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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
Form 10-K
 
     
(Mark One)    
þ
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
     
    For the Fiscal Year Ended December 31, 2006
or
     
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
Commission File Number: 001-32407
 
 
AMERICAN REPROGRAPHICS COMPANY
(Exact name of Registrant as specified in its Charter)
 
     
Delaware
  20-1700361
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
 
700 North Central Avenue, Suite 550
Glendale, California 91203
(818) 500-0225
(Address, including zip code, and telephone number,
including area code, of Registrant’s principal executive offices)
 
Securities registered pursuant to Section 12(b) of the Act:
 
     
Title of Each Class
 
Name of Each Exchange on Which Registered
 
Common Stock, par value
  New York Stock Exchange
 
Securities registered pursuant to Section 12(g) of the Act:
NONE
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes  þ      No  o
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes  o      No  þ
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  þ      No  o
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer  þ      Accelerated filer  o      Non-accelerated filer  o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes  o      No  þ
 
Based on the closing price of $36.25 of the registrant’s Common Stock on the New York Stock Exchange on June 30, 2006 (the last business day of the registrant’s most recently completed second fiscal quarter), the aggregate market value of the voting common equity held by non-affiliates of the registrant on that date was approximately $1,005,736,711.
 
As of February 15, 2007, there were 45,359,460 shares of the Registrant’s common stock outstanding.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
None.
 


 

 
AMERICAN REPROGRAPHICS COMPANY
 
ANNUAL REPORT ON FORM 10-K
for the fiscal year ended December 31, 2006

Table of Contents
 
                 
        Page
 
  3
  Business   3
  Risk Factors   10
  Unresolved Staff Comments   14
  Properties   15
  Legal Proceedings   15
  Submission of Matters to a Vote of Security Holders   15
       
  16
  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities   16
  Selected Consolidated Financial Data   19
  Management’s Discussion and Analysis of Financial Condition and Results of Operation   20
  Quantitative and Qualitative Disclosures About Market Risk   40
  Consolidated Financial Statements and Supplementary Data   41
  Changes in and Disagreements with Accountants On Accounting And Financial Disclosure   41
  Controls and Procedures   41
  Other Information   41
       
  42
  Directors and Executive Officers of the Registrant   42
  Executive Compensation   45
  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters   57
  Certain Relationships and Related Transactions   60
  Principal Accounting Fees and Services   64
       
  65
  Exhibits, Financial Statement Schedules   65
  EXHIBIT 10.13
  EXHIBIT 10.24
  EXHIBIT 10.26
  EXHIBIT 10.48
  EXHIBIT 10.50
  EXHIBIT 10.61
  EXHIBIT 10.62
  EXHIBIT 21.1
  EXHIBIT 23.1
  EXHIBIT 31.1
  EXHIBIT 31.2
  EXHIBIT 32.1


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AMERICAN REPROGRAPHICS COMPANY 2006 ANNUAL REPORT
 
In this report, “American Reprographics Company,” “ARC”, “the company,” “we,” “us,” and “our” refer to American Reprographics Company and its consolidated subsidiaries, unless the context otherwise dictates.
 
FORWARD-LOOKING STATEMENTS
 
We have included in this report, and from time to time may make in our public filings, press releases or other public announcements, statements that may constitute “forward-looking statements,” as defined by federal securities laws, with respect to our financial condition, results of operations and business, and our expectations or beliefs concerning future events. Words such as, but not limited to, “believe,” “expect,” “anticipate,” “estimate,” “intend,” “plan,” “targets,” “likely,” “will,” “would,” “could,” and similar expressions or phrases identify forward-looking statements. In addition, our management may make forward-looking statements to analysts, investors, representatives of the media and others.
 
All forward-looking statements involve risks and uncertainties. The occurrence of the events described, and the achievement of the expected results, depend on many events, some or all of which are not predictable or within our control. Actual results may differ materially from expected results.
 
Factors that may cause actual results to differ from expected results include, among others:
 
  •  general economic conditions and a downturn in the architectural, engineering and construction industry;
 
  •  competition in our industry and innovation by our competitors;
 
  •  our failure to anticipate and adapt to future changes in our industry;
 
  •  uncertainty regarding our product and service innovations;
 
  •  the inability to charge for our value-added services to offset potential declines in print volumes;
 
  •  adverse developments affecting the State of California, including general and local economic conditions, macroeconomic trends, and natural disasters;
 
  •  our inability to successfully identify potential acquisitions, manage our acquisitions or open new branches;
 
  •  our inability to successfully monitor and manage the business operations of our subsidiaries and uncertainty regarding the effectiveness of financial and management policies and procedures we established to improve accounting controls;
 
  •  adverse developments concerning our relationships with certain key vendors;
 
  •  our inability to adequately protect our intellectual property and litigation regarding intellectual property;
 
  •  acts of terrorism, violence, war, natural disaster or other circumstances that cause damage or disruption to us, our facilities, our technology centers, our vendors or our customers;
 
  •  the loss of key personnel or qualified technical staff;
 
  •  the potential writedown of goodwill or other intangible assets we have recorded in connection with our acquisitions;
 
  •  the availability of cash to operate and expand our business as planned and to service our debt;
 
  •  failure to maintain an effective system of internal controls necessary to accurately report our financial results and prevent fraud; and
 
  •  potential environmental liabilities.
 
All future written and verbal forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. We undertake no obligation, and specifically decline any obligation, to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. You should, however, consult further


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disclosures we may make in future filings of our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K, and any amendments thereto.
 
See the section entitled “Risk Factors” in Item 1A of this report for a more complete discussion of these risks and uncertainties and for other risks and uncertainties. These factors and the other risk factors described in this report are not necessarily all of the important factors that could cause actual results to differ materially from those expressed in any of our forward-looking statements. Other unknown or unpredictable factors also could harm our results. Consequently, there can be no assurance that the actual results or developments anticipated by us will be realized or, even if substantially realized, that they will have the expected consequences to, or effects on, us. Given these uncertainties, you are cautioned not to place undue reliance on such forward-looking statements.
 
TRADEMARKS AND TRADE NAMES
 
We own or have rights to trademarks, service marks, and trade names that we use in conjunction with the operation of our business, including the names “American Reprographics Company SM ,” “ARC SM ,” “Abacus PCR TM ,” “BidCaster SM ,” “PlanWell EWO SM ,” “MetaPrint TM ,” “OneView SM ,” “PEiR Group SM ,” “PlanWell ® ,” “PlanWell PDS ® ,” “PlanWell Enterprise SM ,” “Sub-Hub SM ,” and various design marks associated therewith. In addition, we own or have rights to various trademarks, service marks, and trade names that we use regionally in conjunction with the operation of our divisions. This report also includes trademarks, service marks and trade names of other companies.


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PART I
 
Item 1.    Business
 
Our Company
 
We are the leading reprographics company in the United States providing business-to-business document management services to the architectural, engineering and construction industry, or AEC industry. We also provide these services to companies in non-AEC industries, such as technology, financial services, retail, entertainment, and food and hospitality, that require sophisticated document management services similar to our core AEC offerings. Reprographics services typically encompass the digital management and reproduction of construction documents or other graphics-related material and the corresponding finishing and distribution services. The business-to-business services we provide to our customers include document management, document distribution and logistics, print-on-demand, and a combination of these services in our customers’ offices as on-site services, often referred to as “facilities management.” We provide our core services through our suite of reprographics technology products, a national network of approximately 230 locally branded reprographics service centers, and approximately 3,300 facilities management programs at our customers’ locations throughout the country. We also sell reprographics equipment and supplies to complement our full range of service offerings. Our services are critical to our customers because they shorten their document processing and distribution time, improve the quality of their document information management, and provide a secure, controlled document management environment.
 
In support of our strategy to create technology standards in the reprographics industry, we license several of our reprographics technology products, including our flagship internet-based application, PlanWell, to independent reprographers. Most of our licensees are members of our wholly-owned trade organization, the PEiR Group (Profit and Education in Reprographics), through which we charge membership fees and provide purchasing, technology and educational benefits to other reprographers, while continuing to promote our reprographics technology as an industry standard.
 
We operate more than 230 reprographics service centers, including 225 service centers in 170 cities in 34 states throughout the United States and the District of Columbia, five reprographics service centers in Canada, and one in Mexico City, Mexico. Our reprographics service centers are located in close proximity to the majority of our customers and offer pickup and delivery services within a 15 to 30 mile radius. These service centers are arranged in a hub and satellite structure and are digitally connected as a cohesive network, allowing us to provide our services both locally and nationally. We service approximately 107,000 active customers and employ approximately 4,400 people, including a sales and customer service staff of approximately 730 employees.
 
In terms of revenue, number of service facilities and number of customers, we believe we are the largest company in our industry, operating in approximately eight times as many cities and with more than six times the number of service facilities as our next largest competitor. We believe that our national footprint, our suite of reprographics technology products, and our value-added services, including logistics and facilities management, provide us with a distinct competitive advantage.
 
While we began our operations in California and currently derive approximately 46% of our net sales from our operations in the state, we have continued to expand our geographic coverage and market share by entering complementary markets through strategic acquisitions of high-quality companies with well-recognized local brand names and, in most cases, more than 25 years of operating history. Since 1997, we have acquired more than 100 companies. It is our preferred practice to maintain the senior management of companies we acquire. As part of our growth strategy, we sometimes open or acquire branch or satellite service centers in contiguous markets, which we view as a low cost, rapid form of market expansion. Our branch openings require modest capital expenditures and are expected to generate operating profit within 12 months from opening. We opened or acquired an additional 47 production facilities in 2006, closed or consolidated 14, and ended the year with a net gain of 33 locations.
 
Our main office is located at 700 North Central Avenue, Suite 550, Glendale, California 91203, and our telephone number is (818) 500-0225.


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Available Information
 
We file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission (the “SEC”). You may read and copy any document we file with the SEC at the SEC’s public reference room at 100 F Street, NW, Washington, DC 20549. Please call the SEC at 1-800-SEC-0330 for information on the public reference room. The SEC maintains an internet site that contains annual, quarterly and current reports, proxy and information statements and other information that issuers file electronically with the SEC. The SEC’s internet site is www.sec.gov.
 
Our internet address is www.e-arc.com. You can access our Investor Relations webpage through our internet site, www.e-arc.com , by clicking on the “Investor Relations” link at the top of the page. We make available free of charge, through our Investor Relations webpage, our proxy statements, annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. We also make available, through our Investor Relations webpage, statements of beneficial ownership of our equity securities filed by our directors, officers, 10% or greater stockholders and others under Section 16 of the Exchange Act. The reference to our website address does not constitute incorporation by reference of the information contained in the website and should not be considered part of this document. You can request a printed copy of these documents, excluding exhibits, at no cost, by contacting Investor Relations at 925-945-5100 or 1981 N. Broadway, Suite 385, Walnut Creek, California 94596. Attention: David Stickney, Vice President of Corporate Communications.
 
Corporate Background and Reorganization
 
Our predecessor, Ford Graphics, was founded in Los Angeles, California in 1960. In 1967 this sole proprietorship was dissolved and a new corporate structure was established under the name Micro Device, Inc., which continued to provide reprographics services under the name Ford Graphics. In 1989, our current senior management team purchased Micro Device, Inc., and in November 1997 our company was recapitalized as a California limited liability company, with management retaining a 50% ownership position and the remainder owned by outside investors. In April 2000, Code Hennessy & Simmons LLC, or CHS, through its affiliates acquired a 50% stake in our company from these outside investors in the 2000 recapitalization.
 
In February 2005, we reorganized from American Reprographics Holdings, L.L.C., a California limited liability company, or Holdings, to a Delaware corporation, American Reprographics Company. In the reorganization, the members of Holdings exchanged their common units and options to purchase common units for shares of our common stock and options to purchase shares of our common stock. As part of our reorganization, all outstanding warrants to purchase common units of Holdings were exchanged for shares of our common stock. We conduct our operations through our wholly-owned operating subsidiary, American Reprographics Company, L.L.C., a California limited liability company, or Opco, and its subsidiaries.
 
Acquisitions
 
In addition to growing the business organically, we have pursued acquisitions to expand and complement our existing service offerings and to expand our geographic locations where we believe we could be a market leader. Since 1997, we have acquired more than 100 companies. Our recent acquisitions include 14 reprographics companies acquired in 2005 for an aggregate purchase price of $32.1 million, and in 2006, we acquired 16 reprographics companies for an aggregate purchase price of $87.7 million. All aggregate purchase price figures include acquisition related costs. None of our acquisitions were related or contingent upon any other acquisitions. See Note 3 to our consolidated financial statements for further details concerning our acquisitions.
 
No acquisitions have been made subsequent to December 31, 2006.
 
Industry Overview
 
According to the International Reprographics Association, or IRgA, and other industry sources, the reprographics industry in the United States is estimated to be approximately $4.5 billion in size. The IRgA indicates that


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the reprographics industry is highly fragmented, consisting of approximately 3,000 firms with average annual sales of approximately $1.5 million and 20 to 25 employees. Since construction documents are the primary medium of communication for the AEC industry, demand for reprographics services in the AEC market is closely tied to the level of activity in the construction industry, which in turn is driven by macroeconomic trends such as GDP growth, interest rates, job creation, office vacancy rates, and tax revenues. According to FMI Corporation, or FMI, a consulting firm to the construction industry, construction industry spending in the United States for 2006 was estimated at $1.2 trillion, with expenditures divided between residential construction 53.1% and commercial and public, or non-residential, construction 46.9%. The $4.5 billion reprographics industry is approximately 0.4% of the $1.2 trillion construction industry in the United States. Our AEC revenues are most closely correlated to the non-residential sectors of the construction industry, which sectors are the largest users of reprographics services. According to FMI, the non-residential sectors of the construction industry are projected to grow at an average of 8.3% per year over the next three years.
 
Market opportunities for business-to-business document management services such as ours are rapidly expanding into non-AEC industries. For example, non-AEC customers are increasingly using large and small format color imaging for point-of-purchase displays, digital publishing, presentation materials, educational materials and marketing materials as these services have become more efficient and available on a short-run, on-demand basis through digital technology. As a result, we believe that our addressable market is substantially larger than the core AEC reprographics market. We believe that the growth of non-AEC industries is generally tied to growth in the U.S. gross domestic product, or GDP, which is estimated to have grown 2.2% in 2006.
 
Our Competitive Strengths
 
We believe that our competitive strengths include the following:
 
  •  Leading Market Position in Fragmented Industry.   Our size and national footprint provide us with significant purchasing power, economies of scale, the ability to invest in industry-leading technologies, and the resources to service large, national customers.
 
  •  Leader in Technology and Innovation.   We believe our PlanWell online planrooms are well positioned to become the industry standard for managing and procuring reprographics services within the AEC industry. In addition, we have developed other proprietary software applications that complement PlanWell and have enabled us to improve the efficiency of our services, add services and increase our revenue.
 
  •  Extensive National Footprint with Regional Expertise.   Our national network of service centers maintains local customer relationships while benefiting from centralized corporate functions and national scale. Our service facilities are organized as hub and satellite structures within individual markets, allowing us to balance production capacity and minimize capital expenditures through technology-sharing among our service centers within each market. In addition, we serve our national and regional customers under a single contract through our Premier Accounts business unit, while offering centralized access to project specific services, billing, and tracking information.
 
  •  Flexible Operating Model.   By promoting regional decision making for marketing, pricing, and selling practices, we remain responsive to our customers while benefiting from the cost structure advantages of our centralized administrative functions. Our flexible operating model also allows us to capitalize on an improving business environment.
 
  •  Consistent, Strong Cash Flow.   Through management of our inventory and receivables and our low capital expenditure requirements, we have consistently generated strong cash flow from operations after capital expenditures regardless of industry and economic conditions.
 
  •  Low Cost Operator.   We believe we are one of the lowest cost operators in the reprographics industry, which we have accomplished by minimizing branch level expenses and capitalizing on our significant scale for purchasing efficiencies.


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  •  Experienced Management Team and Highly Trained Workforce.   Our senior management team has an average of over 20 years of industry experience and it is our preferred practice to maintain the senior management of the companies we acquire.
 
Our Services
 
Reprographics services typically encompass the digital management and reproduction of graphics-related material and corresponding finishing and distribution services. We provide these business-to-business services to our customers in three major categories: document management, document distribution and logistics, and print-on-demand.
 
Document Management.   We store, organize, print and track AEC and non-AEC project documents using a variety of digital tools and our industry expertise. The documents we manage are typically larger than 11×17, requiring specialized production equipment, and the documents are iterative in nature; frequently 10 or more versions of a single document must be tracked and managed throughout the course of a project.
 
Document Distribution and Logistics.   We provide fully-integrated document distribution and logistics, which consist of tracking document users, packaging prints, addressing and coordinating services for shipment (either in hard copy or electronic form), as well as local pick-up and delivery of documents to multiple locations within tight time constraints.
 
Print-on-demand.   We produce small and large-format documents in black and white or color using digital scanning and printing devices. We can reproduce documents when and where they are needed by balancing production capacity between the high-volume equipment in our network of reprographic service centers, as well as equipment placed on site in our customers’ facilities.
 
On-site services.   Frequently referred to as facilities management, or FMs, this service includes any combination of the above services supplied on-site at our customers’ locations.
 
These broad categories of services are provided to our AEC industry, customers, as well as to our customers in non-AEC industries that have similar document management and production requirements. Our AEC customers work primarily with high volumes of large format construction plans and small format specification documents that are technical, complex, constantly changing and frequently confidential. Our non-AEC customers generally require services that apply to black and white and color small format documents, promotional documents of all sizes, and the digital distribution of document files to multiple locations for a variety of print-on-demand needs including short-run digital publishing.
 
These services include:
 
  •  PlanWell, our proprietary, internet-based planroom launched in June 2000, and our suite of other reprographics software products that enable the online purchase and fulfillment of document management services.
 
  •  Production services, including print-on-demand, document assembly, document finishing, mounting, laminating, binding, and kitting. Documents can be digitally transferred from one service facility to another to balance production capacity or take advantage of a “distribute and print” operating system.
 
  •  Document distribution and logistics, including the physical pick up, delivery, and shipping of time-sensitive, critical documents.
 
  •  Highly customized large and small format reprographics in color and black and white. This includes digital reproduction of posters, tradeshow displays, plans, banners, signage and maps.
 
  •  Facilities management, including recurring on-site document management services and staffing at our customers’ locations.
 
  •  Sales of reprographics equipment and supplies and licensing of software to other reprographics companies and end-users in the AEC industry.


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  •  The design and development of other document management and reprographics software, in addition to PlanWell, that supports ordering, tracking, job costing, and other customer specific accounting information for a variety of projects and services. These proprietary applications include:
 
  •  Electronic Work Order (EWO) , which offers our customers access to the services of all of our service centers through the internet.
 
  •  Abacus Print Cost Recovery (PCR) System , which provides a suite of software modules for reprographers and their customers to track documents produced from equipment installed as a part of a facilities management program.
 
  •  BidCaster “Invitation-to-Bid” (ITB) , a data management internet application inside PlanWell Enterprise that issues customizable “invitations to bid” from a customer’s desktop using email and a hosted fax server.
 
  •  MetaPrint Print Automation and Device Manager , a universal print driver that facilitates the printing of documents with output devices manufactured by multiple vendors, and allows the reprographer to print multiple documents in various formats as a single print submission.
 
  •  OneView Document Access and Customer Administration System , an internet-based application that leverages the security attributes of PlanWell to provide a single point of access to all of a customer’s project documents inside PlanWell planrooms, regardless of which of our local production facilities stores the relevant documents.
 
  •  Sub-Hub , an internet-based application that notifies subscribers of upcoming construction jobs in their markets and allows them to view plans online and order paper copies from a reprographer.
 
To further support and promote our major categories of services, we also:
 
  •  License our suite of reprographics technology products, including our flagship online planroom, PlanWell, to independent reprographers.
 
  •  Operate PEiR (Profit and Education in Reprographics), a trade organization wholly owned by us, through which we charge membership fees and provide purchasing, technology and educational benefits to other reprographers. PEiR members are required to license PlanWell and may purchase equipment and supplies at a lower cost than they could obtain independently. We also distribute our educational programs to PEiR members to help establish and promote best practices within the reprographics industry.
 
Customers
 
Our business is not dependent on any single customer or few customers, the loss of any one or more of whom would have a material adverse effect on our business. Our customers are both local and national companies, with no single customer accounting for more than 2% of our net sales in 2006.
 
Operations
 
Geographic Presence.   We operate 231 reprographics service centers, including 225 service centers in 170 cities in 34 states throughout the United States and the District of Columbia, five service centers in Canada, and one in Mexico City, Mexico. Our reprographics service centers are located in close proximity to the majority of our customers and offer pickup and delivery services within a 15 to 30 mile radius.
 
Hub and Satellite Configuration.   We organize our business into operating divisions that typically consist of a cluster configuration of at least one large service facility, or hub, and several smaller facilities, or satellites, that are digitally connected as a cohesive network, allowing us to provide all of our services both locally and nationwide. Our hub and satellite configuration enables us to shorten our customers’ document processing and distribution time, as well as achieve higher utilization of output devices by coordinating the distribution of work orders digitally among our service centers.


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  •  Central Hub Facilities.   In each of our major markets, we operate one or more large scale full service facilities that have high production capacity and sophisticated equipment. These larger facilities offer specialized services such as laser digital imaging on photographic material, large format color printing, and finishing services that may not be economically viable for smaller facilities to provide. Our central hub facilities also coordinate our facilities management programs.
 
  •  Satellite Facilities.   To supplement the capabilities of our central hub facilities, we operate satellite facilities that are typically located closer to our customers than the central hubs. Our satellite facilities have quick turnaround capabilities, responsive, localized service, and handle the majority of digital processes.
 
  •  Management Systems and Controls.   We operate our business under a dual operating structure of centralized administrative functions and regional decision making. Acquired companies typically retain their local business identities, managers, sales force, and marketing efforts in order to maintain strong local relationships. Our local management maintains autonomy over the day-to-day operations of their business units, including profitability, customer billing, receivables collection, and service mix decisions.
 
Although we operate on a decentralized basis, our senior management closely monitors and reviews each of our divisions through daily reports that contain operating and financial information such as sales, inventory levels, purchasing commitments, collections, and receivables. In addition, our operating divisions submit monthly reports to senior management that track each division’s financial and operating performance in comparison to historical performance.
 
Suppliers and Vendors
 
We purchase raw materials, consisting primarily of paper, toner, and other consumables, and purchase or lease reprographics equipment. Our reprographics equipment, which includes imaging and printing equipment, is typically leased for use in our service facilities and facilities management sites. We use a two-tiered approach to purchasing in order to maximize the economies associated with our size, while maintaining the local efficiencies and time sensitivity required to meet customer demands. We continually monitor market conditions and product developments, as well as regularly review the contractual terms of our national purchasing agreements, to take advantage of our buying power and to maximize the benefits associated with these agreements.
 
Our primary vendors of equipment, maintenance services and reprographics supplies include Oce N.V., Xerox Corporation, Canon Inc., and Xpedx, a division of International Paper Company. We have long standing relationships with all of our suppliers and we believe we receive favorable prices as compared to our competition due to the large quantities we purchase and strong relationships with our vendors. We have entered into annual supply contracts with certain vendors to guarantee prices. Significant market fluctuations in our raw material costs have historically been limited to paper prices and we have typically maintained strong gross margins as the result of our ability to pass increased material costs through to our customers.
 
Sales and Marketing
 
Divisional Sales Force.   We market our products and services throughout the United States through localized sales forces and marketing efforts at the divisional level. We had approximately 730 sales and customer service representatives as of December 31, 2006. Each sales force generally consists of a sales manager and a staff of sales and customer service representatives that target various customer segments. Depending on the size of the operating division, a sales team may be as small as two people or as large as 35 or more people. Sales teams serve both the central hub service facility and satellite facilities, or if market demographics require, operate on behalf of a single service facility.
 
Premier Accounts.   To further enhance our market share and service portfolio on a national level, we operate a “Premier Accounts” business unit. Designed to meet the requirements of large regional and national businesses, we established this operating division to take advantage of growing globalization within the AEC market, and to establish ourselves at the corporate level as the leading national reprographer with extensive geographic and service capabilities. The “Premier Accounts” sales initiative allows us to attract large AEC and non-AEC companies with document management, distribution and logistics, and print-on-demand needs that span wide geographical or


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organizational boundaries. Since its launch in the middle of 2003, we have established 14 national customers through Premier Accounts.
 
PEiR Group.   We established the PEiR Group (Profit and Education in Reprographics) in July 2003, a separate operating division of our company that is a membership-based organization for the reprographics industry. Comprised of independent reprographers and reprographics vendors, PEiR members are required to license PlanWell technology, facilitating the promotion of our applications as industry standards. We also provide general purchasing discounts to PEiR members through our preferred vendors. This provides other reprographics companies the opportunity to purchase equipment and supplies at a lower cost than they could obtain independently, while increasing our influence and purchasing power with our vendors. Through PEiR, we also present educational programs to members to establish and promote best practices within the industry.
 
Competition
 
According to the IRgA, most firms in the U.S. reprographics services industry are small, privately held entrepreneurial businesses. The larger reprographers in the United States, besides ourselves, include Service Point USA, a subsidiary of Service Point Solutions, S.A., Thomas Reprographics, Inc., ABC Imaging, LLC, and National Reprographics Inc. While we have no nationwide competitors, we do compete at the local level with a number of privately held reprographics companies, commercial printers, digital imaging firms, and to a limited degree, retail copy shops. Competition is primarily based on customer service, technological leadership, product performance and price. See Item 1A — “Risk Factors — Competition in our industry and innovation by our competitors may hinder our ability to execute our business strategy and maintain our profitability.”
 
Research and Development
 
We believe that to compete effectively we must continue to innovate, and thus conduct research and development into our services. Our research and development efforts are focused on improving and enhancing PlanWell and other technology, as well as developing new proprietary services. As of December 31, 2006, we employed 41 engineers and technical specialists with expertise in software, internet-based applications, database management, internet security and quality assurance. In total, research and development which includes both capitalized and expensed items, amounted to $6.8 million in 2004, $7.5 million in 2005, and $8.8 million in 2006, of which $5.1 million, $5.6 million, and $6.3 million were expensed during 2004, 2005 and 2006, respectively.
 
Proprietary Rights
 
Our success depends on our proprietary information and technology. We rely on a combination of copyright, trademark and trade secret laws, license agreements, nondisclosure and noncompete agreements, reseller agreements, customer contracts, and technical measures to establish and protect our rights in our proprietary technology. Our PlanWell license agreements grant our customers a nonexclusive, nontransferable, limited license to use our products and receive our services and contain terms and conditions prohibiting the unauthorized reproduction or transfer of our proprietary technologies. We retain all title and rights of ownership in our software products. In addition, we enter into agreements with some of our employees, third-party consultants and contractors that prohibit the disclosure or use of our confidential information and require the assignment to us of any new ideas, developments, discoveries or inventions related to our business. We also require other third parties to enter into nondisclosure agreements that limit use of, access to, and distribution of our proprietary information. We also rely on a variety of technologies that are licensed from third parties to perform key functions.
 
We have registered “PlanWell” as a trademark with the United States Patent and Trademark Office, in Canada, Australia and the European Union. Additionally, we have registered the trademark “PlanWell PDS” with the United States Patent and Trademark Office, Australia and the European Union and have applied for registration in Canada. We do not have any other registered trademarks or service marks, or any patents, that are material to our business.
 
For a discussion of the risks associated with our proprietary rights, see Item 1A — “Risk Factors — Our failure to adequately protect the proprietary aspects of our technology, including PlanWell, may cause us to lose market share” and Item 1A — “Risk Factors — We may be subject to intellectual property rights claims, which are


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costly to defend, could require us to pay damages and could limit our ability to use certain technologies in the future.”
 
Information Technology
 
We operate two technology centers in Silicon Valley to support our reprographics services and a software programming facility in Kolkata, India. Our technology centers also serve as design and development facilities for our software applications, and house our North American database administration team and networking engineers.
 
From these technology centers, our technical staff is able to remotely manage, control and troubleshoot the primary databases and connectivity of each of our operating divisions. This allows us to avoid the costs and expenses of employing costly database administrators and network engineers in each of our service facilities.
 
All of our reprographics service centers are connected via a high performance, dedicated wide area network (WAN), with additional capacity and connectivity through a virtual private network (VPN) to handle customer data transmissions and e-commerce transactions. Our technology centers use both commonly available software and custom applications running in a clustered computing environment and employ industry leading technologies for redundancy, backup and security.
 
Employees
 
As of December 31, 2006, we had more than 4,400 employees. Approximately 20 of our employees are covered by two collective bargaining agreements. The collective bargaining agreement with our subsidiary, Ridgway’s Ltd., expires on November 30, 2007 and the agreement with our subsidiary, B.P.I. Repro, LLC, expires on December 4, 2009. We have not experienced a work stoppage during the past five years and believe that our relationships with our employees and collective bargaining units are good.
 
Item 1A.    Risk Factors
 
The following risk factors could adversely affect our results of operations and financial condition and/or the per share trading price of our common stock. We may encounter risks in addition to those described below. Additional risks and uncertainties not currently known to us or that we currently deem immaterial may also impair or adversely affect our results of operations and financial condition.
 
Future downturns in the architectural, engineering and construction industry, or AEC industry, could diminish demand for our products and services, which would impair our future revenue and profitability.
 
We believe that AEC markets accounted for approximately 80% of our net sales for the year ended December 31, 2006. Our historical operating results reflect the cyclical and variable nature of the AEC industry. This industry historically experiences alternating periods of inadequate supplies of housing, commercial and industrial space coupled with low vacancies, causing a surge in construction activity and increased demand for reprographics services, followed by periods of oversupply and high vacancies and declining demand for reprographics services. In addition, existing and future government policies and programs may greatly influence the level of construction spending in the public sector, such as highways, schools, hospitals, sewers, and heavy construction. Since we derive a majority of our revenues from reprographics products and services provided to the AEC industry, our operating results are more sensitive to the nature of this industry than other companies who serve more diversified markets. Our experience has shown that the AEC industry generally experiences economic downturns several months after a downturn in the general economy. We expect that there may be a similar delay in the rebound of the AEC industry following a rebound in the general economy. Future economic and industry downturns may be characterized by diminished demand for our products and services and, therefore, any continued weakness in our customers’ markets and overall global economic conditions could adversely affect our future revenue and profitability.
 
In addition, because approximately 60% of our overall costs are fixed, changes in economic activity, positive or negative, affect our results of operations. As a result, our results of operations are subject to volatility and could deteriorate rapidly in an environment of declining revenues. Failure to maintain adequate cash reserves and


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effectively manage our costs could adversely affect our ability to offset our fixed costs and may have an adverse effect on our results of operations and financial condition.
 
Competition in our industry and innovation by our competitors may hinder our ability to execute our business strategy and maintain our profitability.
 
The markets for our products and services are highly competitive, with competition primarily at a local and regional level. We compete primarily based on customer service, technological leadership, product performance and price. Our future success depends, in part, on our ability to continue to improve our service offerings, and develop and integrate technological advances. If we are unable to integrate technological advances into our service offerings to successfully meet the evolving needs of our customers in a timely manner, our operating results may be adversely affected. Technological innovation by our existing or future competitors could put us at a competitive disadvantage. In particular, our business could be adversely affected if any of our competitors develop or acquire superior technology that competes directly with or offers greater functionality than our technology, including PlanWell.
 
We also face the possibility that competition will continue to increase, particularly if copy and printing or business services companies choose to expand into the reprographics services industry. Many of these companies are substantially larger and have significantly greater financial resources than us, which could place us at a competitive disadvantage. In addition, we could encounter competition in the future from large, well capitalized companies such as equipment dealers, system integrators, and other reprographics associations, that can produce their own technology and leverage their existing distribution channels. We could also encounter competition from non-traditional reprographics service providers that offer reprographics services as a component of the other services they provide to the AEC industry, such as vendors to our industry that provide services directly to our customers, bypassing reprographers. Any such future competition could adversely affect our business and impair our future revenue and profitability.
 
The reprographics industry has undergone vast changes in the last seven years and will continue to evolve, and our failure to anticipate and adapt to future changes in our industry could harm our competitive position.
 
Since 2000, the reprographics industry has undergone vast changes. The industry’s main production technology has migrated from analog to digital. This has prompted a number of trends in the reprographics industry, including a rapid shift toward decentralized production and lower labor utilization. As digital output devices become smaller, less expensive, easier to use and interconnected, end users of construction drawings are placing these devices within their offices and other locations. On-site reprographics equipment allows a customer to print documents and review hard copies without the delays or interruptions associated with sending documents out for duplication. Also, as a direct result of advancements in digital technology, labor demands have decreased. Instead of producing one print at a time, reprographers now have the capability to produce multiple sets of documents with a single production employee. By linking output devices through a single print server, a production employee simply directs output to the device that is best suited for the job. As a result of these trends, reprographers have had to modify their operations to decentralize printing and shift costs from labor to technology.
 
Looking forward, we expect the reprographics industry to continue to evolve. Our industry will continue to embrace digital technology, not only in terms of production services, but also in terms of network technology, digital document storage and management, and information distribution, all of which will require investment in, and continued development of, technological innovation. If we fail to keep pace with current changes or fail to anticipate or adapt to future changes in our industry, our competitive position could be harmed.
 
If we fail to continue to develop and introduce new services successfully, our competitive positioning and our ability to grow our business could be harmed.
 
In order to remain competitive, we must continually invest in new technologies that will enable us to meet the evolving demands of our customers. We cannot assure you that we will be successful in the introduction and marketing of any new services, or that we will develop and introduce in a timely manner innovative services that


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satisfy customer needs or achieve market acceptance. Our failure to develop new services and introduce them successfully could harm our competitive position and our ability to grow our business, and our revenues and operating results could suffer.
 
In addition, as reprographics technologies continue to be developed, one or more of our current service offerings may become obsolete. In particular, digital technologies may significantly reduce the need for high volume printing. Digital technology may also make traditional reprographics equipment smaller and cheaper, which may cause larger AEC customers to discontinue outsourcing their reprographics needs. Any such developments could adversely affect our business and impair future revenue and profitability.
 
If we are unable to charge for our value-added services to offset potential declines in print volumes, our long term revenue could decline.
 
Our customers value the ability to view and order prints via the internet and print to output devices in their own offices and other locations throughout the country. In 2006, our reprographics services represented approximately 74.1% and our facilities management services represented approximately 16.9% of our total net sales. Both categories of revenue are generally derived via a charge per square foot of printed material. Future technological advances may further facilitate and improve our customers’ ability to print in their own offices or at a job site. As technology continues to improve, this trend toward consuming information on an “as needed” basis could result in decreasing printing volumes and declining revenues in the longer term. Failure to offset these potential declines in printing volumes by changing how we charge for our services and developing additional revenue sources could significantly affect our business and reduce our long term revenue, resulting in an adverse effect on our results of operations and financial condition.
 
We derive a significant percentage of net sales from within the State of California and our business could be disproportionately harmed by an economic downturn or natural disaster affecting California.
 
We derived approximately 46% of our net sales in 2006 from our operations in California. As a result, we are dependent to a large extent upon the AEC industry in California and, accordingly, are sensitive to economic factors affecting California, including general and local economic conditions, macroeconomic trends, and natural disasters. Any adverse developments affecting California could have a disproportionately negative effect on our revenue, operating results and cash flows.
 
Our growth strategy depends in part on our ability to successfully identify and manage our acquisitions and branch openings. Failure to do so could impede our future growth and adversely affect our competitive position.
 
As part of our growth strategy, we intend to prudently pursue strategic acquisitions within the reprographics industry. Since 1997, we have acquired more than 100 businesses, most of which were long established in the communities in which they conduct their business. Our efforts to execute our acquisition strategy may be affected by our ability to continue to identify, negotiate, integrate, and close acquisitions. In addition, any governmental review or investigation of our proposed acquisitions, such as by the Federal Trade Commission, or FTC, may impede, limit or prevent us from proceeding with an acquisition. We regularly evaluate potential acquisitions, although we currently have no agreements or active negotiations with respect to any material acquisitions.
 
Acquisitions involve a number of special risks. There may be difficulties integrating acquired personnel and distinct business cultures. Additional financing may be necessary and, if used, would increase our leverage, dilute our equity, or both. Acquisitions may divert management’s time and our resources from existing operations. It is possible that there could be a negative effect on our financial statements from the impairment related to goodwill and other intangibles. We may experience the loss of key employees or customers of acquired companies. In addition, risks may include high transaction costs and expenses of integrating acquired companies, as well as exposure to unforeseen liabilities of acquired companies and failure of the acquired business to achieve expected results. These risks could hinder our future growth and adversely affect our competitive position and operating results.


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In addition to acquisitions, we expand our geographic coverage by opening additional satellite branches in regions near our established operations to capture new customers and greater market share. Although the capital investment for a new branch is modest, the branches we open in the future may not ultimately produce returns that justify our investment.
 
If we are unable to successfully monitor and manage the business operations of our subsidiaries, our business and profitability could suffer.
 
Since 1997, we have acquired more than 100 businesses and, in most cases, have delegated the responsibility for marketing, pricing, and selling practices with the local and operational managers of these businesses. If we do not successfully manage our subsidiaries under this decentralized operating structure, we risk having disparate results, lost market opportunities, lack of economic synergies, and a loss of vision and planning, all of which could harm our business and profitability.
 
We depend on certain key vendors for reprographics equipment, maintenance services and supplies, making us vulnerable to supply shortages and price fluctuations.
 
We purchase reprographics equipment and maintenance services, as well as paper, toner and other supplies, from a limited number of vendors. Our three largest vendors in 2006 were Oce N.V., Azerty and Xpedx, a division of International Paper Company. Adverse developments concerning key vendors or our relationships with them could force us to seek alternate sources for our reprographics equipment, maintenance services and supplies or to purchase such items on unfavorable terms. An alternative source of supply of reprographics equipment, maintenance services and supplies may not be readily available. A delay in procuring reprographics equipment, maintenance services or supplies, or an increase in the cost to purchase such reprographics equipment, maintenance services or supplies could limit our ability to provide services to our customers on a timely and cost-effective basis.
 
Our failure to adequately protect the proprietary aspects of our technology, including PlanWell, may cause us to lose market share.
 
Our success depends on our ability to protect and preserve the proprietary aspects of our technologies, including PlanWell. We rely on a combination of copyright, trademark and trade secret protection, confidentiality agreements, license agreements, non-compete agreements, reseller agreements, customer contracts, and technical measures to establish and protect our rights in our proprietary technologies. Under our PlanWell license agreements, we grant other reprographers a non-exclusive, non-transferable, limited license to use our technology and receive our services. Our license agreements contain terms and conditions prohibiting the unauthorized reproduction or transfer of our products. These protections, however, may not be adequate to remedy harm we suffer due to misappropriation of our proprietary rights by third parties. In addition, U.S. law provides only limited protection of proprietary rights and the laws of some foreign countries may offer less protection than the laws of the U.S. Third parties may unlawfully copy aspects of our products or unlawfully distribute them, impermissibly reverse engineer our products or otherwise obtain and use information that we regard as proprietary. Others may develop non-infringing technologies that are similar or superior to ours. If competitors are able to develop such technologies and we cannot successfully enforce our rights against them, they may be able to market and sell or license the marketing and sale of products that compete with ours, and this competition could adversely affect our results of operations and financial condition. Furthermore, intellectual property litigation can be expensive, a burden on management’s time and our company’s resources, and its results can be uncertain.
 
Damage or disruption to our facilities, our technology centers, our vendors or a majority of our customers could impair our ability to effectively provide our services and may have a significant impact on our revenues, expenses and financial condition.
 
We currently store most of our customer data at our two technology centers located in Silicon Valley near known earthquake fault zones. Damage or destruction of one or both of these technology centers or a disruption of our data storage processes resulting from sustained process abnormalities, human error, acts of terrorism, violence, war or a natural disaster, such as fire, earthquake or flood, could have a material adverse effect on the markets in which we operate, our business operations, our expectations and other forward-looking statements contained in this


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report. In addition, such damage or destruction on a national scale resulting in a general economic downturn could adversely affect our results of operations and financial condition. We store and maintain critical customer data on computer servers at our technology centers that our customers access remotely through the internet and/or directly through telecommunications lines. If our back-up power generators fail during any power outage, if our telecommunications lines are severed or those lines on the internet are impaired for any reason, our remote access customers would be unable to access their critical data, causing an interruption in their operations. In such event, our remote access customers and their customers could seek to hold us responsible for any losses. We may also potentially lose these customers and our reputation could be harmed. In addition, such damage or destruction, particularly those that directly impact our technology centers or our vendors or customers could have an impact on our sales, supply chain, production capability, costs, and our ability to provide services to our customers.
 
Although we currently maintain general property damage insurance, we do not maintain insurance for loss from earthquakes, acts of terrorism or war. If we incur losses from uninsured events, we could incur significant expenses which would adversely affect our results of operations and financial condition.
 
If we lose key personnel or qualified technical staff, our ability to manage the day-to-day aspects of our business will be adversely affected.
 
We believe that the attraction and retention of qualified personnel is critical to our success. If we lose key personnel or are unable to recruit qualified personnel, our ability to manage the day-to-day aspects of our business will be adversely affected. Our operations and prospects depend in large part on the performance of our senior management team and the managers of our principal operating divisions. Outside of the implementation of succession plans and executive transitions done in the normal course of business, including implementation of succession and transition planning related to Mr. Chandramohan’s intention to retire, the loss of the services of one or more members of our senior management team, in particular, the sudden loss of Mr. Chandramohan, our Chief Executive Officer, or the loss of Mr. Suriyakumar, our President and Chief Operating Officer, could disrupt our business and impede our ability to execute our business strategy. Because the other members of our executive and divisional management team have on average more than 20 years of experience within the reprographics industry, it would be difficult to replace them.
 
Item 1B.    Unresolved Staff Comments
 
None


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Item 2.    Properties
 
We currently operate 231 reprographics service centers totaling 1,434,259 square feet. We also occupy two technology centers in Silicon Valley, California, a software programming facility in Kolkata, India, as well as our two administrative facilities. Our executive offices are located in Glendale California.
 
                                 
    Number of
          Reprographics
       
    Admin & IT
    Square
    Service
    Square
 
Region
  Facilities     Footage     Centers     Footage  
 
Southern California(1)
    3       28,003       46       309,918  
Northern California(2)
    1       5,796       39       277,307  
Pacific Northwest(3)
    0       0       14       102,115  
Northeast
    2       11,297       35       169,918  
Southern
    1       3,711       65       334,644  
Midwest(4)
    0       0       32       240,357  
                                 
Total
    7       48,807       231       1,434,259  
 
 
(1) Includes one service center in Mexico City, Mexico.
 
(2) Includes two technology centers in Fremont, California, and one in Calcutta, India.
 
(3) Includes two service centers in the Vancouver, British Columbia area.
 
(4) Includes three service centers in the Toronto metropolitan area.
 
We lease 226 of our reprographics service centers, each of our administrative facilities and our technology centers. These leases expire through January 2017. Substantially all of the leases contain renewal provisions and provide for annual increases in rent based on the local Consumer Price Index. The five owned facilities are subject to major encumbrances under our credit facilities. In addition to the facilities that are owned, our fixed assets are comprised primarily of machinery and equipment, trucks, and computer equipment. We believe that our facilities are adequate and appropriate for the purposes for which they are currently used in our operations and are well maintained.
 
Item 3.    Legal Proceedings
 
Louis Frey Case.   On August 16, 2006, a judgment was entered against the company in the previously disclosed Louis Frey Company bankruptcy litigation in the United States Bankruptcy Court, Southern District of New York. The judgment awarded damages to the plaintiff, the bankruptcy trustee, in the principal amount of $11.1 million, interest, totaling $2.7 million through December 31, 2006, and $0.20 million in preference claims. The company continues to believe its position is meritorious, and commenced an appeal, which is pending, from the judgment in the United States District Court, Southern District of New York.
 
We are involved in various additional legal proceedings and other legal matters from time to time in the normal course of business. We do not believe that the outcome of any of these matters will have a material adverse effect on our consolidated financial position, results of operations or cash flows.
 
Environmental and Regulatory Considerations
 
Our property consists principally of reprographics and related production equipment, and we lease substantially all of our production and administrative facilities. We are not aware of any environmental liabilities which would have a material impact on our operations and financial condition.
 
Item 4.    Submission of Matters to a Vote of Security Holders
 
No matter was submitted to a vote of our stockholders, through solicitation of proxies or otherwise, during the fourth quarter of the year ended December 31, 2006.


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PART II
 
Item 5.    Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
Market Information
 
Our common stock, par value $0.001, is listed on the NYSE under the stock symbol “ARP” and has been listed since February 4, 2005, when it was first listed in connection with our initial public offering. No sales of our common stock took place prior to February 4, 2005. The following table sets forth for the fiscal periods indicated the high and low sale prices for our common stock as reported by the NYSE:
 
                 
    High     Low  
Fiscal Year 2005
               
First Quarter(1)
  $ 15.64     $ 13.00  
Second Quarter
    16.20       13.42  
Third Quarter
    18.29       15.85  
Fourth Quarter
    25.95       16.55  
Fiscal Year 2006
               
First Quarter
  $ 35.80     $ 25.00  
Second Quarter
    38.98       30.06  
Third Quarter
    38.51       28.45  
Fourth Quarter
    36.27       29.16  
 
 
(1) Beginning on February 4, 2005, the first day that our stock was listed on the NYSE.


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The following graph compares the cumulative 23-month total return to shareholders on American Reprographics Company’s common stock relative to the cumulative total returns of the Russell 2000 index and the S&P 600 Diversified Commercial & Professional Services index. The S&P 600 Diversified Commercial & Professional Services consists of the following companies: Angelica Corp., G&K Services Inc, Healthcare Service Group Inc, Mobile Mini Inc, School Specialty Inc, Tetra Tech Inc and Viad Corp. The graph assumes that the value of the investment in the company’s common stock and in each of the indexes (including reinvestment of dividends) was $100 on 2/4/2005 and tracks it through 12/31/2006.
 
COMPARISON OF 23 MONTH CUMULATIVE TOTAL RETURN*
Among American Reprographics Company, The Russell 2000 Index
And The S&P 600 Diversified Commercial &Professional Services
 
(GHART)
 
  $100 invested on 2/4/05 in stock or index-including reinvestment of dividends. Fiscal year ending December 31.
 
Copyright © 2007, Standard & Poor’s, a division of The McGraw-Hill Companies, Inc. All rights reserved. www.researchdatagroup.com/S&P.htm.
 
                                                                                           
      2/05     2/05     3/05     4/05     5/05     6/05     7/05     8/05     9/05
American Reprographic Company
      100         105         104         102         108         117         129         124         124  
Russell 2000
      100         100         97         91         97         101         107         105         106  
S&P 600 Diversified Commercial & Professional Services
      100         101         99         92         98         103         108         110         109  
                                                                                           
                                                                                           
 
                                                                                           
      10/05     11/05     12/05     1/06     2/06     3/06     4/06     5/06     6/06
American Reprographic Company
      123         156         185         199         209         252         258         252         264  
Russell 2000
      102         107         107         116         116         122         122         115         116  
S&P 600 Diversified Commercial & Professional Services
      97         102         101         103         105         112         114         108         101  
                                                                                           
                                                                                           
 
                                                             
      7/06     8/06     9/06     10/06     11/06     12/06
American Reprographic Company
      233         222         223         258         227         242  
Russell 2000
      112         115         116         123         126         126  
S&P 600 Diversified Commercial & Professional Services
      101         104         108         117         113         116  
                                                             
                                                             


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The stock price performance included in this graph is not necessarily indicative of future stock price performance.
 
This section is not “soliciting material,” is not deemed “filed” with the SEC and is not to be incorporated by reference in any of our filings under the Securities Act or the Exchange Act whether made before or after the date hereof and irrespective of any general incorporation language in any such filing.
 
Holders
 
As of February 21, 2007, the approximate number of stockholders of record of our common stock was 36 and the closing price of our common stock was $30.90 per share as reported by the NYSE. Because many of the shares of our common stock are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of beneficial owners represented by these stockholders of record.
 
Dividends
 
We have never declared or paid cash dividends on our common equity. We currently intend to retain all available funds and any future earnings for use in the operation of our business and do not anticipate paying any cash dividends in the foreseeable future. Any future determination to declare cash dividends will be made at the discretion of our board of directors, subject to compliance with certain covenants under our credit facilities, which restrict or limit our ability to declare or pay dividends, and will depend on our financial condition, results of operations, capital requirements, general business conditions, and other factors that our board of directors may deem relevant.
 
Sales of Unregistered Securities
 
Since January 1, 2006, the only sale of unregistered securities was made in connection with our acquisition of Reliable Graphics, Inc. On July 17, 2006, we issued 246, 277 shares of common stock which had an aggregate share value of $8,500,000 and were issued as part of the consideration we paid in connection with our acquisition of the assets of Reliable Graphics, Inc. The issuance of these securities was exempt from registration under the Securities Act in reliance on Section 4(2) of the Securities Act as a transaction by an issuer not involving any public offering. Reliable Graphics, Inc. represented (i) its intention to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof, (ii) it had adequate access to information about us, (iii) it has such knowledge and experience in business and financial matters that it is capable of evaluating the merits and risks of its investment, and (iv) it is an “accredited investor” as such term is defined in Rule 501 promulgated under the Securities Act.


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Item 6.    Selected Consolidated Financial Data
 
The selected historical financial data presented below are derived from the audited financial statements of Holdings for the fiscal years ended December 31, 2002, 2003, and 2004, and the audited financial statements of American Reprographics Company for the fiscal years ended December 31, 2005 and 2006. The selected historical financial data does not purport to represent what our financial position or results of operations might be for any future period or date. The financial data set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited financial statements included elsewhere in this report.
 
                                         
    Fiscal Year Ended December 31,  
    2002     2003     2004     2005     2006  
    (Dollars in thousands)  
 
Statement of Operations Data:
                                       
Reprographics services
  $ 324,402     $ 315,995     $ 333,305     $ 369,123     $ 438,375  
Facilities management
    52,290       59,311       72,360       83,125       100,158  
Equipment and supplies sales
    42,232       40,654       38,199       41,956       53,305  
                                         
Total net sales
    418,924       415,960       443,864       494,204       591,838  
Cost of sales
    247,778       252,028       263,787       289,580       337,509  
                                         
Gross Profit
    171,146       163,932       180,077       204,624       254,329  
Selling, general and administrative expenses
    103,305       101,252       105,780       112,679       131,743  
Litigation Reserve
                            11,262  
Provision for sales tax dispute settlement
                1,389              
Amortization of intangibles
    1,498       1,709       1,695       2,120       5,055  
                                         
Income from operations
    66,343       60,971       71,213       89,825       106,269  
Other income
    541       1,024       420       381       299  
Interest expense, net
    (39,917 )     (39,390 )     (33,565 )     (26,722 )     (23,192 )
Loss on early extinguishment of debt
          (14,921 )           (9,344 )      
                                         
Income before income tax provision (benefit)
    26,967       7,684       38,068       54,140       83,376  
Income tax provision (benefit)(1)
    6,267       4,131       8,520       (6,336 )     31,982  
                                         
Net income
    20,700       3,553       29,548       60,476       51,394  
Dividends and amortization of discount on preferred equity
    (3,291 )     (1,730 )                  
                                         
Net income
  $ 17,409     $ 1,823     $ 29,548     $ 60,476     $ 51,394  
                                         


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    Fiscal Year Ended December 31,  
    2002     2003     2004     2005     2006  
    (In thousands, except per share amounts)  
 
Earnings per share:
                                       
Basic
  $ 0.48     $ 0.05     $ 0.83     $ 1.43     $ 1.14  
Diluted
  $ 0.47     $ 0.05     $ 0.79     $ 1.40     $ 1.13  
Weighted average common shares outstanding:
                                       
Basic
    36,406       35,480       35,493       42,264       45,015  
Diluted
    36,723       37,298       37,464       43,178       45,595  
 
                                         
    Fiscal Year Ended December 31,  
    2002     2003     2004     2005     2006  
    (Dollars in thousands)  
 
Other Financial Data:
                                       
Depreciation and amortization
  $ 19,178     $ 19,937     $ 18,730     $ 19,165     $ 27,749  
Capital expenditures, net
  $ 5,209     $ 4,992     $ 5,898     $ 5,237     $ 7,391  
Interest expense, net
  $ 39,917     $ 39,390     $ 33,565     $ 26,722     $ 23,192  
 
                                         
    As of December 31,  
    2002     2003     2004     2005     2006  
    (Dollars in thousands)  
 
Balance Sheet Data:
                                       
Cash and cash equivalents
  $ 24,995     $ 17,315     $ 13,826     $ 22,643     $ 11,642  
Total assets
  $ 395,128     $ 374,716     $ 377,334     $ 442,362     $ 547,581  
Long term obligations and mandatorily redeemable preferred and common stock(2)
  $ 378,102     $ 360,008     $ 338,371     $ 253,371     $ 252,097  
Total stockholders’ equity (deficit)
  $ (61,082 )   $ (60,015 )   $ (35,009 )   $ 113,569     $ 184,244  
Working capital
  $ 24,371     $ 16,809     $ 22,387     $ 35,797     $ 19,828  
 
 
(1)  The Company was reorganized from a California limited liability company to a Delaware corporation immediately prior to the consummation of its initial public offering on February 9, 2005. As a result of that reorganization, a deferred tax benefit of $27,701 was booked concurrent with the consummation of the IPO.
 
(2)  In July 2003, we adopted SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” In accordance with SFAS No. 150, the redeemable preferred equity of Holdings has been reclassified in our financial statements as a component of our total debt upon our adoption of this new standard. The redeemable preferred equity amounted to $25.8 million as of December 31, 2003 and $27.8 million as of December 31, 2004. SFAS No. 150 does not permit the restatement of financial statements for periods prior to the adoption of this standard.
 
Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
The following discussion should be read in conjunction with our consolidated financial statements and the related notes and other financial information appearing elsewhere in this Annual Report. This Annual Report contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those indicated in forward-looking statements. See “Forward-Looking Statements” and “Risk Factors.”
 
Executive Summary
 
American Reprographics Company is the leading reprographics company in the United States. We provide business-to-business document management services to the architectural, engineering and construction industry, or AEC industry, through a nationwide network of independently branded service centers. The majority of our customers know us as a local reprographics provider, usually with a local brand and a long history in the community.


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We also serve a variety of clients and businesses outside the AEC industry in need of sophisticated document management services similar to our core AEC offerings.
 
Our services apply to time-sensitive and graphic-intensive documents, and fall into four primary categories:
 
  •  Document management;
 
  •  Document distribution & logistics;
 
  •  Print-on-demand; and
 
  •  On-site services, frequently referred to as facilities management, or FMs, (any combination of the above services supplied at a customer’s location).
 
We deliver these services through our specialized technology, to more than 700 sales and customer service employees interacting with our customers every day, and more than 3,300 on-site services facilities at our customers’ locations. All of our local service centers are connected by a digital infrastructure, allowing us to deliver services, products, and value to approximately 107,000 companies throughout the country.
 
Our divisions operate under local brand names. Each brand name typically represents a business or group of businesses that has been acquired since the formation of the company. We coordinate these operating divisions and consolidate their service offerings for large regional or national customers through a corporate-controlled “Premier Accounts” division.
 
A significant component of our growth has been from acquisitions. In 2006, we acquired 16 businesses for $87.7 million, and in 2005 we acquired 14 businesses for $32.1 million. We acquired six businesses in 2004 for $3.7 million. Each acquisition was accounted for using the purchase method, so consolidated income statements reflect sales and expenses of acquired businesses only for post-acquisition periods. All acquisition amounts include acquisition related costs.
 
As part of our growth strategy, we sometimes open or acquire branch or satellite service centers in contiguous markets, which we view as a low cost, rapid form of market expansion. Our branch openings require modest capital expenditures and are expected to generate operating profit within 12 months from opening. We have opened or acquired 47 production facilities since December 31, 2005 and we have closed or consolidated 14 in the same period. The Company ended the year with a net gain of 33 branch locations for the year. We expect to open at least an additional 15 branches by the end of 2007.
 
In the following pages, we offer descriptions of how we manage and measure financial performance throughout the company. Our comments in this report represent our best estimates of current business trends and future trends that we think may affect our business. Actual results, however, may differ from what is presented here.
 
Evaluating our Performance.   We measure our success in delivering value to our stockholders by striving for the following:
 
  •  Creating consistent, profitable growth;
 
  •  Maintaining our industry leadership as measured by our geographical footprint, market share and revenue generation;
 
  •  Continuing to develop and invest in our products, services, and technology to meet the changing needs of our customers;
 
  •  Maintaining the lowest cost structure in the industry; and
 
  •  Maintaining a flexible capital structure that provides for both responsible debt service and pursuit of acquisitions and other high-return investments.
 
Primary Financial Measures.   We use net sales, costs and expenses and operating cash flow to operate and assess the performance of our business.


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Net Sales.   Net sales represent total sales less returns and discounts. These sales consist of document management services, document distribution and logistics services, print-on-demand services, and reprographics equipment and supplies sales. We generate sales by individual orders through commissioned sales personnel and, in some cases, through national contracts.
 
Net sales are categorized as reprographics services, facilities management, and equipment and supplies. Our current revenue sources is likely to change in the future if our digital services revenue commands a greater and more distinctive role in our service mix. Digital services now comprise less than six percent of our overall revenue.
 
Software licenses and membership fees are derived over the term of the license or the membership agreement. Licensed technology includes PlanWell online planrooms, PlanWell Electronic Work Order (EWO), PlanWell BidCaster and MetaPrint. Revenues from these agreements are separate from digital services. Digital services include digital document management tasks, scanning and archiving digital documents, posting documents to the web and other related work performed on a computer. Software licenses, membership fees and digital services are categorized and reported as a part of “Reprographics services”.
 
Revenue from reprographics services is produced from document management, document distribution and logistics, and print-on-demand services, including the use of PlanWell by our customers. Though these services are becoming an increasingly distinct part of our service pricing, they are frequently invoiced to a customer as part of a combined per-square-foot printing cost. As such, it is impractical to allocate revenue levels for each item separately. We include revenues for these services under the caption “reprographics services”.
 
On-site services, or facilities management, revenues are generated from providing reprographics services in our customers’ locations using machines that we own or lease. Generally, this revenue is derived from a single cost per- square-foot of printed material, similar to our “Reprographics services”.
 
Revenue from equipment and supplies is derived from the resale of such items to our customers. We do not manufacture such items but rather purchase them from our vendors at wholesale costs.
 
In 2006, our reprographics services represented 74.1% of net sales, facilities management 16.9%, and sales of reprographics equipment and supplies 9.0%. Of the 74.1% of reprographic services, 5.2% was derived from digital services revenue. Software licenses, including PlanWell, and PEiR memberships have not, to date, contributed significant revenue. While we achieve modest cost recovery through membership, licensing and maintenance fees charged by the PEiR Group, we measure success in this area primarily by the adoption rate of our programs and products.
 
The company identifies operating segments based on the various business activities that earn revenue and incur expense, whose operating results are reviewed by management. Based on the fact that operating segments have similar products and services, class of customers, production process and performance objectives, the company is deemed to operate as a single reportable business segment.
 
While large orders involving thousands of documents and hundreds of recipients are common, the bulk of our customer orders consist of organizing, printing or distributing less than 200 drawings at a time. Such “short-run” orders are usually recurring, despite their tendency to arrive with no advance notice and a short turnaround requirement. Since we do not operate with a backlog, it is difficult to predict the number, size and profitability of reprographics work that we expect to undertake more than a few weeks in advance.
 
Costs and Expenses.   Our cost of sales consists primarily of paper, toner and other consumables, labor, and expenses for facilities and equipment. Facilities and equipment expenses include maintenance, repairs, rents, insurance, and depreciation. Paper is the largest component of our material cost. However, paper pricing typically does not affect our operating margins because changes are generally passed on to our customers. We closely monitor material cost as a percentage of net sales to measure volume and waste. We also track labor utilization, or net sales per employee, to measure productivity and determine staffing levels.
 
We maintain low levels of inventory and other working capital. Capital expenditure requirements are also low; most facilities and equipment are leased, with overall cash capital spending averaging approximately 1.2% of annual net sales over the last three years. Since we typically lease our reprographics equipment for a three-to-five year term, we are able to upgrade equipment in response to rapid changes in technology.


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Technology development costs consist mainly of the salaries, leased building space, and computer equipment that comprise our data storage and development centers in Silicon Valley, California and Kolkata, India.
 
Our selling expenses generally include salaries and commissions paid to our sales professionals, along with promotional, travel and entertainment costs. Our general and administrative expenses generally include salaries and benefits paid to support personnel at our reprographics businesses and our corporate staff, as well as office rent, utilities, insurance, communications expenses, and various professional services.
 
Operating Cash.   Operating Cash or “Cash Flow from Operations” includes net income less common expenditures requiring cash and is used as a measure to control working capital.
 
Other Common Financial Measures.   We also use a variety of other common financial measures as indicators of our performance, including:
 
  •  Net income and earnings per share;
 
  •  EBIT;
 
  •  EBITDA;
 
  •  Material costs as a percentage of net sales; and
 
  •  Days Sales Outstanding/Days Sales Inventory/Days Accounts Payable.
 
In addition to using these financial measures at the corporate level, we monitor some of them daily and location-by-location through use of our proprietary company intranet and reporting tools. Our corporate operations staff also conducts a monthly variance analysis on the income statement, balance sheet, and cash flow statement of each operating division.
 
We believe our current customer segment mix is approximately 80% of our revenues come from the AEC market, while 20% come from non-AEC sources. We believe this mix is optimal because it offers us the advantages of diversification without diminishing our focus on our core competencies.
 
Not all of these financial measurements are represented directly on the company’s consolidated financial statements, but meaningful discussions of each are part of our quarterly disclosures and presentations to the investment community.
 
Acquisitions.   Our disciplined approach to complementary acquisitions has led us to acquire reprographic businesses that fit our profile for performance potential and meet strategic criteria for gaining market share. In most cases, performance of newly acquired businesses improves almost immediately due to the application of financial best practices, significantly greater purchasing power, and productivity-enhancing technology.
 
According to the International Reprographics Association (IRgA), the reprographics industry is highly-fragmented and comprised primarily of small businesses with an average of $1.5 million in annual sales. Our own experience in acquiring reprographic businesses over the past ten years reflects the accuracy of this estimate. Although none of the individual acquisitions we made in the past three years are material to our overall business, each was strategic from a marketing and regional market share point of view.
 
When we acquire businesses, our management typically uses the previous year’s sales figures as an informal basis for estimating future revenues for the company. We do not use this approach for formal accounting or reporting purposes but as an internal benchmark with which to measure the future effect of operating synergies, best practices and sound financial management on the acquired entity.
 
We also use previous year’s sales figures to assist us in determining how the acquired business will be integrated into the overall management structure of the company. We categorize newly acquired businesses in one of two ways:
 
1.  Standalone Acquisitions.   Post-acquisition, these businesses maintain their existing local brand and act as strategic platforms for the company to acquire market share in and around the specific geographical location.


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2.  Branch/Fold-in Acquisitions.   These are equivalent to our opening a new or “green field” branch. They support an outlying portion of a larger market and rely on a larger centralized production facility nearby for strategic management, load balancing, for providing specialized services, and for administrative and other “back office” support. We maintain the staff and equipment of these businesses to a minimum to serve a small market or a single large customer, or we may physically integrate (“fold-in”) staff and equipment into a larger nearby production facility.
 
New acquisitions frequently carry a significant amount of goodwill in their purchase price, even in the case of a low purchase multiple. This goodwill typically represents the purchase price of an acquired business less tangible assets and identified intangible assets. We test our goodwill components annually for impairment on September 30. The methodology for such testing is detailed further on page 39 of this report.
 
Recent Developments.   In December 2005, the company entered into a Second Amended and Restated Credit and Guaranty Agreement (the Second Amended and Restated Credit Agreement). The Second Amended and Restated Credit Agreement provided the company a $310.6 million Senior Secured Credit Facility, comprised of a $280.6 million term loan facility and a $30 million revolving credit facility. In July 2006, to finance an acquisition, the company drew down $30 million of the available $50 million term loan facility.
 
In July 2006, the company entered into a First Amendment to Second Amended and Restated Credit and Guaranty Agreement, or the First Amendment, in order to facilitate the consummation of certain proposed acquisitions. The First Amendment provided the Company with a $30 million increase to its term loan facility, thus restoring availability of the term loan facility to $50 million, in addition to amending certain other terms including the following:
 
  •  An increase in the aggregate purchase price limitation for business acquisitions commencing with fiscal year ending December 31, 2006;
 
  •  An increase in the threshold for capital expenditures during any trailing twelve-month period; and
 
  •  Permit the Company to issue certain shares of its common stock in connection with certain proposed acquisitions.
 
Except as described above, all other material terms and conditions, including the maturity dates of the company’s existing Senior Secured Credit Facilities remained similar to those as described in Note 5 — “Long Term Debt” to our consolidated financial statements included in our 2005 Annual Report on Form 10-K.
 
Economic Factors Affecting Financial Performance.   We estimate that sales to the AEC market accounted for 80% of our net sales for the year ended December 31, 2006, with the remaining 20% consisting of sales to non-AEC markets (based on our review of the top 30% of our customers, and designating customers as either AEC or non-AEC based on their primary use of our services). As a result, our operating results and financial condition can be significantly affected by economic factors that influence the AEC industry, such as non-residential construction spending, GDP growth, interest rates, employment rates, office vacancy rates, and government expenditures. Similar to the AEC industry, the reprographics industry typically lags a recovery in the broader economy.
 
Non-GAAP Measures
 
EBIT and EBITDA and related ratios presented in this report are supplemental measures of our performance that are not required by or presented in accordance with GAAP. These measures are not measurements of our financial performance under GAAP and should not be considered as alternatives to net income, income from operations, or any other performance measures derived in accordance with GAAP or as an alternative to cash flow from operating, investing or financing activities as a measure of our liquidity.
 
EBIT represents net income before interest and taxes. EBITDA represents net income before interest, taxes, depreciation and amortization. EBIT margin is a non-GAAP measure calculated by subtracting depreciation and amortization from EBITDA and dividing the result by net sales. EBITDA margin is a non-GAAP measure calculated by dividing EBITDA by net sales.


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We present EBIT and EBITDA and related ratios because we consider them important supplemental measures of our performance and liquidity. We believe investors may also find these measures meaningful, given how our management makes use of them. The following is a discussion of our use of these measures.
 
We use EBIT to measure and compare the performance of our operating segments. Our operating segments’ financial performance includes all of the operating activities except for debt and taxation which are managed at the corporate level. As a result, EBIT is the best measure of divisional profitability and the most useful metric by which to measure and compare the performance of our divisions. We also use EBIT to measure performance for determining division-level compensation and use EBITDA to measure performance for determining consolidated-level compensation. We also use EBITDA as a metric to manage cash flow from our divisions to the corporate level and to determine the financial health of each division. As noted above, since debt and taxation are managed at the corporate level the cash flow from each division should be equal to the corresponding EBITDA of each division, assuming no other changes to a division’s balance sheet. As a result, we reconcile EBITDA to cash flow monthly as one of our key internal controls. We also use EBIT and EBITDA to evaluate potential acquisitions and to evaluate whether to incur capital expenditures.
 
EBIT, EBITDA and related ratios have limitations as analytical tools, and you should not consider them in isolation, or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are as follows:
 
  •  They do not reflect our cash expenditures, or future requirements for capital expenditures and contractual commitments;
 
  •  They do not reflect changes in, or cash requirements for, our working capital needs;
 
  •  They do not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments on our debt;
 
  •  Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA does not reflect any cash requirements for such replacements; and
 
  •  Other companies, including companies in our industry, may calculate these measures differently than we do, limiting their usefulness as comparative measures.
 
Because of these limitations, EBIT, EBITDA, and related ratios should not be considered as measures of discretionary cash available to us to invest in business growth or to reduce our indebtedness. We compensate for these limitations by relying primarily on our GAAP results and using EBIT and EBITDA only as supplements.
 
We have presented adjusted net income and adjusted earnings per share for the year ended December 31, 2006 to reflect the exclusion of the one-time litigation charge related to the Louis Frey bankruptcy litigation. This presentation facilitates a meaningful comparison of the Company’s operating results for the year ended December 31, 2006 to the same period in 2005, excluding a one-time income tax benefit taken in February of 2005.


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The following is a reconciliation of cash flows provided by operating activities to EBIT, EBITDA, and net income:
 
                         
    Fiscal Year Ended December 31,  
    2004     2005     2006  
 
Cash flows provided by operating activities
  $ 60,858     $ 56,648     $ 98,354  
Changes in operating assets and liabilities
    (3,830 )     8,859       (10,138 )
Non-cash (expenses) income, including depreciation and amortization
    (27,480 )     (5,031 )     (36,822 )
Income tax provision (benefit)
    8,520       (6,336 )     31,982  
Interest expense, net
    33,565       26,722       23,192  
Loss on early extinguishment of debt
          9,344        
                         
EBIT
    71,633       90,206       106,568  
Depreciation and amortization
    18,730       19,165       27,749  
                         
EBITDA
    90,363       109,371       134,317  
Interest expense
    (33,565 )     (26,722 )     (23,192 )
Loss on early extinguishment of debt
          (9,344 )      
Income tax provision (benefit)
    (8,520 )     6,336       (31,982 )
Depreciation and amortization
    (18,730 )     (19,165 )     (27,749 )
                         
Net income
  $ 29,548     $ 60,476     $ 51,394  
                         
 
The following is a reconciliation of net income to EBITDA:
 
                         
    Fiscal Year Ended December 31,  
    2004     2005     2006  
 
Net income
  $ 29,548     $ 60,476     $ 51,394  
Dividends and amortization of discount on preferred equity
                 
Interest expense, net
    33,565       26,722       23,192  
Loss on early extinguishment of debt
          9,344        
Income tax provision (benefit)
    8,520       (6,336 )     31,982  
                         
EBIT
    71,633       90,206       106,568  
Depreciation and amortization
    18,730       19,165       27,749  
                         
EBITDA
  $ 90,363     $ 109,371     $ 134,317  
                         
 
The following is a reconciliation of our net income margin to EBIT margin and EBITDA margin:
 
                         
    Fiscal Year Ended
 
    December 31,  
    2004     2005     2006  
 
Net income margin
    6.7 %     12.2 %     8.7 %
Interest expense, net
    7.6 %     5.4 %     3.9 %
Loss on early extinguishment of debt
          1.9 %      
Income tax provision (benefit)
    1.9 %     (1.3 )%     5.4 %
                         
EBIT margin
    16.2 %     18.2 %     18.0 %
Depreciation and amortization
    4.2 %     3.9 %     4.7 %
                         
EBITDA margin
    20.4 %     22.1 %     22.7 %
                         


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The following is a reconciliation of net income to adjusted net income and earnings per share to adjusted earnings per share:
 
                         
    Fiscal Year Ended December 31,  
    2004     2005     2006  
 
Net income
  $ 29,548     $ 60,476     $ 51,394  
Litigation reserve
                11,262  
Interest expense due to litigation reserve
                2,685  
Income tax benefit due to litigation reserve
                (5,579 )
Income tax benefit due to reorganization
          (27,701 )      
Loss on refinance of debt, net of tax
          5,558        
Unaudited adjusted incremental income tax provision
    (9,196 )     (333 )      
                         
Unaudited adjusted net income
  $ 20,352     $ 38,000     $ 59,762  
                         
Earning Per Share (Actual):
                       
Basic
  $ 0.83     $ 1.43     $ 1.14  
                         
Diluted
  $ 0.79     $ 1.40     $ 1.13  
                         
Earning Per Share (Adjusted):
                       
Basic
  $ 0.57     $ 0.90     $ 1.33  
                         
Diluted
  $ 0.54     $ 0.88     $ 1.31  
                         
Weighted average common shares outstanding:
                       
Basic
    35,493,136       42,264,001       45,014,786  
Diluted
    37,464,123       43,178,000       45,594,950  


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Results of Operations
 
The following table provides information on the percentages of certain items of selected financial data compared to net sales for the periods indicated:
 
                         
    As a Percentage of Net Sales  
    Fiscal Year Ended December 31,  
    2004     2005     2006  
 
Net sales
    100.0 %     100.0 %     100.0 %
Cost of sales
    59.4       58.6       57.0  
                         
Gross profit
    40.6       41.4       43.0  
Selling, general and administrative expenses
    23.8       22.8       22.3  
Litigation Reserve
                1.9  
Provision for sales tax dispute settlement
    0.3              
Amortization of intangibles
    0.4       0.4       0.9  
                         
Income from operations
    16.1       18.2       18.0  
Other income
    0.1       0.1       0.0  
Interest expense, net
    (7.6 )     (5.4 )     (3.9 )
Loss on early extinguishment of debt
          (1.9 )      
                         
Income before income tax provision
    8.6       11.0       14.1  
Income tax provision (benefit)
    (1.9 )     1.2       (5.4 )
                         
Net income
    6.7 %     12.2 %     8.7 %
                         
 
Year Ended December 31, 2006 Compared to Year Ended December 31, 2005
 
                                 
    Fiscal Year Ended
       
    December 31,     Increase (decrease)  
    2005     2006     (In dollars)     (Percent)  
    (In millions)        
 
Reprographics services
  $ 369.1     $ 438.4     $ 69.3       18.8 %
Facilities management
    83.1       100.1       17.0       20.5 %
Equipment and supplies sales
    42.0       53.3       11.3       26.9 %
                                 
Total net sales
  $ 494.2     $ 591.8     $ 97.6       19.8 %
Gross profit
  $ 204.6     $ 254.3     $ 49.7       24.3 %
Selling, general and administrative expenses
  $ 112.7     $ 131.7     $ 19.0       16.9 %
Litigation reserve
        $ 11.3     $ 11.3       100.0 %
Amortization of intangibles
  $ 2.1     $ 5.1     $ 3.0       142.9 %
Interest expense, net
  $ 26.7     $ 23.2     $ (3.5 )     (13.1 )%
Income taxes provision (benefit)
  $ (6.3 )   $ 32.0     $ 38.3       (607.9 )%
Net Income
  $ 60.5     $ 51.4     $ (9.1 )     (15.0 )%
EBITDA
  $ 109.4     $ 134.3     $ 24.9       22.8 %
 
Net Sales.
 
Net Sales in 2006 increased by 19.8% of which approximately 9% of the increase was related to our standalone acquisitions.
 
Reprographics services.   Net sales increased in 2006 compared to 2005 primarily from increased commercial construction spending throughout the U.S. and the expansion of our market share through branch openings and acquisitions. Estimates from FMI, a well-respected management consultancy for the construction industry, show non-residential construction increasing by a minimum of 7% in each of the U.S. Census districts during 2006, with


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some districts reporting 11% and 12% increases. We acquired 16 businesses at various times throughout the year, each with a primary focus on reprographics services. These acquired businesses added sales from their book of business to our own, and in some cases, also allowed us to aggregate regional work from larger clients. Regional managers reported continued strength in our core construction-related reprographics services. Company-wide, pricing remained at similar levels to 2005, indicating that revenue increases were due primarily to volume.
 
Facilities management.   The increase in revenues from facilities management sales reflects increased contract volume of these services. As a percentage of overall revenue, however, FM services increased only slightly due to the dilutive effects of acquisitions with small or non-existent FM programs of their own. FM revenue is derived from a single cost per square foot of printed material, similar to our “Reprographics Services” revenue. As convenience and speed continue to characterize our customers’ needs, and as printing equipment continues to become smaller and more affordable, the trend of placing equipment (and sometimes staff) in an architectural studio or construction company office remains strong as evidenced by the compounded annual growth rate of 31% in new on-site services contracts since the inception of the sales program in 1997. By placing such equipment on-site and billing on a per use and per project basis, the invoice continues to be issued by us, just as if the work were produced in one of our centralized production facilities. The resulting benefit is the convenience of on-site production with a pass-through or reimbursable cost of business that many customers continue to find attractive. Customers continue to renew their FM contracts at high rates, and, in combination with the convenience features that characterize the continuing development of printing equipment, we believe that this source of revenue will continue to increase in the near term.
 
Equipment and supplies sales.   From 2001 through 2004, our equipment and supplies sales declined or were generally flat. In 2005, we experienced a 10% gain as compared to 2004 revenue for this service line, and in 2006, the increase was 26.9%. The sales decline reflected in the earlier period was due in large measure to the success of our FM programs displacing the outright sale of equipment, but several acquired divisions with a strong focus in equipment sales began to reverse that sales pattern in late-2004 and 2005. Trends in smaller, less expensive and more convenient printing equipment are gaining popularity with customers who want the convenience of in-house production, but have no compelling reimbursable invoice volume to offset the cost of placing the equipment. In the future, we expect this market to grow independently from our FM program, and intend to target this type of customer through increased marketing and sales efforts.
 
Gross Profit.
 
Gross profit in 2006 was $254.3 million compared to $204.6 million in 2005. This 24.3% increase in gross profit was the result of increased revenues of 19.8%, continued focus on higher margin service lines, and the fixed cost nature of some of our cost of good sold expenses, such as machine cost and facility rent. Gross margins increased from 41.4% in 2005 to 43.0% in 2006 due to increased revenue and the margin improvement our high-fixed costs provide to our incremental revenue. These increases were partially diluted by the lower gross margins attributed to our acquisitions in 2006 that tend to depress gross margins temporarily.
 
Facilities management revenues are a significant component of our gross margins. We believe that this service segment will continue to be our strongest margin producer in the foreseeable future. Customers continue to view on-site services and digital equipment as a high-value convenience offering, and we believe the market for this service will continue to expand. We believe that more customers will adopt these services, as the equipment continues to become smaller and more affordable.
 
Material costs as a percentage of net sales were flat from 2005 to 2006, as our purchasing power as one of the largest purchasers of reprographics equipment in the country continues to keep our material cost and purchasing costs low by industry standards. Production labor cost as a percentage of net sales remained consistent year over year at approximately 23%. Production overhead as a percentage of revenue decreased from 16.8% in 2005 to 15.2% in 2006 due to the fixed cost nature of the expense coupled with the net sales increase.
 
Selling, General and Administrative Expenses.   In 2006, selling, general and administrative expenses increased by $19 million or 16.9% over 2005. The increase is attributable to both the increase in our sales volume during 2006, as well as costs related to compliance with Section 404 of the Sarbanes Oxley Act of 2002 and the company’s secondary offering in April 2006. Expenses also rose primarily due to increases in sales commissions,


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incentive payments and bonus accruals that accompany sales growth. As a percentage of net sales, selling, general and administrative expenses declined by 0.5% in 2006 as compared to 2005 as a result of continued regional consolidation of operations, accounting and finance functions, and refinements in our regional management structure instituted in 2003. We continue to expect that our selling, general and administrative expenses will increase in absolute dollars due to our expected growth, but we believe these costs as a percentage of overall sales will decline in the future as we continue to refine their management.
 
Amortization of Intangibles.   Amortization of intangibles increased 142.9% in 2006 compared to 2005 due to an increase in identified intangible assets such as customer relationships, trade names and not-to-compete covenants in association with our increased acquisition activity during the year. The amortization of such intangibles applies over a period of years according to pre-defined schedules and the company expects increases to continue in the future as additional acquisitions are completed.
 
Interest Expense.   Net interest expense was $23.2 million in 2006 compared with $26.7 million in 2005, a decrease of 13.1% year-over-year. The decrease was due primarily to the refinancing of our debt in December of 2005 at more favorable interest rates and pay down of debt during 2006, partially offset by interest expense of $2.7 million related to the Louis Frey litigation reserve.
 
Income Taxes.   Our effective income tax rate, excluding our one-time benefit as a result of our reorganization in February 2005, decreased from 39% in 2005 to 38% in 2006. The decrease is primarily due to the release of a tax reserve for a prior year as the statute of limitations had closed. Additionally, a $5.6 million tax benefit was recorded in 2006, due to the Louis Frey litigation charge.
 
Net Income.   Net income decreased to $51.4 million in 2006 compared to $60.5 million in 2005. This was primarily due to a one time litigation charge taken in 2006 associated with the Louis Frey litigation and tax benefit of $27.7 million as a result of our reorganization in February 2005. Excluding the one-time tax benefit of $27.7 million and the Louis Frey litigation charge of $8.4 million, net of taxes, net income increased by $27.0 million in 2006 as compared to 2005. The increase in net income is primarily due to increased sales and lower interest expense resulting from the refinance of our debt in December 2005.
 
EBITDA.   Our EBITDA margin increased to 22.8% in 2006 compared to 22.1% in 2005 primarily due to higher revenues.


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Year Ended December 31, 2005 Compared to Year Ended December 31, 2004
 
                                 
    Fiscal Year Ended
       
    December 31,     Increase (decrease)  
    2004     2005     (In dollars)     (Percent)  
    (In millions)              
 
Reprographics services
  $ 333.3     $ 369.1     $ 35.8       10.7 %
Facilities management
    72.4       83.1       10.7       14.8 %
Equipment and supplies sales
    38.2       42.0       3.8       10.0 %
                                 
Total net sales
  $ 443.9     $ 494.2     $ 50.3       11.3 %
Gross profit
  $ 180.1     $ 204.6     $ 24.5       13.6 %
Selling, general and administrative expenses
  $ 105.8     $ 112.7     $ 6.9       6.5 %
Provision for sales tax liability
  $ 1.4           $ (1.4 )     n/a  
Amortization of intangibles
  $ 1.7     $ 2.1     $ 0.4       23.5 %
Interest expense, net
  $ 33.6     $ 26.7     $ (6.9 )     (20.5 )%
Income taxes provision (benefit)
  $ 8.5     $ (6.3 )   $ (14.8 )     (174.1 )%
Net Income
  $ 29.5     $ 60.5     $ 31.0       105.1 %
EBITDA
  $ 90.4     $ 109.0     $ 18.6       20.6 %
 
Reprographics Services.   Net sales increased in 2005 compared to 2004 from increased construction spending throughout the U.S. and the expansion of our market share through branch openings and acquisitions. Data from FMI, a well-respected management consultancy for the construction industry, show non-residential construction increasing by a minimum of 5% in each of the U.S. Census districts, with some districts reporting 8% and 10% increases. Residential construction was also robust, showing increases in every district by as much as 10%. We acquired 14 businesses at various times throughout 2005, each with a primary focus on reprographic services. These acquired businesses added sales from their book of business to our own, but in some cases, also allowed us to aggregate regional work from larger clients. Regional managers reported continued strength in large-format printing sales. Several regions also saw significant increases in large and small-format color sales as our AEC customers began to market new projects in view of the improving economy. The hurricane season of 2005 depressed sales in the affected region, with Louisiana, Mississippi and Alabama operations reporting monthly revenues at 70% of 2004 averages for the same period. Company-wide, pricing remained at similar levels to 2004, indicating that revenue increases were due primarily to volume.
 
Facilities management.   The increase in on-site or facilities management services continued to post solid dollar volume and year-over-year percentage gains. This revenue is derived from a single cost per square foot of printed material, similar to our “Reprographics Services” revenue. As convenience and speed continue to characterize our customers’ needs, and as printing equipment continues to become smaller and more affordable, the trend of placing equipment (and sometimes staff) in an architectural studio or construction company office remained strong as evidenced by the nine-year compounded annual growth rate of 30% in new on-site services contracts. By placing such equipment on-site and billing on a per use and per project basis, the invoice continues to be issued by us, just as if the work were produced in one of our centralized production facilities. The resulting benefit is the convenience of on-site production with a pass-through or reimbursable cost of business that many customers continue to find attractive.
 
Equipment and supplies sales.   From 2001 through 2004, our equipment and supplies sales declined or were generally flat. In 2005, we experienced a 10% gain as compared to 2004 revenue for this service line. During the past four years, our facilities management sales efforts made steady progress against the outright sale of equipment and supplies by converting such sales contracts to on-site service agreements. Two acquisitions in the Midwest in 2005 and one late in 2004 contributed to reversing this trend, as each possessed a strong equipment and supply business unit. Trends in smaller, less expensive and more convenient printing equipment are gaining popularity with customers who want the convenience of in-house production, but have no compelling reimbursable invoice volume to offset the cost of placing the equipment.


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Gross Profit.
 
Gross profit in 2005 came in at $204.6 million compared to $180.1 million in 2004. This 13.6% increase in gross profit was the result of increased revenues of 11.3% coupled with the fixed cost nature of some of our cost of good sold expenses, such as machine cost and facility rent. Gross margins increased from 40.6% in 2004 to 41.4% in 2005 due to increased revenue and the fixed cost nature of some of our cost of goods sold expenses. These increases were partially offset by lower gross margins due to acquisition activity and new branch openings that tend to depress gross margins temporarily.
 
Facilities management revenues are a significant component of our gross margins. We believe that this service segment will continue to be our strongest margin producer in the foreseeable future. Customers continue to view on-site services and digital equipment as a premium “convenience” offering, and we believe the market for this service will continue to expand. We believe that more customers will adopt these services, as the equipment continues to become smaller and more affordable.
 
While material costs as a percentage of net sales remained flat from 2004 to 2005, our increased purchasing power as a result of our expanding geographical footprint continues to keep our material cost and purchasing costs low by industry standards. Production labor cost as a percentage of net sales increased from 22.8% in 2004 to 23.2% in 2005 due to the increased cost associated with higher-priced, technologically-equipped employees whose skills are necessary to serve our customers, and continuing increases in employee health benefit costs. Production overhead as a percentage of revenue decreased from 18% in 2004 to 16.8% in 2005 due to the fixed cost nature of the expense coupled with the net sales increase.
 
Selling, General and Administrative Expenses.   In 2005, selling, general and administrative expenses increased by $6.9 million or 6.5% over 2004. The increase is attributable to the increase in our sales volume during the same period. Expenses rose primarily due to increases in sales commissions, incentive payments and bonus accruals that accompany sales growth. As a percentage of net sales, selling, general and administrative expenses declined by 1% in 2005 as compared to 2004 as a result of continued regional consolidation of accounting and finance functions, and a maturing regional management structure. Our regional management structure, instituted in 2003, continues to bear positive results in the dissemination of best business practices, better administrative controls, and greater consolidation of common regional resources. Our general and administrative expenses included management fees of approximately $0.9 million paid in each of 2003 and 2004 to CHS Management IV LP and $217,000 in 2005 in accordance with a management agreement entered into as part of our recapitalization in 2000. These management fees ceased after our initial public offering in February 2005.
 
Amortization of Intangibles.   Amortization of intangibles increased 25.1% in 2005 compared to 2004 primarily due to an increase in identified intangible assets such as customer relationships, trade names and not-to-compete covenants in association with acquired businesses.
 
Interest Expense, Net.   Net interest expense declined to $26.7 million in 2005 compared with $33.6 million in 2004, a decrease of 20.5% year-over-year. The decrease was due primarily to the use of $88 million in net proceeds from our February 2005 initial public offering to repay debt.
 
Income Taxes.   Our effective income tax rate increased from 22% to 39%, not including our one-time benefit as a result of our reorganization in February 2005. The increase is due to our entire company being subject to corporate income taxation in 2005 as compared to 2004 in which a substantial portion of our business was operated within a limited liability company and treated as a partnership for income tax purposes. The members of Holdings paid income tax on their respective share of Holdings’ income.
 
Net Income.   Net income increased to $60.5 million in 2005 compared to $29.5 million in 2004 primarily due to increased sales as overall construction activity in the U.S. expanded in most regions, lower interest expense due to the reduction in our overall debt, and a one-time tax benefit due to our reorganization in February 2005.


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EBITDA.   Our EBITDA margin increased to 22.1% in 2005 compared to 20.4% in 2004 primarily due to higher revenues.
 
Quarterly Results of Operations
 
The following table sets forth certain quarterly financial data for the eight quarters ended December 31, 2006. This unaudited quarterly information, has been prepared on the same basis as the annual financial statements and, in our opinion, reflects all adjustments, necessary for a fair presentation of the information for periods presented. Operating results for any quarter are not necessarily indicative of results for any future period.
 
                                                                 
    Quarter Ended  
    Mar. 31,     June 30,     Sept. 30,     Dec. 31,     Mar. 31,     June 30,     Sept. 30,     Dec. 31,  
    2005     2006  
 
Reprographics services
    87,695       94,708       94,730       91,990       104,817       114,658       111,176       107,724  
Facilities management
    19,172       21,076       21,577       21,300       22,932       24,691       25,814       26,721  
Equipment and supplies sales
    9,599       9,776       11,180       11,401       13,053       12,178       15,548       12,526  
                                                                 
Total net sales
  $ 116,466     $ 125,560     $ 127,487     $ 124,691     $ 140,802     $ 151,527     $ 152,538     $ 146,971  
Quarterly sales as a % of annual sales
    23.6 %     25.4 %     25.8 %     25.2 %     23.8 %     25.6 %     25.8 %     24.8 %
Gross profit
  $ 48,325     $ 53,654     $ 52,522     $ 50,124     $ 60,359     $ 65,814     $ 67,007     $ 61,149  
Income from operations
  $ 21,060     $ 25,083     $ 23,604     $ 20,078     $ 28,088     $ 20,573     $ 30,917     $ 26,691  
EBITDA
  $ 25,608     $ 29,648     $ 28,685     $ 25,431     $ 34,052     $ 27,416     $ 38,020     $ 34,829  
Net Income
  $ 35,563     $ 11,383     $ 10,518     $ 3,012     $ 14,375     $ 8,427     $ 15,756     $ 12,836  
 
The following is a reconciliation of EBITDA to net income for each respective quarter.
 
                                                                 
    Quarter Ended  
    Mar. 31,     June 30,     Sept. 30,     Dec. 31,     Mar. 31,     June 30,     Sept. 30,     Dec. 31,  
    2005     2006  
 
EBITDA
  $ 25,608     $ 29,648     $ 28,685     $ 25,431     $ 34,052     $ 27,416     $ 38,020     $ 34,829  
Interest expense
    (8,324 )     (6,194 )     (6,131 )     (6,074 )     (4,459 )     (7,001 )     (5,810 )     (5,922 )
Loss on early extinguishment of debt
                      (9,344 )                        
Income tax benefit (provision)
    22,709       (7,612 )     (7,018 )     (1,743 )     (9,583 )     (5,617 )     (8,993 )     (7,789 )
Depreciation and amortization
    (4,430 )     (4,459 )     (5,018 )     (5,258 )     (5,635 )     (6,371 )     (7,461 )     (8,282 )
                                                                 
Net income
  $ 35,563     $ 11,383     $ 10,518     $ 3,012     $ 14,375     $ 8,427     $ 15,756     $ 12,836  
                                                                 
 
We believe that quarterly revenues and operating results may vary significantly in the future and that quarter-to-quarter comparisons of our results of operations are not necessarily meaningful and should not be relied upon as indications of future performance. In addition, our quarterly operating results are typically affected by seasonal factors, primarily the number of working days in a quarter. Historically, our fourth quarter is the slowest, reflecting the slowdown in construction activity during the holiday season, and our second quarter is the strongest, reflecting the fewest holidays and best weather compared to other quarters.
 
Impact of Inflation
 
Inflation has not had a significant effect on our operations. Price increases for raw materials such as paper typically have been, and we expect will continue to be, passed on to customers in the ordinary course of business.


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Liquidity and Capital Resources
 
Our principal sources of cash have been operations and borrowings under our bank credit facilities or debt agreements. Our historical uses of cash have been for acquisitions of reprographics businesses, payment of principal and interest on outstanding debt obligations, capital expenditures and tax-related distributions to members of Holdings. Supplemental information pertaining to our historical sources and uses of cash is presented as follows and should be read in conjunction with our consolidated statements of cash flows and notes thereto included elsewhere in this report.
 
                         
    Year Ended December 31,  
    2004     2005     2006  
 
Net cash provided by operating activities
  $ 60,858     $ 56,648     $ 98,354  
                         
Net cash used in investing activities
  $ (10,586 )   $ (27,547 )   $ (77,488 )
                         
Net cash used in financing activities
  $ (53,761 )   $ (20,284 )   $ (31,867 )
                         
 
Operating Activities
 
Net cash provided by operating activities for the year ended December 31, 2006, primarily related to net income of $51.4 million, depreciation and amortization of $27.8, Louis Frey litigation charge of $14 million and an increase in accounts payable and accrued expenses of $14.9 million, net of acquisitions. The increase in accounts payable and accrued expenses was primarily due to the timing of tax payments and trade payables. These factors were offset by the growth in accounts receivable of $5.8 million, primarily related to increased sales during 2006. Our days sales outstanding remained consistent with 2005 at 51 days as of December 31, 2006.
 
Net cash provided by operating activities for the year ended December 31, 2005 primarily related to net income of $60.5 million, depreciation and amortization of $19.1 million and non-cash interest expense of $8.7 million from the amortization of deferred financing costs. These factors were offset by the recording of $27.7 million in deferred tax benefits resulting from the reorganization of our company from an LLC to a corporation, the growth in accounts receivable of $4.0 million, primarily related to increased sales during 2005 and a decrease in accounts payable and accrued expenses of $6.1 million, primarily due to the timing of payments of interest on our bank debt coupled with timing of trade payables.
 
Net cash provided by operating activities for the year ended December 31, 2004, primarily related to net income of $29.5 million, depreciation and amortization of $18.7 million, non-cash interest expense of $4.6 million from the amortization of deferred financing costs and the accretion of yield on our mandatorily redeemable preferred members’ equity, and an increase in accounts payable and accrued expenses of $12.4 million, primarily due to the timing of payments on trade payables, incentive bonus accruals to be paid at year end, and the higher volume of business activity in 2004. These factors were offset by the growth in accounts receivables of $5.7 million, primarily related to increased sales during 2004, and by the $3.1 million increase in our prepaid expenses, primarily due to the $2.2 million of IPO-related costs incurred in 2004 that were recorded as prepaid expenses. Such IPO-related costs were offset against gross IPO proceeds upon the completion of our IPO in February 2005.
 
Investing Activities
 
Net cash used in investing activities primarily relates to acquisition of businesses, capital expenditures, and restricted cash. Payments for businesses acquired, net of cash acquired and including other cash payments and earnout payments associated with the acquisitions, amounted to $62.2 million, $22.4 million, and $4.6 million during the years ended December 31, 2006, 2005, and 2004, respectively. We incurred capital expenditures totaling $7.4 million, $5.2 million, and $5.9 million during the years ended December 31, 2006, 2005, and 2004, respectively. Our restricted cash out flow in 2006 of $8.4 million is due to the cash collateral of $7.5 million we posted to stay the execution of the Louis Frey judgment pending appeal and a $0.9 million escrow account established in connection with one of our acquisitions.


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Financing Activities
 
Net cash used in 2006 primarily relates to the net repayment of debt and capital leases of $37.8 million, offset by $2.1 million of proceeds from the exercise of stock options and the related excess tax benefit of $4.0 million. Net cash used in 2005 primarily relates to the redemption of preferred units of $28.3 million and repayment of long term debt of $97.2 million and distributions to members of $8.2 million, offset by net proceeds from our initial public offering of $92.7 million, borrowings under long term debt agreements of $18 million and proceeds from the issuance of common stock under our Employee Stock Purchase Plan of $4 million. Cash used in financing activities for the year ended December 31, 2004, included $48.4 million of repayments under our debt agreements and $6.1 million in cash distributions to members.
 
Our cash position, working capital, and debt obligations as of December 31, 2004, 2005, and 2006 are shown below and should be read in conjunction with our consolidated balance sheets and notes thereto elsewhere in this report.
 
                         
    December 31,  
    2004     2005     2006  
 
Cash and cash equivalents
  $ 13,826     $ 22,643     $ 11,642  
Working capital
  $ 22,387     $ 35,797     $ 19,828  
Mandatorily redeemable preferred and common membership units
  $ 27,814              
Borrowings from senior secured credit facilities
  $ 320,833     $ 230,423     $ 215,651  
Other debt obligations and capital leases
          43,389       57,494  
                         
Total debt obligations
  $ 348,647     $ 273,812     $ 273,145  
                         
 
Debt obligations as of December 31, 2004 include $27.8 million of redeemable preferred equity, which has been reclassified in our financial statements as a component of our total debt upon our adoption of SFAS No. 150 in July 2003. The redeemable preferred equity was redeemed on February 9, 2005.
 
As discussed in “Quantitative and Qualitative Disclosure about Market Risk,” we had $273.1 million of total debt and capital leases outstanding as of December 31, 2006, of which $215.7 million was bearing interest at variable rates. A 1.0% change in interest rates on variable rate debt would have resulted in interest expense fluctuating by approximately $2.3 million during the year ended December 31, 2006.
 
We believe that our cash flow provided by operations will be adequate to cover our 2007 working capital needs, debt service requirements, and planned capital expenditures, to the extent such items are known or are reasonably determinable based on current business and market conditions. However, we may elect to finance certain of our capital expenditure requirements through borrowings under our credit facilities or the issuance of additional debt.
 
We continually evaluate potential acquisitions. Absent a compelling strategic reason, we target potential acquisitions that would be cash flow accretive within six months. Currently, we are not a party to any agreements or engaged in any negotiations regarding a material acquisition. We expect to fund future acquisitions through cash flow provided by operations, additional borrowings, or the issuance of our equity. The extent to which we will be willing or able to use our equity or a mix of equity and cash payments to make acquisitions will depend on the market value of our shares from time to time and the willingness of potential sellers to accept equity as full or partial payment.
 
Debt Obligations
 
Senior Secured Credit Facilities.   On December 21, 2005, we entered into a Second Amended and Restated Credit and Guaranty Agreement (the “Second Amended and Restated Credit Agreement”), which replaced our Amended and Restated Credit and Guaranty Agreement dated as of June 30, 2005 (“First Amended and Restated Credit and Guaranty Agreement”). The Second Amended and Restated Credit Agreement provides for senior secured credit facilities aggregating up to $310.6 million, consisting of a $280.6 million term loan facility and a $30 million revolving credit facility. We used the proceeds from the incremental new term loan, in the amount of $157.5 million, to prepay in full all principal and interest payable under our then existing Second Lien Credit and


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Guaranty Agreement, dated December 18, 2003. The remaining balance of the increased term loan facility of $50 million is available for our use, subject to the terms of the Second Amended and Restated Credit Agreement. Our obligations are guaranteed by our domestic subsidiaries and, subject to certain limited exceptions, are collateralized by first priority security interests granted in all of our and the guarantors’ personal and real property, and 65% of the assets of our foreign subsidiaries. Term loans are amortized over the term with the final payment due June 18, 2009. Amounts borrowed under the revolving credit facility must be repaid by December 18, 2008.
 
In July 2006, to finance an acquisition, we drew down $30 million of the available $50 million term loan facility.
 
In July 2006, the Company entered into a First Amendment to Second Amended and Restated Credit and Guaranty Agreement, or First Amendment, in order to facilitate the consummation of certain proposed acquisitions. The First Amendment provided the Company with a $30 million increase to its term loan facility, thus restoring availability of the term loan facility to $50 million, in addition to amending certain other terms including the following:
 
  •  An increase in the aggregate purchase price limitation for business acquisitions commencing with fiscal year ending December 31, 2006;
 
  •  An increase in the threshold for capital expenditures during any trailing twelve-month period; and
 
  •  Permit the company to issue certain shares of its common stock in connection with certain proposed acquisitions.
 
Except as described above, all other material terms and conditions, including the maturity dates of the company’s existing senior secured credit facilities remained similar to those as described in Note 5 — “Long Term Debt”.
 
Interest on borrowings under the First Priority Revolving Credit Facility was at our option, one of two floating rates: (i) a Eurodollar rate plus a margin (the Applicable Margin) that ranges from 2% to 2.75% per annum, depending on the company’s Leverage Ratio, as defined in the First Priority Revolving Credit Facility, or (ii) an Index Rate, as defined in the First Priority Revolving Credit Facility, plus the Applicable Margin. The First Priority Revolving Credit Facility is also subject to a commitment fee equal to 0.50% of the average daily unused portion of such revolving facility. Borrowings under the First Priority Term Loan Facility bear interest at either (i) a Eurodollar rate plus 1.75% per annum, or (ii) an Index Rate, as defined in the First Priority Revolving Credit Facility, plus .75% per annum. The applicable margin is determined by a grid based on the ratio of the consolidated indebtedness of us and our subsidiaries to the consolidated adjusted EBITDA (as defined in the credit facilities) of us and our subsidiaries for the most recently ended four fiscal quarters and range between 2.00% and 2.75% for Eurodollar Rate loans and range between 1.00% and 1.75% for Index Rate Loans.
 
As of December 31, 2005 and 2006, standby letters of credit aggregated to $4.3 and $4.1 million respectively
 
The following table sets forth the outstanding balance, borrowing capacity and applicable interest rate under our senior secured credit facilities.
 
                                                 
    As of December 31, 2005     As of December 31, 2006  
          Available
                Available
       
          Borrowing
    Interest
          Borrowing
    Interest
 
    Balance     Capacity     Rate     Balance     Capacity     Rate  
    (Dollars in thousands)  
 
Term facility
  $ 230,423     $ 50,000       6.20 %   $ 215,651     $ 50,000       7.10 %
Revolving facility
    5,000       20,722       8.25 %           25,945       9.00 %
                                                 
    $ 235,423     $ 70,722             $ 215,651     $ 75,945          
                                                 
 
In addition, under the revolving facility, we are required to pay a fee equal to 0.50% of the total unused commitment amount. We may also draw upon this credit facility through letters of credit, which carry specific fees.
 
Redeemable Preferred Units.   As of December 31, 2004, we had $27.8 million of redeemable, non-voting preferred membership units. Holders of the redeemable preferred units were entitled to receive a yield of 13.25% of


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its liquidation value per annum for the first three years starting in April 2000, and increasing to 15% of the liquidation value per annum thereafter. The discount inherent in the yield for the first three years was recorded as an adjustment to the carrying amount of the redeemable preferred units. This discount was amortized as a dividend over the initial three years. Of the total yield on the redeemable preferred units, 48% was mandatorily payable quarterly in cash to the redeemable preferred unit holders. The unpaid portion of the yield accumulated annually and was added to the liquidation value of the redeemable preferred units. The preferred units were redeemable without premium or penalty, wholly or in part, at Holdings’ option at any time, for the liquidation value, including any unpaid yield. On February 9, 2005, we utilized $28.3 million of cash proceeds from our initial public offering to redeem 100% of the redeemable preferred units based on the liquidation value of the redeemable preferred units on such date.
 
Seller Notes.   As of December 31, 2006, we had $20.1 million of seller notes outstanding, with interest rates ranging between 5.0% and 7.1% and maturities between 2007 and 2012. These notes were issued in connection with prior acquisitions.
 
Off-Balance Sheet Arrangements
 
At December 31, 2005, and 2006, we did 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.
 
Contractual Obligations and Other Commitments
 
Our future contractual obligations as of December 31, 2006, by fiscal year are as follows:
 
                                                 
    Years Ending December 31,        
    2007     2008     2009     2010     2011     Thereafter  
    (Dollars in thousands)  
 
Debt obligations
  $ 6,731     $ 112,175     $ 111,326     $ 4,284     $ 1,211     $ 27  
Capital lease obligations
    14,317       11,518       6,496       2,872       1,818       370  
Operating lease
    29,807       21,495       15,607       10,501       6,182       12,801  
                                                 
Total
  $ 50,855     $ 145,188     $ 133,429     $ 17,657     $ 9,211     $ 13,198  
                                                 
 
Operating Leases.   We have entered into various noncancelable operating leases primarily related to facilities, equipment and vehicles used in the ordinary course of our business.
 
Contingent Transaction Consideration.   We have entered into earnout agreements in connection with prior acquisitions. If the acquired businesses generate operating profits in excess of predetermined targets, we are obligated to make additional cash payments in accordance with the terms of such earnout agreements. As of December 31, 2006, we estimate that we will be required to make additional cash payments of up to $14.5 million, in the aggregate between 2007 and 2010. These additional cash payments are accounted for as goodwill when earned.
 
Impact of Conversion from an LLC to a Corporation
 
Immediately prior to our initial public offering in February 2005, we reorganized from a California limited liability company to a Delaware corporation, American Reprographics Company. In the reorganization, the members of Holdings exchanged their common units and options to purchase common units for shares of our common stock and options to purchase shares of our common stock. As required by the operating agreement of Holdings, we used a portion of the net proceeds from our initial public offering to repurchase all of the preferred equity of Holdings upon the closing of our initial public offering. As part of the reorganization, all outstanding warrants to purchase common units were exchanged for shares of our common stock. We do not expect any significant effect on operations from the reorganization apart from an increase in our effective tax rate due to corporate-level taxes, which will be offset by the elimination of tax distributions to our members and the recognition


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of deferred income taxes upon our conversion from a California limited liability company to a Delaware corporation.
 
Income Taxes
 
Between 2001 and February 9, 2005, Holdings and Opco, through which a substantial portion of our business was operated prior to our reorganization, were limited liability companies that were taxed as partnerships. As a result, the members of Holdings paid income taxes on the earnings of Opco, which are passed through to Holdings. Certain divisions are consolidated in Holdings and treated as separate corporate entities for income tax purposes (the consolidated corporations). These consolidated corporations pay income tax and record provisions for income taxes in their financial statements.
 
As a result of the reorganization to a Delaware corporation, our total earnings are subject to federal, state and local income taxes The unaudited pro forma incremental income tax provision and unaudited pro forma earnings per common member unit amounts in the following table were calculated as if our reorganization became effective on January 1, 2001.
 
                                         
    Fiscal Year Ended December 31,  
    2002     2003     2004     2005     2006  
    (In thousands, except per unit/share amounts)  
 
Net income (loss) attributable to common members/stockholders
  $ 17,409     $ 1,823     $ 29,548     $ 60,476     $ 51,394  
Unaudited pro forma incremental income tax provision
    6,211       673       9,196       333        
                                         
Unaudited pro forma net income attributable to common members/stockholders
  $ 11,198     $ 1,150     $ 20,352     $ 60,143     $ 51,394  
                                         
Unaudited pro forma net income attributable to common members/stockholders per common unit/share:
                                       
Basic
  $ 0.31     $ 0.03     $ 0.57     $ 1.42     $ 1.14  
Diluted
  $ 0.30     $ 0.03     $ 0.54     $ 1.39     $ 1.13  
 
Stockholders’ Equity
 
Due to their tax attributes, certain members of Holdings have in the past elected to receive less than their proportionate share of distributions for such taxes as a result of a difference in the tax basis of their equity interest in Holdings. In accordance with the terms of the operating agreement of Holdings, we made a cash distribution of approximately $8.2 million to such members on February 9, 2005, with the completion of our initial public offering to bring their proportionate share of tax distributions equal to the other members. These distributions were not accrued at December 31, 2004, but became payable and were recorded immediately prior to our reorganization and the completion of our initial public offering on February 9, 2005. See Note 11 to our consolidated financial statements for further details.
 
Critical Accounting Policies.   Our management prepares financial statements in conformity with accounting principles generally accepted in the United States. This requires us to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. We evaluate our estimates and assumptions on an ongoing basis and rely on historical experience and other factors that we believe are reasonable under the circumstances. Actual results could differ from those estimates and such differences may be material to the consolidated financial statements. We believe the critical accounting policies and areas that require more significant judgments and estimates used in the preparation of our consolidated financial statements to be the following: goodwill and other intangible assets; allowance for doubtful accounts; and commitments and contingencies.


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Goodwill and Other Intangible Assets
 
We apply SFAS 142, Goodwill and Other Intangible Assets and perform an annual impairment test. Application of the goodwill impairment test requires judgment, including the identification of reporting units, assignment of assets and liabilities to reporting units, assignment of goodwill to reporting units, and determination of the fair value of each reporting unit. The fair value of each reporting unit is estimated using a discounted cash flow methodology. This requires significant judgments including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth of our business, the useful life over which cash flows will occur, and determination of our weighted average cost of capital. Changes in these estimates and assumptions could materially affect the determination of fair value and/or goodwill impairment for each reporting unit.
 
We have selected September 30 as the date on which we will perform our annual goodwill impairment test. Based on our valuation of goodwill, no impairment charges related to the write-down of goodwill were recognized for the years ended December 31, 2004, 2005 and 2006.
 
In connection with our acquisitions, we have applied the provisions of SFAS No. 141 “Business Combinations”, using the purchase method of accounting. The assets and liabilities assumed were recorded at their estimated fair values. The excess purchase price over those fair values was recorded as goodwill and other intangible assets.
 
The additions to goodwill include the excess purchase price over the fair value of net tangible assets and identifiable intangible assets acquired, adjustments to acquisition costs and certain earnout payments. See Note 3.
 
Other intangible assets that have finite useful lives are amortized over their useful lives. Intangible assets with finite useful lives consist primarily of not-to-compete covenants, trade names, and customer relationships and are amortized over the expected period of benefit which ranges from three to twenty years using the straight-line and accelerated methods. Customer relationships are amortized under an accelerated method which reflects the related customer attrition rates and trade names and not-to-compete covenants are amortized using the straight-line method.
 
Allowance for Doubtful Accounts
 
We perform periodic credit evaluations of the financial condition of our customers, monitor collections and payments from customers, and generally do not require collateral. Receivables are recorded at invoiced amounts. We provide for the possible inability to collect accounts receivable by recording an allowance for doubtful accounts. We write off an account when it is considered uncollectible. We estimate our allowance for doubtful accounts based on historical experience, aging of accounts receivable, and information regarding the creditworthiness of our customers. In 2004, 2005, and 2006, we recorded expenses of $1,281, $1,241 and $599, respectively, related to the allowance for trade receivables.
 
Commitments and Contingencies
 
In the normal course of business, we estimate potential future loss accruals related to legal, tax and other contingencies. These accruals require management’s judgment on the outcome of various events based on the best available information. However, due to changes in facts and circumstances, the ultimate outcomes could differ from management’s estimates.
 
Stock-Based Compensation
 
Prior to the January 1, 2006, adoption of Financial Accounting Standards Board (“FASB”) Statement No. 123(R), “Share-Based Payment” (“SFAS 123R”), we accounted for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. Accordingly, because the stock option grant price equaled the market price on the date of grant, no compensation expense was recognized for Company-issued stock options issued prior to fiscal year 2004. As permitted by SFAS 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), stock-based compensation was included as a pro forma disclosure in the Notes to the Consolidated Financial Statements.


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Effective January 1, 2006, we adopted SFAS 123R using the modified prospective transition method and, as a result, did not retroactively adjust results from prior periods. Under this transition method, stock-based compensation was recognized for: (i) expense related to the remaining unvested portion of all stock option awards granted in 2005, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123; and (ii) expense related to all stock option awards granted on or subsequent to January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS 123R. In accordance with SAB 107, the remaining unvested options issued by the company prior to their initial public offering are not included in their SFAS 123R option pool. As a result unless subsequently modified, repurchased or cancelled, such unvested options will not be included in stock-based compensation. We apply the Black-Scholes valuation model in determining the fair value share-based payments to employees, which is then amortized on a straight-line basis over the requisite service period.
 
As a result of adopting SFAS 123R, the impact to the Consolidated Statement of Income for the year ended December 31, 2006, on income before income taxes and net income was $1.4 million. In addition, upon the adoption of SFAS 123R, the net tax benefit resulting from the exercise of stock options, which were previously presented as operating cash inflows in the Consolidated Statement of Cash Flows, are classified as financing cash inflows.
 
Recent Accounting Pronouncements
 
On July 13, 2006, the FASB issued Interpretation No. 48 (FIN No. 48) “Accounting for Uncertainty in Income Taxes: an interpretation of FASB Statement No. 109.” This interpretation clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes.” FIN No. 48 prescribes a recognition threshold and measurement principles for financial statement disclosure of tax positions taken or expected to be taken on a tax return. This interpretation is effective for fiscal years beginning after December 15, 2006, or fiscal year 2007 for the company. We are currently completing our analysis of the impact of this new standard on our consolidated financial statements.
 
On September 13, 2006, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements , which provides interpretive guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment. SAB No. 108 is effective for fiscal years ending after November 14, 2006, or fiscal year 2006 for the Company. Early application is encouraged, but not required. We are currently assessing the impact, if any, the adoption of SAB No. 108 will have on the Company’s consolidated financial position and results of operations. The adoption did not have a material impact on the Company’s beginning retained earnings.
 
On September 15, 2006, the FASB issued SFAS No. 157, Fair Value Measurements . SFAS NO. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosure about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this Statement does not require any new fair value measurements. SFAS No. 157 is effective for fiscal years beginning after December 15, 2007, or fiscal year 2008 for the Company. The adoption of SFAS No. 157 is not expected to have a material impact on the Company’s financial position, results of operations or cash flows.
 
Item 7A.    Quantitative and Qualitative Disclosures about Market Risk
 
Our primary exposure to market risk is interest rate risk associated with our debt instruments. We use both fixed and variable rate debt as sources of financing.
 
In March 2006, we entered into an interest rate collar agreement effective as of December 23, 2006, with a fixed notional amount of $76.7 million until December 23, 2007, which then decreases to $67.0 million until termination of the collar on December 23, 2008. The interest rate collar has a cap strike three month LIBOR rate of 5.50% and a floor strike three month LIBOR rate of 4.70%. At December 31, 2006, the interest rule collar agreement had a negative fair value of $97,254.


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As of December 31, 2006, we had $273.1 million of total debt and capital lease obligations of which $215.7 million was bearing interest at variable rates approximating 7.1% on a weighted average basis. A 1.0% change in interest rates on our variable rate debt would have resulted in interest expense fluctuating by approximately $2.3 million during the year ended December 31, 2006.
 
We have not, and do not plan to, enter into any derivative financial instruments for trading or speculative purposes. As of December 31, 2006, we had no other significant material exposure to market risk, including foreign exchange risk and commodity risks.
 
Item 8.    Consolidated Financial Statements and Supplementary Data
 
Our Financial Statements and the accompanying Notes that are filed as part of this report are listed under “PART IV, ITEM 15. Financial Statements Schedules and Reports” and are set forth beginning on page F-1 immediately following the signature pages of this report.
 
Item 9.    Changes in and Disagreements with Accountants On Accounting And Financial Disclosure
 
None
 
Item 9A.    Controls and Procedures
 
Disclosure Controls and Procedures
 
As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of its management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) of the Exchange Act). Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective to provide reasonable assurance that information is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Chief Executive Officer and the Chief Financial Officer as appropriate, to allow timely decisions regarding required disclosure.
 
Management’s Report on Internal Control Over Financial Reporting
 
Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) or 15(d)-15(f) of the Exchange Act). Under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, the Company conducted an evaluation of the effectiveness of its internal control over financial reporting based upon the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that evaluation, the Company’s management concluded that its internal control over financial reporting was effective as of December 31, 2006. Management’s report is included with our Consolidated Financial Statements under Part IV, Item 15 of this annual report on Form 10-K.
 
Management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2006, has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their Report of Independent Registered Public Accounting Firm under Part IV, Item 15 of this Form 10-K.
 
Changes in Internal Control Over Financial Reporting
 
There has been no change in the Company’s internal control over financial reporting during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
 
Item 9B.    Other Information
 
None


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PART III
 
Item 10.    Directors and Executive Officers of the Registrant
 
Board of Directors
 
Our Board of Directors currently consists of seven directors. Our directors are elected annually. There are no family relationships among any of the directors or executive officers of the company. The following table sets forth, with respect to each director, his name, the year in which he first became a director of the company, and his age as of March 1, 2007.
 
                 
    Year First
       
Name
  Elected     Age  
 
Sathiyamurthy Chandramohan
    1998 (1)     48  
Kumarakulasingam Suriyakumar
    1998 (1)     53  
Thomas J. Formolo
    2000 (2)     42  
Dewitt Kerry McCluggage
    2006       52  
Mark W. Mealy
    2005       49  
Manuel Perez de la Mesa
    2002 (3)     49  
Eriberto R. Scocimara
    2006       71  
 
 
(1) Served as an advisor of Holdings since 1998 and as a director of ARC since October 2004.
 
(2) Served as an advisor of Holdings since 2000 and as a director of ARC since October 2004.
 
(3) Functioned as a director of Holdings since 2002 and served as a director of ARC since October 2004.
 
The following is a brief description of the principal occupation and business experience of each of our directors during the past five years and their other affiliations.
 
Sathiyamurthy (“Mohan”) Chandramohan has served as an advisor and the Chairman of the Board of Advisors of Holdings since March 1998 and has served as a director and the Chairman of the Board of Directors of American Reprographics Company since October 2004. Mr. Chandramohan joined Micro Device, Inc. (our predecessor company) in February 1988 as President and became the Chief Executive Officer in March 1991. Prior to joining our company, Mr. Chandramohan was employed with U-Save Auto Parts Stores from December 1981 to February 1988, and became the company’s Chief Financial Officer in May 1985 and Chief Operating Officer in March 1987. Mr. Chandramohan served as the President of the International Reprographics Association (IRgA) from August 1, 2001 to July 31, 2002 and continues to be an active member of the IRgA.
 
Kumarakulasingam (“Suri”) Suriyakumar has served as an advisor of Holdings since March 1998 and has served as a director of American Reprographics Company since October 2004. Mr. Suriyakumar joined Micro Device, Inc. in 1989. He became the Vice President of Micro Device, Inc. in 1990 and became the company’s President and Chief Operating Officer in 1991. Prior to joining our company, Mr. Suriyakumar was employed with Aitken Spence & Co. LTD, a highly diversified conglomerate and one of the five largest corporations in Sri Lanka. Mr. Suriyakumar is an active member of the IRgA.
 
Thomas J. Formolo has served as an advisor of Holdings since April 2000 and has served as a director of American Reprographics Company since October 2004. Since 1997, Mr. Formolo has been a partner of CHS, a private equity firm based in Chicago, Illinois, that specializes in leveraged buyout and recapitalizations of middle market companies in partnership with company management through its private equity funds. He has been employed by CHS’s affiliates since 1990.
 
Dewitt Kerry McCluggage was appointed as a director of American Reprographics Company in February 2006. Mr. McCluggage has served as the President of Craftsman Films, Inc., which produces motion pictures and television programs, since January 2002. Mr. McCluggage has also served as the Co-Chairman of Allumination Filmworks, a distributor of home videos, since March 2005. From 1991 to 2003, Mr. McCluggage served as Chairman of the Paramount Television Group where he was responsible for overseeing television operations. Prior to that, Mr. McCluggage served as President of Universal Television from 1987 to 1991.


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Mark W. Mealy was appointed as a director of American Reprographics Company in March 2005. Mr. Mealy has served as Managing Partner of Colville Capital LLC, a private equity firm since October 2005. Mr. Mealy also served as the Managing Director and Group Head of Mergers and Acquisitions of Wachovia Securities, Inc., an investment banking firm, from March 2000 until October 2004. Mr. Mealy served as the Managing Director, Mergers and Acquisitions of First Union Securities, Inc., an investment banking firm, from April 1998 to March 2000. Mr. Mealy also serves as a director of Morton Industrial Group, Inc. a metal fabrication supplier to off-highway construction and agricultural equipment markets.
 
Manuel Perez de la Mesa functioned as a director for Holdings from July 2002 until his appointment as a director of American Reprographics Company in October 2004. Mr. Perez de la Mesa has been Chief Executive Officer of Pool Corporation, a wholesale distributor of swimming pool supplies and related equipment, since May 2001 and has also been the President of Pool Corporation since February 1999. Mr. Perez de la Mesa served as Chief Operating Officer of Pool Corporation from February 1999 to May 2001. Mr. Perez de la Mesa serves as a director of Pool Corporation.
 
Eriberto R. Scocimara was elected as a director of American Reprographics Company in May 2006. Mr. Scocimara has served as the President and Chief Executive Officer of the Hungarian-American Enterprise Fund, a privately managed investment company created by the President and Congress of the United States and funded by the U.S. Government, since 1994. Mr. Scocimara also has served as the President and Chief Executive Officer of Scocimara & Company, Inc, a financial consulting firm, since he founded the company in 1984. Mr. Scocimara has over 30 years of experience in corporate management, acquisitions and operational restructuring. Mr. Scocimara serves as a director of Carlisle Companies Incorporated, Roper Industries, Inc., Quaker Fabric Corporation and Euronet Worldwide, Inc.
 
Executive Officers of the Registrant
 
Our executive officers are appointed annually by our Board of Directors and serve at the discretion of our Board of Directors. The names, ages and positions of all of our executive officers as of February 28, 2007 are listed below:
 
             
Name
 
Age
 
Position
 
Sathiyamurthy Chandramohan
  48   Chief Executive Officer; Chairman of the Board of Directors
Kumarakulasingam Suriyakumar
  53   President; Chief Operating Officer; Director
Jonathan R. Mather
  56   Chief Financial Officer; Secretary
Rahul K. Roy
  47   Chief Technology Officer
 
The following is a brief description of the business experience of each of our executive officers during the past five years and their other affiliations. Biographical information for Messrs. Chandramohan and Suriyakumar is provided above under “Board of Directors.”
 
Jonathan R. Mather joined American Reprographics Company as its Chief Financial Officer in December 2006. From 2001 to 2006, Mr. Mather was employed at NETGEAR, a manufacturer of computer networking products, as its Executive Vice President and Chief Financial Officer. Before NETGEAR, from July 1995 to March 2001, Mr. Mather worked at Applause Inc., a consumer products company, where he served as President and Chief Executive Officer from 1998 to 2001, as Chief Financial Officer and Chief Operating Officer from 1997 to 1998 and as Chief Financial Officer from 1995 to 1997. From 1985 to 1995, Mr. Mather was at Home Fashions Inc., a consumer products company, where he served as Chief Financial Officer from 1992 to 1995, and as Vice President, Finance of an operating division, Louverdrape, from 1988 to 1992. Prior to that, he spent more than two years at the semiconductor division of Harris Corporation, a communications equipment company, where he served as the Finance Manager of the offshore manufacturing division. He has also worked in public accounting for four years with Coopers & Lybrand (now part of PricewaterhouseCoopers LLP) and for two years with Ernst & Young.
 
Rahul K. Roy joined Holdings as its Chief Technology Officer in September 2000. Prior to joining our company, Mr. Roy was the Founder, President and Chief Executive Officer of MirrorPlus Technologies, Inc., which developed software for the reprographics industry, from August 1993 until it was acquired by us in 1999. Mr. Roy


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also served as the Chief Operating Officer of InPrint, a provider of printing, software, duplication, packaging, assembly and distribution services to technology companies, from 1993 until it was acquired by us in 1999.
 
Audit Committee
 
The Audit Committee is governed by the Audit Committee Charter. The functions of our Audit Committee are described in the Audit Committee Charter and include, among other things the following: (i) reviewing the adequacy of our system of internal accounting controls; (ii) reviewing the results of the independent registered public accounting firm’s annual audit, including any significant adjustments, management judgments and estimates, new accounting policies and disagreements with management; (iii) reviewing our audited financial statements and discussing the statements with management; (iv) reviewing disclosures by our independent registered public accounting firm concerning relationships with our Company and the performance of our independent registered public accounting firm and annually recommending the independent registered public accounting firm; and (v) preparing such reports or statements as may be required by securities laws. The Audit Committee Charter provides that the Audit Committee shall meet as often as it determines but no less frequently than quarterly.
 
The members of our Audit Committee are Mark W. Mealy, Manuel Perez de la Mesa, and Eriberto R. Scocimara. Our Board of Directors has determined that all members of our Audit Committee meet the applicable tests for independence and the requirements for financial literacy that are applicable to audit committee members under the rules and regulations of the SEC and NYSE. Our Board of Directors has determined that Mr. Perez de la Mesa is an “audit committee financial expert” as defined by the applicable rules of the SEC and NYSE as a result of his education and experience actively supervising a principal financial officer and controller. Our Board of Directors has determined that Mr. Mealy is also an “audit committee financial expert” as defined by the applicable rules of the SEC and NYSE, as a result of his substantial familiarity and experience with the use and analysis of financial statements of public companies. For the last 15 years, Mr. Mealy has served in various positions in which he analyzed financial statements in connection with the refinance, recapitalization and restructure of debt and equity securities and the evaluation of mergers and acquisitions. Our board of directors has determined that Mr. Scocimara is also an “audit committee financial expert” as defined by the applicable rules of the SEC and NYSE, as a result of his substantial familiarity and experience with the use and analysis of financial statements of public companies. For more than 35 years Mr. Scocimara has served in various positions in which he analyzed financial statements in connection with corporate management, financial consulting, acquisition and development of manufacturing companies, and operational restructuring. Mr. Scocimara has also served as audit committee chair for Roper Industries, Inc., Carlisle Companies Incorporated, and Quaker Fabric Corporation, publicly-owned companies.
 
Section 16(a) Beneficial Ownership Reporting Compliance
 
Section 16(a) of the Exchange Act requires directors and certain officers of the company and persons who own more than ten percent of our common stock to file with the SEC initial reports of beneficial ownership (Form 3) and reports of subsequent changes in their beneficial ownership (Form 4 or Form 5) of ARC’s common stock. Such directors, officers and greater-than-ten-percent stockholders are required to furnish us with copies of the Section 16(a) reports they file. The SEC has established specific due dates for these reports, and ARC is required to disclose in this report any late filings or failures to file.
 
Based solely on our review of copies of the Section 16(a) reports received or written representations from such officers, directors and more than ten percent stockholders, we believe that all Section 16(a) filings applicable to our officers, directors and more than ten percent stockholders were complied with during the fiscal year ended December 31, 2006, except for the following: (i) Jonathan R. Mather, our Chief Financial Officer, filed a Form 5 on February 21, 2007 which included the late reporting of a stock option grant effective December 4, 2006; (ii) Rahul K. Roy, our Chief Technology Officer, filed a Form 5 on February 14, 2007, which included the late reporting of the grant of a stock option on February 21, 2006 and filed a Form 5 amendment on February 26, 2007 which included the late reporting of a grant of restricted shares on November 10, 2006, (iii) Mark W. Legg, our former Chief Financial Officer, filed a Form 5 on February 14, 2007, which included the late reporting of the grant of a stock option on February 21, 2006, and (iv) Billy E. Thomas, who owned greater than ten percent of our stock until


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April 11, 2005, filed a Form 4 on April 19, 2006, which included the late reporting of a disposition of stock that brought this ownership to less than ten percent.
 
Code of Ethics
 
We have adopted a Code of Conduct applicable to all employees, officers and directors, including our Chief Executive Officer, our Chief Financial Officer and our controller, which meets the definition of a “code of ethics” set forth in Item 406 of Regulation S-K of the Exchange Act.
 
A copy of our Code of Conduct, as defined under Item 406 of Regulation S-K, including any amendments thereto or waivers thereof, Corporate Governance Guidelines, and Board Committee Charters can be accessed on our website www.e-arc.com, by clicking on the “Investor Relations” link at the top of the page and then selecting “Corporate Governance” from the Investor Relations webpage. We will post any amendments to the Code of Conduct, and any waivers that are required to be disclosed by the rules of either the SEC or the NYSE, on our internet site. We will make printed copies of our Code of Conduct, Corporate Governance Guidelines and Board Committee Charters available to any stockholder, at no cost, upon written request to the company at 1981 N. Broadway, Suite 385, Walnut Creek, California 94596, Attention: David Stickney, Vice President of Corporate Communications.
 
Certain Executive Officer Certifications
 
Our common stock is listed on the NYSE. As required by Section 303A.12 of the NYSE Listed Company Manual, we have filed as exhibits to this Form 10-K Annual Report the Chief Executive Officer and Chief Financial Officer certifications required by Section 302 of the Sarbanes-Oxley Act of 2002.
 
On June 20, 2006, we submitted to the NYSE the Annual CEO Certification regarding the company’s compliance with the NYSE’s corporate governance listing standards as required by Section 303A.12 of the NYSE Listed Company Manual.
 
Item 11.    Executive Compensation
 
Compensation Discussion and Analysis
 
The compensation committee of the Board of Directors (“Compensation Committee”), which is comprised solely of independent directors, administers the company’s stock plan and reviews and makes recommendations to the Board of Directors regarding compensation and benefits of executive officers. After consideration of the Compensation Committee’s recommendations, the entire board of directors reviews and approves the salaries, bonuses and benefit programs for the company’s executive officers. The Compensation Committee has the authority to engage the services of outside consultants to assist it. Additionally, the Compensation Committee relies upon data, analysis and recommendations from the Chief Executive Officer.
 
Executive Compensation Philosophy
 
Our executive compensation program is designed to attract, retain and motivate our executive officers in a manner that is tied directly to achievement of our overall operating and financial goals, and in turn increase our overall equity value. We believe it is in the best interests of our stockholders and our executive officers that our compensation program, and each of its elements, be easy to calculate. We intend that this simplicity reduce the time and cost involved in setting and implementing our compensation policies and calculating payments under such policies, and increase the transparency of our compensation policies. With this in mind, our compensation program provides our executive officers with the incentive to increase our revenues and earnings per share, and allows us a framework for measuring and rewarding such performance.
 
Specifically, our executive compensation program for 2006 consisted of three primary elements: base salary, annual incentive bonuses (which are discussed more specifically below, and are disclosed in the Summary Compensation Table), and stock options granted to our Chief Financial Officer and our Chief Technology Officer (but not to our Chief Executive Officer or to our President and Chief Operating Officer, who are our founders and substantial stockholders of the company).


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Our Compensation Committee has not adopted any formal policy for allocating compensation between long-term and short-term, between cash and non-cash, or among different forms of non-cash compensation.
 
Objectives
 
The company’s compensation objective is to link compensation to continuous improvements in corporate performance and increases in stockholder value. As an employee’s level of responsibility increases so does the percentage of compensation that is based upon this objective. The company’s executive compensation program goals include the following:
 
  •  To establish pay levels that attract, retain and motivate highly qualified executive officers while considering the overall market competitiveness for such executive talent and balancing the relationship between total stockholder return and direct compensation;
 
  •  To align executive officer remuneration with the interests of the stockholders;
 
  •  To recognize superior individual performance;
 
  •  To balance base and incentive compensation to complement the company’s annual and longer term business objectives and strategies and encourage the fulfillment of those objectives and strategies through executive officer performance;
 
  •  To provide compensation opportunities based on the company’s performance; and
 
  •  To encourage equity participation by executive officers.
 
The Compensation Committee believes these goals apply equally to the company’s non-executive senior management, and has established that annual incentive bonuses and stock option grants be included as fundamental elements of senior management compensation.
 
Elements of Executive Compensation
 
Executive compensation consists of the following elements:
 
Base Salary.   Base salaries for our executives are established based on the scope of their responsibilities, taking into account competitive market compensation paid by similarly sized companies for similar positions. Prior to entering into employment agreements with our executive officers in February 2005, under which their base salaries were established, our then governing board of advisors (prior to our reorganization as a Delaware corporation), which consisted of our Chief Executive Officer, Mr. Chandramohan, our President and Chief Operating Officer, Mr. Suriyakumar, and Andrew W. Code, Thomas J. Formolo and Marcus J. George of Code Hennessy & Simmons LLC, engaged a prominent compensation consulting firm to provide competitive compensation benchmarking data regarding base salary, annual incentive bonuses, long-term incentive compensation, and other elements of executive remuneration for each of our executive officer positions, and recommendations for contracts between us and our executive officers.
 
The surveys conducted by the compensation consultant of chief executive officers, presidents and chief operating officers, chief financial officers, and chief technology officers included companies with annual revenues between $300 million and $600 million, with median revenue of approximately $425-450 million for the survey samples, by position, which approximated our net revenues for the fiscal year ended December 31, 2004.
 
Based on the survey data and recommendations of our compensation consultant, we entered into employment agreements with three-year initial terms with each of our executive officers setting their base salaries within approximately 10% of the salaries proposed in our compensation consultant’s report for our Chief Executive Officer, President and Chief Operating Officer, and Chief Technology Officer, and just below the median chief financial officer base salary identified in the survey data.
 
We have not adjusted the base salaries for our Chief Executive Officer, President and Chief Operating Officer, or Chief Technology Officer since entering into the February 2005 employment agreements with them, which agreements fixed their base salaries for three years. In connection with the hiring of a new Chief Financial Officer in


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December 2006, we entered into an employment agreement with a three-year initial term that sets our Chief Financial Officer’s base salary. In determining the base salary, we considered the growth in our current revenues since the date of our compensation consultant’s report, as well as current market competitive factors.
 
Annual Incentive Bonus.   We utilize annual bonuses payable in cash or, at an executive officer’s election, in shares of our common stock, to focus corporate behavior on achievement of goals for improved financial performance, and achievement of specific annual objectives. Our annual incentive bonuses, as opposed to our stock option and restricted stock grants described below, are designed to immediately reward our executive officers for their performance during the most recent fiscal year. We believe that the immediacy of these annual bonuses, in contrast to equity grants vesting over greater time, provides significant incentive to our executive officers to drive the company’s financial performance and meet their respective individual objectives. We believe our annual incentive bonuses are an important motivating factor for our executive officers, in addition to being a significant factor in attracting and retaining our executive officers.
 
We adopted the recommendation of our compensation consultant to base the annual incentive bonuses for Messrs. Chandramohan and Suriyakumar solely on year-over-year growth of our pre-tax earnings per share on a fully-diluted basis (“EPS”). Pursuant to our employment agreements with these executive officers, they are entitled to receive an incentive bonus in an amount equal to $60,000 for each full percentage point by which our EPS for the fiscal year exceeds by more than 10% the EPS for the immediately preceding fiscal year, after taking into account the amounts of the incentive bonuses earned by both of them.
 
Thus, for example, if the EPS for an immediately preceding fiscal year was $1.00, an incentive bonus of $60,000 would be due to our Chief Executive Officer and to our President/Chief Operating Officer for the succeeding fiscal year if the EPS that year exceeds $1.11, but is less than $1.12. Under their employment agreements, Messrs. Chandramohan and Suriyakumar can elect to receive such incentive bonus in cash or in shares of our common stock.
 
Notwithstanding our annual incentive bonus agreements with our Chief Executive Officer and our President/Chief Operating Officer, given the significant expected savings to the company resulting from the financial restructuring of our debt in December 2005, the company and Messrs. Chandramohan and Suriyakumar agreed that annual incentive bonuses that would have been earned by them for our fiscal year ended December 31, 2006, and payable during our fiscal year ending December 31, 2007, will be waived given that our reduced interest costs would have resulted in incentive bonuses greater than originally contemplated.
 
As recommended by our compensation consultant, and by contrast to the annual incentive bonuses available to our Chief Executive Officer and our President/Chief Operating Officer, our Chief Financial Officer and Chief Technology Officer are eligible to earn annual incentive bonuses by successfully completing individual performance criteria during the fiscal year. These goal-oriented awards are intended to be responsive to changing internal and external business conditions and objectives from year to year. Accordingly, each year objectives are established for these executive officers against which their actual performance is subsequently measured at year-end.
 
The objectives for our Chief Technology Officer are determined jointly by our Chief Executive Officer and our President/Chief Operating Officer annually. These objectives include critical technology initiatives and enhancements to our suite of reprographics technology products. Our Chief Executive Officer annually identifies performance objectives for our Chief Financial Officer that relate to Sarbanes-Oxley Act compliance, internal auditing, corporate budgets, financial reporting systems, and our financial performance. Our Compensation Committee annually reviews and approves the performance objectives proposed for these executive officers, and approves any annual incentive bonus payments to them.
 
2005 Stock Plan.   We believe that equity grants provide our executive officers with a strong link to our long-term performance, create an ownership culture, and closely align the interests of our executive officers and our stockholders. We seek to create an environment where employees have a vested interest in the performance of the company’s stock.
 
Our Chief Financial Officer, Chief Technology Officer, and all management-level employees are eligible to receive stock options pursuant to the American Reprographics Company 2005 Stock Plan (“2005 Stock Plan”). The individual option grant levels for all employees in 2006 were based on each respective employee’s scope of


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responsibility. Our Compensation Committee has reviewed other forms of long-term equity compensation. Considering the impact of alignment with stockholder interests, accounting costs, perceived value, and cash cost to the company, the Compensation Committee believes that long-term equity incentive primarily in the form of stock options is the best alternative.
 
Stock options granted in 2006, other than options granted to Mr. Mather, generally vest at the rate of 20% annually over five years or 25% annually over four years. The stock option granted to Mr. Mather vests at the rate of 25% upon the first anniversary of his employment and 1/48th monthly thereafter. We have designed our vesting schedules to encourage stock ownership by our employees and as a means of motivating and retaining them. Nevertheless, there are no specific guidelines regarding employee ownership of the company’s stock. Our current practice is to grant stock options at the first Compensation Committee meeting of the year, which is normally held in February.
 
The stock options granted in 2006 were incentive stock options, except for options granted to Mr. Mather. The stock options granted in 2006 to Mr. Mather, and all stock options the Compensation Committee intends to grant in 2007, are nonstatutory stock options.
 
Restricted Stock Awards.   In addition to stock options, the 2005 Stock Plan authorizes us to grant restricted shares of our stock. We believe such a grant of restricted stock rewards exceptional performance that drives significant business objectives and is consistent with our executive compensation philosophy. Our Compensation Committee determines the performance-based conditions for an award of restricted stock, and the conditions for vesting of restricted shares, as it determines to be appropriate.
 
To date, the only restricted stock award we have made was to our Chief Technology Officer, Rahul K. Roy, in connection with the successful development of our Sub-Hub software product, as more fully described in the “Executive Compensation” section below.
 
Employee Stock Purchase Plan.   We offer all of our employees, including our executive officers, the opportunity to purchase our common stock through a tax-qualified employee stock purchase plan (“ESPP”). Under the ESPP, employees may elect to purchase annually, at a five percent discount (applied to the closing price of our common stock on the NYSE on the date of purchase(s)) up to the lesser of (a) 400 shares of our common stock, or (b) that number of shares of our common stock having an aggregate fair market value of $25,000.
 
Other Compensation.   Our executive officers are entitled to participate in our health, life and disability insurance plans, and our 401(k) plan to the same extent that our other employees are entitled to participate. Our employment agreements with Messrs. Chandramohan, Suriyakumar, Legg and Roy also provide for payment of certain perquisites, including without limitation, automobile leasing and club membership dues.
 
We have no current plans to change either the employment agreements (except as required by law or as required to clarify the benefits to which our executive officers are entitled as set forth therein) or levels of benefits provided thereunder.
 
Change in Control and Severance Arrangements.   We grant change in control and severance arrangements to our executive officers, as we believe that granting these arrangements to our executive officers is an important element in retaining such employees, and that such arrangements are elements of competitive market compensation, given information furnished by our compensation consultant. Currently, Messrs. Chandramohan, Suriyakumar, Roy, our current Chief Financial Officer, Jonathan R. Mather, and our former Chief Financial Officer, Mark W. Legg, have change in control and severance arrangements, which are described in the “Employment Contracts, Termination of Employment and Change in Control Arrangements” section below.
 
Summary.   After its review of all existing programs, consideration of current market and competitive conditions, and alignment with the company’s overall compensation objectives and philosophy, our Compensation Committee believes that the total compensation program for our executive officers is focused on increasing value for stockholders and enhancing the company’s performance. The Compensation Committee currently believes that a significant portion of compensation of executive officers is properly tied to stock appreciation or stockholder value through stock options and annual incentive bonus measures. Our Compensation Committee believes that our


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executive compensation levels are competitive with the compensation programs offered by other corporations with which we compete for executive talent.
 
Compensation Committee Report
 
The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis set forth above with management and, based upon such review and discussions, the Compensation Committee has recommended that the Compensation Discussion and Analysis be included in this report.
 
THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS
 
Manuel Perez de la Mesa
Dewitt Kerry McCluggage
Thomas J. Formolo


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Executive Compensation
 
The following table provides information regarding the compensation earned during the fiscal year ended December 31, 2006 by our Chief Executive Officer, our current Chief Financial Officer, our former Chief Financial Officer, and our additional two executive officers who were employed by us as of December 31, 2006.
 
Summary Compensation Table
 
                                                                 
                                      Change in
           
                                      Pension
           
                                      Value and
           
                                      Non-Qualified
           
                                Non-Equity
    Deferred
           
                    Stock
    Option
    Incentive Plan
    Compensation
  All Other
       
Name and Principal
      Salary
    Bonus
    Awards
    Awards(2)
    Compensation
    Earnings
  Compensation
    Total
 
Position(1)
  Year   ($)     ($)     ($)     ($)     ($)     ($)   ($)     ($)  
 
Sathiyamurthy Chandramohan,
  2006     650,000       (3 )                                         650,000  
Chief Executive Officer
                                                               
Jonathan R. Mather,
  2006     27,692 (5)                     1,888,500 (6)                         1,916,192  
Chief Financial Officer(4)
                                                               
Kumarakulasingam Suriyakumar,
  2006     650,000       (7 )                                         650,000  
President & Chief Operating Officer
                                                               
Rahul K. Roy,
  2006     400,000               1,000,000 (8)     147,150       300,000 (9)         18,291 (10)     1,865,441  
Chief Technology Officer
                                                               
Mark W. Legg,
  2006     250,000                       147,150       100,000 (12)         22,924 (13)     520,074  
former Chief Financial Officer(11)
                                                               
 
 
(1) In addition to our principal executive officer, our principal financial officer, and our former principal financial officer, our only other “executive officers” (as defined in Rule 3b-7 of the Exchange Act) were our President/Chief Operating Officer, Mr. Suriyakumar, and our Chief Technology Officer, Mr. Roy.
 
(2) The amounts were computed in accordance with FAS 123R.
 
(3) Given the significant expected savings to the company resulting from the financial restructuring of our debt in December 2005, the company and Mr. Chandramohan agreed that the annual incentive bonus that would have been earned by him for the year ended December 31, 2006 based on year-over-year growth of our EPS will be waived because our reduced interest costs would have resulted in an incentive bonus to Mr. Chandramohan greater than originally contemplated.
 
(4) Mr. Mather commenced employment with us December 4, 2006.
 
(5) Mr. Mather’s annual base salary is $360,000.
 
(6) Mr. Mather was granted an option to purchase 150,000 shares of our common stock under the 2005 Stock Plan, at an exercise price equal to $33.10 — the closing price of our common stock on the NYSE on his first day of employment.
 
(7) Given the significant expected savings to the company resulting from the financial restructuring of our debt in December 2005, the company and Mr. Suriyakumar agreed that the annual incentive bonus that would have been earned by him for the year ended December 31, 2006 based on year-over-year growth of our EPS will be waived because our reduced interest costs would have resulted in an incentive bonus to Mr. Suriyakumar greater than originally contemplated.
 
(8) Pursuant to a December 7, 2004 Agreement to Grant Stock with Mr. Roy, we granted him 28,253 restricted shares of our common stock with an aggregate value of $1,000,000 upon successful completion of software for our Sub-Hub product. As of November 10, 2006, such software had been completed pursuant to our specifications, and Mr. Roy was granted 28,253 shares (determined by the average NYSE closing price for the 10 days immediately preceding the fifth day prior to grant). Such shares remain subject to a reacquisition option in favor of the company for failure to satisfactorily maintain and enhance our Sub-Hub software product, which reacquisition option lapses on November 10, 2011.
 
(9) Annual incentive bonus earned by Mr. Roy for completing specific deliverables related to our suite of reprographics technology during the year ended December 31, 2006.


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(10) Consists of club membership dues of $2,448, auto lease payments of $13,308, $1,632 401(k) matching contribution, and life insurance premiums of $903.
 
(11) Mr. Legg resigned as our Chief Financial Officer effective December 4, 2006.
 
(12) Includes $100,000 incentive bonus for meeting objectives during the year ended December 31, 2006, pursuant to Mr. Legg’s employment agreement related to Sarbanes-Oxley Section 404 compliance, completion of an internal audit plan, and the company’s cash flow from operations.
 
(13) Consists of club membership dues of $6,924, auto lease payments of $13,269, $1,975 401(k) matching contribution, and life insurance premiums of $756.
 
Grants of Plan-Based Awards
 
All plan-based stock option awards granted to our executive officers in our fiscal year ended December 31, 2006, except the award granted to Mr. Mather, were incentive stock options, to the extent permissible under the Internal Revenue Code. Pursuant to the 2005 Stock Plan, the exercise price per share of each such option granted to our executive officers (other than Mr. Mather) was based upon the closing sales price for our common stock as quoted on the NYSE on the last trading day prior to the date of grant. Pursuant to Mr. Mather’s employment agreement, the exercise price per share of his option is equal to the closing price of our common stock on the NYSE on December 4, 2006, the date Mr. Mather’s employment commenced.
 
Pursuant to our Agreement to Grant Stock with Mr. Roy, we granted him restricted shares of our common stock with an aggregate value of $1,000,000, based upon the average NYSE closing price for the 10 trading days immediately preceding the fifth trading day prior to the November 10, 2006 grant.
 
All plan-based awards were granted under the 2005 Stock Plan.
 
Grants of Plan-Based Awards
 
                                                                                         
                      All Other
    All Other
             
                      Stock
    Option
             
                      Awards;
    Awards;
    Exercise
       
                      Number
    Number of
    or Base
       
                      of Shares
    Securities
    Price of
    Market
 
                                              of Stock
    underlying
    Option
    Price on
 
    Grant
    Estimated Future Payouts under
    Estimated Future Payouts under
    or Units
    Options
    Awards
    Grant
 
Name
  Date     Non-Equity Incentive Plan Awards     Equity Incentive Plan Awards     (#)     (#)     ($/Sh)     Date(1)  
          Threshold
    Target
    Maximum
    Threshold
    Target
    Maximum
                         
          ($)
    ($)
    ($)
    (#)
    (#)
    (#)
                         
 
Sathiuamurthy
Chandramohan
                                                                                       
Jonathan R. Mather
    12/4/06 (2)                                                             150,000       33.10       33.10  
Kumarakulasingam
Suriyakumar
                                                                                       
Rahul K. Roy
    2/21/06                                                               15,000 (3)     25.95       26.00  
      11/10/06                                                       28,253 (4)                     32.25 (5)
Mark W. Legg
    2/21/06                                                               15,000 (3)     25.95       26.00  
 
 
(1) Under the 2005 Stock Plan in effect on December 31, 2006, the exercise price for an option grant is the NYSE closing price of our common stock on the last market trading day before the grant date.
 
(2) Pursuant to Mr. Mather’s December 4, 2006 employment agreement, we granted him an option to purchase 150,000 shares of our common stock under the 2005 Stock Plan, at an exercise price equal to $33.10. The option vests at the rate of 25% upon the first anniversary of his employment and 1/48th each month thereafter.
 
(3) Option vests 20% annually over 5 years.
 
(4) Pursuant to a December 7, 2004 Agreement to Grant Stock with Mr. Roy, we granted him 28,253 restricted shares of our common stock with an aggregate value of $1,000,000 upon successful completion of software for our Sub-Hub product. As of November 10, 2006, such software had been completed pursuant to our specifications. Based on average NYSE closing price for the 10 days immediately preceding the fifth day prior to grant, pursuant to the December 7, 2004 Agreement to Grant Stock with Mr. Roy. Such shares remain


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subject to a reacquisition option in favor of the company for failure to satisfactorily maintain and enhance our Sub-Hub software product, which reacquisition option lapses on November 10, 2011.
 
(5) Granted November 10, 2006
 
Outstanding Equity Awards at Fiscal Year-End
 
The following table presents the outstanding equity awards held by each of the named executive officers as of the fiscal year ended December 31, 2006, including the value of the stock awards.
 
Outstanding Equity Awards at Fiscal Year-End
 
                                                                         
Name   Option Awards     Stock Awards  
                                                    Equity
 
                                                    Incentive
 
                                              Equity
    Plan
 
                                              Incentive
    Awards:
 
                                              Plan
    Market or
 
                Equity
                            Awards;
    Payout
 
                Incentive
                            Number of
    Value of
 
                Plan Awards;
                      Market
    Unearned
    Unearned
 
    Number of
    Number of
    Number of
                Number of
    Value of
    Shares,
    Shares,
 
    Securities
    Securities
    Securities
                Shares or
    Shares or
    Units or
    Units or
 
    underlying
    underlying
    underlying
                Units of
    Units of
    Other
    Other
 
    Unexercised
    Unexercised
    Unexercised
    Option
          Stock that
    Stock that
    Rights that
    Rights that
 
    Options
    Options
    Unearned
    Exercise
    Option
    Have Not
    Have Not
    Have Not
    Have Not
 
    (#)
    (#)
    Options
    Price
    Expiration
    Vested
    Vested
    Vested
    Vested
 
    Exercisable     Unexercisable     (#)     ($)     Date     (#)     ($)     (#)     ($)  
 
Sathiyamurthy Chandramohan
                                                                       
Jonathan R. Mather
            150,000 (1)             33.10       12/4/2016                                  
Kumarakulasingam Suriyakumar
                                                                       
Rahul K. Roy
    24,000                       4.88       1/2/2011       28,253 (2)     941,107                  
      80,000       20,000 (3)             5.25       5/10/2012                                  
      300,000                       5.25       5/10/2012                                  
      40,000       60,000 (3)             5.85       5/30/2014                                  
              15,000 (3)             25.95       2/21/2016                                  
Mark W. Legg
            15,000 (3)             25.95       2/21/2016                                  
 
 
(1) The option vests at the rate of 25% upon the first anniversary of his employment and 1/48th each month thereafter.
 
(2) Restricted shares remain subject to a reacquisition option in favor of the company for failure to satisfactorily maintain and enhance our Sub-Hub software product, which reacquisition option lapses on November 10, 2011.
 
(3) Option vests 20% annually over 5 years.
 
Option Exercises and Stock Vested at Fiscal Year-End
 
The following table presents certain information concerning the exercise of options by each of the named executive officers during the fiscal year ended December 31, 2006.


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Option Exercises and Stock Vested
 
                                 
    Option Awards     Stock Awards  
    Number of Shares
    Value
    Number of Shares
    Value
 
    Acquired on
    Realized on
    Acquired on
    Realized on
 
    Exercise
    Exercise
    Vesting
    Vesting
 
Name
  (#)     ($)     (#)     ($)  
 
Sathiyamurthy Chandramohan
                               
Jonathan R. Mather
                               
Kumarakulasingam Suriyakumar
                               
Rahul K. Roy
    200,000       5,924,540                  
Mark W. Legg
    15,000       370,098                  
 
Pension Benefits
 
None of our executive officers participates in or has account balances in qualified or non-qualified defined benefit plans sponsored by us.
 
Nonqualified Deferred Compensation
 
None of our executive officers participate in or have account balances in non-qualified defined contribution plans or other deferred compensation plans maintained by us.
 
Employment Contracts, Termination of Employment and Change in Control Arrangements
 
On February 3, 2005, we entered into employment agreements with Messrs. Chandramohan, Suriyakumar, Roy and Legg, and on December 4, 2006, we entered into an employment agreement with Mr. Legg’s successor, Mr. Mather. Each of these employment agreements includes an initial three-year term and automatic year-to-year renewal thereafter, subject to notice of non-renewal by the Company or the executive officer. Mr. Legg voluntarily terminated his employment agreement as of February 28, 2007.
 
Bonus provisions under the employment agreements are described in the “Annual Incentive Bonus” section above. The employment agreements also provide for payment of group medical, disability and life insurance premiums for our executive officers and their eligible dependents. In addition, the employment agreements with Messrs. Chandramohan, Suriyakumar, Roy and Legg provide for payment of certain perquisites, including without limitation, automobile leasing and club membership dues. Our employment agreement with Mr. Mather provides for the grant of an option to purchase 150,000 shares of our common stock at an exercise price $33.10 per share (the closing price or our common stock on the NYSE on December 4, 2006, the date Mr. Mather’s employment commenced).
 
Change in Control and Severance Arrangements.   The employment agreements between us and Messrs. Chandramohan, Suriyakumar, Roy and Mather each include change in control and severance arrangements, which provide as follows:
 
  •  For each of Messrs. Chandramohan and Suriyakumar, if terminated without cause or employment terminates for “good reason” (as discussed below), each is entitled to receive: (a) his base salary through the February 3, 2008 expiration of the employment agreement term; (b) continued payment of premiums for him and his eligible dependants to remain covered by our group medical insurance programs, until the earlier of (i) medical insurance coverage being available through another employer, (ii) termination of eligibility for his children under our policies and applicable laws, or (iii) qualification of him and his spouse, in each instance, for Medicare coverage; (c) continued payment of employer-paid benefits, including without limitation, the lease of automobiles, through the February 3, 2008 expiration of the employment agreement term; and (d) immediate vesting of any unvested stock options, restricted stock or similar rights granted to him as of the effective date of termination. As of December 31, 2006, payment of all the foregoing in connection with termination of Mr. Chandramohan employment without cause or for good reason would have totaled approximately $729,426, and payment of all of the foregoing in connection with termination of Mr. Suriyakumar’s employment without cause or for good reason would have totaled approximately


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  $724,486. Neither Mr. Chandramohan nor Mr. Suriyakumar had any unvested stock options, restricted stock or similar rights as of December 31, 2006.
 
  •  For Mr. Roy, if terminated without cause or employment terminates for “good reason” (as discussed below), he is entitled to receive: (a) his then base salary through the February 3, 2008 expiration of the employment agreement term, provided that in the event such termination occurs for good reason because of a change of control, such payment of base salary shall continue for the greater of (i) the then remaining term of the agreement, or (ii) twelve months; (b) continued payment of premiums for him and his eligible dependants to remain covered by our group medical insurance programs for the period in which he is entitled to continue to receive his base salary; (c) continued payment of employer-paid benefits, including without limitation, automobile leasing, for the period in which he is entitled to continue to receive his base salary; and (d) immediate vesting of all unvested stock options, restricted stock or similar rights granted to him as of the effective date of termination. As of December 31, 2006, payment of all the foregoing in connection with termination of Mr. Roy’s employment without cause or for good reason would have totaled approximately $470,857. Accelerated vesting of Mr. Roy’s outstanding stock options would have resulted in vesting of 123,253 shares of common stock subject to unvested options as of December 31, 2006, with an aggregate fair market value of $4,105,557 based on the NYSE closing price on the last trading day most recently preceding that date.
 
  •  For Mr. Mather, if terminated without cause or employment terminates for “good reason” (as discussed below), he is entitled to receive: (a) his base salary for nine months following the effective date of termination; (b) continued payment of premiums for Mr. Mather and his eligible dependants to remain covered by our group medical insurance programs for nine months following the effective date of termination; (c) in the event the effective date of termination occurs before the December 4, 2007 first anniversary of Mr. Mather’s commencement of employment with us, accelerated vesting of all stock options, restricted stock or similar rights granted to Mr. Mather that would have vested as of the first anniversary of his employment; (d) in the event the effective date of termination occurs after December 4, 2007, immediate vesting of all unvested stock options, restricted stock or similar rights granted to him as of the effective date of termination; and (e) a pro-rated incentive bonus based on the number of days Mr. Mather is employed with us during the fiscal year in which his employment is terminated. As of December 31, 2006, payment of all of the foregoing in connection with termination of Mr. Mather’s employment without cause or for good reason would have totaled approximately $300,051. Accelerated vesting of outstanding stock options that would have been vested as of the December 4, 2007 first anniversary of Mr. Mather’s employment with us but for his termination without cause or for good reason before that date would result in vesting of 37,500 shares of common stock subject to unvested options as of December 31, 2006, with an aggregate fair market value of $1,249,125 based on the NYSE closing price on the last trading day most recently preceding that date.
 
The severance payments and benefits described above are only payable if the executive officer executes and delivers to us an agreement releasing us and our related parties for all claims and liabilities that the executive officer may have against us and our related parties.
 
Under each of our employment agreements with Messrs. Chandramohan, Suriyakumar, Roy, and Mather, cause is defined to include a willful refusal to perform the duties set forth in the agreement or as delegated to him (subject to a 30-day cure period following written notice in each case), gross negligence, self dealing or willful misconduct injurious to the company, fraud or misappropriation of our business and assets, habitual insobriety or use of illegal drugs, any felony conviction or guilty plea that harms the reputation or business of the company, or material breach of the employment agreement or material policy of ours that is not cured within 30 days of written notice.
 
Each employment agreement with Messrs. Chandramohan, Suriyakumar, Roy, and Mather provides that termination of employment by the executive officer for good reason means a material change in his respective duties and responsibilities set forth in the employment agreement, without his written consent, a reduction in his compensation, other than as expressly provided in the employment agreement, a material breach by the company of any other material terms of the employment agreement, or a change of control, as a result of which he is not offered the same or comparable position in the surviving company, or 12 months after accepting such position, he is


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terminated without cause, or he terminates his employment for good reason, as provided in the employment agreement. In addition, under Mr. Mather’s agreement, termination for good reason includes a termination resulting from relocation of his principal office to a site greater than 50 miles from Glendale, California.
 
Under each employment agreement between us and Messrs. Chandramohan, Suriyakumar, Roy, and Mather, a change of control means: (a) our being merged with any other corporation, as a result of which we are not the surviving company or our shares are not exchanged for or converted into more than 50% of the voting securities of the merged company; (b) our sale or transfer of all or substantially all of our assets; or (c) any third party becoming the beneficial owner in one transaction or a series of transactions within 12 months, of at least 50% of our voting securities.
 
Proprietary Information and Invention Assignment Agreements.   Each of our executive officer’s employment agreements also includes customary covenants with respect to proprietary information and inventions. Among other things, the agreements obligate each named executive officer to refrain from disclosing any of our proprietary information received during the course of employment and, subject to an exception under the California Labor Code, to assign to us any inventions conceived or developed during the course of employment.
 
Director Compensation
 
We pay an annual cash fee of $40,000 to each of our non-employee directors, payable quarterly. In addition, non-employee directors receive $5,000 cash per year for duties as chair of any committee of our Board of Directors.
 
In addition to cash fees, we also grant each non-employee director a nonstatutory stock option under our 2005 Stock Plan to purchase that number of shares having an aggregate grant date value equal to $50,000, as computed in accordance with FAS 123R. Such grants are made on the date of our annual meeting of stockholders, without any further action of our Board of Directors, and compensates each non-employee director for his or her service since the later of (a) the last preceding annual meeting of stockholders, or (b) the date on which he or she was elected or appointed for the first time to be a non-employee director. Options granted to our non-employee directors expire three months after termination of service as director.
 
Directors who are our employees are not compensated for their services as directors.
 
We reimburse our employee and non-employee directors for reasonable travel expenses relating to attendance at our board meetings and participating in director continuing education.


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Director Compensation
 
                                                         
                    Change in
       
                    Pension
       
    Fees
              Value and
       
    Earned or
          Non-Equity
  Nonqualified
       
    Paid in
  Stock
  Option
  Incentive Plan
  Deferred
  All Other
   
    Cash
  Awards
  Awards(1)
  Compensation
  Compensation
  Compensation
  Total(2)
Name
  ($)   ($)   ($)   ($)   Earnings   ($)   ($)
 
Sathiyamurthy Chandramohan(3)
                                                       
Kumarakulasingam Suriyakumar(3)
                                                       
Andrew W. Code(4)
                                                       
Thomas J. Formolo(5)
    40,000               50,000 (14)                             90,000  
Edward D. Horowitz(6)
                                                       
Dewitt Kerry McCluggage(7)
    45,000 (11)             50,000 (14)                             95,000  
Mark W. Mealy(8)
    45,000 (12)             50,000 (14)                             95,000  
Manuel Perez de la Mesa(9)
    45,000 (13)             50,000 (14)                             95,000  
Eriberto R. Scocimara(10)
    40,000               50,000 (14)                             90,000  
 
 
 (1) Reflects options granted under the 2005 Stock Plan, as described above. One-twelfth of the shares included in the options granted to non-employee directors vest monthly from the date of grant.
 
 (2) Table does not include reimbursement for travel expenses to attend board meetings.
 
 (3) Except for reimbursement for travel expenses to attend board meetings, Messrs. Chandramohan and Suriyakumar were not compensated for their services as directors.
 
 (4) Mr. Code resigned from our board effective January 20, 2006. As of December 31, 2006, no options to purchase shares of stock under the 2005 Stock Plan awarded to Mr. Code were outstanding.
 
 (5) As of December 31, 2006, options to purchase 13,851 shares of stock under the 2005 Stock Plan awarded to Mr. Formolo were outstanding.
 
 (6) Mr. Horowitz did not stand for re-election to our board at our May 2006 annual meeting of stockholders. As of December 31, 2006, no options to purchase shares of stock under the 2005 Stock Plan awarded to Mr. Horowitz were outstanding.
 
 (7) As of December 31, 2006, options to purchase 3,997 shares of stock under the 2005 Stock Plan awarded to Mr. McCluggage were outstanding.
 
 (8) As of December 31, 2006, options to purchase 13,851 shares of stock under the 2005 Stock Plan awarded to Mr. Mealy were outstanding.
 
 (9) As of December 31, 2006, options to purchase 39,351 shares of stock under the 2005 Stock Plan awarded to Mr. Perez de la Mesa were outstanding.
 
(10) As of December 31, 2006, options to purchase 3,997 shares of stock under the 2005 Stock Plan awarded to Mr. Scocimara were outstanding.
 
(11) Includes cash compensation of $5,000 for serving as chair of the nominating and corporate governance committee.
 
(12) Includes cash compensation of $5,000 for serving as chair of the audit committee.
 
(13) Includes cash compensation of $5,000 for serving as chair of the compensation committee.
 
(14) Aggregate grant date fair value computed in accordance with FAS 123R.
 
Indemnification Agreements.   We have entered, and expect to continue to enter, into written indemnification agreements with each of our directors and executive officers. With certain exceptions, these agreements provide for


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indemnification for related expenses including, among other things, attorneys’ fees, judgments, fines and settlement amounts incurred by any of these individuals in any action or proceeding. We believe that these indemnification agreements are necessary to attract and retain qualified persons as directors and executive officers. We also maintain directors’ and officers’ liability insurance.
 
Compensation Committee Interlocks and Insider Participation
 
The members of our Compensation Committee from January 2006 unitl May 2006 were Messrs. Perez de la Mesa, McCluggage and Horowitz. In May 2006, Mr. Formolo replaced Mr. Horowitz on the Compensation Committee.
 
During the year ended December 31, 2006, no executive officer of the company served as a director, or as a member of any compensation committee, of any other for-profit entity that had an executive officer that served on the Board of Directors or Compensation Committee of the company.
 
Item 12.    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 
Security Ownership of Certain Beneficial Owners and Management
 
The following table sets forth information, as of February 15, 2007, regarding the beneficial ownership of our common stock by:
 
  •  each person who is known to us to own beneficially more than 5% of our common stock;
 
  •  all directors and named executive officers as a group; and
 
  •  each of our directors and each of our executive officers named in the Summary Compensation Table on page 49 of this report.
 
The table includes all shares of common stock issuable within 60 days of February 15, 2007 upon the exercise of options and other rights beneficially owned by the indicated stockholders on that date. Beneficial ownership is determined in accordance with the rules of the SEC and includes voting and investment power with respect to shares. The applicable percentage of ownership for each stockholder is based on 45,359,460 shares of common stock outstanding as of February 15, 2007, together with applicable options for that stockholder. Shares of common stock issuable upon exercise of options and other rights beneficially owned were deemed outstanding for the purpose of computing the percentage ownership of the person holding these options and other rights, but are not deemed outstanding for computing the percentage ownership of any other person. To our knowledge, except under applicable community property laws or as otherwise indicated in the footnotes to this table, beneficial ownership is direct and the persons named in the table below have sole voting and sole investment control regarding all shares beneficially owned.
 
                 
    Shares Beneficially
    Owned
Name and Address of Beneficial Owner
  Number   Percent
 
Principal Stockholders:
               
ARC Acquisition Co., L.L.C.(1)
    6,150,643       13.6%  
10 S. Wacker Drive, Suite 3175
Chicago, IL 60606
               
Micro Device, Inc. 
    5,684,842       12.5%  
Wellington Management Company, LLP(14)
    2,976,830       6.6%  
75 State Street
Boston, MA 02109
               
Times Square Capital Management, LLC(15)
    2,899,714       6.4%  
1177 Avenue of the Americas — 39th Floor
New York, NY 10036
               


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    Shares Beneficially
    Owned
Name and Address of Beneficial Owner
  Number   Percent
 
FMR Corp.(16)
    2,728,700       6.0%  
82 Devonshire Street
Boston, MA 02109
               
Eagle Asset Management, Inc.(17)
    2,409,843       5.3%  
880 Carillon Parkway
St. Petersburg, FL 33716
               
Directors and Named Executive Officers:
               
Sathiyamurthy Chandramohan(2)(4)(5)(6)
    9,877,448       21.8%  
Kumarakulasingam Suriyakumar(2)(4)(5)(6)(7)
    9,676,351       21.3%  
1981 N. Broadway, Suite 202
Walnut Creek, CA 94596
               
Thomas J. Formolo(3)(8)
    6,181,927       13.6%  
Mark W. Legg(9)
    329,482       **  
Jonathan Mather
    0       **  
Dewitt Kerry McCluggage(10)
    3,330       **  
Mark W. Mealy(8)(11)
    63,184       **  
Manuel Perez de la Mesa(12)
    58,684       **  
Rahul K. Roy(13)
    475,253       1.0%  
Eriberto R. Scocimara(10)
    3,330       **  
All directors and Named Executive Officers as a group (ten persons)
    17,770,055       38.7%  
 
 
  * Except as otherwise noted, the address of each person listed in the table is c/o American Reprographics Company, 700 North Central Avenue, Suite 550, Glendale, California 91203.
 
 ** Less than one percent of the outstanding shares of common stock.
 
 (1) The sole member of ARC Acquisition Co., L.L.C. is Code Hennessey & Simmons IV LP. The general partner of Code Hennessy & Simmons IV LP is CHS Management IV LP. The general partner of CHS Management IV LP is Code Hennessy & Simmons LLC. Code Hennessy & Simmons LLC, CHS Management IV LP and Code Hennessy & Simmons IV LP may be deemed to beneficially own these shares, but disclaim beneficial ownership of shares in which they do not have a pecuniary interest. The investment committee of Code Hennessy & Simmons LLC is composed of Andrew W. Code, Daniel J. Hennessy, Brian P. Simmons, Thomas J. Formolo, Peter M. Gotsch, Steven R. Brown, David O. Hawkins and Richard A. Lobo. Messrs. Code, Hennessy, Simmons, Formolo, Gotsch, Brown, Hawkins and Lobo may be deemed to beneficially own these shares due to the fact that they share investment and voting control over shares held by ARC Acquisition Co., L.L.C., but disclaim beneficial ownership of shares in which they do not have a pecuniary interest
 
 (2) Includes 1,857,474 shares held by OCB Reprographics, Inc. As Messrs. Chandramohan and Suriyakumar have ownership interests of 22.4% and 17.6%, respectively, in OCB Reprographics, Inc. and serve on its board of directors, each could be deemed to have beneficial ownership of all these shares. Messrs. Chandramohan and Suriyakumar each disclaim beneficial ownership of these shares except to the extent of each of their pecuniary interests therein.
 
 (3) Includes 6,150,643 shares held by ARC Acquisition Co., L.L.C. and 10,100 shares held by CHS Associates IV. Thomas J. Formolo is a member of the investment committee of Code Hennessy & Simmons LLC, the general partner of CHS Management IV LP, which in turn is the general partner of Code Hennessy & Simmons IV LP, which is the sole member of ARC Acquisition Co., L.L.C. Code Hennessy & Simmons LLC is also the general partner of CHS Associates IV. Mr. Formolo may be deemed to beneficially own the shares owned by ARC Acquisition Co., L.L.C. and CHS Associates IV, but disclaims beneficial ownership of shares in which he does not have a pecuniary interest.

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 (4) Includes 5,684,842 shares held by Micro Device, Inc. As Messrs. Chandramohan and Suriyakumar have ownership interests of 56% and 44%, respectively, in Micro Device, Inc. and serve on its board of directors, each could be deemed to have beneficial ownership of all these shares. Messrs. Chandramohan and Suriyakumar each disclaim beneficial ownership of these shares except to the extent of each of their pecuniary interests therein.
 
 (5) Includes 666,181 shares held by Brownies Blueprint, Inc. As Messrs. Chandramohan and Suriyakumar have ownership interests of 42% and 33%, respectively, in Brownies Blueprint, Inc. and serve on its board of directors, each could be deemed to have beneficial ownership of all these shares. Messrs. Chandramohan and Suriyakumar each disclaim beneficial ownership of these shares except to the extent of each of their pecuniary interests therein.
 
 (6) Includes 690,437 shares held by Dieterich Post Company. As Messrs. Chandramohan and Suriyakumar have ownership interests of 47.6% and 37.4%, respectively, in Dieterich Post Company and serve on its board of directors, each could be deemed to have beneficial ownership of all these shares. Messrs. Chandramohan and Suriyakumar each disclaim beneficial ownership of these shares except to the extent of each of their pecuniary interests therein.
 
 (7) Includes 701,693 shares held by the Suriyakumar Family Trust. Mr. Suriyakumar and his spouse, as trustees of the Suriyakumar Family Trust, share voting and investment power over these shares.
 
 (8) Includes 13,184 shares issuable upon exercise of outstanding stock options exercisable within 60 days of February 15, 2007.
 
 (9) Includes 3,000 shares issuable upon exercise of outstanding stock options exercisable within 60 days of February 15, 2007. Includes 326,482 shares held by the Legg Family Trust. Mr. Legg and his spouse, as trustees of the Legg Family Trust, share voting and investment power over these shares.
 
(10) Includes 3,330 shares issuable upon exercise of outstanding stock options exercisable within 60 days of February 15, 2007.
 
(11) Includes 50,000 shares held by Eastover Group LLC. Mr. Mealy has controlling voting and investment power over these shares.
 
(12) Includes 38,684 shares issuable upon exercise of outstanding stock options exercisable within 60 days of February 15, 2007. Also includes 6,000 shares held by Mr. Perez’s children.
 
(13) Includes 447,000 shares issuable upon exercise of outstanding stock options exercisable within 60 days of February 15, 2007. Includes 28,253 shares which remain subject to a reacquisition option in favor of the company for failure to satisfactorily maintain and enhance our Sub-Hub software product, which reacquisition option lapses on November 10, 2011.
 
(14) We have obtained this information concerning the common stock beneficially owned by Wellington Management Company, LLP as of December 31, 2006 based solely on a Schedule 13G filed by Wellington Management Company, LLP on February 14, 2007. According to the Schedule 13G, Wellington Management Company, LLP has shared voting power with respect to 2,632,450 shares and shared dispositive power with respect to 2,976,830.
 
(15) We have obtained this information concerning the common stock beneficially owned by Times Square Capital Management, LLC as of December 31, 2006 based solely on a Schedule 13G filed by Times Square Capital Management, LLC on February 9, 2007. According to the Schedule 13G, Times Square Capital Management, LLC has sole voting power with respect to 2,488,814 shares and sole dispositive power with respect to 2,899,714 shares.
 
(16) We have obtained this information concerning the common stock beneficially owned by FMR Corp. as of December 31, 2006 based solely on a Schedule 13G filed by FMR Corp. on February 14, 2007. According to the Schedule 13G, FMR Corp. has sole dispositive power with respect to 2,728,700 shares.
 
(17) We have obtained this information concerning the common stock beneficially owned by Eagle Asset Management, Inc. as of December 31, 2006 based solely on a Schedule 13G filed by Eagle Asset Management, Inc. on February 8, 2007 under the CIK for American Reprographics Company, L.L.C. but stating in the Schedule 13G that it was reporting ownership of our common stock. According to the Schedule 13G, Eagle Asset Management, Inc. has sole voting power and sole dispositive power with respect to 2,409,843 shares.


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Changes in Control
 
Registrant does not know of any arrangements, the operation of which may at a subsequent date result in a change of control.
 
Equity Compensation Plan Information
 
The following table sets forth information as of December 31, 2006 regarding all compensation plans previously approved by our security holders and all compensations plans not previously approved by our security holders
 
                         
    (a)   (b)   (c)
            Number of Securities
            Remaining Available for Future
    Number of Securities to
  Weighted-Average
  Issuance Under Equity
    be Issued Upon Exercise
  Exercise Price of
  Compensation Plans
    of Outstanding Options,
  Outstanding Options,
  (Excluding Securities
Plan Category
  Warrants and Rights   Warrants and Rights   Reflected in Column (a))
 
Equity compensation plans approved by stockholders
                       
2005 Stock Plan
    1,683,600 (1)   $ 14.69       2,903,230 (2)
2005 Employee Stock Purchase Plan
    9,032     $ 32.06       378,907  
Equity compensation plans not approved by stockholders
        $        
                         
Total
    1,692,632     $       3,282,137  
                         
 
 
(1) Represents outstanding options granted under the 2005 Stock Plan to acquire common stock.
 
(2) The total shares of common stock currently reserved and authorized for issuance under the 2005 Stock Plan equals 5,000,000 shares of common stock. This authorization automatically increases annually on the first day of our fiscal year, from 2006 through and including 2010, by the lesser of (i) 1.0% of the outstanding shares on the date of the increase; (ii) 300,000 shares; or (iii) such smaller number of shares determined by our board of directors. The board may elect to increase, with stockholder approval, or reduce the number of additional shares authorized in any given year.
 
Item 13.    Certain Relationships and Related Transactions
 
Certain of our directors, executive officers, five percent beneficial owners and their affiliates have engaged in transactions with us in the ordinary course of business. We believe these transactions involved terms comparable to terms that would be obtained from an unaffiliated third party at the times the transactions were consummated. The following is a description of these transactions during our fiscal year ended December 31, 2006.
 
Related Party Leases and Purchases
 
During our fiscal year ended December 31, 2006, we were a party to leases with entities owned by our Chief Executive Officer, Mr. Chandramohan, and our President/Chief Operating Officer, Mr. Suriyakumar, for eight of our facilities located in Los Angeles, California, San Jose, California, Irvine, California, Sacramento, California, Oakland, California, Gaithersburg, Maryland, Costa Mesa, California and Monterey Park, California. These facilities are leased to us under written lease agreements between us and our subsidiaries, Sumo Holdings LA, LLC, Sumo Holdings San Jose, LLC, Sumo Holdings Irvine, LLC, Sumo Holdings Sacramento, LLC (for both Sacramento and Oakland, California facilities), Sumo Holdings Maryland, LLC, Sumo Holdings Costa Mesa, LLC, and Dieterich-Post Company, respectively.
 
Messrs. Chandramohan and Suriyakumar are the only members of each of these limited liability companies, and collectively own 85% of the outstanding shares of Dieterich-Post Company.


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Under these leases, we paid these entities rent in the aggregate amount of $1,583,328 in 2006. We were also obligated to reimburse these entities for certain real property taxes and the actual costs incurred by these entities for insurance and maintenance on a triple net basis.
 
The eight leases described above expire between March 31, 2009 and July 31, 2019.
 
We sold certain products and services to Thomas Reprographics, Inc., Albinson Reprographics, LLC and Thomas Reprographics of Florida, LLC. Billy E. Thomas owns 69% of Thomas Reprographics Inc., 33.3% of Albinson Reprographics, LLC and 33.3% of Thomas Reprographics of Florida, LLC. Billy E. Thomas beneficial owned more than five percent of our common stock until May 17, 2006. These three companies purchased products and services from us of approximately $257,610 during the year ended December 31, 2006.
 
Consulting Agreement
 
On February 28, 2007, we entered into a written consulting agreement with Legg Consulting LLC, which is controlled by our former Chief Financial Officer, Mark Legg, effective March 1, 2007 upon Mr. Legg’s resignation as our full-time employee. The term of the consulting agreement is one year.
 
Pursuant to the consulting agreement, Mr. Legg will provide us professional services related to merger and acquisition strategic planning and due diligence, transition assistance to our current Chief Financial Officer, pending accounting matters, and such other matters as we may request. We will pay Legg Consulting LLC the sum of $24,250 per month during the term of the agreement.
 
Policies and Procedures Regarding Related Persons Transactions
 
The real property leases described above were originally entered into by us between November 17, 1997 and September 23, 2003. Our Board of Directors determined that as of the February 2005 closing of our initial public offering, we would not enter into any arrangements to lease any additional facilities from Messrs. Chandramohan and Suriyakumar or their affiliates, or from any other related persons. Our Board of Directors requires that any extensions of the existing real property leases will not be approved if the proposed base rent exceeds the then-existing fair market rate in the applicable geographic market. Our Chief Financial Officer reviews relevant market data to ensure that lease term base rent for any extension term does not exceed the fair market rate and is authorized to consult with and retain the services of professionals, as necessary, to determine prevailing market rental rates.
 
In addition to these guidelines regarding real property leasing, written guidelines adopted by our Board of Directors require that the Board review and approve any proposed transaction with any principal stockholder, director, or executive officer, including their affiliates and other related persons. Pursuant to these guidelines, our Board of Directors reviewed and approved the compensation under the consulting agreement with Legg Consulting LLC described above.
 
Indemnification Agreements
 
We have entered into indemnification agreements with each of our directors and executive officers that provide indemnification under certain circumstances for acts and omissions that may not be covered by any directors’ and officers’ liability insurance. The indemnification agreements may require us, among other things, to indemnify our officers and directors against certain liabilities that may arise by reason of their status or service as officers and directors (other than liabilities arising from willful misconduct of a culpable nature), to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified, and to obtain officers’ and directors’ insurance if available on reasonable terms.
 
Registration Rights Agreement
 
On April 10, 2000, we entered into a registration rights agreement with Messrs. Chandramohan and Suriyakumar, and with certain other holders of our common stock and holders of warrants to purchase our common stock, including entities affiliated with our director, Mr. Formolo, and our former director, Mr. Code, which registration rights agreement was amended as of December 29, 2004. As of December 31, 2006, holders of


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14,958,657 shares of common stock are entitled to certain rights with respect to the registration of such shares under the Securities Act. These registration rights are described below.
 
Demand Registrations.   At any time following six months after the February 9, 2005 closing of our initial public offering, the holders of a majority of the registrable securities held by ARC Acquisition Co., L.L.C., an entity affiliated with our director, Mr. Formolo, and our former director, Mr. Code, and the holders of a majority of the registrable securities held by Messrs. Chandramohan and Suriyakumar (or entities in which they control a majority of the voting shares) shall each be entitled (as a group) to request up to two registrations on Form S-1 or similar long-form registration statements, respectively, and two short-form registrations on Form S-2, S-3 or any similar short-form registration statements, respectively. The holders of a majority of all other registrable securities under this agreement are entitled to request one short-form registration.
 
Piggyback Rights.   The holders of registrable securities other than those originally requesting registration pursuant to a demand registration can request to participate in, or “piggyback” on, any demand registration.
 
Piggyback Registrations.   If we propose to register any of our equity securities under the Securities Act (other than pursuant to a demand registration of registrable securities or a registration on Form S-4 or Form S-8) for us or for holders of securities other than the registrable securities, we will offer the holders of registrable securities the opportunity to register their registrable securities.
 
Conditions and Limitations; Expenses.   The registration rights are subject to conditions and limitations, including the right of the underwriters to limit the number of shares to be included in a registration and our right to delay or withdraw a registration statement under specified circumstances. We will pay the registration expenses of the holders of registrable securities in demand registrations and piggyback registrations in connection with the registration rights agreement.
 
Director Independence
 
As required by the rules of the New York Stock Exchange, our board evaluates the independence of its members at least annually, and at other appropriate times (e.g., in connection with a change in employment status) when a change in circumstances could potentially impact the independence of one or more directors.
 
Under NYSE rules, a director is independent if the Board affirmatively determines that he or she currently has no direct or indirect material relationship with the company or any of its consolidated subsidiaries. In addition, a director must meet each of the following standards to be considered independent under NYSE rules:
 
  •  The director is not and has not been an employee of the company, and no member of the director’s immediate family is or has served as an executive officer of the company or any of its consolidated subsidiaries, during the last three years.
 
  •  Neither the director nor any member of the director’s immediate family has received more than $100,000 in direct compensation from the company or any of its consolidated subsidiaries (excluding director and committee fees, pensions or deferred compensation for prior service) during any 12-month period within the last three years.
 
  •  The director: (i) is not, and does not have an immediate family member that is a current partner of a firm that is the company’s, or any of its consolidated subsidiaries’, internal or external auditor; (ii) is not a current employee of such external audit firm; (iii) does not have an immediate family member who is a current employee of such external audit firm who participates in such firm’s audit, assurance or tax compliance (but not tax planning) practice; and (iv) was not, and does not have an immediate family member that was, within the last three years (but is no longer) a partner or employee of such external audit firm who personally worked on the company’s, or any of its consolidated subsidiaries’, audit within that time.
 
  •  Neither the director nor any member of the director’s immediate family is or has been employed within the last three years as an executive officer of any company whose compensation committee, or the compensation committee of any of its consolidated subsidiaries, includes or included an executive officer of the company.


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  •  The director is not a current employee of, and does not have an immediate family member who is a current executive officer of, another company that has made payments to, or has received payments from, the company or any of its consolidated subsidiaries, for property or services in an amount which, in any of the last three fiscal years, exceeds the greater of $1 million or 2% of the consolidated gross revenues of such other company.
 
In determining whether a material relationship exists between the company and each director, the Board broadly considers all relevant facts and circumstances, including:
 
  •  the nature of any relationships with the company.
 
  •  the significance of the relationship to the company, the other organization and the individual director.
 
  •  whether or not the relationship is solely a business relationship in the ordinary course of the company’s and the other organization’s businesses and does not afford the director any special benefits.
 
  •  any commercial, industrial, banking, consulting, legal, accounting, charitable and familial relationships, and such other criteria as the board may determine from time to time.
 
  •  If a proposed director serves as an executive officer, director or trustee of a tax exempt organization, whether contributions from the company, or any of its consolidated subsidiaries, to such tax exempt organization in any of the last three fiscal years are less than the greater of (i) $1 million or (ii) 2% of the consolidated gross revenues of such tax exempt organization for its last completed fiscal year.
 
Pursuant to the company’s Corporate Governance Guidelines, all members of the audit committee must also meet the following requirements:
 
  •  Director’s fees are the only compensation that members of the Audit Committee may receive from the company or any of its consolidated subsidiaries. Audit Committee members may not receive, directly or indirectly, any consulting, advisory or other compensatory fees from the company or any of its consolidated subsidiaries (other than in his or her capacity as a member of the audit committee, the Board, or any other committee of the Board).
 
  •  No member of the audit committee may be an “affiliated person” of the company, or any of its consolidated subsidiaries, as such term is defined by the Securities and Exchange Commission.
 
A copy of our Corporate Governance Guidelines can be accessed on our website www.e-arc.com, by clicking on the “Investor Relations” link at the top of the page and then selecting “Corporate Governance” from the Investor Relations Webpage. You can request a printed copy of our Corporate Governance Guidelines, at no cost, by contacting Investor Relations at 925-949-5100 or 1981 N. Broadway, Suite 385, Walnut Creek, California 94596, attention David Stickney, Vice President Corporate Communications.
 
After considering the policies set forth in the company’s Corporate Governance Guidelines and the standards for independence adopted by the NYSE described above, the Board determined that, in its judgment, current directors Messrs. Formolo, McCluggage, Mealy, Perez de la Mesa and Scocimara are independent and that Edward D. Horowitz, who served as a director during the last fiscal year from January 1, 2006 until May 22, 2006 was independent. The Board also determined that all members of the audit committee, the nominating and corporate governance committee and the compensation committee are independent. Messrs. Mealy, Perez de la Mesa and Scocimara are the members of the audit committee, Messrs. Perez de la Mesa, Formolo and McCluggage are the members of the compensation committee and Messrs. Mealy, McCluggage and Scocimara are the members of the nominating and corporate governance committee.
 
When affirmatively determining that Mr. Formolo was independent, the Board considered that Mr. Formolo had a direct ownership interest in CHS Management IV LP, an entity with who we had a management agreement until our initial public offering in February 2005 and to who we paid a management fee. After considering that the management agreement had terminated and that amounts that had been paid under the management agreement were less than the amounts specified in the NYSE independence rules, the board affirmatively determined that Mr. Formolo did not have a direct or indirect material relationship with us.


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Item 14.    Principal Accounting Fees and Services
 
A summary of the services provided by PricewaterhouseCoopers LLP for the years ended December 31, 2005 and 2006 are as follows (in thousands):
 
                 
    2005   2006
 
Audit fees(a)
  $ 780     $ 1,690  
Audit related fees(b)
    43       203  
Tax fees(c)
    56        
All other fees(d)
          2  
                 
    $ 879     $ 1,895  
                 
 
 
(a) Consists of aggregate fees billed or expected to be billed for professional services rendered for the audit of our annual consolidated financial statements for each of the fiscal years ended December 31, 2006 and December 31, 2005, reviews of financial statements in the company’s quarterly reports on Form 10-Q for each of the fiscal years ended December 31, 2005 and December 31, 2006.
 
(b) Consists of aggregate fees billed or expected to be billed for assurance and related services reasonably related to the performance of the audit or review of the company’s financial statements for the fiscal years ended December 31, 2005 and December 31, 2006 and are not included in the audit fees listed above. This category includes fees related to accounting consultations, consultations concerning financial accounting and reporting standards, and audit services not required by statute or regulation.
 
(c) Consists of aggregate fees billed or expected to be billed for tax compliance, tax advice, and tax planning for each of the fiscal years ended December 31, 2005, and December 31, 2006.
 
(d) Consists of aggregate fees billed or expected to be billed for all other services not included in the three categories set forth above for each of the fiscal years ended December 31, 2005 and December 31, 2006.
 
The audit committee has adopted a pre-approval policy governing the engagement of the company’s independent registered public accounting firm for all audit and non-audit services. The audit committee’s pre-approval policy provides that the audit committee must pre-approve all audit services and non-audit services to be performed for the company by its independent registered public accounting firm prior to their engagement for such services. The audit committee pre-approval policy establishes pre-approved categories of certain non-audit services that may be performed by the company’s independent registered public accounting firm during the fiscal year, subject to dollar limitations that may be set by the audit committee. Pre-approved services include certain audit related services, tax services and various non-audit related services. The term of any pre-approval is 12 months from the date of pre-approval, unless the audit committee specifically provides for a different period. The audit committee may delegate pre-approval authority to one or more of its members. The member(s) to whom such authority is delegated must report any pre-approval decisions to the audit committee at its next meeting. One hundred percent of the services provided by PricewaterhouseCoopers LLP during 2006 and 2005 were approved by the audit committee in accordance with the pre-approval procedures described above.
 
Under Company policy and/or applicable rules and regulations, the independent registered public accounting firm is prohibited from providing the following types of services to the Company: (1) bookkeeping or other services related to the Company’s accounting records or financial statements, (2) financial information systems design and implementation, (3) appraisal or valuation services, fairness opinions or contribution-in-kind reports, (4) actuarial services, (5) internal audit outsourcing services, (6) management functions, (7) human resources, (8) broker-dealer, investment advisor or investment banking services, and (9) legal services.


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PART IV
 
Item 15.    Exhibits, Financial Statement Schedules
 
The following documents are filed as part of this report:
 
(1)  Financial Statements
 
The following consolidated financial statements are filed as part of this report:
 
Management’s Report on Internal Controls Over Financial Reporting
 
Report of Independent Registered Public Accounting Firm
 
Consolidated Balance Sheets as of December 31, 2005 and 2006
 
Consolidated Statements of Income for the years ended December 31, 2004, 2005 and 2006
 
Consolidated Statements of Stockholders’ Equity and Comprehensive Income for the years ended December 31, 2004, 2005 and 2006
 
Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2005 and 2006
 
Notes to Consolidated Financial Statements
 
(2)  Financial Statement Schedule
 
Schedule II — Valuation and Qualifying Accounts
 
All other schedules have been omitted as the required information is not present or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements and notes thereto.
 
(3) Exhibits
 
The following exhibits are filed as part of this report.
 
Index to Exhibits
 
         
Number
 
Description
 
  3 .1   Amended and Restated Certificate of Incorporation, filed February 2, 2005 (incorporated by reference to Exhibit 3.1 to the Registrant’s Form 10-K filed on March 31, 2005).
  3 .2   Amended and Restated Bylaws, adopted by Board January 28, 2005 (incorporated by reference to Exhibit 3.2 to the Registrant’s Form 10-K filed on March 31, 2005).
  4 .1   Specimen Stock Certificate (incorporated by reference to Exhibit 4.1 to the Registrant’s Registration Statement on Form S-1 A (Reg. No. 333-119788), as amended on January 13, 2005).
  10 .1   Second Amended and Restated Credit and Guaranty Agreement dated as of December 21, 2005 by and among American Reprographics Company; American Reprographics Company, L.L.C., American Reprographics Holdings, L.L.C., certain subsidiaries of American Reprographics Company, L.L.C., or guarantors, and the lenders named therein (incorporated by reference to Exhibit 10.1 of the Form 8-K filed on December 21, 2005).
  10 .2   First Amendment to Second Amended and Restated Credit and Guaranty Agreement dated effective as of July 17, 2006, by and among American Reprographics Company L.L.C., a California limited liability company, American Reprographics Company, a Delaware corporation, certain financial institutions listed in the signature pages thereto, Goldman Sachs Credit Partners L.P., as Sole Lead Arranger and Joint Bookrunner, JPMorgan Securities, Inc., as Joint Bookrunner, General Electric Capital Corporation, as Administrative Agent and as Collateral Agent and the Credit Support Parties listed on the signature pages thereto (incorporated by reference to Exhibit 10.1 of the Form 10-Q filed on August 14, 2006).


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Number
 
Description
 
  10 .3   Intercreditor Agreement, dated as of December 18, 2003, between American Reprographics Company, L.L.C. and General Electric Capital Corporation and Goldman Sachs Credit Partners L.P., as collateral agents (incorporated by reference to Exhibit 10.3 to the Registrant’s Registration Statement on Form S-1 (Reg. No. 333-119788), as filed on October 15, 2004).
  10 .4   2004 Bonus Plan, dated March 24, 2004, between American Reprographics Company and Mr. Legg (incorporated by reference to Exhibit 10.4 to the Registrant’s Registration Statement on Form S-1 (Reg. No. 333-119788), as filed on October 15, 2004).^
  10 .5   2005 Bonus Plan between American Reprographics Company and Mr. Legg (incorporated by reference to Exhibit 10.4 to the Registrant’s Form 10-K filed on March 16, 2006).^
  10 .6   American Reprographics Holdings, L.L.C. Unit Option Plan II, adopted effective as of January 1, 2001 (incorporated by reference to Exhibit 10.5 to the Registrant’s Registration Statement on Form S-1 (Reg. No. 333-119788), as filed on October 15, 2004).^
  10 .7   Amendment No. 1 dated as of July 1, 2003 to American Reprographics Holdings, L.L.C. Unit Option Plan II (incorporated by reference to Exhibit 10.6 to the Registrant’s Registration Statement on Form S-1 (Reg. No. 333-119788), as filed on October 15, 2004).^
  10 .8   American Reprographics Company 2005 Stock Plan (incorporated by reference to Exhibit 10.7 to the Registrant’s Registration Statement on Form S-1 A (Reg. No. 333-119788), as amended on January 13, 2005).^
  10 .9   Forms of Stock Option Agreements under the 2005 Stock Plan (incorporated by reference to Exhibit 10.8 to the Registrant’s Registration Statement on Form S-1 (Reg. No. 333-119788), as filed on October 15, 2004).^
  10 .10   Form of American Reprographics Company Stock Option Grant Notice — Non-employee Directors (Discretionary Non-statutory Stock Options) (incorporated by reference to Exhibit 10.1 to the Form 8-K filed on December 16, 2005).^
  10 .11   Form of American Reprographics Company Non-employee Directors — Stock Option Agreement (Discretionary Grants) (incorporated by reference to Exhibit 10.2 to the Form 8-K filed on December 16, 2005).^
  10 .12   American Reprographics Company 2005 Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.9 to the Registrant’s Registration Statement on Form S-1 (Reg. No. 333-119788), as filed on October 15, 2004).^
  10 .13   Amendment to American Reprographics Company 2005 Employee Stock Purchase Plan dated September 29, 2006.*^
  10 .14   Lease Agreement, dated November 19, 1997, between American Reprographics Company, L.L.C. (formerly Ford Graphics Group, L.L.C.) and Sumo Holdings LA, LLC (incorporated by reference to Exhibit 10.10 to the Registrant’s Registration Statement on Form S-1 (Reg. No. 333-119788), as filed on October 15, 2004).
  10 .15   Amendment to Lease for the premises commonly known as 934 and 940 Venice Boulevard, Los Angeles, CA, effective as of August 2, 2005, by and between Sumo Holdings LA, LLC, Landlord and American Reprographics Company, L.L.C. (formerly known as FORD GRAPHICS GROUP, L.L.C.) Tenant (incorporated by reference to Exhibit 10.2 to the Form 10-Q filed on November 14, 2005).
  10 .16   Lease Agreement between American Reprographics Company, L.L.C. and Sumo Holdings San Jose, LLC (incorporated by reference to Exhibit 10.11 to the Registrant’s Registration Statement on Form S-1 (Reg. No. 333-119788), as filed on October 15, 2004).
  10 .17   Lease Agreement between American Reprographics Company, L.L.C. and Sumo Holdings Irvine, LLC (incorporated by reference to Exhibit 10.12 to the Registrant’s Registration Statement on Form S-1 (Reg. No. 333-119788), as filed on October 15, 2004).
  10 .18   Amendment to Lease for the premises commonly known as 17721 Mitchell North, Irvine, CA, effective as of August 2, 2005, by and between Sumo Holdings Irvine, LLC, Lessor and American Reprographics Company, L.L.C., Lessee (incorporated by reference to Exhibit 10.1 to the Form 10-Q filed on November 14, 2005).
  10 .19   Lease Agreement, dated December 1, 1997, between American Reprographics Company, L.L.C. and Sumo Holdings Sacramento, LLC (Oakland Property) (incorporated by reference to Exhibit 10.13 to the Registrant’s Registration Statement on Form S-1 (Reg. No. 333-119788), as filed on October 15, 2004).


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Number
 
Description
 
  10 .20   Lease Agreement between American Reprographics Company, L.L.C. (formerly Ford Graphics Group, L.L.C.) and Sumo Holdings Sacramento, LLC (Sacramento Property) (incorporated by reference to Exhibit 10.14 to the Registrant’s Registration Statement on Form S-1 (Reg. No. 333-119788), as filed on October 15, 2004).
  10 .21   Amendment to Lease for the premises commonly known as 1322 V Street, Sacramento, CA, effective as of August 2, 2005, by and between Sumo Holdings Sacramento, LLC, Landlord and American Reprographics Company, L.L.C. (formerly known as Ford Graphics Group, L.L.C.) Tenant (incorporated by reference to Exhibit 10.4 to the Form 10-Q filed on November 14, 2005).
  10 .22   Lease Agreement, dated December 7, 1995, between Leet-Melbrook, Inc. and Sumo Holdings Maryland, LLC (as successor lessor) (incorporated by reference to Exhibit 10.15 to the Registrant’s Registration Statement on Form S-1 (Reg. No. 333-119788), as filed on October 15, 2004).
  10 .23   Amendment to Lease for the premises commonly known as 18810 Woodfield Road, Gaithersburg, MD, effective as of August 2, 2005, by and between Sumo Holdings Maryland, LLC, Landlord and Leet-Melbrook, Inc., Tenant (incorporated by reference to Exhibit 10.3 to the Form 10-Q filed on November 14, 2005).
  10 .24   Second Amendment to Lease for the premises commonly known as 18810 Woodfield Road, Gaithersburg, MD, effective as of August 1, 2006 by and between Sumo Holdings Maryland, LLC, Landlord and Leet-Melbrook Inc., Tenant.*
  10 .25   Lease Agreement, dated September 23, 2003, between American Reprographics Company (dba Consolidated Reprographics) and Sumo Holdings Costa Mesa, LLC (incorporated by reference to Exhibit 10.16 to the Registrant’s Registration Statement on Form S-1 (Reg. No. 333-119788), as filed on October 15, 2004).
  10 .26   Lease agreement dated November 19, 1997, between Dieterich-Post Company and Ford Graphics Group, L.L.C.*
  10 .27   Management Agreement, dated April 10, 2000, between American Reprographics Company, L.L.C. and CHS Management IV LP (incorporated by reference to Exhibit 10.17 to the Registrant’s Registration Statement on Form S-1 (Reg. No. 333-119788), as filed on October 15, 2004).
  10 .28   Termination Agreement to Management Agreement, dated November 29, 2004, between American Reprographics Company, L.L.C. and CHS Management&#