UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-Q/A
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(Mark One)
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended
March 31, 2005
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or
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o
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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)
Indicate by check mark whether the registrant: (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past
90 days. Yes
þ
No
o
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Exchange Act
Rule 12b-2). Yes
þ
No
o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes
þ
No
o
Indicate by check mark whether the registrant has filed all
documents and reports required to be filed by Sections 12,
13 or 15(d) of the Securities Exchange Act of 1934 subsequent to
the distribution of securities under a plan confirmed by a
court. Yes
þ
No
o
Indicate the number of shares outstanding of each of the
issuers classes of common stock, as of the latest
practicable date: 26,849,351 shares of the
Registrants Common Stock ($0.0001 par value per
share) were outstanding as of May 6, 2005.
USA
MOBILITY, INC.
QUARTERLY
REPORT ON
FORM 10-Q/A
Index
1
PART I.
FINANCIAL INFORMATION
Restatement
As described in our Annual Report on
Form 10-K/A
for the year ended December 31, 2004, USA Mobility, Inc.
(USA Mobility, the Company, or
we) restated the financial statements and other
financial information for the periods 2002, 2003 and 2004 and
interim quarterly periods for 2004 and 2005 to reflect certain
adjustments.
Only those items affected by the restatement have been changed
in this
Form 10-Q/A.
Those areas include Item 1, 2 and 4 of Part I and
Item 6 of Part II. Other information in this
Form 10-Q/A
has not been updated to reflect the impact of any other items
occurring subsequent to the original
10-Q
filing
date.
For further discussion of the effects of the restatement, see
Part 1, Item 1. Financial Statements, Condensed
Consolidated Financial Statements and Note 1, Unaudited
Notes to Condensed Consolidated Financial Statements,
Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations and Item 4.
Controls and Procedures.
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Item 1.
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Financial
Statements
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USA
MOBILITY, INC.
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December 31,
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March 31,
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2004
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2005
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(Restated)
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(Restated)
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(In thousands)
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(unaudited)
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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46,995
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$
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37,111
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Accounts receivable, net
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40,078
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36,055
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Prepaid rent, expenses and other
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15,460
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20,321
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Deferred income taxes
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25,525
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24,660
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Total current assets
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128,058
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118,147
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Property and equipment, net
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220,028
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189,780
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Goodwill
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154,369
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154,369
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Intangible assets
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67,129
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59,037
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Deferred income taxes
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207,046
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209,302
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Other assets
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5,517
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5,486
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TOTAL ASSETS
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$
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782,147
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$
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736,121
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LIABILITIES AND
STOCKHOLDERS EQUITY
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Current liabilities:
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Current maturities of long-term
debt
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$
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47,558
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$
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32,318
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Accounts payable and other accrued
liabilities
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86,478
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76,866
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Customer deposits
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4,316
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3,970
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Deferred revenue
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23,623
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22,475
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Total current liabilities
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161,975
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135,629
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Long-term debt, less current
maturities
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47,500
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24,214
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Other long-term liabilities
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16,632
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18,466
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TOTAL LIABILITIES
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226,107
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178,309
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Stockholders equity:
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Preferred stock
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Common stock
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3
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3
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Additional paid-in capital
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536,252
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537,887
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Retained earnings
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19,785
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19,922
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TOTAL STOCKHOLDERS EQUITY
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556,040
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557,812
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TOTAL LIABILITIES AND
STOCKHOLDERS EQUITY
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$
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782,147
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$
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736,121
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The accompanying notes are an integral part of these
unaudited condensed consolidated financial statements.
2
USA
MOBILITY, INC.
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Three Months Ended
March 31,
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2004
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2005
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(Restated)
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(Restated)
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(In thousands, except share and
per share amounts)
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(Unaudited)
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Revenue:
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Service, rental and maintenance,
net of service credits
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$
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119,546
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$
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159,150
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Product sales
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4,113
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6,527
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Total revenue
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123,659
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165,677
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Operating expenses:
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Cost of products sold
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938
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1,279
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Service, rental and maintenance
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38,790
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56,353
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Selling and marketing
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9,068
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10,402
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General and administrative
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31,304
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48,427
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Depreciation, amortization and
accretion
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26,353
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40,595
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Stock based compensation
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2,267
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1,385
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Severance and restructuring
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3,689
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5,137
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Total operating expenses
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112,409
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163,578
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Operating income
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11,250
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2,099
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Interest expense, net
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(3,329
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(1,214
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Loss on extinguishment of
long-term debt
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(594
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Other income
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168
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137
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Income before income tax expense
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8,089
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428
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Income tax expense
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(3,256
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)
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(291
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Net income
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$
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4,833
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$
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137
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Basic net income per common share
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$
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0.24
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$
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0.01
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Diluted net income per common share
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$
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0.24
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$
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0.01
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Basic weighted average common
shares outstanding
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20,000,000
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27,108,034
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Diluted weighted average common
shares outstanding
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20,078,213
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27,320,212
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The accompanying notes are an integral part of these
unaudited condensed consolidated financial statements.
3
USA
MOBILITY, INC.
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Three Months Ended
March 31,
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2004
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2005
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(Restated)
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(Restated)
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(Unaudited and in
thousands)
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Cash flows from operating
activities:
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Net income
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$
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4,833
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$
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137
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Adjustments to reconcile net
income (loss) to net cash provided by operating activities:
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Depreciation, amortization and
accretion
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26,353
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40,595
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Amortization of deferred financing
costs
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505
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Amortization of stock based
compensation
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2,267
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1,385
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Deferred income tax expense
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3,523
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(1,391
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)
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Loss on extinguishment of
long-term debt
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594
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Gain on disposals of property and
equipment
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(109
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)
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(26
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Provisions for doubtful accounts,
service credits and other
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2,280
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7,005
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Changes in assets and liabilities:
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Accounts receivable
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3,317
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(3,084
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)
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Prepaid expenses and other
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(2,017
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)
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(4,861
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)
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Intangibles and other long-term
assets
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(46
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Accounts payable and accrued
expenses
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(13,786
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)
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(9,704
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Customer deposits and deferred
revenue
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(1,866
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)
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(1,494
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)
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Other long-term liabilities
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(275
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)
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1,464
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Net cash provided by operating
activities
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24,520
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31,079
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Cash flows from investing
activities:
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Purchases of property and equipment
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(5,701
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)
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(2,564
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)
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Proceeds from disposals of
property and equipment
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750
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25
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Receipts from note receivable
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56
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102
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Net cash used for investing
activities
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(4,895
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)
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(2,437
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)
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Cash flows from financing
activities:
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Repayment of long-term debt
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(20,000
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)
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(38,526
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)
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Net cash used for financing
activities
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(20,000
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)
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(38,526
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)
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Net decrease in cash and cash
equivalents
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(375
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)
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(9,884
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)
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Cash and cash equivalents,
beginning of period
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34,582
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46,995
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Cash and cash equivalents, end of
period
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$
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34,207
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$
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37,111
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Supplemental
disclosure:
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Interest paid
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$
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1,903
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$
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1,367
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Income taxes paid
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$
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$
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The accompanying notes are an integral part of these
unaudited condensed consolidated financial statements.
4
USA
MOBILITY, INC.
(unaudited)
Note 1
Restatement of Prior Interim Period and Annual Financial
Statements
During 2005, USA Mobility, Inc.
(USA Mobility or the Company) identified
adjustments related to certain assets, liabilities, and expenses
of the 2002, 2003 and 2004 consolidated financial statements and
2004 and 2005 interim period financial statements. Accordingly,
the Company has restated the 2002, 2003 and 2004 consolidated
financial statements and 2004 and 2005 interim period financial
statements. The Companys assessment of certain identified
accounting errors resulted in the following adjustments to
previously reported periods for 2004 and 2005.
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. During the first quarter
of 2005, accumulated depreciation decreased by
$0.3 million, current liabilities increased by less than
$0.1 million, long-term liabilities decreased by
$0.4 million, depreciation, amortization and accretion
expense increased by $0.8 million and service, rental and
maintenance expense decreased by less than $0.1 million.
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,
5
USA MOBILITY, INC.
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 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. The restated interim quarterly financials for
the first quarter of 2005 reflects a $0.2 million increase
in general and administrative expense offset in accrued taxes.
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. In 2005,
the restated financials for the first quarter include an
increase to depreciation expense and a corresponding decrease to
accumulated depreciation of $0.7 million.
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.
6
USA MOBILITY, INC.
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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.
The financial statement line items impacted by these adjustments
are summarized in the following tables (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2004
|
|
|
March 31, 2005
|
|
|
|
As
|
|
|
|
|
|
As
|
|
|
|
|
|
|
Previously
|
|
|
As
|
|
|
Previously
|
|
|
As
|
|
|
|
Reported
|
|
|
Restated
|
|
|
Reported
|
|
|
Restated
|
|
|
ASSETS
|
Accounts receivable, net
|
|
$
|
37,750
|
|
|
$
|
40,078
|
|
|
$
|
33,976
|
|
|
$
|
36,055
|
|
Deferred income tax
assets current
|
|
|
26,906
|
|
|
|
25,525
|
|
|
|
26,626
|
|
|
|
24,660
|
|
Total current assets
|
|
|
127,111
|
|
|
|
128,058
|
|
|
|
118,034
|
|
|
|
118,147
|
|
Property and equipment, net
|
|
|
216,508
|
|
|
|
220,088
|
|
|
|
187,608
|
|
|
|
189,780
|
|
Goodwill
|
|
|
151,791
|
|
|
|
154,369
|
|
|
|
151,791
|
|
|
|
154,369
|
|
Deferred income tax
assets long-term
|
|
|
225,253
|
|
|
|
207,046
|
|
|
|
224,662
|
|
|
|
209,302
|
|
Total Assets
|
|
$
|
793,309
|
|
|
$
|
782,147
|
|
|
$
|
746,618
|
|
|
$
|
736,121
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY
|
Accounts payable and other accrued
liabilities
|
|
$
|
76,420
|
|
|
$
|
86,478
|
|
|
$
|
70,042
|
|
|
$
|
76,866
|
|
Total current liabilities
|
|
|
151,917
|
|
|
|
161,975
|
|
|
|
128,805
|
|
|
|
135,629
|
|
Other long-term liabilities
|
|
|
10,555
|
|
|
|
16,632
|
|
|
|
7,559
|
|
|
|
18,466
|
|
Total Liabilities
|
|
|
209,972
|
|
|
|
226,107
|
|
|
|
160,578
|
|
|
|
178,309
|
|
Total Stockholders Equity
|
|
|
583,337
|
|
|
|
556,040
|
|
|
|
586,040
|
|
|
|
557,812
|
|
Total Liabilities and
Stockholders Equity
|
|
$
|
793,309
|
|
|
$
|
782,147
|
|
|
$
|
746,618
|
|
|
$
|
736,121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
Quarter Ended
|
|
|
|
|
|
|
March 31, 2004
|
|
|
March 31, 2005
|
|
|
|
|
|
|
As
|
|
|
|
|
|
As
|
|
|
|
|
|
|
|
|
|
Previously
|
|
|
As
|
|
|
Previously
|
|
|
As
|
|
|
|
|
|
|
Reported
|
|
|
Restated
|
|
|
Reported
|
|
|
Restated
|
|
|
|
|
|
Service, rental and maintenance
|
|
$
|
39,362
|
|
|
$
|
38,790
|
|
|
$
|
56,973
|
|
|
$
|
56,353
|
|
|
|
|
|
General and administrative
|
|
|
32,941
|
|
|
|
31,304
|
|
|
|
53,140
|
|
|
|
48,427
|
|
|
|
|
|
Depreciation, amortization and
accretion
|
|
|
26,309
|
|
|
|
26,353
|
|
|
|
38,535
|
|
|
|
40,595
|
|
|
|
|
|
Stock based compensation
|
|
|
688
|
|
|
|
2,267
|
|
|
|
1,411
|
|
|
|
1,385
|
|
|
|
|
|
Severance and restructuring
|
|
|
3,018
|
|
|
|
3,689
|
|
|
|
|
|
|
|
5,137
|
|
|
|
|
|
Total operating expenses
|
|
|
112,376
|
|
|
|
112,409
|
|
|
|
161,808
|
|
|
|
163,578
|
|
|
|
|
|
Operating income
|
|
|
11,283
|
|
|
|
11,250
|
|
|
|
3,869
|
|
|
|
2,099
|
|
|
|
|
|
Other income
|
|
|
168
|
|
|
|
168
|
|
|
|
293
|
|
|
|
137
|
|
|
|
|
|
Income before income taxes
|
|
|
8,122
|
|
|
|
8,089
|
|
|
|
2,354
|
|
|
|
428
|
|
|
|
|
|
Income tax (expense) benefit
|
|
|
(3,265
|
)
|
|
|
(3,256
|
)
|
|
|
(1,062
|
)
|
|
|
(291
|
)
|
|
|
|
|
Net income
|
|
$
|
4,857
|
|
|
$
|
4,833
|
|
|
$
|
1,292
|
|
|
$
|
137
|
|
|
|
|
|
Basic net income per common share
|
|
$
|
0.24
|
|
|
$
|
0.24
|
|
|
$
|
0.05
|
|
|
$
|
0.01
|
|
|
|
|
|
Diluted net income per common share
|
|
|
0.24
|
|
|
|
0.24
|
|
|
|
0.05
|
|
|
|
0.01
|
|
|
|
|
|
7
USA MOBILITY, INC.
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(a)
Preparation of Interim Financial
Statements
The consolidated financial
statements of USA Mobility, Inc. (USA Mobility or
the Company) have been prepared in accordance with
the rules and regulations of the U.S. Securities and
Exchange Commission (SEC). The financial information
included herein, other than the consolidated balance sheet as of
December 31, 2004 (as restated), has been prepared without
audit. The consolidated balance sheet at December 31, 2004
has been derived from, but does not include all the disclosures
contained in, the audited consolidated financial statements for
the year ended December 31, 2004. In the opinion of
management, these unaudited statements include all adjustments
and accruals, which are necessary for a fair presentation of the
results of all interim periods reported herein. All adjustments
are of a normal recurring nature. These consolidated financial
statements should be read in conjunction with the consolidated
financial statements and accompanying notes included in USA
Mobilitys Annual Report on
Form 10-K/A
for the year ended December 31, 2004. The results of
operations for the interim periods presented are not necessarily
indicative of the results that may be expected for a full year.
Amounts shown on the statement of results of operations within
the Operating Expense categories of cost of products sold;
service, rental and maintenance; selling and marketing; and
general and administrative are recorded exclusive of
depreciation, amortization, accretion, stock based compensation,
severance and restructuring charges. These items are shown
separately on the Statement of Results of Operations within
Operating Expenses.
Reclassifications Certain prior years
amounts have been reclassified to conform with current
years presentation. Those reclassifications included
(1) decreases to restructuring and stock based compensation
of $3.0 million and $7.9 million, respectively, with a
corresponding increase to severance, restructuring and other of
$10.9 million for the three months ended March 31,
2004 and (2) an increase to depreciation, amortization and
accretion of $0.1 million for the three months ended
March 31, 2004 for accretion expense formerly included in
service, rental and maintenance expense.
(b)
Merger of Arch and
Metrocall
The merger of Arch Wireless,
Inc. (Arch) and Metrocall Holdings, Inc.
(Metrocall) occurred on November 16, 2004.
Under the terms of the merger agreement, holders of 100% of the
outstanding Arch common 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 million of cash and
all of the remaining 7,236,868 shares of Metrocalls
common stock were 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.
The merger was accounted for using the purchase method of
accounting with Arch as 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 were based upon the
total purchase price and the estimated fair values of such
assets and liabilities, as determined by an independent
third-party valuation. The results of operations of Metrocall
have been included in the USA Mobility results from
November 16, 2004, therefore, the results presented for the
three months ended March 31, 2004 do not include results
associated with Metrocall.
In connection with the merger, USA Mobility expects to incur
restructuring costs, primarily as a result of severance and
relocation of its workforce and the elimination of duplicate
facilities and networks related to Metrocalls operations.
Such costs have been recognized by the Company as a liability
assumed as of the acquisition date, to the extent known or
estimable. At the acquisition date, these restructuring costs
consisted of $2.4 million of employee termination and
relocation benefits. As of March 31, 2005, less than
$100,000 of this liability remains unpaid.
USA Mobility expects to achieve operating and other synergies
through elimination of redundant overhead and duplicative
network structures. Subsequent to the merger, the Company began
an extensive review of all operating systems, the
rationalization of our one-way and two-way messaging networks,
and the composition of our sales force. The Company expects to
continue its reviews through 2005 and beyond as it deconstructs
networks and
8
USA MOBILITY, INC.
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
standardizes its systems. In this process, the Company expects
to incur additional costs, however, no specific plan is
currently in place.
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.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31, 2004
|
|
|
March 31, 2005
|
|
|
|
(Pro forma)
|
|
|
|
|
|
|
(In thousands
|
|
|
|
except for per share
amounts)
|
|
|
Revenues
|
|
$
|
214,372
|
|
|
$
|
165,677
|
|
Net income (restated)
|
|
|
13,987
|
|
|
|
137
|
|
Basic net income per common share
(restated)
|
|
|
0.52
|
|
|
|
0.01
|
|
Diluted net income per common
share (restated)
|
|
|
0.51
|
|
|
|
0.01
|
|
(c)
Business
USA Mobility is
a leading provider of wireless messaging 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 voice mail,
personalized greeting, message storage and retrieval and
equipment loss
and/or
maintenance protection to both one-way and two-way messaging
subscribers. These services are commonly referred to as wireless
messaging and information services.
(d)
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, should be adequate to
meet its cash requirements for the foreseeable future.
In the event that net cash provided by operating activities and
cash on hand are not sufficient to meet future cash
requirements, USA Mobility may be required to reduce planned
capital 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 the Companys messaging services
exceeds its expectations, revenues may 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 reduce the value of USA Mobilitys
common stock.
(e)
Goodwill and Other Intangible
Assets
Goodwill of $154.4 million
(as restated) at March 31, 2005 resulted from the purchase
accounting related to the Metrocall merger as previously
discussed. The Companys operations consists of one
reporting unit to evaluate goodwill. Goodwill is not amortized,
but is evaluated for impairment annually. The Company has
selected the fourth quarter to perform its annual impairment
test. Other intangible assets were recorded at fair value at the
date of acquisition and amortized over periods generally ranging
9
USA MOBILITY, INC.
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
from one to five years. Aggregate amortization expense for
intangible assets for the three months ended March 31, 2004
and 2005 was zero and $7.1 million, respectively.
Amortizable intangible assets are comprised of the following at
March 31, 2005 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Useful Life
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
|
|
|
|
(in years)
|
|
|
Amount
|
|
|
Amortization
|
|
|
Net Balance
|
|
|
Purchased subscriber lists
|
|
|
5
|
|
|
$
|
68,593
|
|
|
$
|
(13,403
|
)
|
|
$
|
55,190
|
|
Purchased Federal Communications
Commission licenses
|
|
|
5
|
|
|
|
3,750
|
|
|
|
(2,242
|
)
|
|
|
1,508
|
|
Other
|
|
|
1
|
|
|
|
2,161
|
|
|
|
(808
|
)
|
|
|
1,353
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74,504
|
|
|
|
(16,453
|
)
|
|
|
58,051
|
|
Deferred financing costs
|
|
|
2
|
|
|
|
3,459
|
|
|
|
(2,472
|
)
|
|
|
987
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
77,963
|
|
|
$
|
(18,925
|
)
|
|
$
|
59,038
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(f)
Long-term Debt
On
November 16, 2004, Metrocall and Arch as Borrowers, along
with USA Mobility and its bank lenders, entered into a credit
agreement (the credit agreement) to borrow
$140.0 million. Under the credit agreement, the Company may
designate all or any portion of the borrowings outstanding at
either a floating base rate or a Eurodollar rate advance with an
applicable margin of 1.50% for base rate advances and 2.50% for
Eurodollar advances. 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. During the
first quarter of 2005, the Company made a mandatory principal
payment of $10 million and optional prepayments of
$28.5 million, reducing the outstanding principal balance
to $56.5 million as of March 31, 2005, which
approximated its fair value. Subsequent to March 31, 2005,
the Company made a voluntary principal repayment of
$15.0 million.
(g)
Accounts Payable and Other Accrued
Liabilities
Accounts payable and other
accrued liabilities (as restated) consist of the following
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, 2004
|
|
|
March 31, 2005
|
|
|
Accounts payable
|
|
$
|
6,011
|
|
|
$
|
4,812
|
|
Accrued compensation and benefits
(restated)
|
|
|
10,329
|
|
|
|
10,449
|
|
Accrued network costs
|
|
|
8,956
|
|
|
|
9,608
|
|
Accrued property and sales taxes
(restated)
|
|
|
30,097
|
|
|
|
28,336
|
|
Accrued severance and
restructuring (restated)
|
|
|
16,241
|
|
|
|
5,233
|
|
Accrued other (restated)
|
|
|
14,844
|
|
|
|
18,428
|
|
|
|
|
|
|
|
|
|
|
Total accounts payable and other
accrued liabilities
|
|
$
|
86,478
|
|
|
$
|
76,866
|
|
|
|
|
|
|
|
|
|
|
Accrued property and sales taxes are based on the Companys
estimate of outstanding state and local taxes. This balance may
be adjusted in the future as the Company settles with various
taxing jurisdictions.
(h)
Stockholders
Equity
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.
|
|
|
|
|
General
At December 31, 2004 and
March 31, 2005, there were 26,827,071 and
26,849,351 shares of common stock outstanding and no shares
of preferred stock outstanding, respectively. In addition, at
March 31, 2005, there were 277,303 shares of common
stock reserved for issuance from time to time as general
unsecured claims under the Arch plan of reorganization. For
financial reporting purposes, the number of shares reserved for
issuance under the Arch plan of reorganization have been
included in the Companys reported outstanding share
balance.
|
10
USA MOBILITY, INC.
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
Earnings 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):
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
Net income (restated)
|
|
$
|
4,833
|
|
|
$
|
137
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares of common
stock outstanding
|
|
|
20,000,000
|
|
|
|
27,108,034
|
|
Dilutive effect of:
|
|
|
|
|
|
|
|
|
Options to purchase common stock
|
|
|
78,213
|
|
|
|
212,178
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares of common
stock and common stock equivalents
|
|
|
20,078,213
|
|
|
|
27,320,212
|
|
|
|
|
|
|
|
|
|
|
Earnings per share (restated):
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.24
|
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.24
|
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
(i)
Revenue
Recognition
Revenue consists primarily
of monthly service and rental 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
, EITF
No. 00-21,
the Company evaluated these revenue arrangements and determined
that two separate units of accounting exist, messaging service
revenue and product sale revenue. Accordingly, the Company
recognizes messaging service revenue over the period the service
is performed and revenue from product sales is recognized at the
time of shipment. The Company recognizes revenue when four basic
criteria have been met: (1) persuasive evidence of an
arrangement exists, (2) delivery has occurred or services
rendered, (3) the fee is fixed or determinable and
(4) collectibility is reasonably assured. Amounts billed,
but not meeting these recognition criteria, are deferred until
all four criteria have been met. The Company has a variety of
billing arrangements with its customers, resulting in deferred
revenue in advance billing and accounts receivable for billing
in-arrears arrangements.
Our customers may subscribe to one-way 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.
(j)
Stock Based
Compensation
Compensation expense
associated with options is being recognized in accordance with
the fair value provisions of SFAS No. 123,
Accounting for Stock Based Compensation
(SFAS No. 123), over the options
vesting period. For reporting purposes, pursuant to Staff
Accounting Bulletin 107,
Share-Based Payment
,
(SAB 107), when an entity has both cash and
stock based compensation, disclosure of the amount of stock
based compensation expense that would be included in cash
compensation-based
11
USA MOBILITY, INC.
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
financial categories must be disclosed. As a result, the
following table reflects the allocation of $2.3 million and
$1.4 million in stock based compensation for the three
months ended March 31, 2004 and 2005, respectively.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Service, rental and maintenance
expense
|
|
$
|
171
|
|
|
$
|
97
|
|
Selling and marketing expense
|
|
|
11
|
|
|
|
60
|
|
General and administrative expense
|
|
|
2,085
|
|
|
|
1,228
|
|
|
|
|
|
|
|
|
|
|
Total stock based compensation
|
|
$
|
2,267
|
|
|
$
|
1,385
|
|
|
|
|
|
|
|
|
|
|
(k)
Severance and
Restructuring
At March 31, 2005,
the balance of the liability (as restated) was as follows
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
|
Balance at
|
|
|
Restructuring
|
|
|
|
|
|
Liability at
|
|
|
|
December 31, 2004
|
|
|
Charge in 2005
|
|
|
Cash Paid
|
|
|
March 31, 2005
|
|
|
Lease obligation costs
|
|
$
|
3,463
|
|
|
$
|
|
|
|
$
|
(2,078
|
)
|
|
$
|
1,385
|
|
Severance (restated)
|
|
|
12,778
|
|
|
|
5,137
|
|
|
|
(14,067
|
)
|
|
|
3,848
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total accrued severance and
restructuring
|
|
$
|
16,241
|
|
|
$
|
5,137
|
|
|
$
|
(16,145
|
)
|
|
$
|
5,233
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The remaining obligation associated with these agreements is
expected to be paid during the second quarter of 2005.
(l)
Settlement
Agreements
During the three months
ended March 31, 2005, the Company reached a settlement
agreement with a vendor for roaming credits held by USA
Mobility. The Company recorded a $1.5 million reduction to
service, rental and maintenance expenses for this cash
consideration. The Company will also utilize additional benefits
of $0.5 million over the next 58 months as USA
Mobility customers incur roaming charges on the vendors
network.
On November 10, 2004, three former Arch senior executives
(the Former Executives) filed a Notice of Claim
before the JAMS/Endispute arbitration forum in Boston,
Massachusetts, asserting they were terminated from their
employment by Arch pursuant to a change in control
as defined in their respective executive employment agreements
(the Claims). On May 9, 2005, the Former
Executives agreed to dismiss the Claims with prejudice against
all parties in exchange for a settlement payment of
$4.3 million. The Company recorded this settlement as an
increase to general and administrative expenses for the three
months ended March 31, 2005.
(m)
Income Taxes
USA
Mobility accounts for income taxes under the liability method.
Deferred tax assets and liabilities are determined based on the
difference between the financial statement bases and the income
tax provision bases of assets and liabilities, given the
provisions of enacted laws. In the event the Company obtains
evidence that the deferred tax assets will not be realized, the
Company would provide a valuation allowance against net deferred
tax assets.
USA Mobility evaluates 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 all of USA Mobilitys net deferred assets
will be realized in future periods. Management continues to
believe no valuation allowance is required as of the filing date.
The anticipated effective tax rate is expected to continue to
differ from the statutory federal tax rate of 35%, primarily due
to the effect of state income taxes.
(n)
Related Party
Transactions
Effective
November 16, 2004, two members of the Companys board
of directors also serve as directors for entities from which it
leases transmission tower sites. During the three months ended
March 31, 2005, the Company paid $4.9 million and
$0.8 million, respectively, to these landlords for rent
12
USA MOBILITY, INC.
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
expenses. Each director has recused himself from any discussions
or decisions we make on matters relating to the relevant vendor.
(o)
Segment Reporting
USA
Mobility believes it currently has two operating segments:
domestic operations and international operations, but no
reportable segments, as international operations are immaterial
to the consolidated entity.
(p)
New Accounting
Pronouncements
In December 2004, the
Financial Accounting Standards Board (FASB) issued a
revision of Statement No. 123,
Accounting for Stock
Based Compensation
(SFAS No. 123R),
Share-Based Payment.
SFAS No. 123R
supersedes Accounting Principles Board (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.
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.
The SEC adopted a rule that defers the effective date of
SFAS 123R until the beginning of the first fiscal year
beginning after June 15, 2005. The Company has elected to
postpone adoption of SFAS 123R until 2006. Management does
not expect SFAS 123R to materially effect the reported
results of operations, cash flows or financial position of the
Company.
In March 2005, the FASB issued Financial Interpretation
No. 47,
Accounting for Conditional Asset Retirement
Obligations
(FIN 47). FIN 47 clarifies
the application of certain aspects of SFAS 143,
Asset
Retirement Obligations.
Management does not expect the
adoption of FIN 47 to materially affect the cash flows or
financial position of the Company.
(q)
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 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, the Company
and the other defendants have entered into a settlement
agreement with the plaintiffs. 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 meetings
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. A settlement hearing has been scheduled for
May 18, 2005.
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 condition, results of operations, or cash flows.
13
|
|
Item 2.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
Restatement
We have restated our 2004 financial statements and 2004 and 2005
interim financial statements and other information, as discussed
in the Restatement section of Part 1 and further described
in Note 1 of the Unaudited Notes to Condensed Consolidated
Financial Statements. In this Quarterly Report on
Form 10-Q/A,
we are reporting net income of $4.9 million and
$1.0 million for the three months ended March 31, 2004
and 2005, respectively, compared to net income of
$4.9 million and $1.3 million that we reported in the
previously filed
Form 10-Q.
In connection with the restatement described herein, the Company
has concluded that, as of December 31, 2004, the
restatement was a result of material weaknesses in the
Companys internal control over financial reporting. 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
Financial Statements in the 2004 Annual Report on
Form 10-K/A.
Forward-Looking
Statements
This quarterly report contains forward-looking statements and
information relating to USA Mobility, Inc. and its subsidiaries
(USA Mobility or the Company) that are
based on 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, Inc. 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 within this Managements Discussion and
Analysis of Financial Condition and Results of Operations
(MD&A). Should one or more of these risks
or uncertainties materialize, or should underlying assumptions
prove incorrect, actual results or outcomes may vary materially
from those described herein as anticipated, believed, estimated,
expected or intended. Investors are cautioned not to place undue
reliance on these forward-looking statements, which speak only
as of their respective dates. 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 the Risk Factors
Affecting Future Operating Results section of the MD&A.
Overview
The following discussion and analysis should be read in
conjunction with our consolidated financial statements (as
restated) and related notes and Risk Factors Affecting
Future Operating Results, which describe key risks
associated with our operations and industry, and the following
subsections of the Managements Discussion and
Analysis of Financial Condition and Results of Operations
section of our Annual Report on
Form 10-K/A
for the fiscal year ended December 31, 2004:
Overview, Results of Operations,
Liquidity and Capital Resources,
Inflation and Application of Critical
Accounting Policies.
USA Mobility is a holding company that was 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. 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 2004 and the acquired operations of Metrocall from
November 16, 2004. Accordingly, the income statement
reflects increases in revenues and costs due to the inclusion of
Metrocall during the three month period ended March 31,
2005 as compared to the three month period ended March 31,
2004, which included only the results of Arch.
Integration
We continue to believe that the combination of Arch and
Metrocall provides us with the potential to generate stronger
financial and operating results than either company could have
achieved separately, by reducing overall
14
costs while the Companys revenue continues to decline
sequentially. During the first quarter of 2005, our integration
and cost reduction efforts focused on:
Technical Infrastructure and Network
Operations
We have begun the process to
deconstruct one of our two-way networks. That process is
expected to continue throughout the remainder of 2005 and into
first quarter 2006. We are also focused on consolidating our
one-way networks. That consolidation also continued in the first
quarter and will be an ongoing process as we attempt to match
our network capacity to the requirements of our customers.
Selling and Marketing
We have started
the process to eliminate redundant and unnecessary sales offices
to match the staff reductions that were taken in the fourth
quarter of 2004.
Billing System Consolidation
We
continued the efforts to convert the Metrocall stand alone
billing system into the Arch billing system. We continue to
believe that this conversion will occur in the third quarter of
2005.
Inventory Fulfillment
We continued our
efforts to consolidate our remaining three distribution centers
to two distribution centers by the end of 2005.
Back-office Operations
We expect to
consolidate our five customer service operations throughout 2005
although completion of this process is not expected until early
2006. Other administrative and support functions such as
accounting, finance, human resources, credit and collections,
information technology and other overhead functions are being
consolidated throughout 2005.
Sales
and Marketing
We market and distribute our services through a direct sales
force and a small indirect sales force.
Direct.
Our direct sales force rents or sells
products and messaging services 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 March 31, 2005,
our sales personnel were located in approximately 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 sales 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 table sets forth units in service associated with
our channels of distribution:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
|
|
As of
|
|
|
|
March 31,
|
|
|
As of December 31,
|
|
|
March 31,
|
|
|
|
2004(a)
|
|
|
2004(b)
|
|
|
2005(c)
|
|
|
|
Units
|
|
|
%
|
|
|
Units
|
|
|
%
|
|
|
Units
|
|
|
%
|
|
|
|
(Units in thousands)
|
|
|
Direct
|
|
|
3,516
|
|
|
|
84
|
%
|
|
|
5,003
|
|
|
|
81
|
%
|
|
|
4,790
|
|
|
|
82
|
%
|
Indirect
|
|
|
662
|
|
|
|
16
|
|
|
|
1,199
|
|
|
|
19
|
|
|
|
1,068
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
4,178
|
|
|
|
100
|
%
|
|
|
6,202
|
|
|
|
100
|
%
|
|
|
5,858
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
Includes units in service of Arch only.
|
15
|
|
|
(b)
|
|
Includes units in service of Arch, and Metrocalls
additional units of 2,744,000 acquired on November 16, 2004.
|
|
(c)
|
|
Includes units in service of Arch and Metrocall.
|
Our customers may subscribe to one-way 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 their
messaging needs. Local coverage generally allows the subscriber
to receive messages within a small geographic area, such as a
city. Regional coverage allows a subscriber to receive messages
in a larger area, which may include a large portion of a state
or sometimes groups of states. Nationwide coverage allows a
subscriber to receive messages in major markets throughout the
United States. The monthly fee generally increases with coverage
area. Two-way messaging is generally offered on a nationwide
basis.
The following table summarizes the breakdown of our one and
two-way units in service at specified dates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
|
|
As of
|
|
|
|
March 31,
|
|
|
As of December 31,
|
|
|
March 31,
|
|
|
|
2004(a)
|
|
|
2004(b)
|
|
|
2005(b)
|
|
|
|
Units
|
|
|
%
|
|
|
Units
|
|
|
%
|
|
|
Units
|
|
|
%
|
|
|
|
(Units in thousands)
|
|
|
One-way messaging
|
|
|
3,901
|
|
|
|
93
|
%
|
|
|
5,673
|
|
|
|
91
|
%
|
|
|
5,357
|
|
|
|
91
|
%
|
Two-way messaging
|
|
|
277
|
|
|
|
7
|
|
|
|
529
|
|
|
|
9
|
|
|
|
501
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
4,178
|
|
|
|
100
|
%
|
|
|
6,202
|
|
|
|
100
|
%
|
|
|
5,858
|
|
|
|
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 the
Company 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.
The following table summarizes the number of units in service
owned by us, our subscribers and our indirect customers at
specified dates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
As of
|
|
|
As of
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
2004(a)
|
|
|
2004(b)
|
|
|
2005(b)
|
|
|
|
Units
|
|
|
%
|
|
|
Units
|
|
|
%
|
|
|
Units
|
|
|
%
|
|
|
|
(Units in thousands)
|
|
|
Owned and leased
|
|
|
3,186
|
|
|
|
76
|
%
|
|
|
4,755
|
|
|
|
77
|
%
|
|
|
4,565
|
|
|
|
78
|
%
|
Owned by subscribers
|
|
|
330
|
|
|
|
8
|
|
|
|
248
|
|
|
|
4
|
|
|
|
225
|
|
|
|
4
|
|
Owned by indirect customers or
their subscribers
|
|
|
662
|
|
|
|
16
|
|
|
|
1,199
|
|
|
|
19
|
|
|
|
1,068
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
4,178
|
|
|
|
100
|
%
|
|
|
6,202
|
|
|
|
100
|
%
|
|
|
5,858
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
Includes units in service of Arch.
|
|
(b)
|
|
Includes units in service of Arch and Metrocall.
|
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
16
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 beginning
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 Three Months
Ended
|
|
|
|
March 31, 2004(a)
|
|
|
December 31,
2004(b)
|
|
|
March 31, 2005
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Placements
|
|
|
Disconnects
|
|
|
Placements
|
|
|
Disconnects
|
|
|
Placements
|
|
|
Disconnects
|
|
|
|
(Units in thousands)
|
|
|
Direct
|
|
|
119
|
|
|
|
277
|
|
|
|
168
|
|
|
|
380
|
|
|
|
166
|
|
|
|
379
|
|
Indirect
|
|
|
35
|
|
|
|
136
|
|
|
|
106
|
|
|
|
208
|
|
|
|
114
|
|
|
|
245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
154
|
|
|
|
413
|
|
|
|
274
|
|
|
|
588
|
|
|
|
280
|
|
|
|
624
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
Includes gross placements and disconnects of Arch only.
|
|
(b)
|
|
Includes gross placements and disconnects of Arch for the three
months ended December 31, 2004 and Metrocall for the period
November 16, 2004 to December 31, 2004.
|
The demand for one-way and two-way messaging services declined
during the three months ended March 31, 2005, and we
believe demand will continue to decline for the foreseeable
future in line with recent trends.
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 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 Three Months
Ended
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
2004(a)
|
|
|
2004(b)
|
|
|
2005
|
|
|
Direct
|
|
$
|
10.35
|
|
|
$
|
9.89
|
|
|
$
|
9.72
|
|
Indirect
|
|
$
|
3.69
|
|
|
$
|
4.15
|
|
|
$
|
4.06
|
|
Consolidated
|
|
$
|
9.25
|
|
|
$
|
8.90
|
|
|
$
|
8.66
|
|
|
|
|
(a)
|
|
Includes average revenue per unit for Arch only.
|
|
(b)
|
|
Includes average revenue per unit for Arch for the three months
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 that we add new subscribers, this
measurement on a consolidated basis is affected by several
factors, most notably the mix of units in service. Gross
revenues have increased year over year due to the Metrocall
merger, but we expect future sequential quarterly revenues to
decline. The decrease in our consolidated average revenue per
unit for the quarter ended March 31, 2005 from the quarters
ended March 31, 2004 and December 31, 2004, was due
primarily to the change in mix in customers. 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 expect average revenue per unit for our direct
units in service will continue to decline in future periods.
17
Our revenues were $123.7 million and $165.7 million
for the quarters ended March 31, 2004 and 2005,
respectively. The revenues for the three months ended
March 31, 2005 includes $68.9 million related to
Metrocall operations. The 2004 revenues include historical
information for Arch only. 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
telecommunications 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, commissions, and
other payroll related expenses.
|
|
|
|
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 basis. In the period ended
March 31, 2005, we incurred approximately 74% of our
operating expenses in three functional expense categories:
payroll and related expenses, lease payments for transmitter
locations and telecommunications expenses.
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, engineering and technical staff, 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. We operate local, regional and
nationwide one-way and two 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 the Companys operating margin as
revenues decline. In order to reduce this expense, USA Mobility
has an active program to consolidate the number of networks and
thus transmitter locations, which the Company refer to as
network rationalization. In 2004, we removed
1,040 transmitters from various networks. We intend to
remove approximately 14% of our 18,500 transmitters in 2005
in conjunction with our integration activities, but the specific
sites have not yet been identified.
Telecommunications 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 telecommunications 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. Telecommunications expenses
do not necessarily vary in direct relationship to units in
service. Therefore, based on the factors discussed above,
efforts are underway to review and reduce telephone circuit
inventories and capacities and to reduce the number of
transmitter and office locations at which we operate.
The total of our cost of products sold, service, rental and
maintenance, selling and marketing, and general and
administrative expenses was $80.3 million and
$116.8 million for the three months ended March 31,
2004 and 2005, respectively. For the three months ended
March 31, 2005, approximately $53.1 million of these
expenses were related to Metrocall operations. As discussed
previously the Company expects revenue from one-way and two-way
messaging services to continue to decline for the foreseeable
future in line with recent trends. Additionally, the
18
Company believes that the rate of revenue decline will likely
outpace the Companys ability to reduce costs, therefore
the Company expects its margins to decline for the
foreseeable future. There can be no assurance that in the face
of declining revenue the Company can remain profitable, or
generate positive cash flow from operating activities.
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 only for the three months ended March 31,
2004, while the 2005 period includes the operating results of
Arch and Metrocall. Accordingly, the apparent growth in
operations is due to the merger. The combined Company has
experienced, and expects to continue to experience, decreases in
revenue for the foreseeable future.
Comparison
of the Results of Operations for the Three Months Ended
March 31, 2004 and 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
Change Between
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
2004 and 2005
|
|
|
|
Amount
|
|
|
Revenue
|
|
|
Amount
|
|
|
Revenue
|
|
|
Amount
|
|
|
%
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service, rental and maintenance
|
|
$
|
119,546
|
|
|
|
96.7
|
%
|
|
$
|
159,150
|
|
|
|
96.1
|
%
|
|
$
|
39,604
|
|
|
|
33.1
|
%
|
Product sales
|
|
|
4,113
|
|
|
|
3.3
|
|
|
|
6,527
|
|
|
|
3.9
|
|
|
|
2,414
|
|
|
|
58.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
123,659
|
|
|
|
100
|
%
|
|
$
|
165,677
|
|
|
|
100
|
%
|
|
$
|
42,018
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of products sold
|
|
$
|
938
|
|
|
|
0.8
|
%
|
|
$
|
1,279
|
|
|
|
0.8
|
%
|
|
$
|
341
|
|
|
|
36.4
|
%
|
Service, rental and maintenance
(restated)
|
|
|
38,790
|
|
|
|
31.4
|
|
|
|
56,353
|
|
|
|
34.0
|
|
|
|
17,563
|
|
|
|
45.3
|
|
Selling and marketing
|
|
|
9,068
|
|
|
|
7.3
|
|
|
|
10,402
|
|
|
|
6.3
|
|
|
|
1,334
|
|
|
|
14.7
|
|
General and administrative
(restated)
|
|
|
31,304
|
|
|
|
25.3
|
|
|
|
48,427
|
|
|
|
29.2
|
|
|
|
17,123
|
|
|
|
54.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
80,100
|
|
|
|
64.8
|
%
|
|
$
|
116,461
|
|
|
|
70.3
|
%
|
|
$
|
36,361
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
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. The increase
in revenues in each revenue type is the result of including
revenues of Metrocall during 2005 as compared to Arch only
during 2004. The combined Company has experienced, and expects
to continue to experience, revenue declines for the foreseeable
future.
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
Ended March 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
Service, rental and maintenance
revenues:
|
|
|
|
|
|
|
|
|
Paging:
|
|
|
|
|
|
|
|
|
Direct:
|
|
|
|
|
|
|
|
|
One-way messaging
|
|
$
|
89,405
|
|
|
$
|
113,300
|
|
Two-way messaging
|
|
|
21,950
|
|
|
|
29,481
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
111,355
|
|
|
$
|
142,781
|
|
|
|
|
|
|
|
|
|
|
Indirect:
|
|
|
|
|
|
|
|
|
One-way messaging
|
|
$
|
7,359
|
|
|
$
|
11,261
|
|
Two-way messaging
|
|
|
532
|
|
|
|
2,546
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,891
|
|
|
$
|
13,807
|
|
|
|
|
|
|
|
|
|
|
Total Paging:
|
|
|
|
|
|
|
|
|
One-way messaging
|
|
$
|
96,764
|
|
|
$
|
124,561
|
|
Two-way messaging
|
|
|
22,482
|
|
|
|
32,027
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
119,246
|
|
|
$
|
156,588
|
|
Non-Paging revenue
|
|
|
300
|
|
|
|
2,562
|
|
|
|
|
|
|
|
|
|
|
Total service, rental and
maintenance revenues
|
|
$
|
119,546
|
|
|
$
|
159,150
|
|
|
|
|
|
|
|
|
|
|
The table below sets forth units in service and service
revenues, the changes in each between the three months ended
March 31, 2004 and 2005 and the change in revenue
associated with differences in the number of units in service
and the average revenue per unit, known as ARPU.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Units in Service
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
As of March 31,
|
|
|
Three Months Ended
March 31,
|
|
|
Change Due to:
|
|
|
|
2004
|
|
|
2005
|
|
|
Change
|
|
|
2004(a)
|
|
|
2005 (a)
|
|
|
Change
|
|
|
ARPU
|
|
|
Units
|
|
|
|
(Units in thousands)
|
|
|
(Dollars in thousands)
|
|
|
One-way messaging
|
|
|
3,901
|
|
|
|
5,357
|
|
|
|
1,456
|
|
|
$
|
97,064
|
|
|
$
|
127,123
|
|
|
$
|
30,059
|
|
|
$
|
(4,110
|
)
|
|
$
|
34,169
|
|
Two-way messaging
|
|
|
277
|
|
|
|
501
|
|
|
|
224
|
|
|
|
22,482
|
|
|
|
32,027
|
|
|
|
9,545
|
|
|
|
(2,370
|
)
|
|
|
11,915
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
4,178
|
|
|
|
5,858
|
|
|
|
1,680
|
|
|
$
|
119,546
|
|
|
$
|
159,150
|
|
|
$
|
39,604
|
|
|
$
|
(6,480
|
)
|
|
$
|
46,084
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
One-way messaging amounts shown include non-paging revenues.
|
Units in service as of March 31, 2005 include
2.5 million units from our merger with Metrocall. Excluding
the Metrocall units, our units in service would have been
3.4 million or a 19% decline from March 31, 2004.
As previously discussed, demand for messaging services has
declined over the past several years and we anticipate that it
may continue to decline for the foreseeable future in line with
recent trends, which would result in reductions in service
revenue due to the lower number of subscribers.
20
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 $0.3 million increase for the three
months ended March 31, 2005 was due primarily to an
increase in the number of device transactions due to the
Metrocall merger.
Service, Rental and Maintenance.
Service,
rental and maintenance expenses consist primarily of the
following significant items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
Change Between
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
2004 and 2005
|
|
|
|
Amount
|
|
|
Revenue
|
|
|
Amount
|
|
|
Revenue
|
|
|
Amount
|
|
|
%
|
|
|
Lease payments for transmitter
locations
|
|
$
|
20,614
|
|
|
|
16.7
|
%
|
|
$
|
33,041
|
|
|
|
19.9
|
%
|
|
$
|
12,427
|
|
|
|
60.3
|
%
|
Telecommunications related expenses
|
|
|
6,921
|
|
|
|
5.6
|
|
|
|
10,286
|
|
|
|
6.2
|
|
|
|
3,365
|
|
|
|
48.6
|
|
Payroll and related expenses
|
|
|
6,658
|
|
|
|
5.4
|
|
|
|
8,915
|
|
|
|
5.4
|
|
|
|
2,257
|
|
|
|
33.9
|
|
Other (restated)
|
|
|
4,597
|
|
|
|
3.7
|
|
|
|
4,111
|
|
|
|
2.5
|
|
|
|
(486
|
)
|
|
|
(10.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
38,790
|
|
|
|
31.4
|
%
|
|
$
|
56,353
|
|
|
|
34.0
|
%
|
|
$
|
17,563
|
|
|
|
45.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As illustrated in the table above, service, rental and
maintenance expenses increased $17.5 million or 45.3% from
2004. The percentage of these costs to revenues also increased,
primarily due to the acquisition of the Metrocall one-way and
two-way networks that resulted in increased lease and
telecommunications-related expenses.
Following is a discussion of each significant item listed above:
|
|
|
|
|
Lease payments for transmitter
locations
The increase in lease payments
for transmitter locations consists of an increase of
$12.4 million primarily due to the Metrocall one-way and
two-way networks. As discussed earlier, we have begun to
deconstruct one of our two-way networks and to rationalize our
one-way networks. 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.
|
|
|
|
Telecommunications related expenses
The
increase in telecommunications expenses reflected an increase of
$3.4 million resulting from the Metrocall merger, net of
$1.5 million benefit that was recorded as a reduction to
telecommunications expense due to a settlement of a roaming
agreement. We have also begun the process to reduce these costs
as we consolidate and rationalize our one-way and two-way
networks. Reductions in these expenses should occur as our
networks are consolidated throughout 2005.
|
|
|
|
Payroll and related expenses
Payroll
consists 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 increased $2.3 million, primarily due to an
increase in employees resulting from the Metrocall merger.
|
|
|
|
Other includes a decrease of $0.1 million in 2004 and
$0.04 million in 2005 due to a gain on deconstructing
transmitter at a cost less than the estimated prior value of the
related asset retirement obligation liability.
|
Selling and Marketing.
Selling and marketing
expenses consist primarily of payroll and related expenses.
Selling and marketing payroll and related expenses increased
$1.3 million or 14.7% over 2004. This increase was
21
due primarily to an increase in the number of sales
representatives and sales management which resulted from the
Metrocall merger.
General and Administrative.
General and
administrative expenses consist of the following significant
items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
Change Between
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
2004 and 2005
|
|
|
|
Amount
|
|
|
Revenue
|
|
|
Amount
|
|
|
Revenue
|
|
|
Amount
|
|
|
%
|
|
|
Payroll and related expenses
|
|
$
|
14,440
|
|
|
|
11.7
|
%
|
|
$
|
18,677
|
|
|
|
11.3
|
%
|
|
$
|
4,237
|
|
|
|
29.3
|
%
|
Bad debt
|
|
|
519
|
|
|
|
0.4
|
|
|
|
1,527
|
|
|
|
0.9
|
|
|
|
1,008
|
|
|
|
194.2
|
|
Facility expenses
|
|
|
3,624
|
|
|
|
2.9
|
|
|
|
6,111
|
|
|
|
3.7
|
|
|
|
2,487
|
|
|
|
68.6
|
|
Telecommunications
|
|
|
1,612
|
|
|
|
1.3
|
|
|
|
2,898
|
|
|
|
1.7
|
|
|
|
1,286
|
|
|
|
79.8
|
|
Outside services
|
|
|
2,835
|
|
|
|
2.3
|
|
|
|
6,768
|
|
|
|
4.1
|
|
|
|
3,933
|
|
|
|
138.7
|
|
Taxes and permits (restated)
|
|
|
3,386
|
|
|
|
2.7
|
|
|
|
5,309
|
|
|
|
3.2
|
|
|
|
1,923
|
|
|
|
56.8
|
|
Other (restated)
|
|
|
4,888
|
|
|
|
4.0
|
|
|
|
7,137
|
|
|
|
4.3
|
|
|
|
2,249
|
|
|
|
46.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
31,304
|
|
|
|
25.3
|
%
|
|
$
|
48,427
|
|
|
|
29.2
|
%
|
|
$
|
17,123
|
|
|
|
54.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As illustrated in the table above, general and administrative
expenses increased $17.1 million from the period ended
March 31, 2004 due to the inclusion of Metrocall
operations. As reflected in the Restatement, $4.7 million
in severance costs was reclassified from General and
administrative to Severance and restructuring costs during the
first quarter 2005.
The percentages of these expenses to revenue also increased,
primarily due to the following:
|
|
|
|
|
Payroll and related expenses
Payroll and
related expenses include employees in customer service,
inventory, collections, finance and other back office functions
as well as executive management. We anticipate staffing
reductions over the next several quarters in conjunction with
the merger integration as we consolidate billing systems,
customer service, and other back-office functions.
|
|
|
|
Bad debt
The increase in bad debt
expenses reflected an increase of $1.0 million due to
higher levels of overall accounts receivable of the combined
operations.
|
|
|
|
Telecommunications
The increase in
telecommunications expense reflects the inclusion of Metrocall
operations.
|
|
|
|
Outside Services
Outside services
consists primarily of costs associated with printing and mailing
invoices, outsourced customer service, temporary help and
various professional fees. The increase in 2005 was due
primarily to higher temporary help and professional fees.
|
|
|
|
Taxes and Permits
Taxes and permits
consist mainly of property, franchise and gross receipts taxes.
The increase in taxes and permits consists of an increase from
the inclusion of Metrocall operations of $2.9 million,
offset by a reduction in taxes payable by Arch of
$1.0 million. The increase in taxes and permits expense, as
a percentage of revenue was due primarily to gross receipts
taxes enacted in several jurisdictions in 2004.
|
|
|
|
Other expenses
Other expenses consist
primarily of postage and express mail costs associated with the
shipping and receipt of messaging devices of $1.9 million,
repairs and maintenance associated with computer hardware and
software of $1.7 million, and insurance of
$1.2 million.
|
Depreciation, Amortization and
Accretion.
Depreciation, amortization and
accretion expenses increased to $40.6 million (restated)
for the period ended March 31, 2005 from $26.3 million
(restated) for the same period in 2004. This increase was due
primarily to depreciation and amortization expense of the
tangible and intangible assets acquired from Metrocall, of
$14.2 million offset by a decrease of $0.2 million
from Arch assets becoming fully depreciated. The remaining
increase of $0.2 million resulted from additional accretion
expense on asset retirement obligation liabilities.
22
Stock Based Compensation.
Stock based
compensation consists primarily of amortization of compensation
expense associated with common stock and options issued to
certain members of management. USA Mobility uses the fair-value
based method of accounting for stock based compensation. Stock
based compensation decreased to $1.4 million for the period
ended March 31, 2005 from $2.3 million for the same
period in 2004 primarily due to lower compensation costs
associated with the long-term management incentive plan, offset
by the conversion of Metrocall options to USA Mobility options.
Interest Expense.
Interest expense decreased
to $1.2 million for the period ended March 31, 2005
from $3.3 million for the same period in 2004. This
decrease was due to the repayment of Archs 12% notes
on May 28, 2004, partially offset by $1.4 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.
Severance and Restructuring.
These costs were
$3.7 million and $5.1 million for 2004 and 2005,
respectively, and consist of charges resulting from staff
reductions as the Company continued to match its employee levels
to operational requirement.
Income Tax Expense.
For the period ended
March 31, 2005, we recognized a $0.3 million income
tax expense. The provision for the three months ended
March 31, 2004 was $3.3 million. The decrease in the
provision for the current year was primarily due to lower income
before income tax expense. We anticipate recognition of
provisions for income taxes to be required for the foreseeable
future.
Liquidity
and Capital Resources
Overview
Based on current and anticipated levels of operations, we
anticipate net cash provided by operating activities, together
with the $37.1 million of cash on hand at March 31,
2005, should be adequate to meet our anticipated cash
requirements for the foreseeable future.
In the event that net cash provided by operating activities and
cash on hand are not sufficient to meet future cash
requirements, 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.
Our net cash flows from operating, investing, and financing
activities for the periods indicated in the table below were as
follows:
CASH
FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
March 31,
|
|
|
Increase/
|
|
|
|
2004
|
|
|
2005
|
|
|
(Decrease)
|
|
|
|
(In thousands)
|
|
|
Net cash provided by operating
activities
|
|
$
|
24,520
|
|
|
$
|
31,079
|
|
|
$
|
6,559
|
|
Net cash used in investing
activities
|
|
|
(4,895
|
)
|
|
|
(2,437
|
)
|
|
|
(2,458
|
)
|
Net cash used in financing
activities
|
|
|
(20,000
|
)
|
|
|
(38,526
|
)
|
|
|
18,526
|
|
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 operations
varies depending on changes in various working capital items
including deferred revenues, accounts payable, accounts
receivable, prepaid expenses and various accrued expenses. The
following table includes the significant cash receipt and
expenditure components of
23
our cash flows from operating activities for the periods
indicated and sets forth the change between the indicated
periods (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
March 31,
|
|
|
Increase/
|
|
|
|
2004
|
|
|
2005
|
|
|
(Decrease)
|
|
|
Cash received from customers
|
|
$
|
127,269
|
|
|
$
|
167,622
|
|
|
$
|
40,353
|
|
Cash paid for
|
|
|
|
|
|
|
|
|
|
|
|
|
Payroll and related expenses
|
|
|
39,773
|
|
|
|
46,945
|
|
|
|
7,172
|
|
Lease payments for tower locations
|
|
|
23,623
|
|
|
|
34,317
|
|
|
|
10,694
|
|
Telecommunications expenses
|
|
|
9,168
|
|
|
|
12,975
|
|
|
|
3,807
|
|
Interest expense
|
|
|
1,903
|
|
|
|
1,367
|
|
|
|
(536
|
)
|
Other operating expenses
|
|
|
28,282
|
|
|
|
40,939
|
|
|
|
12,657
|
|
Net cash provided by operating activities for the three months
ended March 31, 2005 increased $6.6 million from the
same period in 2004 due primarily to the following:
|
|
|
|
|
Cash received from customers increased $40.4 million in
2005 compared to the same period in 2004. This measure consists
of revenues and direct taxes billed to customers adjusted for
changes in accounts receivable, deferred revenue and tax
withholding amounts. The increase was due primarily to revenue
increases of $42.0 million, as discussed earlier, and a
change in accounts receivable, $4.0 million in 2005
compared to $5.7 million in 2004. The change in accounts
receivable was due to higher billings resulting from more units
in service and higher revenue, which were a result of the merger.
|
|
|
|
Cash payments for payroll and related expenses increased
$7.2 million due primarily to higher payroll expenses of
$7.7 million, as discussed above, partially offset by
$10.1 million of lower accruals for incentives and other
payroll amounts and higher severance payments of
$9.6 million.
|
|
|
|
Lease payments for tower locations increased $10.7 million.
This increase was due primarily to payments for a greater number
of tower locations resulting from the merger with Metrocall.
|
|
|
|
Cash used for telecommunications related expenditures increased
$3.8 million in 2005 compared to the same period in 2004.
This increase 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 three months ended
March 31, 2005 compared to the same period in 2004 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 31, 2005 we repaid $38.5 million of principal.
We anticipate repaying the remaining balance of the long-term
debt by the end of 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 increased balances of
prepaid expenses and other current assets, and higher payments
for outside services of $4.0 million and taxes and permits
of $2.4 million.
|
Net Cash Used In Investing Activities.
Net
cash used in investing activities in 2005 decreased
$2.5 million from the same period in 2004 due primarily to
lower capital expenditures. The merger of the two companies
provided additional messaging devices allowing for reduced
capital expenditures. Our business requires funds to finance
capital expenditures which primarily include the purchase and
repair of messaging devices, system and transmission equipment
and information systems. Capital expenditures for 2005 consisted
primarily of the purchase of messaging devices and expenditures
related to transmission and information systems and other
equipment, offset by the net proceeds from the sale of other
assets. The amount of capital we 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, total competitive
conditions and the nature and timing of our strategy to
24
integrate and consolidate our networks. We anticipate our total
capital expenditures for 2005 to be between $12.0 and
$15.0 million.
Net Cash Used In Financing Activities.
Net
cash used in financing activities in 2005 increased
$18.5 million from the same period in 2004. In November
2004, as discussed below, we borrowed $140.0 million to
primarily fund the cash consideration related to the Metrocall
merger. Our use of cash in 2005 related primarily to principal
repayments of those borrowings. In 2004, we used
$20.0 million of net cash provided by operating activities
to redeem Archs 12% notes.
Borrowings.
At December 31, 2004, we had
aggregate principal amount of borrowings outstanding under our
credit agreement of $95.0 million. During the three months
ended March 31, 2005, we made additional optional principal
prepayments of $28.5 million and a mandatory principal
prepayment of $10.0 million, reducing the outstanding
principal amount to $56.5 million as of March 31,
2005. The following table describes our principal borrowings at
March 31, 2005 and associated debt service requirements.
|
|
|
|
|
Value
|
|
Interest
|
|
Maturity Date
|
|
$56.5 million
|
|
London InterBank Offered Rate plus
250 basis points
|
|
November 16, 2006
|
Subsequent to March 31, 2005 and through May 9, 2005,
we made a voluntary principal repayment of $15.0 million,
reducing outstanding borrowings to $41.5 million. We expect
to make additional repayments of debt during the second quarter
2005 including, but not limited to, a mandatory principal
prepayment of approximately $6.0 million due in May 2005.
We were in compliance with our financial covenants at
March 31, 2005.
Commitments
and Contingencies
Operating Leases.
USA Mobility has operating
leases for office and transmitter locations with lease terms
ranging from one month to approximately eighteen years. (Total
rent expense under operating leases for the three-month period
ending March 31, 2005 approximated $37.6 million.)
Other Commitments.
We have a commitment to
fund annual cash flow deficits, if any, of GTES, LLC
(GTES), a company in which we have a majority
ownership interest, of up to $1.5 million during the
initial three-year period following the investment date of
February 11, 2004. Funds may be provided to GTES in the
form of capital contributions or loans. No funding has been
required through March 31, 2005.
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.
Contingencies.
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.
Related
Party Transactions
Effective November 16, 2004, two members of the
Companys board of directors also serve as directors for
entities from which it leases transmission tower sites. During
the three months ended March 31, 2005, the Company paid
$4.9 million and $0.8 million, respectively, to these
landlords for rent expenses. Each director has recused himself
from any discussions or decisions we make on matters relating to
the relevant vendor.
Application
of Critical Accounting Policies
The preceding discussions 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
25
to the impairment of long-lived assets, allowances for doubtful
accounts and service credits, revenue recognition, asset
retirement obligations, restructuring liabilities 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.
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-Q/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
may 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 compared to the decline that we experienced
on a pro forma basis assuming the Metrocall merger occurred at
the beginning of 2004, it could outpace our ability to reduce
costs, and adversely affect our ability to produce positive net
cash flow from operations.
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
26
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 of directors 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.
We may
be unable to find vendors willing to supply us with paging
equipment based on future demands.
We purchase paging equipment from third party vendors. This
equipment is sold or leased to our customers in order to provide
our wireless messaging services. The reduction in industry
demand for paging equipment has caused various suppliers to
cease manufacturing this equipment. We believe that our existing
vendor relationships, our current on-hand inventories of paging
equipment and our repair and maintenance programs will ensure an
adequate supply of paging equipment for the next two years;
however, we are unable to predict if the existing third party
vendors will continue to supply paging equipment. A lack of
paging equipment could impact our ability to provide certain
wireless messaging services and could materially adversely
affect our cash flows, results of operations, and ultimately,
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 Code, our use of our
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 March 31, 2005, we have undergone 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.
There are transfer restrictions 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 cannot assure you 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 years ended December 31, 2004 and 2005. See
Item 4. Controls and Procedures.
27
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,
obligation liability and the related depreciation, amortization
and accretion expense.
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 3.
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QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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At March 31, 2005, 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
collateralized 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 $56.5 million,
as of March 31, 2005, a 1/2% change in the weighted-average
interest rate would have an interest impact of approximately
$24,000 each month.
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|
|
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|
|
|
|
|
|
|
|
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Principal Balance
|
|
Fair Value
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Weighted-Average Interest
Rate
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Scheduled Maturity
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$
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56.5 million
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$
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56.5 million
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5.0
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%
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November 2006
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ITEM 4.
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CONTROLS
AND PROCEDURES
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Evaluation
of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive
Officer and Chief Financial Officer, evaluated the effectiveness
of our disclosure controls and procedures pursuant to
Rule 13a-15(b)
under the Securities and Exchange Act of 1934, as amended, as of
the end of the period covered by this quarterly report.
Management had previously concluded the Companys
disclosure controls and procedures were effective as of
March 31, 2005. However, in connection with the restatement
of the Companys 2003 and 2004 annual and interim
consolidated financial statements as fully described in
Note 1 of the
10-Q/A,
management determined that the material weaknesses described
below existed as of March 31, 2005. Accordingly, our Chief
Executive Officer and Chief Financial Officer have now concluded
our disclosure controls and procedures (as defined in
Rules 13a-15(e)
and
15d-15(e)
under the Securities Exchange Act of 1934, as amended) were not
effective as of March 31, 2005 to ensure information
required to be disclosed by us in the reports we file or submit
under the Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified within
the SECs rules and forms that such information is
accumulated and communicated to our management, including our
Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required
disclosure.
Notwithstanding the material weaknesses described below,
management believes that the condensed consolidated financial
statements included in this Quarterly Report on
Form 10-Q/A
fairly present in all material respects our financial condition,
results of operations and cash flows for all periods presented.
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 quarterly statements will not be prevented or
detected.
28
As a result of this evaluation, management identified the
following material weaknesses in our internal control over
financial reporting. Specifically, management concluded as of
March 31, 2005:
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 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
29
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.
Changes
in Internal Control Over Financial Reporting
During the first quarter of 2005, we converted the Arch payroll
system into the Metrocall payroll system. During the first
quarter of 2005, we also converted the Metrocall
telecommunications cost management system to the Arch system. We
expect to make other changes in internal control over financial
reporting.
The internal control over financial reporting at our recently
acquired Metrocall subsidiary was excluded from the annual
assessment of the effectiveness of our internal control over
financial reporting as of December 31, 2004. Outside of
this assessment, management identified control deficiencies
related to the financial reporting process at our Metrocall
subsidiary. These deficiencies included the accounting for
complex, non-routine transactions, the period-end financial
closing process and the recording, billing, collection and
payment of certain transactional taxes and similar fees owed to
state and local jurisdictions. The accounting function at our
Metrocall subsidiary did not have adequate staffing and
resources to effectively communicate with operational personnel,
properly account for complex non-routine transactions occurring
at the subsidiary in accordance with generally accepted
accounting principles and effectively mitigate other
deficiencies in our business processes and information systems
at that subsidiary.
In connection with our efforts to integrate Metrocall into our
operations and in order to remediate the above control
deficiencies at our Metrocall subsidiary, the following is the
current status of our actions in the first quarter of 2005.
(1) With respect to staffing, we have:
a. Hired a Director of Financial Reporting who is
responsible for reviewing complex and non-routine transactions
for compliance with generally accepted accounting principles;
b. Engaged an outside search firm to assist in finding the
required talent to meet our staffing requirements. The Company
expects to fill these positions by the end of the year; and
c. Engaged outside consultants to supplement our existing
staff until full time staff can be hired. These consultants also
will provide expertise in determining the appropriate accounting
for transactions.
(2) With respect to the financial closing and reporting
process and controls in order to enhance the effectiveness of
communications among our accounting staff and operations
management, we have:
a. Assigned finance support staff to monitor and review
transaction activity for site and office rents and
telecommunications costs; and
b. Established procedures for the review of specified sales
contracts to ensure proper revenue recognition.
PART II.
OTHER INFORMATION
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Item 1.
|
Legal
Proceedings
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As previously disclosed, on November 10, 2004, three former
Arch senior executives (the Former Executives) filed
a Notice of Claim before the JAMS/ Endispute arbitration forum
in Boston, Massachusetts, asserting they were terminated from
their employment by Arch pursuant to a change in
control as defined in their respective Executive
Employment Agreements (the Claims). On May 9,
2005, the Former Executives agreed to dismiss the Claims with
prejudice against all parties in exchange for a settlement
payment of $4.3 million.
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
30
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
settlement agreement with the plaintiffs. 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 meetings
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. A settlement hearing has been scheduled for
May 18, 2005.
USA Mobility, from time to time, is involved in lawsuits arising
in the normal course of business. We believe that our pending
lawsuits will not have a material adverse effect on our
financial position, results of operations, or cash flows.
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Item 2.
|
Changes
in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities
|
None.
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Item 3.
|
Defaults
upon Senior Securities
|
None.
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|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
None.
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|
Item 5.
|
Other
Information
|
None.
The exhibits listed in the accompanying Exhibit Index are
filed as part of this Quarterly Report on
Form 10-Q/A
and such Exhibit Index is incorporated herein by reference.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
USA MOBILITY, INC.
Thomas L. Schilling
Chief Financial Officer
Dated: May 24, 2006
31
EXHIBIT INDEX
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Exhibit No.
|
|
Description
|
|
|
31
|
.1*
|
|
Certificate of the Chief Executive
Officer pursuant to
Rule 13a-14(a)
or
Rule 15d-14(a),
as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002, dated May 24, 2006
|
|
31
|
.2*
|
|
Certificate of the Chief Financial
Officer pursuant to
Rule 13a-14(a)
or
Rule 15d-14(a),
as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002, dated May 24, 2006
|
|
32
|
.1*
|
|
Certificate of the Chief Executive
Officer pursuant to
Rule 13a-14(b)
or
Rule 15d-14(b)
and 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, dated
May 24, 2006
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32
|
.2*
|
|
Certificate of the Chief Financial
Officer pursuant to
Rule 13a-14(b)
or
Rule 15d-14(b)
and 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, dated
May 24, 2006
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32