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Service, rental and maintenance expenses, 31, 1995 from $69 in the year ended December
which consist primarily of telephone line and site 31, 1994. Most selling expenses are directly related
rental expenses, increased to $29.7 million (20.9% to the number of net new subscribers added. There-
of net revenues) in the year ended December 31, fore, such expenses may increase in the future if
1995 from $14.4 million (22.8% of net revenues) in pagers in service are added at a more rapid rate
the year ended December 31, 1994. The increase in than in the past.
absolute dollars was due primarily to increased
General and administrative expenses increased
expenses associated with system expansions and the
to $40.4 million (28.5% of net revenues) in the year
provision of paging services to a greater number of
ended December 31, 1995 from $19.2 million
subscribers. The decrease as a percentage of reve-
(30.5% of net revenues) in the year ended Decem-
nues resulted from the increase in Arch™s subscriber
ber 31, 1994. The increase in absolute dollars was
base described above. As existing paging systems
due primarily to increased expenses associated with
became more populated through the addition of
supporting more pagers in service.
new subscribers, the ¬xed costs of operating these
paging systems are spread over a greater subscriber Depreciation and amortization expenses
base. Annualized service, rental and maintenance increased to $60.2 million (42.5% of net revenues)
expenses per subscriber decreased to $28 in the in the year ended December 31, 1995 from $18.3
543
Equity Security Analysis




13-41 Part 2 Business Analysis and Valuation Tools




million (29.0% of net revenues) in the year ended prepayment of indebtedness under a prior credit
December 31, 1994. These expenses re¬‚ect Arch™s facility in September 1994.
acquisitions of paging businesses, accounted for as Net loss increased to $36.6 million in the year
purchases, and continued investment in pagers and ended December 31, 1995 from $6.5 million in the
other system expansion equipment to support con- year ended December 31, 1994 as a result of the
tinued growth. As a result of its September 1995 factors outlined above. Included in the net loss for
Arch Communications Group




acquisition of USA Mobile, which also was the year ended December 31, 1995 was a charge
accounted for under the purchase method of of $4.0 million representing Arch™s pro rata share of
accounting, Arch expects its depreciation and amor- USA Mobile™s net loss for the period of time from
tization expenses to increase by approximately $70 Arch™s acquisition of its initial 37% interest in USA
million annually through the year ending December Mobile on May 16, 1995 through the completion of
31, 2002. Arch™s pending acquisition of Westlink, if Arch™s acquisition of USA Mobile on September 7,
completed, will result in further signi¬cant increases 1995. The increases in depreciation and amortiza-
in Arch™s future depreciation and amortization tion expenses attributable to Arch™s September 1995
expenses. acquisition of USA Mobile and its pending acquisi-
tion of Westlink, as described above, will increase
Operating loss increased to $13.0 million in
Arch™s future net losses (or decrease its future net
the year ended December 31, 1995 from $0.4 mil-
income, if any).
lion in the year ended December 31, 1994 as a
EBITDA increased 162.6% to $47.2 million
result of the factors outlined above.
(33.3% of net revenues) in the year ended Decem-
Net interest expense increased to $22.5 million ber 31, 1995 from $18.0 million (28.5% of net rev-
in the year ended December 31, 1995 from $5.0 enues) in the year ended December 31, 1994 as a
million in the year ended December 31, 1994. The result of the factors outlined above.
increase was attributable to an increase in Arch™s
outstanding debt and higher interest rates. Arch
Recent and Pending Acquisitions
expects its future interest expense to increase signi¬-
In September 1995, Arch completed its acquisi-
cantly as a result of additional debt incurred in con-
tion of USA Mobile for aggregate consideration of
nection with its September 1995 acquisition of USA
$582.2 million, consisting of $88.9 million in cash
Mobile, its pending Westlink acquisition, and other
(including direct transaction cost), 7,599,493 shares
acquisitions.
of common stock valued at $209.0 million on the
During the year ended December 31, 1995, date of completion and the assumption of liabilities
Arch recognized an income tax bene¬t of $4.6 mil- of $284.3 million, including $241.2 million of long-
lion representing the tax bene¬t of operating losses term debt. The acquisition was completed in two
subsequent to September 7, 1995 which were avail- steps. The ¬rst step, Arch acquired an aggregate of
able to offset previously established deferred tax lia- 5,450,000 shares of USA Mobile common stock,
bilities arising from Arch™s acquisition of USA representing approximately 37% of USA Mobile™s
Mobile. Arch expects to recognize the $28.9 million then outstanding capital stock, in a tender offer
balance of such tax bene¬t in the year ending completed in May 1995 for $15.40 per share. On
December 31, 1996. September 7, 1995, Arch completed its acquisition
of USA Mobile through the merger of Arch with and
During the year ended December 31, 1995,
into USA Mobile. In accordance with generally
Arch recognized an extraordinary charge of $1.7
accepted accounting principles, Arch was treated as
million, representing the write-off of unamortized
the acquirer in such transaction for accounting and
deferred ¬nancing costs associated with the prepay-
¬nancial reporting purposes. See Note 2 to Consoli-
ment of indebtedness under a prior credit facility in
dated Financial Statements.
May 1995. During the year ended December 31,
1994, Arch recognized an extraordinary charge of During 1995, Arch also completed ¬ve addi-
$1.1 million, representing the write-off of unamor- tional acquisitions for aggregate consideration of
tized deferred ¬nancing costs associated with the $36.1 million in cash plus the issuance of 395,000
544 Equity Security Analysis




13-42
Equity Security Analysis




shares of common stock valued at $6.9 million on ordinated Debentures due 2003 (“Arch Convertible
the date of completion. See Note 2 to Arch™s Con- Debentures”) converted into common stock at
solidated Financial Statements. $16.75 per share. Effective upon the expiration of
the Conversion Offer at 12:00 midnight, Eastern
In December 1995, Arch entered into a de¬ni-
Time, on March 6, 1996, the Company accepted for
tive agreement to acquire Westlink for approxi-
conversion $14,121,000 in principal amount of
mately $340 million in cash, subject to adjustment




Arch Communications Group
Arch Convertible Debentures in exchange for an
by the amount of certain budgeted or approved
aggregate of approximately 843,000 shares of
capital expenditures made by Westlink prior to the
common stock and $1.6 million in cash.
closing less the increase in Westlink™s bank indebt-
On March 12, 1996, Arch completed a public
edness between December 17, 1995 and the clos-
offering of 10-7/8% Senior Discount Notes due
ing.
2008 (the Senior Discount Notes) in the aggregate
Arch has pursued and intends to continue to
principal amount of $467.4 million ($275.0 million
pursue acquisitions of paging businesses as part of
initial accreted value). Interest does not accrue on
its growth strategy. As a result, Arch evaluates acqui-
the Senior Discount Notes prior to March 15, 2001.
sition opportunities on an ongoing basis and from
Commencing September 15, 2001, interest on the
time to time is engaged in discussions with respect to
Senior Discount Notes is payable semi-annually at
possible acquisitions. On December 5, 1995, Arch
an annual rate of 10-7/8%. The $266.1 million net
entered into a letter of intent to acquire a paging
proceeds from the issuance of the Senior Discount
business for $14.0 million, subject to adjustment, of
Notes, after deducting underwriting discounts and
which $7.5 million would be paid in cash and $6.5
commissions and offering expenses, will be used
million would be paid through the issuance of
principally to fund a portion of the purchase price of
unregistered common stock. The acquisition is sub-
Arch™s pending acquisition of Westlink. Pending
ject to the execution of a de¬nitive purchase agree-
completion of Westlink acquisition, Arch used
ment, regulatory approvals and other conditions,
$225.0 million of the net proceeds to repay existing
and no assurance can be given that the acquisition
indebtedness under Arch™s credit facilities, with the
will be completed.
remainder primarily invested in short-term, interest-
bearing instruments. See Notes 3 and 9 to Arch™s
Sources of Funds
Consolidated Financial Statements.
Arch™s net cash provided by operating activities
was $7.9 million, $8.7 million, $14.8 million, $4.7 Future Capital Needs
million, $14.2 million, and $14.7 million in the
The Company™s business strategy requires the
years ended August 31, 1992, 1993 and 1994, and
availability of substantial funds to ¬nance the contin-
four months ended December 31, 1994 and the
ued development and further growth and expansion
years ended December 31, 1994 and 1995,
of its operations, including the Company™s pending
respectively.
acquisition of Westlink and other possible acquisi-
In February 1995, Arch completed a public
tions. The amount of capital required by the Com-
offering of 4,600,000 shares of common stock, of
pany will depend upon a number of factors,
which 2,701,296 shares were sold by Arch for net
including subscriber growth, technical develop-
proceeds of $46.2 million and 1,898,704 shares
ments, marketing and sales expenses, competitive
were sold by certain stockholders of Arch (including
conditions, acquisition strategy and acquisition
1,295,000 shares sold by the former owners of cer-
opportunities. No assurance can be given that addi-
tain paging businesses acquired by Arch). Arch used
tional equity or debt ¬nancing will be available to
its proceeds to repay borrowings of $46.2 million
the Company on acceptable terms, if at all. The
under a prior credit facility.
unavailability of suf¬cient ¬nancing when needed
On February 7, 1996, the Company com- would have a material adverse effect on the
menced an offer (the “Conversion Offer”) to pay a Company.
cash premium of $110 for each $1,000 principal
amount of the Company™s 6-3/4% Convertible Sub-
545
Equity Security Analysis




13-43 Part 2 Business Analysis and Valuation Tools




CONSOLIDATED BALANCE SHEETS

In 1994 Arch changed its ¬scal year end from August 31 to December 31. Included
herein are statements covering the period from September 1 to December 31, 1994.
Arch™s ¬nancial reporting is now based on its new ¬scal year end of December 31.
Arch Communications Group




December 31, (in thousands, except share amounts) 1994 1995
Assets
Current assets:
Cash $ 2,351 $ 3,643
Accounts receivable (less reserves of $707 and $2,125 in 1994 and 1995,
respectively) 4,632 14,278
Inventories ” 11,801
Due from employees 47 41
Prepaid expenses and other 1,453 3,908
Total current assets 8,483 33,671
Property and equipment, at cost:
Land, buildings, and improvements 3,333 6,813
Paging and computer equipment 73,992 191,461
Furniture, ¬xtures, and vehicles 2,935 7,362
80,260 205,636
Less accumulated depreciation and amortization 23,130 36,390
Property and equipment, net 57,130 169,246
Intangible and other assets (less accumulated amortization of $14,255 and
$44,915 in 1994 and 1995, respectively) 52,245 582,459
$117,858 $785,376
Liabilities and Stockholders™ Equity
Current liabilities:
Current maturities of long-term debt $ 86 $ 166
Accounts payable 8,567 22,463
Accrued expenses 3,044 8,947
Accrued interest 391 7,845
Customer deposits 1,182 5,258
Deferred revenue 1,800 4,493
Total current liabilities 15,070 49,172
Long-term debt, less current maturities 93,420 457,044
Deferred income taxes ” 28,900
Commitments (Note 6)
Redeemable preferred stock ” 3,376
Stockholders™ equity:
Preferred stock”$.01 par value, authorized 10,000,000 shares, no shares issued ” ”
Common stock”$.01 par value, authorized 75,000,000 shares, issued and out-
standing: 8,058,665, and 19,653,031 shares in 1994 and 1995 respectively 81 197
Additional paid-in capital 60,823 334,825
Accumulated de¬cit (51,536) (88,138)
Total stockholders™ equity 9,368 246,884
$117,858 $785,376

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