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of cash is equal to the carrying value at December
31, 1993 are unaudited and, in the opinion of
31, 1995.
Arch™s management, include all adjustments, con-
As discussed in Note 3, Arch™s debt ¬nancing
sisting of normal, recurring adjustments, necessary
consists primarily of (1) senior bank debt, (2) ¬xed
for a fair presentation of Arch™s consolidated ¬nan-
rate senior notes, and (3) convertible subordinated
cial position, results of operations, and cash ¬‚ows.
debentures. Arch considers the fair value of senior
The results of operations for the four months ended
bank debt to be equal to the carrying value since the
December 31, 1993 are not necessarily indicative of
related facilities bear a current market rate of inter-
the results of any other period.
est. Arch is unable to determine the fair value of the
convertible subordinated debentures due to the spe- Change in year end In October 1994, Arch
ci¬c terms and conversion features available in their changed its ¬scal year end from August 31 to
respective agreements. These various facilities were December 31. Arch™s quarterly and annual report-
negotiated with creditors based on the facts and cir- ing is now based on Arch™s new ¬scal year end.
cumstances available at the time the debt was
Reclassi¬cations Certain amounts of prior periods
incurred. Since Arch has undergone signi¬cant
were reclassi¬ed to conform to the 1995 presenta-
change over the past year, management is unable
to determine what rates and terms would be avail-
able currently.
2. Acquisitions
Arch™s ¬xed rate senior notes are traded pub-
licly. The following depicts the fair value of this debt During the year ended August 31, 1993, Arch
based on the current market quotes as of December acquired, in separate transactions, four paging sys-
31, 1995: tems located in New York, New Hampshire, and
550 Equity Security Analysis

Equity Security Analysis

Maine for an aggregate purchase price of approxi- A Redeemable Preferred Stock remained outstand-
mately $10,100,000. ing and were not otherwise affected by the Merger
(see Note 4).
During the year ended August 31, 1994, Arch
acquired a paging system located in Rhode Island Arch is treated as the acquirer in the Merger for
for approximately $3,325,000. accounting and ¬nancial reporting purposes. The
During the four months ended December 31,

Arch Communications Group
aggregate consideration paid or exchanged in the
1994, Arch acquired in separate transactions the Merger was $582.2 million, consisting of cash paid
paging assets of a system located in Florida and the of $88.9 million, including direct transaction costs,
stock of a paging company located in Illinois and 7,599,493 shares of Arch common stock valued at
Wisconsin for an aggregate purchase price of $209.0 million and the assumption of liabilities of
approximately $31 million including 900,000 $284.3 million, including $241.2 million of long-
shares of Arch common stock valued at $15.9 mil- term debt.
lion. In connection with the stock acquisition, the fair
During the year ended December 31, 1995,
value of assets acquired was approximately $33
Arch completed ¬ve acquisitions of paging compa-
million less liabilities assumed of approximately
nies, in addition to the Merger, for purchase prices
$2 million. In December 1994, Arch purchased cer-
aggregating approximately $43.0 million, consist-
tain paging system assets and frequencies from Bell-
ing of cash of $36.1 million and 395,000 shares of
South Telecommunications, Inc. for approximately
Arch common stock valued at $6.9 million. Good-
$500,000 in cash.
will resulting from the acquisitions and the Merger is
On September 7, 1995, Arch completed its
being amortized over a ten-year period using the
acquisition of USA Mobile Communications Hold-
straight-line method.
ings, Inc. (USA Mobile). The acquisition was com-
pleted in two steps. First, in May 1995, Arch These acquisitions have been accounted for as
acquired approximately 37%, or 5,450,000 shares, purchases, and the results of their operations have
of USA Mobile™s then outstanding common stock for been included in the consolidated ¬nancial state-
$83.9 million in cash, funded by borrowings under ments from the dates of the respective acquisitions.
the Arch Enterprises Credit Facility (see Note 3). Sec- The following unaudited pro forma summary pre-
ond, on September 7, 1995, the acquisition was sents the consolidated results of operations as if the
completed through the merger of Arch with and into acquisitions had occurred at the beginning of the
USA Mobile (the Merger). Upon consummation of periods presented, after giving effect to certain
the Merger, USA Mobile was renamed Arch Com- adjustments, including depreciation and amortiza-
munications Group, Inc. In the Merger, each share tion of acquired assets and interest expense on
of USA Mobile™s outstanding common stock was acquisition debt. These pro forma results have been
exchanged for Arch common stock on a .8020-for- prepared for comparative purposes only and do not
one-basis (an aggregate of 7,599,493 shares of purport to be indicative of what would have
Arch common stock) and the 5,450,000 USA occurred had the acquisitions been made at the
Mobile shares purchased by Arch in May 1995 were beginning of the period presented, or of results that
retired. Outstanding shares of USA Mobile™s Series may occur in the future.

Year Ended Four Months Ended Year Ended
August 31, December 31, December 31,
(unaudited) 1994 1993 1994 1995

Revenues $155,566 $42,093 $67,512 $249,507
Income (loss) before extraordinary
item (75,523) (25,161) (25,188) (71,806)
Net income (loss) (75,523) (25,161) (26,325) (73,490)
Net income (loss) per common
share (4.71) (1.57) (1.64) (3.93)
Equity Security Analysis

13-49 Part 2 Business Analysis and Valuation Tools

9. Subsequent Events
On December 17, 1995, Arch entered into a
de¬nitive stock purchase agreement to acquire
On March 6, 1996, the holders of $14.1 mil-
Westlink Holdings, Inc. for approximately $340 mil-
lion principal amount of Arch Convertible Deben-
lion in cash subject to adjustment by the amount of
tures (see Note 3) elected to convert their Arch
certain budgeted or approved capital expenditures
Convertible Debentures into Arch common stock at
made by Westlink prior to the closing less the
a conversion price of $16.75 per share and
Arch Communications Group

increase in Westlink™s bank indebtedness between
received approximately 843,000 shares of Arch
December 17, 1995 and the closing. This acquisi-
common stock, together with a $1.6 million cash
tion is subject to closing conditions, including FCC
On March 12, 1996, Arch completed a public
offering of 10-7/8% Senior Discount Notes due
3. Long-Term Debt
2008 (the Senior Discount Notes) in the aggregate
Long-term debt consisted of the following at principal amount of $467.4 million ($275.0 million
December 31, 1994 and 1995: initial accreted value). Interest does not accrue on
the Senior Discount Notes prior to March 15, 2001.
(in thousands) 1994 1995
Commencing September 15, 2001, interest on the
Senior bank debt $58,872 $204,500
Senior Discount Notes is payable semi-annually at
9-1/2% Senior Notes due 2004 of USA
an annual rate of 10-7/8%. The $266.1 million net
Mobile II ” 125,000
14% Senior Notes due 2004 of USA proceeds from the issuance of the Senior Discount
Mobile II ” 100,000
Notes, after deducting underwriting discounts and
Convertible subordinated debentures 34,475 27,485
commissions and offering expenses, principally will
Non-competition agreement obligations 135 210
be used to fund a portion of the purchase price of
Capital lease obligations 24 15
Arch™s pending acquisition of Westlink (see Note 2).
93,506 457,210
Less-current maturities 86 166 Pending completion of the Westlink acquisition, Arch
Long-term debt $93,420 $457,044
used $225.0 million of the net proceeds to repay
existing indebtedness under Arch™s credit facilities,
with the remainder primarily invested in short-term,
interest-bearing instruments.
552 Equity Security Analysis

Equity Security Analysis


To Arch Communications Group, Inc:
We have audited the accompanying consolidated balance sheets of Arch Communi-
cations Group, Inc. (a Delaware corporation) and subsidiaries as of December 31, 1994

Arch Communications Group
and 1995 and the related consolidated statements of operations, stockholders™ equity
(de¬cit) and cash ¬‚ows for each of the two years in the period ended August 31, 1994,
for the four months ended December 31, 1994 and the year ended December 31, 1995.
These ¬nancial statements are the responsibility of Arch™s management. Our responsibil-
ity is to express an opinion on these ¬nancial statements based on our audit.
We conducted our audit in accordance with generally accepted accounting stan-
dards. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the ¬nancial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclo-
sures in the ¬nancial statements. An audit also includes assessing the accounting princi-
ples used and signi¬cant estimates made by management, as well as evaluating the
overall ¬nancial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the ¬nancial statements referred to above present fairly, in all mate-
rial respects, the ¬nancial position of Arch Communications Group, Inc. and subsidiaries
as of December 31, 1994 and 1995 and the results of their operations and their cash
¬‚ows for each of the two years in the period ended August 31, 1994, for the four months
ended December 31, 1994 and the year ended December 31, 1995, in conformity with
generally accepted accounting principals.

Arthur Andersen LLP
Boston, Massachusetts
February 15, 1996 (except with respect to Note 9 as to which the date is March 12, 1996)
14 C red it An a ly s is a n d D is t r e s s P r e di c t i o n

C redit analysis is the evaluation of a ¬rm from the perspective of a
holder or potential holder of its debt, including trade payables, loans, and public debt
securities. A key element of credit analysis is the prediction of the likelihood a ¬rm will
face ¬nancial distress.

Credit analysis is involved in a wide variety of decision contexts:
Analysis • A potential supplier asks: Should I sell products or services to this firm? The asso-
ciated credit will be extended only for a short period, but the amount is large and I
and should have some assurance that collection risks are manageable.
• A commercial banker asks: Should we extend a loan to this firm? If so, how should
it be structured? How should it be priced?
Application • If the loan is granted, the banker must later ask: Are we still providing the services,
including credit, that this firm needs? Is the firm still in compliance with the loan
s terms? If not, is there a need to restructure the loan, and if so, how? Is the situation
serious enough to call for accelerating the repayment of the loan?
• A pension fund manager, insurance company, or other investor asks: Are these debt
securities a sound investment? What is the probability that the firm will face dis-
tress and default on the debt? Does the yield provide adequate compensation for the
default risk involved?
• An investor contemplating purchase of debt securities in default asks: How likely
is it that this firm can be turned around? In light of the high yield on this debt, rel-
ative to its current price, can I accept the risk that the debt will not be repaid in full?
Although credit analysis is typically viewed from the perspective of the ¬nancier, it
is obviously important to the borrower as well:
• A manager of a small firm asks: What are our options for credit financing? Would
the firm qualify for bank financing? If so, what type of financing would be possi-
ble? How costly would it be? Would the terms of the financing constrain our flex-
• A manager of a large firm asks: “What are our options for credit financing? Is the
firm strong enough to raise funds in the public market? If so, what is our debt rating
likely to be? What required yield would that rating imply?
Finally, there are third parties”those other than borrowers and lenders”who are in-
terested in the general issue of how likely it is that a ¬rm will avoid ¬nancial distress:



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