December 31, 2006. This increase in interest income was due to the investment of available cash in short-term interest bearing accounts for the year ended December 31, 2006.

 

Income Tax Expense.   Income tax expense for the years ended December 31, 2005 and 2006 were $10.6 million and $31.6 million, respectively. The increase in the income tax provision between 2005 and 2006 was primarily attributable to higher pre-tax book income, a charge of $1.8 million resulting from recently enacted changes in state income tax laws, including Texas and Michigan, and a $0.8 million charge to establish a valuation allowance against the portion of the Company’s charitable contribution carry forward estimated to expire prior to utilization. The December 31, 2005 income tax provision included a charge of $1.5 million related to an enacted change to the Ohio income tax laws.

 

Net cash provided by operating activities decreased $33.0 million from the year ended December 31, 2006 compared to the year ended December 31, 2007 due primarily to the following:

 

 

Net Cash Used In Investing Activities.   Net cash used in investing activities decreased $1.4 million from the year ended December 31, 2006 compared to the same period in 2007 primarily due to lower capital expenses in 2007. USA Mobility’s business requires funds to finance capital expenses, which primarily include the purchase of messaging devices, system and transmission equipment and information systems. Capital expenses for the year ended December 31, 2007 consisted primarily of the purchase of messaging devices and other equipment, offset by the net proceeds from the sale of assets. The amount of capital USA Mobility will require in the future will depend on a number of factors, including the number of existing subscriber devices to be replaced, the number of gross placements, technological developments, total competitive conditions and the nature and timing of the Company’s strategy to integrate and consolidate its networks. USA Mobility anticipates its total capital expenses for 2008 to be between $18.0 and $20.0 million, and expects to fund such requirements from net cash provided by operating activities.

 

Net Cash Used In Financing Activities.   Net cash used in financing activities decreased $0.7 million from the year ended December 31, 2006 compared to the same period in 2007 due to lower cash distributions to stockholders in 2007.

 

Cash Distributions to Stockholders.   The following table details information on the Company’s cash distributions for each of the three years ended December 31, 2007:

 

 

 

 

Cash distributions paid as disclosed in the statement of cash flows for the year ended December 31, 2007 include previously declared cash distributions on shares of vested restricted stock issued in January, April, July and October 2007 under 2005 Grant.

 

On February 13, 2008, the Board of Directors declared a regular quarterly cash distribution of $0.65 per share of common stock, with a record date of February 25, 2008, and a payment date of March 13, 2008. This cash distribution of approximately $17.8 million will be paid from available cash on hand.

 

Borrowings.   As of December 31, 2007, the Company had no borrowings or associated debt service requirements.

 

Commitments

 

Contractual Obligations.   As of December 31, 2007, USA Mobility’s contractual payment obligations under its long-term debt agreements and operating leases for office and transmitter locations are indicated in the table below. For purposes of the table below, purchase obligations are defined as agreements to purchase goods or services that are enforceable and legally binding and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable pricing provisions; and the approximate timing of transactions. These purchase obligations primarily relate to certain telecommunications and information technology related expenses. The amounts are based on the Company’s contractual commitments; however, it is possible that the Company may be able to negotiate lower payments if it chooses to exit these contracts before their expiration date.

 

 

 

 

 

The Company incurred the following commitments and contractual obligations. These commitments and obligations have been reflected as appropriate in the table above.

 

In August 2005, the Company, through a subsidiary, entered into a MLA with a subsidiary of Global Signal, Inc. (“Global Signal”) under which the Company and/or its affiliates may lease space for their equipment on communications sites currently and subsequently owned, managed or leased by Global Signal. The MLA was effective as of July 1, 2005 and expires on December 31, 2008. Under the MLA, the Company may locate up to a specified maximum number of transmitters on Global Signal’s sites for a fixed monthly fee. The fixed monthly fee decreases periodically over time from approximately $1.6 million in July 2005 to approximately $1.0 million per month in 2008. On January 12, 2007 Global Signal merged into a subsidiary of Crown Castle International Corp.

 

In January 2006, USA Mobility entered into a MLA with American Tower Corporation (“ATC”). Under the MLA, USA Mobility will pay ATC a fixed monthly amount in exchange for the rights to a fixed number of transmitter equivalents (as defined in the MLA) on transmission towers in the ATC portfolio of properties. The MLA was effective January 1, 2006 and expires on December 31, 2010. The fixed monthly fee decreases periodically over time from $1.5 million per month in January 2006 to $0.9 million per month in 2010.

 

In September 2006, USA Mobility renegotiated an existing contract with a vendor under which the Company is committed to purchase $24.0 million in telecommunication services through September 2008. In August 2007 the Company signed an amendment, which extended the service period through March 2010 with a revised total commitment of $23.5 million.

 

In January 2007, USA Mobility entered into a contract under which the Company is committed to deconstruct 2,000 transmitters over a two-year period ending in December 2008 at a cost of approximately $1,700 per site including shipping and handling costs. In November 2007, an amendment to this agreement was signed. The revised cost per deconstruction is approximately $1,900 per site including taxes, shipping and handling.

 

In March 2007, the Company contracted with a managed service-hosting provider for certain computer support services in order to eliminate a data center and to handle its customer billing/provisioning system. The total cost is estimated to be approximately $7.5 million over the five-year contract term, of which the Company is contractually obligated for $2.7 million as reflected in the table of contractual obligations above.

 

In September 2007, the Company entered into an agreement with a current vendor to modify the power source for an existing two-way pager. After final testing and approval by the Company, the vendor will manufacture and supply the pagers exclusively to the Company. If the Company approves the modification, the agreement requires a purchase commitment of approximately $5.6 million over an eighteen-month period. As acceptance of the modification has not yet occurred, the purchase commitment is not reflected in the table of contractual obligations above.

 

Other Commitments.   USA Mobility also has various Letters of Credit (“LOCs”) outstanding with multiple state agencies. The LOCs typically have three-year contract requirements but are renewed annually. The deposits related to these LOCs are classified within other assets on the consolidated balance sheet.

 

Pending Regulatory Action.   On June 8, 2007, 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 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 alternating current 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 backup 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 (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 backup power requirement, indicating which facilities will qualify for these exemptions. The Back-up Power Order also provided that a CMRS carrier need not deploy backup power at a given transmitter site if it can ensure that backup power is available for 100 percent of the area covered by that site through alternative means.

 

Wireless voice providers sought judicial review of the FCC’s initial order imposing a backup power mandate, and further appeals are expected regarding the Back-up Power Order. In January 2008 the Company petitioned for review of the Back-up Power Order in the DC Circuit Court of Appeals (“Court”). The petition requested an expedited review by the Court, which was granted. At the time the Company filed the petitions, Sprint Nextel Corporation filed a stay motion, which was granted by the Court on February 28, 2008.

 

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 operations.

 

Off-Balance Sheet Arrangements.   USA Mobility does not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such, the Company is not exposed to any financing, liquidity, market or credit risk that could arise if it had engaged in such relationships.

 

Contingencies.   USA Mobility, from time to time, is involved in lawsuits arising in the normal course of business. USA Mobility believes that its pending lawsuits will not have a material adverse impact on the Company’s financial results or operations. (See Note 7 of the Notes to Consolidated Financial Statements.)

 

USA Mobility has been named as a defendant in four lawsuits. The first lawsuit involves breach of contract disputes with a former lessor and claims $0.8 million in damages. USA Mobility denies all liability and will vigorously contest the claims alleged in the lawsuit. USA Mobility believes the lawsuit is without merit and will not have a material adverse impact on the Company’s financial results or operations.

 

The second lawsuit involves a breach of contract dispute with a professional services firm and claims $3.3 million in damages. USA Mobility denies all liability and will vigorously contest the claims alleged in the lawsuit. USA Mobility believes the lawsuit is without merit and will not have a material adverse impact on the Company’s financial results or operations.

 

The third lawsuit involves billing practices and service disputes with a former customer and claims $6.9 million in damages. USA Mobility denies all liability and will vigorously contest the claims alleged in the lawsuit. USA Mobility believes the lawsuit is without merit and will not have a material adverse impact on the Company’s financial results or operations.

 

The fourth lawsuit involves a sales and use tax dispute claim with the State of Florida due to acquisitions made in the 1990s. USA Mobility denies all liability and will vigorously contest the claims alleged in the lawsuit. USA Mobility believes the lawsuit appears to be without merit and will not have a material adverse impact on the Company’s financial results or operations.

Related Party Transactions

 

Effective November 16, 2004, two members of the Company’s Board of Directors also serve as directors for entities that lease transmission tower sites to the Company. For the years ended December 31, 2005, 2006 and 2007, the Company paid $23.6 million and $10.2 million, $17.8 million and $18.6 million, and $16.0 million and $15.5 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 directors voluntarily resigned from the Company’s Board of Directors and effective January 1, 2008 will no longer be a related party.

 

Inflation

 

Inflation has not had a material effect on USA Mobility’s operations to date. System equipment and operating costs have not increased in price and the price of wireless messaging devices has tended to decline in recent years. This reduction in costs has generally been reflected in lower prices charged to subscribers who purchase their wireless messaging devices. The Company’s general operating expenses, such as salaries, site rent for transmitter locations, employee benefits and occupancy costs, are subject to normal inflationary pressures.

 

Application of Critical Accounting Policies

 

The preceding discussion and analysis of financial condition and results of operations are based on USA Mobility’s consolidated financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. On an on-going basis, the Company evaluates estimates and assumptions, including but not limited to those related to the impairment of long-lived assets and goodwill, accounts receivable allowances, revenue recognition, depreciation expense, asset retirement obligations, severance and restructuring and income taxes. USA Mobility bases its estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

 

USA Mobility believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements.

 

Impairment of Long-Lived Assets and Goodwill

 

In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets , (“SFAS No. 144”), the Company is required to evaluate the carrying value of its long-lived assets and certain intangible assets. SFAS No. 144 first requires an assessment of whether circumstances currently exist which suggest the carrying value of long-lived assets may not be recoverable. At December 31, 2007, the Company did not believe any such conditions existed. Had these conditions existed, the Company would have assessed the recoverability of the carrying value of its long-lived assets and certain intangible assets based on estimated undiscounted cash flows to be generated from such assets. In assessing the recoverability of these assets, the Company would have projected estimated enterprise-level cash flows based on various operating assumptions such as ARPU, disconnect rates, and sales and workforce productivity ratios. If the projection of undiscounted cash flows did not exceed the carrying value of the long-lived assets, USA Mobility would have been required to record an impairment charge to the extent the carrying value exceeded the fair value of such assets.

 

Intangible assets were recorded in accordance with SFAS No. 141 and are being amortized over periods generally ranging from one to five years. Goodwill was also recorded in conjunction with the Arch and Metrocall merger. Goodwill is not amortized but will be evaluated for impairment at least annually, or when events or circumstances suggest a potential impairment may have occurred. In accordance with SFAS No. 142, Goodwill and Other Intangible Assets (“SFAS No. 142”), USA Mobility has selected the fourth quarter to perform this annual impairment test. SFAS No. 142 requires the comparison of the fair value of the reporting unit to its carrying amount to determine if there is potential impairment. For this determination, USA Mobility, 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 the goodwill within the reporting unit is less than the carrying value. The fair value of the reporting unit will be determined based upon generally accepted valuation methodologies such as market capitalization, discounted cash flows or other methods as deemed appropriate.

 

The Company may evaluate goodwill for impairment more frequently than annually if indicators of impairment exist. Declines in the price of the Company’s common stock, among other indicators, could require an evaluation of impairment more frequently than annually and could require a goodwill impairment. The Company performed impairment tests using market capitalization as an estimate for the fair value of the reporting unit in the third and fourth quarters of 2007.

 

The Company did not record any impairment of long-lived assets, intangible assets or goodwill in 2005, 2006 or 2007.

 

The price per share of the Company’s common stock has declined over 45% since the closing price per share on December 31, 2007. This decline in the price per share of the Company’s common stock could be a circumstance that would require an impairment evaluation sooner than the required annual evaluation in the fourth quarter of 2008.

 

Accounts Receivable Allowances

 

USA Mobility records four allowances against its gross accounts receivable balance of which the two most significant are: an allowance for doubtful accounts and an allowance for service credits. Provisions for these allowances are recorded on a monthly basis and are included as a component of general and administrative expenses and a reduction of revenue, respectively.

 

Estimates are used in determining the allowance for doubtful accounts and are based on historical collection experience, current and forecasted trends and a percentage of the accounts receivable aging categories. In determining these percentages, the Company reviews historical write-offs, including comparisons of write-offs to provisions for doubtful accounts and as a percentage of revenues. USA Mobility compares the ratio of the allowance to gross receivables to historical levels and monitors amounts collected and related statistics. The allowance for doubtful accounts were $4.1 million and $3.3 million at December 31, 2006 and 2007, respectively. While write-offs of customer accounts have historically been within the Company’s expectations and the provisions established, USA Mobility cannot guarantee that future write-off experience will be consistent with historical experience, which could result in material differences in the allowance for doubtful accounts and related provisions.

 

The allowance for service credits and related provisions is based on historical credit percentages, current credit and aging trends and actual credit experience. The Company analyzes its past credit experience over several time frames. Using this analysis along with current operational data including existing experience of credits issued and the time frames in which credits are issued, the Company establishes an appropriate allowance for service credits. The allowance for service credits were $3.0 million and $1.3 million at December 31, 2006 and 2007, respectively. While credits issued have been within the Company’s expectations and the provisions established, USA Mobility cannot guarantee that future credit experience will be consistent with historical experience, which could result in material differences in the allowance for service credits and related provisions.

 

Other allowance accounts totaled $1.5 million and $1.3 million at December 31, 2006 and 2007, respectively.

 

Revenue Recognition

 

Revenue consists primarily of monthly service rental and maintenance fees charged to customers on a monthly, quarterly, semi-annual or annual basis. Revenue also includes the sale of messaging devices directly to customers and other companies that resell the Company’s services. In accordance with the provisions of Emerging Issues Task Force Issue No. 00-21, Revenue Arrangements with Multiple Deliverables, (“EITF No. 00-21”), the Company evaluated these revenue arrangements and determined that two separate units of accounting exist, paging service revenue and product sale revenue. Accordingly, effective July 1, 2003, the Company recognizes paging service revenue over the period the service is performed and revenue from product sales is recognized at the time of shipment or installation. The Company recognizes revenue when four basic criteria have been met: (1) persuasive evidence of an arrangement exists, (2) delivery has occurred or services rendered, (3) the fee is fixed or

determinable and (4) collectibility is reasonably assured. Amounts billed but not meeting these recognition criteria are deferred until all four criteria have been met. The Company has a variety of billing arrangements with its customers resulting in deferred revenue in advance billing and accounts receivable for billing in-arrears arrangements.

 

Depreciation Expense

 

The largest component of USA Mobility’s depreciation expense relates to the depreciation of certain of its paging equipment assets. The primary component of these assets is a transmitter. During the year ended December 31, 2007, $18.9 million of total depreciation expense of $37.6 million related to these assets.

 

Transmitter assets are grouped into tranches based on the Company’s transmitter decommissioning forecast and are depreciated using the group life method. Depreciation expense is determined by the expected useful life of each tranche of the underlying transmitter assets. That expected useful life is based on the Company’s forecast usage of those assets and their retirement over time and so aligns the useful lives of these transmitter assets with their planned removal from service. This rational and systematic method matches the underlying usage of these assets to the underlying revenue that is generated from these assets.

 

Depreciation expense for these assets is subject to change based upon revisions in the timing of the Company’s network rationalization plans. The expected usage of the Company’s paging equipment changed in 2007 based on its network rationalization plans. This change has resulted in a revision of the expected future yearly depreciation expense for the transmitter assets beginning in 2008. For 2008, this change will result in $2.1 million in additional depreciation expense with reduced depreciation expense in future years. USA Mobility believes these estimates are reasonable at the present time, but the Company can give no assurance that changes in technology, customer usage patterns, its financial condition, the economy or other factors would not result in changes to the Company’s transmitter decommissioning plans. Any further variations from the Company’s estimates could result in a change in the expected useful life of the underlying transmitter assets and operating results could differ in the future by any difference in depreciation expense.

 

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.

 

The Company had recognized cumulative asset retirement costs of $17.4 million at December 31, 2006. In 2007 the Company recorded $3.2 million in additional asset retirement costs. During 2007 $10.7 million of fully depreciated asset retirement costs were written off, resulting in a cumulative asset retirement costs of $9.9 million at December 31, 2007. Paging equipment assets have been increased to reflect these costs and depreciation is being recognized over the estimated lives, which range between one and nine years. Depreciation, amortization and accretion expense for the years ended December 31, 2005, 2006 and 2007 included $3.5 million, $1.3 million and ($0.6) million, respectively, related to depreciation of these assets. The reduction to depreciation expense in 2007 is due to the adjustment of the asset retirement costs made in 2004. 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.

 

At December 31, 2005, 2006 and 2007, accrued other liabilities included $3.6 million, $4.6 million and $5.1 million, respectively, of asset retirement liabilities related to USA Mobility’s efforts to reduce the number of transmitters it operates; other long-term liabilities included $9.9 million, $9.0 million and $10.0 million, respectively, related primarily to an estimate of the costs of deconstructing assets through 2013. The primary variables associated with these estimates are the number of transmitters and related equipment to be removed, the timing of removal, and a fair value estimate of the outside contractor fees to remove each asset.

The long-term cost associated with the estimated removal costs and timing refinements due to ongoing network rationalization activities will accrete to a total liability of $21.3 million through 2013. The accretion will be recorded on the interest method utilizing a 13% discount rate for the 2004 incremental estimates and a 10.6% discount rate for the 2007 incremental estimates. The total estimated liability is based on the transmitter locations remaining after USA Mobility has consolidated the number of networks it operates and assumes the underlying leases continue to be renewed to that future date. Depreciation, amortization and accretion expense in 2005, 2006 and 2007 included $2.9 million, $3.2 million and $1.3 million, respectively, for accretion expense on the asset retirement obligation liabilities.

 

USA Mobility believes these estimates are reasonable at the present time, but the Company can give no assurance that changes in technology, its financial condition, the economy or other factors would not result in higher or lower asset retirement obligations. Any variations from the Company’s estimates would generally result in a change in the assets and liabilities in equal amounts, and operating results would differ in the future by any difference in depreciation expense and accretion expense.

 

Severance and Restructuring

 

The Company continually evaluates its staffing levels to meet its business objectives and its strategy to reduce its cost of operations. Severance costs are reviewed periodically to determine whether a severance charge is required to be recorded in accordance with SFAS No. 112, Employers’ Accounting for Post-employment Benefits, (“SFAS No. 112”). The provisions of 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.

 

From time to time, the Company will announce reorganization plans that may include eliminating positions within the Company. Each plan is reviewed to determine whether a restructuring charge is required to be recorded in accordance with SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, (“SFAS No. 146”). The provisions of SFAS No. 146 require the Company to record an estimate of the fair value of any termination costs based on certain facts, circumstances and assumptions, including specific provisions included in the underlying reorganization plan.

 

Also from time to time, the Company ceases to use certain facilities, such as office buildings and transmitter locations, including available capacity under certain agreements, prior to expiration of the underlying lease agreements. Exit costs are reviewed in each of these circumstances on a case-by-case basis to determine whether a restructuring charge is required to be recorded in accordance with SFAS No. 146. The provisions of SFAS No. 146 require the Company to record an estimate of the fair value of the exit costs based on certain facts, circumstances and assumptions, including remaining minimum lease payments, potential sublease income and specific provisions included in the underlying lease agreements.

 

Subsequent to recording such accrued severance and restructuring liabilities, changes in market or other conditions may result in changes to assumptions upon which the original liabilities were recorded that could result in an adjustment to the liabilities and, depending on the circumstances, such adjustment could be material.

 

Income Taxes

 

The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of tax-related assets and liabilities and income tax expense. These estimates and assumptions are based on the requirements of SFAS No. 109 and FIN 48.

 

As of December 31, 2007 the Company has total unrecognized tax benefits of $350.0 million for tax positions that have been included in the Company’s previously filed Federal, state or local income tax returns that did not meet the more likely than not recognition threshold required by FIN 48.

 

One of the more significant tax positions taken by the Company’s predecessor entity, Arch, was the handling of cancellation of debt income arising from the Arch bankruptcy in 2002. In accordance with provisions of the IRC, Arch was required to apply the cancellation of debt income arising in conjunction with its plan of reorganization

against tax attributes existing as of its emergence from bankruptcy date. The method utilized to allocate the cancellation of debt income is subject to varied interpretations of tax law and it has a material effect on the tax attributes remaining after allocation, and thus the Company’s future tax position. As a result of the method used to allocate cancellation of debt income, Arch had no net operating losses remaining and the tax basis of certain other tax assets were reduced as of the May 29, 2002, the date of emergence from the Chapter 11 proceedings. Other methods of allocating the cancellation of debt income are possible based on different interpretations of tax law and if such other methods were applied, the amount of deductions available to offset past and future taxable income might be further limited. Based on the requirements of FIN 48 the Company has recognized the benefits of this tax position using the more likely than not standard.

 

The Company assesses whether these previously unrecognized tax benefits may be recognized when the tax position is (1) more likely than not of being sustained based on its technical merits, (2) effectively settled through examination, negotiation or litigation, or (3) settled through actual expiration of the relevant tax statutes. Implementation of this requirement requires the exercise of significant judgment. In 2007 the Company reduced its liability for uncertain tax positions by $20.7 million due to lapse of the statute of limitations.

 

The Company also assesses the recoverability of its deferred income tax assets on an ongoing basis. The assessment, which is based on management’s judgment, is required to determine whether based on all available evidence, it is more likely than not that all the Company’s deferred income tax assets will be realized in future periods.

 

During 2002, Arch established a valuation allowance against its deferred income tax assets existing at its emergence from bankruptcy because, based on information available at that time, it was considered unlikely that the deferred income tax assets would be realized. However, during the quarter ended December 31, 2003, Arch management evaluated new facts and, based on operating income for the prior two years, repayment of notes well ahead of schedule and anticipated operating income and cash flows for future periods, concluded it was more likely than not that deferred income tax assets would be realized.

 

Accordingly, Arch management determined it was appropriate to release the valuation allowance. Because operational results for the years ended December 31, 2004, 2005 and 2006 were consistent with the previous Arch management’s assessment, and because the Company’s anticipated results including additional incremental income to be generated due to the merger with Metrocall, no valuation allowance against deferred income tax assets was required as of December 31, 2004, 2005 and 2006, except for the valuation allowance related to the charitable contributions carry-forward at December 31, 2004, 2005 and 2006.

 

Under the provisions of SFAS No. 109 and related interpretations, reductions in a deferred income tax asset valuation allowance that existed as of the date of fresh start accounting are first credited against an asset established for reorganization value in excess of amounts allocable to identifiable assets, then to other identifiable intangible assets existing at the date of fresh start accounting and then, once these assets have been reduced to zero, credited directly to additional paid-in capital. The release of the valuation allowance reduced the carrying value of intangible assets by $2.3 million and $13.4 million for the seven-month period ended December 31, 2002 and the year ended December 31, 2003, respectively. After reduction of intangibles recorded in conjunction with fresh start accounting, the remaining reduction of the valuation allowance of $195.9 million was recorded as an increase to stockholders’ equity as of December 31, 2003.

 

During the first three quarters of 2007 the Company experienced revenue and subscriber erosion within its direct customer base that had exceeded its earlier expectations. As part of the Company’s regular year-end planning process management evaluated these trends and concluded that there was uncertainty regarding the Company’s ability to generate sufficient taxable income to fully utilize the deferred income tax assets as of December 31, 2007. Using forecasted taxable income through 2022 along with the available positive and negative evidence the Company’s management concluded that, based on the requirements of SFAS No. 109, all of its deferred income tax assets would not be recoverable at December 31, 2007. A valuation allowance of $55.0 million was then recorded in the fourth quarter to reduce 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 adjustments to the valuation allowance and in changes to income tax expense, stockholders’ equity and the Company’s future net income.

On February 13, 2008 the President of the United States signed the Economic Stimulus Act of 2008 (“Stimulus Act”). The Stimulus Act (among other items) provides for bonus depreciation on certain defined property placed in service after December 31, 2007 and before January 1, 2009. The Company is currently assessing the impact that the Stimulus Act will have on its deferred income tax asset valuation allowance. As required by SFAS No. 109 the impact of the Stimulus Act will be reflected in the period of enactment, in this case 2008.

 

Recent and Pending Accounting Pronouncements

 

In June 2006, the Financial Accounting Standards Board (“FASB”) issued FIN 48, an interpretation of 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 6 of the Notes to Consolidated Financial Statements.

 

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 fiscal years beginning after November 15, 2007. The FASB has issued a proposed FASB Staff Position 157-a (“FSP 157-a”) that would exclude SFAS No. 13, Accounting for Leases, and its related pronouncements that address leasing transactions. Also, the FASB has issued a proposed FASB Staff Position 157-b (“FSP 157-b”) that would delay 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-b would defer the effective date of SFAS No. 157 for non-financial assets and non-financial liabilities to fiscal years beginning after November 15, 2008. Management is currently evaluating the impact that SFAS No. 157 will have on the Company’s financial position or results of operations.

 

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 fiscal years beginning after November 15, 2007. SFAS No. 159 is not anticipated to 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, Business Combinations, (“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 fiscal years beginning after December 15, 2008. Management is currently evaluating the impact that SFAS No. 141R and SFAS No. 160 will have on the Company’s financial position or results of operations.

 

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. EITF No. 06-11 is effective for fiscal years beginning after December 15, 2007. Management is currently evaluating the impact that EITF No. 06-11 will have on the Company’s financial position or results of operations.

 

Other new pronouncements issued during 2007 are not applicable to the Company and are not anticipated to have an effect on the Company’s financial position or results of operations.