seven Months
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
Operating
income as previously reported
|
|
$
|
25,326
|
|
|
$
|
46,115
|
|
|
$
|
29,046
|
|
Increase (decrease) due to changes
in:
|
|
|
|
|
|
|
|
|
|
|
|
|
Service, Rental and Maintenance
|
|
|
2,684
|
|
|
|
2,549
|
|
|
|
504
|
|
General and administrative expense
|
|
|
(536
|
)
|
|
|
(781
|
)
|
|
|
(747
|
)
|
Depreciation, amortization, and
accretion
|
|
|
(6,317
|
)
|
|
|
(10,421
|
)
|
|
|
7,161
|
|
Severance and restructuring
|
|
|
|
|
|
|
|
|
|
|
(856
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
(loss) as restated
|
|
$
|
21,157
|
|
|
$
|
37,462
|
|
|
$
|
35,108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
(loss) as previously reported
|
|
$
|
827
|
|
|
$
|
16,128
|
|
|
$
|
13,481
|
|
Adjustments to operating income
(loss), net
|
|
|
(4,169
|
)
|
|
|
(8,653
|
)
|
|
|
6,062
|
|
Other income,
net increase (decrease)
|
|
|
|
|
|
|
|
|
|
|
156
|
|
Income tax
expense (increase) decrease
|
|
|
|
|
|
|
5,533
|
|
|
|
(7,532
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
(loss) as restated
|
|
$
|
(3,342
|
)
|
|
$
|
13,008
|
|
|
$
|
12,167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seven Months
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
Diluted net income per common
share as previously reported
|
|
$
|
0.04
|
|
|
$
|
0.81
|
|
|
$
|
0.64
|
|
Effect of adjustments to income
|
|
|
(0.21
|
)
|
|
|
(0.16
|
)
|
|
|
(0.06
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per
common share as restated
|
|
$
|
(0.17
|
)
|
|
$
|
0.65
|
|
|
$
|
0.58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-12
USA
MOBILITY, INC.
NOTES TO
CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
Summary
of Adjustments to Assets and Liabilities
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(740
|
)
|
Property and equipment, net
|
|
|
4,710
|
|
|
|
(5,367
|
)
|
|
|
3,520
|
|
Goodwill
|
|
|
|
|
|
|
|
|
|
|
2,578
|
|
Deferred income tax assets
|
|
|
|
|
|
|
(11,883
|
)
|
|
|
(19,588
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impact on Assets
|
|
$
|
4,710
|
|
|
$
|
(17,250
|
)
|
|
$
|
(14,230
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets, as restated
|
|
$
|
442,634
|
|
|
$
|
495,495
|
|
|
$
|
782,147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued taxes
|
|
$
|
536
|
|
|
$
|
1,317
|
|
|
$
|
2,235
|
|
Accrued restructuring
|
|
|
|
|
|
|
|
|
|
|
856
|
|
Accrued other
|
|
|
2,939
|
|
|
|
780
|
|
|
|
951
|
|
Other long-term liabilities
|
|
|
5,404
|
|
|
|
9,012
|
|
|
|
9,025
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impact on Liabilities
|
|
$
|
8,879
|
|
|
$
|
11,109
|
|
|
$
|
13,067
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities, as restated
|
|
$
|
328,410
|
|
|
$
|
169,231
|
|
|
$
|
226,107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in:
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
$
|
|
|
|
$
|
(21,070
|
)
|
|
$
|
(18,694
|
)
|
Retained earnings
|
|
|
(4,169
|
)
|
|
|
(7,289
|
)
|
|
|
(8,603
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impact on Equity
|
|
$
|
(4,169
|
)
|
|
$
|
(28,359
|
)
|
|
$
|
(27,297
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Equity, as restated
|
|
$
|
114,224
|
|
|
$
|
326,264
|
|
|
$
|
556,040
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impact on Liabilities &
Equity
|
|
$
|
4,710
|
|
|
$
|
(17,250
|
)
|
|
$
|
(14,230
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Equity, as
restated
|
|
$
|
442,634
|
|
|
$
|
495,495
|
|
|
$
|
782,147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-13
USA
MOBILITY, INC.
NOTES TO
CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
The financial statement line items impacted by these adjustments
are summarized in the following tables (in thousands, except
shares and per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2003
|
|
|
December 31, 2004
|
|
|
|
As
|
|
|
|
|
|
As
|
|
|
|
|
|
|
previously
|
|
|
|
|
|
previously
|
|
|
|
|
|
|
reported
|
|
|
As restated
|
|
|
reported
|
|
|
As restated
|
|
|
|
(In thousands)
|
|
|
ASSETS
|
Accounts receivable, net
|
|
$
|
26,052
|
|
|
$
|
28,925
|
|
|
$
|
37,750
|
|
|
$
|
40,078
|
|
Deferred income tax
assets current
|
|
|
30,206
|
|
|
|
32,389
|
|
|
|
26,906
|
|
|
|
25,525
|
|
Total current assets
|
|
|
105,511
|
|
|
|
110,567
|
|
|
|
127,111
|
|
|
|
128,058
|
|
Property and equipment, net
|
|
|
213,873
|
|
|
|
208,506
|
|
|
|
216,508
|
|
|
|
220,028
|
|
Goodwill
|
|
|
|
|
|
|
|
|
|
|
151,791
|
|
|
|
154,369
|
|
Deferred income tax
assets long-term
|
|
|
189,346
|
|
|
|
175,280
|
|
|
|
225,253
|
|
|
|
207,046
|
|
Total Assets
|
|
$
|
509,872
|
|
|
$
|
495,495
|
|
|
$
|
793,309
|
|
|
$
|
782,147
|
|
LIABILITIES AND STOCKHOLDERS
EQUITY
|
Accrued compensation and benefits
|
|
$
|
17,820
|
|
|
$
|
16,759
|
|
|
$
|
17,792
|
|
|
$
|
10,329
|
|
Accrued taxes
|
|
|
10,076
|
|
|
|
11,393
|
|
|
|
27,862
|
|
|
|
30,097
|
|
Accrued severance and restructuring
|
|
|
11,481
|
|
|
|
12,542
|
|
|
|
4,974
|
|
|
|
16,241
|
|
Accrued other
|
|
|
8,104
|
|
|
|
11,757
|
|
|
|
10,279
|
|
|
|
14,297
|
|
Total current liabilities
|
|
|
111,207
|
|
|
|
116,177
|
|
|
|
151,917
|
|
|
|
161,975
|
|
Other long-term liabilities
|
|
|
4,042
|
|
|
|
13,054
|
|
|
|
10,555
|
|
|
|
16,632
|
|
Total Liabilities
|
|
|
155,249
|
|
|
|
169,231
|
|
|
|
209,972
|
|
|
|
226,107
|
|
Total Stockholders Equity
|
|
|
354,623
|
|
|
|
326,264
|
|
|
|
583,337
|
|
|
|
556,040
|
|
Total Liabilities and
Stockholders Equity
|
|
$
|
509,872
|
|
|
$
|
495,495
|
|
|
$
|
793,309
|
|
|
$
|
782,147
|
|
F-14
USA
MOBILITY, INC.
NOTES TO
CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seven Months Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31, 2002
|
|
|
December 31, 2003
|
|
|
December 31, 2004
|
|
|
|
As
|
|
|
|
|
|
As
|
|
|
|
|
|
As
|
|
|
|
|
|
|
previously
|
|
|
|
|
|
previously
|
|
|
As
|
|
|
previously
|
|
|
As
|
|
|
|
reported
|
|
|
As restated
|
|
|
reported
|
|
|
restated
|
|
|
reported
|
|
|
restated
|
|
|
Service, rental and maintenance
|
|
$
|
135,295
|
|
|
$
|
132,611
|
|
|
$
|
192,159
|
|
|
$
|
189,290
|
|
|
$
|
161,071
|
|
|
$
|
160,144
|
|
General and administrative
|
|
|
136,257
|
|
|
|
136,793
|
|
|
|
166,167
|
|
|
|
166,948
|
|
|
|
129,299
|
|
|
|
130,046
|
|
Depreciation, amortization and
accretion
|
|
|
103,875
|
|
|
|
110,192
|
|
|
|
118,917
|
|
|
|
129,658
|
|
|
|
114,367
|
|
|
|
107,629
|
|
Stock based compensation
|
|
|
6,979
|
|
|
|
6,979
|
|
|
|
11,420
|
|
|
|
6,218
|
|
|
|
12,927
|
|
|
|
4,863
|
|
Severance and restructuring charges
|
|
|
|
|
|
|
|
|
|
|
11,481
|
|
|
|
16,683
|
|
|
|
3,018
|
|
|
|
11,938
|
|
Total operating expenses
|
|
|
428,043
|
|
|
|
432,212
|
|
|
|
551,363
|
|
|
|
560,016
|
|
|
|
461,114
|
|
|
|
455,052
|
|
Operating income
|
|
|
25,326
|
|
|
|
21,157
|
|
|
|
46,115
|
|
|
|
37,462
|
|
|
|
29,046
|
|
|
|
35,108
|
|
Other income
|
|
|
(1,129
|
)
|
|
|
(1,129
|
)
|
|
|
516
|
|
|
|
516
|
|
|
|
658
|
|
|
|
814
|
|
Income before income tax (expense)
|
|
|
3,092
|
|
|
|
(1,077
|
)
|
|
|
26,969
|
|
|
|
18,316
|
|
|
|
22,759
|
|
|
|
28,977
|
|
Income tax (expense)
|
|
|
(2,265
|
)
|
|
|
(2,265
|
)
|
|
|
(10,841
|
)
|
|
|
(5,308
|
)
|
|
|
(9,278
|
)
|
|
|
(16,810
|
)
|
Net income
|
|
$
|
827
|
|
|
$
|
(3,342
|
)
|
|
$
|
16,128
|
|
|
$
|
13,008
|
|
|
$
|
13,481
|
|
|
$
|
12,167
|
|
Basic net income per common share
|
|
$
|
0.04
|
|
|
$
|
(0.17
|
)
|
|
$
|
0.81
|
|
|
$
|
0.65
|
|
|
$
|
0.65
|
|
|
$
|
0.58
|
|
Diluted net income per common share
|
|
$
|
0.04
|
|
|
$
|
(0.17
|
)
|
|
$
|
0.81
|
|
|
$
|
0.65
|
|
|
$
|
0.64
|
|
|
$
|
0.58
|
|
Business
USA Mobility, formerly Arch
Wireless, Inc., is a leading provider of wireless messaging and
information services 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 or PDAs and
personal computers. USA Mobility also offers wireless
information services, such as stock quotes, news, weather and
sports updates, voice mail, personalized greeting, message
storage and retrieval and equipment loss and/or maintenance
protection to both one and two-way messaging subscribers. These
services are commonly referred to as wireless messaging and
information services.
Organization and Principles of
Consolidation
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 (see Note 3). Prior to the merger,
USA Mobility had conducted no operations other than those
incidental to its formation. For financial reporting purposes,
Arch was deemed to be the accounting acquirer of Metrocall. The
historical information for USA Mobility includes the historical
financial information of Arch for 2002, 2003 and 2004 and the
acquired operations of Metrocall from November 16, 2004.
The accompanying consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries, Arch
and Metrocall. All significant intercompany accounts and
transactions have been eliminated in consolidation. Investments
in affiliated companies that are 20%-50% owned entities, or
those in which we can otherwise exercise significant influence,
are accounted for under the equity method of accounting, which
include PageNet Canada, Inc. and Iris Wireless, Inc., both of
which have a carrying value of zero.
Bankruptcy-Related Financial
Reporting
The consolidated financial
statements of Arch, prior to its emergence from Chapter 11
on May 29, 2002 (the Predecessor Company), have
been prepared in accordance with the American Institute of
Certified Public Accountants Statement of
Position 90-7,
Financial Reporting by Entities in Reorganization under the
Bankruptcy Code
(SOP 90-7).
Substantially all of the Predecessor Companys pre-petition
debt was in default. As required by
SOP 90-7,
the Predecessor Company recorded the pre-petition debt
instruments at the allowed amount, as defined by
SOP 90-7.
F-15
USA
MOBILITY, INC.
NOTES TO
CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
Upon emergence from Chapter 11, the Reorganized
Company restated its assets and liabilities, in accordance
with
SOP 90-7,
on the fresh start basis of accounting which requires recording
the assets on a fair value basis similar to those required by
Statement of Financial Accounting Standards (SFAS)
No. 141,
Business Combinations
(SFAS No. 141).
Reclassifications
Certain prior
years amounts have been reclassified to conform with
current years presentation. Those reclassifications
include (1) an increase of $2.9 million to accounts
receivable and accrued other associated with inactive customer
credit balances, and (2) a decrease to accrued compensation
of $1.1 million with a corresponding increase to accrued
restructuring and severance, (3) decreases to restructuring
and stock based compensation of $11.5 million and
$5.2 million, respectively, with a corresponding increase
to severance, restructuring and other of $16.7 million and
(4) decreases to service, rental and maintenance expense of
$0.3 million with a corresponding increase to depreciation,
amortization and accretion for accretion expense on asset
retirement obligation.
Risks and Other Important Factors
Based
on current and anticipated levels of operations, USA
Mobilitys management believes that the Companys net
cash provided by operating activities, together with cash on
hand, will 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 expenditures, sell assets or seek additional financing.
USA Mobility can provide no assurance that reductions in planned
capital expenditures 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. If
the rate of decline for our messaging services exceeds our
expectations, revenues will be negatively impacted, and such
impact could be material. USA Mobilitys plan to
consolidate its networks may also negatively impact revenues as
customers experience a reduction in, and possible disruptions
of, service in certain areas. 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 Mobilitys revenue or
operating results may not meet the expectations of investors and
creditors, which could impair the value of USA Mobilitys
common stock.
Use of Estimates
The preparation of
financial statements in conformity with accounting principles
generally accepted in the United States of America requires
management to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues, expenses and
related disclosures. On an on-going basis, USA Mobility
evaluates its estimates and assumptions, including but not
limited to those related to the impairment of long-lived assets
and goodwill, allowances for doubtful accounts and service
credits, revenue recognition, asset retirement obligations,
income taxes and restructuring charges. USA Mobility bases its
estimates on historical experience and various other assumptions
that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the
carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.
Allowances for Doubtful Accounts and Service
Credits
USA Mobility extends trade credit to its
customers for messaging services. Service to customers is
generally discontinued if payment has not been received within
approximately sixty days of billing. Once service is
discontinued, accounts are subject to internal and external
collection activities. If these efforts are unsuccessful, the
account is written off, which generally occurs within
120 days of billing. USA Mobility records two allowances
against its gross accounts receivable balance: an allowance for
doubtful accounts and an allowance for service credits.
Provisions for these allowances are recorded on a monthly basis
and are included as a component of general and administrative
expense and a reduction of revenue, respectively.
F-16
USA
MOBILITY, INC.
NOTES TO
CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
Estimates are used in determining the allowance for doubtful
accounts and are based on historical collection experience,
current trends and a percentage of the accounts receivable aging
categories. In determining these percentages historical
write-offs are reviewed, including comparisons of write-offs to
provisions for doubtful accounts and as a percentage of
revenues. The ratio of the allowance to gross receivables is
compared to historical levels and amounts collected and related
statistics are monitored. The allowance for doubtful accounts
was $5.0 million and $3.8 million at December 31,
2003 and 2004, respectively.
The allowance for service credits and related provisions is
based on historical credit percentages, current credit and aging
trends and days billings outstanding. Days billings outstanding
is determined by dividing the daily average of amounts billed to
customers into the accounts receivable balance. This approach is
used because it more accurately represents the amounts included
in accounts receivable and minimizes fluctuations that occur in
days sales outstanding due to the billing of quarterly,
semi-annual and annual contracts and the associated revenue that
is deferred. A range is developed and an allowance is recorded
within that range based on an assessment of trends in days
billings outstanding, aging characteristics and other operating
factors. The allowance for service credits was $3.6 million
and $4.5 million at December 31, 2003 and 2004,
respectively.
Long-Lived Assets
Leased messaging
devices sold or otherwise retired are removed from the accounts
at their net book value using the weighted-average method.
Property and equipment is depreciated using the straight-line
method over the following estimated useful lives:
|
|
|
|
|
Estimated
|
|
|
Useful Life
|
Asset Classification
|
|
(in Years)
|
|
Buildings and improvements
|
|
20
|
Leasehold improvements
|
|
Shorter of 3 or
Lease Term
|
Messaging devices
|
|
1-2
|
Messaging and computer equipment
|
|
1.25-10
|
Furniture and fixtures
|
|
5
|
Vehicles
|
|
3
|
In accordance with SFAS No. 144,
Accounting for the
Impairment or Disposal of Long-Lived Assets
(SFAS No. 144), USA Mobility is
required to evaluate the carrying value of its long-lived assets
and certain intangible assets. SFAS No. 144 first
requires an assessment of whether circumstances currently exist
which suggest the carrying value of long-lived assets may not be
recoverable. At December 31, 2003 and 2004, the Company did
not believe any such conditions existed. Had these conditions
existed, USA Mobility would have assessed the recoverability of
the carrying value of the Companys long-lived assets and
certain intangible assets based on estimated undiscounted cash
flows to be generated from such assets. In assessing the
recoverability of these assets, USA Mobility would have
projected estimated cash flows based on various operating
assumptions such as average revenue per unit, disconnect rates,
and sales and workforce productivity ratios. If the projection
of undiscounted cash flows did not exceed the carrying value of
the long-lived assets, USA Mobility would have been required to
record an impairment charge to the extent the carrying value
exceeded the fair value of such assets.
Goodwill and Other Intangible Assets
Goodwill
is not amortized and will be evaluated for impairment at least
annually, or when events or circumstances suggest a potential
impairment may have occurred. In accordance with
SFAS No. 142,
Goodwill and Other Intangible Assets
(SFAS No. 142), USA Mobility has
selected the fourth quarter to perform its annual impairment
test. SFAS No. 142 requires USA Mobility to compare
the fair value of the reporting unit to its carrying amount on
an annual basis to determine if there is a potential impairment.
If the fair value of the reporting unit is less than its
carrying value, an impairment loss is recorded to the extent
that the fair value of the goodwill within the reporting unit is
less than the carrying value. The fair value for goodwill is
determined based on discounted cash flows, market multiples or
appraised values as appropriate.
F-17
USA
MOBILITY, INC.
NOTES TO
CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
Other intangible assets were recorded at fair value at the date
of acquisition and amortized over periods generally ranging from
one to five years.
Revenue Recognition
USA Mobilitys
revenue consists primarily of monthly service and lease fees
charged to customers on a monthly, quarterly, semi-annual or
annual basis. Revenue also includes the sale of messaging
devices directly to customers and other companies that resell
the Companys services. In accordance with the provisions
of Emerging Issues Task Force (EITF) Issue
No. 00-21,
Revenue Arrangements with Multiple Deliverables,
(EITF
No. 00-21),
the Company evaluated these revenue arrangements and determined
that two separate units of accounting exist, messaging service
revenue and device sale revenue. Accordingly, effective
July 1, 2003, the Company recognized messaging service
revenue over the period the service is performed and revenue
from device sales is recognized at the time of shipment. The
Company recognizes revenue when these four basic criteria have
been met: (1) persuasive evidence of an arrangement exists,
(2) delivery has occurred or services rendered,
(3) the fee is fixed or determinable and
(4) collectibility is reasonably assured.
Prior to July 1, 2003, in accordance with SAB 101,
Revenue Recognition in Financial Statements,
we bundled
the sale of two-way messaging devices with the related service,
since we had determined the sale of the service was essential to
the functionality of the device. Therefore, revenue from two-way
device sales and the related cost of sales were recognized over
the expected customer relationship, which was estimated to be
two years. In accordance with the transition provisions of EITF
No. 00-21,
we will continue to recognize previously deferred revenue and
expense from the sale of two-way devices based upon the
amortization schedules in place at the time of deferral. At
December 31, 2004, we had approximately $139,000 of
deferred revenue and $39,000 of deferred expense that will be
recognized in future periods, principally over the next two
quarters.
Shipping and Handling Costs
USA Mobility
incurs shipping and handling costs to send and receive messaging
devices to its customers. These costs are included in general
and administrative expense and amounted to $2.3 million,
$4.0 million, $5.3 million and $4.5 million for
the five months ended May 31, 2002, seven months ended
December 31, 2002 and years ended December 31, 2003
and 2004, respectively.
Cash Equivalents
Cash equivalents
include short-term, interest-bearing instruments purchased with
remaining maturities of three months or less.
Fair Value of Financial Instruments
USA
Mobilitys financial instruments, as defined under
SFAS No. 107,
Disclosures about Fair Value of
Financial Instruments
, include its cash, accounts receivable
and accounts payable and bank debt. The fair value of cash,
accounts receivable and accounts payable are equal to their
carrying values at December 31, 2003 and 2004. The fair
value of the debt is included in Note 5.
Stock-Based Compensation
Effective
January 1, 2003, compensation expense associated with
options is being recognized in accordance with the fair value
provisions of SFAS No. 123,
Stock Based
Compensation
(SFAS No. 123), over the
options vesting period. The transition to these provisions
was accounted for and disclosed in accordance with the
provisions of SFAS No. 148,
Accounting for
Stock-Based Compensation Transition and
Disclosure
, utilizing the prospective method.
Income Taxes
USA Mobility accounts for
income taxes under the provisions of SFAS No. 109,
Accounting for Income Taxes
(SFAS
No. 109). Deferred tax assets and liabilities are
determined based on the difference between the financial
statement and the accounting for income tax bases of assets and
liabilities, given the provisions of enacted laws. The Company
would provide a valuation allowance against net deferred tax
assets if, based on available evidence, it is more likely than
not the deferred tax assets would not be realized (see
Note 7).
New Accounting Pronouncements
In
December 2004, the FASB issued a revision of Statement
No. 123,
Accounting for Stock-Based Compensation
(SFAS No. 123R),
Share-Based
Payment.
SFAS No. 123R supersedes APB Opinion
No. 25,
Accounting for Stock Issued to Employees,
and its related implementation guidance.
SFAS No. 123R establishes standards for the accounting
for transactions in which an entity exchanges its equity
instruments for goods or services. It also addresses
transactions in which an entity incurs liabilities in exchange
for
F-18
USA
MOBILITY, INC.
NOTES TO
CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
goods or services that are based on the fair value of the
entitys equity instruments or that may be settled by the
issuance of those equity instruments. SFAS No. 123R
focuses primarily on accounting for transactions in which an
entity obtains employee services in share-based payment
transactions. SFAS No. 123R does not change the
accounting guidance for share-based payment transactions with
parties other than employees provided in SFAS No. 123
as originally issued and EITF Issue
No. 96-18,
Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services.
SFAS No. 123R is effective as
of the first interim or annual period that begins after
June 15, 2005. The Company elected to adopt
SFAS No. 123R as of January 1, 2005. Since the
Company previously adopted the fair value provisions of
SFAS 123 and SFAS 148, this adoption will not have a
material impact on the financial statements.
|
|
2.
|
Arch
Wireless Petition for Relief Under Chapter 11 and Fresh
Start Accounting
|
Certain holders of
12
3
/
4
% senior
notes of Arch Wireless Communications, Inc., a wholly owned
subsidiary of Arch Wireless, Inc., 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. 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 are
now operating their businesses and properties as a group of
reorganized entities pursuant to the terms of the plan of
reorganization.
Pursuant to Archs plan of reorganization, all of its
former equity securities were cancelled and the holders of
approximately $1.8 billion of its former indebtedness
received securities which represented substantially all of
Archs consolidated capitalization, consisting of
$200 million aggregate principal amount of 10% senior
subordinated secured notes (which have been fully repaid),
$100 million aggregate principal amount of
12% subordinated secured compounding notes (which have been
fully repaid) and approximately 95% of Archs then
outstanding common stock. The remaining common stock of
approximately 5% was distributed pursuant to the terms of the
2002 Stock Incentive Plan to certain members of Archs
senior management.
The accompanying Predecessor Company Consolidated Financial
Statements have been prepared in accordance with
SOP 90-7
and on a going concern basis, which contemplates continuity of
operations, realization of assets and liquidation of liabilities
in the ordinary course of business. Although May 29, 2002
was the effective date of Archs emergence from bankruptcy,
for financial reporting convenience, Arch accounted for
consummation of the plan as of May 31, 2002.
As a result of the application of fresh start accounting,
Archs financial results during the year ended
December 31, 2002 include two different bases of accounting
and, accordingly, the operating results and cash flows of the
Reorganized Company and the Predecessor Company are presented
separately. The Reorganized Companys financial statements
are not comparable with those of the Predecessor Company.
During the five months ended May 31, 2002, the Predecessor
Company recorded reorganization expense of $22.5 million
consisting of $15.3 million of professional fees,
$3.1 million of retention costs and $4.1 million paid
or accrued to settle specific pre-petition liabilities in
conjunction with assumed contracts. Contractual interest expense
not accrued or recorded on pre-petition debt totaled
$76.0 million for the five months ended May 31, 2002.
|
|
3.
|
Merger of
Arch and Metrocall
|
USA Mobility, a holding company, was formed to effect the merger
of Arch and Metrocall, which occurred on November 16, 2004.
Under the terms of the merger agreement, holders of 100% of the
outstanding Arch common
F-19
USA
MOBILITY, INC.
NOTES TO
CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
stock received one share of the Companys common stock for
each common share held of Arch. Holders of 2,000,000 shares
of Metrocall common stock received consideration totaling
$150.0 million of cash and all of the remaining shares of
Metrocalls common stock were each exchanged for
1.876 shares of USA Mobility common stock. Upon
consummation of the merger exchange, former Arch and Metrocall
common shareholders held approximately 72.5% and 27.5%,
respectively, of USA Mobilitys common stock on a fully
diluted basis. At the time of the merger, each outstanding
option to purchase common stock of Metrocall was converted into
an option to purchase the number of shares of common stock of
USA Mobility determined by multiplying the number of shares
subject to the original option by 1.876, at an exercise price
determined by dividing the exercise price of the original option
by 1.876, and otherwise on the same terms and conditions as were
applicable to such Metrocall stock options. At the time of the
merger, outstanding options to purchase common stock of Arch
were converted into options to purchase the same number of
shares of common stock of USA Mobility on the same terms and
conditions that were applicable to such Arch stock options.
USA Mobility expects to benefit from operating and other
synergies which Arch or Metrocall could not achieve as
stand-alone entities and be capable of improved long-term
financial performance through elimination of redundant overhead
and duplicative network structures.
The merger was accounted for using the purchase method of
accounting pursuant to SFAS No. 141. Arch was deemed
the accounting acquirer. Accordingly, the basis of Archs
assets and liabilities as of the acquisition date are reflected
in the balance sheet of USA Mobility at their historical basis.
Amounts allocated to Metrocalls assets and liabilities are
based upon the total purchase price and the estimated fair
values of such assets and liabilities on the effective date of
the merger. The results of operations of Metrocall have been
included in USA Mobilitys results from November 16,
2004.
The aggregate purchase price for Metrocall of
$432.8 million (as restated) including $150.0 million
of cash, common stock valued at $207.6 million, and options
to purchase USA Mobility common stock valued at
$9.0 million. The value of the common shares issued to
Metrocall shareholders was determined based on the average
market price of Arch common stock for the seven-day period
beginning three days before and ending three days after the date
the merger was publicly announced.
As part of the restatement, liabilities assumed increased by
$0.2 million from $57.2 million to $57.4 million
to reflect adjustments to accrued taxes. The fair value of
accounts receivable acquired was reduced by $0.7 million to
reflect errors in the accumulation of other accounts receivable
at the date of the merger. In addition, deferred income tax
assets were reduced by $3.0 million to reflect a correction
of the expected applicable income tax rate used to calculate the
value of the deferred tax assets. The impact of these items
resulted in an aggregate increase to liabilities assumed, a
decrease in the fair value of identifiable assets acquired, and
an increase of $3.9 million in Goodwill from
$151.8 million to $155.7 million as of
December 31, 2004. (See Note 1)
F-20
USA
MOBILITY, INC.
NOTES TO
CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
The restated purchase price has been allocated as follows ($ in
thousands):
|
|
|
|
|
|
|
At November 16,
|
|
|
|
2004
|
|
|
Consideration exchanged:
|
|
|
|
|
Fair value of shares issued
|
|
$
|
207,563
|
|
Fair value of options issued
|
|
|
9,005
|
|
Cash payment
|
|
|
150,000
|
|
Transaction costs
|
|
|
8,870
|
|
|
|
|
|
|
|
|
|
375,438
|
|
Liabilities assumed (restated)
|
|
|
57,385
|
|
|
|
|
|
|
Total purchase price
|
|
|
432,823
|
|
|
|
|
|
|
Less estimated fair value of
identifiable assets acquired:
|
|
|
|
|
Cash and cash equivalents
|
|
|
41,112
|
|
Accounts receivable (restated)
|
|
|
26,021
|
|
Prepaid expenses and other current
assets
|
|
|
7,380
|
|
Property and equipment
|
|
|
90,683
|
|
Deferred tax assets (restated)
|
|
|
38,119
|
|
Intangible assets
|
|
|
72,254
|
|
Other assets
|
|
|
553
|
|
Deferred compensation
|
|
|
2,332
|
|
|
|
|
|
|
Total assets acquired
|
|
|
278,454
|
|
|
|
|
|
|
Goodwill (restated)
|
|
$
|
154,369
|
|
|
|
|
|
|
The following table summarizes the fair values of the assets
acquired (as restated) and liabilities assumed (as restated) at
the date of acquisition ($ in thousands):
|
|
|
|
|
|
|
At November 16,
|
|
|
|
2004
|
|
|
Current assets (restated)
|
|
$
|
74,513
|
|
Property, plant and equipment
(restated)
|
|
|
90,683
|
|
Intangible assets
|
|
|
72,254
|
|
Deferred tax assets (restated)
|
|
|
38,119
|
|
Goodwill (restated)
|
|
|
154,369
|
|
Other assets
|
|
|
553
|
|
Deferred Compensation (presented
as contra equity)
|
|
|
2,332
|
|
|
|
|
|
|
Total assets acquired
|
|
|
432,823
|
|
|
|
|
|
|
Current liabilities (restated)
|
|
|
(57,310
|
)
|
Long-term debt
|
|
|
(75
|
)
|
|
|
|
|
|
Total liabilities assumed
|
|
|
(57,385
|
)
|
|
|
|
|
|
Net assets acquired
|
|
$
|
375,438
|
|
|
|
|
|
|
In connection with the transaction, USA Mobility expects to
incur restructuring costs primarily as a result of severance and
relocation of workforce and the elimination of duplicate
facilities and networks related to Metrocalls
F-21
USA
MOBILITY, INC.
NOTES TO
CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
operations. Such costs have been recognized by the Company as a
liability assumed as of the acquisition date, to the extent
known or estimable. These restructuring costs consisted of
$2.4 million of employee relocation and termination
benefits. Through December 31, 2004, $0.9 million of
these costs had been paid. The Company expects to pay the
remaining liability in 2005. The Company also expects additional
restructuring costs related to the merger to be incurred during
2005 as the Company finalizes and implements its reduction of
duplicate facilities, rationalization of its network
infrastructure, changes to telecommunication contracts, further
severance and relocation of employees and other costs. The
purchase price allocation will be adjusted as these additional
costs become known or estimable for up to one year from the
transaction date.
The amount of purchase price allocated to intangible assets and
their respective amortization periods were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocated
|
|
|
Amortization
|
|
|
Amortization
|
|
|
Amount
|
|
|
Period
|
|
|
Method
|
|
Customer relationships and
contracts
|
|
$
|
65,046
|
|
|
|
5 years
|
|
|
Economic Consumption
|
Deferred financing costs
|
|
|
3,459
|
|
|
|
2 years
|
|
|
Straight Line
|
Commission licenses
|
|
|
1,630
|
|
|
|
5 years
|
|
|
Straight Line
|
Other
|
|
|
2,119
|
|
|
|
1 year
|
|
|
Straight Line
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
72,254
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amortization periods above result in a weighted-average
amortization period of approximately 4.7 years. The amount
of goodwill was $155.7 million (as restated), none of which
will be deductible for tax purposes.
The following unaudited pro forma summary presents the
consolidated results of operations as if the merger had occurred
at the beginning of the period presented, after giving effect to
certain adjustments, including depreciation and amortization of
acquired assets and interest expense on merger-related debt.
These pro forma results have been prepared for comparative
purposes only and do not purport to be indicative of what would
have occurred had the merger been completed at the beginning of
the periods presented, or of results that may occur in the
future.
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2003
|
|
|
2004
|
|
|
|
(Restated)
|
|
|
(Restated)
|
|
|
|
(Unaudited and in thousands
except for per share amounts)
|
|
|
Revenues
|
|
$
|
1,015,418
|
|
|
$
|
788,705
|
|
Net income (restated)
|
|
|
58,941
|
|
|
|
36,581
|
|
Basic net income per common share
(restated)
|
|
|
2.19
|
|
|
|
1.36
|
|
Diluted net income per common
share (restated)
|
|
|
2.16
|
|
|
|
1.34
|
|
Property and Equipment
Depreciation,
amortization and accretion expense related to property and
equipment totaled $81.8 million, $104.9 million,
$124.6 million and $101.7 million for the five months
ended May 31, 2002, the seven months ended
December 31, 2002 and the years ended December 31,
2003 and 2004, respectively. As part of the restatement 2003
depreciation, amortization and accretion expense related to
property and equipment was increased from $118.9 million to
$129.6 million to reflect the correction of an error with
respect to the depreciation of certain assets. As part of the
restatement, 2004 depreciation, amortization and accretion
expense related to property and equipment was reduced from
$114.4 million to $107.6 million to reflect the
correction of an error with respect to the depreciation of
certain assets. The carrying value of the net property and
equipment on the Consolidated Balance Sheet for the year ended
December 31, 2004 was increased to reflect this adjustment.
F-22
USA
MOBILITY, INC.
NOTES TO
CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
The Company adopted the provisions of SFAS No. 143,
Accounting for Asset Retirement Obligations
(SFAS No. 143)
,
in 2002.
SFAS No. 143 requires the recognition of liabilities
and corresponding assets for future obligations associated with
the retirement of assets. USA Mobility has network assets that
are located on leased transmitter locations. The underlying
leases generally require the removal of equipment at the end of
the lease term, therefore a future obligation exists. The
Company has recognized cumulative asset retirement costs of
$11.7 million and $17.4 million through
December 31, 2003 and 2004, respectively. Network assets
have been increased to reflect these costs and depreciation is
being recognized over their estimated lives, which range between
one and ten years. Depreciation, amortization and accretion
expense for the seven months December 31, 2002, and the
years ended December 31, 2003 and 2004 included
$4.6 million, $3.8 million and $1.6 million,
respectively, related to depreciation of these assets. 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 through 2013.
The components of the changes in the asset retirement obligation
balances for the year ended December 31, 2004 were as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
Long-Term
|
|
|
|
Portion
|
|
|
Portion
|
|
|
Balance at December 31, 2003
(Restated)
|
|
$
|
1,787
|
|
|
$
|
6,173
|
|
Accretion
|
|
|
491
|
|
|
|
1,707
|
|
Amounts paid
|
|
|
(1,357
|
)
|
|
|
|
|
Additional amounts recorded
|
|
|
2,502
|
|
|
|
3,115
|
|
Changes in cash flow estimates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004
(Restated)
|
|
$
|
3,423
|
|
|
$
|
10,995
|
|
|
|
|
|
|
|
|
|
|
The balances above were included in accrued other and other
long-term liabilities, respectively, at December 31, 2004.
The primary variables associated with the estimate are the
number and timing of transmitters and related equipment to be
removed and an estimate of the outside contractor fees to remove
each asset. In November 2004, this liability was increased to
reflect the merger with Metrocall and the increased transmitters
acquired, the extension of the economic life of the paging
network and the Companys plans to rationalize the Arch
two-way network through 2005. In addition, the obligation was
increased by the cost associated with rationalization of the
combined one-way network.
The long-term asset retirement cost associated with the original
assessment, the additional amount recorded due to the Metrocall
merger, and the refinements of the estimated removal cost timing
due to the Metrocall merger will accrete to a total liability of
$24.4 million through 2013. The accretion will be recorded
on the interest method utilizing a 24% discount rate for the
original assessment and 13% for the 2004 incremental estimates.
This estimate is based on the transmitter locations remaining
after USA Mobility has consolidated the number of networks it
operates and assumes the underlying leases continue to be
renewed to that future date. Depreciation, amortization, and
accretion expense in 2002, 2003 and 2004 included
$1.7 million (as restated), $2.9 million (as restated)
and $2.2 million (as restated), respectively, for accretion
expense on the asset retirement obligation liabilities. This
estimate is based on the transmitter locations remaining after
USA Mobility has consolidated the number of networks it operates
and assumes the underlying leases continue to be renewed to that
future date.
Effective November 16, 2004 USA Mobility revised the
estimated depreciable lives of its paging infrastructure from
five years to a range of one to approximately ten years. The
changes in useful life resulted from the timing of USA
Mobilitys network rationalization program due to the
merger with Metrocall and aligned the useful lives of these
assets with their planned removal from service. As a result of
this prospective change depreciation expense decreased
approximately $0.7 million (as restated) in the fourth
quarter 2004.
F-23
USA
MOBILITY, INC.
NOTES TO
CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
Effective October 1, 2002, Arch revised the estimated
depreciable life of certain of its messaging equipment from five
years to 1.25 years. This change in useful life resulted
from the timing of its network rationalization program in order
to align the useful lives of these assets with their planned
removal from service. As a result of this change, depreciation
expense increased approximately $12.1 million in the fourth
quarter of 2002, approximately $9.3 million of which was
due to adjusting the carrying value of certain pieces of this
equipment to scrap value as they were removed from service at
December 31, 2002.
Goodwill and Amortizable Intangible
Assets
Goodwill of $154.4 million (as
restated) at December 31, 2004 resulted from the purchase
accounting related to the Metrocall acquisition (see
Note 3).
Amortizable intangible assets are comprised of the following at
December 31, 2004 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Useful
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
|
|
|
|
Life
|
|
|
Amount
|
|
|
Amortization
|
|
|
Net Balance
|
|
|
Customer relationships and
contracts
|
|
|
5 yrs
|
|
|
$
|
68,593
|
|
|
$
|
(6,958
|
)
|
|
$
|
61,635
|
|
Purchased Federal Communications
Commission licenses
|
|
|
5 yrs
|
|
|
|
3,749
|
|
|
|
(2,160
|
)
|
|
|
1,589
|
|
Deferred financing costs
|
|
|
2 yrs
|
|
|
|
3,459
|
|
|
|
(1,409
|
)
|
|
|
2,050
|
|
Other
|
|
|
1 year
|
|
|
|
2,119
|
|
|
|
(264
|
)
|
|
|
1,855
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
77,920
|
|
|
$
|
(10,791
|
)
|
|
$
|
67,129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other intangible assets are comprised of the following at
December 31, 2003 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Useful
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
|
|
|
|
Life
|
|
|
Amount
|
|
|
Amortization
|
|
|
Net Balance
|
|
|
Customer relationships
|
|
|
3 yrs
|
|
|
$
|
3,547
|
|
|
$
|
(3,547
|
)
|
|
$
|
|
|
Purchased Federal Communications
Commission licenses
|
|
|
5 yrs
|
|
|
|
2,119
|
|
|
|
(2,119
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,666
|
|
|
$
|
(5,666
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate amortization expense for other intangible assets for
the five months ended May 31, 2002, the seven months ended
December 31, 2002 and the years ended December 31,
2003 and 2004 was $0.9 million, $3.5 million,
$2.2 million, and $3.7 million respectively. The
estimated amortization expense, based on current intangible
balances, is $25.9 million, $14.9 million,
$9.5 million, $9.0 million and $7.9 million, for
the years ending December 31, 2005, 2006, 2007, 2008 and
2009, respectively.
5. Debt
Debt consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2003
|
|
|
2004
|
|
|
|
Carrying Value
|
|
|
Fair Value
|
|
|
Carrying Value
|
|
|
Fair Value
|
|
|
Borrowings under credit agreement
|
|
$
|
|
|
|
$
|
|
|
|
$
|
95,000
|
|
|
$
|
95,000
|
|
Arch 12% Subordinated Secured
Compounding Notes due 2009
|
|
|
60,000
|
|
|
|
63,600
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
58
|
|
|
|
58
|
|
|
|
|
60,000
|
|
|
|
|
|
|
|
95,058
|
|
|
|
|
|
Less Current
maturities
|
|
|
20,000
|
|
|
|
|
|
|
|
47,558
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
40,000
|
|
|
|
|
|
|
$
|
47,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-24
USA
MOBILITY, INC.
NOTES TO
CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
Borrowings under Credit Facility
On
November 16, 2004, Metrocall and Arch as Borrowers, along
with USA Mobility, Inc. and its bank lenders, entered into a
credit agreement (the credit agreement) to borrow
$140.0 million. The cash proceeds under the credit
agreement were used by USA Mobility to fund a portion of the
cash consideration paid to Metrocall shareholders in accordance
with the merger agreement. The borrowings are secured by
substantially all of the assets of USA Mobility.
Under the credit agreement, the Company may designate all or any
portion of the borrowings outstanding at either a floating base
rate advance or a Eurodollar rate advance with an applicable
margin of 1.50% for base rate advances and 2.50% for Eurodollar
advances. For the period from November 16 to December 31,
2004, weighted average borrowings outstanding under the credit
agreement were $129.0 million; interest expense was
$1.2 million including amortization expense related to
deferred financing fees of $0.4 million, the weighted
average interest rate was 4.97% and the effective interest rate
at December 31, 2004 was 4.74%.
The Company is required to make mandatory prepayments of
principal amounts outstanding at least once each quarter. Under
the following circumstances mandatory prepayments are required:
|
|
|
|
|
Once each quarter on or about February 16, May 16,
July 16, and November 16, 2005 and 2006. The amount of
prepayment is equal to the remaining principal outstanding under
the credit agreement on the mandatory prepayment date divided by
the number of quarterly prepayments remaining prior to the
maturity date.
|
|
|
|
out of the net proceeds of asset sales;
|
|
|
|
out of the net cash proceeds from the issuance of debt or
preferred stock;
|
|
|
|
out of 50% of the net cash proceeds from the issuance of common
equity;
|
|
|
|
out of specified kinds of insurance (to the extent net cash
proceeds exceed $5.0 million) and condemnation proceeds in
excess of replacement amounts; and
|
|
|
|
50% of excess cash flows, as defined in the term loan agreement,
as determined December 31, 2005.
|
The Company is also permitted to make optional prepayments,
without prepayment penalty, provided that each optional
prepayment exceeds $1.0 million.
The credit agreement includes certain provisions which impose
restrictions or requirements on the Company, including the
following:
|
|
|
|
|
prohibition on restricted payments, including cash dividends;
|
|
|
|
prohibition on incurring additional indebtedness;
|
|
|
|
prohibition on liens on assets;
|
|
|
|
prohibition on making or maintaining investments, loans and
advances except for permitted cash-equivalent type instruments;
|
|
|
|
prohibition on certain sales and leaseback transactions;
|
|
|
|
prohibition on mergers and consolidations or sales of assets
outside the ordinary course of business or unrelated to the
integration of Arch and Metrocall;
|
|
|
|
prohibition on transactions with affiliates; and
|
|
|
|
Compliance with certain quarterly and financial covenants
including, but not limited to: (1) maximum total leverage;
(2) minimum interest coverage and (3) maximum annual
capital expenditures.
|
The Company was in compliance with the financial covenants at
December 31, 2004.
F-25
USA
MOBILITY, INC.
NOTES TO
CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
Arch 12% Subordinated Secured Compounding Notes due
2009
Arch debt consisted of fixed rate
senior notes, which were publicly traded. The fair values of the
fixed rate senior notes were based on market quotes as of
December 31, 2003. There was often limited trading in the
Arch notes and, therefore, quoted prices may not have been an
indication of the value of the notes.
On the effective date of the plan of reorganization, Arch issued
$200 million of its 10% Senior Subordinated Secured
Notes due 2007 and $100 million of its
12% Subordinated Secured Compounding Notes due 2009. The
10% notes accrued interest at 10% per annum payable
semi-annually in arrears. The 10% notes were secured by a lien
on substantially all the assets of Arch. Arch completed the
repayment of these notes during 2003.
Interest compounded semi-annually on the 12% notes at
12% per annum from May 29, 2002 through May 15,
2003 resulting in the 12% notes having an aggregate
compounded value of $111.9 million. Upon repayment of the
10% notes, interest on the 12% notes became due
semi-annually in cash on May 15 and November 15, which
commenced November 15, 2003. The 12% notes were
secured by a lien on substantially all of Archs assets.
Arch completed the repayment of these notes in May 2004.
Maturities of Debt
Scheduled long-term
debt maturities at December 31, 2004 were as follows (in
thousands):
|
|
|
|
|
|
|
Year Ending
|
|
|
|
December 31
|
|
|
2005
|
|
$
|
47,558
|
|
2006
|
|
|
47,500
|
|
|
|
|
|
|
|
|
$
|
95,058
|
|
|
|
|
|
|
6. Stockholders
Equity
General
The authorized capital stock of the Company consists of
75 million shares of common stock and 25 million
shares of preferred stock, par value $0.0001 per share.
On November 16, 2004 the Company completed the acquisitions
of Arch and Metrocall and issued 19,605,528 shares and
7,236,868 of its common stock in exchange for all the issued and
outstanding shares of Arch and Metrocall, respectively. In
addition, there were 278,683 shares of Company common stock
reserved for issuance from time to time as general unsecured
claims under the Arch plan of reorganization are resolved.
Please refer to Note 2 for further discussion.
At December 31, 2004, there were 26,827,071 shares of
common stock and zero shares of preferred stock outstanding. For
financial reporting purposes, the number of shares reserved for
issuance under the Arch plan of reorganization has been included
in the Companys reported outstanding shares balance.
Arch Wireless, Inc. New Common
Stock
Upon the effective date of the Arch
plan of reorganization, all of the Arch Predecessor
Companys preferred and common stock, and all stock options
were cancelled. The Reorganized Companys authorized
capital stock consists of 50,000,000 shares of common
stock. Each share of common stock has a par value of
$0.001 per share. As of December 31, 2003, Arch had
issued and outstanding 19,483,477 shares of common stock
and the remaining 516,523 shares were reserved for issuance
under Archs plan of reorganization, to be issued from time
to time as unsecured claims were resolved. Approximately 278,683
of these shares remain at December 31, 2004, to be issued
pursuant to Archs plan of reorganization. All
20,000,000 shares were deemed issued and outstanding for
accounting purposes at December 31, 2003. All shares of
Arch Wireless, Inc. new common stock were exchanged for a like
number of shares of USA Mobility common stock.
Additional Paid in Capital
During the
quarter ended December 31, 2003, additional paid in capital
increased by $195.9 million (as restated) as a result of
the reduction in the valuation allowance previously recorded
F-26
USA
MOBILITY, INC.
NOTES TO
CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
against Archs deferred tax assets (see Note 1 and 7).
On November 16, 2004, additional paid in capital increased
by approximately $216.6 million due to the exchange of the
Companys stock and options for outstanding Metrocall
common stock and options (see Note 3).
Earning Per Share
Basic earnings per
share is computed on the basis of the weighted average common
shares outstanding. Diluted earnings per share is computed on
the basis of the weighted average common shares outstanding plus
the effect of outstanding stock options using the treasury
stock method. The components of basic and diluted earnings
per share were as follows (in thousands, except share and per
share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arch
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
|
|
Reorganized Company
|
|
|
|
Five Months
|
|
|
|
Seven Months
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
May 31,
|
|
|
|
December 31,
|
|
|
Year Ended
December 31,
|
|
|
|
2002
|
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
Net income (restated)
|
|
$
|
1,658,922
|
|
|
|
$
|
(3,342
|
)
|
|
$
|
13,008
|
|
|
$
|
12,167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares of common
stock outstanding
|
|
|
182,434,590
|
|
|
|
|
20,000,000
|
|
|
|
20,000,000
|
|
|
|
20,839,959
|
|
Dilutive effect of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options to purchase common stock
|
|
|
|
|
|
|
|
|
|
|
|
34,476
|
|
|
|
126,446
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares of common
stock and common stock equivalents
|
|
|
182,434,590
|
|
|
|
|
20,000,000
|
|
|
|
20,034,476
|
|
|
|
20,966,405
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share (restated):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
9.09
|
|
|
|
$
|
(0.17
|
)
|
|
$
|
0.65
|
|
|
$
|
0.58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
9.09
|
|
|
|
$
|
(0.17
|
)
|
|
$
|
0.65
|
|
|
$
|
0.58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the seven months ended December 31, 2002, the
Reorganized Company had no outstanding stock options, warrants
or other convertible securities.
Arch
2002 Stock Incentive Plan
Restricted Stock.
The Arch 2002 Stock
Incentive Plan, as amended, authorized the grant of up to
1.2 million shares of common stock of the Reorganized
Company to be issued pursuant to the Arch plan of
reorganization. On May 29, 2002, November 5, 2002 and
June 27, 2003, 882,200, 17,800 and 29,257 shares,
respectively, were issued, at $0.001 per share, to certain
members of Arch management. On both May 29, 2003 and 2004,
316,998 shares vested and 316,002 shares were
scheduled to vest on May 29, 2005, subject to adjustment as
described below.
Any unvested shares granted under the 2002 Stock Incentive Plan
are subject to repurchase by Arch or the Company at the issue
price of $0.001 per share if the employment of an employee
entitled to such grant is terminated for any reason other than,
in the case of Archs chief executive officer, its
president and chief operating officer and its executive vice
president and chief financial officer, a change of control. In
2004, Arch and the Company repurchased 273,658 shares from
terminated employees. As of December 31, 2004, there were
42,344 remaining shares scheduled to vest on May 29, 2005.
The fair value of the shares listed above totaled
$5.4 million and was being recognized ratably over the
three year vesting period, $1.8 million and
$1.1 million of which was included in stock based and other
compensation for the years ended December 31, 2003 and
2004, respectively.
Stock Options
On June 12, 2003,
Archs stockholders approved an amendment to the 2002 Stock
Incentive Plan that increased the number of shares of common
stock authorized for issuance under the plan from 950,000 to
1,200,000. In connection with the amendment to the plan, options
to purchase 249,996 shares of common stock at an
F-27
USA
MOBILITY, INC.
NOTES TO
CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
exercise price of $0.001 per share and 10 year term
were issued to certain members of the board of directors. The
options vested 50% upon issuance and the remaining 50% vested on
May 29, 2004. The compensation expense associated with
these options of $1.7 million was recognized in accordance
with the fair value provisions of SFAS No. 123 over
the vesting period, $1.3 million of which was recognized in
2003 and $0.4 million of which was recognized in 2004. The
compensation expense was calculated utilizing the Black-Scholes
option valuation model assuming: a risk-free interest rate of
1%, an expected life of 1.5 years, an expected dividend
yield of zero and an expected volatility of 79% which resulted
in a fair value per option granted of $6.65. On
November 16, 2004, all options outstanding under the stock
option plan were converted into a like number of options to
purchase shares of USA Mobility common stock.
The Arch Predecessor Company had stock option plans, which
provided for the grant of incentive and nonqualified stock
options to key employees, directors and consultants to purchase
common stock. Incentive stock options were granted at exercise
prices not less than the fair market value on the date of grant.
Options generally vested over a five-year period from the date
of grant. However, in certain circumstances, options were
immediately exercisable in full. Options generally had a
duration of 10 years. All outstanding options under these
plans were terminated in accordance with Archs plan of
reorganization.
USA Mobility, Inc.
In connection with
the merger of Arch and Metrocall, options to
purchase 83,332 shares of Arch common stock were
converted into the same number of options to purchase Company
common stock at an exercise price of $0.001 per share. All
of these options are fully vested.
Options to purchase 169,000 shares of Metrocall common
stock were converted into options to
purchase 317,044 shares of Company common stock at an
exercise price of $0.302 per share. The Metrocall options
converted into USA Mobility options will vest on May 6,
2005. The fair value of these options was $9.0 million
which was calculated using the Black-Scholes option valuation
model assuming a risk free interest rate of 1.0%, an expected
life of 5.7 months, an expected dividend yield of zero, and
an expected volatility of 79% which resulted in a fair value per
option grant of $28.40. Compensation expense of
$2.3 million associated with the remaining vesting period
will be recognized over 5.7 months; $614,000 of which was
recognized for the November 16, 2004 to December 31,
2004 period.
F-28
USA
MOBILITY, INC.
NOTES TO
CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
The following table summarizes the activities under the USA
Mobility and Arch stock option plans for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Number
|
|
|
Average
|
|
|
|
of
|
|
|
Exercise
|
|
|
|
Options
|
|
|
Price
|
|
|
Arch options outstanding at
December 31, 2001
|
|
|
6,166,061
|
|
|
$
|
6.80
|
|
Terminated
|
|
|
(6,166,061
|
)
|
|
|
6.80
|
|
|
|
|
|
|
|
|
|
|
Arch options outstanding at
December 31, 2002
|
|
|
|
|
|
|
|
|
Granted
|
|
|
249,996
|
|
|
|
0.001
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arch options outstanding at
December 31, 2003
|
|
|
249,996
|
|
|
|
0.001
|
|
Exercised
|
|
|
(166,664
|
)
|
|
|
0.001
|
|
|
|
|
|
|
|
|
|
|
Arch options outstanding as of
November 16, 2004 converted into USA Mobility options
|
|
|
83,332
|
|
|
|
0.001
|
|
Metrocall options converted into
USA Mobility options
|
|
|
317,044
|
|
|
|
0.302
|
|
Terminated
|
|
|
(31,422
|
)
|
|
|
0.302
|
|
Exercised
|
|
|
(76,267
|
)
|
|
|
0.066
|
|
|
|
|
|
|
|
|
|
|
USA Mobility options outstanding
at December 31, 2004
|
|
|
292,687
|
|
|
$
|
0.278
|
|
|
|
|
|
|
|
|
|
|
USA Mobility options exercisable
at December 31, 2004
|
|
|
23,481
|
|
|
$
|
0.001
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2004, 23,481 and 269,206 options to
purchase USA Mobility common stock had exercise prices of $0.001
and $0.302, respectively. The range of exercise prices for USA
Mobility options was $0.001 to $0.302.
Prior to 2003, Arch Predecessor Company accounted for its stock
option plans under the recognition and measurement principles of
APB Opinion No. 25 and related interpretations. No
stock-based employee compensation cost was reflected in net
income, as all options granted under the plans had an exercise
price equal to the market value of the underlying common stock
on the date of grant.
USA
Mobility, Inc. Equity Incentive Plan
In connection with the merger, the Company established the USA
Mobility, Inc. Equity Incentive Plan. Under the plan, the
Company has the ability to issue up to 1,878,976 shares of
its common stock to eligible employees, consultants and
non-employee members of its Board of Directors in the form of
stock options or restricted stock or units. As of
December 31, 2004, no awards had been granted under this
plan.
7. Income
Taxes
USA Mobility accounts for income taxes under the provisions of
SFAS No. 109. Deferred tax assets and liabilities are
determined based on the difference between the financial
statement and the accounting for income tax bases of assets and
liabilities, given the provisions of enacted laws. As part of
the restatement described in Note 1 above, adjustments were
made to deferred income tax assets to reflect corrections to:
(1) the Companys recognition of applicable state laws
applicable to NOLs; (2) the expected applicable income tax
rate used to value deferred income taxes; (3) the correction of
errors made concerning the tax basis of assets both on a gross
basis and in relation to limitations imposed by the IRC; and
(4) income tax expense for 2002, 2003 and 2004 as a result
of other adjustments included in the restatement. These changes
and adjustments are included in the following schedules
F-29
USA
MOBILITY, INC.
NOTES TO
CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
detailing the components of the deferred tax asset, as well as
the reconciliation of the federal statutory tax rate to the
Companys expected applicable tax rate for 2003 and 2004.
The components of USA Mobilitys restated net deferred tax
asset at December 31, 2003 and 2004 were as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
2003
|
|
|
2004
|
|
|
Deferred tax assets (restated)
|
|
$
|
207,669
|
|
|
$
|
232,571
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
207,669
|
|
|
$
|
232,571
|
|
|
|
|
|
|
|
|
|
|
The approximate effect of each type of temporary difference and
carry forward at December 31, 2003 and 2004 is summarized
as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2003
|
|
|
2004
|
|
|
Net operating losses (restated)
|
|
$
|
36,269
|
|
|
$
|
39,040
|
|
Intangibles and other assets
|
|
|
120,139
|
|
|
|
152,654
|
|
Property and equipment
|
|
|
16,561
|
|
|
|
12,308
|
|
Contributions carryover
|
|
|
2,845
|
|
|
|
2,441
|
|
Accruals and reserves
|
|
|
31,855
|
|
|
|
26,128
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
207,669
|
|
|
$
|
232,571
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2004, the Company had unused net operating
loss carryforwards for federal and state income tax purposes of
approximately $104 million which expire in various amounts
through 2024. The Companys ability to use net operating
losses may be subject to limitations pursuant to the ownership
change rules of the Internal Revenue Code Section 382.
SFAS No. 109 requires USA Mobility to evaluate the
recoverability of its deferred tax assets on an ongoing basis.
The assessment is required to consider all available positive
and negative evidence to determine whether, based on such
evidence, it is more likely than not that some portion or all of
USA Mobilitys net deferred assets will be realized in
future periods. Upon emergence from bankruptcy, Arch had not
generated income before tax expense for any prior year,
projections indicated losses before tax expense for early future
periods and Arch had just reorganized under Chapter 11.
Since significant positive evidence of realizability did not
exist, a valuation allowance was established against the net
deferred tax assets at that time.
During the quarter ended December 31, 2003, Arch management
determined the available positive evidence carried more weight
than the historical negative evidence and concluded it was more
likely than not that the net deferred tax assets would be
realized in future periods. Therefore, the $207.6 million
(as restated) valuation allowance was released in the quarter
ended December 31, 2003. The positive evidence management
considered included operating income and cash flows for 2002 and
2003, Archs repayment of debt well ahead of scheduled
maturities and anticipated operating income and cash flows for
future periods in sufficient amounts to utilize the net deferred
tax assets.
Under the provisions of SFAS No. 109, reductions in a
deferred tax asset valuation allowance that existed at the date
of fresh start accounting are first credited against an asset
established for reorganization value in excess of amounts
allocable to identifiable assets, then to other identifiable
intangible assets existing at the date of fresh start accounting
and then, once these assets have been reduced to zero, credited
directly to additional paid in capital. The release of the
valuation allowance described above reduced the carrying value
of intangible assets by $2.3 million and $13.4 million
for the seven month period ended December 31, 2002 and the
year ended December 31, 2003, respectively, and the
remaining reduction of the valuation allowance of
$195.9 million (as restated) was recorded as an increase to
stockholders equity
.
F-30
USA
MOBILITY, INC.
NOTES TO
CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
In accordance with provisions of the Internal Revenue Code, Arch
was required to apply the cancellation of debt income arising in
conjunction with the provisions of its plan of reorganization
against tax attributes existing as of December 31, 2002.
The tax law about the method utilized to allocate the
cancellation of debt income is subject to varied interpretations
and differences have a material effect on the future tax
position of USA Mobility. As a result of the method used to
allocate cancellation of debt income for financial reporting
purposes as of December 31, 2002, Arch had no net operating
losses remaining and the tax bases of certain other tax assets
were reduced. In August 2003, the treasury issued new
regulations regarding the allocation of cancellation of debt
income. Arch evaluated these regulations and determined that an
alternative method of allocation was more applicable to the
facts than the method utilized at December 31, 2002. This
method resulted in approximately $19.0 million of
additional deferred tax assets and stockholders equity
being recognized in 2003 than would have been recognized using
the allocation method applied for financial reporting purposes
as of December 31, 2002. Had this revised method been
utilized at December 31, 2002, the only effect on the
Companys consolidated financial statements would have been
the gross amounts disclosed in the tables above because Arch had
a full valuation allowance in place at that time.
For the year ended December 31, 2004, the Company evaluated
the recoverability of its deferred assets. The Company
determined that (1) the results for the year ended
December 31, 2004, were consistent with Archs
managements previous assessment and (2) the
anticipated future results (which include additional incremental
income from Metrocall operations) indicated that the Company
will continue to generate income before income tax expense. The
results of this assessment continue to indicate no valuation
allowance against the deferred tax assets is required.
The significant components of USA Mobilitys income tax
expense attributable to current operations for the periods ended
December 31, 2002, 2003 and 2004 were as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003
|
|
|
2004
|
|
|
|
2002
|
|
|
(Restated)
|
|
|
(Restated)
|
|
|
Current tax expense
|
|
$
|
|
|
|
$
|
3,653
|
|
|
$
|
(956
|
)
|
Deferred tax expense
|
|
|
2,265
|
|
|
|
1,655
|
|
|
|
17,766
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,265
|
|
|
$
|
5,308
|
|
|
$
|
16,810
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following is a restated reconciliation of the United States
federal statutory rate of 35% to the Companys expected
applicable tax rate for each of the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seven Months Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
|
(Restated)
|
|
|
(Restated)
|
|
|
(Restated)
|
|
|
Federal income tax at statutory
rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
Increase (decrease) in taxes
resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
State income taxes, net of federal
tax benefit
|
|
|
6.2
|
|
|
|
5.1
|
|
|
|
21.1
|
|
Non-deductible bankruptcy related
expenses
|
|
|
(89.9
|
)
|
|
|
|
|
|
|
|
|
Change in valuation allowances
|
|
|
(159.5
|
)
|
|
|
(9.4
|
)
|
|
|
|
|
Other
|
|
|
(2.1
|
)
|
|
|
(1.7
|
)
|
|
|
2.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
(210.3
|
)%
|
|
|
29.0
|
%
|
|
|
58.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8.
|
Commitments
and Contingencies
|
USA Mobility was named as a defendant, along with Arch,
Metrocall and Metrocalls former board of directors, in two
lawsuits filed in the Court of Chancery of the State of
Delaware, New Castle County, on June 29, 2004 and
July 28, 2004. Each action was brought by a Metrocall
shareholder on his own behalf and purportedly on behalf of all
public shareholders of Metrocalls common stock, excluding
the defendants and their affiliates and
F-31
USA
MOBILITY, INC.
NOTES TO
CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
associates. Each complaint alleges, among other things, that the
Metrocall directors violated their fiduciary duties to Metrocall
shareholders in connection with the proposed merger between Arch
and Metrocall and that USA Mobility and Arch aided and abetted
the Metrocall directors alleged breach of their fiduciary
duties. The complaints seek compensatory relief as well as an
injunction to prevent consummation of the merger. USA Mobility
believes the allegations made in the complaints are without
merit. However, given the uncertainties and expense of
litigation, USA Mobility and the other defendants have entered
into a memorandum of understanding with the plaintiffs to settle
these actions. The proposed settlement, which must be approved
by the court, required, among other things, Arch and Metrocall
to issue a supplement to the joint proxy/prospectus (which was
first mailed to Metrocall and Arch shareholders on
October 22, 2004) and to announce their respective
operating results for the three months ended September 30,
2004 in advance of the shareholder meeting that occurred on
November 8, 2004. Plaintiffs counsel of record in the
actions will apply to the Court for an award of attorneys
fees and expenses not to exceed $275,000, and defendants have
agreed to not oppose such application. Metrocall, Arch and USA
Mobility have agreed to bear the costs of providing any notice
to Metrocall stockholders regarding the proposed settlement.
On November 10, 2004, former Arch senior executives (the
Former Executives) filed a Notice of Claim before
the JAMS/Endispute in Boston, Massachusetts, asserting that they
were terminated from their employment by the Company pursuant to
a Change in Control as defined in their respective
Executive Employment Agreements (the Claim). The
Former Executives filed the Claim against Arch Wireless, Inc.,
Arch Wireless Holdings, Inc., Arch Wireless Operating Co., Inc.,
MobileMedia Communications, Inc. and Mobile Communications
Corporation of America (collectively, the
Respondents). The Former Executives asserted in
their Claim, entitlement to additional compensation under the
Arch Long-Term Incentive Plan and their respective Restricted
Stock Agreements, attorneys fees and costs and unspecified other
and further relief. In the event that the Former Executives were
to prevail on their Claim they could be awarded additional
compensation under the Arch Long-Term Incentive Plan and their
respective Restricted Stock Agreements up to approximately
$8.5 million plus the costs of attorneys fees and other
costs. USA Mobility and the Former Executives mutually selected
an arbitrator to preside over the case. Discovery is underway
and the trial is scheduled to take place in May 2005. We are
disputing the Claim vigorously. USA Mobility does not believe
that a Change in Control as defined in the Former Executives
Executive Employment Agreements has occurred and believe that we
will ultimately prevail in the arbitration proceeding.
Certain holders of
12
3
/
4
% senior
notes of Arch Wireless Communications, Inc., a wholly owned
subsidiary of Arch Wireless, Inc., 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. 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 are
now operating their businesses and properties as a group of
reorganized entities pursuant to the terms of the plan of
reorganization.
USA Mobility, from time to time is involved in lawsuits arising
in the normal course of business. USA Mobility believes that its
pending lawsuits will not have a material adverse effect on its
financial position or results of operations.
Operating Leases
USA Mobility has
operating leases for office and transmitter locations with lease
terms ranging from one month to approximately eighteen years. In
most cases, USA Mobility expects that, in the normal course of
business, leases will be renewed or replaced by other leases.
F-32
USA
MOBILITY, INC.
NOTES TO
CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
Future minimum lease payments under non-cancelable operating
leases at December 31, 2004 were as follows (in thousands):
|
|
|
|
|
Year Ending
December 31,
|
|
|
|
|
2005
|
|
$
|
111,122
|
|
2006
|
|
|
76,995
|
|
2007
|
|
|
52,698
|
|
2008
|
|
|
32,223
|
|
2009
|
|
|
8,545
|
|
Thereafter
|
|
|
4,857
|
|
|
|
|
|
|
Total
|
|
$
|
286,440
|
|
|
|
|
|
|
Total rent expense under operating leases for the five months
ended May 31, 2002, the seven months ended
December 31, 2002 and the years ended December 31,
2003 and 2004, approximated $59.8 million,
$76.2 million, $121.9 million and 102.8 million
respectively.
As a result of various decisions by the Federal Communications
Commission (FCC), over the last few years, USA
Mobility no longer pays fees for the termination of traffic
originating on the networks of local exchange carriers providing
wireline services interconnected with the Companys
services and in some instances USA Mobility received refunds for
prior payments to certain local exchange carriers. USA Mobility
had 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. USA Mobility may be liable to local exchange
carriers for the costs associated with delivering traffic that
does not originate on that local exchange carriers
network, referred to as transit traffic, resulting in some
increased interconnection costs for the Company, depending on
further FCC disposition of these issues and the agreements
reached between USA Mobility and the local exchange carriers. If
these issues are not ultimately decided through settlement
negotiations or via the FCC in USA Mobilitys favor, the
Company may be required to pay past due contested transit
traffic charges not addressed by existing agreements or offset
against payments due from local exchange carriers and may also
be assessed interest and late charges for amounts withheld.
Although these requirements have not, to date, had a material
adverse effect on USA Mobilitys operating results, these
or similar requirements could, in the future, have a material
adverse effect on the Companys operating results.
The Company and certain of its subsidiaries, permitted under
Delaware law, have entered into indemnification agreements with
several persons, including each of its present directors and
certain members of management, for certain events or occurrences
while the director or member of management is, or was serving,
at its request in such capacity. The maximum potential amount of
future payments the Company could be required to make under
these indemnification agreements is unlimited; however, the
Company has a director and officer insurance policy that limits
its exposure and enables it to recover a portion of any future
amounts paid under the terms of the policy. As a result of USA
Mobilitys insurance policy coverage, USA Mobility believes
the estimated fair value of these indemnification agreements is
immaterial. Therefore, the Company has not recorded a liability
for these agreements as of December 31, 2003 and 2004.
Other Commitments-
On February 11, 2004,
Metrocalls wholly owned subsidiary, Metrocall Ventures
(Ventures), entered into an agreement with Glenayre
Electronics, Inc., a subsidiary of Glenayre Technologies, Inc.
to form GTES, LLC (GTES). GTES offers product
sales, maintenance services, software development and product
development to the wireless industry as an authorized licensee
of paging infrastructure technology owned by Glenayre
Electronics, Inc. Pursuant to the terms of the agreement,
Ventures contributed cash of $2.0 million in exchange for a
51% fully diluted ownership interest in GTES. We have a
commitment to fund annual cash flow deficits, if any, of GTES of
up to $1.5 million during the initial three-year period
following the investment date.
F-33
USA
MOBILITY, INC.
NOTES TO
CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
Funds may be provided by Ventures to GTES in the form of capital
contributions or loans. No funding has been required through
December 31, 2004.
|
|
9.
|
Employee
Benefit Plans
|
Arch
Long-term Incentive Plan
In June 2003, Archs board of directors approved a
long-term incentive plan to retain and attract key members of
management and to align their interests with those of
Archs shareholders. Payments under this plan were based on
the annual management incentive payment for 2003, which was paid
by Arch in the first quarter of 2004. At that time, the amount
of the annual incentive payment amount was also converted into a
number of units, derived based on the average price of
Archs common stock for ten days prior to the annual
incentive payment. Payment under the long-term incentive plan
will occur on the second anniversary following the 2003 annual
incentive payment. The amount of the payment will be determined
by multiplying the number of units for each participant by the
average price of USA Mobilitys common stock at that point
in time. Therefore, the liability associated with the long-term
incentive plan will fluctuate in each reporting period based on
the price of USA Mobilitys common stock in each reporting
period. Each participants units vest as follows: 1/3 upon
the 2003 annual incentive payment date and 1/3 on each
subsequent anniversary. The plan includes provisions that
require payment prior to the second anniversary following the
2003 annual incentive payment under certain circumstances, such
as the involuntary termination of a participant without cause or
a change in control of Arch. At December 31, 2004 and 2003,
other long-term liabilities included $2.6 million and
$3.1 million associated with this plan, respectively. At
December 31, 2004, accrued severance and restructuring
included $3.0 million associated with this plan.
Arch
Retirement Savings Plans
A
rch has had multiple retirement savings plans since its
acquisitions of MobileMedia and PageNet in 1999 and 2000,
respectively, qualifying under Section 401(k) of the
Internal Revenue Code covering eligible employees, as defined.
During 2002, Arch completed the consolidation of these plans
into one plan, the Arch Retirement Savings Plan. Under the plan,
a participant may elect to defer receipt of a stated percentage
of the compensation which would otherwise be payable to the
participant for any plan year (the deferred amount) provided,
however, that the deferred amount shall not exceed the maximum
amount permitted under Section 401(k) of the Internal
Revenue Code. Each of the current and former plans provide for
employer matching contributions. Aggregate matching
contributions for the five months ended May 31, 2002, the
seven months ended December 31, 2002 and the years ended
December 31, 2003 and 2004 were approximately
$0.7 million, $0.6 million, $0.8 million and
$0.8 million, respectively. Effective January 1, 2005,
the Arch Retirement Savings Plan was merged into the Metrocall,
Inc. Savings and Retirement Plan.
Metrocall,
Inc. Savings and Retirement Plan
The Metrocall, Inc. Savings and Retirement Plan (the
Savings Plan), a combination employee savings plan
and discretionary profit-sharing plan, is open to all Metrocall
employees working a minimum of twenty hours per week with at
least six months of service. The Plan qualifies under
section 401(k) of the Internal Revenue Code (the
IRC). Under the Savings Plan, participating
employees may elect to voluntarily contribute on a pretax basis
between 1% and 15% of their salary up to the annual maximum
established by the IRC. Metrocall has agreed to match 50% of the
employees contribution, up to 4% of each
participants gross salary. Contributions made by the
Company vest 20% per year beginning on the second
anniversary of the participants employment. Other than the
Companys matching obligations, discussed above, profit
sharing contributions are discretionary. Matching contributions
under the Savings Plan were approximately $122,000 for the
period November 16 to December 31, 2004. On January 1,
2005, the Metrocall, Inc. Savings and Retirement Plan was
renamed USA Mobility, Inc. Savings and Retirement Plan.
F-34
USA
MOBILITY, INC.
NOTES TO
CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
|
|
10.
|
Severance
and Restructuring Liabilities
|
In the years ended December 31, 2003 and 2004, the Company
recorded severance and restructuring costs of $16.7 million
and $11.9 million, respectively, related to severance and
certain lease agreements for transmitter locations. Under the
terms of lease agreements for transmitter locations, Arch is
required to pay minimum amounts for a designated number of
transmitter locations. However, Arch determined the designated
number of transmitter locations was in excess of its current and
anticipated needs. The severance costs resulted from staff
reductions as the Company continued to match its employee levels
to operational requirements, and from anticipated additional
staff reductions resulting from the integration of Arch and
Metrocall.
At December 31, 2004, the balance of the restructuring
liabilities was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Restructuring
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
December 31,
|
|
|
Charge in
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2003
|
|
|
2004
|
|
|
Reclassifications
|
|
|
Cash Paid
|
|
|
2004
|
|
|
Lease obligation costs
|
|
$
|
11,481
|
|
|
$
|
3,018
|
|
|
|
|
|
|
$
|
(11,036
|
)
|
|
$
|
3,463
|
|
Severance (restated)
|
|
|
1,061
|
|
|
|
8,920
|
|
|
$
|
2,948
|
|
|
|
(151
|
)
|
|
|
12,778
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
12,542
|
|
|
$
|
11,938
|
|
|
$
|
2,948
|
|
|
$
|
(11,187
|
)
|
|
$
|
16,241
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The reclassification amount represents another long-term
liability that became due as part of the severance agreement.
The balance of these liabilities will be paid over the first two
quarters of 2005.
11. Related
Party Transactions
Two of USA Mobilitys directors, effective
November 16, 2004, also serve on the Board of Directors of
entities that lease transmission tower sites to the Company.
During the twelve months ended December 31, 2004, the
Company paid $19.7 million and $2.8 million,
respectively, to these landlords for rent expenses. Each
director has recused himself from any discussion or decisions by
the Company on matters relating to the relevant vendor.
12. Quarterly
Financial Results (Unaudited)
Quarterly financial information for the years ended
December 31, 2003 and 2004 is summarized below (in
thousands, except per share amounts). A reconciliation to the
previously reported amounts is included in Note 1.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter (1)
|
|
|
Year Ended December 31,
2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
164,753
|
|
|
$
|
154,076
|
|
|
$
|
143,623
|
|
|
$
|
135,026
|
|
Operating income (restated)
|
|
|
13,863
|
|
|
|
10,364
|
|
|
|
12,619
|
|
|
|
616
|
|
Net income (loss) (restated)
|
|
|
5,225
|
|
|
|
3,908
|
|
|
|
5,711
|
|
|
|
(1,835
|
)
|
Basic/diluted net income (loss)
per common share (restated)
|
|
|
0.26
|
|
|
|
0.20
|
|
|
|
0.29
|
|
|
|
(0.09
|
)
|
F-35
USA
MOBILITY, INC.
NOTES TO
CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter (2)
|
|
|
Year Ended December 31,
2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
123,659
|
|
|
$
|
115,797
|
|
|
$
|
109,417
|
|
|
$
|
141,287
|
|
Operating income (restated)
|
|
|
11,250
|
|
|
|
9,458
|
|
|
|
11,636
|
|
|
|
2,764
|
|
Net income (loss) (restated)
|
|
|
4,833
|
|
|
|
6,245
|
|
|
|
2,404
|
|
|
|
(1,315
|
)
|
Basic net income (loss) per common
share (restated)
|
|
|
0.24
|
|
|
|
0.31
|
|
|
|
0.12
|
|
|
|
(0.06
|
)
|
Diluted net income (loss) per
common share (restated)
|
|
|
0.24
|
|
|
|
0.31
|
|
|
|
0.12
|
|
|
|
(0.06
|
)
|
The quarterly financial statement line items impacted by these
adjustments are summarized in the following tables (in
thousands, except shares and per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
|
First Quarter
|
|
|
Second Quarter
|
|
|
Third Quarter
|
|
|
Fourth Quarter
|
|
|
|
As
|
|
|
|
|
|
As
|
|
|
|
|
|
As
|
|
|
|
|
|
As
|
|
|
|
|
|
|
previously
|
|
|
As
|
|
|
previously
|
|
|
As
|
|
|
previously
|
|
|
As
|
|
|
previously
|
|
|
As
|
|
|
|
reported
|
|
|
restated
|
|
|
reported
|
|
|
restated
|
|
|
reported
|
|
|
restated
|
|
|
reported
|
|
|
restated
|
|
|
|
(Quarterly amounts are
unaudited)
|
|
|
ASSETS
|
Accounts receivable, net
|
|
$
|
20,363
|
|
|
$
|
23,272
|
|
|
$
|
20,279
|
|
|
$
|
22,541
|
|
|
$
|
20,987
|
|
|
$
|
22,803
|
|
|
$
|
37,750
|
|
|
$
|
40,078
|
|
Deferred income tax
assets current
|
|
|
30,206
|
|
|
|
32,453
|
|
|
|
25,893
|
|
|
|
27,804
|
|
|
|
22,226
|
|
|
|
23,242
|
|
|
|
26,906
|
|
|
|
25,525
|
|
Total current assets
|
|
|
101,464
|
|
|
|
106,620
|
|
|
|
80,478
|
|
|
|
84,651
|
|
|
|
105,497
|
|
|
|
108,329
|
|
|
|
127,111
|
|
|
|
128,058
|
|
Property and equipment, net
|
|
|
193,183
|
|
|
|
188,312
|
|
|
|
167,321
|
|
|
|
165,735
|
|
|
|
150,840
|
|
|
|
150,229
|
|
|
|
216,508
|
|
|
|
220,028
|
|
Goodwill
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
151,791
|
|
|
|
154,369
|
|
Deferred income tax
assets long-term
|
|
|
189,346
|
|
|
|
175,229
|
|
|
|
191,955
|
|
|
|
176,665
|
|
|
|
191,395
|
|
|
|
171,952
|
|
|
|
225,253
|
|
|
|
207,046
|
|
Total Assets
|
|
$
|
484,654
|
|
|
$
|
470,822
|
|
|
$
|
439,757
|
|
|
$
|
427,054
|
|
|
$
|
449,057
|
|
|
$
|
431,835
|
|
|
$
|
793,309
|
|
|
$
|
782,147
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY
|
Accrued compensation and benefits
|
|
$
|
8,584
|
|
|
$
|
7,523
|
|
|
$
|
7,131
|
|
|
$
|
6,070
|
|
|
$
|
9,850
|
|
|
$
|
8,789
|
|
|
$
|
17,792
|
|
|
$
|
10,329
|
|
Accrued taxes
|
|
|
8,196
|
|
|
|
9,700
|
|
|
|
8,887
|
|
|
|
10,573
|
|
|
|
9,102
|
|
|
|
10,965
|
|
|
|
27,862
|
|
|
|
30,097
|
|
Accrued restructuring and severance
|
|
|
11,467
|
|
|
|
12,528
|
|
|
|
8,470
|
|
|
|
9,531
|
|
|
|
5,541
|
|
|
|
6,602
|
|
|
|
4,974
|
|
|
|
16,241
|
|
Accrued other
|
|
|
7,445
|
|
|
|
11,107
|
|
|
|
7,028
|
|
|
|
9,966
|
|
|
|
5,956
|
|
|
|
8,368
|
|
|
|
10,279
|
|
|
|
14,297
|
|
Total current liabilities
|
|
|
115,481
|
|
|
|
120,647
|
|
|
|
68,335
|
|
|
|
72,959
|
|
|
|
68,699
|
|
|
|
72,974
|
|
|
|
151,917
|
|
|
|
161,975
|
|
Other long-term liabilities
|
|
|
9,005
|
|
|
|
18,390
|
|
|
|
6,921
|
|
|
|
16,703
|
|
|
|
8,203
|
|
|
|
18,148
|
|
|
|
10,555
|
|
|
|
16,632
|
|
Total Liabilities
|
|
|
124,486
|
|
|
|
139,037
|
|
|
|
75,256
|
|
|
|
89,662
|
|
|
|
76,902
|
|
|
|
91,122
|
|
|
|
209,972
|
|
|
|
226,107
|
|
Total Stockholders Equity
|
|
|
360,168
|
|
|
|
331,785
|
|
|
|
364,501
|
|
|
|
337,392
|
|
|
|
372,155
|
|
|
|
340,713
|
|
|
|
583,337
|
|
|
|
556,040
|
|
Total Liabilities and
Stockholders Equity
|
|
$
|
484,654
|
|
|
$
|
470,822
|
|
|
$
|
439,757
|
|
|
$
|
427,054
|
|
|
$
|
449,057
|
|
|
$
|
431,835
|
|
|
$
|
793,309
|
|
|
$
|
782,147
|
|
F-36
USA
MOBILITY, INC.
NOTES TO
CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
|
First Quarter
|
|
|
Second Quarter
|
|
|
Third Quarter
|
|
|
Fourth Quarter
|
|
|
|
As
|
|
|
|
|
|
As
|
|
|
|
|
|
As
|
|
|
|
|
|
As
|
|
|
|
|
|
|
previously
|
|
|
As
|
|
|
previously
|
|
|
As
|
|
|
previously
|
|
|
As
|
|
|
previously
|
|
|
As
|
|
|
|
reported
|
|
|
restated
|
|
|
reported
|
|
|
restated
|
|
|
reported
|
|
|
restated
|
|
|
reported
|
|
|
restated
|
|
|
|
(Quarterly amounts are
unaudited)
|
|
|
Service, rental and maintenance
|
|
|
39,362
|
|
|
|
38,790
|
|
|
|
36,988
|
|
|
|
36,739
|
|
|
|
36,904
|
|
|
|
36,653
|
|
|
|
47,817
|
|
|
|
47,962
|
|
General and administrative
|
|
|
32,941
|
|
|
|
31,304
|
|
|
|
28,968
|
|
|
|
29,150
|
|
|
|
27,438
|
|
|
|
27,615
|
|
|
|
39,952
|
|
|
|
41,977
|
|
Depreciation, amortization and
accretion
|
|
|
26,309
|
|
|
|
26,353
|
|
|
|
31,071
|
|
|
|
28,327
|
|
|
|
22,302
|
|
|
|
21,867
|
|
|
|
34,685
|
|
|
|
31,082
|
|
Stock based compensation
|
|
|
688
|
|
|
|
2,267
|
|
|
|
2,054
|
|
|
|
1,908
|
|
|
|
1,865
|
|
|
|
1,865
|
|
|
|
8,320
|
|
|
|
(1,177
|
)
|
Severance and restructuring
|
|
|
3,018
|
|
|
|
3,689
|
|
|
|
456
|
|
|
|
602
|
|
|
|
1,228
|
|
|
|
1,228
|
|
|
|
(1,684
|
)
|
|
|
6,419
|
|
Total operating expenses
|
|
|
112,376
|
|
|
|
112,409
|
|
|
|
109,150
|
|
|
|
106,339
|
|
|
|
98,290
|
|
|
|
97,781
|
|
|
|
141,298
|
|
|
|
138,523
|
|
Operating income
|
|
|
11,283
|
|
|
|
11,250
|
|
|
|
6,647
|
|
|
|
9,458
|
|
|
|
11,127
|
|
|
|
11,636
|
|
|
|
(11
|
)
|
|
|
2,764
|
|
Other income
|
|
|
168
|
|
|
|
168
|
|
|
|
177
|
|
|
|
177
|
|
|
|
66
|
|
|
|
66
|
|
|
|
247
|
|
|
|
403
|
|
Income before income tax (expense)
|
|
|
8,122
|
|
|
|
8,089
|
|
|
|
5,124
|
|
|
|
7,935
|
|
|
|
11,264
|
|
|
|
11,773
|
|
|
|
(1,751
|
)
|
|
|
1,180
|
|
Income tax (expense)
|
|
|
(3,265
|
)
|
|
|
(3,256
|
)
|
|
|
(2,060
|
)
|
|
|
(1,690
|
)
|
|
|
(4,527
|
)
|
|
|
(9,369
|
)
|
|
|
574
|
|
|
|
(2,495
|
)
|
Net income (loss)
|
|
$
|
4,857
|
|
|
$
|
4,833
|
|
|
$
|
3,064
|
|
|
$
|
6,245
|
|
|
$
|
6,737
|
|
|
$
|
2,404
|
|
|
$
|
(1,177
|
)
|
|
$
|
(1,315
|
)
|
Basic net income (loss) per common
share
|
|
$
|
0.24
|
|
|
$
|
0.24
|
|
|
$
|
0.15
|
|
|
$
|
0.31
|
|
|
$
|
0.34
|
|
|
$
|
0.12
|
|
|
$
|
(0.05
|
)
|
|
$
|
(0.06
|
)
|
Diluted net income (loss) per
common share
|
|
$
|
0.24
|
|
|
$
|
0.24
|
|
|
$
|
0.15
|
|
|
$
|
0.31
|
|
|
$
|
0.34
|
|
|
$
|
0.12
|
|
|
$
|
(0.05
|
)
|
|
$
|
(0.06
|
)
|
CONDENSED
CONSOLIDATED INCOME STATEMENT
(In thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003
|
|
|
|
First Quarter
|
|
|
Second Quarter
|
|
|
Third Quarter
|
|
|
Fourth Quarter
|
|
|
|
As
|
|
|
|
|
|
As
|
|
|
|
|
|
As
|
|
|
|
|
|
As
|
|
|
|
|
|
|
previously
|
|
|
As
|
|
|
previously
|
|
|
As
|
|
|
previously
|
|
|
As
|
|
|
previously
|
|
|
As
|
|
|
|
reported
|
|
|
restated
|
|
|
reported
|
|
|
restated
|
|
|
reported
|
|
|
restated
|
|
|
reported
|
|
|
restated
|
|
|
|
(Quarterly amounts are
unaudited)
|
|
|
Service, rental and maintenance
|
|
$
|
50,135
|
|
|
$
|
49,515
|
|
|
$
|
48,511
|
|
|
$
|
48,108
|
|
|
$
|
46,736
|
|
|
$
|
46,067
|
|
|
$
|
46,777
|
|
|
$
|
45,600
|
|
General and administrative
|
|
|
49,092
|
|
|
|
49,249
|
|
|
|
43,887
|
|
|
|
44,090
|
|
|
|
39,526
|
|
|
|
39,735
|
|
|
|
33,662
|
|
|
|
33,874
|
|
Depreciation, amortization and
accretion
|
|
|
33,223
|
|
|
|
35,779
|
|
|
|
30,638
|
|
|
|
34,143
|
|
|
|
27,998
|
|
|
|
29,634
|
|
|
|
27,058
|
|
|
|
30,102
|
|
Total operating expenses
|
|
|
148,797
|
|
|
|
150,890
|
|
|
|
140,407
|
|
|
|
143,712
|
|
|
|
129,828
|
|
|
|
131,004
|
|
|
|
132,331
|
|
|
|
134,410
|
|
Operating income
|
|
|
15,956
|
|
|
|
13,863
|
|
|
|
13,669
|
|
|
|
10,364
|
|
|
|
13,795
|
|
|
|
12,619
|
|
|
|
2,695
|
|
|
|
616
|
|
Income before income tax (expense)
|
|
|
10,320
|
|
|
|
8,227
|
|
|
|
8,915
|
|
|
|
5,610
|
|
|
|
10,516
|
|
|
|
9,340
|
|
|
|
(2,782
|
)
|
|
|
(4,861
|
)
|
Income tax (expense)
|
|
|
(4,249
|
)
|
|
|
(3,002
|
)
|
|
|
(3,671
|
)
|
|
|
(1,702
|
)
|
|
|
(4,330
|
)
|
|
|
(3,630
|
)
|
|
|
1,409
|
|
|
|
3,026
|
|
Net income (loss)
|
|
$
|
6,071
|
|
|
$
|
5,225
|
|
|
$
|
5,244
|
|
|
$
|
3,908
|
|
|
$
|
6,186
|
|
|
$
|
5,710
|
|
|
$
|
(1,373
|
)
|
|
$
|
(1,835
|
)
|
Basic net income (loss) per common
share
|
|
$
|
0.30
|
|
|
$
|
0.26
|
|
|
$
|
0.26
|
|
|
$
|
0.20
|
|
|
$
|
0.31
|
|
|
$
|
0.29
|
|
|
$
|
(0.07
|
)
|
|
$
|
(0.09
|
)
|
Diluted net income (loss) per
common share
|
|
$
|
0.30
|
|
|
$
|
0.26
|
|
|
$
|
0.26
|
|
|
$
|
0.20
|
|
|
$
|
0.31
|
|
|
$
|
0.29
|
|
|
$
|
(0.07
|
)
|
|
$
|
(0.09
|
)
|
F-37
USA
MOBILITY, INC.
NOTES TO
CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
|
|
|
(1)
|
|
In the fourth quarter of 2003, Arch recorded an
$11.5 million restructuring charge associated with a lease
agreement (see Note 10). In addition, general and
administrative expenses for the fourth quarter of 2003 include
approximately $3.6 million related to changes in estimates
resulting in accrual reductions for various sales and property
related taxes.
|
|
|
(2)
|
USA Mobility is a holding company formed to effect the merger of
Arch and Metrocall that occurred on November 16, 2004. For
financial reporting purposes Arch was deemed the acquiring
entity. The operations of Metrocall have been included since
November 16, 2004.
|
F-38
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Shareholders of
USA Mobility, Inc.:
Our audit of the consolidated financial statements referred to
in our report dated February 26, 2004 appearing in the 2004
Annual Report on
Form 10-K
of USA Mobility, Inc. (formerly Arch Wireless, Inc.) also
included an audit of the financial statement schedule for the
five months ended May 31, 2002 listed in Item 15(a)(2)
of this
Form 10-K.
In our opinion, this financial statement schedule presents
fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated
financial statements.
/s/
PricewaterhouseCoopers
LLP
Boston, Massachusetts
February 26, 2004
SCHEDULE II
USA
MOBILITY, INC.
VALUATION
AND QUALIFYING ACCOUNTS
Years
Ended December 2002, 2003 and 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
Allowance for Doubtful Accounts
and
|
|
Beginning
|
|
|
Charged to
|
|
|
|
|
|
|
|
|
End of
|
|
Service Credits
|
|
of Period
|
|
|
Operations
|
|
|
Write-Offs
|
|
|
Other (1)
|
|
|
Period
|
|
|
|
(In thousands)
|
|
|
Five Months ended May 31, 2002
|
|
$
|
41,987
|
|
|
$
|
34,355
|
|
|
$
|
(39,355
|
)
|
|
$
|
|
|
|
$
|
36,987
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seven Months ended
December 31, 2002
|
|
$
|
36,987
|
|
|
$
|
35,048
|
|
|
$
|
(49,543
|
)
|
|
$
|
|
|
|
$
|
22,492
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2003
|
|
$
|
22,492
|
|
|
$
|
23,244
|
|
|
$
|
(37,091
|
)
|
|
$
|
|
|
|
$
|
8,645
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2004
|
|
$
|
8,645
|
|
|
$
|
13,061
|
|
|
$
|
(19,598
|
)
|
|
$
|
6,185
|
|
|
$
|
8,293
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
Beginning
|
|
|
Charged to
|
|
|
|
|
|
|
|
|
End of
|
|
Accrued Restructuring
Charge
|
|
of Period
|
|
|
Expense
|
|
|
Deductions
|
|
|
Other (1)
|
|
|
Period
|
|
|
Five Months ended May 31, 2002
|
|
$
|
17,496
|
|
|
$
|
|
|
|
$
|
(17,496
|
)
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seven Months ended
December 31, 2002
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2003
(restated)
|
|
$
|
|
|
|
$
|
16,683
|
|
|
$
|
(4,141
|
)
|
|
$
|
|
|
|
$
|
12,542
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2004
(restated)
|
|
$
|
12,542
|
|
|
$
|
11,938
|
|
|
$
|
(10,603
|
)
|
|
$
|
2,364
|
|
|
$
|
16,241
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Fair value of balance acquired from Metrocall
|
EXHIBIT INDEX
|
|
|
|
|
|
2
|
.1
|
|
Agreement and Plan of Merger,
dated as of March 29, 2004, as amended, by and among
Wizards-Patriots Holdings, Inc., Wizards Acquiring Sub, Inc.,
Metrocall Holdings, Inc., Patriots Acquiring Sub, Inc. and Arch
Wireless, Inc. (incorporated by reference as part of
Annex A to the Joint Proxy Statement/Prospectus forming
part of Amendment No. 3 to USA Mobilitys Registration
Statement) (1)
|
|
2
|
.2
|
|
Amendment No. 1 to the
Agreement and Plan of Merger, dated as of October 5, 2004
(incorporated by reference as part of Annex B to the Joint
Proxy Statement/Prospectus forming part of Amendment No. 3
to USA Mobilitys Registration Statement) (1)
|
|
2
|
.3
|
|
Amendment No. 2 to the
Agreement and Plan of Merger, dated as of November 15,
2004 (2)
|
|
2
|
.4
|
|
Asset Purchase Agreement among
WebLink Wireless I, L.P., WebLink Wireless, Inc. and
Metrocall, Inc. and Metrocall Holdings, Inc. dated as of
November 18, 2003 (3)
|
|
3
|
.1
|
|
Amended and Restated Certificate
of Incorporation. (2)
|
|
3
|
.2
|
|
Amended and Restated
By-Laws (2)
|
|
4
|
.1
|
|
Specimen of common stock
certificate, par value $0.0001 per share (1)
|
|
4
|
.2
|
|
Registration Right Agreement,
dated as of November 18, 2003, by and between Metrocall
Holdings, Inc. and WebLink Wireless I, L.P. (4)
|
|
10
|
.1
|
|
Credit Agreement. Dated as of
November 16, 2004, among Metrocall, Inc., Arch Wireless
Operating Company, Inc., USA Mobility, Inc., the other
guarantors party thereto, the lenders party thereto, UBS
Securities LLC, as arranger, documentation agent and syndication
agent, and UBS AG, Stamford Branch, as administrative agent and
collateral agent (2)
|
|
10
|
.2
|
|
Form of Indemnification Agreement
for directors and executive officers of USA Mobility, Inc. (2)
|
|
10
|
.3
|
|
Employment Agreement, dated as of
November 15, 2004, between USA Mobility, Inc. and Vincent
D. Kelly (2)
|
|
10
|
.4
|
|
Amendment No. 1 to the Credit
Agreement (8)
|
|
10
|
.5
|
|
Offer Letter, dated as of
November 30, 2004, between USA Mobility, Inc. and Thomas L.
Schilling (8)
|
|
10
|
.6
|
|
Metrocall Holdings, Inc. 2003
Stock Option Plan (5)
|
|
10
|
.7
|
|
Arch Wireless, Inc. 2002 Stock
Incentive Plan (5)
|
|
10
|
.8
|
|
Arch Wireless Holdings, Inc.
Severance Benefits Plan (7)
|
|
10
|
.9
|
|
USA Mobility, Inc. Equity
Incentive Plan (8)
|
|
16
|
.1
|
|
Letter from Ernst & Young
LLP regarding change in certifying accountant (6)
|
|
21
|
.1
|
|
Subsidiaries of USA
Mobility (8)
|
|
31
|
.1
|
|
Certification of Chief Executive
Officer pursuant to
Rule 13a-14(a)/Rule 15d-14(a)
of the Securities Exchange Act of 1934, as amended, dated
May 24, 2006 (9)
|
|
31
|
.2
|
|
Certification of Chief Financial
Officer pursuant to
Rule 13a-14(a)/Rule 15d-14(a)
of the Securities Exchange Act of 1934, as amended, dated
May 24, 2006 (9)
|
|
32
|
.1
|
|
Certification of Chief Executive
Officer pursuant to 18 U.S.C. Section 1350 dated
May 24, 2006 (9)
|
|
32
|
.2
|
|
Certification of Chief Financial
Officer pursuant to 18 U.S.C. Section 1350 dated
May 24, 2006 (9)
|
|
|
(1)
|
Incorporated by reference to USA Mobilitys Registration
Statement on
Form S-4/A
filed on October 6, 2004.
|
|
(2)
|
Incorporated by reference to USA Mobilitys Current Report
on
Form 8-K
filed on November 17, 2004.
|
|
(3)
|
Incorporated by reference to Metrocalls Current Report on
Form 8-K
filed on November 21, 2003.
|
|
(4)
|
Incorporated by reference to Metrocalls Registration
Statement on
Form S-3
filed on December 18, 2003.
|
|
(5)
|
Incorporated by reference to USA Mobilitys Registration
Statement on
Form S-8
filed on November 23, 2004.
|
|
(6)
|
Incorporated by reference to USA Mobilitys Current Report
on
Form 8-K
filed November 22, 2004.
|
|
(7)
|
Incorporated by reference to Archs Annual Report on
Form 10-K
for the year ended December 31, 2002.
|
|
(8)
|
Incorporated by reference to USA Mobilitys Annual Report
on
Form 10-K
for the year ended December 31, 2004 originally filed on
March 17, 2005.
|
|
(9)
|
Filed herewith.
|