10-K 1 usmo-12312013x10k.htm 10-K USMO-12.31.2013-10K
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
 
(Mark One)
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2013
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission file number 001-32358
USA Mobility, Inc.
(Exact name of registrant as specified in its charter)
DELAWARE
 
16-1694797
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
6850 Versar Center, Suite 420
Springfield, Virginia
 
22151-4148
(Address of principal executive offices)
 
(Zip Code)
(800) 611-8488
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Common Stock, par value $0.0001 per share
 
NASDAQ National Market®
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    YES  ¨    NO  x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    YES  ¨    NO  x
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  x    NO  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  x    NO  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
¨
Accelerated filer
 
x
 
 
 
 
Non-accelerated filer
 
¨  (Do not check if a smaller reporting company)
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    YES    ¨    NO  x
The aggregate market value of the common stock held by non-affiliates of the registrant was $289,067,041 based on the closing price of $13.57 per share on the NASDAQ National Market® on June 28, 2013.
The number of shares of registrant’s common stock outstanding on March 7, 2014 was 21,658,816.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Definitive Proxy Statement for the 2014 Annual Meeting of Stockholders of the registrant, which will be filed with the Securities and Exchange Commission pursuant to Regulation 14A no later than April 30, 2014, are incorporated by reference into Part III of this Report.
 




TABLE OF CONTENTS
 
 
 
 
 
 
 
 
Part I
 
 
 
 
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
 
 
 
 
Part II
 
 
 
 
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8
Item 9.
Item 9A.
Item 9B.
 
 
 
 
Part III
 
 
 
 
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
 
 
 
 
Part IV
 
 
 
 
Item 15.
 

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Forward-Looking Statements
This Annual Report on Form 10-K contains forward-looking statements and information relating to USA Mobility, Inc. and its direct and indirect wholly owned subsidiaries (collectively, “USA Mobility” or the “Company”) that set forth anticipated results based on management’s current plans, known trends and assumptions. 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,” “will,” “target,” “forecast” and similar expressions, as they relate to USA Mobility are forward-looking statements.
Although these statements are based upon current plans, known trends and assumptions that management considers reasonable, they are subject to certain risks, uncertainties and assumptions, including but not limited to those discussed in this Annual Report under Item 1A “Risk Factors.” Should known or unknown risks or uncertainties materialize, known trends change, or underlying assumptions prove inaccurate, actual results or outcomes may differ materially from past results and those described herein as anticipated, believed, estimated, expected, intended, targeted or forecasted. Investors are cautioned not to place undue reliance on these forward-looking statements.
The Company undertakes no obligation to update forward-looking statements. Investors are advised to consult all further disclosures the Company makes in its subsequent reports on Form 10-Q and Form 8-K that it will file with the Securities and Exchange Commission (“SEC”). Also note that, in the risk factors, the Company provides a cautionary discussion of risks, uncertainties and possibly inaccurate assumptions relevant to its business. These are factors that, individually or in the aggregate, could cause the Company’s actual results to differ materially from past results as well as those results that may be anticipated, believed, estimated, expected, intended, targeted or forecasted. It is not possible to predict or identify all such risk factors. Consequently, investors should not consider the risk factor discussion to be a complete discussion of all of the potential risks or uncertainties that could affect USA Mobility’s business, statement of income or financial condition, subsequent to the filing of this Annual Report.




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PART I


The terms "we", "us", "our", "Company" and "USA Mobility" refer to USA Mobility, Inc. and its direct and indirect wholly owned subsidiaries. "Wireless operations" refers to our indirect wholly owned subsidiary, USA Mobility Wireless, Inc. "Amcom" or "Software operations" refers to our indirect wholly owned subsidiary, Amcom Software, Inc.

ITEM 1. BUSINESS
General
We are a holding company, which, acting through wireless operations, is a leading provider of wireless messaging, mobile voice and data and unified communications solutions in the United States. In addition, Amcom which we acquired on March 3, 2011, provides mission critical unified communications solutions for contact centers, emergency management, mobile event notification, and Smartphone messaging. Our combined product offerings are capable of addressing a customer’s mission critical communications needs.
Our principal office is located at 6850 Versar Center, Suite 420, Springfield, Virginia 22151, and our telephone number is 800-611-8488. We maintain an Internet website at http://www.usamobility.com/. (This website address is for information only and is not intended to be an active link or to incorporate any website information into this 2013 Annual Report on Form 10-K ("2013 Form 10-K").) We make available on our website, free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the United States Securities and Exchange Commission (the “SEC”). The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at http://www.sec.gov. We also make available on our website, and in print, if any stockholder or other person so requests, our code of business conduct and ethics entitled “Code of Ethics” which is applicable to all employees and directors, our “Corporate Governance Guidelines,” and the charters for all committees of our Board of Directors, including Audit, Corporate Governance and Nominating. Any changes to our Code of Ethics or waiver, if any, of our Code of Ethics for executive officers or directors will be posted on that website.
We currently have two reportable segments, wireless operations and software operations. The operations of our software segment have been included in the consolidated results of the Company from March 3, 2011, the date of acquisition. (See Note 17 in our Notes to Consolidated Financial Statements.)
Scope
We are a leading provider of paging services and selected software solutions in the United States and abroad, generally in Europe, Canada, Australia, Asia and the Middle East. These foreign sales represent less than 3% of consolidated revenue. We offer our services and products primarily to three major market segments: healthcare, government, and large enterprise. For the year ended December 31, 2013, 70% and 30% of our consolidated revenue was generated by our wireless and software operations, respectively.
Wireless Operations
Industry Overview
Our wireless operations provide one-way and advanced two-way wireless messaging services including information services throughout the United States. These services are offered on a local, regional, and nationwide basis employing digital networks. One-way messaging consists of numeric and alphanumeric messaging services. Numeric messaging services enable subscribers to receive messages that are composed entirely of numbers, such as a phone number, while alphanumeric messages may include numbers and letters, which enable subscribers to receive text messages. Two-way messaging services enable subscribers to send and receive messages to and from other wireless messaging devices, including pagers, personal digital assistants and personal computers. Our wireless operations also offer 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.
Our customers include businesses with employees who need to be accessible to their offices or customers, first responders who need to be accessible in emergencies, and third parties, such as other telecommunication carriers and resellers that pay our Company to use our networks. Customers include businesses, professionals, management personnel, medical personnel, field sales

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personnel and service forces, members of the construction industry and construction trades, real estate brokers and developers, sales and service organizations, specialty trade organizations, manufacturing organizations, and government agencies.
Although the traditional paging industry in the United States has several licensed paging companies, the overall number of one-way and two-way messaging subscribers has been declining as the industry faces intense competition from “broadband”/voice wireless services and other forms of wireless message delivery. As a result, demand for our one-way and two-way messaging services has declined over the past several years, and we believe that it will continue to decline for the foreseeable future. The decline in demand for messaging services has largely been attributable to competition from cellular and broadband Personal Communications Service carriers.
Products and Operations
We market and distribute our wireless services through a direct sales force and a small indirect sales channel.
Direct. The direct sales force rents or sells products and messaging services directly to customers ranging from small and medium-sized businesses to companies in the Fortune 1000, healthcare and related businesses, and Federal, state and local government agencies. We will continue to market to commercial enterprises, especially healthcare organizations, that are interested in low cost, highly reliable critical messaging. We maintain a sales presence in key markets throughout the United States in an effort to gain new customers and to retain and increase sales to existing customers. We also maintain several corporate groups, such as our Key Account Management team, focused on retaining and selling additional services to our key healthcare accounts as well as a team selling to government and national accounts. Our direct sales efforts also include a focus on cross-selling Amcom services to our extensive list of wireless operations' customers.
Indirect. Within the 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. Generally, there is no contractual relationship that exists between us and the end subscriber. Therefore, operating costs per unit to provide these services are lower than those required in the direct distribution channel. Indirect units in service typically have lower average revenue per unit (“ARPU”) than direct units in service. The rate at which subscribers disconnect service in the indirect distribution channel has generally been higher than the rate experienced with direct customers, and we expect this trend to continue in the foreseeable future.
The following table summarizes the breakdown of our direct and indirect units in service at specified dates:
 
 
As of December 31,
 
2013
 
2012
 
2011
Distribution Channel
Units
 
% of Total
 
Units
 
% of Total
 
Units
 
% of Total
 
(Units in thousands)
Direct
1,315

 
95.6
%
 
1,421

 
93.8
%
 
1,555

 
93.2
%
Indirect
61

 
4.4
%
 
94

 
6.2
%
 
113

 
6.8
%
Total
1,376

 
100.0
%
 
1,515

 
100.0
%
 
1,668

 
100.0
%
Our core offering includes subscriptions to one-way or two-way messaging services for a periodic (monthly, quarterly, semi-annual, or annual) service fee. This 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. A subscriber to one-way messaging services may select coverage on a local, regional or nationwide basis to best meet their messaging needs. Two-way messaging is generally offered on a nationwide basis. We offer ancillary services, such as voicemail and equipment loss/maintenance protection, which help increase the monthly recurring revenue we receive along with these traditional messaging services.
The following table summarizes the breakdown of our one-way and two-way units in service at specified dates:
 
 
As of December 31,
 
2013
 
2012
 
2011
Service Type
Units
 
% of Total
 
Units
 
% of Total
 
Units
 
% of Total
 
(Units in thousands)
One-way messaging
1,280

 
93.0
%
 
1,394

 
92.0
%
 
1,528

 
91.6
%
Two-way messaging
96

 
7.0
%
 
121

 
8.0
%
 
140

 
8.4
%
Total
1,376

 
100.0
%
 
1,515

 
100.0
%
 
1,668

 
100.0
%

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The demand for one-way and two-way messaging services declined at each specified date and we believe demand will continue to decline for the foreseeable future. Demand for our services has also been impacted by the uncertainty in the United States economy and high unemployment rates nationwide.
As demand for one-way and two-way messaging has declined, we have developed or added service offerings in order to increase our revenue potential and mitigate the decline in our wireless operations. We will continue to look for ways to innovate and provide customers the highest value possible.
Software Operations
Industry Overview
Our software operations offer a focused suite of unified communications solutions that include call center operations, clinical alerting and notifications, mobile communications and public safety solutions. Given the focused nature of our software products, our primary market has been the healthcare industry, particularly hospitals. We have identified hospitals with 200 or more beds as the primary targets for our software solutions.
Due to the focused nature of our software solutions there is no single competitor that matches our portfolio of software solutions (see “Competition” below). Within this market we have identified the following dynamics and have focused our software solutions (see “Products and Operations” below) to address these dynamics:
A heightened awareness of the ubiquitous, mission critical role of communications in healthcare;
An increased focus within hospitals on quality of care and patient safety initiatives;
A continuing focus within hospitals to reduce labor and administrative costs while increasing productivity; and
A broader proliferation of information technology in healthcare as hospitals strive to apply technology to solve their business problems.
Products and Operations
We develop, sell, and support enterprise-wide systems for hospitals and other organizations needing to automate, centralize, and standardize mission critical communications. These solutions are used for contact centers, clinical alerting and notification, mobile communications and messaging and for public safety notifications. These areas of market focus compliment the market focus of our wireless operations outlined above. We have a sales presence and customer base both domestically, throughout the United States, and internationally, in Europe, Australia, Asia and the Middle East.
Our software operations have established solutions for:
Hospital Call Centers — These solutions encompass operator and answering services along with call recording, scheduling and selective additional support modules.
Clinical Workflow Communication — These solutions address hospital code processing as well as physician support tools.
Communication Applications — These solutions support hospital notification and appointment support.
Communications Infrastructure — These solutions support the wireless messaging infrastructure and offer a software product that can link disparate communications software (“middleware”).
Public Safety — These solutions implement and support emergency communication systems.
In our software operations we sell software solutions, professional services (installation and training), equipment (to be used in conjunction with the software) and maintenance support (post-contract support). Our software is licensed to end users under an industry standard software license agreement. Our software operations are organized as follows to support this business.
Marketing. We have a centralized marketing function which is focused on supporting our software products and vertical sales efforts by strengthening our Amcom brand, generating sales leads, and facilitating the sales process. These marketing functions are accomplished through targeted email campaigns, webinars, regional and national user conferences, monthly newsletters, and participation at industry trade shows.
Sales. We have organized our global sales organization into two theaters: the Americas and International. We sell our software products through a direct and channel sales force. The direct sales effort is geographically focused with the exception of dedicated government specialists. The direct sales force targets unified communication executives such as chief information officers, medical officers, care givers, information technology directors, telecommunications directors and contact center managers. Additionally, we target clinical resources including chief nursing officers and chief medical information officers. The timing for a direct sale from initial contact to final sale ranges from 6 to 18 months depending on the type of software solution.

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The direct sales force is complemented by a channel sales force consisting of a dedicated team of managers. These managers coordinate relationships with alliance partners who provide sales introductions for our direct sales force.
Professional Services. We offer implementation services for our software products. These implementation services are provided by a dedicated group of professional service employees. Our professional services staff uses a branded, consistent methodology that provides a comprehensive phased work plan for both new software installations and/or upgrades. In support of our implementation methodology, we manage the various aspects of the process through a professional services automation tool. A typical implementation process ranges from 30 to 180 days depending on the type of implementation. We may also use professional services partners to implement our solutions for customers.
Customer Support. To support our software products, we have established a dedicated customer support organization. Due to the mission critical nature of our software products, we provide 24 hours a day, 7 days a week, 365 days a year customer support that customers can access via telephone, email or the Internet.
Product Development. We maintain a product development group focused on developing new software products along with ongoing maintenance and enhancement of existing products. Our product development group uses a methodology that balances enhancement requests from a number of sources including customers, the professional services staff, customer support incidents, known defects, market and technology trends, and competitive requirements. These requests are reviewed and prioritized based on criteria that include the potential for increased revenue, customer/employee satisfaction, possible cost savings and development time and expense.
Licenses and Messaging Networks
Wireless Operations — We hold licenses to operate on various frequencies in the 150 MHz, 450 MHz and 900 MHz narrowband. We are licensed by the United States Federal Communications Commission (the “FCC”) to operate Commercial Mobile Radio Services (“CMRS”). These licenses are required to provide one-way and two-way messaging services over our networks.
We operate local, regional and nationwide one-way networks, which enable subscribers to receive messages over a desired geographic area. The majority of the messaging traffic that is transmitted on our 150 MHz and 450 MHz frequency bands utilize the Post Office Code Standardization Advisory Group (“POCSAG”) messaging protocol. This technology is an older and less efficient air interface protocol due to slower transmission speeds and minimal error correction. One-way networks operating in 900 MHz frequency bands predominantly utilize the FLEX protocol developed by Motorola Mobility, Inc. (“Motorola”); some legacy POCSAG traffic also is broadcast in the 900 MHz frequency band. The FLEX protocol is a newer technology having the advantages of functioning at higher network speeds (which increases the volume of messages that can be transmitted over the network) and of having more robust error correction (which facilitates message delivery to a device with fewer transmission errors).
Our two-way networks utilize the ReFLEX 25 protocol, also developed by Motorola. ReFLEX 25 promotes spectrum efficiency and high network capacity by dividing coverage areas into zones and sub-zones. Messages are directed to the zone or sub-zone where the subscriber is located, allowing the same frequency to be reused to carry different traffic in other zones or sub-zones. As a result, the ReFLEX 25 protocol allows the two-way network to transmit substantially more messages than a one-way network using either the POCSAG or FLEX protocols. The two-way network also provides for assured message delivery. The network stores messages that could not be delivered to a device that is out of coverage for any reason, and when the unit returns to service, those messages are delivered. The two-way paging network operates under a set of licenses called narrowband Personal Communications Service, which uses 900 MHz frequencies. These licenses require certain minimum five and ten-year build-out commitments established by the FCC, which have been satisfied.
Although the capacities of our networks vary by market, we have a significant amount of excess capacity. We have implemented a plan to manage network capacity and to improve overall network efficiency by consolidating subscribers onto fewer, higher capacity networks with increased transmission speeds. This plan is referred to as network rationalization. Network rationalization will result in fewer networks and therefore fewer transmitter locations, which we believe will result in lower operating expenses due primarily to lower site rent expenses.
Software Operations — Generally, our software solutions do not require licenses or permits from Federal, state and/or local government agencies in order to be sold to customers. However, certain of our software products are subject to regulation by the United States Food and Drug Administration (“FDA”). (See “Regulation” below).



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Sources of Equipment
Wireless Operations — We do not manufacture the messaging devices our customers need to take advantage of our services or the network equipment we use to provide messaging services. We have relationships with several vendors to purchase new messaging devices. Used messaging devices are available in the secondary market from various sources. We believe existing inventory, returns of devices from customers that cancelled services, and purchases from other available sources of new and reconditioned devices will be sufficient to meet expected messaging device requirements for the foreseeable future. We negotiate contractual terms with our vendors that do not directly relate to the manufacturing of the network equipment or messaging devices. The network equipment and messaging devices are generic on which we may place our logo or label.
Software Operations — Our software products are considered to be “off-the-shelf software” as the software is marketed as a stock item that customers can use with little or no customization. We also sell third party equipment for use with the software. The third party equipment that we sell is generally available and does not require any specialty manufacturing to accommodate our software solutions.
We currently have inventory and network equipment on hand that we believe will be sufficient to meet our wireless and software equipment requirements for the foreseeable future.
Competition
Wireless Operations — The wireless messaging industry is highly competitive. Companies compete on the basis of price, coverage area, services offered, transmission quality, network reliability, and customer service.
Our wireless operations compete by maintaining competitive pricing for our products and services, by providing broad coverage options through high-quality, reliable messaging networks and by providing quality customer service. Direct competitors for wireless messaging services include American Messaging Service, LLC and a variety of other regional and local providers. Our products and services also compete with a broad array of wireless messaging services provided by mobile telephone companies, including AT&T Mobility LLC, Sprint Nextel Corporation, T-Mobile USA, Inc., and Verizon Wireless, Inc. This competition has intensified as prices for the services of mobile telephone companies have declined and as those companies have incorporated messaging capabilities into their mobile phone devices. Many of these companies possess greater financial, technical and other resources than we do.
Most Personal Communications Service and other mobile phone devices currently sold in the United States are capable of sending and receiving one-way and two-way messages. Most subscribers that purchase these services no longer need to subscribe to a separate messaging service. As a result, many one-way and two-way messaging subscribers can readily switch to cellular, Personal Communications Service and other mobile telephone services. The decrease in prices and increase in capacity and functionality for cellular, Personal Communications Service and other mobile telephone services have led many subscribers to select combined voice and messaging services from mobile telephone companies as an alternative to stand-alone messaging services.
Software Operations — Based on industry research, we do have a number of competitors whose software products compete with one or more modules of our unified communications solutions. These competitors are mostly privately held companies and offer a number of call center and middleware products. Currently, there are no competitors that offer a similar comprehensive set of software modules that match our product offerings. Based on the current competitive environment, we do not foresee in the near term any competitor developing a comprehensive set of modular software products that will completely match our current portfolio of software products.
Regulation
Federal Regulation
Wireless Operations — The FCC issues licenses to use radio frequencies necessary to conduct our business and regulate many aspects of our wireless operations. Licenses granted to us by the FCC have varying terms, generally of up to ten years, at which time the FCC must approve renewal applications. In the past, FCC renewal applications generally have been granted upon showing compliance with FCC regulations and adequate service to the public. Other than those still pending, the FCC has thus far granted each license renewal that our wireless operation has requested.
The Communications Act of 1934, as amended (the “Communications Act”), requires radio licensees including our wireless operations to obtain prior approval from the FCC for the assignment or transfer of control of any construction permit or station license or authorization of any rights thereunder. The FCC has thus far granted each assignment or transfer request we have made in connection with a change of control.

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The Communications Act also places limitations on foreign ownership of CMRS licenses, which constitute the majority of our licenses. These foreign ownership restrictions limit the percentage of stockholders’ equity that may be owned or voted, directly or indirectly, by non-United States citizens or their representatives, foreign governments or their representatives, or foreign corporations. Our Amended and Restated Certificate of Incorporation permits the redemption of our equity from stockholders where necessary to ensure compliance with these requirements.
The FCC’s rules and regulations require us to pay a variety of fees that otherwise increase our costs of doing business. For example, the FCC requires licensees, including our wireless operations, to pay levies and fees, such as universal service fees, to cover the costs of certain regulatory programs and to promote various other societal goals. These requirements increase the cost of the services provided. By law, we are permitted to bill our customers for these regulatory costs and we typically do so.
Additionally, the Communications Assistance to Law Enforcement Act of 1994, (“CALEA”) and certain rules implementing CALEA require some telecommunication companies, including us, to design and/or modify their equipment in order to allow law enforcement personnel to “wiretap” or otherwise intercept messages. Other regulatory requirements restrict how we may use customer information and prohibit certain commercial electronic messages, even to our own customers.
In addition, the FCC’s rules require us to pay other carriers for the transport and termination of some telecommunication traffic. As a result of various FCC decisions over the last few years, we no longer pay fees for the termination of traffic originating on the networks of local exchange carriers providing wireline services interconnected with our services. In some instances, we received refunds for prior payments to certain local exchange carriers. We have entered into a number of interconnection agreements with local exchange carriers in order to resolve various issues regarding charges imposed by local exchange carriers for interconnection.
Failure to follow the FCC’s rules and regulations can result in a variety of penalties, ranging from monetary fines to the loss of licenses. Additionally, the FCC has the authority to modify licenses, or impose additional requirements through changes to its rules.
Software Operations — The FDA has determined software systems that connect to medical devices are subject to regulation as medical devices as defined by the Federal Food, Drug and Cosmetic Act (“the FDC Act”). Since our middleware software products connect to medical devices, we are required to comply with the FDC Act’s requirements, including but not limited to: registration and listing, labeling, medical device reporting (reporting of medical device-related adverse events), removal and correction, and good manufacturing practice requirements. We have complied with the regulatory requirements of the FDC Act, and registered and received the necessary clearances for our products. As we modify and/or enhance our software products (including our middleware product), we may be required to request FDA clearance before we are permitted to market these products.
In addition, our software products may handle or have access to personal health information subject in the United States to the Health Insurance Portability and Accountability Act (“HIPAA”), the Health Information Technology for Economic and Clinical Health Act (“HITECH”), and related regulations. These statutes and related regulations impose numerous requirements regarding the use and disclosure of personal health information with which we help our customers comply. Our failure to accurately anticipate or interpret these complex and technical laws could subject us to civil and/or criminal liability. We believe that we are in compliance with these laws and their related regulations.
Although these and other regulatory requirements have not, to date, had a material adverse effect on our operating results, such requirements could have a material impact on our operating results in the future. We monitor discussions at the FCC and FDA on pending changes in regulatory policy or regulations; however, we are unable to predict what changes, if any, may occur in 2014 to regulatory policy or regulations.
State Regulation
Wireless Operations — As a result of the enactment by Congress of the Omnibus Budget Reconciliation Act of 1993 (“OBRA”) in August 1993, states are now generally preempted from exercising rate or entry regulation over any of our operations. States are not preempted, however, from regulating “other terms and conditions” of our operations, including consumer protection and similar rules of general applicability. Zoning requirements are also generally permissible, however, provisions of the OBRA prohibit local zoning authorities from unreasonably restricting wireless services. States that regulate our services also may require us to obtain prior approval of (1) the acquisition of controlling interests in other paging companies and (2) a change of control. At this time, we are not aware of any proposed state legislation or regulations that would have a material adverse impact on our existing wireless operations.
Software Operations — At this time, we are not aware of any proposed state legislation or regulations that would have a material adverse impact on our existing software operations.

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Trademarks
Wireless Operations — We have owned the service marks “USA Mobility” since November 16, 2004, “Arch” since December 17, 2002 and “Metrocall” since September 4, 1979, and hold Federal registrations for the service marks “Metrocall” and “Arch Wireless” as well as various other trademarks. The trademarks are fully amortized for accounting purposes. We believe our trademarks distinguish our wireless operations from our smaller non-public competitors.
Software Operations — We have owned the trademark “Amcom” in the United States since April 9, 2002 and in Australia since August 28, 2009. We have also owned the trademark “Amcom Software, Inc.” in the United States since April 8, 2009 and in Australia since August 28, 2009. We also own various other trademarks such as “911 Solutions” since July 21, 1998, “Intellidesk” in the United States since August 1, 1995 and “Intellispeech” in the United States since July 22, 2003. We believe these trademarks distinguish our software solutions from our smaller and diverse competitors.
Employees
At December 31, 2013 and March 7, 2014 we had 631 and 633 full time equivalent (“FTE”) employees, respectively. Our employees are not represented by labor unions. We believe that our employee relations are good.
2014 Business Strategy
During 2014, we will continue to focus on serving the mission critical needs of our customers with a variety of wireless and software communication solutions and new product offerings while operating an efficient and profitable business strategy. In 2013 we recognized that maintaining two distinct businesses - wireless and software - could distract from our long range goal of creating stockholder value based on the ultimate growth potential of our technology solutions and operations. On January 1, 2014 we consolidated our wireless and software operations into one company to operate as a unified communications business with (1) an integrated sales force selling software and wireless solutions, (2) one set of operating overhead, (3) a single customer message and experience and (4) a consolidated operation for future growth and acquisitions. In furtherance of this consolidation we have established the following operating objectives and priorities for 2014:

Grow our software revenue and bookings;
Retain our wireless subscribers and revenue stream;
Return capital to our stockholders; and
Seek long-term revenue growth through business diversification.

Grow our software revenue and bookings — Throughout 2014 we expect to continue our investments in sales and marketing, product implementation, product development and customer support that drive software, services and maintenance bookings and revenue growth. Healthcare customers represent our most stable and loyal customers and represented 67% of our revenue base in 2013. We will continue to focus our sales and marketing efforts in the healthcare market in order to identify opportunities for sales and close those opportunities in the form of purchase orders or bookings. We also plan to leverage our existing wireless relationships in the healthcare market to support our objectives to grow software revenue and bookings.

We have an ongoing initiative to further penetrate the hospital segment in the United States and believe there is a significant opportunity to sell unified communication solutions to hospitals located outside the United States. We intend to leverage the strength of our market presence and the breadth of our product offerings to further expand our customer base in healthcare, but also in the government and large enterprise segments both in the United States and overseas.
We plan to continue to innovate and invest in product development in order to enhance existing software solutions and bring new offerings to market. In particular we have focused on the increased potential in the mobile communications marketplace and our ability to make sure the right person gets the right message on the right device at the right time.
We must address the challenge of effectively managing our operating expenses to support our revenue and bookings growth without allowing costs to erode our profitability objectives. We have established a free cash flow objective for our consolidated operations that focuses management on achieving operating efficiencies. We define free cash flow as operating income plus depreciation, amortization, accretion and impairment expenses (also known as “EBITDA”) less capital expenditures. We have defined this non-GAAP financial measure as operating cash flow. (See Item 7. Non-GAAP Financial Measures.)
Retain our wireless subscribers and revenue stream — Wireless subscribers and the resulting revenue represented about 71%, 77% and 85% of our total consolidated revenue for each of the three years ended December 31, 2013. We will continue to focus on reducing the rate of subscriber disconnects and minimize the rate of revenue erosion. We continue to have a valuable

10


wireless presence in the healthcare market, particularly in larger hospitals. We offer a comprehensive suite of wireless messaging products and services focused on healthcare and “campus” type environments and critical mission notification. We will also focus on network reliability and customer service to help minimize the rate of subscriber disconnects.
We recognize that our wireless subscribers and revenue will continue to decline. We will also continue to reduce the underlying cost structure directly supporting this revenue stream. These cost reductions will come from all impacted areas. We will reduce payroll and related expenses as well as network related expenses as necessary in light of the declining revenue. We will integrate and consolidate operations as necessary to ensure the lowest cost operational platform for our consolidated business. We have established a total revenue objective for our operations that will focus management on both our software and wireless revenue targets.
Return capital to our stockholders — We understand that our primary objective is to create long-term stockholder value. Executing our 2014 objectives is important but we continue to evaluate how best to deploy our capital resources to support sustainable business growth and maximize stockholder value. We expect to continue to pay a quarterly dividend of $0.125 per share of common stock or $0.50 annually. Also, we may repurchase more shares of our common stock from time to time under our existing stock repurchase program that expires on December 31, 2014. (See Item 5. Common Stock Repurchase program).
Seek long-term revenue growth through business diversification — We believe that add-on acquisitions of companies or technologies are an important part of our future growth. We believe add-on acquisitions of complementary companies or technologies in the healthcare market will further enhance our position with current customers and expand our overall addressable markets. Rapidly and successfully integrating strategic acquisitions and improving operational efficiencies is a focus of our management team. Given the nature of our solutions new technologies can be integrated to accelerate cross-selling opportunities. Our goal is to evaluate other businesses that are profitably accretive and can accelerate our revenue goals.
To ensure focus on our 2014 business strategy we have established specific performance objectives in our short-term incentive plan (“STIP”) for our management that include these operating objectives and priorities. In addition, our long-term incentive plan (“LTIP”) includes specific performance objectives for these priorities.

ITEM 1A. RISK FACTORS
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 2013 Form 10-K or presented elsewhere by management from time to time.
We may not realize the benefits of integrating our software and wireless operations.
In 2013 we recognized that maintaining separate wireless and software operations could impact our operational efficiency and ability to generate long-term stockholder value. While we had previously consolidated certain administrative functions such as information technology, human resources and accounting and finance, our consolidation efforts in 2014 will focus on customer support, logistics and sales and marketing. With respect to customer support and logistics we need to ensure that our integration activities will not impact customer service levels which could exacerbate our wireless subscriber churn and wireless revenue erosion. These integration activities could also impact the implementation of our software solutions and adversely impact our ability to deliver software maintenance support.
In 2014 we will begin to combine our sales and marketing teams from the wireless and software operations. The transition will occur over a multi-year period. Combining the wireless and software resources in Sales and Marketing may distract or dilute employee efforts to focus on executing core sales and marketing strategies in their respective areas of expertise. In addition, we risk losing key talent during this transition that may impede our ability to execute on our sales and marketing plans.
Our inability to successfully integrate our operations could adversely impact our operating cash flow and could have material adverse effects on our business, financial condition and statement of income including our continued ability to remain profitable, produce positive operating cash flow, pay cash dividends to stockholders and repurchase shares of our common stock.
The rate of subscriber and revenue erosion could exceed our ability to reduce operating expenses in order to maintain overall positive operating cash flow.
Our wireless revenue is dependent on the number of subscribers that use our paging devices. There is intense competition for these subscribers from other paging service providers and alternate wireless communications providers such as mobile phone and mobile data service providers. We expect our subscriber numbers and revenue to continue to decline into the foreseeable future. As this revenue erosion continues, maintaining positive cash flow is dependent on substantial and timely reductions in selected operating expenses. Reductions in operating expenses require both the reduction of internal costs and negotiation of lower costs from outside vendors. There can be no assurance that we will be able to reduce our operating expenses commensurate with

11


the level of revenue erosion. The inability to reduce operating expenses would have a material adverse impact on our business, financial condition and statement of income including our continued ability to remain profitable, produce positive operating cash flow, pay cash dividends to stockholders, and repurchase shares of our common stock.
We may experience a long sales cycle in our software operations.
Our software revenue growth results from a long sales cycle that from initial contact to final sales order may take 6 to 18 months depending on the type of software solution. Our software sales and marketing efforts involve educating our customers on the technical capabilities of our software solutions and the potential benefits from the deployment of our software. The inherent unpredictability of decision making resulting from budget constraints, multiple approvals and administrative issues may result in fluctuating bookings and revenue from month to month and quarter to quarter. While we attempt to manage this unpredictability through a robust marketing effort to identify sales opportunities, our bookings and corresponding revenue are dependent on actions that have occurred in the past. In every month we need to spend substantial time, effort, and expense on our marketing and sales efforts that may not result in future revenue.
The impact of this sales cycle could adversely impact our operating cash flow and margins and could have a material adverse effect on our business, financial condition and statement of income, including our continued ability to remain profitable, produce positive operating cash flow, pay cash dividends to stockholders, and repurchase shares of our common stock.
Service to our customers could be adversely impacted by network rationalization.
We have an active program to consolidate our number of networks and related transmitter locations, which is referred to as network rationalization. Network rationalization is necessary to match our technical infrastructure to our smaller subscriber base and to reduce both site rent and telecommunication costs. The implementation of the network rationalization program could adversely impact service to our existing subscribers despite our efforts to minimize the impact on subscribers. This adverse impact could increase the rate of gross subscriber cancellations and/or the level of revenue erosion. Adverse changes in gross subscriber cancellations and/or revenue erosion could have a material adverse effect on our business, financial condition and statement of income, including our continued ability to remain profitable, produce positive operating cash flow, pay cash dividends to stockholders, and repurchase shares of our common stock.
If we are unable to retain key management personnel, we might not be able to find suitable replacements in a timely basis, or at all, and our business could be disrupted.
Our success is largely dependent upon the continued service of a relatively small group of experienced and knowledgeable executive and management personnel. We believe that there is, and will continue to be, intense competition for qualified personnel in the telecommunication and software industry, and there is no assurance that we will be able to attract and retain the personnel necessary for the management and development of our business. Turnover, particularly among senior management, can also create distractions as we search for replacement personnel, which could result in significant recruiting, relocation, training and other costs, and can cause operational inefficiencies as replacement personnel become familiar with our business and operations. In addition, manpower in certain areas may be constrained, which could lead to disruptions over time. The consolidation of our wireless and software operations may mitigate this risk although the elimination or reconfiguration of employee responsibilities could impact retention decisions by key executives and management personnel. 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 business, financial condition and statement of income, including our continued ability to remain profitable, produce positive operating cash flow, pay cash dividends to stockholders, and repurchase shares of our common stock.

In order to grow our software revenue and bookings and maintain our wireless revenue and subscribers we are dependent on our ability to effectively manage our employee base in areas such as sales, marketing, product development and implementation.
Growth in our software revenue and bookings and maintenance of our wireless revenue and subscriber base is dependent on the sales productivity of our sales organization. We anticipate that we will continue to improve our sales productivity. A number of mitigating factors could adversely impact our productivity assumptions. Those factors include competitive forces, employee turnover, product innovation and overall market conditions. Our software revenue and bookings growth is also dependent on our ability to attract, integrate and retain employees in our operations. To protect our employee base from competition for software talent, we initiated a software compensation study and developed a market-competitive compensation and rewards strategy. We believe that we have implemented appropriate compensation and incentive programs for our employees, but future costs of these programs is dependent on market conditions that are subject to change. Adverse changes in our sales productivity or ability to attract, integrate and retain employees could have a material adverse effect on our business, financial condition and statement of income including our continued ability to remain profitable, produce positive operating cash flow, pay dividends to stockholders and repurchase shares of our common stock.

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We may be unable to find vendors able 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 customers in order to provide wireless messaging services. The reduction in industry demand for paging equipment has caused various suppliers to cease manufacturing this equipment. There can be no assurance that we can continue to find vendors to supply paging equipment, or that the vendors will supply equipment at costs that allow us to remain a competitive alternative in the wireless messaging industry. A lack of paging equipment could impact our ability to provide certain wireless messaging services and could have a material adverse effect on our business, financial condition and statement of income, including our continued ability to remain profitable, produce positive operating cash flow, pay cash dividends to stockholders, and repurchase shares of our common stock.
We may be unable to realize the benefits associated with our deferred income tax assets.
We have significant deferred income tax assets that are available to offset future taxable income and increase cash flows from operations. The use of these deferred income tax assets is dependent on the availability of taxable income in future periods. The availability of future taxable income is dependent on our ability to profitably grow our software operations and to continue to reduce operating expenses and to maintain profitability in our wireless operations as both revenue and subscribers are expected to decline in the future. To the extent that anticipated reductions in operating expenses do not occur or sufficient revenue is not generated, we may not achieve sufficient taxable income to allow for use of our deferred income tax assets. The accounting for deferred income tax assets is based upon an estimate of future results, and the valuation allowance may be increased or decreased as conditions change or if we are unable to implement certain tax planning strategies. If we are unable to use these deferred income tax assets, our financial condition and statement of income may be materially affected. In addition, a significant portion of our deferred income tax assets relate to net operating losses. If our ability to utilize these losses is limited, due to Internal Revenue Code (“IRC”) Section 382, our financial condition and statement of income may be materially affected.
Our wireless operations are regulated by the FCC and, to a lesser extent, state and local regulatory authorities. Changes in regulation could result in increased costs to us and our customers.
We are subject to regulation by the FCC and, to a lesser extent, by state and local authorities. Changes in regulatory policy could increase the fees we must pay to the government or to third parties, and could subject us to more stringent requirements that could cause us to incur additional capital and/or operating costs. To the extent additional regulatory costs are passed along to customers, those increased costs could adversely impact subscriber cancellations.
For example, the FCC issued an order in October 2007 that mandated paging carriers (such as us) along with all other CMRS providers serving a defined minimum number of subscribers to maintain an emergency back-up power supply at all cell sites to enable operation for a minimum of eight hours in the event of a loss of commercial power (the “Back-up Power Order”). Ultimately, after a hearing by the DC Circuit Court and disapproval by the Office of Management and Budget (the “OMB”) of the information collection requirements of the Back-Up Power Order, the FCC indicated that it would not seek to override the OMB’s disapproval. Rather the FCC indicated that it would issue a Notice of Proposed Rulemaking with the goal of adopting revised back-up power rules. To date, there has been no Notice of Proposed Rulemaking by the FCC and we are unable to predict what impact, if any, a revised back-up power rule could have on our operations, cash flows, ability to continue payment of cash dividends to stockholders, and ability to repurchase shares of our common stock.
The FCC continues to consider changes to the rules governing the collection of universal service fees. The FCC is evaluating a flat monthly charge per assigned telephone number as opposed to assessing universal service contributions based on telecommunication carriers’ interstate revenue. There is no timetable for any rulemaking to implement this numbers-based methodology. If the FCC adopts a numbers-based methodology, our attempt to recover the increased contribution costs from our customers could significantly diminish demand for our services, and our failure to recover such increased contribution costs could have a material adverse impact on our business, financial condition and statement of income, including our continued ability to remain profitable, produce positive operating cash flow, pay cash dividends to stockholders and repurchase shares of our common stock.
In our software operations certain of our software products are regulated by the FDA. The application of or changes in regulations could impact our ability to market new or revised software products to our customers.
Certain of our software products are regulated by the FDA as medical devices. The classification of our software products as medical devices means that we are required to comply with certain registration and listing, labeling, medical device reporting, removal and correction, and good manufacturing practice requirements. Updates to these products or the development of new products could require us to seek clearance from the FDA before we are permitted to market or sell these software products. In addition, changes to FDA regulations could impact existing software products or updates to existing products. The impact of delays in FDA clearance or changes to FDA regulations could impact our ability to market or sell our software products and could have a material adverse effect on our software operations, financial condition and statement of income, including our continued ability

13


to remain profitable, produce positive operating cash flow, pay cash dividends to stockholders and repurchase shares of our common stock.
We have investigated potential acquisitions and may be unable to successfully integrate such acquisitions into our business and may not achieve all or any of the operating synergies or anticipated benefits of those acquisitions.
We continue to evaluate acquisitions of other businesses where we believe such acquisitions will yield increased cash flows, improved market penetration and/or identified operating efficiencies and synergies. We cannot provide any assurances that we will be successful in finding such acquisitions or consummating future acquisitions on favorable terms. We anticipate that our acquisitions will be financed through a combination of methods, including but not limited to the use of available cash on hand, and borrowings under our revolving credit facility. Disruptions in credit markets may limit our ability to finance acquisitions should financing requirements exceed the availability under our revolving credit facility. In addition, we may face various challenges with our integration efforts, including the combination and simplification of product and service offerings, sales and marketing approaches and establishment of combined operations. Although acquired businesses may have significant operating histories, we may have limited or no history of owning and operating these businesses. If we were to acquire these businesses, there can be no assurance that:
such businesses will perform as expected;
such businesses will not incur unforeseen obligations or liabilities;
such businesses will generate sufficient cash flow to support the indebtedness, if incurred, to acquire them or the expenditures needed to develop them; and/or
the rate of return from such businesses will justify the decision to invest the capital to acquire them.
If we do not realize all or any of the anticipated benefits of an acquisition, it could have a material adverse effect on our business, financial condition and statement of income, including our continued ability to remain profitable, produce positive operating cash flow, pay cash dividends to stockholders, and repurchase shares of our common stock.
Technical problems and higher costs may affect our product development initiatives.
Our future software revenue growth depends on our ability to develop, introduce and effectively deploy new solutions and features to our existing software solutions. These new features and functionalities are designed to address both existing and new customer requirements. While we have a disciplined approach to product development, we may experience technical problems and additional costs as these new features are tested and deployed. Failure to effectively develop new or improved software solutions could adversely impact software revenue growth and could have a material adverse effect on our operations, financial condition and statement of income including our continued ability to remain profitable, produce positive operating cash flow, pay cash dividends to stockholders, and repurchase shares of our common stock.
We may experience litigation on intellectual property infringement.
Intellectual property infringement litigation has become commonplace. This litigation can be protracted, expensive, and time consuming. Although we have not experienced any litigation of this type in the past, there is no assurance that we will remain immune to this type of predatory litigation. Any such claims, whether meritorious or not, could be time consuming and costly in terms of both resources and management time.
Third parties may claim we infringe their intellectual property rights. We may receive claims that we have infringed the intellectual property rights of others, including claims regarding patents, copyrights, and trademarks. The number of these claims may grow as a result of constant technological change in the segments in which our software products compete, the extensive patent coverage of existing technologies, and the rapid rate of issuance of new patents.
Our portfolio of issued patents and copyrights may be insufficient to defend ourselves against intellectual property infringement claims. We understand these risks and will take reasonable and appropriate action to protect ourselves as we develop and deploy additional software solutions. Should we experience litigation on intellectual property infringement, such litigation could have a material adverse impact on our ability to sell our software solutions and on our financial condition and statement of income including our continued ability to remain profitable, produce positive operating cash flow, pay cash dividends to stockholders, and repurchase shares of our common stock.
We may encounter issues with privacy and security of personal information.
A substantial portion of our revenue comes from healthcare customers. Our software solutions may handle or have access to personal health information subject in the United States to HIPPA, HITECH and related regulations as well as legislation and regulations in foreign countries. These statutes and related regulations impose numerous requirements regarding the use and

14


disclosure of personal health information with which we must comply. Our failure to accurately anticipate or interpret these complex and technical laws and regulations could subject us to civil and/or criminal liability. We make every effort to comply with these and all relevant statutes and regulations. Such failure could adversely impact our ability to market and sell our software solutions to healthcare customers, and have a material adverse impact on our software operations, financial condition and statement of income including our continued ability to remain profitable, produce positive operating cash flow, pay cash dividends to stockholders and repurchase shares of our common stock.
System disruptions and security threats to our computer networks, satellite control or telecommunications systems could have a material adverse effect on our business.
The performance and reliability of our computer network and telecommunications systems infrastructure is critical to our operations. Any computer system or satellite network error or failure, regardless of cause, could result in a substantial outage that materially disrupts our operations. In addition, we face the threat to our computer systems of unauthorized access, computer hackers, computer viruses, malicious code, organized cyber-attacks and other security problems and system disruptions. We devote significant resources to the security of our computer systems, but our computer systems may still be vulnerable to these threats. A user who circumvents security measures could misappropriate proprietary information or cause interruptions or malfunctions in our operations. As a result, we may be required to expend significant resources to protect against the threat of these system disruptions and security breaches or to alleviate problems caused by these disruptions and breaches. Any of these events could have a material adverse effect on our business, financial condition, statement of income and cash flows.
We may encounter issues with international sales and expansion.
A portion of our revenue comes from international sales. We plan to further expand our international presence. We may not be successful in our efforts to expand into these international markets. Our international sales and operations are subject to a number of risks, including:
compliance with foreign and U.S. laws and regulations including the U.S. Foreign Corrupt Practices Act and the United Kingdom Bribery Act 2010;
volatility in international political and economic environments;
imposition of taxes, export controls, tariffs, embargoes and other trade barriers;
changes in regulatory requirements;
lack of strong intellectual property protection;
difficulty in staffing, developing and managing foreign operations;
limitations on the repatriation and investment of funds;
fluctuations in foreign currency exchange rates; and
geopolitical developments, including war and terrorism.
In addition, the economic uncertainty in Europe and implementation of stringent financial austerity measures by many national governments, and the continuing risk of conflict and political instability in the Middle East may lead to delays or cancellations of our sales orders. The consistent growth in the economy of Australia and increase in compensation costs may make it increasingly difficult to attract and retain quality staff and may increase our cost of doing business.
We are unable to predict the impact of these factors. Any one or more of these factors could adversely affect our business, financial condition and statement of income including our continued ability to remain profitable, produce positive operating cash flow, pay cash dividends to stockholders, and repurchase shares of our common stock.
General economic conditions that are largely out of our control may adversely affect our financial condition and statement of income.
Our business is sensitive to changes in general economic conditions, both nationally and locally. Recessionary economic cycles, higher interest rates, inflation, higher levels of unemployment, higher tax rates and other changes in tax laws, or other economic factors that may affect business spending or buying habits could adversely affect the demand for our services. This adverse impact could increase the rate of gross subscriber cancellations and/or the level of revenue erosion. Adverse changes in gross subscriber cancellations and/or revenue erosion could have a material adverse effect on our business, financial condition and statement of income, including our continued ability to remain profitable, produce positive operating cash flow, pay cash dividends to stockholders, and repurchase shares of our common stock.
A significant portion of our revenue is derived from healthcare customers and we are impacted by changes in the healthcare economic environment. The healthcare industry is highly regulated and is subject to changing political, legislative, regulatory, and

15


other economic developments. These developments can have a dramatic effect on the decision-making and the spending for information technology and software. This economic uncertainty can add to the unpredictability of decision-making and lengthen our sales cycle. We plan to respond to these conditions by maintaining our marketing focus and continuing our diversification into other market segments including government and large enterprise.
Further, the consequences of the healthcare reform legislation continue to impact both the economy in general and the healthcare market in particular. The uncertainty created by the legislation is impacting customer decision making and information technology plans in our key healthcare market. We are unable to predict the full consequences of this uncertainty on our operations. Adverse changes in the economic environment could adversely impact our ability to market and sell our wireless and software solutions to healthcare customers and have a material adverse impact on our software operations, financial condition and statement of income including our continued ability to remain profitable, produce positive operating cash flow, pay cash dividends to stockholders, and repurchase shares of our common stock.
 
ITEM 1B. UNRESOLVED STAFF COMMENTS
We had no unresolved SEC staff comments as of March 11, 2014.
 
ITEM 2. PROPERTIES
Wireless Operations — At December 31, 2013, we owned one office building in the United States. The office building has 4,400 square feet and is located in Rochester, New York. In addition, we leased facility space, including our executive headquarters, sales, technical, and storage facilities in approximately 71 locations in 31 states.
At December 31, 2013, we leased transmitter sites on commercial broadcast towers, buildings and other fixed structures in approximately 3,652 locations throughout the United States. These leases are for our active transmitters and are for various terms and provide for periodic lease payments at various rates.
At December 31, 2013, we had 4,538 active transmitters on leased sites which provide service to our customers (of which 2,302 are customer provided sites with no associated site rent expenses).
Software Operations — At December 31, 2013, we leased seven facilities in the United States, one facility in Australia, one facility in the United Kingdom and one facility in the Middle East, which included space in four office buildings, three executive sales offices, two storage facilities and one warehouse location.
 
ITEM 3. LEGAL PROCEEDINGS
We are involved, from time to time, in lawsuits arising in the normal course of business. We believe these pending lawsuits will not have a material adverse impact on our financial results or statement of income.
 
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
 
PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES

Our sole class of common equity is our $0.0001 par value common stock, which is listed on the NASDAQ National Market® and is traded under the symbol “USMO.”
The following table sets forth the high and low intraday sales prices per share of our common stock for the periods indicated, which correspond to our quarterly fiscal periods for financial reporting purposes. Prices for our common stock are as reported on the NASDAQ National Market® from January 1, 2012 through December 31, 2013.
 

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2013
 
2012
For the Three Months Ended
High
 
Low
 
High
 
Low
March 31,
$
13.30

 
$
11.10

 
$
15.20

 
$
13.10

June 30,
14.19

 
12.19

 
14.32

 
11.51

September 30,
15.79

 
13.30

 
14.29

 
10.71

December 31,
15.55

 
12.58

 
12.49

 
10.34

We sold no unregistered securities during the years ended December 31, 2013, 2012 and 2011. As of March 7, 2014, there were 4,579 holders of record of our common stock.
Cash Distributions/Dividends to Stockholders
The following table details information on our cash distributions since the formation of USA Mobility through the year ended December 31, 2013. Cash distributions paid as disclosed in the statements of cash flows for the years ended December 31, 2008 through December 31, 2013, include previously declared cash distributions on restricted stock units (“RSUs”) and shares of vested restricted common stock (“restricted stock”) granted under the USA Mobility, Inc. Equity Incentive Plan (“Equity Plan”) to executives and non-executive members of our Board of Directors. Cash distributions on RSUs and restricted stock have been accrued and are paid when the applicable vesting conditions are met. Accrued cash distributions on forfeited RSUs and restricted stock are also forfeited. So long as no default or event of default exists as defined in our Amended and Restated Credit Agreement with Wells Fargo Capital Finance, LLC we may declare and pay dividends of up to $25.0 million in any fiscal year.
 
Year
Per Share
Amount

Total
Payment(1)
 
 

(Dollars in
thousands)
2005
$
1.50

 
$
40,691

2006(2)
3.65

 
98,904

2007(3)
3.60

 
98,250

2008(4)
1.40

 
39,061

2009(3)
2.00

 
45,502

2010(3)
2.00

 
44,234

2011
1.00

 
22,121

2012(5)
0.75

 
16,512

2013
0.50

 
12,312

Total
$
16.40

 
$
417,587

 
(1) 
The total payment reflects the cash distributions paid in relation to common stock, vested RSUs and vested shares of restricted stock.
(2) 
On August 8, 2006, we announced the adoption of a regular quarterly cash distribution of $0.65 per share of common stock.
(3) 
The cash distribution includes an additional special one-time cash distribution to stockholders of $1.00 per share of common stock.
(4) 
On May 2, 2008, our Board of Directors reset the quarterly cash distribution rate to $0.25 per share of common stock from $0.65 per share of common stock.
(5) 
On July 30, 2012, our Board of Directors reset the quarterly cash distribution rate to $0.125 per share of common stock from $0.25 per share of common stock.
On March 5, 2014, our Board of Directors declared a regular quarterly cash dividend of $0.125 per share of common stock, with a record date of March 18, 2014, and a payment date of March 28, 2014. This cash dividend of approximately $2.7 million is expected to be paid from available cash on hand.
Common Stock Repurchase Program
On July 31, 2008, our Board of Directors approved a program to repurchase up to $50.0 million of our common stock in the open market during the twelve-month period commencing on or about August 5, 2008. This program has been extended at various times, most recently through December 31, 2014.

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Credit Suisse Securities (USA) LLC administers such purchases. We use available cash on hand and net cash provided by operating activities to fund the common stock repurchase program. This repurchase authority allows us, at management’s discretion, to selectively repurchase shares of our common stock from time to time in the open market depending upon market price and other factors. 
For the quarter and year ended December 31, 2013, we made no common stock repurchase. From the inception of the program in August 2008 through December 31, 2013, we have repurchased a total of 6,268,504 shares of our common stock for approximately $59.8 million (excluding commissions). There was approximately $17.0 million of common stock repurchase authority remaining under the program as of December 31, 2013. The repurchase authority was reset to $15.0 million as of January 1, 2014. All repurchased shares of common stock were returned to the status of authorized but unissued shares of the Company. Repurchased shares of our common stock were accounted for as a reduction to common stock and additional paid-in-capital in the period in which the repurchase occurred.
Securities Authorized for Issuance Under Equity Compensation Plan
The following table sets forth, as of December 31, 2013, the number of securities outstanding under our currently authorized Equity Plan, the weighted-average exercise price of such securities and the number of securities available for grant under this plan:
 
Plan Category
Number of securities to be issued upon exercise of outstanding options, warrants and rights
[a]

Weighted-average exercise price of outstanding options, warrants and rights
[b]

Number of securities remaining available for future issuance under equity compensation plans (excluding securities
reflected in column[a])[c]
Equity compensation plan approved by security holders:





2012 USA Mobility, Inc. Equity Incentive Plan




1,720,752

Equity compensation plan not approved by security holders:
 
 
 
 
 
None

 

 

Total

 

 
1,720,752

 
(1) 
The Equity Plan provides that common stock authorized for issuance under the plan may be granted in the form of common stock, stock options, restricted stock and RSUs. As of December 31, 2013, 109,193 shares of restricted stock were granted to the non-executive members of the Board of Directors and 617,027 RSUs were granted to eligible employees under the Equity Plan.
Performance Graph
We began trading on the NASDAQ National Market® on November 17, 2004. The chart below compares the relative changes in the cumulative total return of our common stock for the period December 31, 2008 to December 31, 2013, against the cumulative total return of the NASDAQ Composite Index® and the NASDAQ Telecommunications Index® for the same period.
The chart below assumes that on December 31, 2008, $100 was invested in our common stock and in each of the indices. The comparisons assume that all cash distributions were reinvested. The chart indicates the dollar value of each hypothetical $100 investment based on the closing price as of the last trading day of each fiscal year from December 31, 2008 to December 31, 2013.

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Transfer Restrictions on Common Stock
In order to reduce the possibility that certain changes in ownership could impose limitations on the use of our deferred income tax assets, our Amended and Restated Certificate of Incorporation contains provisions which generally restrict transfers by or to any 5% stockholder of our common stock or any transfer that would cause a person or group of persons to become a 5% stockholder of our common stock. After a cumulative indirect shift in ownership of more than 45% since our emergence from bankruptcy proceedings in May 2002 through a transfer of our common stock, any transfer of our common stock by or to a 5% stockholder of our common stock or any transfer that would cause a person or group of persons to become a 5% stockholder of such common stock, will be prohibited unless the transferee or transferor provides notice of the transfer to us and our Board of Directors determines in good faith that the transfer would not result in a cumulative indirect shift in ownership of more than 47%.
Prior to a cumulative indirect ownership change of more than 45%, transfers of our common stock will not be prohibited, except to the extent that they result in a cumulative indirect shift in ownership of more than 47%, but any transfer by or to a 5% stockholder of our common stock or any transfer that would cause a person or group of persons to become a 5% stockholder of our common stock requires notice to us. Similar restrictions apply to the issuance or transfer of an option to purchase our common stock, if the exercise of the option would result in a transfer that would be prohibited pursuant to the restrictions described above. These restrictions will remain in effect until the earliest of (1) the repeal of IRC Section 382 (or any comparable successor provision) and (2) the date on which the limitation amount imposed by IRC Section 382 in the event of an ownership change would not be less than the tax attributes subject to these limitations. Transfers by or to us and any transfer pursuant to a merger approved by our Board of Directors or any tender offer to acquire all of our outstanding stock where a majority of the shares have been tendered will be exempt from these restrictions.
Based on publicly available information and after considering any direct knowledge we may have, our combined cumulative change in ownership was 3.24% as of December 31, 2013 compared to 6.88% as of December 31, 2012.


19


ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read in conjunction with “Item 7. Management’s Discussion and Analysis of Financial Condition and Statement of Income” (“MD&A”), the consolidated financial statements and notes thereto, and other financial information appearing elsewhere in this 2013 Form 10-K. (Software operations have been reflected in the consolidated financial data from March 3, 2011, the acquisition date.)

 
For the Year Ended December 31,
 
2013
 
2012
 
2011
 
2010
 
2009
 
(Dollars in thousands except per share amounts)
Statements of Income Data:
 
 
 
 
 
 
 
 
 
Revenues
$
209,752

 
$
219,696

 
$
233,693

 
$
233,254

 
$
289,706

Operating expenses
164,258

 
173,968

 
181,864

 
176,075

 
232,298

Operating income
45,494

 
45,728

 
51,829

 
57,179

 
57,408

Net income
27,530

 
26,984

 
83,786

 
77,898

 
67,558

Basic net income per common share
1.27

 
1.23

 
3.79

 
3.50

 
2.95

Diluted net income per common share
1.25

 
1.20

 
3.72

 
3.45

 
2.90

Cash distributions declared per common share
0.50

 
0.75

 
1.00

 
2.00

 
2.00

 
 
 
 
 
 
 
 
 
 
 
December 31,
 
2013
 
2012
 
2011
 
2010
 
2009
 
(Dollars in thousands)
Balance Sheets Data:
 
 
 
 
 
 
 
 
 
Current assets
$
120,168

 
$
95,909

 
$
105,492

 
$
154,356

 
$
137,843

Total assets
326,898

 
322,627

 
354,421

 
230,658

 
213,548

Long-term debt

 

 
28,250

 

 

Long-term liabilities, excluding deferred revenue
9,259

 
9,789

 
12,223

 
11,787

 
11,228

Stockholders’ equity
269,950

 
251,419

 
247,587

 
184,390

 
158,796


ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND STATEMENT OF
INCOME
The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes and the discussions under “Application of Critical Accounting Policies” (also under Item 7.), which describes key estimates and assumptions we make in the preparation of our consolidated financial statements; “Item 1. Business”, which describes our wireless and software operations; and “Item 1A. Risk Factors”, which describes key risks associated with our operations and markets in which we operate. A reference to a “Note” in this section refers to the accompanying Notes to Consolidated Financial Statements.
Overview
We offer our services and products in the United States and abroad primarily to three major market segments: healthcare, government and large enterprise, while our software operations also have a presence in the hospitality market. For the wireless operations, the government business has been trending downward over the last several years as state and local governments have been struggling with budget constraints. At the same time, our wireless services tend to be a reliable and low cost communication alternative when budgets are constrained and therefore paging services can be positioned well against other communication tools. Large enterprise customers have been trending away from paging to cellular/smart phones for a number of years and we expect that trend to continue in future years. Our software operations leverage these trends with more advanced critical messaging offerings such as our Amcom Mobile Connect offering for smart phones, which enables caregivers and physicians to communicate more effectively, and other more advanced unified communication tools. The trend toward more advanced/smart communications devices has been ongoing in large enterprise and is emerging in healthcare and government.

20


The following table indicates revenue by key market segments for the periods stated and illustrates the relative significance of these market segments to our wireless operations.
 
For the Year Ended December 31,
Market Segment
2013
 
% of Total
 
2012
 
% of Total
 
2011
 
% of Total
 
(Dollars in thousands)
Healthcare
$
97,458

 
65.2
%
 
$
102,036

 
60.6
%
 
$
111,950

 
56.1
%
Government
11,894

 
8.0
%
 
15,228

 
9.0
%
 
19,961

 
10.0
%
Large Enterprise
17,056

 
11.4
%
 
20,846

 
12.4
%
 
25,721

 
12.9
%
Other
17,559

 
11.7
%
 
22,717

 
13.5
%
 
31,139

 
15.5
%
Total Direct
143,967

 
96.3
%
 
160,827

 
95.5
%
 
188,771

 
94.5
%
Total Indirect
5,481

 
3.7
%
 
7,578

 
4.5
%
 
10,930

 
5.5
%
Total
$
149,448

 
100.0
%
 
$
168,405

 
100.0
%
 
$
199,701

 
100.0
%
Our software operations focus primarily on the healthcare and government market segments, but with a greater emphasis on the healthcare market segment. The following table indicates revenue by key market segments for the periods stated and indicates the relative significance of these market segments to our software operations.
 
For the Year Ended December 31,
Market Segment
2013
 
% of Total
 
2012
 
% of Total
 
2011(1)
 
% of Total
 
(Dollars in thousands)
Healthcare
$
40,501

 
67.2
%
 
$
32,237

 
62.9
%
 
$
20,327

 
59.8
%
Government
6,751

 
11.2
%
 
5,064

 
9.9
%
 
2,944

 
8.7
%
Large Enterprise
2,658

 
4.4
%
 
2,767

 
5.4
%
 
1,817

 
5.3
%
Other(2)
3,276

 
5.4
%
 
2,939

 
5.7
%
 
1,972

 
5.8
%
Total Direct
53,186

 
88.2
%
 
43,007

 
83.8
%
 
27,060

 
79.6
%
Total Indirect
7,118

 
11.8
%
 
8,284

 
16.2
%
 
6,932

 
20.4
%
Total
$
60,304

 
100.0
%
 
$
51,291

 
100.0
%
 
$
33,992

 
100.0
%
 
(1)
Revenue reflects results from March 3, 2011 (the acquisition date) to December 31, 2011 and is net of maintenance revenue reductions of $6.1 million required by purchase accounting to reflect fair value.
(2) Other includes hospitality, resort and billable travel revenue.
We generate revenue by providing paging services, as well as developing, licensing, and supporting a wide range of software products and services. Our most significant expenses are related to compensating employees, site rents, telecommunications and taxes.
Wireless Operations
Our wireless operations provide one-way and advanced two-way wireless messaging services including information services throughout the United States. We also offer voice mail, personalized greeting, message storage and retrieval, and equipment loss and/or maintenance protection to both one-way and two-way messaging subscribers. We market and distribute these wireless messaging and information services through a direct sales force and a small indirect sales channel. (See Item 1. “Business” for more details.)
The following table summarizes the breakdown of our direct and indirect units in service at specified dates:
 
As of December 31,
 
2013
 
2012
 
2011
Distribution Channel
Units
 
% of Total
 
Units
 
% of Total
 
Units
 
% of Total
 
(Units in thousands)
Direct
1,315

 
95.6
%
 
1,421

 
93.8
%
 
1,555

 
93.2
%
Indirect
61

 
4.4
%
 
94

 
6.2
%
 
113

 
6.8
%
Total
1,376

 
100.0
%
 
1,515

 
100.0
%
 
1,668

 
100.0
%
As noted above in “Overview,” our key market segments are healthcare, government and large enterprise. The following table indicates the percentage of our units in service by key market segments for the periods stated and illustrates the relative significance of these market segments to our operations.

21


 
 
As of December 31,
Market Segment
2013
 
2012
 
2011
Healthcare
71.9
%
 
67.1
%
 
62.6
%
Government
8.6
%
 
10.3
%
 
11.9
%
Large Enterprise
8.1
%
 
8.5
%
 
9.5
%
Other
7.0
%
 
7.9
%
 
9.2
%
Total Direct
95.6
%
 
93.8
%
 
93.2
%
Total Indirect
4.4
%
 
6.2
%
 
6.8
%
Total
100.0
%
 
100.0
%
 
100.0
%

The following table sets forth information on our direct units in service by account size for the periods stated: 
 
As of December 31,
Account Size
2013
 
% of Total
 
2012
 
% of Total
 
2011
 
% of Total
 
(Units in thousands)
1 to 3 Units
43

 
3.2
%
 
52

 
3.6
%
 
65

 
4.2
%
4 to 10 Units
25

 
1.9
%
 
31

 
2.2
%
 
40

 
2.6
%
11 to 50 Units
61

 
4.6
%
 
75

 
5.3
%
 
92

 
5.9
%
51 to 100 Units
42

 
3.2
%
 
49

 
3.5
%
 
56

 
3.6
%
101 to 1000 Units
287

 
21.9
%
 
334

 
23.5
%
 
380

 
24.4
%
> 1000 Units
857

 
65.2
%
 
880

 
61.9
%
 
922

 
59.3
%
Total direct units in service
1,315

 
100.0
%
 
1,421

 
100.0
%
 
1,555

 
100.0
%
We provide wireless messaging services to subscribers for a periodic fee, as described above. In addition, subscribers either lease a messaging device from us for an additional fixed monthly fee or they own a device, having purchased it either from us or from another vendor. We also sell devices to resellers who lease or resell devices to their subscribers and then sell messaging services utilizing our networks.
We derive the majority of our revenue 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. Revenue is generally based upon the number of units in service and the monthly charge per unit. The number of units in service changes based on subscribers added, referred to as gross placements, less subscriber cancellations, or disconnects. The net of gross placements and disconnects is commonly referred to as net gains or losses of units in service or net disconnect rate. The absolute number of gross placements as well as the number of gross placements relative to average units in service in a period, referred to as the gross placement rate, is monitored on a monthly basis. Disconnects are also monitored on a monthly basis. The ratio of units disconnected in a period to average units in service for the same period, called the disconnect rate, is an indicator of our success at retaining subscribers, which is important in order to maintain recurring revenue and to control operating expenses.
The following table sets forth our gross placements and disconnects for the periods stated:
 
For the Year Ended December 31,
 
2013
 
2012
 
2011
Distribution Channel
Gross
Placements
 
Disconnects
 
Gross
Placements
 
Disconnects
 
Gross
Placements
 
Disconnects
 
(Units in thousands)
Direct
174

 
280

 
193

 
327

 
209

 
405

Indirect
4

 
37

 
6

 
25

 
11

 
36

Total
178

 
317

 
199

 
352

 
220

 
441



22


The following table sets forth information on the direct net disconnect rate by account size for our direct customers for the periods stated:
 
For the Year Ended December 31,
Account Size
2013
 
2012
 
2011
1 to 3 Units
(17.6
)%
 
(20.9
)%
 
(22.0
)%
4 to 10 Units
(18.8
)%
 
(20.9
)%
 
(23.6
)%
11 to 50 Units
(18.2
)%
 
(19.1
)%
 
(25.2
)%
51 to 100 Units
(14.8
)%
 
(12.2
)%
 
(26.8
)%
101 to 1000 Units
(13.9
)%
 
(12.1
)%
 
(12.9
)%
> 1000 Units
(2.6
)%
 
(4.5
)%
 
(5.9
)%
Total direct net unit loss %
(7.4
)%
 
(8.6
)%
 
(11.2
)%
The other factor that contributes to revenue, in addition to the number of units in service, is the monthly charge per unit. As previously discussed, the monthly charge per unit is dependent on the subscriber’s service, extent of geographic coverage, whether the subscriber leases or owns the messaging device, and the number of units the customer has in the account. The ratio of revenue for a period to the average units in service, for the same period, commonly referred to as average revenue per unit ("ARPU"), is a key revenue measurement as it indicates whether charges for similar services and distribution channels are increasing or decreasing. ARPU by distribution channel and messaging service are monitored regularly.
The following table sets forth ARPU by distribution channel for the periods stated:
 
ARPU For the Year Ended December 31,
Distribution Channel
2013
 
2012
 
2011
Direct
$
8.34

 
$
8.53

 
$
8.82

Indirect
5.87

 
6.00

 
6.25

Consolidated
8.20

 
8.37

 
8.64

While ARPU for similar services and distribution channels is indicative of changes in monthly charges and the revenue rate applicable to new subscribers, this measurement on a consolidated basis is affected by several factors, including the mix of units in service and the pricing of the various components of our services. We expect future sequential annual revenues to decline in line with recent trends. The change in ARPU in the direct distribution channel is the most significant indicator of rate-related changes in our revenue. The decrease in consolidated ARPU during the years 2011 through 2013 was due to the change in composition of our customer base as the percentage of units in service attributable to larger customers continues to increase. These larger customers benefit from lower pricing associated with their larger number of units-in-service. We believe that without further price adjustments, ARPU would trend lower for both the direct and indirect distribution channels in 2014 and that price increases could mitigate, but not completely offset, the expected declines in both ARPU and revenue.
The following table sets forth information on direct ARPU by account size for the periods stated:
 
For the Year Ended December 31,
Account Size
2013
 
2012
 
2011
1 to 3 Units
$
15.04

 
$
15.31

 
$
15.48

4 to 10 Units
14.15

 
14.28

 
14.46

11 to 50 Units
11.92

 
11.99

 
12.14

51 to 100 Units
10.40

 
10.41

 
10.72

101 to 1000 Units
8.75

 
9.00

 
9.03

> 1000 Units
7.25

 
7.25

 
7.43

Total direct ARPU
$
8.34

 
$
8.53

 
$
8.82

Software Operations
Our primary business in the software operations is the sale of software, professional services (primarily installation and training), equipment (to be used in conjunction with the software), and maintenance support (post-contract support). The software is licensed to end-users under an industry standard software license agreement.

23


Revenue from software operations is included in software revenue and other in the consolidated statements of income. For purposes of MD&A, we break out revenue from software operations into two primary components: operations revenue and maintenance revenue.
Operations revenue in software operations consists of software license revenue, professional services revenue, and equipment sales. In most instances, we recognize equipment revenue when it is delivered to the customer, and software license revenue and professional services revenue when the application is ready for use at the customer location and all service obligations are satisfied under such arrangements.
Maintenance revenue in software operations is for ongoing support of a software application or equipment and is recognized ratably over the period of coverage, typically one year. The maintenance renewal rates for the years ended December 31, 2013, 2012 and 2011 were 99.1%, 99.0% and 99.4%, respectively.
The breakout of revenue by component from software operations was as follows for the periods stated:
  
For the Year Ended
December 31,
Revenue
2013
 
2012
 
2011(1)
 
(Dollars in thousands)
Operations revenue
$
32,446

 
$
25,360

 
$
20,219

Maintenance revenue
27,858

 
25,931

 
13,773

Total revenue
$
60,304

 
$
51,291

 
$
33,992

 
(1)
Revenue reflects results from March 3, 2011 (the acquisition date) to December 31, 2011 and is net of maintenance revenue reductions of $6.1 million required by purchase accounting to reflect fair value.

On a regular basis, our software operations engage in contractual arrangements with our customers to provide software licenses, professional services, and equipment sales. In addition, we enter into contractual arrangements for maintenance with our customers on new solutions or renewals on existing solutions. These contractual arrangements are reported as bookings and represent future revenue. Bookings increased by 3.5% for the year ended December 31, 2013 compared to 2012. The increase reflects the continuing success of our expanding software sales force, in both the Americas and International theaters, in closing business and expanding market penetration with new customers, as well as selling additional solutions to our installed customer base.
The following table summarizes total bookings for the periods stated:
  
For the Year Ended
December 31,
Bookings
2013
 
2012
 
2011(1)
 
(Dollars in thousands)
Operations and new maintenance orders
$
35,130

 
$
33,191

 
$
26,213

Maintenance and subscription revenue
28,322

 
28,110

 
21,673

Total bookings
$
63,452

 
$
61,301

 
$
47,886


(1) 
Bookings reflects results from March 3, 2011 (the acquisition date) to December 31, 2011.







24


Software operations reported a backlog of $40.2 million for the year ended December 31, 2013, which represented all purchase orders received from customers not yet recognized as revenue. The following table reconciles the Company’s reported backlog at December 31, 2013:
Backlog
December 31, 2013
 
(Dollars in thousands)
Beginning balance at January 1, 2013
$
40,626

Operations bookings for the year
35,130

Maintenance renewals for the year
28,322

Available backlog
$
104,078

Operations revenue for the year
(32,446
)
Maintenance revenue for the year
(27,858
)
Other(1) 
(3,563
)
Total backlog at December 31, 2013
$
40,211

Decrease in backlog from January 1, 2013
1.0
%
 
 
 
(1) 
Other reflects cancellations and adjustments to backlog.
Operations — Consolidated
Our operating expenses are presented in functional categories. Certain of our functional categories are especially important to overall expense control and management; these operating expenses are categorized as follows:
Cost of revenue. These are expenses primarily for systems and pagers costs for the wireless operations and hardware, third-party software, payroll and related expenses for our professional services, customer support and maintenance staff, and various other expenses associated with the software operations for professional services and post contract support.
Service, rental, and maintenance. These are expenses associated with the operation of our networks and the provision of messaging services. Expenses consist largely of site rent expenses for transmitter locations, telecommunication expenses to deliver messages over our networks, and payroll and related expenses for our engineering and pager repair functions. Expenses related to the development and maintenance of our software products are included in this category.
Selling and marketing. These are expenses associated with our direct sales force and indirect sales channel and marketing expenses in support of those sales groups. This classification consists primarily of payroll and related expenses and commission expenses.
General and administrative. These are expenses associated with customer service for wireless operations, inventory management, billing, collections, bad debt, and other administrative functions. This classification consists primarily of payroll and related expenses, outside service expenses, taxes, licenses and permit expenses, and facility rent expenses.
We review the percentages of these operating expenses to revenue on a regular basis. Even though the operating expenses are classified as described above, expense control and management are also performed by expense category. Approximately 70% of the operating expenses referred to above were incurred in payroll and related expenses, site and facility rent expenses and telecommunication expenses for each of the years ended December 31, 2013, 2012 and 2011. Payroll and related expenses for the year ended December 31, 2012 for software operations included a benefit of $0.3 million for forfeitures under the 2012 STIP associated with the departure of two former executives.
Payroll and related expenses include wages, incentives, employee benefits and related taxes. On a monthly basis, we review the number of employees in major functional categories such as professional services, product development, direct sales, engineering and technical staff, customer service and inventory. We also review the design and physical locations of functional groups to continuously improve efficiency, to simplify organizational structures, and to minimize the number of physical locations for the wireless operations.
We have reduced our wireless employee base by approximately 9.8% to 341 full-time equivalent employees (“FTEs”) at December 31, 2013 from 378 FTEs at December 31, 2012. We anticipate continued staffing reductions in 2014 for wireless operations, consistent with the declining subscriber and revenue trends, and we have accrued post-employment benefits for these anticipated staffing reductions. For our software operations, we expect staffing increases in 2014 to support our revenue growth. The software operations had 290 FTEs at December 31, 2013, an increase of 1.0% from 287 FTEs at December 31, 2012.

25


Site rent expenses for transmitter locations are largely dependent on our paging networks. We operate local, regional, and nationwide one-way and two-way paging networks. These networks each require locations on which to place transmitters, receivers, and antennae. Site rent expenses for transmitter locations are highly dependent on the number of transmitters, which in turn is dependent on the number of networks. In addition, these expenses generally do not vary directly with the number of subscribers or units in service, which is detrimental to our operating margins as revenue declines. In order to reduce these expenses, we have an active program to consolidate the number of networks, and thus transmitter locations, which we refer to as network rationalization. We have reduced the number of active transmitters by 4.4% to 4,538 active transmitters at December 31, 2013 from 4,749 active transmitters at December 31, 2012.
Telecommunication expenses are incurred to interconnect our paging networks and to provide telephone numbers for customer use, points of contact for customer service, and connectivity among our offices. These expenses for wireless operations are dependent on the number of units in service and the number of office and network locations that 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 call centers may vary from period to period based on factors other than the number of units in service, which could cause telecommunication expenses to vary regardless of the number of units in service. In addition, certain phone numbers we provide to our customers may have a usage component based on the number and duration of calls to the subscriber’s messaging device. Telecommunication expenses do not necessarily vary in direct relationship to units in service. Therefore, based on the factors discussed above, efforts are underway to review and reduce telephone circuit inventories for wireless operations. Telecommunication expenses are also incurred for our offices and call centers for software operations.
Statements of Income
Comparison of the Statements of Income for the Years Ended December 31, 2013 and 2012
 
For the Year Ended December 31,
 
 
 
 
 
2013
 
2012
 
Change Between
2013 and 2012
 
Wireless
 
Software
 
Total
 
Wireless
 
Software
 
Total
 
Total
 
%
 
(Dollars in thousands)
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Service, rental and maintenance, net
$
143,628

 
$

 
$
143,628

 
$
161,890

 
$

 
$
161,890

 
$
(18,262
)
 
(11.3
)%
Software revenue and other, net
5,820

 
60,304

 
66,124

 
6,515

 
51,291

 
57,806

 
8,318

 
14.4
 %
Total
$
149,448

 
$
60,304

 
$
209,752

 
$
168,405

 
$
51,291

 
$
219,696

 
$
(9,944
)
 
(4.5
)%
Selected operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of revenue
$
493

 
$
21,633

 
$
22,126

 
$
693

 
$
20,153

 
$
20,846

 
$
1,280

 
6.1
 %
Service, rental and maintenance
41,470

 
9,169

 
50,639

 
45,789

 
9,636

 
55,425

 
(4,786
)
 
(8.6
)%
Selling and marketing
9,572

 
16,512

 
26,084

 
11,521

 
12,124

 
23,645

 
2,439

 
10.3
 %
General and administrative
42,281

 
6,978

 
49,259

 
44,689

 
5,991

 
50,680

 
(1,421
)
 
(2.8
)%
Severance and restructuring
969

 
14

 
983

 
1,197

 
561

 
1,758

 
(775
)
 
(44.1
)%
Total
$
94,785

 
$
54,306

 
$
149,091

 
$
103,889

 
$
48,465

 
$
152,354

 
$
(3,263
)
 
(2.1
)%
FTEs
341

 
290

 
631

 
378

 
287

 
665

 
(34
)
 
(5.1
)%
Active transmitters
4,538

 

 
4,538

 
4,749

 

 
4,749

 
(211
)
 
(4.4
)%
 

Revenue — Wireless
Our total revenue was $149.4 million and $168.4 million for the years ended December 31, 2013 and 2012, respectively. The decrease in total revenue reflected the decrease in demand for our wireless services. Service, rental and maintenance revenue, net of $143.6 million and $161.9 million for the years ended December 31, 2013 and 2012, respectively, consist primarily of recurring fees associated with the provision of messaging services and rental of leased units and is net of a provision for service credits. Included in software revenue and other, net was $5.8 million and $6.5 million for the years ended December 31, 2013 and 2012, respectively, of revenue associated with system sales, the sale of devices and charges for leased devices that are not returned and are net of anticipated credits. The table below details total service, rental and maintenance revenue, net for the periods stated:

26


 
 
For the Year Ended
December 31,
 
2013
 
2012
 
(Dollars in thousands)
Service, rental and maintenance revenue, net:
 
 
 
Paging:
 
 
 
Direct:
 
 
 
One-way messaging
$
119,467

 
$
131,729

Two-way messaging
17,365

 
20,546

 
$
136,832

 
$
152,275

Indirect:
 
 
 
One-way messaging
$
3,747

 
$
5,042

Two-way messaging
1,692

 
2,422

 
$
5,439

 
$
7,464

Total paging:
 
 
 
One-way messaging
$
123,214

 
$
136,771

Two-way messaging
19,057

 
22,968

Total paging revenue
142,271

 
159,739

Non-paging revenue
1,357

 
2,151

Total service, rental and maintenance revenue, net
$
143,628

 
$
161,890

The table below sets forth units in service and service revenue, the changes in each between 2013 and 2012 and the changes in revenue associated with differences in ARPU and the number of units in service:
 
Units in Service
 
Revenues
 
 
 
As of December 31,
 
For the Year Ended December 31,
 
Change Due To:
 
2013
 
2012
 
Change
 
2013(1)
 
2012(1)
 
Change
 
ARPU
 
Units
 
(Units in thousands)
 
(Dollars in thousands)
One-way messaging
1,280

 
1,394

 
(114
)
 
$
123,214

 
$
136,771

 
$
(13,557
)
 
$
(1,875
)
 
$
(11,682
)
Two-way messaging
96

 
121

 
(25
)
 
19,057

 
22,968

 
(3,911
)
 
(170
)
 
(3,741
)
Total
1,376

 
1,515

 
(139
)
 
$
142,271

 
$
159,739

 
$
(17,468
)
 
$
(2,045
)
 
$
(15,423
)
 
(1) 
Amounts shown exclude non-paging and product and related sales.
As previously discussed, demand for messaging services has declined over the past several years and we anticipate that it will continue to decline for the foreseeable future, which would result in reductions in service, rental and maintenance revenue, net due to the lower number of subscribers and related units in service.
Revenue — Software
Revenue for software operations was $60.3 million and $51.3 million for the years ended December 31, 2013 and 2012, respectively, which consisted of operations revenue from licenses revenue, professional services revenue, equipment sales, and maintenance revenue. The table below details total revenue for software operations for the periods stated:
 
For the Year Ended
December 31,

2013
 
2012
 
(Dollars in thousands)
Operations revenue
$
32,446

 
$
25,360

Maintenance revenue
27,858

 
25,931

Total revenue
$
60,304

 
$
51,291



27


The increase in operations revenue of 27.9% over 2012 is a result of the additional investment in the sales team. We recorded record bookings in 2013 which resulted in higher revenue for the year. Maintenance revenue increased 7.4% over 2012, which reflects the increase in new maintenance orders and price increases to the existing customer base.
 
Operating Expenses — Consolidated
Cost of revenue. Cost of revenue consisted primarily of the following items:
 
For the Year Ended December 31,
 
 
 
 
 
2013
 
2012
 
Change Between
2013 and 2012
 
Wireless
 
Software
 
Total
 
Wireless
 
Software
 
Total
 
Total
 
%
 
(Dollars in thousands)
Payroll and related
$

 
$
11,527

 
$
11,527

 
$

 
$
9,753

 
$
9,753

 
$
1,774

 
18.2
 %
Cost of sales
493

 
8,248

 
8,741

 
693

 
8,473

 
9,166

 
(425
)
 
(4.6
)%
Other

 
1,858

 
1,858

 

 
1,927

 
1,927

 
(69
)
 
(3.6
)%
Total cost of revenue
$
493

 
$
21,633

 
$
22,126

 
$
693

 
$
20,153

 
$
20,846

 
$
1,280

 
6.1
 %
FTEs

 
128

 
128

 

 
119

 
119

 
9

 
7.6
 %
As illustrated in the table above, cost of revenue for the year ended December 31, 2013 increased $1.3 million or 6.1% from the same period in 2012 due to the following variances:
Payroll and related — The increase of $1.8 million in payroll and related expenses was due to higher professional services and maintenance support costs associated with the software operations. Total FTEs who provided professional services and post contract support as of December 31, 2013 and 2012 were 128 and 119 FTEs, respectively.
Cost of sales — The decrease of $0.4 million in cost of sales was primarily due to the reduction in wireless operations’ costs of $0.2 million related to a credit issued for a previously reported cost of a systems sale and due to a reduction in software operations’ costs of $0.2 million resulting from the lower cost of third party products.
Other — The decrease of $0.1 million in other expenses was primarily due to lower miscellaneous expenses in the software operations.
Service, Rental and Maintenance. Service, rental and maintenance expenses consisted primarily of the following items:
 
For the Year Ended December 31,
 
Change Between
2013 and 2012
 
2013
 
2012
 
 
Wireless
 
Software
 
Total
 
Wireless
 
Software
 
Total
 
Total
 
%
 
(Dollars in thousands)
Site rent
$
16,586

 
$

 
$
16,586

 
$
17,864

 
$

 
$
17,864

 
$
(1,278
)
 
(7.2
)%
Telecommunications
7,357

 

 
7,357

 
8,968

 

 
8,968

 
(1,611
)
 
(18.0
)%
Payroll and related
13,353

 
6,720

 
20,073

 
14,488

 
7,142

 
21,630

 
(1,557
)
 
(7.2
)%
Stock based compensation
54

 

 
54

 
25

 

 
25

 
29

 
116.0
 %
Other
4,120

 
2,449

 
6,569

 
4,444

 
2,494

 
6,938

 
(369
)
 
(5.3
)%
Total service, rental and maintenance
$
41,470

 
$
9,169

 
$
50,639

 
$
45,789

 
$
9,636

 
$
55,425

 
$
(4,786
)
 
(8.6
)%
FTEs
134

 
57

 
191

 
150

 
65

 
215

 
(24
)
 
(11.2
)%
As illustrated in the table above, service, rental and maintenance expenses for the year ended December 31, 2013 decreased $4.8 million or 8.6% from the same period in 2012 due to the following variances:
Site rent — The decrease of $1.3 million in site rent expenses was primarily due to the rationalization of our networks, which has decreased the number of transmitters required to provide service to our customers. The reduction in transmitters has, in turn, reduced the number of lease locations required for the wireless operations. Active transmitters declined 4.4% in 2013 from the same period in 2012.
Telecommunications — The decrease of $1.6 million in telecommunication expenses was due to the consolidation of our networks. We believe continued reductions in these expenses will occur as our networks continue to be consolidated as anticipated throughout 2014 for our wireless operations.

28


Payroll and related — Payroll and related expenses for wireless operations were incurred largely for field technicians, their managers, and in-house repair personnel, and payroll and related expenses for software operations were incurred for product development, product strategy and quality assurance personnel. The decrease in payroll and related expenses of $1.6 million was due to reductions of $1.2 million and $0.4 million in payroll and related expenses for wireless and software operations, respectively. Wireless operations FTEs decreased by 16 FTEs to 134 FTEs at December 31, 2013 from 150 FTEs at December 31, 2012. Software operations FTEs decreased by 8 FTEs to 57 FTEs at December 31, 2013 from 65 FTEs at December 31, 2012.
Other — The decrease of $0.4 million in other expenses was due primarily to lower employee and personnel training expenses of $0.1 million for the software operations, and lower outside services expenses of $0.1 million and repairs and maintenance expenses of $0.2 million for the wireless operations.
Selling and Marketing. Selling and marketing expenses consisted of the following items:
 
 
For the Year Ended December 31,
 
Change Between
2013 and 2012
 
 
2013
 
2012
 
 
 
 
Wireless
 
Software
 
Total
 
Wireless
 
Software
 
Total
 
Total
 
%
 
 
(Dollars in thousands)
 
Payroll and related
$
5,965

 
$
8,501

 
$
14,466

 
$
7,422

 
$
6,704

 
$
14,126

 
$
340

 
2.4
 %
 
Commissions
2,514

 
3,864

 
6,378

 
3,037

 
2,092

 
5,129

 
1,249

 
24.4
 %
 
Stock based compensation
70

 

 
70

 
72

 

 
72

 
(2
)
 
(2.8
)%
 
Other
1,023

 
4,147

 
5,170

 
990

 
3,328

 
4,318

 
852

 
19.7
 %
 
Total selling and marketing
$
9,572

 
$
16,512

 
$
26,084

 
$
11,521

 
$
12,124

 
$
23,645

 
$
2,439

 
10.3
 %
 
FTEs
65

 
80

 
145

 
79

 
68

 
147

 
(2
)
 
(1.4
)%
As indicated in the table above, selling and marketing expenses for the year ended December 31, 2013 increased by $2.4 million, or 10.3%, from the same period in 2012. Selling and marketing expenses consisted primarily of payroll and related expenses, which increased $0.3 million for the year ended December 31, 2013 compared to the same period in 2012 due to the increase of payroll and related expenses of $1.8 million for the software operations, partially offset by a reduction of $1.5 million in payroll and related expenses for the wireless operations due to headcount reductions of 14 FTEs to 65 FTEs at December 31, 2013 from 79 FTEs at December 31, 2012. Software operations FTEs increased by 12 FTEs to 80 FTEs at December 31, 2013 from 68 FTEs at December 31, 2012. The change of 12 FTEs reflects additional sales staff of 14, partially offset by lower marketing staff of 2. The increase in software operations sales staff was focused on increasing software bookings.
The sales and marketing staff are all involved in selling our paging and software products and services domestically and internationally, as well as reselling other wireless products and services such as cellular phones and email devices under authorized agent agreements. These expenses support our efforts to maintain gross placements of units in service, which mitigated the impact of disconnects on our revenue base for wireless operations, and to identify business opportunities for additional or future software sales. We have a centralized marketing function which is focused on supporting our software products and vertical sales efforts by strengthening our brand, generating sales leads and facilitating the sales process. These marketing functions are accomplished through targeted email campaigns, webinars, regional and national user conferences, monthly newsletters and participation at industry trade shows. We sell our software products through a direct and channel sales force that consists of a dedicated team of managers. We have increased the number of software sales and marketing staff with the intention of increasing our potential sales opportunities. We have reduced the overall cost of our selling and marketing activities in the wireless operations by focusing on the most productive sales and marketing employees.
Commission expenses increased by $1.2 million for the year ended December 31, 2013 compared to the same period in 2012 due primarily to an increase in commission expenses for software operations of $1.7 million, partially offset by a reduction of commission expenses for wireless operations of $0.5 million in line with the revenue and subscriber erosion. The increase in software operations commission expense reflects the increase in both operations and maintenance revenue in the software operations.
Other expenses increased by $0.9 million for the year ended December 31, 2013 compared to the same period in 2012 due primarily to increases in travel and entertainment expenses of $0.1 million, advertising expenses of $0.2 million, outside services expenses of $0.2 million, telephone expenses of $0.1 million and other miscellaneous expenses, net of $0.3 million for the software operations.


29


General and Administrative. General and administrative expenses consisted of the following items:
 
For the Year Ended December 31,
 
Change Between
2013 and 2012
 
2013
 
2012
 
 
Wireless
 
Software
 
Total
 
Wireless
 
Software
 
Total
 
Total
 
%
 
(Dollars in thousands)
Payroll and related
$
18,073

 
$
4,201

 
$
22,274

 
$
20,211

 
$
4,525

 
$
24,736

 
$
(2,462
)
 
(10.0
)%
Stock based compensation
2,144

 
777

 
2,921

 
1,010

 
117

 
1,127

 
1,794

 
159.2
 %
Bad debt
749

 
327

 
1,076

 
636

 
442

 
1,078

 
(2
)
 
(0.2
)%
Facility rent
1,821

 
1,464

 
3,285

 
2,062

 
1,404

 
3,466

 
(181
)
 
(5.2
)%
Telecommunications
1,158

 
368

 
1,526

 
1,273

 
351

 
1,624

 
(98
)
 
(6.0
)%
Outside services
8,782

 
1,100

 
9,882

 
9,069

 
566

 
9,635

 
247

 
2.6
 %
Taxes, licenses and permits
4,677

 
186

 
4,863

 
5,341

 
147

 
5,488

 
(625
)
 
(11.4
)%
Other
4,877

 
(1,445
)
 
3,432

 
5,087

 
(1,561
)
 
3,526

 
(94
)
 
(2.7
)%
Total general and administrative
$
42,281

 
$
6,978

 
$
49,259

 
$
44,689

 
$
5,991

 
$
50,680

 
$
(1,421
)
 
(2.8
)%
FTEs
142

 
25

 
167

 
150

 
36

 
186

 
(19
)
 
(10.2
)%
As illustrated in the table above, general and administrative expenses for the year ended December 31, 2013 decreased $1.4 million, or 2.8%, from the same period in 2012 due to the following variances:
Payroll and related — Payroll and related expenses were incurred mainly for employees in customer service, information technology, inventory, finance and other support functions as well as executive management. Payroll and related expenses decreased by $2.5 million due primarily to lower payroll and related expenses of $2.2 million for the wireless operations reflecting headcount reductions of 8 FTEs to 142 FTEs at December 31, 2013 from 150 FTEs at December 31, 2012, and lower payroll and related expenses of $0.3 million for software operations reflecting headcount reductions of 11 FTEs to 25 FTEs at December 31, 2013 from 36 FTEs at December 31, 2012. The decrease of $2.2 million in payroll and related expenses for the wireless operations was primarily due to less senior level positions in 2013 than 2012 and due to lower payroll and related expense associated with the 2013 Short-Term Incentive Plan (“STIP”) in 2013.
Stock based compensation — Stock based compensation expenses consisted primarily of amortization of compensation expense associated with RSUs awarded to certain eligible employees for both wireless and software operations and amortization of compensation expense for restricted stock awarded to non-executive members of our Board of Directors under the Equity Plans (see Note 6). Stock based compensation expenses increased by $1.8 million due to higher amortization of compensation expense of $1.1 million related to the 2011 LTIP for the wireless operations during the year ended December 31, 2013 compared to the same period in 2012 since the 2011 LTIP award was effective on January 1, 2013 while 2012 included amortization of compensation expense for the 2009 LTIP. Stock based compensation expenses increased by $0.7 million for the software operations for the year ended December 31, 2013 compared to the same period in 2012 primarily due to the benefit of stock based compensation in 2012 related to the forfeitures under the 2011 LTIP associated with the departure of former executives in the software operations and the benefit related to the modification of the 2011 LTIP in 2012.
Facility rent — The decrease of $0.2 million in facility rent expenses was primarily due to lower facility rent expenses for our wireless operations related to the closure of office facilities, as we continue to rationalize our operating requirements to meet lower revenue and customer demand for the wireless operations.
Telecommunications — The decrease of $0.1 million in telecommunication expenses reflected continued office and staffing reductions as we continue to streamline our operations and reduce our telecommunication requirements for the wireless operations.
Outside services — Outside service expenses consisted primarily of costs associated with printing and mailing invoices, outsourced customer service and various professional fees. The increase of $0.2 million in outside services expenses was due primarily to higher professional services fees for external accounting services, partially offset by lower costs for outsourced customer service support.
Taxes, licenses and permits — Taxes, licenses and permit expenses consist of property, franchise, gross receipts and transactional taxes. The decrease in taxes, licenses and permit expenses of $0.6 million was primarily due to lower universal service fund expenses of $0.6 million and lower transactional taxes of $0.2 million due to the resolution of various state and local tax audits at amounts lower than the originally estimated liabilities, partially offset by higher gross receipts taxes.

30


Other — The decrease of $0.1 million in other expenses was due to decreases in office expenses of $0.3 million, recruiting and relocation expenses of $0.3 million, repairs and maintenance expenses of $0.1 million and insurance expenses of $0.1 million; partially offset by higher travel and entertainment expenses of $0.2 million, financial services expenses of $0.2 million, and miscellaneous expenses of $0.3 million.
Severance and Restructuring. Severance and restructuring expenses decreased to $1.0 million for the year ended December 31, 2013 compared to $1.8 million for the same period in 2012 due primarily to lower severance charges recorded during the year ended December 31, 2013 for post-employment benefits resulting from planned staffing reductions for both operations. We accrued post-employment benefits if certain specified criteria are met. Post-employment benefits include salary continuation, severance benefits and continuation of health insurance benefits. (See Note 1 for further discussion on our severance and restructuring policies.)
Depreciation, Amortization and Accretion. Depreciation, amortization and accretion expenses were $15.2 million for the year ended December 31, 2013 compared to $18.2 million for the same period in 2012. There was $1.0 million less depreciation expense for the period from fully depreciated paging infrastructure and other assets, $0.4 million less depreciation expense on paging devices resulting from fewer purchases of paging devices and from fully depreciated paging devices, $1.4 million less amortization expense and $0.2 million less accretion expense. Depreciation, amortization and accretion expenses for software operations represented $5.6 million of the total $15.2 million in depreciation, amortization and accretion expenses for the year ended December 31, 2013 and $7.1 million of the total $18.2 million in depreciation, amortization and accretion expenses for the year ended December 31, 2012. (See Note 1 for further discussion on our depreciation expense policies.)
Impairments. We evaluate long-lived assets, amortizable intangible assets and goodwill for impairment at least annually, or when events or circumstances suggest a potential impairment has occurred. We have selected the fourth quarter to perform this annual impairment test. We did not record any impairment of long-lived assets, intangible assets subject to amortization, and goodwill for the year ended December 31, 2013. We recorded an impairment charge of $3.4 million to the contract-based intangible assets for our software operations for the year ended December 31, 2012. We did not record any impairment of long-lived assets, other intangible assets and goodwill in 2012. (See Note 3 for further discussion on the impairment.)
Interest Expense, Net; Other Income, Net and Income Tax Expense
Interest Expense, Net. Net interest expense decreased to $0.3 million for the year ended December 31, 2013 from $0.4 million for the same period in 2012. This decrease was primarily due to less interest on debt associated with the Amcom acquisition as the debt was completely repaid on April 6, 2012.
Other Income, Net. Net other income decreased to $0.1 million for the year ended December 31, 2013 from $0.7 million for the same period in 2012. The decrease in net other income in 2013 was primarily due to a net loss of $21,000 on asset disposals compared to a net gain of $0.2 million on asset disposals in 2012 in our wireless operations and a higher consulting expense related to potential mergers and acquisitions of $0.1 million in 2013 and a software support services settlement of $0.3 million in 2013 in our software operations.
Income Tax Expense. Income tax expense for the year ended December 31, 2013 was $17.8 million, a decrease of $1.3 million from $19.1 million income tax expense for the year ended December 31, 2012. The decrease in income tax expense and the effective tax rate reflects a decrease in income before tax of $0.7 million and a reduction in our effective tax rate of 2.1%. Our annual effective tax rate for the year ended December 31, 2013 decreased by 2.1%, from 41.4% to 39.3% primarily due to a change in the tax rate used to value our deferred tax assets (the deferred income tax rate).









31


The following is the effective tax rate reconciliation for the years ended December 31, 2013 and 2012, respectively. (See Note 7 for further discussion on our income taxes.)
 
For the Year Ended December 31,
 
2013
 
2012
 
(Dollars in thousands)
Income before income tax expense
$
45,339

 
 
 
$
46,063

 
 
Income tax expense at the Federal statutory rate
$
15,869

 
35.0
 %
 
$
16,122

 
35.0
 %
State income taxes, net of Federal benefit
1,709

 
3.8
 %
 
1,555

 
3.4
 %
State law changes

 
 %
 
117

 
0.3
 %
Nondeductible compensation expense
841

 
1.8
 %
 

 
 %
Change in deferred income tax rates
(1,194
)
 
(2.6
)%
 

 
 %
Change in valuation allowance
554

 
1.2
 %
 
658

 
1.4
 %
Interest on income tax refunds

 
 %
 
(47
)
 
(0.1
)%
Other
30

 
0.1
 %
 
674

 
1.4
 %
Income tax expense
$
17,809

 
39.3
 %
 
$
19,079

 
41.4
 %
Our annual effective tax rate is comparable to prior periods once the effects of the change in the valuation allowance and the change in the deferred income tax rate are excluded from the computation as indicated in the following table:
 
For the Year Ended December 31,
 
2013
 
2012
Effective tax rate
39.3
%
 
41.4
%
Change in valuation allowance
(1.2
%)
 
(1.4
%)
Change in deferred income tax rate
2.6
%
 
%
Adjusted effective tax rate
40.7
%
 
40.0
%

Statements of Income
Comparison of the Statements of Income for the Years Ended December 31, 2012 and 2011
 
For the Year Ended December 31,
 
 
 
2012
 
2011
 
Change Between
2012 and 2011
 
Wireless
 
Software
 
Total
 
Wireless
 
Software(1)
 
Total
 
Total
 
%
 
(Dollars in thousands)
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Service, rental and maintenance, net
$
161,890

 
$

 
$
161,890

 
$
189,568

 
$

 
$
189,568

 
$
(27,678
)
 
(14.6
%)
Software revenue and other, net
6,515

 
51,291

 
57,806

 
10,133

 
33,992

 
44,125

 
13,681

 
31.0
%
Total
$
168,405

 
$
51,291

 
$
219,696

 
$
199,701

 
$
33,992

 
$
233,693

 
$
(13,997
)
 
(6.0
%)
Selected operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of revenue
$
693

 
$
20,153