UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

 

 

 

 

(866) 662-3049
(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  þ      No  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

 

 

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

 

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.  Yes  þ      No  o

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 27,199,503 shares of the Registrant’s Common Stock ($0.0001 par value per share) were outstanding as of October 24, 2008.

 

 

USA MOBILITY, INC.

 

QUARTERLY REPORT ON FORM 10-Q

 

Index

 

 

 

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

 

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

USA MOBILITY, INC.

 

 

USA MOBILITY, INC.

 

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

of investors, which could reduce the value of USA Mobility’s common stock, impact the Company’s ability to pay future cash distributions to stockholders or repurchase shares of its common stock.

 

(4)  Recent and New Accounting Pronouncements — In June 2006, the Financial Accounting Standards Board (“FASB”) issued Financial Interpretation No. 48, Accounting for Uncertainty in Income Taxes , (“FIN 48”), an interpretation of Statement of Financial Accounting Standards (“SFAS”) No. 109, Accounting for Income Taxes , as amended (“SFAS No. 109”). In May 2007, FASB Staff Position 48-1 amended FIN 48. The disclosure requirements and cumulative effect of adoption of FIN 48, as amended, are presented in Note 14.

 

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, (“SFAS No. 157”). SFAS No. 157 establishes a formal framework for measuring fair value under generally accepted accounting principles. Although SFAS No. 157 applies (amends) the provisions of existing FASB and other accounting pronouncements, it does not require any new fair value measurements nor does it establish valuation standards. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued FASB Staff Position No. 157-1 (“FSP 157-1”) which excludes SFAS No. 13, Accounting for Leases , and its related pronouncements that address leasing transactions from the scope of SFAS No. 157. Also in February 2008, the FASB issued FASB Staff Position No. 157-2 (“FSP 157-2”) which delays the effective date of SFAS No. 157 for all non-financial assets and liabilities, except those items recognized or disclosed at fair value on a recurring basis (at least annually). FSP 157-2 defers the effective date of SFAS No. 157 for non-financial assets and non-financial liabilities for financial statements issued for fiscal years beginning after November 15, 2008. The FASB has issued a proposed FASB Staff Position No. 157-c, (“FSP 157-c”), that would provide guidance on measuring liabilities under SFAS No. 157. Management is currently evaluating the impact that SFAS No. 157 will have on the Company’s financial position or results of operations for non-financial assets. There is no material impact on financial assets at September 30, 2008.

 

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, (“SFAS No. 159”), which provides companies with an option to report selected financial assets and liabilities at fair value. SFAS No. 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007. SFAS No. 159 does not have a material impact on the Company’s consolidated financial position or results of operations.

 

In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations , (“SFAS No. 141R”) and SFAS No. 160, Non-controlling Interests in Consolidated Financial Statements , (“SFAS No. 160”). SFAS No. 141R replaces SFAS No. 141. SFAS No. 141R applies to all transactions or other events in which an entity (the acquirer) obtains control of one or more businesses. SFAS No. 160 amends Accounting Research Bulletin (“ARB”) No. 51, Consolidated Financial Statements . SFAS No. 160 establishes accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. Both SFAS No. 141R and SFAS No. 160 are effective for financial statements issued for fiscal years beginning after December 15, 2008. SFAS No. 141R will have an impact on accounting for business combinations once adopted, but the effect is dependent upon acquisitions at that time. Management believes that SFAS No. 160 will not have a material impact on the Company’s financial position or results of operations.

 

In April 2008, the FASB issued FASB Staff Position No. 142-3 (“FSP 142-3”), Determination of the Useful Life of Intangible Assets . FSP 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets, (“SFAS No. 142”). The intent of FSP No. 142-3 is to improve the consistency between the useful life of a recognized intangible asset under SFAS No. 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141R. FSP No. 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years. FSP No. 142-3

 

USA MOBILITY, INC.

 

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

will have an impact on accounting for acquired intangible assets once adopted, but the effect is dependent upon acquisitions at that time.

 

In June 2007, the Emerging Issues Task Force (“EITF”) reached a consensus on EITF No. 06-11, Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards , (“EITF No. 06-11”). EITF No. 06-11 prescribes how an entity should recognize the income tax benefit received on dividends that are (1) paid to employees holding equity-classified non-vested shares, equity-classified non-vested share units, or equity-classified outstanding share options and (2) charged to retained earnings under SFAS No. 123R, Share-Based Payment , (“SFAS No. 123R”). EITF No. 06-11 is effective for financial statements issued for fiscal years beginning after December 15, 2007. EITF No. 06-11 does not have a material impact on the Company’s consolidated financial position or results of operations.

 

In June 2008, the FASB issued the FASB Staff Position No. EITF 03-6-1, Determining Whether Instruments Granted In Share-Based Payment Transactions Are Participating Securities , (“FSP No. 03-6-1”), which states that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method described in SFAS No. 128, Earnings Per Share . FSP No. 03-6-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years. All prior period earnings per share data presented shall be adjusted retrospectively (including interim financial statements, summaries of earnings, and selected financial data) to conform with the provisions of FSP No. 03-6-1. FSP No. 03-6-1 is not applicable to the Company.

 

Other new pronouncements issued during the nine months ended September 30, 2008 are not applicable to the Company.

 

(5)  Long-Lived Assets, Intangible Assets and Goodwill — The Company did not record any impairment of long-lived assets and intangible assets subject to amortization during the nine months ended September 30, 2007 and 2008, respectively.

 

Intangible assets subject to amortization were recorded at fair value on the date of acquisition and amortized over periods generally ranging from one to five years. Aggregate amortization expense for intangible assets was $2.2 million for the three months ended September 30, 2007 and 2008; and $7.5 million and $6.7 million for the nine months ended September 30, 2007 and 2008, respectively.

 

Amortizable intangible assets are comprised of the following at September 30, 2008:

 

 

Goodwill of $188.2 million at December 31, 2007 resulted from the application and subsequent adjustments of the purchase accounting for the November 2004 merger of Arch Wireless, Inc. and subsidiaries (“Arch”) and Metrocall Holdings, Inc. and subsidiaries (“Metrocall”). Goodwill is not amortized. The Company is required to evaluate goodwill of a reporting unit for impairment at least annually and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount. For this determination, the Company as a whole is considered the reporting unit. If the fair value of the reporting unit is less than its carrying value, an impairment loss is required to be recorded to the extent that the implied value of goodwill within the reporting unit is less than the carrying value. To determine the fair value of the

 

USA MOBILITY, INC.

 

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

reporting unit, the Company uses generally accepted valuation methodologies such as market capitalization, discounted cash flows or other methods as deemed appropriate.

 

The Company evaluated goodwill for impairment between annual tests if indicators of impairment exist. During the first quarter of 2008 the price per share of the Company’s common stock declined by 50% from the closing price per share on December 31, 2007. This significant decline in the price per share of the Company’s common stock was deemed a circumstance of possible goodwill impairment that required a goodwill impairment evaluation sooner than the required annual evaluation in the fourth quarter of 2008. The market capitalization of USMO taken as a whole at March 31, 2008 was used as the fair value of the reporting unit. Based on the requirements of SFAS No. 142, the Company determined that all of its goodwill had been impaired and recorded an impairment charge of $188.2 million in the first quarter of 2008.

 

(6)  Depreciation, Amortization and Accretion — The components of depreciation, amortization and accretion expenses for the three and nine months ended September 30, 2007 and 2008, respectively, are as follows:

 

 

(7)  Accounts Payable and Accrued Liabilities  — Accounts payable and accrued liabilities consist of the following:

 

 

Accrued compensation and benefits at September 30, 2008 include the long-term cash performance awards reclassified from other long-term liabilities during the first quarter of 2008 as the vesting of the long-term cash performance awards will occur within one year.

 

Accrued taxes are based on the Company’s estimate of outstanding state and local taxes. This balance may be adjusted in the future as the Company settles with various taxing jurisdictions.

 

(8)  Asset Retirement Obligations — In accordance with SFAS No. 143, Accounting for Asset Retirement Obligations, (“SFAS No. 143”), the Company recognizes liabilities and corresponding assets for future obligations associated with the retirement of assets. USA Mobility has paging equipment assets, principally transmitters, which are located on leased locations. The underlying leases generally require the removal of equipment at the end of the lease term; therefore, a future obligation exists.

 

USA MOBILITY, INC.

 

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

The Company had recognized cumulative net asset retirement costs of $6.3 million at December 31, 2007. During the second quarter of 2008, the Company recorded $0.6 million in additional asset retirement costs, offset by $1.3 million of depreciation expense, resulting in cumulative net asset retirement costs of $5.6 million at June 30, 2008. During the third quarter of 2008, management evaluated the timing and the impact on the future obligations related to the retirement of assets as part of the Company’s annual long range planning process. As a result, the Company recorded $0.3 million in additional asset retirement costs, offset by $0.7 million of depreciation expense, resulting in cumulative net asset retirement costs of $5.2 million at September 30, 2008. Paging equipment assets have been increased to reflect these additional costs and depreciation is being recognized over the related estimated lives of 15 to 63 months. The asset retirement costs, and the corresponding liabilities, that have been recorded to date generally relate to either current plans to consolidate networks or to the removal of assets at an estimated future terminal date.

 

The components of the changes in the asset retirement obligation liabilities are as follows:

 

 

The balances above were included within accounts payable and accrued liabilities and other long-term liabilities, respectively, at September 30, 2008.

 

(9)  Other Long-Term Liabilities — Other long-term liabilities consist of the following:

 

 

Liabilities for the cash distributions related to the 2006 grant of restricted stock (the “2006 Grant”) and the long-term cash performance awards were reclassified from other long-term liabilities to distributions payable and accounts payable and accrued liabilities, respectively, during the first quarter of 2008 as the vesting will occur within one year.

 

(10)  Stockholders’ Equity — The authorized capital stock of the Company consists of 75 million shares of common stock and 25 million shares of preferred stock, par value $0.0001 per share.

 

 

General.   At December 31, 2007 and September 30, 2008, there were 27,305,379 and 27,340,083 shares of common stock outstanding, respectively, and no shares of preferred stock outstanding. In addition, at December 31, 2007, there were 268,679 shares of common stock reserved for issuance from time to time to satisfy general unsecured claims under the Arch plan of reorganization. During the first quarter of 2008, the Company issued 2,104 shares of common stock under the Arch plan of reorganization. At September 30, 2008, 266,575 shares of common stock remained reserved for future issuance under the Arch plan of reorganization. For financial reporting purposes, the number of shares reserved for future issuance under the Arch plan of reorganization has been included in the Company’s reported outstanding share balance.

 

At September 30, 2008, the Company had no stock options outstanding.

 

In connection with and prior to the November 2004 merger of Arch and Metrocall, the Company established the USA Mobility, Inc. Equity Incentive Plan (the “Equity Plan”). Under the Equity Plan, the Company has the ability to issue up to 1,878,976 shares of its common stock to eligible employees and non-executive members of its Board of Directors in the form of shares of common stock, stock options, shares of restricted common stock (“restricted stock”), stock grants or units. Restricted stock awarded under the Equity Plan entitles the stockholder to all rights of common stock ownership except that the restricted stock may not be sold, transferred, exchanged, or otherwise disposed of during the restriction period, which will be determined by the Compensation Committee of the Board of Directors of the Company.

 

 

 

 

Restricted Stock.   For the 2005 grant of restricted stock (the “2005 Grant”), the Company used the fair-value based method of accounting for the award and fully amortized the $2.2 million to expense as of December 31, 2007. On January 1, 2008, 6,017 shares of restricted stock from the 2005 Grant vested, of which 2,254 shares were sold back to the Company in payment of required tax withholdings at a price per share of $14.30, the Company’s closing stock price on December 31, 2007. This represented the final vesting of the 2005 Grant.

 

For the 2006 Grant, the Company used the fair-value based method of accounting for the 2006 Grant and is ratably amortizing the $3.1 million to expense over the 36 month vesting period. A total of $0.2 million and $0.3 million was included in stock based compensation expense for the three months ended September 30, 2007 and 2008, respectively, and $0.8 million and $0.7 million for the nine months ended September 30, 2007 and 2008, respectively, in relation to the 2006 Grant.

 

Any unvested shares of restricted stock granted under the Equity Plan are forfeited if the participant terminates employment with USA Mobility. As of December 31, 2007 the cumulative forfeitures were 18,919 shares of restricted stock. During the first quarter and second quarter of 2008, 662 and 1,395 shares of restricted stock, respectively, were forfeited. During the third quarter of 2008, 188 shares of restricted stock were forfeited resulting in a cumulative forfeiture total of 21,164 shares. As of September 30, 2008, there were 111,408 shares from the 2006 Grant scheduled to fully vest on January 1, 2009.

 

Since the 2006 Grant will fully vest on January 1, 2009, the Company reclassified the accrued liability related to the cash distributions set aside for the 2006 Grant from other long-term liabilities to distributions payable during the first quarter of 2008.

 

Cash Award.   Also, on February 1, 2006, the Company provided for long-term cash performance awards to the same certain eligible employees. The vesting date for these long-term cash performance awards is January 1, 2009 and payment will be made after the vesting date. The Company is ratably amortizing the $3.2 million to expense over the 36 month vesting period.

 

USA MOBILITY, INC.

 

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

A total of $0.4 million and $0.2 million and $1.0 million and $0.7 million was included in payroll and related expenses for the three months and nine months ended September 30, 2007 and 2008, respectively, for these long-term cash performance awards. Any unvested long-term cash performance awards are forfeited if the participant terminates employment with USA Mobility.

 

Since the long-term cash performance awards will fully vest on January 1, 2009, the Company reclassified the accrued liability associated with the long-term cash performance awards from other long-term liabilities to accounts payable and accrued liabilities during the first quarter of 2008.

 

Board of Directors’ Equity Compensation.   On May 3, 2006, the Board of Directors granted the non-executive directors restricted stock units (“RSUs”) in addition to cash compensation of $40,000 per year ($50,000 for the chair of the Audit Committee), payable quarterly. No shares of common stock are issued for RSUs until their date of conversion and, accordingly, prior to the issuance of shares of common stock underlying the RSUs, the RSUs represent unsecured obligations of the Company.

 

On August 1, 2007 the Board of Directors approved an acceleration in the conversion date for existing RSUs. Existing RSUs would be converted into shares of common stock on the earlier of: (1) a director’s departure from the Board of Directors; (2) a change in control of the Company (as defined in the Equity Plan); or (3) the second trading day following the day that the Company filed its 2007 Annual Report on Form 10-K with the SEC. At December 31, 2007 there were 19,605 RSUs awarded and outstanding.

 

The Board of Directors also approved that future cash distributions related to the existing RSUs will be set aside and paid in cash to each non-executive director when the RSUs are converted into shares of common stock. During the first quarter of 2008, the Company set aside approximately $11,000 for cash distributions declared on February 13, 2008 on existing RSUs, resulting in a cumulative cash distribution total of $37,000 for the then existing RSUs.

 

On August 1, 2007 with an effective date of July 1, 2007 the Board of Directors approved that, in lieu of RSUs, each non-executive director will be granted in arrears on the first business day following the quarter of service, restricted stock in addition to cash compensation for their service on the Board of Directors and committees thereof. The restricted stock will vest on the earlier of a change in control of the Company (as defined in the Equity Plan) or one year from the date of grant, provided, in each case, that the non-executive director maintains continuous service on the Board of Directors. Future cash distributions related to the restricted stock will be set aside and paid in cash to each non-executive director on the date the restricted stock vests.

 

During the first quarter of 2008, the Company set aside approximately $5,250 for cash distributions declared on February 13, 2008 for non-executive directors’ outstanding restricted stock. During the second quarter of 2008, the Company set aside approximately $4,200 for cash distributions declared on May 2, 2008. During the third quarter of 2008, the Company set aside approximately $5,300 for cash distributions declared on July 31, 2008. As of September 30, 2008, the cumulative cash distributions set aside for the non-executive directors’ outstanding restricted stock is $14,730.

 

 

 

 

These grants of shares of restricted stock will reduce the number of shares eligible for future issuance under the Equity Plan. The Company used the fair-value based method of accounting for the equity awards and properly recorded the expenses for the nine months ended September 30, 2008 in relation to these awards.

 

In January 2008, one of the non-executive directors voluntarily resigned from the Company’s Board of Directors. Upon and as a result of his resignation, 2,704 RSUs were converted into shares of common stock and issued to the non-executive director. In addition, the related cash distributions on the RSUs were paid. Finally, 1,292 shares of restricted stock and the related cash distributions were forfeited.

 

The Company filed its 2007 Annual Report on Form 10-K with the SEC on March 13, 2008. On March 17, 2008 the Company converted the remaining 16,901 outstanding RSUs into an equivalent number of shares of common stock.

 

In May 2008, one of the non-executive directors declined to stand for re-election to the Company’s Board of Directors. As a result, 2,693 shares of restricted stock and the related cash distributions were forfeited.

 

On October 1, 2008, 3,113 shares of restricted stock vested from the grant issued to the non-executive directors on October 1, 2007 for services performed in the third quarter of 2007. In addition, the related cash distributions on the vested restricted stock were paid in October 2008.

 

Board of Directors’ Common Stock.   In lieu of cash payment of $10,000 for directors’ fees earned in the fourth quarter of 2007, one non-executive director elected to receive a total of 699 shares of common stock in January 2008 based upon a price per share of $14.30, the Company’s closing stock price on December 31, 2007. As of September 30, 2008, a cumulative total of 9,091 shares of common stock have been issued in lieu of cash payments to the non-executive directors for services performed. These shares of common stock reduced the number of shares eligible for future issuance under the Equity Plan.

 

Cash Distributions to Stockholders.   On February 13, 2008, the Board of Directors declared a regular quarterly cash distribution of $0.65 per share of common stock, to stockholders of record on February 25, 2008, and

 

USA MOBILITY, INC.

 

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

with a payment date of March 13, 2008. This cash distribution of approximately $17.8 million was paid from available cash on hand.

 

On May 2, 2008, the 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. Also on May 2, 2008, the Board of Directors declared a regular quarterly cash distribution of $0.25 per share of common stock, to stockholders of record on May 19, 2008 and with a payment date of June 19, 2008. This cash distribution of approximately $6.8 million was paid from available cash on hand.

 

On July 31, 2008, the Board of Directors declared a regular quarterly cash distribution of $0.25 per share of common stock, to stockholders of record on August 14, 2008 and with a payment date of September 11, 2008. This cash distribution of approximately $6.8 million was paid from available cash on hand.

 

Cash distributions paid as disclosed in the statement of cash flows for the nine months ended September 30, 2008 include previously declared cash distributions on RSUs and shares of vested restricted stock issued in January 2008 under the 2005 Grant.

 

Cash distributions on restricted stock have been accrued and are paid when the applicable vesting conditions are met. Accrued cash distributions on forfeited restricted stock are also forfeited.

 

Future Cash Distributions to Stockholders.   On October 29, 2008, the Board of Directors declared a regular quarterly cash distribution of $0.25 per share of common stock, to stockholders of record on November 14, 2008 and with a payment date of December 10, 2008. This cash distribution of approximately $6.8 million is expected to be paid from available cash on hand.

 

Stock Repurchase Program.   On July 31, 2008, the Board of Directors approved a program for the Company to repurchase up to $50.0 million of its common stock in the open market during the twelve month period commencing on or about August 5, 2008. Credit Suisse Securities (USA) LLC will administer such purchases.

 

During the third quarter of 2008, the Company did not purchase any shares of its common stock. As such, there was approximately $50.0 million of share repurchase authority remaining as of September 30, 2008. This repurchase authority allows the Company, at management’s discretion, to selectively repurchase shares of its common stock from time to time in the open market depending upon market price and other factors. All repurchased shares of common stock will be returned to the status of authorized but unissued shares of the Company.

 

Additional Paid-in Capital.   For the nine months ended September 30, 2008, additional paid-in capital decreased by $30.5 million due primarily to cash distributions to stockholders and the vesting and repurchase of restricted stock under the 2005 Grant. This was offset by the amortization of stock based compensation, issuance of common stock to a non-executive director, and other.

 

(11)  Net Income (Loss) per Common Share — Basic net income (loss) per common share is computed on the basis of the weighted average common shares outstanding. Diluted net income (loss) per common share is computed on the basis of the weighted average common shares outstanding plus the effect of all potentially dilutive common shares including outstanding restricted stock using the “treasury stock” method plus the effect of outstanding RSUs, which are treated as contingently issuable shares. The Company acquired a total of 2,254 shares of the Company’s common stock from the Company’s executives in payment of required tax withholdings for the restricted stock that vested on January 1, 2008. These shares of common stock acquired were retired and excluded from the Company’s reported outstanding share balance as of September 30, 2008. For the three months and nine months ended September 30, 2008, the effect of 66,005 and 71,787, respectively, of potential dilutive common shares was not included in the calculation for diluted net income (loss) per share as the impact is anti-dilutive. The components of

 

 

(12)  Stock Based Compensation  — Compensation expense associated with RSUs and restricted stock was recognized in accordance with the fair value provisions of SFAS No. 123R over the instruments’ vesting period. The following table reflects the impact on stock based compensation expense in the Company’s statements of operations for the three months and nine months ended September 30, 2007 and 2008, respectively:

 

 

(13)  Accrued Severance and Restructurings  — Accrued severance and restructuring consist of the following:

 

 

Accrued severance and restructuring charges incurred in 2008 were primarily related to additional staff reductions as the Company continues to match its employee levels with operational requirements. The provisions of SFAS No. 112, Employers’ Accounting for Post-employment Benefits , (“SFAS No. 112”), require the Company to accrue post-employment benefits if certain specified criteria are met. Post-employment benefits include salary continuation, severance benefits and continuation of health insurance benefits. The balance of accrued severance and restructuring will be paid during the fourth quarter of 2008 and throughout 2009.

 

USA MOBILITY, INC.

 

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

(14)  Income Taxes — The Company adopted the provisions of FIN 48 on January 1, 2007 and recorded an estimated liability of $52.2 million for uncertain tax positions. As of December 31, 2007, this liability had decreased to $37.1 million, largely due to the expiration of the statute of limitations. During the third quarter of 2008, the Company reclassified amounts from the FIN 48 liability to deferred income tax assets. This reclassification increased the December 31, 2007 FIN 48 liability and non-current deferred income tax assets by $7.7 million.

 

The liability for uncertain tax positions at September 30, 2008 of $38.8 million includes accrued gross interest expense on uncertain tax positions of approximately $4.8 million. For the nine months ended September 30, 2008, $1.5 million of gross interest expense was accrued. These amounts are included in other long-term liabilities.

 

During the third quarter of 2008, the Company increased both the FIN 48 liability and the non-current balance of deferred income tax assets by $8.7 million at September 30, 2008 and $7.7 million at December 31, 2007. These reclassifications result in the presentation of the FIN 48 liability and the deferred income tax assets before offsetting any tax benefits for net operating losses, state income taxes and accrued interest.

 

The total unrecognized income tax benefits as of January 1, 2007 and 2008 were $372.4 million and $350.0 million, respectively. Unrecognized income tax benefits reflect positions taken for income tax purposes that do not meet the more likely than not standard as required by FIN 48.

 

The Company files its tax returns as prescribed by the tax laws of the jurisdictions in which it operates. The Internal Revenue Service (the “IRS”) is auditing the Company’s Federal consolidated income tax returns for the period beginning January 1, 2004 to November 16, 2004 and the years ended December 31, 2005 and 2006. The audits are in process and the IRS has not proposed any significant adjustments. The IRS has requested and the Company has granted an extension of the statute of limitations related to the IRS’ review of the Company’s returns for the period from January 1, 2004 to November 16, 2004. Therefore, the Company does not anticipate a significant decrease in the liability for uncertain tax positions during 2008.

 

The Company evaluates the recoverability of its deferred income tax assets and is required to determine whether based on all available evidence, it is more likely than not that all of the Company’s deferred income tax assets will be realized in future periods.

 

During December 2007, the Company’s management concluded that, based on the requirements of SFAS No. 109, not all of its deferred income tax assets would be recoverable. A valuation allowance of $55.0 million was recorded to reduce the deferred income tax assets to their estimated recoverable amounts. During the first three quarters of 2008, the Company experienced revenue and subscriber erosion within its direct customer base that exceeded its expectations from earlier planning processes. As part of the Company’s annual long-range planning process in 2008, management evaluated these trends and concluded that there was continuing uncertainty regarding the Company’s ability to generate sufficient taxable income to fully use the deferred income tax assets as of September 30, 2008. Using forecasted taxable income through 2015 along with the available positive and negative evidence, the Company’s management concluded that, based on the requirements of SFAS No. 109, that an additional amount of its deferred income tax assets would not be recoverable at September 30, 2008. The Company recorded $7.3 million in income tax expense that increased the valuation allowance to a total of $62.2 million at September 30, 2008. This valuation allowance reduced the deferred income tax assets to their estimated recoverable amounts. Changes in the Company’s forecast of future taxable income along with all other evidence could result in additional adjustments to the valuation allowance and to income tax expense, stockholders’ equity and the Company’s future net income (loss).

 

On February 13, 2008 the Economic Stimulus Act of 2008 (the “Stimulus Act”) was enacted. The Stimulus Act provides, in part, for bonus depreciation on certain defined property placed in service after December 31, 2007 and before January 1, 2009. The Company has not fully evaluated whether to elect the bonus depreciation provisions. Should the Company elect to apply the bonus depreciation provisions, the Company estimates that the deferred income tax asset valuation allowance would be reduced by approximately $2.5 million which, in turn, would reduce income tax expense.

 

USA MOBILITY, INC.

 

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

The anticipated effective income tax rate is expected to continue to differ from the Federal statutory rate of 35% primarily due to the effect of discrete items, such as accrued interest on the FIN 48 liability, the goodwill impairment, state income taxes, and permanent differences between book and taxable income.

 

(15)  Related Party Transactions — Effective November 16, 2004, two members of the Company’s Board of Directors also served as directors for entities that lease transmission tower sites to the Company. For the three months ended September 30, 2007 the Company paid $3.9 million to each landlord; and for the nine months ended September 30, 2007 the Company paid $11.7 million and $11.8 million, respectively, to these two landlords for site rent expenses that are included in service, rental and maintenance expenses. In January 2008, one of these non-executive directors voluntarily resigned from the Company’s Board of Directors and, effective January 1, 2008, was no longer a related party. For the three months and nine months ended September 30, 2008, the Company paid $3.1 million and $9.3 million, respectively, in site rent expenses that are included in service, rental and maintenance expenses to the remaining related party.

 

(16)  Segment Reporting — USA Mobility believes it currently has two operating segments: domestic operations and international operations, but no reportable segments, as international operations are immaterial to the consolidated entity.

 

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

 

Settled Lawsuits.   USA Mobility was named as defendant in a breach of contract suit filed in the U.S. District Court for the Northern District of Texas, Ad Valorem Services Company v. USA Mobility, Inc. , No. 4-06CV-742-Y, alleging that the Company owed a property tax filing services firm monetary damages. In April 2008 the matter was settled to the mutual satisfaction of the parties and did not have a material impact on the Company’s financial condition or results of operations.

 

USA Mobility was involved as a successor in liability in the case PageNet, Inc. (“ PageNet”) v. The State of Florida, Department of Revenue (“ DOR”) . In 2002 PageNet contested a tax assessment issued against PageNet by DOR alleging that PageNet owes sales and use tax arising from PageNet acquisitions in the 1990s. In June 2008 the matter was settled to the mutual satisfaction of the parties and did not have a material impact on the Company’s financial condition or results of operations.

 

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

 

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

 

The Company filed a petition in the Ninth Circuit Court for rehearing and rehearing en banc on July 9, 2008. The Company believes that the Ninth Circuit Court’s interpretation of the SCA is erroneous and conflicts with Ninth Circuit Court precedent, and that AWOC’s disclosure of the communications was in compliance with the law. At the

 

USA MOBILITY, INC.

 

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Ninth Circuit’s direction, the plaintiffs in this action responded to the Company’s petition for rehearing on September 11, 2008. The Ninth Circuit Court should determine whether it intends to rehear the case within the next few months. If the Ninth Circuit Court does not grant rehearing, the district court could award damages to the plaintiffs. The Company does not expect any such liability to have a material impact on the Company’s financial condition or results of operations.

 

Nationwide Lawsuit.   On July 23, 2008, USA Mobility received the opinion of the United States Court of Appeals for the First Circuit (the “First Circuit Court”) in an appeal of the case In re Arch Wireless, Inc . ; Paging Network, Inc., Debtors; Arch Wireless, Inc.; Paging Network, Inc., Appellants, v. Nationwide Paging, Inc. (“Nationwide”), Appellee. The First Circuit Court affirmed the decision of the bankruptcy court that the claim of Nationwide was not discharged in the Arch Bankruptcy Case. The Company is evaluating the consequences of this decision on the Arch Bankruptcy Case and on the various Massachusetts state court cases including the case where Nationwide has alleged damages of $6.9 million. The Company intends to vigorously defend the allegations of Nationwide and is unable, at this time, to predict the impact, if any, on the Company’s financial condition or results of operations.

 

Back-up Power Litigation.   On June 8, 2007, the Federal Communications Commission (the “FCC”) issued an order in response to recommendations by an independent panel established to review the impact of Hurricane Katrina on communications networks. Among other requirements, the FCC mandated that all commercial mobile radio service (“CMRS”) providers with at least 500,000 subscribers maintain an emergency backup 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 Company is regulated as a CMRS carrier under the FCC’s rules, but various aspects of this initial order suggested that this mandate might not apply to paging carriers. In an Order on Reconsideration (“Back-Up Power Order”) issued October 4, 2007, however, the FCC clarified that paging carriers serving at least 500,000 subscribers (such as the Company) would in fact be subject to this new back-up power requirement.

 

While the initial FCC mandate would have been effective almost immediately, the FCC stayed that ruling and made the new rule effective one year following approval by the Office of Management and Budget (the “OMB”) (which has yet to occur). The Back-Up Power Order established exemptions where compliance is precluded due to (1) risk to safety, life, or health; (2) private legal obligations (such as lease agreements); or (3) Federal, state, or tribal law. Six months before the effective date of the rule, all covered entities will be required to submit a comprehensive inventory of all transmitter sites and other network facilities subject to the back-up power requirement, indicating which facilities will qualify for these exemptions. The Back-Up Power Order also provided that a CMRS carrier need not deploy back-up power at a given transmitter site if it can ensure that back-up power is available for 100 percent of the area covered by that site through alternative means.

 

In January 2008, the Company petitioned for review of the Back-Up Power Order in the United States Court of Appeals for the DC Circuit (the “DC Circuit Court”). Wireless voice providers also filed petitions for review. These petitions requested expedited review by the DC Circuit Court, which was granted. The DC Circuit Court subsequently issued an order staying the effectiveness of the Back-Up Power Order pending the outcome of the appeal. The DC Circuit Court heard oral arguments on May 8, 2008.

 

On July 8, 2008, the DC Circuit Court issued an opinion finding the case not yet ripe for review, because OMB has not yet approved of certain information collection provisions incorporated by the Back-Up Power Order, as OMB is required to do by the Paperwork Reduction Act. OMB’s review will not likely result in significant changes to the Back-Up Power Order. The DC Circuit Court’s stay of the Back-Up Power Order remains in effect pending the DC Circuit Court’s ultimate resolution of the case. Once OMB review is complete, the DC Circuit Court will resume its review of the merits of the petition for review. The FCC submitted the information-collection requirements to OMB on September 3, 2008, and the deadline for OMB’s review is November 10, 2008. It is likely that the DC Circuit Court will issue a ruling in late 2008 or early 2009.

 

USA MOBILITY, INC.

 

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

The Company believes that the mandate should not apply to paging carriers for a variety of reasons, including the fact that the Company’s simulcast capabilities and satellite-controlled network already ensure continuing operation in many cases when a single transmitter loses power. The Company is also evaluating the potential burdens of complying with the Back-Up Power Order, in the event it is not vacated or modified. Although those burdens are uncertain at this early stage, the Company expects that compliance with the Back-Up Power Order would entail significant capital investment and related expenses, and that such costs could have a material impact on the Company’s financial results or operations.

 

eOn Lawsuit.   On September 29, 2008, eOn Corp. IP Holdings, LLC, a Texas limited liability company, filed a complaint in the Eastern District of Texas against the Company and eighteen other defendants, including current or former customers of the Company or its predecessors. The complaint alleges that the Company infringes U.S. Patents Nos. 5,388,101 and 5,481,546, both titled, “Interactive Nationwide Data Service Communication System for Stationary and Mobile Battery Operated Subscriber Units” by making, using, offering for sale and/or selling two-way communication networks and/or data systems. At this time the Company has not been served by the plaintiff, no answer to the complaint is due and no schedule is in place. Based on the limited information included in the plaintiff’s complaint, the Company is unable at this time to assess the impact, if any, that the plaintiff’s claims may have on the Company’s financial condition or results of operations.

 

Forward-Looking Statements

 

This Quarterly Report contains forward-looking statements and information relating to USA Mobility, Inc. and its subsidiaries (“USA Mobility” or the “Company”) that are based on management’s beliefs as well as assumptions made by and information currently available to management. These statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Statements that are predictive in nature, that depend upon or refer to future events or conditions, or that include words such as “anticipate”, “believe”, “estimate”, “expect”, “intend” and similar expressions, as they relate to USA Mobility and its subsidiaries or its management are forward-looking statements. Although these statements are based upon assumptions management considers reasonable, they are subject to certain risks, uncertainties and assumptions, including but not limited to those factors set forth below and under the captions “Business,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”),” and “Part I — Item 1A — Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007, filed with the United States Securities and Exchange Commission (the “SEC”) on March 13, 2008 (the “2007 Annual Report”). Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results or outcomes may vary materially from those described herein as anticipated, believed, estimated, expected or intended. Investors are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their respective dates. The Company undertakes no obligation to update or revise any forward-looking statements. All subsequent written or oral forward-looking statements attributable to USA Mobility, Inc. and its subsidiaries or persons acting on their behalf are expressly qualified in their entirety by the discussion under the section “Item 1A. Risk Factors”.

 

Overview

 

In preparing the discussion and analysis contained in this Item 2, the Company presumes that readers have read or have access to the discussion and analysis contained in the 2007 Annual Report. In addition, the following discussion and analysis should be read in conjunction with USA Mobility’s condensed consolidated financial statements, related notes and “Part I — Item 1A — Risk Factors”, which describe key risks associated with the Company’s operations and industry, and “Part II — Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of the 2007 Annual Report.

 

Sales and Marketing

 

USA Mobility markets and distributes its services through a direct sales force and a small indirect sales force.

 

Direct.   The direct sales force rents or sells products and messaging services directly to customers ranging from small and medium-sized businesses to companies in the Fortune 1000, healthcare and related businesses and Federal, state and local government agencies. USA Mobility intends to continue to market to commercial enterprises utilizing its direct sales force as these commercial enterprises have typically disconnected service at a lower rate than individual consumers. As of September 30, 2008, USA Mobility sales personnel were located in approximately 38 offices in 23 states throughout the United States. In addition, the Company maintains several corporate sales groups focused on medical sales; Federal government accounts; large enterprises; advanced wireless services; systems sales applications; emergency/mass notification services and other product offerings.

 

Indirect.   Within the indirect channel the Company contracts with and invoices an intermediary for airtime services (which includes telemetry services). The intermediary or “reseller” in turn markets, sells, and provides customer service to the end user. Generally, there is no contractual relationship that exists between USA Mobility and the end subscriber. Therefore, operating costs per unit to provide these services are lower than those required in the direct distribution channel. Indirect units in service typically have lower average revenue per unit than direct units in service. The rate at which subscribers disconnect service in the indirect distribution channel has generally been higher than the rate experienced with direct customers, and USA Mobility expects this to continue in the foreseeable future.

The following table summarizes the breakdown of the Company’s direct and indirect units in service at specified dates:

 

 

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

 

 

Customers may subscribe to one-way or two-way messaging services for a periodic (monthly, quarterly or annual) service fee which is generally based upon the type of service provided, the geographic area covered, the number of devices provided to the customer and the period of commitment. Voice mail, personalized greeting and equipment loss and/or maintenance protection may be added to either one-way or two-way messaging services, as applicable, for an additional monthly fee. Equipment loss protection allows subscribers who lease devices to limit their cost of replacement upon loss or destruction of a messaging device. Maintenance services are offered to subscribers who own their device.

 

A subscriber to one-way messaging services may select coverage on a local, regional or nationwide basis to best meet their messaging needs. Local coverage generally allows the subscriber to receive messages within a small geographic area, such as a city. Regional coverage allows a subscriber to receive messages in a larger area, which may include a large portion of a state or sometimes groups of states. Nationwide coverage allows a subscriber to receive messages in major markets throughout the United States. The monthly fee generally increases with coverage area. Two-way messaging is generally offered on a nationwide basis.

 

The following table summarizes the breakdown of the Company’s one-way and two-way units in service at specified dates:

 

The demand for one-way and two-way messaging services declined at each specified date and USA Mobility believes demand will continue to decline for the foreseeable future.

 

USA Mobility provides wireless messaging services to subscribers for a periodic fee, as described above. In addition, subscribers either lease a messaging device from the Company for an additional fixed monthly fee or they own a device, having purchased it either from the Company or from another vendor. USA Mobility also sells devices to resellers who lease or resell devices to their subscribers and then sell messaging services utilizing the Company’s networks.

 

The following table summarizes the number of units in service owned by the Company, its subscribers and indirect customers at specified dates:

 

 

USA Mobility derives the majority of its revenues from fixed monthly or other periodic fees charged to subscribers for wireless messaging services. Such fees are not generally dependent on usage. As long as a subscriber maintains service, operating results benefit from recurring payment of these fees. Revenues are generally based upon the number of units in service and the monthly charge per unit. The number of units in service changes based on subscribers added, referred to as gross placements, less subscriber cancellations, or disconnects. The net of gross placements and disconnects is commonly referred to as net gains or losses of units in service. The absolute number of gross placements as well as the number of gross placements relative to average units in service in a period, referred to as the gross placement rate, is monitored on a monthly basis. Disconnects are also monitored on a monthly basis. The ratio of units disconnected in a period to average units in service for the same period, called the disconnect rate, is an indicator of the Company’s success at retaining subscribers, which is important in order to maintain recurring revenues and to control operating expenses.

 

The following table sets forth the Company’s gross placements and disconnects for the periods stated:

 

The following table sets forth information on the disconnect rate by account size for the Company’s direct customers for the periods stated:

 

 

The other factor that contributes to revenue, in addition to the number of units in service, is the monthly charge per unit. As previously discussed, the monthly charge per unit is dependent on the subscriber’s service, extent of geographic coverage, whether the subscriber leases or owns the messaging device and the number of units the customer has in the account. The ratio of revenues for a period to the average units in service for the same period, commonly referred to as average revenue per unit (“ARPU”), is a key revenue measurement as it indicates whether charges for similar services and distribution channels are increasing or decreasing. ARPU by distribution channel and messaging service are monitored regularly.

 

The following table sets forth ARPU by distribution channel for the periods stated:

 

 

While ARPU for similar services and distribution channels is indicative of changes in monthly charges and the revenue rate applicable to new subscribers, this measurement on a consolidated basis is affected by several factors, including the mix of units in service and the pricing of the various components of the Company’s services. Gross revenues decreased year over year, and the Company expects future sequential annual revenues to decline in line with recent trends. One-time price increases that were implemented for smaller customers in certain channels and in the indirect channel as well as improvements in the rate of service credits in part contributed to increases in ARPU in 2007. Going forward without further price adjustments the Company believes ARPU will continue to decline for both the direct and indirect distribution channels. The increase in consolidated ARPU for the quarter ended September 30, 2008 from the quarter ended June 30, 2008 was due primarily to selected price increases implemented starting in June 2008 in the direct channel. The price increases implemented in June and July will impact ARPU and revenues throughout the remainder of 2008 and will mitigate but not completely offset the expected declines in both ARPU and revenues.

The following table sets forth information on direct ARPU by account size for the period stated.

 

 

Operations

 

USA Mobility’s operating expenses are presented in functional categories. Certain of the Company’s functional categories are especially important to overall expense control; these operating expenses are categorized as follows:

 

 

USA Mobility reviews the percentages of these operating expenses to revenues on a regular basis. Even though the operating expenses are classified as described above, expense controls are also performed by expense category. For both the three months and nine months ended September 30, 2008, approximately 70% of the operating expenses referred to above were incurred in three expense categories: payroll and related expenses, site rent expenses, and telecommunications expenses.

 

Payroll and related expenses include wages, incentives, employee benefits and related taxes. USA Mobility reviews the number of employees in major functional categories such as direct sales, engineering and technical staff, customer service, collections and inventory on a monthly basis. The Company also reviews the design and physical locations of functional groups to continuously improve efficiency, to simplify organizational structures and to minimize the number of physical locations. The Company has reduced its employee base by approximately 26% from 1,133 full time equivalent employees (“FTEs”) at September 30, 2007 to 839 FTEs at September 30, 2008. The Company anticipates continued staffing reductions for the remainder of 2008 and throughout 2009; however, the Company anticipates these staffing reductions will be less significant than the reductions in 2007.

 

Site rent expenses for transmitter locations are largely dependent on the Company’s paging networks. USA Mobility operates local, regional and nationwide one-way and two-way paging networks. These networks each require locations on which to place transmitters, receivers and antennae. Generally, site rent expenses are incurred for each transmitter location. Therefore, site rent expenses for transmitter locations are highly dependent on the number of transmitters, which, in turn, is dependent on the number of networks. In addition, these expenses generally do not vary directly with the number of subscribers or units in service, which is detrimental to the Company’s operating margin as revenues decline. In order to reduce these expenses, USA Mobility has an active program to consolidate the number of networks and thus transmitter locations, which the Company refers to as network rationalization.

Telecommunications expenses are incurred to interconnect USA Mobility’s paging networks and to provide telephone numbers for customer use, points of contact for customer service and connectivity among the Company’s offices. These expenses are dependent on the number of units in service and the number of office and network locations the Company maintains. The dependence on units in service is related to the number of telephone numbers provided to customers and the number of telephone calls made to the Company’s call centers, though this is not always a direct dependency. For example, the number or duration of telephone calls to call centers may vary from period to period based on factors other than the number of units in service, which could cause telecommunications expenses to vary regardless of the number of units in service. In addition, certain phone numbers USA Mobility provides to its customers may have a usage component based on the number and duration of calls to the subscriber’s messaging device. Telecommunications expenses do not necessarily vary in direct relationship to units in service. Therefore, based on the factors discussed above, efforts are underway to review and reduce telephone circuit inventories and capacities and to reduce the number of transmitter and office locations from which the Company operates.

 

The total of USA Mobility’s cost of products sold; service, rental and maintenance; selling and marketing; and general and administrative expenses was $72.7 million and $57.7 million for the three months ended September 30, 2007 and 2008, respectively; and $223.2 million and $183.8 million for the nine months ended September 30, 2007 and 2008, respectively. Since the Company believes the demand for, and the Company’s revenues from, one-way and two-way messaging will continue to decline in future years, expense reductions will continue to be necessary in order for USA Mobility to mitigate the financial impact of such revenue declines on its cash from operating activities. However, there can be no assurance that the Company will be able to maintain margins or generate continuing net cash from operating activities.

 

 

Revenues

 

Service, rental and maintenance revenues consist primarily of recurring fees associated with the provision of messaging services and rental of leased units and is net of a provision for service credits. Product sales consist primarily of revenues associated with the sale of devices and charges for leased devices that are not returned and is net of anticipated credits. The decrease in revenues reflects the decrease in demand for the Company’s wireless services. USA Mobility’s total revenues were $105.4 million and $88.4 million for the three months ended

September 30, 2007 and 2008, respectively. The table below details total service, rental and maintenance revenues, net of service credits for the periods stated:

 

 

The table below sets forth units in service and service revenues, the changes in each between the three months ended September 30, 2007 and 2008 and the changes in revenue associated with differences in ARPU and the number of units in service.