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The accompanying notes are an integral part of these consolidated financial statements.
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CONSOLIDATED STATEMENT OF OPERATIONS

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
Years Ended Four Months Ended Year Ended
August 31, December 31, December 31,
(in thousands, except share and per 1993 1994 1993 1994 1995
amounts) (unaudited)
Service, rental and maintenance revenues $ 39,610 $ 55,139 $ 16,457 $ 22,847 $ 138,466
Product sales 5,698 12,108 2,912 5,178 24,132
Total revenues 45,308 67,247 19,369 28,025 162,598
Cost of products sold (4,031) (10,124) (2,027) (4,690) (20,789)
41,277 57,123 17,342 23,335 141,809
Operating expenses:
Service, rental and maintenance 9,532 13,123 3,959 5,231 29,673
Selling 7,307 10,243 3,058 4,338 24,502
General and administrative 13,123 17,717 5,510 7,022 40,448
Depreciation and amortization 13,764 16,997 5,549 6,873 60,205
Total operating expenses 43,726 58,080 18,076 23,464 154,828
Operating income (loss) (2,449) (957) (734) (129) (13,019)
Interest expense (3,036) (4,221) (1,138) (2,009) (22,560)
Interest income 175 109 6 16 38
Equity in loss of af¬liate ” ” ” ” (3,977)
Income (loss) before income tax bene¬t and
extraordinary item (5,310) (5,069) (1,866) (2,122) (39,518)
Bene¬t from income taxes ” ” ” ” 4,600
Income (loss) before extraordinary item (5,310) (5,069) (1,866) (2,122) (34,918)
Extraordinary charge from early extinguishment
of debt (415) ” ” (1,137) (1,684)
Net income (loss) (5,725) (5,069) (1,866) (3,259) (36,602)
Accretion of redeemable preferred stock ” ” ” ” (102)
Net income (loss) to common stockholders $ (5,725) $ (5,069) $ (1,866) $ (3,259) $ (36,704)
Income (loss) per common share before
extraordinary item $ (.74) $ (.71) $ (.26) $ (.29) $ (2.59)
Extraordinary charge from early extinguishment
of debt (.06) ” ” (.16) (.12)
Accretion of redeemable preferred stock ” ” ” ” (.01)
Net income (loss) per common share $ (.80) $ (.71) $ (.26) $ (.45) $ (2.72)
Weighted average number of common shares
outstanding 7,125,164 7,153,044 7,149,136 7,238,624 13,497,734

The accompanying notes are an integral part of these consolidated financial statements.
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Equity Security Analysis




13-45 Part 2 Business Analysis and Valuation Tools




CONSOLIDATED STATEMENT OF CASH FLOWS

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




Four Months
Years Ended Ended Year Ended
August 31, December 31, December 31,
1993 1994 1993 1994 1995
(in thousands) (unaudited)
Cash ¬‚ows from operating activities:
Net income (loss) $ (5,725) $ (5,069) $ (1,866) $ (3,259) $(36,602)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 13,764 16,997 5,549 6,873 60,205
Deferred tax bene¬t ” ” ” ” (4,600)
Extraordinary charge from early extinguishment
of debt 415 ” ” 1,137 1,684
Equity in loss of af¬liate ” ” ” ” 3,977
Accretion of discount on subordinated note 70 ” ” ” ”
Accounts receivable loss provision 873 1,239 389 649 3,915
Changes in assets and liabilities, net of effect
from acquisitions of paging companies:
Accounts receivable (1,296) (2,683) (929) (855) (9,582)
Inventories ” ” ” ” (3,176)
Due from employees 8 16 15 2 6
Prepaid expenses and other (419) (197) (164) (156) (517)
Accounts payable 23 2,633 2,143 2,338 3,535
Accrued expenses 681 1,093 108 (1,382) (5,089)
Accrued interest (143) 523 123 (279) 1,003
Customer deposits 81 248 10 (173) 262
Deferred revenue 389 (19) (72) (215) (272)
Net cash provided by operating activities 8,721 14,781 5,306 4,680 14,749
Cash ¬‚ows from investing activities:
Additions to property and equipment, net (16,607) (21,506) (5,340) (9,438) (45,331)
Additions to intangible and other assets (4,246) (4,151) (2,146) (5,841) (15,137)
Acquisition of paging companies, net of cash
acquired (10,145) (3,325) ” (15,085) (132,081)
Net cash used for investing activities (30,998) (28,982) (7,486) (30,364) (192,549)
Cash ¬‚ows from ¬nancing activities:
Issuance of long-term debt 13,323 40,225 35,225 58,872 191,617
Repayment of long-term debt (2,061) (25,791) (24,125) (32,776) (63,705)
Net proceeds from sale of common stock 6 202 190 12 51,180
Net cash provided by ¬nancing activities 11,268 14,636 11,290 26,108 179,092
Net increase (decrease) in cash & equivalents (11,009) 435 9,110 424 1,292
Cash, beginning of period 12,501 1,492 1,492 1,927 2,351
Cash, end of period $ 1,492 $ 1,927 $ 10,602 $ 2,351 $ 3,643

The accompanying notes are an integral part of these consolidated financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Organizational and Significant Arch provides for depreciation and amortiza-
tion using the straight-line method over the follow-
Accounting Policies
ing estimated useful lives:




Arch Communications Group
Organization Arch Communication Group, Inc. Estimated
(Arch) is a leading provider of wireless messaging Asset Classi¬cation Useful Life
services, primarily paging services. Buildings and improvements 20 Years
Leasehold improvements Lease Term
Principles of consolidation The accompanying
Paging and computer equipment 3-8 Years
consolidating ¬nancial statements include the Furniture and ¬xtures 5-8 Years
accounts of Arch and its wholly-owned subsidiaries. Vehicles 3 Years
All signi¬cant inter-company accounts and transac-
tions have been eliminated. Intangible and other assets Intangible and other
assets, net of accumulated amortization, are com-
Revenue recognition Arch recognizes revenue
posed of the following at December 31, 1994 and
under rental and service agreements with customers
1995:
as the related services are performed. Maintenance
(in thousands) 1994 1995
revenues and related costs are recognized ratably
over the respective terms of the agreements. Sales of Purchased subscriber lists $ 5,675 $ 96,686
equipment are recognized upon delivery. Commis- Purchased FCC licenses 22,886 174,533
Goodwill 12,722 283,814
sions are recognized as an expense when incurred.
Non-competition agreements 963 5,321
Deferred ¬nancing costs 3,867 6,012
Inventories Inventories consist of new pagers
Investment In PCS
which are held speci¬cally for resale. Inventories are
Development Corporation 1,419 6,500
stated at the lower of cost or market, with cost deter- Other 4,713 9,593
mined on a ¬rst-in, ¬rst-out basis. $52,245 $582,459

Property and equipment Effective June 1, 1993,
Subscriber lists, Federal Communications Com-
Arch changed its estimate of the useful life of pagers
mission (FCC) licenses and goodwill are amortized
from ¬ve years to four years. This change was made
over their estimated useful lives, ranging from ¬ve to
to better re¬‚ect the estimated period during which
ten years using the straight-line method. Non-com-
pagers will produce equipment rental revenue. The
petition agreements are amortized over the terms of
change had the effect of increasing depreciation
the agreements using the straight-line method.
expense and net loss by approximately $700,000
Other assets consist of contract rights, organiza-
($.10 per share) in the quarter ended August 31,
tional and FCC application and development costs,
1993.
which are amortized using the straight-line method
Effective October 1, 1995, Arch changed its over their estimated useful lives not exceeding ten
estimate of the useful life of pagers from four years years. Development costs include non-recurring,
to three years. This change was made to better direct costs incurred in the development and expan-
re¬‚ect the estimated period during which pagers will sion of paging systems, and are amortized over a
produce equipment rental revenue. The change did two-year period.
not have a material effect on depreciation expense
Deferred ¬nancing costs incurred in connection
or net loss in the quarter ended December 31,
with Arch™s credit agreements (see Note 3) are being
1995.
amortized over periods not to exceed the terms of
Pagers sold or otherwise retired are removed the related agreements. As credit agreements are
from the accounts at their net book value using the amended or renegotiated, unamortized deferred
¬rst-in, ¬rst-out method. ¬nancing costs are written off as an extraordinary
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13-47 Part 2 Business Analysis and Valuation Tools




charge. For the four months ended December 31, Description (in thousands) Carrying Value Fair Value
1994, a charge of $1,137,000 was recognized, and 9-1/2% Senior Notes due 2004
an additional charge of $1,684,000 was recog- of USA Mobile II $125,000 $129,000
nized in the second quarter of 1995 in connection 14% Senior Notes due 2004 of
USA Mobile II 100,000 111,000
with the closing of a new credit facility in May 1995.
On November 8, 1994, PCS Development Cor-
Arch Communications Group




Net income (loss) per common share Net income
poration (PCSD) was successful in acquiring the
(loss) per common share is based on the weighted
rights to a two-way paging license in ¬ve designated
average number of common shares outstanding.
regions in the United States in the FCC narrowband
Shares of stock issuable pursuant to stock options
wireless spectrum auction. Upon completion of the
and upon conversion of the subordinated deben-
Merger, Arch™s equity interest in PCSD became
tures (see Note 3) have not been considered, as
17.47% but was subsequently diluted to 10.5%. As
their effect would be antidilutive.
of December 31, 1995, Arch™s investment in PCSD
totaled $6.5 million. Use of estimates The preparation of ¬nancial
statements in conformity with generally accepted
Arch evaluates the realizability of goodwill and
accounting principles requires management to
other intangible assets based on estimated cash
make estimates and assumptions that affect the
¬‚ows to be generated from each of such assets as
reported amounts of assets and liabilities and dis-
compared to the original estimates used in measur-
closure of contingent assets and liabilities at the date
ing the assets. To the extent impairment is identi¬ed,
of the ¬nancial statements and the reported
Arch recognizes a write-down. To date, Arch has not
amounts of revenues and expenses during the
had any such impairments.
reported period. Actual results could differ from
Fair value of ¬nancial instruments Arch™s ¬nan- those estimates.
cial instruments, as de¬ned under Statement of
Unaudited interim consolidated ¬nancial state-
Financial Accounting Standards (SFAS) No. 107,
ments The consolidated statements of operations
include its cash and its debt ¬nancing. The fair value
and cash ¬‚ows for the four months ended December

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