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have allowed Arch to increase shareholder value by
among the highest in the industry. This was the
increasing our operating leverage and expanding
fourth consecutive year in which we produced
our access to new geographic markets.
almost twice as many net new customers from inter-
nal distribution channels as we had produced the In addition to the major acquisition of USA
previous year. During 1995 the Company tripled its Mobile, Arch made ¬ve other acquisitions in 1995.
quarterly internal growth from approximately These consisted of The Beeper Company of Amer-
50,000 net new customers per quarter to more than ica, Inc. with operations in Texas, California, and
150,000. We view our 366,000 new subscribers Georgia; Beta Tele-Page, Inc., with operations in
added in 1995 as validation of our strategy for Texas; Data Transmission, Inc., with operations in
internal growth. Georgia; Groome Enterprises, Inc., with operations
in Louisiana; and Professional Paging and Radio,
Acquisitions also played a signi¬cant role in our
Inc. with operations in Florida.
growth for the year. We closed six transactions this
year which increased our subscribers by over 1.1 At year end Arch entered into an agreement to
million. The most signi¬cant acquisition was that of acquire Westlink Holdings, Inc. for $340 million.
USA Mobile. The $540 million transaction is the sec- This transaction is expected to close in the second
ond largest in the history of the paging industry and quarter of 1996. Pro forma for the Westlink acquisi-
added 959,000 subscribers to Arch. tion, Arch has 2.5 million subscribers, operating in
38 states and is the third largest paging company in
Record Financial Performance the United States. Additionally, we expect our annu-
Financial performance in the wireless commu- alized EBITDA to be more than $100 million follow-
nications industry is measured primarily by operat- ing the close.
540 Equity Security Analysis




13-38
Equity Security Analysis




Narrowband Personal Communications agement team. With the acquisition of USA Mobile,
Stan Sech joined us as president of USA Mobile,
Services (NPCS)
now our largest division. Stan brings many years of
We believe that NPCS holds promise as a plat-
management experience in paging. Tony Ott was
form for new narrowband wireless messaging ser-
appointed vice president, Information Services. Tony
vices. Arch is well positioned to participate in this
brings to Arch over 20 years of experience in infor-




Arch Communications Group
new generation of messaging services as a result of
mation services and telecommunications. Bob Alp-
two strategic investments.
erin joined Arch as vice president, Business
Our ¬rst investment was made in PCS Develop- Development. Bob will be focused on expanding our
ment Corporation (PCSD), a company in which Arch strategic alliances, developing new distribution part-
played a signi¬cant role in its beginnings. PCSD was nerships and assisting with future acquisitions. Carol
formed to bid in the Federal Communications Com- Burns was named director, Human Resources. Carol
mission 1994 auction for NPCS licenses. PCSD was has over 14 years of experience in the human
a successful bidder at the auctions and acquired a resources ¬eld. We are pleased to welcome these
national license for paired 50 KHz inbound/50 KHz key leaders to the Arch team.
outbound frequencies. These frequencies are ideally
suited for voice paging and wireless data service
In Conclusion
applications. Through Arch™s 10% equity position
1995 was the most eventful year in Arch™s his-
and its seat on PCSD™s Board of Directors, we
tory. In addition to setting records in all key operat-
believe Arch will have the opportunity to offer excit-
ing and ¬nancial measures, we achieved the size
ing new NPCS service offerings in the future.
and national geographic presence required for our
Our second strategic investment results from
future success. I want to thank all Arch team mem-
the upcoming acquisition of Westlink Holdings, Inc.
bers for their dedication, commitment and high per-
As a part of this transaction, Arch will acquire a 49%
formance levels which have been so critical to our
equity interest in Benbow PCS Ventures. Benbow is
track record of operating excellence. And although
licensed for paired 50 KHz outbound/12.5 KHz
all of us at Arch are proud of past accomplishments,
inbound frequencies that cover over half of the
our motivation comes from our bright prospects for
United States. Benbow™s licenses are expected to
the future.
enhance Arch™s ability to be a full participant in the
evolving market of NPCS. C.E. Baker, Jr.
Chairman of the Board, President
Human Resources
and Chief Executive Of¬cer
As Arch™s business has grown signi¬cantly in
1995, so has the depth and strength of our man- March 12, 1996


MANAGEMENT™S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

Overview Arch derives the majority of its revenues from
¬xed periodic (usually monthly) fees, not dependent
Arch is a leading provider of wireless messag-
on usage, charged to subscribers for paging ser-
ing services, primarily paging services, and had 2.0
vices. As long as a subscriber remains on service,
million pagers in service as of December 31, 1995.
operating results bene¬t from the recurring pay-
From September 1, 1991 through December 31,
ments of the ¬xed periodic fees without incurrence of
1995, Arch™s total subscriber base grew at a com-
additional selling expenses by Arch. Arch™s service,
pound rate on an annualized basis of 89.1% and its
rental and maintenance revenues and the related
compound rate of internal subscriber base growth
expenses exhibit substantially similar growth trends.
(excluding pagers added through acquisitions) on
Arch™s average paging revenue per subscriber has
an annualized basis was 52.8%.
541
Equity Security Analysis




13-39 Part 2 Business Analysis and Valuation Tools




Arch and its subsidiaries are in compliance with the
declined over the past three years for two principal
covenants under their respective indebtedness, but
reasons: (i) the percentage of subscriber-owned and
should not be construed as an alternative to operat-
reseller-owned pagers for which Arch receives no
ing income or cash ¬‚ows from operating activities as
recurring equipment rental revenues has increased
determined in accordance with generally accepted
from 29% of pagers in service at August 31, 1992 to
accounting principles. Arch™s ¬nancial objective is to
55% of pagers in service at December 31, 1995;
Arch Communications Group




increase its EBITDA, as such earnings are a signi¬-
and (ii) the percentage of net new pagers in service
cant source of funds for servicing indebtedness and
added to Arch™s subscriber base through indirect
for investment in continued growth, including pur-
channels has increased from 3% in the year ended
chase of pagers and paging system equipment con-
August 31, 1992 to 49% in the year ended Decem-
struction and expansion of paging systems, and
ber 31, 1995. Most of the indirect channel additions
possible acquisitions.
are derived from resellers who purchase air time
from Arch at wholesale prices. The reduction in On October 17, 1994, Arch announced that it
average paging revenue per subscriber resulting was changing its ¬scal year end from August 31 to
from these trends has been more than offset by the December 31. Arch ¬led a transitional report on
elimination of associated expenses so that Arch™s Form 10-K with audited ¬nancial statements for the
margins have improved over such period. period September 1, 1994 through December 31,
1994 and has elected to include herein, for compar-
Arch™s total revenues have increased from
ative purposes, unaudited ¬nancial statements for the
$35.2 million in the year ended August 31, 1992 to
period September 1, 1993 through December 31,
$67.2 million in the year ended August 31, 1994,
1993. Arch™s quarterly and annual reporting is now
and from $75.9 million in the year ended December
based on its new ¬scal year end of December 31.
31, 1994 to $162.6 million in the year ended
December 31, 1995. Over the same period,
Results of Operations
through operating ef¬ciencies and economies of
scale, Arch has been able to reduce its per pager
The table on the facing page presents certain
operating costs to enhance its competitive position
items from Arch™s Consolidated Statements of Oper-
in its markets. Due to the rapid growth in its sub-
ations as a percentage of net revenue (total revenue
scriber base, Arch has incurred signi¬cant selling
less cost of products sold) and certain other infor-
expenses, which are charged to operations in the
mation for periods indicated.
year incurred. Arch has reported net losses of $6.7
million, $5.7 million, $5.1 million, $3.3 million,
Year Ended December 31, 1995
$6.5 million, and $36.6 million in the years ended
Compared with Year Ended December
August 31, 1992, 1993, and 1994, the four months
31, 1994
ended December 31, 1994 and the years ended
December 31, 1994 and 1995, respectively, as a
Total revenue increased $86.7 million, or
result of signi¬cant depreciation and amortization
114.2%, to $162.6 million in the year ended
expenses related to acquired and developed assets
December 31, 1995 from $75.9 million the year
and interest charges associated with indebtedness.
ended December 31, 1994 and net revenues
However, as its subscriber base has grown, Arch™s
increased $78.7 million, or 124.7%, from $63.1
operating results have improved, as evidenced by
million to $141.8 million over the same period. Ser-
an increase in its EBITDA from $9.8 million in the
vice, rental and maintenance revenues, which con-
year ended August 31, 1992 to $16.0 million in the
sist primarily of recurring revenues associated with
year ended August 31, 1994, and from $18.0 mil-
the sale or lease of pagers, increased $77.0 million,
lion in the year ended December 31, 1994 to $47.2
or 125.2%, to $138.5 million in the year ended
million in the year ended December 31, 1995.
December 31, 1995 from $61.5 million in the year
EBITDA is a standard measure of ¬nancial per- ended December 31, 1994. These increases in reve-
formance in the paging industry and also is one of nues were due primarily to the increase in the num-
the ¬nancial measures used to calculate whether ber of pagers in service from 538,000 at December
542 Equity Security Analysis




13-40
Equity Security Analysis




Year Ended Four Months Ended Year Ended
August 31, December 31, December 31,
1993 1994 1993 1994 1994 1995
Total revenues 109.8% 117.7% 111.7% 120.1% 120.3% 114.7%
Cost of products sold (9.8) (17.7) (11.7) (20.1) (20.3) (14.7)
Net revenues 100.0 100.0 100.0 100.0 100.0 100.0




Arch Communications Group
Operating expenses:
Service, rental and maintenance 23.1 23.0 22.8 22.4 22.8 20.9
Selling 17.7 17.9 17.6 18.6 18.3 17.3
General and administrative 31.8 31.0 31.8 30.1 30.5 28.5
Depreciation and amortization 33.3 29.8 32.0 29.5 29.0 42.5
Operating income (loss) (5.9)% (1.7)% (4.2)% (0.6)% (0.6)% (9.2)%
Net income (loss) (13.9)% (8.9)% (10.8)% (14.0)% (10.2)% (25.8)%
EBITDA 27.4% 28.1% 27.8% 28.9% 28.5% 33.3%
Annual service, rental and maintenance
expenses per pager $ 48 $41 $44 $33 $35 $28
Selling cost per net new pager in service $105 $74 $90 $68 $69 $67

year ended December 31, 1995 from $35 in the
31, 1994 to 2,006,000 at December 31, 1995.
year ended December 31, 1994.
Acquisitions of paging companies added 1,102,000
pagers in service, with the remaining 366,000 pag- Selling expenses increased to $24.5 million
ers added through internal growth. Maintenance (17.3% of net revenues) in the year ended Decem-
revenues represented less than 10% of total service, ber 31, 1995 from $11.5 million (18.3% of net rev-
rental and maintenance revenues in the years ended enues) in the year ended December 31, 1994. The
December 31, 1994 and 1995. Arch does not dif- increase in selling expenses was due to the addition
ferentiate between service and rental revenues. of sales personnel to support continued growth in
Product sales, less cost of products sold, increased the subscriber base, as the number of net new pag-
110.7% to $3.3 million in the year ended December ers in service resulting from internal growth
31, 1995 from $1.6 million in the year ended increased by 117.9% from the year ended Decem-
December 31, 1994 as a result of a greater number ber 31, 1994 to the year ended December 31,
of pager unit sales. 1995. Arch™s selling cost per net new pager in ser-
vice decreased to $67 in the year ended December

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