e424b5
The information in this preliminary
prospectus supplement is not complete and may be changed. The
selling stockholders may not sell these securities until the
registration statement filed with the Securities and Exchange
Commission has been declared effective. Neither this preliminary
prospectus supplement nor the accompanying prospectus is an
offer to sell these securities and we and the selling
stockholders are not soliciting offers to buy these securities
in any state where the offer or sale is not permitted.
|
Filed Pursuant to Rule 424(b)(5)
Registration No. 333-132530
SUBJECT TO COMPLETION, DATED
MARCH 29, 2006
Prospectus Supplement
(To Prospectus dated
March , 2006)
6,087,000 shares
Common stock
The selling stockholders identified in this prospectus
supplement are selling 6,087,000 shares. We will not
receive any of the proceeds from the sale of the shares by the
selling stockholders.
Our common stock is quoted on the New York Stock Exchange under
the symbol ARP. On March 27, 2006, the last
reported sale price of our common stock was $35.15 per share.
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Per share | |
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Total | |
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Public offering price
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$ |
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$ |
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Underwriting discounts and
commission
|
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$ |
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$ |
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Proceeds to selling stockholders,
before expenses
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$ |
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$ |
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Certain stockholders have granted the underwriters an option for
a period of 30 days to purchase up to 913,000 additional
shares of our common stock on the same terms and conditions set
forth above to cover over-allotments, if any.
Investing in our common stock involves a high degree of risk.
See Risk factors beginning on
page S-11.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or passed upon the adequacy or the accuracy of this
prospectus supplement or the accompanying prospectus. Any
representation to the contrary is a criminal offense.
The underwriters expect to deliver the shares of common stock to
investors on April , 2006.
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JPMorgan |
Goldman, Sachs & Co. |
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Robert W. Baird & Co. |
CIBC World Markets |
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Credit Suisse |
William Blair & Company |
Prospectus Supplement dated
April , 2006
Table of contents
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Prospectus supplement
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Page |
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About
this prospectus supplement
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S-ii
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S-ii
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S-1
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S-11
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S-20
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S-22
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S-22
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S-22
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S-23
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S-24
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S-26
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S-51
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S-63
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S-65
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S-67
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S-72
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F-1
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Prospectus |
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1
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1
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2
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2
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4
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S-i
About this prospectus supplement
This prospectus supplement is a supplement to the accompanying
prospectus that is also a part of this document. The prospectus
is part of a registration statement that we filed with the SEC
using a shelf registration process. Under the shelf registration
process, from time to time and up to an aggregate amount of
7,000,000 shares (including this offering), the selling
stockholders may offer common stock. No securities have been
sold under this shelf registration as of the date of this
prospectus supplement. In the accompanying prospectus, we
provide you with a general description of the securities the
selling stockholders may offer from time to time under our shelf
registration statement. In this prospectus supplement, we
provide you with specific information about the terms of this
offering. Both this prospectus supplement and the prospectus
include, or incorporate by reference, important information
about us, our common stock and other information you should know
before investing. This prospectus supplement also adds to,
updates and changes information contained in the prospectus. If
any specific statement that we make in this prospectus
supplement is inconsistent with the statements made in the
accompanying prospectus, the statements made in the accompanying
prospectus are deemed modified or superceded by the statements
made in this prospectus supplement. You should read both this
prospectus supplement and the prospectus, as well as the
additional information described under Where you can find
more information in the prospectus before investing in our
common stock.
Market data
We operate in an industry in which it is difficult to obtain
precise industry and market information. Although we have
obtained some industry data from third-party sources that we
believe to be reliable, in many cases we have based certain
statements contained in this prospectus regarding our industry
and our position in the industry on our estimates concerning our
customers and competitors. These estimates are based on our
experience in the industry, conversations with our principal
vendors, our own investigation of market conditions and
information obtained through our numerous acquisitions.
S-ii
Prospectus summary
This summary highlights only selected information contained
elsewhere in this prospectus supplement and the accompanying
prospectus and does not contain all of the information you
should consider before investing in our common stock. You should
read carefully this entire prospectus supplement, the
accompanying prospectus, the documents incorporated by reference
and the other documents to which we refer. Please read
Risk factors, beginning on
page S-11 of this
prospectus supplement for more information about important risks
that you should consider before buying our common stock. In this
prospectus supplement, American Reprographics
Company, ARC, the company,
we, us, and our refer to
American Reprographics Company and its consolidated
subsidiaries, unless the context otherwise dictates.
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 also require sophisticated document
management services. We provide our core services through our
suite of reprographics technology products, a network of
approximately 220 locally branded reprographics service centers
in 161 U.S. cities, and approximately 2,500 facilities
management programs at our customers locations throughout
the country. Our 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 73,000 active customers and
we employ more than 3,800 people, including a sales and customer
service staff of more than 775 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.
Reprographics services typically encompass the management and
reproduction of construction documents or other graphics-related
material and the 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. We
also sell reprographics equipment and supplies to complement
these offerings. We also serve other independent reprographers
by licensing our suite of reprographics technology products,
including our flagship internet-based application, PlanWell. In
addition, we operate PEiR (Profit and Education in
Reprographics), a privately held trade organization through
which we charge membership fees and provide purchasing,
technology and educational benefits to other reprographers,
while promoting our reprographics technology products as
industry standards.
For the year ended December 31, 2005, our net sales were
$494.2 million, our income from operations was
$89.8 million, and our net income was $60.5 million.
For the year ended December 31, 2005, we estimate that the
AEC market accounted for approximately 80% of our net sales,
with the remaining 20% from non-AEC markets.
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
$5 billion in
S-1
size. The IRgA indicates that 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 is estimated at $1.1 trillion, with
expenditures divided between residential construction 55%
and commercial and public, or non-residential,
construction 45%. The $5 billion reprographics
industry is approximately 0.5% of the $1.1 trillion construction
industry in the United States. Our AEC revenues are most closely
correlated to the non-residential sectors of the construction
industry, which are the largest users of reprographics services.
According to FMI, the non-residential sectors of the
construction industry are projected to grow at a compounded
annual growth rate of approximately 8% 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 projected to
have grown 3.5% in 2005 and is projected to remain at that
growth rate in 2006 according to Wall Streets consensus
estimates.
Our competitive strengths
We believe that our competitive strengths include the following:
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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. |
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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 complementary services and increase our revenue. |
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Extensive National Footprint with Regional Expertise. Our
national network of service centers maintains local customer
relationships while benefiting from our 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. |
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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 |
S-2
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structure advantages of our centralized administrative
functions. Our flexible operating model also allows us to
capitalize on an improving business environment. |
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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. We have also successfully retained
approximately 90% of the managers of the businesses we
have acquired since 1997. |
Our business strategy
We intend to strengthen our competitive position as the
preferred provider of reprographics services in each market we
serve. We seek to do so while increasing revenue, cash flow,
profitability, and market share. Our key strategies to
accomplish this objective include:
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Continue to Increase Our Market Penetration and Expand Our
Nationwide Footprint. We believe that many of our local
customers rely on local relationships with our service centers
for their document management services. We also recognize a
growing desire among larger regional and national customers to
consolidate their purchasing of reprographics services. We
believe that we are currently a leader in approximately half of
the top 50 U.S. markets (as defined by Neilsen media research).
To expand our nationwide footprint, we intend to increase our
presence in the top 50 U.S. markets and other under-penetrated
regions through facilities management contracts, targeted branch
openings, strategic acquisitions and national accounts. |
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Facilities Management Contracts. We expect to capitalize
on the continued trend of our customers to outsource their
document management services, including their in-house
operations. Placing equipment (and sometimes staff) in an
architectural studio or construction company office remains a
compelling service offering as evidenced by our eight-year
compounded annual growth rate of 30% in new on-site services
contracts. The renewable nature of most on-site service
contracts leads us to believe that this source of revenue will
continue to increase in the near term. We will continue to
concentrate on developing ongoing facilities management
relationships in all of the markets we serve and building our
base of recurring revenue. |
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Targeted Branch Openings. Significant opportunities exist
to expand our geographic coverage, capture new customers and
increase our market share by opening additional satellite
branches in regions near our established operations. In 2005, we
opened 19 such branches in areas that expand or further
penetrate our existing markets. We plan to open an additional 15
branches by the end of 2006. We believe that our existing
corporate infrastructure is capable of supporting a much larger
branch network and significantly higher revenue. |
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Strategic Acquisitions. Acquisitions have historically
been an important component of our growth strategy and,
accordingly, we have developed a structured approach to
acquiring and integrating companies. Because our industry
consists primarily of small, privately held companies that serve
only local markets, we believe that we can continue to grow our |
S-3
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business by acquiring additional reprographics companies at
reasonable prices and subsequently realizing substantial
operating and purchasing synergies by leveraging our existing
corporate infrastructure. |
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National Accounts. Our Premier Accounts business unit
offers a comprehensive suite of reprographics services designed
to meet the demands of large regional and national businesses.
It provides local reprographics services to regional and
national companies through our national network of reprographics
service centers, while offering centralized access to
project-specific services, billing and tracking information.
Through our extensive national footprint and industry-leading
technology, we believe that we are well positioned to meet the
demands of national companies and will continue to capture
additional revenues and customers through this business unit. |
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Promote PlanWell as the Industry Standard for Procuring
Reprographics Services Online. We continue to expand the
market penetration of PlanWell to create an industry standard
for online document management, storage, and document retrieval
services. In order to increase market share and achieve industry
standardization, we will continue to license our PlanWell
technology to other reprographics companies, including members
of PEiR. Through December 2005, we licensed PlanWell technology
products for use in 140 independent reprographics service
facilities, which, in combination with ARC locations, has made
our technology available in more than 350 locations across the
United States. |
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|
Solidify Our Non-AEC Service Offerings. We have leveraged
our expertise in providing highly customized, quick turnaround
services to the AEC industry to attract customers from non-AEC
industries that are increasingly seeking document management,
document distribution and logistics, and print-on-demand
services. We have been successful in attracting non-AEC
customers that require services such as the production of large
format and small format color and black and white documents,
educational and training materials, short-run publishing
products, and retail and promotional items. Our services to
these customers accounted for approximately 20% of our net sales
in 2005. |
In addition, we continue to focus on creating new value-added
services beyond traditional reprographics to offer all of our
customers. We are actively engaged in services such as bid
facilitation, print network management for offices and on-site
production facilities, and on-demand color publishing. We plan
to continue to capitalize on our technological innovation to
enhance our existing services, add new revenue streams, and
create new reprographics technologies.
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 (referred to as 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
S-4
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.
S-5
The offering
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Common stock offered by the
selling stockholders
|
|
6,087,000 shares
|
Common stock to be outstanding
after this offering(1)
|
|
44,812,815 shares
|
Use of proceeds
|
|
We will not receive any proceeds
from the sale of shares by the selling stockholders.
|
Dividend policy
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|
We do not anticipate paying any
dividends on our common stock in the foreseeable future.
|
New York Stock Exchange
symbol
|
|
ARP
|
Unless otherwise noted, the information in this prospectus,
including the information above:
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|
|
|
|
reflects our conversion from a California limited liability
company to a Delaware corporation, which occurred on
February 3, 2005; |
|
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|
reflects 44,625,815 shares of common stock outstanding at
March 1, 2006; |
|
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excludes 1,397,585 shares of common stock subject to
outstanding options at March 1, 2006 issued at a weighted
average exercise price of $5.92 per share; |
|
|
|
excludes 32,050 shares of common stock issued upon option
exercises since March 1, 2006; |
|
|
|
excludes 3,249,315 shares of common stock reserved for
future issuance under our 2005 Stock Plan, and
387,939 shares of common stock reserved for future issuance
under our 2005 Employee Stock Purchase Plan; and |
|
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|
assumes no exercise of the underwriters option to purchase
additional shares. |
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(1) |
Includes 187,000 shares of common stock to be issued upon
exercise of outstanding options prior to the close of the
offering. |
Risk factors
See Risk factors and the other information included
in this prospectus for a discussion of the factors you should
consider carefully before deciding to invest in shares of our
common stock.
S-6
Summary historical and unaudited
pro forma financial data
The summary historical and unaudited pro forma financial data
presented below are derived from the audited financial
statements of Holdings for the fiscal years ended
December 31, 2001, 2002, 2003 and 2004 and the audited
financial statements of American Reprographics Company for the
fiscal year ended December 31, 2005. Except where otherwise
indicated, the unaudited pro forma financial data set forth
below give effect to our conversion to a Delaware corporation in
February 2005. For additional information see
Capitalization, Selected historical financial
data, Managements discussion and analysis of
financial condition and results of operations, and our
audited financial statements included elsewhere in this
prospectus supplement.
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| |
Fiscal year ended | |
December 31, | |
(dollars in thousands, | |
except per unit / share | |
amounts) |
|
2001 | |
|
2002 | |
|
2003 | |
|
2004 | |
|
2005 | |
| |
Statement of operations
data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reprographics services
|
|
$ |
338,124 |
|
|
$ |
324,402 |
|
|
$ |
315,995 |
|
|
$ |
333,305 |
|
|
$ |
369,123 |
|
Facilities management
|
|
|
39,875 |
|
|
|
52,290 |
|
|
|
59,311 |
|
|
|
72,360 |
|
|
|
83,125 |
|
Equipment and supplies sales
|
|
|
42,702 |
|
|
|
42,232 |
|
|
|
40,654 |
|
|
|
38,199 |
|
|
|
41,956 |
|
|
|
|
|
|
Total net sales
|
|
|
420,701 |
|
|
|
418,924 |
|
|
|
415,960 |
|
|
|
443,864 |
|
|
|
494,204 |
|
Cost of sales
|
|
|
243,710 |
|
|
|
247,778 |
|
|
|
252,028 |
|
|
|
263,787 |
|
|
|
289,580 |
|
|
|
|
Gross profit
|
|
|
176,991 |
|
|
|
171,146 |
|
|
|
163,932 |
|
|
|
180,077 |
|
|
|
204,624 |
|
|
|
|
Selling, general and administrative
expenses
|
|
|
104,004 |
|
|
|
103,305 |
|
|
|
101,252 |
|
|
|
105,780 |
|
|
|
112,679 |
|
Provision for sales tax dispute
settlement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,389 |
|
|
|
|
|
Amortization of intangibles
|
|
|
5,801 |
|
|
|
1,498 |
|
|
|
1,709 |
|
|
|
1,695 |
|
|
|
2,120 |
|
Write-off of intangible assets
|
|
|
3,438 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
63,748 |
|
|
|
66,343 |
|
|
|
60,971 |
|
|
|
71,213 |
|
|
|
89,825 |
|
Other income
|
|
|
304 |
|
|
|
541 |
|
|
|
1,024 |
|
|
|
420 |
|
|
|
381 |
|
Interest expense
|
|
|
(47,530 |
) |
|
|
(39,917 |
) |
|
|
(39,390 |
) |
|
|
(33,565 |
) |
|
|
(26,722 |
) |
Loss on early extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
(14,921 |
) |
|
|
|
|
|
|
(9,344 |
) |
|
|
|
Income before income tax provision
(benefit)
|
|
|
16,522 |
|
|
|
26,967 |
|
|
|
7,684 |
|
|
|
38,068 |
|
|
|
54,140 |
|
Income tax provision (benefit)(1)
|
|
|
5,787 |
|
|
|
6,267 |
|
|
|
4,131 |
|
|
|
8,520 |
|
|
|
(6,336 |
) |
|
|
|
Net income
|
|
|
10,735 |
|
|
|
20,700 |
|
|
|
3,553 |
|
|
|
29,548 |
|
|
|
60,476 |
|
Dividends and amortization of
discount on preferred equity
|
|
|
(3,107 |
) |
|
|
(3,291 |
) |
|
|
(1,730 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common
members / stockholders
|
|
|
7,628 |
|
|
|
17,409 |
|
|
|
1,823 |
|
|
|
29,548 |
|
|
|
60,476 |
|
Unaudited pro forma incremental
income tax provision(1)
|
|
|
2,574 |
|
|
|
6,211 |
|
|
|
673 |
|
|
|
9,196 |
|
|
|
333 |
|
|
|
|
Unaudited pro forma net income
attributable to common members / stockholders
|
|
$ |
5,054 |
|
|
$ |
11,198 |
|
|
$ |
1,150 |
|
|
$ |
20,352 |
|
|
$ |
60,143 |
|
|
|
|
Net income attributable to common
members / stockholders per common unit / share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.21 |
|
|
$ |
0.48 |
|
|
$ |
0.05 |
|
|
$ |
0.83 |
|
|
$ |
1.43 |
|
S-7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Fiscal year ended | |
December 31, | |
(dollars in thousands, | |
except per unit / share | |
amounts) |
|
2001 | |
|
2002 | |
|
2003 | |
|
2004 | |
|
2005 | |
| |
Diluted
|
|
$ |
0.21 |
|
|
$ |
0.47 |
|
|
$ |
0.05 |
|
|
$ |
0.79 |
|
|
$ |
1.40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Fiscal year ended December 31, |
|
2001 | |
|
2002 | |
|
2003 | |
|
2004 | |
|
2005 | |
| |
Unaudited pro forma net income
attributable to common members / stockholders per common
unit / share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.14 |
|
|
$ |
0.31 |
|
|
$ |
0.03 |
|
|
$ |
0.57 |
|
|
$ |
1.42 |
|
|
Diluted
|
|
$ |
0.14 |
|
|
$ |
0.30 |
|
|
$ |
0.03 |
|
|
$ |
0.54 |
|
|
$ |
1.39 |
|
Weighted average common
units / shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
36,628,801 |
|
|
|
36,406,220 |
|
|
|
35,480,289 |
|
|
|
35,493,136 |
|
|
|
42,264,001 |
|
|
Diluted
|
|
|
36,757,814 |
|
|
|
36,723,031 |
|
|
|
37,298,349 |
|
|
|
37,464,123 |
|
|
|
43,178,001 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Fiscal year ended | |
December 31, | |
(dollars in thousands) |
|
2001 | |
|
2002 | |
|
2003 | |
|
2004 | |
|
2005 | |
| |
Other financial data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBIT(2)
|
|
$ |
64,052 |
|
|
$ |
66,884 |
|
|
$ |
61,995 |
|
|
$ |
71,633 |
|
|
$ |
90,206 |
|
EBITDA(2)
|
|
$ |
89,494 |
|
|
$ |
86,062 |
|
|
$ |
81,932 |
|
|
$ |
90,363 |
|
|
$ |
109,371 |
|
EBIT margin(2)
|
|
|
15.2% |
|
|
|
16.0% |
|
|
|
14.9% |
|
|
|
16.2% |
|
|
|
18.2% |
|
EBITDA margin(2)
|
|
|
21.3% |
|
|
|
20.5% |
|
|
|
19.7% |
|
|
|
20.4% |
|
|
|
22.1% |
|
Depreciation and amortization(3)
|
|
$ |
25,442 |
|
|
$ |
19,178 |
|
|
$ |
19,937 |
|
|
$ |
18,730 |
|
|
$ |
19,165 |
|
Capital expenditures, net
|
|
$ |
8,659 |
|
|
$ |
5,209 |
|
|
$ |
4,992 |
|
|
$ |
5,898 |
|
|
$ |
5,237 |
|
Interest expense, net
|
|
$ |
47,530 |
|
|
$ |
39,917 |
|
|
$ |
39,390 |
|
|
$ |
33,565 |
|
|
$ |
26,722 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
As of December 31, 2005 | |
|
|
As of December 31, | |
|
| |
|
|
| |
|
|
|
As adjusted(4) | |
(dollars in thousands) |
|
2001 | |
|
2002 | |
|
2003 | |
|
2004 | |
|
Actual | |
|
(unaudited) | |
| |
|
| |
Balance sheet data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
29,110 |
|
|
$ |
24,995 |
|
|
$ |
17,315 |
|
|
$ |
13,826 |
|
|
$ |
22,643 |
|
|
$ |
22,193 |
|
Total assets
|
|
|
372,583 |
|
|
|
395,128 |
|
|
|
374,716 |
|
|
|
377,334 |
|
|
|
442,362 |
|
|
|
441,912 |
|
Long-term obligations and
mandatorily redeemable preferred and common units /
shares(5)(6)
|
|
|
371,515 |
|
|
|
378,102 |
|
|
|
360,008 |
|
|
|
338,371 |
|
|
|
253,371 |
|
|
|
253,371 |
|
Total
members /stockholders equity (deficit)(7)
|
|
|
(78,955 |
) |
|
|
(61,082 |
) |
|
|
(60,015 |
) |
|
|
(35,009 |
) |
|
|
113,569 |
|
|
|
113,119 |
|
Working capital
|
|
|
24,338 |
|
|
|
24,371 |
|
|
|
16,809 |
|
|
|
22,387 |
|
|
|
35,797 |
|
|
|
35,347 |
|
|
(1) Prior to our reorganization as a Delaware corporation
in February 2005, a substantial portion of our business was
operated as a limited liability company, or LLC, and taxed as a
partnership. As a result, the members of the LLC paid the income
taxes on the earnings. The unaudited pro forma incremental
income tax provision amounts reflected in the table above were
calculated as if our reorganization became effective on
January 1, 2001.
EBIT and EBITDA and related ratios presented in this prospectus
supplement 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.
S-8
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.
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
divisions. We operate our divisions as separate business units
but manage debt and taxation 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, because our
divisions do not incur interest or income tax expense, the cash
flow from each division should be equal to the corresponding
EBITDA of each division, assuming no other changes to a
divisions 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 and 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 and 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. For more information, see our consolidated
financial statements and related notes elsewhere in this
prospectus supplement.
The following is a reconciliation of cash flows provided by
operating activities to EBIT, EBITDA, and net income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Fiscal year ended December 31, | |
(dollars in thousands) |
|
2001 | |
|
2002 | |
|
2003 | |
|
2004 | |
|
2005 | |
| |
Cash flows provided by operating
activities
|
|
$ |
53,151 |
|
|
|
56,413 |
|
|
$ |
48,237 |
|
|
$ |
60,858 |
|
|
$ |
56,648 |
|
|
Changes in operating assets and
liabilities
|
|
|
2,399 |
|
|
|
(4,040 |
) |
|
|
(1,102 |
) |
|
|
(3,830 |
) |
|
|
8,859 |
|
|
Non-cash expenses, including
depreciation and amortization
|
|
|
(44,815 |
) |
|
|
(31,673 |
) |
|
|
(43,582 |
) |
|
|
(27,480 |
) |
|
|
(5,031 |
) |
|
Income tax provision (benefit)
|
|
|
5,787 |
|
|
|
6,267 |
|
|
|
4,131 |
|
|
|
8,520 |
|
|
|
(6,336 |
) |
|
Interest expense
|
|
|
47,530 |
|
|
|
39,917 |
|
|
|
39,390 |
|
|
|
33,565 |
|
|
|
26,722 |
|
|
Loss on early extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
14,921 |
|
|
|
|
|
|
|
9,344 |
|
|
|
|
EBIT
|
|
|
64,052 |
|
|
|
66,884 |
|
|
|
61,995 |
|
|
|
71,633 |
|
|
|
90,206 |
|
|
Depreciation and amortization
|
|
|
25,442 |
|
|
|
19,178 |
|
|
|
19,937 |
|
|
|
18,730 |
|
|
|
19,165 |
|
|
|
|
EBITDA
|
|
|
89,494 |
|
|
|
86,062 |
|
|
|
81,932 |
|
|
|
90,363 |
|
|
|
109,371 |
|
|
Interest expense
|
|
|
(47,530 |
) |
|
|
(39,917 |
) |
|
|
(39,390 |
) |
|
|
(33,565 |
) |
|
|
(26,722 |
) |
|
Loss on early extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
(14,921 |
) |
|
|
|
|
|
|
(9,344 |
) |
|
Income tax (provision) benefit
|
|
|
(5,787 |
) |
|
|
(6,267 |
) |
|
|
(4,131 |
) |
|
|
(8,520 |
) |
|
|
6,336 |
|
|
Depreciation and amortization
|
|
|
(25,442 |
) |
|
|
(19,178 |
) |
|
|
(19,937 |
) |
|
|
(18,730 |
) |
|
|
(19,165 |
) |
|
Dividends and amortization of
discount on preferred equity
|
|
|
(3,107 |
) |
|
|
(3,291 |
) |
|
|
(1,730 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
7,628 |
|
|
$ |
17,409 |
|
|
$ |
1,823 |
|
|
$ |
29,548 |
|
|
$ |
60,476 |
|
|
The following is a reconciliation of net income to EBITDA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Fiscal year ended December 31, | |
(dollars in thousands) |
|
2001 | |
|
2002 | |
|
2003 | |
|
2004 | |
|
2005 | |
| |
Net income
|
|
|
7,628 |
|
|
|
17,409 |
|
|
$ |
1,823 |
|
|
$ |
29,548 |
|
|
$ |
60,476 |
|
|
Dividends and amortization of
discount on preferred equity
|
|
|
3,107 |
|
|
|
3,291 |
|
|
|
1,730 |
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
47,530 |
|
|
|
39,917 |
|
|
|
39,390 |
|
|
|
33,565 |
|
|
|
26,722 |
|
|
Loss on early extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
14,921 |
|
|
|
|
|
|
|
9,344 |
|
|
Income tax provision (benefit)
|
|
|
5,787 |
|
|
|
6,267 |
|
|
|
4,131 |
|
|
|
8,520 |
|
|
|
(6,336 |
) |
|
Depreciation and amortization
|
|
|
25,442 |
|
|
|
19,178 |
|
|
|
19,937 |
|
|
|
18,730 |
|
|
|
19,165 |
|
|
|
|
EBITDA
|
|
|
89,494 |
|
|
|
86,062 |
|
|
$ |
81,932 |
|
|
$ |
90,363 |
|
|
$ |
109,371 |
|
|
S-9
The following is a reconciliation of our net income margin to
EBIT margin and EBITDA margin:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
As a percentage of net sales for fiscal year ended December 31, |
|
2001 | |
|
2002 | |
|
2003 | |
|
2004 | |
|
2005 | |
| |
Net income margin
|
|
|
2.6 |
% |
|
|
4.9 |
% |
|
|
0.9 |
% |
|
|
6.7 |
% |
|
|
12.2 |
% |
|
Interest expense, net
|
|
|
11.3 |
|
|
|
9.5 |
|
|
|
9.5 |
|
|
|
7.6 |
|
|
|
5.4 |
|
|
Income tax provision (benefit)
|
|
|
1.4 |
|
|
|
1.5 |
|
|
|
1.0 |
|
|
|
1.9 |
|
|
|
(1.3) |
|
|
Loss on early extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
3.6 |
|
|
|
|
|
|
|
1.9 |
|
|
|
|
EBIT margin
|
|
|
15.2 |
|
|
|
16.0 |
|
|
|
14.9 |
|
|
|
16.2 |
|
|
|
18.2 |
|
|
Depreciation and amortization
|
|
|
6.0 |
|
|
|
4.6 |
|
|
|
4.8 |
|
|
|
4.2 |
|
|
|
3.9 |
|
|
|
|
EBITDA margin
|
|
|
21.3 |
% |
|
|
20.5 |
% |
|
|
19.7 |
% |
|
|
20.4 |
% |
|
|
22.1 |
% |
|
(3) Depreciation and amortization includes a write-off of
intangible assets of $3.4 million for the year ended
December 31, 2001.
(4) Adjusted to reflect the payment of the expenses of the
offering.
(5) 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.
(6) Redeemable common membership units amounted to
$8.1 million at December 31, 2001.
(7) Reflects an $88.8 million cash distribution to
Holdings common unit holders in connection with the 2000
recapitalization and the reclassification of $20.3 million
of preferred equity issued in connection with the 2000
recapitalization upon the adoption of SFAS No. 150 in
July 2003.
S-10
Risk factors
Investing in our common stock involves a number of risks. You
should carefully consider all of the information contained or
incorporated in this prospectus supplement or the accompanying
prospectus, including the risk factors set forth below and in
our SEC periodic reports, before investing in the common stock
offered pursuant to this prospectus supplement. We may encounter
risks in addition to those described below. Additional risks and
uncertainties not currently known to us or that we currently
deem to be immaterial may also impair or adversely affect our
results of operations and financial condition. This could cause
the trading price of our common stock to decline, perhaps
significantly.
Risks related to our business
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 estimate that AEC markets accounted for approximately 80% of
our net sales for the year ended December 31, 2005. 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 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
S-11
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
products, 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 six 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 industrys 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
S-12
introduce in a timely manner innovative services that 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 2005, our
reprographics services represented approximately 74.7% and our
facilities management services represented approximately 16.8%
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 half of our net sales in 2005 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, most of the businesses we have acquired 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.
S-13
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 managements 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.
We expand our geographic coverage by opening additional
satellite branches in regions near our established operations to
capture new customers and greater market share. In 2005 we
opened 19 new branches in areas that expand or further penetrate
our existing markets, and we expect to open an additional 15
branches by the end of 2006. Although the capital investment for
a new branch is modest, our growth strategy with respect to
branch openings is in the early stages of implementation and 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.
We operate our company under a dual operating structure of
centralized administrative functions and regional decision
making on marketing, pricing, and selling practices. Of the
businesses we have acquired since 1997, we have, in most cases,
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 four largest vendors in 2005 were Oce N.V.,
Xerox Corporation, Canon Inc., 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,
S-14
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 United
States. Unauthorized third parties may copy aspects of our
products, 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 technology 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 managements time and our
companys 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 prospectus supplement. 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.
S-15
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. The loss of the services of one or more
members of our senior management team, in particular,
Mr. Chandramohan, our Chief Executive Officer, and
Mr. Suriyakumar, our President and Chief Operating Officer,
could disrupt our business and impede our ability to execute our
business strategy. Because our executive and divisional
management team has on average more than 20 years of
experience within the reprographics industry, it would be
difficult to replace them.
If we fail to maintain an effective system of internal
controls, we may not be able to accurately report our financial
results or prevent fraud. As a result, our business could be
harmed and current and potential stockholders could lose
confidence in our company, which could cause our stock price to
fall.
Changing laws, regulations and standards relating to corporate
governance and public disclosure, including the Sarbanes-Oxley
Act of 2002 and related regulations implemented by the
Securities and Exchange Commission, or SEC, and the New York
Stock Exchange, or NYSE, are creating uncertainty for public
companies, increasing legal and financial compliance costs and
making some activities more time consuming. We will be
evaluating our internal controls systems to allow management to
report on, and our independent auditors to attest to, our
internal controls. We will be performing the system and process
evaluation and testing (and any necessary remediation) required
to comply with the management certification and auditor
attestation requirements of Section 404 of the
Sarbanes-Oxley Act. As a result, we expect to incur substantial
additional expenses and diversion of managements time.
While we anticipate being able to fully implement the
requirements relating to internal controls and all other aspects
of Section 404 by our December 31, 2006 deadline, we
cannot be certain as to the timing of completion of our
evaluation, testing and remediation actions or the impact of the
same on our operations since there is presently no precedent
available by which to measure compliance adequacy. If we are not
able to implement the requirements of Section 404 in a
timely manner or with adequate compliance, we may not be able to
accurately report our financial results or prevent fraud and
might be subject to sanctions or investigation by regulatory
authorities, such as the SEC or the NYSE. Any such action could
harm our business or investors confidence in our company,
and could cause our stock price to fall.
Risks related to our common stock
The price of our common stock may fluctuate significantly,
which may make it difficult for you to resell the common stock
issuable when you want or at prices you find attractive.
The price of shares of our common stock on the NYSE constantly
changes. We expect that the market price of our common stock
will continue to fluctuate. Holders of our common stock will be
subject to the risk of volatility and depressed prices of our
common stock. Our stock price
S-16
can fluctuate as a result of a variety of factors, many of which
are beyond our control. These factors include:
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general domestic and international economic conditions; |
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developments generally affecting the architectural, engineering
and construction industry; |
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quarterly variations in our or our competitors results of
operations; |
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the announcement and introduction of new products or product
enhancements by us or our competitors; |
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announcement by third parties of significant claims or
proceedings against us; |
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changes in expectations as to our future financial performance,
including financial estimates by securities analysts and
investors; and |
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future sales of our equity or equity-linked securities. |
General market fluctuations, industry factors and general
economic and geopolitical conditions and events, such as
economic slowdowns or recessions, consumer confidence in the
economy, terrorist attacks and ongoing military conflicts, also
could cause our stock price to decrease. In addition, the stock
market in general has experienced extreme volatility that has
often been unrelated to the operating performance of a
particular company. These broad market fluctuations also may
adversely affect the market price of our common stock.
If securities or industry analysts cease publishing
research or reports about our business or publish negative
research, or our results are below analysts estimates, our
stock price and trading volume could decline.
The trading market of our common stock depends on the research
and reports that industry or securities analysts publish about
us or our business. We do not have any control over these
analysts. If one or more of the analysts who cover us downgrade
our stock or our results are below analysts estimates, our
stock price would likely decline. If one or more of these
analysts cease coverage of our company or fail to regulatory
publish reports on us, we could lose visibility in the financial
markets, which in turn could cause or stock price or trading
volume to decline.
Anti-takeover provisions in our charter documents and
Delaware corporate law may make it difficult for our
stockholders to replace or remove our current board of directors
and could deter an unsolicited third party acquisition offer,
which may adversely affect the marketability and market price of
our common stock.
Provisions in our amended and restated certificate of
incorporation and amended and restated bylaws and in Delaware
corporate law will make it difficult for stockholders to change
the composition of our board of directors, which consequently
will make it difficult to change the composition of management.
In addition, these provisions may make it difficult and
expensive for a third party to pursue a tender offer, change in
control or takeover attempt that is opposed by our management
and board of directors. Public stockholders who might desire to
participate in this type of transaction may not have an
opportunity to do so. These anti-takeover provisions could
substantially impede the ability of public stockholders to
benefit from a change in control or change our management and
board of directors and, as a result, may adversely affect the
market price of our common stock and your ability to realize any
potential change of control premium.
S-17
Our board of directors can issue preferred stock without
stockholder approval of the terms of such stock.
Our amended and restated certificate of incorporation authorizes
our board of directors, without stockholder approval, to issue
up to 25,000,000 shares of preferred stock in one or more
series and to fix the rights, preferences, privileges, and
restrictions granted to or imposed upon the preferred stock,
including voting rights, dividend rights, conversion rights,
terms of redemption, liquidation preference, sinking fund terms,
subscription rights, and the number of shares constituting any
series or the designation of a series. Our board of directors
will be able to issue preferred stock with voting and conversion
rights that could adversely affect the voting power of the
holders of common stock, without stockholder approval. No shares
of preferred stock are outstanding and we have no present plan
to issue any shares of preferred stock.
Shares available for public sale after this offering could
decrease the market price of our stock.
Sales of shares of our common stock in the public market
following this offering, or the perception that sales may occur,
could depress the market price of our common stock. As of
March 1, 2006, we had 44,625,815 shares of common
stock outstanding, all of which will be available for resale
after this offering. The number of shares of common stock
available for sale in the public market is temporarily limited
under lock-up
agreements covering 19,452,264 (assuming no exercise of the
underwriters over-allotment option) shares that our
directors, executive officers, the selling stockholders and
certain other stockholders have entered into with the
underwriters. Those
lock-up agreements
restrict these persons from disposing of or hedging their shares
or securities convertible into or exchangeable for their shares
until 90 days after the date of this prospectus without the
prior written consent of J.P. Morgan Securities Inc. and
Goldman, Sachs & Co. However, J.P. Morgan
Securities Inc. and Goldman, Sachs & Co. may release
all or any portion of the shares from the restrictions of the
lock-up agreements.
Upon expiration of the
lock-up period
described above, and subject to the provisions of Rule 144,
all of our shares will be available for sale in the public
market.
Your percentage ownership in us may be diluted by future
issuances of capital stock, which could reduce your influence
over matters on which stockholders vote and be dilutive to
earnings.
Our board of directors has the authority, without action or vote
of our stockholders, except as required by the NYSE, to issue
all or any part of our authorized but unissued shares of common
stock, including shares issuable upon the exercise of options.
Issuance of common stock would reduce your influence over
matters on which our stockholders vote and could be dilutive to
earnings.
Because a limited number of stockholders control a
significant portion of the voting power of our common stock,
investors in this offering may not be able to determine the
outcome of stockholder votes.
Following this offering, our executive officers, directors, Code
Hennessy & Simmons IV LP, and their affiliated
entities will control approximately 43.4% of the voting
power of our common stock, or approximately 41.3% if the
underwriters over-allotment option is exercised in full.
So long as these stockholders continue to hold, directly or
indirectly, shares of common stock representing such a
substantial portion of the voting power of our common stock,
they will be able to influence significantly the election of all
of the members of our board of directors who
S-18
will determine our strategic plans and financing decisions and
appoint senior management. These stockholders will also be able
to determine to a substantial degree the outcome of
substantially all matters submitted to a vote of our
stockholders, including matters involving mergers, acquisitions,
and other transactions resulting in a change in control of our
company. These stockholders do not have any obligation to us to
either retain or dispose of our common stock. They may seek to
cause us to take courses of action that, in their judgment,
could enhance their investment in us, but which might involve
risks to other holders of our common stock or adversely affect
us or other investors, including investors in this offering.
A portion of the proceeds of this offering will be used to
benefit our affiliates.
Our affiliates including Code, Hennessy &
Simmons III, L.P. and certain directors and executive
officers, will directly or indirectly receive net proceeds from
the sale in this offering of shares of common stock owned by
them. For a discussion of selling stockholders, see
Selling stockholders on page S-65.
S-19
Forward-looking statements
Some statements and disclosures in this prospectus supplement
and the accompanying prospectus, including the documents
incorporated by reference, are forward-looking
statements. Forward-looking statements include statements
concerning our plans, objectives, goals, strategies, future
events, future revenues or performance, capital expenditures,
financing needs, plans or intentions relating to acquisitions,
our competitive strengths and weaknesses, our business strategy
and the trends we anticipate in the industry and economies in
which we operate and other information that is not historical
information. When used in this prospectus, the words
estimates, expects,
anticipates, projects,
plans, intends, believes and
variations of such words or similar expressions are intended to
identify forward-looking statements. All forward-looking
statements, including, without limitation, our examination of
historical operating trends, are based upon our current
expectations and various assumptions. Our expectations, beliefs
and projections are expressed in good faith, and we believe
there is a reasonable basis for them, but we cannot assure you
that our expectations, beliefs and projections will be realized.
There are a number of risks and uncertainties that could cause
our actual results to differ materially from the forward-looking
statements contained in this prospectus supplement and
accompanying prospectus, including the documents incorporated by
reference. Important factors that could cause our actual results
to differ materially from the forward-looking statements we make
in this prospectus supplement and accompanying prospectus are
set forth in, or incorporated by reference into, this prospectus
supplement and accompanying prospectus, including the factors
described in the section entitled Risk factors in
this prospectus supplement. If any of these risks or
uncertainties materialize, or if any of our underlying
assumptions are incorrect, our actual results may differ
significantly from the results that we express in, or imply by,
any of our forward-looking statements. We do not undertake any
obligation to revise these forward-looking statements to reflect
future events or circumstances. Presently known risk factors
include, but are not limited to, the following factors:
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general economic conditions and a downturn in the architectural,
engineering and construction industry; |
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competition in our industry and innovation by our competitors; |
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our failure to anticipate and adapt to future changes in our
industry; |
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uncertainty regarding our product and service innovations; |
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the inability to charge for our value-added services to offset
potential declines in print volumes; |
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adverse developments affecting the state of California,
including general and local economic conditions, macroeconomic
trends, and natural disasters; |
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our inability to successfully identify potential acquisitions,
manage our acquisitions or open new branches; |
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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; |
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adverse developments concerning our relationships with certain
key vendors; |
S-20
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our inability to adequately protect our intellectual property
and litigation regarding intellectual property; |
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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; |
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the loss of key personnel or qualified technical staff; |
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the potential write-down of goodwill or other intangible assets
we have recorded in connection with our acquisitions; |
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the availability of cash to operate and expand our business as
planned and to service our debt; |
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the increased expenses and administrative workload associated
with being a public company; |
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failure to maintain an effective system of internal controls
necessary to accurately report our financial results and prevent
fraud; and |
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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. In light of these risks, uncertainties and
assumptions, the forward-looking events discussed in this
prospectus supplement and accompanying prospectus might not
occur.
See the section entitled Risk factors 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 prospectus supplement and accompanying
prospectus 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,
prospective investors are cautioned not to place undue reliance
on such forward-looking statements.
S-21
Use of proceeds
We will not receive any of the proceeds from the sale of shares
by the selling stockholders or upon any exercise of the
underwriters over-allotment option.
Under the terms of our investor rights agreement with the
selling stockholders, other than OCB Reprographics, Inc., or
OCB, and Rahul Roy, we are bearing all of the expenses of
registration of this offering, except that the selling
stockholders will pay their pro rata share of underwriting
discounts and commissions and the fees and expenses of legal
counsel for the selling stockholders if more than one counsel.
OCB and Rahul Roy each will bear its or his pro rata share of
such offering expenses.
Price range of common stock
Our common stock has been traded on the New York Stock Exchange
under the symbol ARP since February 4, 2005,
when it was first listed in connection with our initial public
offering. Prior to that time there was no public market for our
stock. The following table lists quarterly information on the
price range of our common stock based on the high and low
reported sales prices for our common stock as reported by the
New York Stock Exchange for the periods indicated below.
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Year ended December 31,
2005:
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First quarter (from
February 4, 2005)
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$15.64 |
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$13.00 |
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Second quarter
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$16.20 |
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$13.42 |
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Third quarter
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$18.29 |
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$15.85 |
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Fourth quarter
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$25.95 |
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$16.55 |
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Year ended December 31,
2006:
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First quarter (through
March 27, 2006)
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$35.60 |
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$24.98 |
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The last reported sales price of our common stock on the New
York Stock Exchange was $35.15 per share on March 27,
2006. There were 36 holders of record of our common stock as of
March 1, 2006.
Dividend policy
We have never declared or paid cash dividends on our common
equity. We currently intend to retain all available funds and
any future earnings for use in the operation of our business and
do not anticipate paying any cash dividends in the foreseeable
future. Any future determination to declare cash dividends will
be made at the discretion of our board of directors, subject to
compliance with certain covenants under our credit facilities,
which restrict or limit our ability to declare or pay dividends,
and will depend on our financial condition, results of
operations, capital requirements, general business conditions,
and other factors that our board of directors may deem relevant.
S-22
Capitalization
The following table sets forth our consolidated cash and cash
equivalents and consolidated capitalization as of
December 31, 2005:
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on an actual basis; and |
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on an as adjusted basis to reflect the payment of
the expenses of this offering. |
This table should be read in conjunction with
Managements discussion and analysis of financial
condition and results of operations and our consolidated
financial statements, including the related notes, appearing
elsewhere in this prospectus supplement.
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As of December 31, 2005 | |
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Cash and cash equivalents
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$ |
22,643 |
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$ |
22,193 |
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Long-term debt, excluding current
maturities:
|
|
|
|
|
|
|
|
|
Existing senior secured credit
facilities(1)
|
|
$ |
227,723 |
|
|
$ |
227,723 |
|
Capital leases
|
|
|
17,442 |
|
|
|
17,442 |
|
Seller notes from acquisitions(2)
|
|
|
8,206 |
|
|
|
8,206 |
|
|
|
|
Total long-term debt
|
|
|
253,371 |
|
|
|
253,371 |
|
|
|
|
Total equity / deficit:
|
|
|
|
|
|
|
|
|
Common stock, par value
$0.001 per share 150,000,000 shares authorized;
44,598,815 issued and outstanding
|
|
|
44 |
|
|
|
44 |
|
Preferred stock, par value
$0.001 per share 25,000,000 shares authorized;
none issued and outstanding
|
|
|
|
|
|
|
|
|
Additional paid-in-capital
|
|
|
56,825 |
|
|
|
56,825 |
|
Deferred stock-based compensation
|
|
|
(1,903 |
) |
|
|
(1,903 |
) |
Accumulated equity:
|
|
|
|
|
|
|
|
|
Accumulated earnings from
inception, less distributions to members / stockholders(3)
|
|
|
58,561 |
|
|
|
58,111 |
|
Accumulated other comprehensive
income
|
|
|
42 |
|
|
|
42 |
|
|
|
|
Total equity
|
|
|
113,569 |
|
|
|
113,119 |
|
|
|
|
Total capitalization
|
|
$ |
366,940 |
|
|
$ |
366,190 |
|
|
|
|
|
|
|
|
|
(1) At December 31, 2005, our senior secured credit
facilities consisted of a $281 million term loan facility,
of which $230 million was outstanding at December 31,
2005, and a $30 million revolving credit facility,
$5 million of which was outstanding at December 31,
2005.
(2) The seller notes were issued in connection with certain
acquisitions, with interest rates ranging between 5% and 8% and
maturities between 2006 and 2010.
(3) Accumulated earnings from inception includes the income
tax effects of the corporate conversion which resulted in an
income tax benefit of $27.7 million.
S-23
Selected historical 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, 2001, 2002, 2003, and
2004 and the audited financial statements of American
Reprographics Company for the fiscal year ended
December 31, 2005. The selected historical financial data
set forth below 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 Managements discussion and analysis
of financial condition and results of operations and our
audited financial statements included elsewhere in this
prospectus supplement.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Fiscal year ended December 31, | |
(dollars in thousands) | |
|
2001 | |
|
2002 | |
|
2003 | |
|
2004 | |
|
2005 | |
| |
Statement of operations
data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reprographics services
|
|
$ |
338,124 |
|
|
$ |
324,402 |
|
|
$ |
315,995 |
|
|
$ |
333,305 |
|
|
$ |
369,123 |
|
Facilities management
|
|
|
39,875 |
|
|
|
52,290 |
|
|
|
59,311 |
|
|
|
72,360 |
|
|
|
83,125 |
|
Equipment and supplies sales
|
|
|
42,702 |
|
|
|
42,232 |
|
|
|
40,654 |
|
|
|
38,199 |
|
|
|
41,956 |
|
|
|
|
|
Total net sales
|
|
|
420,701 |
|
|
|
418,924 |
|
|
|
415,960 |
|
|
|
443,864 |
|
|
|
494,204 |
|
Cost of sales
|
|
|
243,710 |
|
|
|
247,778 |
|
|
|
252,028 |
|
|
|
263,787 |
|
|
|
289,580 |
|
|
|
|
Gross profit
|
|
|
176,991 |
|
|
|
171,146 |
|
|
|
163,932 |
|
|
|
180,077 |
|
|
|
204,624 |
|
Selling, general and administrative
expenses
|
|
|
104,004 |
|
|
|
103,305 |
|
|
|
101,252 |
|
|
|
105,780 |
|
|
|
112,679 |
|
Provision for sales tax dispute
settlement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,389 |
|
|
|
|
|
Amortization of intangibles
|
|
|
5,801 |
|
|
|
1,498 |
|
|
|
1,709 |
|
|
|
1,695 |
|
|
|
2,120 |
|
Write-off of intangible assets
|
|
|
3,438 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
63,748 |
|
|
|
66,343 |
|
|
|
60,971 |
|
|
|
71,213 |
|
|
|
89,825 |
|
Other income
|
|
|
304 |
|
|
|
541 |
|
|
|
1,024 |
|
|
|
420 |
|
|
|
381 |
|
Interest expense
|
|
|
(47,530 |
) |
|
|
(39,917 |
) |
|
|
(39,390 |
) |
|
|
(33,565 |
) |
|
|
(26,722 |
) |
Loss on early extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
(14,921 |
) |
|
|
|
|
|
|
(9,334 |
) |
|
|
|
Income before income tax provision
(benefit)
|
|
|
16,522 |
|
|
|
26,967 |
|
|
|
7,684 |
|
|
|
38,068 |
|
|
|
54,140 |
|
Income tax provision (benefit)
|
|
|
5,787 |
|
|
|
6,267 |
|
|
|
4,131 |
|
|
|
8,520 |
|
|
|
(6,336 |
) |
|
|
|
Net income
|
|
|
10,735 |
|
|
|
20,700 |
|
|
|
3,553 |
|
|
|
29,548 |
|
|
|
60,476 |
|
Dividends and amortization of
discount on preferred equity
|
|
|
(3,107 |
) |
|
|
(3,291 |
) |
|
|
(1,730 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common
member / stockholders
|
|
$ |
7,628 |
|
|
$ |
17,409 |
|
|
$ |
1,823 |
|
|
$ |
29,548 |
|
|
$ |
60,476 |
|
|
S-24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Fiscal year ended December 31, |
|
2001 | |
|
2002 | |
|
2003 | |
|
2004 | |
|
2005 | |
| |
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.21 |
|
|
$ |
0.48 |
|
|
$ |
0.05 |
|
|
$ |
0.83 |
|
|
$ |
1.43 |
|
|
Diluted
|
|
$ |
0.21 |
|
|
$ |
0.47 |
|
|
$ |
0.05 |
|
|
$ |
0.79 |
|
|
$ |
1.40 |
|
Weighted average common units /
shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
36,628,801 |
|
|
|
36,406,220 |
|
|
|
35,480,289 |
|
|
|
35,493,136 |
|
|
|
42,264,001 |
|
|
Diluted
|
|
|
36,757,814 |
|
|
|
36,723,031 |
|
|
|
37,298,349 |
|
|
|
37,464,123 |
|
|
|
43,178,001 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Fiscal year ended December 31, | |
(dollars in thousands) |
|
2001 | |
|
2002 | |
|
2003 | |
|
2004 | |
|
2005 | |
| |
Other financial data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization(2)
|
|
$ |
25,442 |
|
|
$ |
19,178 |
|
|
$ |
19,937 |
|
|
$ |
18,730 |
|
|
$ |
19,165 |
|
Capital expenditures, net
|
|
|
8,659 |
|
|
|
5,209 |
|
|
|
4,992 |
|
|
|
5,898 |
|
|
|
5,237 |
|
Interest expense
|
|
|
47,530 |
|
|
|
39,917 |
|
|
|
39,390 |
|
|
|
33,565 |
|
|
|
26,722 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
As of December 31, | |
(dollars in thousands) |
|
2001 | |
|
2002 | |
|
2003 | |
|
2004 | |
|
2005 | |
| |
Balance sheet data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
29,110 |
|
|
$ |
24,995 |
|
|
$ |
17,315 |
|
|
$ |
13,826 |
|
|
$ |
22,643 |
|
Total assets
|
|
|
372,583 |
|
|
|
395,128 |
|
|
|
374,716 |
|
|
|
377,334 |
|
|
|
442,362 |
|
Long term obligations and
mandatorily redeemable preferred and common units / stock(3)(4)
|
|
|
371,515 |
|
|
|
378,102 |
|
|
|
360,008 |
|
|
|
338,371 |
|
|
|
253,371 |
|
Total members /
stockholders equity (deficit)
|
|
|
(78,955 |
) |
|
|
(61,082 |
) |
|
|
(60,015 |
) |
|
|
(35,009 |
) |
|
|
113,569 |
|
Working capital
|
|
|
24,338 |
|
|
|
24,371 |
|
|
|
16,809 |
|
|
|
22,387 |
|
|
|
35,797 |
|
|
(1) The company was reorganized from a California limited
liability company to a Delaware corporation immediately prior to
the consummation of our 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) Depreciation and amortization includes a write-off of
intangible assets of $3.4 million for the year ended
December 31, 2001.
(3) 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.
(4) Redeemable common stock amounted to $8.1 million
at December 31, 2001.
S-25
Managements 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
prospectus supplement. This prospectus supplement 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.
We also serve a variety of clients and businesses outside the
AEC industry in need of sophisticated document management
services.
Our services apply to time-sensitive and graphic-intensive
documents, and fall into four primary categories:
|
|
|
document management; |
|
|
document distribution and 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 customers location). |
We deliver these services through our specialized technology,
more than 775 sales and customer service employees
interacting with our customers every day, and more than 2,500
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 73,000 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 in our
17-year history. 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 come from
acquisitions. In 2005, we acquired 14 businesses for
$32.1 million. We acquired six businesses in 2004 for
$3.7 million, and five in 2003 for $870,000. Each
acquisition was accounted for using the purchase method, and as
such, our 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, in 2003 we began opening and
operating branch service centers, which we view as a relatively
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
19 new branches in key markets in 2005 and expect to open
an additional 15 branches by the end of 2006. To date, we
believe that each branch that has been open at least
12 months has generated operating profit.
S-26
In the following pages, we offer descriptions of how we manage
and measure financial performance throughout the company. Our
comments in this prospectus supplement 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 shareholders by:
|
|
|
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.
Net Sales. Net sales represent total sales less
returns, discounts and allowances. These sales consist of
document management services, document distribution and
logistics services,
print-on-demand
services, reprographics equipment, and reprographics equipment
and supplies sales. We generate sales by individual orders
through commissioned sales personnel and, in some cases, through
national contracts.
The distinctions in our reportable revenue categories are based
primarily on the similarities in their gross margins and other
economic similarities. They are categorized as reprographic
services, facilities management, and equipment and supplies. Our
current service segmentation 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 five percent of our overall revenue. We
believe digital services will likely exceed 10% of our revenue
mix by the end of 2007.
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. These
services are typically invoiced to a customer as part of a
combined per-square foot printing cost and, 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.
S-27
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 2005, our reprographics services represented 74.7% of net
sales, facilities management 16.8%, and sales of reprographics
equipment and supplies 8.5%. Of the 74.7% of reprographics
services, 4.9% 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.
We identify reportable segments based on how management
internally evaluates financial information, business activities
and management responsibility. On that basis, we operate in 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 1.1% 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.
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 Calcutta, 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; |
S-28
|
|
|
EBITDA; |
|
Revenue per geographical region; |
|
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.
Not all of these financial measurements are represented directly
on the Companys consolidated financial statements, but
meaningful discussions of each are part of our quarterly
disclosures and presentations to the investment community.
Measuring revenue by other means. We also measure
revenue generation by geographic region to manage the
performance of our local and regional business units. This
offers us operational insights into the effectiveness of our
sales and marketing efforts and alerts us to significant
business trends.
We estimate approximately 80% of our net sales 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.
Our six geographic operating regions are:
|
|
|
East Coastincludes New England and the Mid-Atlantic states; |
|
|
Midwestincludes Canadian operations as well as commonly
considered Midwestern states; |
|
|
Southernour broadest region, spans Florida to Texas and
north into Las Vegas; |
|
|
Southern Californiawith the Monterey Bay area as an
approximate dividing line; |
|
|
Northern Californiaincludes Silicon Valley, the
San Francisco Bay Area and the greater Sacramento / Central
Valley area; and |
|
|
Pacific Northwestincludes Oregon and Washington. |
S-29
Acquisitions. Our disciplined approach to complementary
acquisitions has led us to acquire reprographics 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, or
IRgA, the reprographics industry is highly fragmented and
comprised primarily of small businesses of less than
$5 million in annual sales. Our own experience in acquiring
reprographics businesses over the past ten years reflects 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 years sales figures as an informal basis for
estimating future revenues for our 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 years sales figures to assist us in
determining how the company will be integrated into the overall
management structure of our company. We categorize newly
acquired businesses in one of two ways:
|
|
|
|
|
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 locations. |
|
|
|
Branch / Fold-in Acquisitions. These are equivalent to
our opening a new or greenfield 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 |
S-30
|
|
|
|
|
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 S-47 of this
prospectus supplement.
Recent Developments. On February 9, 2005, we
completed our initial public offering of common stock consisting
of 13,350,000 shares at $13.00 per share. Of these
shares, 7,666,667 were newly issued shares sold by us and
5,683,333 were outstanding shares sold by stockholders. On
March 2, 2005, an additional 1,685,300 shares were
sold by certain stockholders pursuant to the underwriters
exercise of their over-allotment option. As required by the
Holdings operating agreement, we repurchased all preferred
equity of Holdings upon closing the initial public offering with
$28.3 million of the net proceeds from the initial public
offering.
On February 9, 2005, we used a portion of the proceeds from
our initial public offering to repay $50.7 million of our
then outstanding $225 million senior second priority
secured term loan facility and $9.0 million of our
$100 million senior first priority secured term loan
facility. On February 9, 2005, we also made a cash
distribution of $8.2 million to certain members of Holdings
in accordance with the Holdings operating agreement. See
Note 11 to our consolidated financial statements for
further details.
In December 2005, we refinanced our second lien credit facility
with additional borrowings under the first lien credit facility
upon the reduction of significant pre-payment penalties
associated with the second lien credit facility. We believe the
new credit structure will save approximately $8 million
annually under the new interest rate and current outstanding
balance. We increased our first lien credit facility to pay off
in full the borrowings under the original second lien credit
facility. In connection with the transaction, we incurred
prepayment penalties of approximately $4 million. In
addition, we wrote off the remaining unamortized deferred
financing costs of approximately $5.3 million. We have
recorded $9.3 million of loss on early extinguishment of
debt in our consolidated statement of operations.
Subsequent to December 31, 2005, we completed the
acquisition of two reprographics companies in the United States
for a total purchase price of $11 million.
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, 2005, 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.
S-31
Non-GAAP Measures
EBIT and EBITDA and related ratios presented in this prospectus
supplement 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.
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
divisions. We operate our divisions as separate business units
but manage debt and taxation 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, because our
divisions do not incur interest or income tax expense, the cash
flow from each division should be equal to the corresponding
EBITDA of each division, assuming no other changes to a
divisions 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 and 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 and 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
S-32
and using EBIT and EBITDA only as supplements. For more
information, see our consolidated financial statements and
related notes elsewhere in this prospectus supplement.
The following is a reconciliation of cash flows provided by
operating activities to EBIT, EBITDA, and net income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Fiscal year ended December 31, | |
(dollars in thousands) |
|
2003 | |
|
2004 | |
|
2005 | |
| |
Cash flows provided by operating
activities
|
|
$ |
48,237 |
|
|
$ |
60,858 |
|
|
$ |
56,648 |
|
|
Changes in operating assets and
liabilities
|
|
|
(1,102 |
) |
|
|
(3,830 |
) |
|
|
8,859 |
|
|
Non-cash expenses, including
depreciation and amortization
|
|
|
(43,582 |
) |
|
|
(27,480 |
) |
|
|
(5,031 |
) |
|
Income tax provision (benefit)
|
|
|
4,131 |
|
|
|
8,520 |
|
|
|
(6,336 |
) |
|
Interest expense
|
|
|
39,390 |
|
|
|
33,565 |
|
|
|
26,722 |
|
|
Loss on early extinguishment of debt
|
|
|
14,921 |
|
|
|
|
|
|
|
9,344 |
|
|
|
|
EBIT
|
|
|
61,995 |
|
|
|
71,633 |
|
|
|
90,206 |
|
|
Depreciation and amortization
|
|
|
19,937 |
|
|
|
18,730 |
|
|
|
19,165 |
|
|
|
|
EBITDA
|
|
|
81,932 |
|
|
|
90,363 |
|
|
|
109,371 |
|
|
Interest expense
|
|
|
(39,390 |
) |
|
|
(33,565 |
) |
|
|
(26,722 |
) |
|
Loss on early extinguishment of debt
|
|
|
(14,921 |
) |
|
|
|
|
|
|
(9,344 |
) |
|
Income tax (provision) benefit
|
|
|
(4,131 |
) |
|
|
(8,520 |
) |
|
|
6,336 |
|
|
Depreciation and amortization
|
|
|
(19,937 |
) |
|
|
(18,730 |
) |
|
|
(19,165 |
) |
|
Dividends and amortization of
discount on preferred equity
|
|
|
(1,730 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
1,823 |
|
|
$ |
29,548 |
|
|
$ |
60,476 |
|
|
The following is a reconciliation of net income to EBITDA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Fiscal year ended December 31, | |
(dollars in thousands) |
|
2003 | |
|
2004 | |
|
2005 | |
| |
Net income
|
|
$ |
1,823 |
|
|
$ |
29,548 |
|
|
$ |
60,476 |
|
|
Dividends and amortization of
discount on preferred equity
|
|
|
1,730 |
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
39,390 |
|
|
|
33,565 |
|
|
|
26,722 |
|
|
Loss on early extinguishment of debt
|
|
|
14,921 |
|
|
|
|
|
|
|
9,344 |
|
|
Income tax provision (benefit)
|
|
|
4,131 |
|
|
|
8,520 |
|
|
|
(6,336 |
) |
|
Depreciation and amortization
|
|
|
19,937 |
|
|
|
18,730 |
|
|
|
19,165 |
|
|
|
|
EBITDA
|
|
$ |
81,932 |
|
|
$ |
90,363 |
|
|
$ |
109,371 |
|
|
S-33
The following is a reconciliation of our net income margin to
EBIT margin and EBITDA margin:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
As a percentage of net sales for fiscal year ended December 31, |
|
2003 | |
|
2004 | |
|
2005 | |
| |
Net income margin
|
|
|
0.9 |
% |
|
|
6.7 |
% |
|
|
12.2 |
% |
|
Interest expense, net
|
|
|
9.5 |
|
|
|
7.6 |
|
|
|
5.4 |
|
|
Income tax provision (benefit)
|
|
|
1.0 |
|
|
|
1.9 |
|
|
|
(1.3) |
|
|
Loss on early extinguishment of debt
|
|
|
3.6 |
|
|
|
|
|
|
|
1.9 |
|
|
|
|
EBIT margin
|
|
|
14.9 |
|
|
|
16.2 |
|
|
|
18.2 |
|
|
Depreciation and amortization
|
|
|
4.8 |
|
|
|
4.2 |
|
|
|
3.9 |
|
|
|
|
EBITDA margin
|
|
|
19.7 |
% |
|
|
20.4 |
% |
|
|
22.1 |
% |
|
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 for fiscal year ended December 31, |
|
2003 | |
|
2004 | |
|
2005 | |
| |
Net sales
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of sales
|
|
|
60.6 |
|
|
|
59.4 |
|
|
|
58.6 |
|
|
|
|
|
Gross profit
|
|
|
39.4 |
|
|
|
40.6 |
|
|
|
41.4 |
|
Selling, general and administrative
expenses
|
|
|
24.3 |
|
|
|
23.8 |
|
|
|
22.8 |
|
Provision for sales tax dispute
settlement
|
|
|
|
|
|
|
0.3 |
|
|
|
|
|
Amortization of intangibles
|
|
|
0.4 |
|
|
|
0.4 |
|
|
|
0.4 |
|
|
|
|
|
Income from operations
|
|
|
14.7 |
|
|
|
16.1 |
|
|
|
18.2 |
|
Other income
|
|
|
0.2 |
|
|
|
0.1 |
|
|
|
0.1 |
|
Interest expense, net
|
|
|
(9.5 |
) |
|
|
(7.6 |
) |
|
|
(5.4 |
) |
Loss on early extinguishment of debt
|
|
|
(3.6 |
) |
|
|
|
|
|
|
(1.9 |
) |
|
|
|
Income before income tax provision
|
|
|
1.8 |
|
|
|
8.6 |
|
|
|
11.0 |
|
Income tax (provision) benefit
|
|
|
(1.0 |
) |
|
|
(1.9 |
) |
|
|
1.2 |
|
|
|
|
|
Net income
|
|
|
0.8 |
% |
|
|
6.7 |
% |
|
|
12.2 |
% |
|
S-34
Year ended December 31, 2005 compared to year ended
December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Increase (decrease) | |
Year ended December 31, | |
|
| |
(in millions) |
|
2004 | |
|
2005 | |
|
(In dollars) | |
|
(Percent) | |
| |
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 |
|
|
$ |
109.4 |
|
|
$ |
19.0 |
|
|
|
21.0 |
% |
|
Net sales
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 between 2005 and 2008,
with some districts reporting 8% and 9% increases. Residential
construction was also robust, showing increases in every
district with some by as much as 10%. We acquired 14 business 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, 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 New Orleans 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
remains strong as evidenced by the eight-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
S-35
attractive. The highly renewable nature of most
on-site service
contracts leads us to 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% increase 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. In the
future, we expect this market to grow and intend to target this
type of customer through increased marketing and sales efforts.
Gross profit
Gross profit in 2005 was $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
18.0% 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 1.0% 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
S-36
controls, and greater consolidation of common regional
resources. Our general and administrative expenses included
management fees of $858,000 in 2003, $835,000 in 2004 and
$217,000 in 2005 paid to CHS Management IV LP, 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. We expect that our
selling, general and administrative expenses will increase in
absolute dollars due to increased legal and accounting fees as a
public company, including costs associated with evaluating and
enhancing our internal controls over financial reporting.
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
$88.0 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.
EBITDA
Our EBITDA margin increased to 22.1% in 2005 compared to 20.4%
in 2004 primarily due to higher revenues.
S-37
Year ended December 31, 2004 compared to year ended
December 31, 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
| |
|
|
Increase | |
Year ended December 31, | |
|
| |
(In millions) | |
|
2003 | |
|
2004 | |
|
(In dollars) | |
|
(Percent) | |
| |
Reprographics services
|
|
$ |
316.1 |
|
|
$ |
333.3 |
|
|
$ |
17.2 |
|
|
|
5.4 |
% |
Facilities management
|
|
|
59.3 |
|
|
|
72.4 |
|
|
|
13.1 |
|
|
|
22.1 |
|
Equipment and supplies sales
|
|
|
40.6 |
|
|
|
38.2 |
|
|
|
(2.4 |
) |
|
|
(5.9) |
|
|
|
|
|
Total net sales
|
|
$ |
416.0 |
|
|
$ |
443.9 |
|
|
$ |
27.9 |
|
|
|
6.7 |
|
Gross profit
|
|
|
163.9 |
|
|
|
180.1 |
|
|
|
16.2 |
|
|
|
9.9 |
|
Selling, general and administrative
expenses
|
|
|
101.3 |
|
|
|
105.8 |
|
|
|
4.5 |
|
|
|
4.4 |
|
Amortization of intangibles
|
|
|
1.7 |
|
|
|
1.7 |
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
39.4 |
|
|
|
33.6 |
|
|
|
(5.8 |
) |
|
|
(14.7) |
|
Income taxes
|
|
|
4.1 |
|
|
|
8.5 |
|
|
|
4.4 |
|
|
|
107.3 |
|
Net income
|
|
|
3.6 |
|
|
|
29.5 |
|
|
|
25.9 |
|
|
|
719.4 |
|
EBITDA
|
|
$ |
67.0 |
|
|
$ |
90.4 |
|
|
$ |
23.4 |
|
|
|
34.9 |
% |
|
Net sales
Net sales increased in 2004 compared to 2003 primarily due to
the improvement in the U.S. economy, particularly in the
Western United States, acquisition activity, the expansion of
our revenue base through the opening of new branches, and by
increasing our market share in certain markets. Prices during
this period remained relatively stable, indicating that our
revenue increases were primarily volume driven.
While revenue from reprographics services and facilities
management increased, our revenue generated from sales of
equipment and supplies sales decreased. This was due to the
conversion of many equipment sales contracts into facilities
management contracts. We believe that the recurring revenues
from such facilities management contracts that span over several
years should make our revenue profile more stable. This ability
to convert our equipment sales contracts into facilities
management contracts, coupled with the increased decentralized
nature of the AEC industry, leads us to believe that facilities
management revenue will continue to increase in the near term.
Gross profit
Our gross profit increased in 2004 compared to 2003 due
primarily to the increase in our net sales coupled with the
fixed cost nature of our leases for production equipment and
facilities. The gross margin realized on our incremental sales
increase during this period amounted to 57.9%. Our overall gross
margin improved by approximately 1.2 percentage points to
40.6% in 2004 compared to 39.4% in 2003. We were able to reduce
our material cost as a percentage of net sales from 16.1% in
2003 to 15.4% in 2004 due to a negotiated price reduction in the
cost of material from one of our major vendors, coupled with
better waste control procedures. Production labor cost as a
percentage of net sales increased slightly from 21.6% in 2003 to
22.8% in 2004 due to the hiring of additional production labor
in anticipation of continued revenue increases coupled with an
increase in employee health benefits costs. Production overhead
as a percentage of revenue decreased from 22.9% in 2003 to 21.3%
in 2004 due to the fixed cost nature of the expense coupled with
the net sales increase.
S-38
Selling, general and administrative expenses
Selling, general and administrative expenses increased in 2004
compared to 2003 primarily due to higher sales commissions
related to increased sales and higher incentive bonus accruals
during 2004 compared to 2003 related to improved operating
results. As a percentage of net sales, selling, general and
administrative expenses during 2003 and 2004 decreased from
24.3% to 23.8%, respectively, as higher sales in 2004 offset the
increase in our sales force and increased selling and marketing
activities during 2004 as we continued to pursue market share
expansion. Our general and administrative expenses included
management fees of $858,000 in 2003 and $835,000 in 2004 paid to
CHS Management IV LP in accordance with a management
agreement entered into as part of our recapitalization in 2000.
These management fees ceased after our initial public offering.
Provision for sales tax dispute settlement
We recorded a $1.4 million provision for a sales tax
dispute settlement in 2004 related to a dispute we are involved
in with a state tax authority. The dispute involves unresolved
sales tax issues which arose from such state tax
authoritys audit findings from their sales tax audit of
certain of our operating divisions for the period from October
1998 to September 2001. The unresolved issues relate to the
application of sales taxes on certain discounts granted to our
customers. For further information concerning the provision for
sales tax dispute settlement, see State sales tax on
page S-45.
Amortization of intangibles
Amortization of intangibles in 2004 remained flat compared to
2003.
Interest expense, net
Net interest expense decreased in 2004 compared to 2003 due to
the refinancing of our debt in December 2003, which lowered our
overall effective interest rate in 2004 by approximately two
percentage points. Also, during 2004, we reduced our total debt
obligations by approximately $36.5 million. Partially
offsetting these interest expense reductions was the additional
interest expense recognized with the adoption of FAS 150.
FAS 150 required that we treat our redeemable preferred
stock as debt from the effective date of July 1, 2003. As a
result, we incurred six months of this interest expense during
2003 amounting to $1.8 million, compared to twelve months
of interest expense amounting to $3.9 million during 2004.
During 2003, the interest benefit from our interest rate swap
contracts was $4.0 million. The interest rate swap
contracts expired in September 2003, and we entered into a new
interest rate hedge in September 2003. This instrument is
accounted for as a hedge, and fluctuations in its market value
do not affect our income statement.
Income taxes
Income tax provision increased in 2004 compared to 2003
primarily due to higher pretax income at the consolidated
corporations. Excluding the $14.9 million loss on early
extinguishment of debt we recorded during 2003, our overall
effective income tax rate for 2004 increased to 22.4%, compared
to 18.3% in 2003.
S-39
Net income
Net income increased in 2004 compared to 2003 primarily related
to increased sales resulting from the improvement in the
U.S. economy, increased AEC activity, as well as reduced
interest expense due to the refinancing of our debt in December
2003, which resulted in a $14.9 million loss on early
extinguishment of debt during 2003.
EBITDA
Our EBITDA margin increased to 20.4% in 2004 compared to 19.7%
in 2003 primarily due to higher revenues. For a reconciliation
of EBITDA to pro forma net income, please see
Non-GAAP measures on
page S-32.
Quarterly results of operations
The following table sets forth certain quarterly financial data
for the eight quarters ended December 31, 2005. This
quarterly information is unaudited, has been prepared on the
same basis as the annual financial statements and, in our
opinion, reflects all adjustments, consisting only of normal
recurring accruals, 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, | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
(unaudited, |
|
|
|
|
dollars in thousands) |
|
2004 | |
|
|
|
200 | |
|
5 | |
|
|
| |
Reprographics services
|
|
$ |
84,170 |
|
|
$ |
87,237 |
|
|
$ |
81,958 |
|
|
$ |
79,938 |
|
|
$ |
87,695 |
|
|
$ |
94,708 |
|
|
$ |
94,730 |
|
|
$ |
91,990 |
|
Facilities management
|
|
|
16,529 |
|
|
|
17,954 |
|
|
|
19,254 |
|
|
|
18,624 |
|
|
|
19,172 |
|
|
|
21,076 |
|
|
|
21,577 |
|
|
|
21,300 |
|
Equipment and supplies sales
|
|
|
9,819 |
|
|
|
10,424 |
|
|
|
8,953 |
|
|
|
9,004 |
|
|
|
9,599 |
|
|
|
9,776 |
|
|
|
11,180 |
|
|
|
11,401 |
|
|
|
|
|
Total net sales
|
|
$ |
110,518 |
|
|
$ |
115,615 |
|
|
$ |
110,165 |
|
|
$ |
107,566 |
|
|
$ |
116,466 |
|
|
$ |
125,560 |
|
|
$ |
127,487 |
|
|
$ |
124,691 |
|
Quarterly sales as a % of annual
sales
|
|
|
24.9 |
% |
|
|
26.1 |
% |
|
|
24.8 |
% |
|
|
24.2 |
% |
|
|
23.6 |
% |
|
|
25.4 |
% |
|
|
25.8 |
% |
|
|
25.2 |
% |
Gross profit
|
|
|
45,919 |
|
|
|
49,424 |
|
|
|
44,287 |
|
|
|
40,447 |
|
|
|
48,325 |
|
|
|
53,654 |
|
|
|
52,522 |
|
|
|
50,124 |
|
Income from operations
|
|
|
18,588 |
|
|
|
20,639 |
|
|
|
17,702 |
|
|
|
14,284 |
|
|
|
21,060 |
|
|
|
25,083 |
|
|
|
23,604 |
|
|
|
20,078 |
|
EBITDA
|
|
|
23,376 |
|
|
|
25,839 |
|
|
|
22,627 |
|
|
|
18,521 |
|
|
|
25,608 |
|
|
|
29,648 |
|
|
|
28,685 |
|
|
|
25,431 |
|
Net income
|
|
$ |
8,438 |
|
|
$ |
9,845 |
|
|
$ |
7,191 |
|
|
$ |
4,074 |
|
|
$ |
35,563 |
|
|
$ |
11,383 |
|
|
$ |
10,518 |
|
|
$ |
3,012 |
|
|
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, | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
(unaudited, |
|
|
|
|
dollars in thousands) |
|
2004 | |
|
|
|
200 | |
|
5 | |
|
|
| |
EBITDA
|
|
$ |
23,3760 |
|
|
$ |
25,839 |
|
|
$ |
22,627 |
|
|
$ |
18,521 |
|
|
$ |
25,608 |
|
|
$ |
29,648 |
|
|
$ |
28,685 |
|
|
$ |
25,431 |
|
Interest expense
|
|
|
(8,125) |
|
|
|
(8,405) |
|
|
|
(8,559) |
|
|
|
(8,476) |
|
|
|
(8,324) |
|
|
|
(6,194) |
|
|
|
(6,131) |
|
|
|
(6,074) |
|
Loss on early extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,344) |
|
Income tax benefit (provision)
|
|
|
(2,299) |
|
|
|
(2,682) |
|
|
|
(1,959) |
|
|
|
(1,580) |
|
|
|
22,709 |
|
|
|
(7,612) |
|
|
|
(7,018) |
|
|
|
(1,743) |
|
Depreciation and amortization
|
|
|
(4,514) |
|
|
|
(4,907) |
|
|
|
(4,918) |
|
|
|
(4,391) |
|
|
|
(4,430) |
|
|
|
(4,459) |
|
|
|
(5,018) |
|
|
|
(5,258) |
|
|
|
|
Net income
|
|
$ |
8,438 |
|
|
$ |
9,845 |
|
|
$ |
7,191 |
|
|
$ |
4,074 |
|
|
$ |
35,563 |
|
|
$ |
11,383 |
|
|
$ |
10,518 |
|
|
$ |
3,012 |
|
|
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,
S-40
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.
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 prospectus supplement.
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Year ended December 31, | |
(dollars in thousands) |
|
2003 | |
|
2004 | |
|
2005 | |
| |
Net cash provided by operating
activities
|
|
$ |
48,237 |
|
|
$ |
60,858 |
|
|
$ |
56,648 |
|
Net cash used in investing
activities
|
|
|
(8,336 |
) |
|
|
(10,586 |
) |
|
|
(27,547 |
) |
Net cash used in financing
activities
|
|
|
(47,581 |
) |
|
|
(53,761 |
) |
|
|
(20,284 |
) |
|
Operating activities
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.
S-41
Net cash provided by operating activities for the year ended
December 31, 2003, primarily related to net income of
$3.6 million, depreciation and amortization of
$19.9 million, non-cash interest expense of
$12.4 million from the accretion of yield on Holdings
notes and mandatorily redeemable preferred members equity,
the amortization of deferred financing costs, the write-off of
unamortized debt discount and deferred financing costs of
$9.0 million as a result of our debt refinancing in
December 2003, a decrease in accounts receivable of
$1.8 million, and a $1.0 million decrease in inventory.
Investing activities
Net cash used in investing activities primarily relates to
acquisition of businesses and capital expenditures. Payments for
businesses acquired, net of cash acquired and including other
cash payments and earnout payments associated with the
acquisitions, amounted to $22.4 million, $4.6 million,
and $3.1 million during the years ended December 31,
2005, 2004, and 2003, respectively. We incurred capital
expenditures totaling $5.2 million, $5.9 million, and
$5.0 million during the years ended December 31, 2005,
2004, and 2003, respectively.
Financing activities
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. Cash used in financing activities
for the year ended December 31, 2003, included
$375.6 million of repayments on our prior credit
facilities, an $8.1 million payment of loan fees related to
our debt refinancing, and $1.7 million in cash
distributions to members. These were offset by
$337.8 million in borrowings under our new credit
facilities in December 2003.
Our cash position, working capital, and debt obligations as of
December 31, 2003, 2004, and 2005 are shown below and
should be read in conjunction with our consolidated balance
sheets and notes thereto elsewhere in this prospectus supplement.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
As of December 31, | |
(dollars in thousands) |
|
2003 | |
|
2004 | |
|
2005 | |
| |
Cash and cash equivalents
|
|
$ |
17,315 |
|
|
$ |
13,826 |
|
|
$ |
22,643 |
|
Working capital
|
|
|
16,809 |
|
|
|
22,387 |
|
|
|
35,797 |
|
Mandatorily redeemable preferred
and common equity
|
|
|
25,791 |
|
|
|
27,814 |
|
|
|
|
|
Other debt obligations
|
|
|
359,340 |
|
|
|
320,833 |
|
|
|
273,812 |
|
|
|
|
|
Total debt obligations
|
|
$ |
385,131 |
|
|
$ |
348,647 |
|
|
$ |
273,812 |
|
|
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.
S-42
We expect a positive effect on our liquidity and results of
operations going forward due to lower interest expense as net
proceeds of approximately $92.7 million from our initial
public offering were used to reduce our existing debt
obligations. Our overall interest expense may also be reduced as
rates applicable to future borrowings on our revolving credit
facility may decrease since the margin for loans made under the
revolving facility is based on the ratio of our consolidated
indebtedness to our consolidated EBITDA (as defined in our
credit facilities). The applicable margin on our revolving
facility ranges between 2.00% and 2.75% for LIBOR rate loans and
ranges between 1.00% and 1.75% for index rate loans. In
addition, the termination of our management agreement with CHS
Management IV LP that occurred upon completion of our
initial public offering will improve future operations and cash
flows by eliminating fees paid under this agreement of $858,000
in 2003, $835,000 in 2004, and $217,000 in 2005.
These positive factors will be offset to a certain extent by
rising market interest rates on our debt obligations under our
senior secured credit facilities, which are subject to variable
interest rates. As discussed in Quantitative and
Qualitative Disclosure about Market Risk, we had
$273.8 million of total debt outstanding as of
December 31, 2005, of which $235.4 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 $2.7 million during the year
ended December 31, 2005.
We believe that our cash flow provided by operations will be
adequate to cover our 2006 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 $310,600,000, consisting of a $280,600,000
term loan facility and a $30,000,000 revolving credit facility.
We used the proceeds from the incremental new term loan, in the
amount of $157,500,000, to prepay in full all principal and
interest payable under our then existing Second Lien Credit and
Guaranty Agreement, dated December 18, 2003. The remaining
balance of the increased term loan facility of $50,000,000 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
S-43
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.
Loans made under the credit facilities bear interest at one of
two floating rates, at our option. The floating rates may be
priced as either an Index Rate Loan or as Eurodollar Rate Loan.
Term loans that are Index Rate Loans bear interest at the Index
Rate plus 0.75%. The Index Rate is defined as the higher of
(i) the rate of interest publicly quoted from time to time
by The Wall Street Journal as the base rate on corporate loans
posted by the nations largest banks and (ii) the
Federal Reserve reported overnight funds rate plus 0.5%. Term
Loans which are Eurodollar Rate Loans bear interest at the
Adjusted Eurodollar Rate plus 1.75%.
Revolving Loans that are Index Rate Loans bear interest at the
Index Rate plus an Applicable Margin. Revolving Loans that are
Eurodollar Rate Loans bear interest at the Adjusted Eurodollar
Rate plus an Applicable Margin. 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.
The following table sets forth the outstanding balance,
borrowing capacity and applicable interest rate under our senior
secured credit facilities. Subsequent to December 31, 2004,
we utilized the net proceeds from our initial public offering to
pay down $9.0 million under our term facility and
$50.7 million under our second priority facility.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
As of December 31, 2004 | |
|
As of December 31, 2005 | |
|
|
| |
|
| |
|
|
|
|
Available | |
|
|
|
|
|
Available | |
|
|
|
|
|
|
borrowing | |
|
Interest | |
|
|
|
borrowing | |
|
Interest | |
(dollars in thousands) |
|
Balance | |
|
capacity | |
|
rate | |
|
Balance | |
|
capacity | |
|
rate | |
| |
Term facility
|
|
$ |
94,800 |
|
|
$ |
|
|
|
|
5.26 |
% |
|
$ |
230,423 |
|
|
$ |
50,000 |
|
|
|
6.12 |
% |
Revolving facility
|
|
|
|
|
|
|
30,000 |
|
|
|
|
|
|
|
5,000 |
|
|
|
25,000 |
|
|
|
8.25 |
% |
Second priority facility, excluding
debt discount
|
|
|
208,231 |
|
|
|
|
|
|
|
8.92 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
303,031 |
|
|
$ |
30,000 |
|
|
|
|
|
|
$ |
235,423 |
|
|
$ |
75,000 |
|
|
|
|
|
|
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 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
S-44
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, 2005, we had
$11.3 million of seller notes outstanding, with interest
rates ranging between 5% and 8% and maturities between 2006 and
2010. These notes were issued in connection with prior
acquisitions.
Off-balance sheet arrangements
At December 31, 2005, and 2004, 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, 2005,
by fiscal year are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Fiscal year ended December 31, | |
(dollars in thousands) |
|
2006 | |
|
2007 | |
|
2008 | |
|
2009 | |
|
2010 | |
|
Thereafter | |
| |
Debt obligations
|
|
$ |
10,756 |
|
|
$ |
4,423 |
|
|
$ |
115,522 |
|
|
$ |
114,495 |
|
|
$ |
1,369 |
|
|
$ |
120 |
|
Capital lease obligations(1)
|
|
|
9,685 |
|
|
|
8,499 |
|
|
|
5,649 |
|
|
|
2,163 |
|
|
|
973 |
|
|
|
158 |
|
Operating lease obligations
|
|
|
28,317 |
|
|
|
19,453 |
|
|
|
12,459 |
|
|
|
8,468 |
|
|
|
5,295 |
|
|
|
11,660 |
|
|
|
|
|
Total
|
|
$ |
48,758 |
|
|
$ |
32,375 |
|
|
$ |
133,630 |
|
|
$ |
125,126 |
|
|
$ |
7,637 |
|
|
$ |
11,938 |
|
|
(1) Principal payments only
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, 2005, we estimate that we
will be required to make additional cash payments of up to
$1.5 million between 2006 and 2007. These additional cash
payments are accounted for as goodwill when earned.
State sales tax. We are involved in a state tax authority
dispute related to unresolved sales tax issues which arose from
such state tax authoritys audit findings from their sales
tax audit of certain of our operating divisions for the period
from October 1998 to September 2001. The unresolved issues
relate to the application of sales taxes on certain discounts we
granted to our customers. Based on the position taken by the
state tax authority on these unresolved issues, they claimed
that an additional $1.2 million of sales taxes are due from
us for the period in question, plus $372,000 of interest. At an
appeals conference held on December 14, 2004, the appeals
board ruled that we are liable in connection with one component
of the dispute involving approximately $40,000, which we had
previously paid. We paid the tax in May of 2005 but we strongly
disagree with the state tax authoritys position and have
filed a petition for redetermination requesting an appeals
conference to resolve these issues. We have been
S-45
granted another appeals conference in April 2006 to resolve the
remaining issues. Our accrued expenses in our consolidated
balance sheet as of December 31, 2005 include $151,000 of
reserves related to this matter based primarily on certain
components of the state tax authoritys audit findings that
we are not disputing. Based on the unfavorable outcome from a
sales tax audit staff hearing held on March 16, 2005, we
believe it is probable that we will not prevail on appeal.
|
|
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 of deferred income taxes upon our conversion from a
California limited liability company to a Delaware corporation.
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 taxes at
a combined statutory rate of approximately 40%, which is lower
than our pro forma effective income tax rate of 46.5% for 2004
due to the redemption of our preferred equity and the related
nondeductible interest expense. 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.
S-46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Fiscal year ended December 31, | |
(in thousands, except per unit / share amounts) |
|
2001 | |
|
2002 | |
|
2003 | |
|
2004 | |
|
2005 | |
| |
Net income attributable to common
members / stockholders
|
|
$ |
7,628 |
|
|
$ |
17,409 |
|
|
$ |
1,823 |
|
|
$ |
29,548 |
|
|
$ |
60,476 |
|
Unaudited pro forma incremental
income tax provision
|
|
|
2,574 |
|
|
|
6,211 |
|
|
|
673 |
|
|
|
9,196 |
|
|
|
333 |
|
|
|
|
Unaudited pro forma net income
attributable to common members / stockholders
|
|
$ |
5,054 |
|
|
$ |
11,198 |
|
|
$ |
1,150 |
|
|
$ |
20,352 |
|
|
$ |
60,143 |
|
|
|
|
Unaudited pro forma net income
attributable to common members / stockholders per common unit /
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.14 |
|
|
$ |
0.31 |
|
|
$ |
0.03 |
|
|
$ |
0.57 |
|
|
$ |
1.42 |
|
|
Diluted
|
|
$ |
0.14 |
|
|
$ |
0.30 |
|
|
$ |
0.03 |
|
|
$ |
0.54 |
|
|
$ |
1.39 |
|
|
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.
|
|
Goodwill and other intangible assets |
|
Effective January 1, 2002, we adopted Statement of
Financial Accounting Standard (SFAS) No. 142,
Goodwill and Other Intangible Assets, which
requires, among other things, the use of a nonamortization
approach for purchased goodwill and certain intangibles. Under a
nonamortization approach, goodwill and intangibles that have an
indefinite life are not amortized but instead will be reviewed
for impairment at least annually, or more frequently
S-47
should an event occur or circumstances indicate that the
carrying amount may be impaired. Such events or circumstances
may be a significant change in business climate, economic and
industry trends, legal factors, negative operating performance
indicators, significant competition, changes in our strategy, or
disposition of a reporting unit or a portion thereof. Goodwill
impairment testing is performed at the reporting unit level.
SFAS 142 requires a two-step test for goodwill impairment.
The first step identifies potential impairment by comparing the
fair value of a reporting unit with its carrying amount,
including goodwill. If the fair value exceeds its carrying
amount, goodwill is not considered impaired and the second step
of the test is unnecessary. If the carrying amount exceeds its
fair value, the second step measures the impairment loss, if
any. The second step compares the implied fair value of goodwill
with the carrying amount of that goodwill. The implied fair
value of goodwill is determined in the same manner as the amount
of goodwill recognized in a business combination. If the
carrying amount goodwill exceeds the implied fair value of that
goodwill, an impairment loss is recognized in an amount equal to
that excess.
The goodwill impairment test requires judgment, including the
identification of reporting units, assignment of assets and
liabilities to such reporting units, assignment of goodwill to
such 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 growth rate for 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 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,
2003, 2004, and 2005.
Other intangible assets that have finite useful lives are
amortized over their useful lives. An impaired asset is written
down to fair value. 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
two to twenty years using the straight-line and accelerated
methods. Customer relationships are amortized under an
accelerated method that reflects the related customer attrition
rates, and trade names 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 generally due within 30 days. 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. To date, uncollectible
amounts have been within the range of managements
expectations.
S-48
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 managements 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 managements estimates.
Recent accounting pronouncements
In November 2004, the FASB issued SFAS No. 151,
Inventory Costs, an amendment of Accounting Research
Bulletin No. 43, Chapter 4.
SFAS No. 151 requires that abnormal amounts of idle
facility expense, freight, handling costs and wasted materials
(spoilage) be recorded as current period charges and that the
allocation of fixed production overheads to inventory be based
on the normal capacity of the production facilities.
SFAS No. 151 is effective for the Company on
January 1, 2006. The Company has concluded that
SFAS No. 151 will not have a material impact on its
consolidated financial statements.
In December 2004, the FASB issued SFAS No. 123
(revised 2004), Share-Based Payment
(SFAS 123R), which replaces
SFAS No. 123, Accounting for Stock-Based
Compensation, (SFAS 123) and supercedes
APB Opinion No. 25, Accounting for Stock Issued to
Employees. SFAS 123R requires all share-based
payments to employees, including grants of employee stock
options, to be recognized in the financial statements based on
their grant date fair values. The provisions of SFAS 123R,
as supplemented by SEC Staff Accounting Bulletin No. 107,
Share-Based Payment, are effective no later than the
beginning of the next fiscal year that begins after
June 15, 2005. The Company will adopt the new requirements
using the modified prospective transition method in the first
quarter of fiscal 2006, and as a result, will not retroactively
adjust results from prior periods. Under this transition method,
compensation expense associated with stock options recognized in
the first quarter of fiscal 2006 will
include: 1) expense related to the remaining unvested
portion of all stock option awards granted prior to
January 1, 2006, based on the grant date fair value
estimated in accordance with the original provisions of
SFAS No. 123; and 2) expense related to all stock
option awards granted subsequent to January 1, 2006, based
on the grant date fair value estimated in accordance with the
provisions of SFAS No. 123R. The Company will apply
the Black-Scholes valuation model in determining the fair value
of share-based payments to employees, which will then be
amortized on a straight-line basis over the requisite service
period. The Company is currently assessing the provisions of
SFAS 123 and the impact that it will have on its
consolidated financial statements.
In December 2004, the FASB issued SFAS No. 153,
Exchanges of Nonmonetary Assets, an amendment of APB
Opinion No. 29. SFAS No. 153 is based on
the principle that exchanges of nonmonetary assets should be
measured based on the fair value of the assets exchanged. APB
Opinion No. 29, Accounting for Nonmonetary
Transactions, provided an exception to its basic
measurement principle (fair value) for exchanges of similar
productive assets. Under APB Opinion No. 29, an exchange of
a productive asset for a similar productive asset was based on
the recorded amount of the asset relinquished.
SFAS No. 153 eliminates this exception and replaces it
with an exception of exchanges of nonmonetary assets that do not
have commercial substance. The Company has concluded that
SFAS No. 153 will not have a material impact on its
consolidated financial statements.
In March 2005, the FASB issued FIN 47, Accounting for
Conditional Asset Retirement Obligations, an
interpretation of SFAS 143. This statement clarified the
term conditional asset
S-49
retirement obligation and is effective for the Companys
fourth quarter ending December 31, 2005. Adoption of
FIN 47 did not have an impact on the Companys
consolidated financial statements.
In September 2005, the Emerging Issues Task Force or EITF
amended and ratified previous consensus on EITF
No. 05-6,
Determining the Amortization Period for Leasehold
Improvements Purchased after Lease Inception or Acquired in a
Business Combination which addresses the amortization
period for leasehold improvements in operating leases that are
either placed in service significantly after and not
contemplated at or near the beginning of the initial lease term
or acquired in a business combination. This consensus applies to
leasehold improvements that are purchased or acquired in
reporting periods beginning after ratification. Adoption of the
provisions of EITF
No. 05-6 did not
have an impact on the Companys consolidated financial
statements.
In May 2005, the FASB issued FAS 154, which changes the
requirements for the accounting and reporting of a change in
accounting principle. FAS 154 eliminates the requirement to
include the cumulative effect of changes in accounting principle
in the income statement and instead requires that changes in
accounting principle be retroactively applied. FAS 154 is
effective for accounting changes and correction of errors made
on or after January 1, 2006, with early adoption permitted.
The Company began applying the provisions of this statement
during the fourth quarter of 2005.
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 January 2004, we entered into an interest rate collar
agreement that became effective in September 2005 and has a
fixed notional amount of $111.0 million. The interest rate
collar agreement expires in December 2006. At December 31,
2005, the fair value of the interest rate collar agreement was
$42,000. In March 2006, we entered into an interest rate collar
agreement that becomes effective on December 23, 2006 and
has a fixed notional amount of $76.7 million until
December 23, 2007, 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, 2005, we had $235.4 million of total
debt obligations which was bearing interest at variable rates
approximating 6.2% on a weighted average basis. A 1.0% change in
interest rates on variable rate debt would have resulted in
interest expense fluctuating by approximately $2.7 million
during the year ended December 31, 2005.
We have not, and do not plan to, enter into any derivative
financial instruments for trading or speculative purposes. As of
December 31, 2005, we had no other significant material
exposure to market risk, including foreign exchange risk and
commodity risks.
S-50
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 also require sophisticated document
management services. 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. We
provide our core services through our suite of reprographics
technology products, a national network of approximately 220
locally branded reprographics service centers, and approximately
2,500 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. In further support of our core services, we license
our suite of reprographics technology products, including our
flagship internet-based application, PlanWell, to independent
reprographers. We also operate PEiR (Profit and Education in
Reprographics) through which we charge membership fees and
provide purchasing, technology and educational benefits to other
reprographers, while promoting our reprographics technology
products as the industry standard. 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.
We operate 220 reprographics service centers, including 216
service centers in 161 cities in 33 states throughout
the United States and the District of Columbia, three
reprographics service centers in the metropolitan area of
Toronto, 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 73,000 active customers and we employ more than
3,800 people, including a sales and customer service staff of
more than 775 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 half 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 retained approximately
90% of the management of these acquired companies. As part of
our growth strategy, we recently began opening and operating
branch service centers, which we view as a low cost, rapid form
of
S-51
market expansion. Our branch openings require modest capital
expenditures and are expected to generate operating profit
within 12 months from opening. We have opened 19 new
branches in key markets since December 31, 2004 and expect
to open an additional 15 branches by the end of 2006.
Our main office is located at 700 North Central Avenue,
Suite 550, Glendale, California 91203, and our telephone
number is (818) 500- 0225.
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 (referred to as 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 our primary focus on the organic growth of our
business, we have pursued tactical acquisitions to expand and
complement our existing service offerings and to expand our
geographic locations where we believe we could be a market
leader. In 2000, we acquired 14 reprographics companies for an
aggregate purchase price of $111.6 million, including our
acquisition of Ridgways, Inc., which enabled us to expand our
geographic reach and market penetration in 14 major metropolitan
markets. In 2001, we acquired 14 reprographics companies for an
aggregate purchase price of $32.6 million. In 2002, we
acquired eight reprographics companies for an aggregate purchase
price of $34.4 million, including certain assets of the
Consolidated Reprographics division of Lason Systems, Inc.,
which allowed us to increase our market penetration in Southern
California. In 2003 and 2004, we acquired five and six
reprographics companies for an aggregate purchase price of
$870,000 and $3.7 million, respectively. In 2005, we
acquired 14 reprographics companies for an aggregate purchase
price of $32.1 million. All aggregate purchase price
figures include acquisition related costs. See Note 3 to
our consolidated financial statements for further details
concerning our acquisitions.
Subsequent to December 31, 2005, we completed the
acquisition of two reprographics companies in the United States
with combined annual sales of approximately $19.9 million
in 2005 for a total purchase price of $11.0 million.
S-52
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
$5 billion in size. The IRgA indicates that 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 $1.1 trillion, with expenditures divided
between residential construction 55% and commercial and
public, or non-residential, construction 45%. The
$5 billion reprographics industry is approximately 0.5% of
the approximately $1.1 trillion construction industry in
the United States. Our AEC revenues are most closely correlated
to the non-residential sectors of the construction industry,
which are the largest users of the reprographics services.
According to FMI, the non-residential sectors of the
construction industry are projected to grow at a compounded
annual growth rate of approximately 8% 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 projected to
have grown 3.5% in 2005 and is projected to remain at that
growth rate in 2006 according to Wall Streets consensus
estimates.
Our competitive strengths
We believe that our competitive strengths include the following:
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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. |
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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 complementary services and increase our revenue. |
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Extensive National Footprint with Regional
Expertise. Our national network of service centers
maintains local customer relationships while benefiting from the
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 |
S-53
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through our Premier Accounts business unit, while offering
centralized access to project-specific services, billing, and
tracking information. |
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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. |
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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. |
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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
more than 20 years of industry experience. We have also
successfully retained approximately 90% of the managers of the
businesses we have acquired since 1997. |
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.
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Document Management. We store, organize, print and
track AEC and non-AEC project documents using a variety of
digital tools and industry expertise. The documents we manage
are typically larger than 11×17 inches, 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. |
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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. |
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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 reprographics service centers, as well as equipment
placed on site in our customers facilities. |
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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
architectural, engineering and construction industry, or 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
S-54
distribution of document files to multiple locations for a
variety of
print-on-demand needs
including short-run digital publishing.
These services include:
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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. |
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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. |
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Document distribution and logistics, including the physical pick
up, delivery, and shipping of time-sensitive, critical documents. |
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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. |
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Facilities management, including recurring
on-site document
management services and staffing at our customers
locations. |
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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: |
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Electronic Work Order (EWO), which offers our customers access
to the services of all of our service centers through the
internet. |
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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. |
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BidCaster
Invitation-to-Bid
(ITB), a data management internet application that issues
customizable invitations to bid from a
customers desktop using email and a hosted fax server. |
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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. |
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One View 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 customers project documents, regardless of which
of our local production facilities stores the relevant documents. |
S-55
To further support and promote our major categories of services,
we also:
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License our suite of reprographics technology products,
including our flagship online planroom, PlanWell, to independent
reprographers. |
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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. |
Our business strategy
We intend to strengthen our competitive position as the
preferred provider of reprographics services in each market we
serve. We seek to do so while increasing revenue, cash flow,
profitability, and market share. Our key strategies to
accomplish this objective include:
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Continue to Increase Our Market Penetration and Expand Our
Nationwide Footprint. We believe that many of our local
customers rely on local relationships with our service centers
for their document management services. We also recognize a
growing desire among larger regional and national customers to
consolidate their purchasing of reprographics services. We are
currently a leader in approximately half of the top 50
U.S. markets (as defined by Neilsen Media research). To
expand our nationwide footprint we intend to increase our
presence in the top 50 U.S. markets and other under-penetrated
regions through facilities management contracts, targeted branch
openings, strategic acquisitions and national accounts. |
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Facilities Management Contracts. We expect to capitalize
on the continued trend of our customers to outsource their
document management services, including their
in-house operations.
Placing equipment (and sometimes staff) in an architectural
studio or construction company office remains a compelling
service offering as evidenced by our eight-year compounded
annual growth rate of 30% in new on-site services contracts. The
highly renewable nature of most
on-site service
contracts leads us to believe that this source of revenue will
continue to increase in the near term. We will continue to
concentrate on developing ongoing facilities management
relationships in all of the markets we serve and building our
base of recurring revenue. |
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Targeted Branch Openings. Significant opportunities exist
to expand our geographic coverage, capture new customers and
increase our market share by opening additional satellite
branches in regions near our established operations. In 2005, we
opened 19 such branches in areas that expand or further
penetrate our existing markets. We plan to open an additional 15
branches by the end of 2006. We believe that our existing
corporate infrastructure is capable of supporting a much larger
branch network and significantly higher revenue. |
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Strategic Acquisitions. Acquisitions have historically
been an important component of our growth strategy. Since 1997,
we have developed a structured approach to acquiring and
integrating companies. Because our industry consists primarily
of small, privately held companies that serve only local
markets, we believe that we can continue to grow our business by
acquiring additional reprographics companies at reasonable
prices and subsequently realizing substantial operating and
purchasing synergies by leveraging our existing corporate
infrastructure. |
S-56
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National Accounts. Our Premier Accounts business unit
offers a comprehensive suite of reprographics services designed
to meet the demands of large regional and national businesses.
It provides local reprographics services to regional and
national companies through our national network of reprographics
service centers, while offering centralized access to
project-specific services, billing and tracking information.
Through our extensive national footprint and industry- leading
technology, we believe that we are well positioned to meet the
demands of national companies and will continue to capture
additional revenues and customers through this business unit. |
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Promote PlanWell as the Industry Standard for Procuring
Reprographics Services Online. We continue to expand the
market penetration of PlanWell to create an industry standard
for online document management, storage, and document retrieval
services. In order to increase market share and achieve industry
standardization, we will continue to license our PlanWell
technology to other reprographics companies, including members
of PEiR. Through December 2005, we licensed PlanWell technology
products for use in 140 independent reprographics service
facilities, which in combination with ARC locations, made our
technology available in more than 350 locations across the
United States. |
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Solidify Our Non-AEC Service Offerings. We have leveraged
our expertise in providing highly customized, quick turnaround
services to the AEC industry to attract customers from non-AEC
industries that are increasingly seeking document management,
document distribution and logistics, and print-on-demand
services. We have been successful in attracting non-AEC
customers that require services such as the production of large
format and small format color and black and white documents,
educational and training materials, short-run publishing
products, and retail and promotional items. Our services to
these customers accounted for approximately 20% of our net sales
in 2005. In addition, we continue to focus on creating new
value-added services beyond traditional reprographics to offer
all of our customers. We are actively engaged in services such
as bid facilitation, print network management for offices and
on-site production facilities, and on-demand color publishing.
We plan to continue to capitalize on our technological
innovation to enhance our existing services, add new revenue
streams, and create new reprographics technologies. |
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 2005.
Operations
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Geographic Presence. We operate 220 reprographics
service centers, including 216 service centers in
161 cities in 33 states throughout the United States
and the District of Columbia, three service centers in the
Toronto metropolitan area, 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. |
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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
facility, and several smaller facilities, or satellite
facilities, that are digitally connected as a cohesive network,
allowing us to provide all of our services both locally and
nationwide. Our hub and |
S-57
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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. |
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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. |
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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 divisions financial and operating
performance in comparison to monthly budgets.
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.
S-58
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 775 sales and customer service representatives as
of December 31, 2005. 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 39. 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 organizational boundaries. Since
its launch in the middle of 2003, we have established nine
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 our PlanWell online planroom application,
facilitating the promotion of our technology as the industry
standard. 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. For a
discussion of the risk associated with competition, see
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
invest in research and development of our services. Our research
and development efforts are focused on improving and enhancing
PlanWell as well as developing new proprietary services. As of
December 31, 2005, we employed 53 engineers and technical
specialists with expertise in software, internet-
S-59
based applications, database management, internet security and
quality assurance. Cash outlays for research and development
which include both capitalized and expensed items amounted to
$2.8 million in 2003, $2.5 million in 2004, and
$2.9 million in 2005.
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 services. 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
trademarks, service marks or patents that are material to our
business.
For a discussion of the risks associated with our proprietary
rights, see Risk factors Our failure to
adequately protect the proprietary aspects of our technology,
including PlanWell, may cause us to lose market share and
Risk factors We may be subject to intellectual
property rights claims, which are 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 Calcutta, India. Our technology centers also serve as design
and development facilities for our software applications, and
house our nationwide 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.
S-60
Employees
As of December 31, 2005, we had more than 3,800 employees.
Approximately 20 of our employees are covered by two collective
bargaining agreements. The collective bargaining agreement with
our subsidiary, Ridgways Ltd., expires on
November 30, 2007 and the agreement with our subsidiary,
B.P. Independent Reprographics, Inc., expires on
December 4, 2006, but will continue thereafter from year to
year unless either party terminates the agreement. 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.
Facilities
As of December 31, 2005 we operated 215 reprographics
service centers totaling 1,475,088 square feet. We also occupy
two technology centers in Silicon Valley, California, a software
programming facility in Calcutta, India, as well as our three
administrative facilities. Our executive offices are located in
Glendale, California.
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| |
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Number of | |
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|
Reprographics | |
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|
admin & IT | |
|
Square | |
|
service | |
|
Square | |
Region |
|
facilities | |
|
footage | |
|
centers | |
|
footage | |
| |
Southern California
|
|
|
1 |
|
|
|
7,183 |
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|
|
47 |
(2) |
|
|
368,468 |
|
Northern California
|
|
|
4 |
(1) |
|
|
29,901 |
|
|
|
37 |
|
|
|
265,789 |
|
Pacific Northwest
|
|
|
0 |
|
|
|
0 |
|
|
|
11 |
|
|
|
103,364 |
|
East Coast
|
|
|
1 |
|
|
|
650 |
|
|
|
37 |
|
|
|
179,627 |
|
Southern
|
|
|
0 |
|
|
|
0 |
|
|
|
52 |
|
|
|
319,104 |
|
Midwest
|
|
|
0 |
|
|
|
0 |
|
|
|
31 |
(3) |
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|
238,736 |
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|
|
|
|
Total
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|
|
6 |
|
|
|
37,734 |
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|
|
215 |
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1,475,088 |
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|
(1) Includes two technology centers in Fremont, California,
and one in Calcutta, India.
(2) Includes one service center in Mexico City, Mexico.
(3) Includes two service centers in the Toronto
metropolitan area.
We lease 206 of our reprographics service centers, each of our
administrative facilities and our technology centers. These
leases expire through 2015. Substantially all of the leases
contain renewal provisions and provide for annual increases in
rent based on the local Consumer Price Index. The 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.
Legal proceedings
We are a creditor and participant in the Chapter 7
Bankruptcy of Louis Frey Company, Inc., or LF Co., which is
pending in the United States Bankruptcy Court, Southern District
of New York. We managed LF Co. under a contract from May through
September of 2003. LF Co. filed for Bankruptcy protection in
August 2003, and the proceeding was converted to a
Chapter 7 liquidation in October 2003. On or about
June 30, 2004, the Bankruptcy Estate Trustee filed a
complaint in the LF Co. Bankruptcy proceeding against us, which
was amended on or about July 19, 2004, alleging, among
other things, breach of contract, breach of fiduciary duties,
S-61
conversion, unjust enrichment, tortious interference with
contract, unfair competition and false commercial promotion in
violation of The Lanham Act, misappropriation of trade secrets
and fraud regarding our handling of the assets of LF Co. The
Trustee claims damages of not less than $9.5 million, as
well as punitive damages and treble damages with respect to the
Lanham Act claims. Previously, on or about October 10,
2003, a secured creditor of LF Co., Merrill Lynch Business
Financial Services, Inc., or Merrill, had filed a complaint in
the LF Co. Bankruptcy proceeding against us, which was most
recently amended on or about July 6, 2004. Merrills
claims are duplicated in the Trustees suit. We, in turn,
have filed answers and counterclaims denying liability to the
Trustee and seeking reimbursement of all costs and damages
sustained as a result of the Trustees actions and in our
efforts to assist LF Co. These cases are set for trial in April
2006. We believe that we have meritorious defenses as well as
substantial counterclaims against Merrill Lynch and the Trustee.
We intend to vigorously contest the above matters. Based on the
discovery and depositions to date, we do not believe that the
outcome of the above matters will have a material adverse impact
on our results of operations or financial condition.
We are involved in various 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.
S-62
Management
The following table sets forth the name, age and position of our
directors and executive officers as of March 1, 2006.
|
|
|
|
|
|
|
|
Name |
|
Age | |
|
Position |
|
Sathiyamurthy Chandramohan
|
|
|
47 |
|
|
Chief Executive Officer and
Chairman of the Board of Directors
|
Kumarakulasingam Suriyakumar
|
|
|
52 |
|
|
President, Chief Operating Officer
and Director
|
Mark W. Legg
|
|
|
51 |
|
|
Chief Financial Officer and
Secretary
|
Rahul K. Roy
|
|
|
46 |
|
|
Chief Technology Officer
|
Thomas J. Formolo
|
|
|
41 |
|
|
Director
|
Edward D. Horowitz
|
|
|
58 |
|
|
Director
|
Dewitt Kerry McCluggage
|
|
|
51 |
|
|
Director
|
Mark W. Mealy
|
|
|
48 |
|
|
Director
|
Manuel Perez de la Mesa
|
|
|
48 |
|
|
Director
|
|
Executive officers are appointed by and serve at the pleasure of
our board of directors. Prior to our conversion from a
California limited liability company to a Delaware corporation,
each officer served Holdings in the capacities discussed below.
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 companys 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 companys 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.
Mark W. Legg joined Holdings as its Chief Financial
Officer in April 1998. From 1987 to 1998, Mr. Legg was
employed at Vivitar Corporation, a distributor of photographic,
optical, electronic and digital imaging products, as a Vice
President and the Chief Financial Officer, and later as its
Chief Operating Officer. Before Vivitar, he was director of
corporate accounting at Sunrise Medical from 1984 to 1986. From
1979 to 1984, Mr. Legg was employed on the professional
staff at Price Waterhouse & Co.
Rahul K. Roy joined Holdings as our 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
S-63
August 1993 until it was acquired by us in 1999. Mr. Roy
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.
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.
Mr. Formolo has been a partner of CHS since 1997 and
employed by its affiliates since 1990.
Edward D. Horowitz was appointed as a director of
American Reprographics Company in January 2005.
Mr. Horowitz is President and Chief Executive Officer of
SES American, a market-leading satellite operator, and a member
of the Executive Committee of its parent company, SES Global
(Euronext Paris, Luxembourg Stock Exchange: SESG). Prior to SES,
Mr. Horowitz founded EdsLink LLC, a venture fund providing
strategic financial, operations and technology consulting
services. From 1997 through 2001 Mr. Horowitz served at
Citigroup, a provider of banking, insurance and investment
services, as an Executive Vice President and as Founder and
Chairman of the e-Citi business unit of Citigroup.
Mr. Horowitz also serves as a director of iVillage, a
provider of online and offline media-based properties.
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. Cluggage has also served
as the Co-Chairman of
the Ardustry Home Entertainment, a distributor of home videos,
since March 2005. From 1991 to 2004 Mr. McCluggage served
as Chairman of the Paramount Television Group where he was
responsible for overseeing television operations.
Mr. McCluggage served as President of Universal Television
from 1987 to 1991.
Mark W. Mealy was appointed as a director of
American Reprographics Company in March 2005. Mr. Mealy
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 of
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 SCP Pool
Corporation, a wholesale distributor of swimming pool supplies
and related equipment, since May 2001 and has also been the
President of SCP Pool Corporation since February 1999.
Mr. Perez de la Mesa served as Chief Operating Officer of
SCP Pool Corporation from February 1999 to May 2001.
S-64
Selling stockholders
The following table sets forth information regarding the
beneficial ownership of our common stock as of March 1,
2006, and as adjusted to reflect the sale of the shares of
common stock offered in this offering, for each stockholder
selling shares in this offering.
The number of shares beneficially owned by each stockholder is
determined under rules promulgated by the SEC. The information
is not necessarily indicative of beneficial ownership for any
other purpose. Under these rules, beneficial ownership includes
any shares as to which the individual or entity has sole or
shared voting or investment power and any shares as to which the
individual or entity has the right to acquire beneficial
ownership within 60 days after March 1, 2006 through
the exercise of any stock option or other right. The applicable
percentage of ownership for each stockholder is based on
44,625,815 shares of common stock outstanding as of
March 1, 2006, together with applicable options for that
stockholder. The inclusion in the following table of those
shares, however, does not constitute an admission that the named
stockholder is a direct or indirect beneficial owner.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Shares beneficially |
|
|
|
Shares beneficially |
|
|
owned prior to |
|
|
|
owned after |
|
|
this offering |
|
|
|
this offering* |
|
|
| |
|
Shares | |
|
| |
|
|
Number | |
|
Percentage | |
|
offered | |
|
Number | |
|
Percentage | |
Name |
|
of shares | |
|
of class | |
|
hereby(1) | |
|
of shares | |
|
of class | |
| |
ARC Acquisition Co., L.L.C.(2)
|
|
|
11,042,194 |
|
|
|
24.7 |
% |
|
|
3,993,103 |
|
|
|
7,049,091 |
|
|
|
15.8 |
% |
Micro Device, Inc.(3)
|
|
|
6,630,442 |
|
|
|
14.9 |
% |
|
|
945,600 |
|
|
|
5,684,842 |
|
|
|
12.7 |
% |
OCB Reprographics, Inc.(4)
|
|
|
4,332,882 |
|
|
|
9.7 |
% |
|
|
617,934 |
|
|
|
3,714,948 |
|
|
|
8.3 |
% |
Brownies Blueprint, Inc.(5)
|
|
|
1,553,982 |
|
|
|
3.5 |
% |
|
|
221,621 |
|
|
|
1,332,361 |
|
|
|
3.0 |
% |
Dietrich-Post Company(6)
|
|
|
805,282 |
|
|
|
1.8 |
% |
|
|
114,845 |
|
|
|
690,437 |
|
|
|
1.5 |
% |
Rahul K. Roy(7)
|
|
|
644,000 |
|
|
|
1.4 |
% |
|
|
187,000 |
|
|
|
457,000 |
|
|
|
1.0 |
% |
CHS Associates IV(8)
|
|
|
18,133 |
|
|
|
** |
|
|
|
6,557 |
|
|
|
11,576 |
|
|
|
** |
|
Paige Walsh
|
|
|
939 |
|
|
|
** |
|
|
|
340 |
|
|
|
599 |
|
|
|
** |
|
|
* Assumes underwriters have not exercised their option to
purchase additional shares.
** Less than one percent of the outstanding shares of
common stock.
(1) If the underwriters overallotment option is
exercised in full, the additional shares sold would be allocated
among the selling stockholders as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Shares beneficially |
|
|
owned assuming |
|
|
exercise of |
|
|
overallotment option |
|
|
Shares beneficially | |
|
| |
|
|
owned subject to | |
|
Number | |
|
Percentage | |
|
|
overallotment option | |
|
of shares | |
|
of class | |
| |
ARC Acquisition Co., L.L.C.(2)
|
|
|
898,448 |
|
|
|
6,150,643 |
|
|
|
13.8 |
% |
Rahul K. Roy(7)
|
|
|
13,000 |
|
|
|
444,000 |
|
|
|
1.0 |
% |
CHS Associates IV(8)
|
|
|
1,476 |
|
|
|
10,100 |
|
|
|
** |
|
Paige Walsh
|
|
|
76 |
|
|
|
523 |
|
|
|
** |
|
|
If the underwriters overallotment option is exercised in
part, the additional shares sold would be allocated pro rata
based upon the share amounts set forth in the preceding table.
S-65
(2) The sole member of ARC Acquisition Co., L.L.C. is Code
Hennessy & 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. Andrew W. Code, a member of Code,
Hennessy & Simmons LLC was a member of our board of
directors from October 2004 until January 2006 and was an
advisor of Holdings from May 2002 until January 2005. Thomas J.
Formolo has served as an advisor of Holdings since April 2000
and has served as a member of our board of directors since
October 2004.
(3) Messrs. Chandramohan and Suriyakumar have
ownership interests of 56% and 44%, respectively, in Micro
Device, Inc. and serve on its Board of Directors, and 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. Mr. 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 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. Mr. Suriyakumar has served as an advisor of
Holdings since March 1988 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 companys President and Chief Executive Officer
in 1991.
(4) Messrs. Chandramohan and Suriyakumar and Billy E.
Thomas have ownership interests of 22.4%, 17.6% and 40%,
respectively, in OCB Reprographics, Inc. and serve on its Board
of Directors, and 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. Mr. 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 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. Mr. Suriyakumar has served
as an advisor of Holdings since March 1988 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 companys President and Chief Executive Officer
in 1991.
(5) Messrs. Chandramohan and Suriyakumar have
ownership interests of 42% and 33%, respectively, in Brownies
Blueprint, Inc. and serve on its Board of Directors, and 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. Mr. 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 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. Mr. Suriyakumar has served as an advisor of
Holdings since March 1988 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 companys President and Chief Executive Officer
in 1991.
(6) Messrs. Chandramohan and Suriyakumar have
ownership interests of 47.6% and 37.4%, respectively, in
Dietrich-Post Company and serve on its Board of Directors, and
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. Mr. 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 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. Mr. Suriyakumar has served as an advisor of
Holdings since March 1988 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 companys President and Chief Executive Officer
in 1991.
(7) Includes 644,000 shares issuable upon exercise of
outstanding stock options exercisable within 60 days of
March 1, 2006, of which 187,000 options will be exercised
in connection with the offering and an additional 13,000 options
will be exercised if the underwriters overallotment option
is exercised in full.
(8) The managing general partner of CHS Associates IV is
Code Hennessy & Simmons LLC. Code Hennessy & Simmons LLC
may be deemed to beneficially own these shares, but disclaims
beneficial ownership of shares in which it does not have a
pecuniary interest.
S-66
Underwriting
The selling stockholders are offering the shares of common stock
described in this prospectus supplement through a number of
underwriters. J.P. Morgan Securities Inc. and Goldman,
Sachs & Co. are acting as joint book-running managers
and joint lead managers for this offering. Subject to the terms
and conditions set forth in an underwriting agreement, the
selling stockholders have agreed to sell to each underwriter
named below, and such underwriters have agreed to purchase, the
number of shares of common stock set forth opposite their names
below:
|
|
|
|
|
|
| |
|
|
Number | |
|
|
of | |
Underwriter |
|
shares | |
| |
J.P. Morgan Securities
Inc.
|
|
|
|
|
Goldman, Sachs &
Co.
|
|
|
|
|
Robert W. Baird & Co.
Incorporated
|
|
|
|
|
CIBC World Markets
Corp.
|
|
|
|
|
Credit Suisse Securities (USA) LLC
|
|
|
|
|
William Blair & Company,
L.L.C.
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
6,087,000 |
|
|
The underwriting agreement provides that the obligations of the
underwriters to purchase the shares included in this offering
are subject to conditions customary for offerings of this type.
The underwriters are committed to purchase all the shares, other
than those covered by the overallotment option described below,
if they purchase any of the shares.
Certain selling stockholders have granted to the underwriters an
option, exercisable for 30 days from the date of this
prospectus, to purchase up to 913,000 additional shares of
common stock at the public offering price less the underwriting
discounts and commissions set forth on the cover page of this
prospectus supplement. The underwriters may exercise the option
solely for the purpose of covering over-allotments, if any, in
connection with this offering.
The following table shows the per share and total underwriting
discounts and commissions that the selling stockholders will pay
to the underwriters. These amounts are shown assuming both no
exercise and full exercise of the underwriters option to
purchase additional shares.
Underwriting discounts and commissions
|
|
|
|
|
|
|
|
|
| |
|
|
Paid by selling stockholders |
|
|
| |
|
|
No | |
|
Full | |
|
|
over-allotment | |
|
over-allotment | |
|
|
exercise | |
|
exercise | |
| |
Per share
|
|
$ |
|
|
|
$ |
|
|
Total
|
|
$ |
|
|
|
$ |
|
|
|
The underwriters initially propose to offer the shares of common
stock directly to the public at the public offering price set
forth on the cover page of this prospectus and to certain dealers
S-67
at the public offering price less a concession not to exceed
$ per
share. The underwriters may allow, and such dealers may reallow,
a concession not in excess of
$ per
share to certain other dealers. After the initial public
offering of the shares, the offering price and other selling
terms may be changed by the underwriters.
Our common stock is traded on the New York Stock Exchange under
the symbol ARP.
We, the selling stockholders, our directors and executive
officers and certain other stockholders have agreed with the
underwriters that we and each of these persons or entities, with
limited exceptions, for a period of 90 days after the date
of this prospectus, will not, without the prior written consent
of J.P. Morgan Securities Inc. and Goldman,
Sachs & Co.:
|
|
|
offer, pledge, announce the intention to sell, sell, contract to
sell, sell any option or contract to purchase, purchase any
option or contract to sell, grant any option, right or warrant
to purchase or otherwise transfer or dispose of directly or
indirectly, any shares of our common stock or any securities
convertible into or exercisable or exchangeable for our common
stock; or |
|
|
enter into any swap or other arrangement that transfers, in
whole or in part, any of the economic consequences of ownership
of our common stock, |
whether any such transaction described above is to be settled by
delivery of our common stock or such other securities, in cash
or otherwise.
The restrictions described in the immediately preceding
paragraph do not apply to:
|
|
|
the sale of shares of our common stock to the underwriters in
connection with this offering; |
|
|
the granting by us of options to purchase shares of our common
stock under existing employee stock plans; |
|
|
the issuance by us of shares of our common stock upon the
exercise of options granted under existing employee stock plans; |
|
|
the granting by us of shares of our common stock under existing
employee stock plans; |
|
|
shares of our common stock acquired in open market transactions
by any person other than us; |
|
|
transfers to affiliates by any person other than us of shares of
our common stock or securities convertible into shares of our
common stock; |
|
|
transfers or distributions by any person other than us of shares
of our common stock or securities convertible into shares of our
common stock to limited partners or stockholders of the
transferor; |
|
|
transfers by any person other than us of shares of our common
stock or securities convertible into shares of our common stock
as a bona fide gift or gifts; or |
|
|
transfers by any person other than us of shares of our common
stock or securities convertible into shares of our common stock
to any trust the sole beneficiaries of which are the transferor
and/or his or her immediate family members; |
S-68
provided that in the case of each of the last five transactions
above, each donee, distributee, transferee or recipient agrees
to be subject to the restrictions described in the immediately
preceding paragraph; In addition, our directors, executive
officers, the selling stockholders and certain other
stockholders have agreed that, without the prior written consent
of J.P. Morgan Securities Inc. and Goldman,
Sachs & Co., they will not, during the period ending
90 days after the date of this prospectus, make any demand
for or exercise any right with respect to the registration of
any shares of our common stock or any security convertible into
or exercisable or exchangeable for common stock.
J.P. Morgan Securities Inc. and Goldman, Sachs &
Co. may release any of the securities subject to these lock-up
agreements at any time without notice. J.P. Morgan
Securities Inc. and Goldman, Sachs & Co. have advised
us that they will determine to waive or shorten the lock-ups on
a case-by-case basis after considering such factors as the
current equity market conditions, the performance of the price
of our common stock since the offering and the likely impact of
any waiver on the price of our common stock, and the requesting
partys reason for making the request. J.P. Morgan
Securities Inc. and Goldman, Sachs & Co. have advised
us that they have no present intent or arrangement to release
any of the securities subject to these lock-up agreements.
We and the selling stockholders have agreed to indemnify the
underwriters against certain liabilities, including liabilities
under the Securities Act of 1933, or to contribute to payments
the underwriters may be required to make because of any of those
liabilities.
The underwriters may engage in stabilizing transactions,
syndicate covering transactions and penalty bids in accordance
with Rule 104 under the Securities Exchange Act in
connection with this offering. Stabilizing transactions permit
bids to purchase the common stock so long as the stabilizing
bids do not exceed a specified maximum. Syndicate covering
transactions involve purchases of the common stock in the open
market following completion of this offering to cover all or a
portion of a syndicate short position created by the
underwriters selling more shares of common stock in connection
with this offering than they are committed to purchase from us
and the selling stockholders. In addition, the underwriters may
impose penalty bids under contractual arrangements
between the underwriters and dealers participating in this
offering whereby they may reclaim from a dealer participating in
this offering the selling concession with respect to shares of
common stock that are distributed in this offering but
subsequently purchased for the account of the underwriters in
the open market. Such stabilizing transactions, syndicate
covering transactions and penalty bids may result in the
maintenance of the price of the common stock at a level above
that which might otherwise prevail in the open market. None of
the transactions described in this paragraph is required and, if
any are undertaken, they may be discontinued at any time.
In connection with this offering, certain underwriters and
selling group members, if any, who are qualified market makers
on the New York Stock Exchange may engage in passive market
making transactions in our common stock on the New York Stock
Exchange in accordance with Rule 103 of Regulation M
under the Exchange Act. In general, a passive market maker must
display its bid at a price not in excess of the highest
independent bid of such security; if all independent bids are
lowered below the passive market makers bid, however, such
bid must then be lowered when certain purchase limits are
exceeded.
Each of the underwriters has represented and agreed that:
|
|
|
(a) it
has not made or will not make an offer of shares to the public
in the United Kingdom within the meaning of section 102B of the
Financial Services and |
S-69
|
|
|
Markets Act 2000 (as amended) (FSMA) except to legal
entities which are authorised or regulated to operate in the
financial markets or, if not so authorised or regulated, whose
corporate purpose is solely to invest in securities or otherwise
in circumstances which do not require the publication by the
company of a prospectus pursuant to the Prospectus Rules of the
Financial Services Authority (FSA); |
|
|
(b) it
has only communicated or caused to be communicated and will only
communicate or cause to be communicated an invitation or
inducement to engage in investment activity (within the meaning
of section 21 of FSMA) to persons who have professional
experience in matters relating to investments falling within
Article 19(5) of the Financial Services and Markets Act
2000 (Financial Promotion) Order 2005 or in circumstances in
which section 21 of FSMA does not apply to the company; and |
|
|
(c) it
has complied with, and will comply with all applicable
provisions of FSMA with respect to anything done by it in
relation to the shares in, from or otherwise involving the
United Kingdom. |
In relation to each Member State of the European Economic Area
which has implemented the Prospectus Directive (each, a Relevant
Member State), each Underwriter has represented and agreed that
with effect from and including the date on which the Prospectus
Directive is implemented in that Relevant Member State (the
Relevant Implementation Date) it has not made and will not make
an offer of Shares to the public in that Relevant Member State
prior to the publication of a prospectus in relation to the
Shares which has been approved by the competent authority in
that Relevant Member State or, where appropriate, approved in
another Relevant Member State and notified to the competent
authority in that Relevant Member State, all in accordance with
the Prospectus Directive, except that it may, with effect from
and including the Relevant Implementation Date, make an offer of
Shares to the public in that Relevant Member State at any time:
|
|
|
(a) to
legal entities which are authorised or regulated to operate in
the financial markets or, if not so authorised or regulated,
whose corporate purpose is solely to invest in securities; |
|
|
(b) to
any legal entity which has two or more of (1) an average of
at least 250 employees during the last financial year;
(2) a total balance sheet of more than
43,000,000 and
(3) an annual net turnover of more than
50,000,000, as shown in its last annual or consolidated
accounts; or |
|
|
(c) in
any other circumstances which do not require the publication by
the Issuer of a prospectus pursuant to Article 3 of the
Prospectus Directive. |
For the purposes of this provision, the expression an
offer of Shares to the public in relation to any
Shares in any Relevant Member State means the communication in
any form and by any means of sufficient information on the terms
of the offer and the Shares to be offered so as to enable an
investor to decide to purchase or subscribe the Shares, as the
same may be varied in that Relevant Member State by any measure
implementing the Prospectus Directive in that Relevant Member
State and the expression Prospectus Directive means Directive
2003/71/ EC and includes any relevant implementing measure in
each Relevant Member State.
The shares may not be offered or sold by means of any document
other than to persons whose ordinary business is to buy or sell
shares or debentures, whether as principal or agent, or in
circumstances which do not constitute an offer to the public
within the meaning of the
S-70
Companies Ordinance (Cap. 32) of Hong Kong, and no
advertisement, invitation or document relating to the shares may
be issued, whether in Hong Kong or elsewhere, which is directed
at, or the contents of which are likely to be accessed or read
by, the public in Hong Kong (except if permitted to do so under
the securities laws of Hong Kong) other than with respect to
shares which are or are intended to be disposed of only to
persons outside Hong Kong or only to professional
investors within the meaning of the Securities and Futures
Ordinance (Cap. 571) of Hong Kong and any rules made thereunder.
This prospectus supplement and accompanying prospectus has not
been registered as a prospectus with the Monetary Authority of
Singapore. Accordingly, this prospectus supplement and
accompanying prospectus and any other document or material in
connection with the offer or sale, or invitation for
subscription or purchase, of the shares may not be circulated or
distributed, nor may the shares be offered or sold, or be made
the subject of an invitation for subscription or purchase,
whether directly or indirectly, to persons in Singapore other
than (i) to an institutional investor under
Section 274 of the Securities and Futures Act,
Chapter 289 of Singapore (the SFA),
(ii) to a relevant person, or any person pursuant to
Section 275(1A), and in accordance with the conditions,
specified in Section 275 of the SFA or (iii) otherwise
pursuant to, and in accordance with the conditions of, any other
applicable provision of the SFA.
Where the shares are subscribed or purchased under
Section 275 by a relevant person which is: (a) a
corporation (which is not an accredited investor) the sole
business of which is to hold investments and the entire share
capital of which is owned by one or more individuals, each of
whom is an accredited investor; or (b) a trust (where the
trustee is not an accredited investor) whose sole purpose is to
hold investments and each beneficiary is an accredited investor,
shares, debentures and units of shares and debentures of that
corporation or the beneficiaries rights and interest in
that trust shall not be transferable for 6 months after
that corporation or that trust has acquired the shares under
Section 275 except: (1) to an institutional investor
under Section 274 of the SFA or to a relevant person, or
any person pursuant to Section 275(1A), and in accordance
with the conditions, specified in Section 275 of the SFA;
(2) where no consideration is given for the transfer; or
(3) by operation of law.
The securities have not been and will not be registered under
the Securities and Exchange Law of Japan (the Securities and
Exchange Law) and each underwriter has agreed that it will not
offer or sell any securities, directly or indirectly, in Japan
or to, or for the benefit of, any resident of Japan (which term
as used herein means any person resident in Japan, including any
corporation or other entity organized under the laws of Japan),
or to others for re-offering or resale, directly or indirectly,
in Japan or to a resident of Japan, except pursuant to an
exemption from the registration requirements of, and otherwise
in compliance with, the Securities and Exchange Law and any
other applicable laws, regulations and ministerial guidelines of
Japan.
We estimate that our total expenses attributable to this
offering will be approximately $450,000, excluding underwriting
discounts and commissions.
In the ordinary course of the underwriters respective
businesses, the underwriters and their affiliates have engaged
and may engage in commercial, investment banking and other
advisory transactions with us or the selling stockholders for
which they have received and will receive customary fees and
expenses.
An affiliate of Goldman, Sachs & Co. is a lender under
ARCs credit facilities, having a commitment to lend up to
$5.0 million under the revolving facility which, as of
March 20,
S-71
2006, had an outstanding balance of $3.0 million. S.
Chandramohan, the Chief Executive Officer of the company,
maintains a private investment account with Goldman, Sachs &
Co. In connection with a project to construct a new Goldman,
Sachs & Co. headquarters in New York City, following a
competitive bidding process, the developer, with Goldman,
Sachs & Co.s concurrence, has selected ARC to
provide reprographics services for the project.
Validity of common stock
The validity of the shares of common stock being offered will be
passed upon for American Reprographics Company by Hanson,
Bridgett, Marcus, Vlahos & Rudy, LLP, San Francisco,
California, and for the underwriters by Sullivan &
Cromwell LLP, Los Angeles, California.
S-72
Index to consolidated financial statements
|
|
|
|
|
|
F-2
|
|
|
F-3
|
|
|
F-4
|
|
|
F-5
|
|
|
F-7
|
|
|
F-8
|
|
|
|
|
Schedule IIValuation and
Qualifying Accounts
|
|
F-36
|
F-1
Report of independent registered public accounting firm
The Board of Directors and Stockholders
American Reprographics Company:
In our opinion, the consolidated financial statements listed in
the accompanying index present fairly, in all material respects,
the financial position of American Reprographics Company and its
subsidiaries (the Company) at December 31, 2004
and 2005, and the results of their operations and their cash
flows each of the three years in the period ended
December 31, 2005 in conformity with accounting principles
generally accepted in the United States of America. In addition,
in our opinion, the financial statement schedule listed in the
accompanying index presents fairly, in all material respects,
the information set forth therein when read in conjunction with
the related consolidated financial statements. These financial
statements and the financial statement schedule are the
responsibility of the Companys management; our
responsibility is to express an opinion on these financial
statements and the financial statement schedule based on our
audits. We conducted our audits of these statements in
accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
Also, as discussed in Note 1 to the consolidated financial
statements, the Company changed its method of accounting for its
redeemable preferred members equity upon adoption of
Statement of Financial Accounting Standard No. 150
effective July 1, 2003.
/s/ PRICEWATERHOUSECOOPERS LLP
Los Angeles, California
March 15, 2006
F-2
American Reprographics Company and subsidiaries
Consolidated balance sheets
|
|
|
|
|
|
|
|
|
|
|
| |
December 31, | |
(in thousands, except share data) |
|
2004 | |
|
2005 | |
| |
Assets
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
13,826 |
|
|
$ |
22,643 |
|
|
Accounts receivable, net of
allowance for doubtful accounts of $3,053 and $3,172,
respectively
|
|
|
61,679 |
|
|
|
71,062 |
|
|
Inventories, net of inventory
obsolescence of $321 and $430, respectively
|
|
|
6,012 |
|
|
|
6,817 |
|
|
Deferred income taxes
|
|
|
1,364 |
|
|
|
4,272 |
|
|
Prepaid expenses and other current
assets
|
|
|
7,855 |
|
|
|
6,425 |
|
|
|
|
|
|
Total current assets
|
|
|
90,736 |
|
|
|
111,219 |
|
Property and equipment, net
|
|
|
35,023 |
|
|
|
45,773 |
|
Goodwill
|
|
|
231,357 |
|
|
|
245,271 |
|
Other intangible assets, net
|
|
|
12,095 |
|
|
|
21,387 |
|
Deferred financing costs, net
|
|
|
6,619 |
|
|
|
923 |
|
Deferred income taxes
|
|
|
|
|
|
|
16,216 |
|
Other assets
|
|
|
1,504 |
|
|
|
1,573 |
|
|
|
|
|
|
Total assets
|
|
$ |
377,334 |
|
|
$ |
442,362 |
|
|
|
|
|
Liabilities and
stockholders equity
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$ |
21,170 |
|
|
$ |
20,811 |
|
|
Accrued payroll and payroll-related
expenses
|
|
|
11,683 |
|
|
|
15,486 |
|
|
Accrued expenses
|
|
|
25,209 |
|
|
|
18,684 |
|
|
Current portion of long-term debt
and capital leases
|
|
|
10,276 |
|
|
|
20,441 |
|
|
|
|
|
|
Total current liabilities
|
|
|
68,338 |
|
|
|
75,422 |
|
Long-term debt and capital leases
|
|
|
310,557 |
|
|
|
253,371 |
|
Mandatorily redeemable preferred
membership units
|
|
|
27,814 |
|
|
|
|
|
Deferred income taxes
|
|
|
5,634 |
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$ |
412,343 |
|
|
$ |
328,793 |
|
|
|
|
Commitments and contingencies
(Note 7)
|
|
|
|
|
|
|
|
|
Stockholders equity (deficit):
|
|
|
|
|
|
|
|
|
|
Members deficit
|
|
|
(32,688 |
) |
|
|
|
|
|
Preferred stock, $.001 par
value, 25,000,000 shares authorized; none issued and
outstanding
|
|
|
|
|
|
|
|
|
|
Common stock, $.001 par value,
150,000,000 shares authorized; no shares issued and
outstanding at December 31, 2004 and 44,598,815 shares
issued and outstanding December 31, 2005
|
|
|
|
|
|
|
44 |
|
|
Additional paid-in capital
|
|
|
|
|
|
|
56,825 |
|
|
Deferred stock-based compensation
|
|
|
(2,527 |
) |
|
|
(1,903 |
) |
|
Retained earnings
|
|
|
|
|
|
|
58,561 |
|
|
Accumulated other comprehensive
income
|
|
|
206 |
|
|
|
42 |
|
|
|
|
|
|
Total stockholders equity
(deficit)
|
|
|
(35,009 |
) |
|
|
113,569 |
|
|
|
|
|
|
Total liabilities and
stockholders equity
|
|
$ |
377,334 |
|
|
$ |
442,362 |
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
American Reprographics Company and subsidiaries
Consolidated statements of operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Year ended December 31, | |
(in thousands, except per share data) |
|
2003 | |
|
2004 | |
|
2005 | |
| |
Reprographics services
|
|
$ |
315,995 |
|
|
$ |
333,305 |
|
|
$ |
369,123 |
|
Facilities management
|
|
|
59,311 |
|
|
|
72,360 |
|
|
|
83,125 |
|
Equipment and supplies sales
|
|
|
40,654 |
|
|
|
38,199 |
|
|
|
41,956 |
|
|
|
|
|
Total net sales
|
|
|
415,960 |
|
|
|
443,864 |
|
|
|
494,204 |
|
Cost of sales
|
|
|
252,028 |
|
|
|
263,787 |
|
|
|
289,580 |
|
|
|
|
Gross profit
|
|
|
163,932 |
|
|
|
180,077 |
|
|
|
204,624 |
|
|
|
|
Selling, general and administrative
expenses
|
|
|
101,252 |
|
|
|
105,780 |
|
|
|
112,679 |
|
Provision for sales tax dispute
settlement
|
|
|
|
|
|
|
1,389 |
|
|
|
|
|
Amortization of intangible assets
|
|
|
1,709 |
|
|
|
1,695 |
|
|
|
2,120 |
|
|
|
|
Income from operations
|
|
|
60,971 |
|
|
|
71,213 |
|
|
|
89,825 |
|
|
|
|
Other income
|
|
|
1,024 |
|
|
|
420 |
|
|
|
381 |
|
Interest expense, net
|
|
|
(39,390 |
) |
|
|
(33,565 |
) |
|
|
(26,722 |
) |
Loss on early extinguishment of debt
|
|
|
(14,921 |
) |
|
|
|
|
|
|
(9,344 |
) |
|
|
|
Income before income tax provision
|
|
|
7,684 |
|
|
|
38,068 |
|
|
|
54,140 |
|
Income tax provision (benefit)
|
|
|
4,131 |
|
|
|
8,520 |
|
|
|
(6,336 |
) |
|
|
|
Net income
|
|
$ |
3,553 |
|
|
$ |
29,548 |
|
|
$ |
60,476 |
|
|
|
|
Dividends and amortization of
discount on preferred members equity
|
|
|
(1,730 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common
shares
|
|
$ |
1,823 |
|
|
$ |
29,548 |
|
|
$ |
60,476 |
|
|
|
|
Net income attributable to common
shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.05 |
|
|
$ |
0.83 |
|
|
$ |
1.43 |
|
|
|
|
|
Diluted
|
|
$ |
0.05 |
|
|
$ |
0.79 |
|
|
$ |
1.40 |
|
|
|
|
Weighted average common shares
outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
35,480,289 |
|
|
|
35,493,136 |
|
|
|
42,264,001 |
|
|
Diluted
|
|
|
37,298,349 |
|
|
|
37,464,123 |
|
|
|
43,178,001 |
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
American Reprographics Company and subsidiaries
Consolidated statements of stockholders equity
and comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Common stock | |
|
|
|
Accumulated | |
|
|
|
|
|
|
Additional | |
|
|
|
other | |
|
Total | |
|
|
Members | |
|
|
|
Par | |
|
paid-in | |
|
Deferred | |
|
Retained | |
|
comprehensive | |
|
stockholders | |
(dollars in thousands) |
|
deficit | |
|
Shares | |
|
value | |
|
capital | |
|
compensation | |
|
earnings | |
|
income | |
|
equity | |
| |
Balance at December 31, 2002
|
|
$ |
(60,248 |
) |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(834 |
) |
|
$ |
(61,082 |
) |
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
3,553 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,553 |
|
|
Reclassification to interest
expense related to swap contract
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
834 |
|
|
|
834 |
|
|
Interest rate swap fair value
adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(822 |
) |
|
|
(822 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,565 |
|
Issuance of common membership units
|
|
|
111 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
111 |
|
Distribution to members
|
|
|
(1,670 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,670 |
) |
Accretion of noncash portion of
yield on mandatorily redeemable preferred membership units
|
|
|
(858 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(858 |
) |
Amortization of discount on
mandatorily redeemable preferred membership units
|
|
|
(81 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(81 |
) |
|
|
|
Balance at December 31, 2003
|
|
|
(59,193 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(822 |
) |
|
|
(60,015 |
) |
Deferred stock-based compensation
charge for options issued to employees
|
|
|
3,074 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,074 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of stock-based
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
547 |
|
|
|
|
|
|
|
|
|
|
|
547 |
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
29,548 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,548 |
|
|
Fair value adjustment of
derivatives, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,028 |
|
|
|
1,028 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,576 |
|
Issuance of common membership units
|
|
|
118 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
118 |
|
Write-off of notes receivable from
members related to common membership units issued in 1998
|
|
|
(111 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(111 |
) |
Distribution to members
|
|
|
(6,124 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,124 |
) |
|
|
|
Balance at December 31, 2004
|
|
|
(32,688 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,527 |
) |
|
|
|
|
|
|
206 |
|
|
|
(35,009 |
) |
F-5
(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Common stock | |
|
|
|
Accumulated | |
|
|
|
|
| |
|
Additional | |
|
|
|
other | |
|
Total | |
|
|
Members | |
|
|
|
Par | |
|
paid-in | |
|
Deferred | |
|
Retained | |
|
comprehensive | |
|
stockholders | |
(dollars in thousands) |
|
deficit | |
|
Shares | |
|
value | |
|
capital | |
|
compensation | |
|
earnings | |
|
income | |
|
equity | |
| |
Amortization of deferred
stock-based compensation for the period from January 1 to
February 9, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61 |
|
|
|
|
|
|
|
|
|
|
|
61 |
|
Comprehensive income for the period
January 1 to February 9, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
1,914 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,914 |
|
|
Fair value adjustment of derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
195 |
|
|
|
195 |
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,109 |
|
Distributions to members
|
|
|
(8,244 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,244 |
) |
Reorganization from LLC to
C Corporation
|
|
|
39,018 |
|
|
|
35,510,011 |
|
|
|
35 |
|
|
|
(39,053 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock in initial
public offering, net of underwriting discounts
|
|
|
|
|
|
|
7,666,667 |
|
|
|
8 |
|
|
|
92,682 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
92,690 |
|
Issuance of common stock in
exchange for warrants exercised upon initial public offering
|
|
|
|
|
|
|
754,476 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
Direct costs of initial public
offering
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,916 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,916 |
) |
Amortization of deferred
stock-based compensation for the period from February 10 to
December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
563 |
|
|
|
|
|
|
|
|
|
|
|
563 |
|
Issuance of common stock under
Employee Stock Purchase Plan
|
|
|
|
|
|
|
362,061 |
|
|
|
|
|
|
|
4,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,000 |
|
Stock options exercised
|
|
|
|
|
|
|
305,600 |
|
|
|
|
|
|
|
1,536 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,536 |
|
Tax benefit from exercise of stock
options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,576 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,576 |
|
Comprehensive income for the period
from February 10, to December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58,561 |
|
|
|
|
|
|
|
58,561 |
|
|
|
Fair value adjustment of
derivatives , net of tax effects
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(359 |
) |
|
|
(359 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58,202 |
|
|
|
|
Balance at December 31, 2005
|
|
$ |
|
|
|
|
44,598,815 |
|
|
$ |
44 |
|
|
$ |
56,825 |
|
|
$ |
(1,903 |
) |
|
$ |
58,561 |
|
|
$ |
42 |
|
|
$ |
113,569 |
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
American Reprographics Company and subsidiaries
Consolidated statements of cash flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Year ended December 31, | |
(dollars in thousands) |
|
2003 | |
|
2004 | |
|
2005 | |
| |
Cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
3,553 |
|
|
$ |
29,548 |
|
|
$ |
60,476 |
|
Adjustments to reconcile net income
to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion of yield on redeemable
preferred member units
|
|
|
949 |
|
|
|
2,023 |
|
|
|
449 |
|
|
Allowance for doubtful accounts
|
|
|
1,698 |
|
|
|
1,281 |
|
|
|
771 |
|
|
Reserve for inventory obsolescence
|
|
|
248 |
|
|
|
89 |
|
|
|
88 |
|
|
Reserve for sales tax liability
|
|
|
|
|
|
|
1,389 |
|
|
|
|
|
|
Depreciation
|
|
|
18,228 |
|
|
|
17,035 |
|
|
|
17,045 |
|
|
Amortization of intangible assets
|
|
|
1,709 |
|
|
|
1,695 |
|
|
|
2,120 |
|
|
Amortization of deferred financing
costs
|
|
|
1,559 |
|
|
|
1,964 |
|
|
|
1,660 |
|
|
Noncash interest expense
|
|
|
8,565 |
|
|
|
|
|
|
|
|
|
|
Deferred income taxes
|
|
|
1,622 |
|
|
|
867 |
|
|
|
(24,815 |
) |
|
Write-off of unamortized debt
discount
|
|
|
3,875 |
|
|
|
|
|
|
|
|
|
|
Write-off of deferred financing
costs
|
|
|
5,129 |
|
|
|
590 |
|
|
|
7,089 |
|
|
Amortization of deferred
stock-based compensation
|
|
|
|
|
|
|
547 |
|
|
|
624 |
|
|
Changes in operating assets and
liabilities, net of effect of business acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
1,802 |
|
|
|
(5,780 |
) |
|
|
(3,964 |
) |
|
|
Inventory
|
|
|
1,034 |
|
|
|
386 |
|
|
|
754 |
|
|
|
Prepaid expenses and other assets
|
|
|
410 |
|
|
|
(3,133 |
) |
|
|
433 |
|
|
|
Accounts payable and accrued
expenses
|
|
|
(2,144 |
) |
|
|
12,357 |
|
|
|
(6,082 |
) |
|
|
|
Cash provided by operating
activities
|
|
|
48,237 |
|
|
|
60,858 |
|
|
|
56,648 |
|
|
|
|
Cash flows from investing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(4,992 |
) |
|
|
(5,898 |
) |
|
|
(5,237 |
) |
Payments for businesses acquired,
net of cash acquired and including other cash payments
associated with the acquisitions
|
|
|
(3,116 |
) |
|
|
(4,654 |
) |
|
|
(22,380 |
) |
Other
|
|
|
(228 |
) |
|
|
(34 |
) |
|
|
70 |
|
|
|
|
Cash used in investing activities
|
|
|
(8,336 |
) |
|
|
(10,586 |
) |
|
|
(27,547 |
) |
|
|
|
Cash flows from financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from initial public
offering, net of underwriting discounts
|
|
|
|
|
|
|
|
|
|
|
92,690 |
|
Direct costs of initial public
offering
|
|
|
|
|
|
|
|
|
|
|
(1,487 |
) |
Proceeds from stock option exercises
|
|
|
|
|
|
|
|
|
|
|
1,536 |
|
Proceeds from issuance of common
stock under Employee Stock Purchase Plan
|
|
|
|
|
|
|
|
|
|
|
4,000 |
|
Redemption of preferred member units
|
|
|
|
|
|
|
|
|
|
|
(28,263 |
) |
Proceeds from borrowings under debt
agreements
|
|
|
337,750 |
|
|
|
1,000 |
|
|
|
18,000 |
|
Payments on long-term debt under
debt agreements
|
|
|
(375,613 |
) |
|
|
(48,400 |
) |
|
|
(97,212 |
) |
Payment of loan fees
|
|
|
(8,159 |
) |
|
|
(355 |
) |
|
|
(1,304 |
) |
Proceeds from issuance of common
membership units
|
|
|
111 |
|
|
|
118 |
|
|
|
|
|
Member distributions and redemptions
|
|
|
(1,670 |
) |
|
|
(6,124 |
) |
|
|
(8,244 |
) |
|
|
|
Cash used in financing activities
|
|
|
(47,581 |
) |
|
|
(53,761 |
) |
|
|
(20,284 |
) |
|
|
|
Net change in cash and cash
equivalents
|
|
|
(7,680 |
) |
|
|
(3,489 |
) |
|
|
8,817 |
|
Cash and cash equivalents at
beginning of period
|
|
|
24,995 |
|
|
|
17,315 |
|
|
|
13,826 |
|
|
|
|
Cash and cash equivalents at end of
period
|
|
$ |
17,315 |
|
|
$ |
13,826 |
|
|
$ |
22,643 |
|
|
|
|
Supplemental disclosure of cash
flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$ |
28,190 |
|
|
$ |
25,165 |
|
|
$ |
28,508 |
|
|
|
|
|
Income taxes
|
|
$ |
1,966 |
|
|
$ |
5,720 |
|
|
$ |
21,323 |
|
|
|
|
Noncash investing and financing
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncash transactions include the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion of noncash portion of
yield on preferred membership units
|
|
$ |
858 |
|
|
$ |
|
|
|
$ |
|
|
|
Amortization of discount on
preferred membership units
|
|
$ |
81 |
|
|
$ |
|
|
|
$ |
|
|
|
Capital lease obligations incurred
|
|
$ |
4,443 |
|
|
$ |
7,413 |
|
|
$ |
19,403 |
|
|
Issuance of subordinated notes in
connection with the acquisition of businesses
|
|
$ |
|
|
|
$ |
915 |
|
|
$ |
10,293 |
|
|
Change in fair value of derivatives
|
|
$ |
(822 |
) |
|
$ |
1,028 |
|
|
$ |
(164 |
) |
The accompanying notes are an integral part of these
consolidated financial statements.
F-7
American Reprographics Company and subsidiaries
Notes to consolidated financial statements
(dollars in thousands, except dollars per share)
|
|
1. |
Description of business and basis of presentation |
American Reprographics Company (ARC or the Company) is 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. ARC also provides
these services to companies in non-AEC industries, such as
technology, financial services, retail, entertainment, and food
and hospitality, that also require sophisticated document
management services. The Company conducts its operations through
its wholly-owned operating subsidiary, American Reprographics
Company, L.L.C., a California limited liability company (Opco),
and its subsidiaries.
Reorganization and initial public offering
Prior to the consummation of the Companys initial public
offering on February 9, 2005, the Company was reorganized
(the Reorganization) from a California limited liability company
(American Reprographics Holdings, L.L.C. or Holdings) to a
Delaware corporation (American Reprographics Company). In
connection with the Reorganization, the members of Holdings
exchanged their common member units for common stock of the
Company. Each option issued to purchase Holdings common
member units under Holdings equity option plan was
exchanged for an option exercisable for shares of ARCs
common stock with the same exercise prices and vesting terms as
the original grants. In addition, all outstanding warrants to
purchase common units of Holdings were exchanged for shares of
ARCs common stock.
On February 9, 2005, the Company closed an initial public
offering (IPO) of its common stock consisting of
13,350,000 shares at $13.00 per share. Of these shares
7,666,667 were newly issued shares sold by the Company and
5,683,333 were outstanding shares sold by shareholders. The
Company used net proceeds from its IPO to prepay
$50.7 million of its $225 million senior second
priority secured term loan facility and $9 million of its
$100 million senior first priority secured term loan
facility. As required by the operating agreement of Holdings,
the Company also repurchased all of the preferred equity of
Holdings upon the closing of the Companys initial public
offering with $28.3 million of the net proceeds from the
IPO.
Due to their tax attributes, certain members of Holdings have in
the past elected to receive less than their proportionate share
of distributions for income 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, the Company made a cash distribution of
$8.2 million to such members on February 9, 2005 in
connection with the consummation of its IPO to bring their
proportionate share of tax distributions equal to the rest of
the members of Holdings. These distributions have been
reclassified into additional paid-in capital in the
Companys consolidated balance sheet as of
December 31, 2005 in connection with the Reorganization in
February 2005.
Basis of presentation
The accompanying consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries. All
significant intercompany accounts and transactions for the
periods presented have been eliminated in consolidation. In
managements opinion, the
F-8
consolidated financial statements presented herein reflect all
adjustments of a normal and recurring nature that are necessary
to fairly present the consolidated financial statements.
|
|
2. |
Summary of significant accounting policies |
Cash equivalents
Cash equivalents include demand deposits and short-term
investments with a maturity of three months or less when
purchased.
The Company maintains its cash deposits at numerous banks
located throughout the United States, which at times, may exceed
federally insured limits. The Company has not experienced any
losses in such accounts and believes it is not exposed to any
significant risk on cash and cash equivalents.
Concentrations of credit risk and significant
vendors
Concentrations of credit risk with respect to trade receivables
are limited due to a large, diverse customer base. No individual
customer represented more than 2% of net sales during the twelve
months ended December 31, 2003, 2004 and 2005.
The Company performs periodic credit evaluations of the
financial condition of its customers, monitors collections and
payments from customers, and generally does not require
collateral. Receivables are generally due within 30 days.
The Company provides for the possible inability to collect
accounts receivable by recording an allowance for doubtful
accounts. The Company writes off an account when it is
considered to be uncollectible. The Company estimates its
allowance for doubtful accounts based on historical experience,
aging of accounts receivable, and information regarding the
creditworthiness of its customers. To date, losses have been
within the range of managements expectations.
The Company contracts with various suppliers. Although there are
a limited number of suppliers that could supply the
Companys inventory, management believes any shortfalls
from existing suppliers would be absorbed from other suppliers
on comparable terms. However, a change in suppliers could cause
a delay in sales and adversely effect results.
Purchases from the Companys three largest vendors during
the years ended December 31, 2003, 2004 and 2005 comprised
approximately 51%, 54%, and 48%, respectively, of the
Companys total purchases of inventory and supplies.
Inventories
Inventories are valued at the lower of cost (principally
determined on a
first-in, first-out
basis) or market. Inventories primarily consist of reprographics
materials for use and resale and equipment for resale. On an
ongoing basis, inventories are reviewed and written down for
estimated obsolescence or unmarketable inventories equal to the
difference between the cost of inventories and the estimated net
realizable value. Charges to increase inventory reserves are
recorded as an increase in cost of goods sold. Estimated
inventory obsolescence has been provided for in the financial
statements and has been within the range of managements
expectations. As of December 31, 2004 and 2005, the
reserves for inventory obsolescence amounted to $321 and $430,
respectively.
F-9
Property and equipment
Property and equipment are stated at cost and are depreciated
using the straight-line method over their estimated useful
lives, as follows:
|
|
|
|
|
| |
Buildings and leasehold improvements
|
|
|
10-20 years |
|
Machinery and equipment
|
|
|
3-7 years |
|
Furniture and fixtures
|
|
|
3-7 years |
|
|
Assets acquired under capital lease arrangements are recorded at
the present value of the minimum lease payments and are
amortized using the straight-line method over the life of the
asset or term of the lease, whichever is shorter. Such
amortization expense is included in depreciation expense.
Leasehold improvements are amortized using the straight-line
method over the shorter of the lease terms or the useful lives
of the improvements. Expenses for repairs and maintenance are
charged to expense as incurred, while renewals and betterments
are capitalized. Gains or losses on the sale or disposal of
property and equipment are reflected in operating income.
The Company accounts for computer software costs developed for
internal use in accordance with Statement of Position 98-1
(SOP 98-1), Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use, which
requires companies to capitalize certain qualifying costs
incurred during the application development stage of the related
software development project. The primary use of this software
is for internal use and, accordingly, such capitalized software
development costs are amortized on a straight-line basis over
the economic lives of the related products not to exceed three
years. The Companys machinery and equipment (see
Note 4) include $4,574, $4,041 and $3,984 of capitalized
software development costs as of December 31, 2003, 2004
and 2005, respectively, net of accumulated amortization of
$2,519, $4,638 and $6,852 as of December 31, 2003, 2004 and
2005, respectively. Depreciation expense includes the
amortization of capitalized software development costs which
amounted to $1,763, $2,120 and $2,214 during the years ended
December 31, 2003, 2004 and 2005, respectively.
In August 2002, the Company decided to license internally
developed software for use by third-party reprographics
companies. In accordance with SOP 98-1, the Company applies
the net revenues from certain of its software licensing activity
to reduce the carrying amount of the capitalized software costs.
Software licensing revenues which have been offset against the
carrying amount of capitalized software costs amounted to $98,
$159 and $232 during the years ended December 31, 2003,
2004 and 2005, respectively.
Impairment of long-lived assets
The Company periodically assesses potential impairments of its
long-lived assets in accordance with the provisions of
SFAS No. 144, Accounting for the Impairment or
Disposal of Long-lived Assets. An impairment review is
performed whenever events or changes in circumstances indicate
that the carrying value of the assets may not be recoverable.
Factors considered by the Company include, but are not limited
to, significant underperformance relative to expected historical
or projected future operating results; significant changes in
the manner of use of the acquired assets or the strategy for the
overall business; and significant negative industry or economic
trends. When the carrying value of a long-lived asset may not be
recoverable based upon the existence of one or more of the above
indicators of impairment, the Company
F-10
estimates the future undiscounted cash flows expected to result
from the use of the asset and its eventual disposition. If the
sum of the expected future undiscounted cash flows and eventual
disposition is less than the carrying amount of the asset, the
Company recognizes an impairment loss. An impairment loss is
reflected as the amount by which the carrying amount of the
asset exceeds the fair value of the asset, based on the fair
market value if available, or discounted cash flows, if not. To
date, the company has not recognized an impairment charge
related to the write-down of long-lived assets.
Goodwill and other intangible assets
Effective January 1, 2002, the Company adopted Statement of
Financial Accounting Standard (SFAS) No. 142,
Goodwill and Other Intangible Assets, which
requires, among other things, the use of a nonamortization
approach for purchased goodwill and certain intangibles. Under a
nonamortization approach, goodwill and intangibles having an
indefinite life are not amortized, but instead will be reviewed
for impairment at least annually or if an event occurs or
circumstances indicate that the carrying amount may be impaired.
Events or circumstances which could indicate an impairment
include a significant change in the business climate, economic
and industry trends, legal factors, negative operating
performance indicators, significant competition, changes in
strategy or disposition of a reporting unit or a portion
thereof. Goodwill impairment testing is performed at the
reporting unit level.
SFAS 142 requires that goodwill be tested for impairment
using a two-step process. The first step of the goodwill
impairment test, used to identify potential impairment, compares
the fair value of a reporting unit with its carrying amount,
including goodwill. If the fair value of a reporting unit
exceeds its carrying amount, goodwill of the reporting unit is
not considered to be impaired and the second step of the
impairment test is unnecessary. If the carrying amount of a
reporting unit exceeds its fair value, the second step of the
goodwill impairment test must be performed to measure the amount
of impairment loss, if any. The second step of the goodwill
impairment test compares the implied fair value of reporting
unit goodwill with the carrying amount of that goodwill. The
implied fair value of goodwill is determined in the same manner
as the amount of goodwill recognized in a business combination.
If the carrying amount of the reporting unit goodwill exceeds
the implied fair value of that goodwill, an impairment loss is
recognized in an amount equal to that excess.
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 the Companys business,
the useful life over which cash flows will occur, and
determination of the Companys 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.
In accordance with SFAS 142, the Company completed the
first step of the transitional goodwill impairment test during
May 2002 and the annual impairment test in September 2002 and
determined based on such tests that no impairment of goodwill
was indicated. The Company has selected September 30 as the
date on which it will perform its annual goodwill impairment
test. Based on the Companys valuation of goodwill, no
impairment charges related to the write-down of goodwill were
recognized for the years ended December 31, 2003, 2004 and
2005.
F-11
Prior to January 1, 2002, goodwill related to businesses
purchased was amortized on a straight-line basis over
40 years.
In connection with its acquisitions subsequent to July 1,
2001, the Company has 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 changes in the carrying amount of goodwill from
December 31, 2004 through December 31, 2005 are
summarized as follows:
|
|
|
|
|
| |
|
|
Goodwill | |
| |
Balance at December 31, 2004
|
|
$ |
231,357 |
|
Additions
|
|
|
13,914 |
|
|
|
|
|
Balance at December 31, 2005
|
|
$ |
245,271 |
|
|
The additions to goodwill include the excess purchase price over
fair value of net assets acquired, adjustments to acquisition
costs and certain earnout payments.
Other intangible assets that have finite useful lives are
amortized over their useful lives. An impaired asset is written
down to fair value. 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
two 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 are amortized using the straight-line
method. At December 31, 2004 and 2005, customer
relationships and the related accumulated amortization consist
of $14,880 and $25,588, and $4,297 and $6,241, respectively.
Trade names and the related accumulated amortization consist of
$1,739 and $2,369, and $227 and $329 at December 31, 2004
and 2005, respectively. Amortization expense related to
intangible assets for the years ended December 31, 2003,
2004 and 2005 was $1,709, $1,695, and $2,079, respectively.
The estimated future amortization expense of other intangible
assets as of December 31, 2005 are as follows:
|
|
|
|
|
|
2006
|
|
$ |
2,632 |
|
2007
|
|
|
2,417 |
|
2008
|
|
|
2,100 |
|
2009
|
|
|
1,911 |
|
2010
|
|
|
1,732 |
|
Thereafter
|
|
|
10,595 |
|
|
|
|
|
|
|
$ |
21,387 |
|
|
Deferred financing costs
Direct costs incurred in connection with indebtedness agreements
are capitalized as incurred and amortized on a straight line
basis over the term of the related indebtedness, which
approximates the effective interest method. At December 31,
2004 and 2005, the Company has
F-12
deferred financing costs of $6,619 and $923, respectively, net
of accumulated amortization of $2,072 and $7, respectively. As
discussed further in Note 5, the Company wrote-off $6,318
of deferred financing costs in 2003 as a result of the
refinancing of the Companys credit facilities in December
2003. Approximately $1,189 of deferred financing costs
written-off were incurred during 2003. In addition, during 2004,
the Company accelerated the repayment of debt under its 2003
Senior Credit Facility as discussed in Note 5. As a result,
the Company wrote-off $590 of deferred financing costs during
2004. In December 2005, the Company wrote off $5,407 of its
remaining deferred financing costs as a result of the
refinancing of the Companys credit facilities on
December 21, 2005.
Derivative financial instruments
In 2001, the Company adopted SFAS No. 133,
Accounting for Derivative Instruments and Hedging
Activities (SFAS No. 133), and its related
amendments. As a result of the adoption of
SFAS No. 133, the Company recognizes all derivative
financial instruments, such as its interest rate swap contracts,
as either assets or liabilities in the consolidated financial
statements at fair value.
The accounting for changes in the fair value (i.e., unrealized
gains or losses) of a derivative instrument depends on whether
it has been designated and qualifies as part of a hedging
relationship and further, on the type of hedging relationship.
Derivatives that are not hedges must be adjusted to fair value
through current earnings.
The Company enters into interest rate swaps to manage its
exposure to changes in interest rates. Interest rate swaps also
allow the Company to raise funds at floating rates and
effectively swap them into fixed rates. These agreements involve
the exchange of floating-rate for fixed-rate payments without
the exchange of the underlying principal amount.
During 2003, the Company recorded an interest benefit of $3,954
based on the improvement in the market value of the interest
rate swap agreements as compared to the prior year, net of $834
of amortization of the original transition adjustment. The
agreements expired in September 2003.
In September 2003, the Company entered into a new interest rate
swap agreement with an initial notional amount of $111,160.
Under the terms of this swap agreement, the Company pays a fixed
rate of 2.29% and receives a variable rate on the notional
amount equal to the Eurodollar rate. The swap agreement provides
for a quarterly reduction of $1,863 in the notional amount of
the swap starting in October 2003 until July 2005, when the
notional amount of the swap will be reduced to $95,988 until its
expiration in September 2005. Because this swap agreement has
been designated and qualifies as a cash flow hedge under
SFAS No. 133, the Company has recorded the fair value
of this swap agreement in Accrued expenses in the
Companys consolidated balance sheet with a corresponding
adjustment to other comprehensive income (loss) as of and for
the year ended December 31, 2003 and 2004. This swap
agreement had a negative fair value of $822 and a positive fair
value of $386 as of December 31, 2003 and 2004,
respectively. The counterparty to this interest rate swap is a
financial institution with a high credit rating. Management does
not believe that there is a significant risk of nonperformance
by the counterparty. The interest rate swap expired during the
year ended December 31, 2005. For the year ended
December 31, 2003 and 2004, the Company determined that its
interest rate swap qualified as an effective hedge as defined by
SFAS 133.
F-13
In January 2004, the Company entered into two interest rate
collar agreements, referred to as the front-end and the back-end
interest rate collar agreements. The front-end interest rate
collar agreement has an initial notional amount of $22,566 which
is increased quarterly to reflect reductions in the notional
amount of our interest rate swap agreement, such that the
notional amount of the swap agreement, together with the
notional amount of the front-end interest rate collar agreement,
remains not less than 40% of the aggregate principal amount
outstanding on our 2003 Senior Credit Facility. The front-end
interest rate collar agreement expired in September 2005. The
back-end interest rate collar agreement became effective upon
expiration of the swap agreement and front-end interest rate
collar agreement in September 2005 and has a fixed notional
amount of $111,000. The back-end interest rate collar agreement
expires in December 2006. At December 31, 2005, the fair
value of the back-end interest rate collar agreement was $42 and
is recorded in Accrued expenses in the
Companys consolidated balance sheet.
Adoption of Statement of Financial Accounting Standard
No. 150
Effective July 1, 2003, the Company adopted
SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and
Equity. This statement establishes standards for
classifying and measuring as liabilities certain financial
instruments that embody obligations of the issuer and have
characteristics of both liabilities and equity. The scope of
this pronouncement includes mandatorily redeemable equity
instruments.
Upon the adoption of SFAS No. 150, the Companys
mandatorily redeemable preferred membership units (the Preferred
Units) $27,814 as of December 31, 2004 have been classified
as long-term liabilities in the Companys consolidated
balance sheet as they are redeemable at a fixed and determinable
date (upon or after the earlier of the occurrence of a qualified
IPO or April 10, 2010). Dividends and accretion related to
the Preferred Units, which previously had been recorded below
net income as a charge in determining net income available to
common shares have been charged to interest expense in the
accompanying consolidated statement of operations since adoption
of this standard on July 1, 2003 and amounted to $3,878 and
$449 during the year ended December 31, 2004 and 2005,
respectively. In accordance with SFAS No. 150,
dividends and accretion related to the mandatorily redeemable
preferred membership units recorded prior to July 1, 2003
have not been reclassified to interest expense. Prior to the
adoption of SFAS 150, dividends paid on the Preferred Units
were accounted for as a direct reduction to members
equity, and the Preferred Units were presented between
liabilities and members deficit in the Companys
consolidated balance sheet. As discussed in
Note 1Initial Public Offering and
Reorganization, the Company redeemed all of the Preferred
Units on February 9, 2005 in connection with the
consummation of its initial public offering (IPO). The
redemption price amounted to $28,263 based on the Preferred
Units Liquidation Value at the IPO date.
Fair values of financial instruments
The following methods and assumptions were used by the Company
in estimating the fair value of its financial instruments for
disclosure purposes:
Cash and cash equivalents. The carrying amounts reported
in the balance sheets for cash and cash equivalents approximate
their fair value due to the relatively short period to maturity
of these instruments.
F-14
Short- and long-term debt (excluding the Holdings and Opco
Notes). The carrying amounts of the Companys
borrowings reported in the consolidated balance sheets
approximate their fair value based on the Companys current
incremental borrowing rates for similar types of borrowing
arrangements or since the floating rates change with market
conditions.
Interest rate swap and collar agreements. The fair values
of the interest rate swap and collar agreements, as previously
disclosed, are the amounts at which they could be settled based
on estimated market rates.
Self-insurance liability
We are self-insured for a significant portion of our risks and
associated liabilities with respect to workers
compensation. The accrued liabilities associated with this
program is based on our estimate of the ultimate costs to settle
known claims as well as claims incurred but not yet reported to
us (IBNR Claims) as of the balance sheet date. Our
estimated liability is not discounted and is based on
information provided by our insurance brokers and insurers,
combined with our judgments regarding a number of assumptions
and factors, including the frequency and severity of claims,
claims development history, case jurisdiction, applicable
legislation and our claims settlement practices.
Revenue recognition
The Company applies the provisions of the Securities and
Exchange Commission (SEC) Staff Accounting Bulletin
(SAB) No. 104, Revenue Recognition in Financial
Statements, which provides guidance on the recognition,
presentation and disclosure of revenue in financial statements
filed with the SEC. SAB No. 104 outlines the basic
criteria that must be met to recognize revenue and provides
guidance for disclosure related to revenue recognition policies.
In general, the Company recognizes revenue when
(i) persuasive evidence of an arrangement exists,
(ii) shipment of products has occurred or services have
been rendered, (iii) the sales price charged is fixed or
determinable and (iv) collection is reasonably assured.
The Company recognizes revenues from reprographics and
facilities management services when services have been rendered
while revenues from the resale of reprographics supplies and
equipment are recognized upon shipment.
The Company has established contractual pricing for certain
large national customer accounts (Premier Accounts). These
contracts generally establish uniform pricing at all branches
for Premier Accounts. Revenues earned from the Companys
Premier Accounts are recognized in the same manner as
non-Premier Account revenues and the Company has no additional
performance obligations.
Included in revenues are fees charged to customers for shipping,
handling and delivery services. Such revenues amounted to
$23,060, $25,462 and $29,553 for the years ended
December 31, 2003, 2004 and 2005, respectively.
Revenues from software licensing activities are recognized over
the term of the license. Revenues from membership fees are
recognized over the term of the membership agreement. Revenues
from software licensing activities and membership revenues
comprise less than 1% of the Companys consolidated
revenues during the years ended December 31, 2003, 2004 and
2005.
F-15
Management provides for returns, discounts and allowances based
on historic experience and adjusts such allowances as considered
necessary. To date, such provisions have been within the range
of managements expectations.
Comprehensive income
SFAS No. 130, Reporting Comprehensive
Income, establishes guidelines for the reporting and
display of comprehensive income and its components in financial
statements. Comprehensive income generally represents all
changes in members equity (deficit), except those
resulting from investments by or distributions to members. The
Companys comprehensive income includes the change in fair
value of derivative instruments and is included in the
consolidated statement of stockholders equity and comprehensive
income.
Segment and geographic reporting
The provisions of SFAS No. 131, Disclosures
about Segments of an Enterprise and Related Information,
require public companies to report financial and descriptive
information about their reportable operating segments. The
Company identifies reportable segments based on how management
internally evaluates separate financial information, business
activities and management responsibility. On that basis and
based on operating segments that have similar economic
characteristics, products and services and class of customers
which have been aggregated, the Company operates as a single
reportable business segment.
The Company recognizes revenues in geographic areas based on the
location to which the product was shipped or services have been
rendered. Operations outside the United States of America have
been immaterial to date.
The following summary presents the Companys revenues for
each of the Companys significant products and service
lines:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Year ended December 31, |
|
2003 | |
|
2004 | |
|
2005 | |
| |
Reprographics services
|
|
$ |
315,227 |
|
|
$ |
332,004 |
|
|
$ |
367,517 |
|
Facilities management
|
|
|
59,311 |
|
|
|
72,360 |
|
|
|
83,125 |
|
Equipment and supplies sales
|
|
|
40,654 |
|
|
|
38,199 |
|
|
|
41,956 |
|
Software licenses and membership
fees
|
|
|
768 |
|
|
|
1,301 |
|
|
|
1,606 |
|
|
|
|
|
Total
|
|
$ |
415,960 |
|
|
$ |
443,864 |
|
|
$ |
494,204 |
|
|
Advertising and shipping and handling costs
Advertising costs are expensed as incurred and approximated
$1,807, $2,239 and $2,773 during the years ended
December 31, 2003, 2004 and 2005, respectively. Shipping
and handling costs incurred by the Company are included in cost
of sales.
Income taxes
Deferred income tax assets and liabilities are recognized for
the tax consequences of temporary differences by applying
enacted statutory rates applicable to future years to the
difference between the financial statement carrying amounts and
the tax bases of existing assets and liabilities. The effect on
deferred taxes of a change in tax rates is recognized in income
in the period that includes the enactment date. Income tax
benefits credited to stockholders equity
F-16
relate to tax benefits associated with amounts that are
deductible for income purposes but do not impact net income.
These benefits are principally generated from employee exercises
of non-qualified stock options.
Stock-based compensation
The Company accounts for grants of options to purchase its
common stock to key personnel in accordance with Accounting
Principles Board (APB) Opinion No. 25
Accounting for Certain Transactions Involving Stock
Compensation. In December 2002, the Financial Accounting
Standards Board (FASB) issued
SFAS No. 148, Accounting for Stock-Based
CompensationTransition and Disclosure, effective for
fiscal years ending after December 15, 2002.
SFAS No. 148 amends SFAS No. 123 to provide
alternative methods of transition to the fair value method of
accounting for stock-based employee compensation.
SFAS No. 148 also amends the disclosure provisions of
SFAS No. 123 to require disclosure in the summary of
significant accounting policies of the effects of an
entitys accounting policy with respect to stock-based
employee compensation on reported net income and earnings per
share in annual and interim financial statements.
SFAS No. 148 does not amend SFAS No. 123 to
require companies to account for their employee stock-based
awards using the fair value method. The disclosure provisions
are required, however, for all companies with stock-based
employee compensation, regardless of whether they utilize the
fair value method of accounting described in
SFAS No. 123 or the intrinsic value method described
in APB Opinion No. 25, Accounting for Stock Issued to
Employees.
The Company has adopted the disclosure requirements of
SFAS No. 148 effective January 1, 2003. The
adoption of this standard did not have a significant impact on
the Companys financial condition or operating results.
The Company accounts for grants of options to employees to
purchase its common stock using the intrinsic value method in
accordance with APB Opinion No. 25 and
FIN No. 44, Accounting for Certain Transactions
Involving Stock Compensation. As permitted by
SFAS No. 123 and as amended by SFAS No. 148,
the Company has chosen to continue to account for such option
grants under APB Opinion No. 25 and provide the expanded
disclosures specified in SFAS No. 123, as amended by
SFAS No. 148.
F-17
Had compensation cost for the Companys option grants been
determined based on their fair value at the grant date for
awards consistent with the provisions of SFAS No. 123,
the Companys net income per common share for the years
ended December 31, 2003, 2004 and 2005 would have been
decreased to the adjusted pro forma amounts indicated below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Year ended December 31, |
|
2003 | |
|
2004 | |
|
2005 | |
| |
Net income attributed to common
shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$ |
1,823 |
|
|
$ |
29,548 |
|
|
$ |
60,476 |
|
|
Equity-based employee compensation
cost included in as reported net income
|
|
|
- |
|
|
|
547 |
|
|
|
624 |
|
|
Equity-based employee compensation
cost that would have been included in the determination of net
income attributed to common shares if the fair value method had
been applied
|
|
|
(225 |
) |
|
|
(727 |
) |
|
|
(953 |
) |
|
|
|
|
Adjusted
|
|
$ |
1,598 |
|
|
$ |
29,368 |
|
|
$ |
60,147 |
|
|
|
|
Basic earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$ |
0.05 |
|
|
$ |
0.83 |
|
|
$ |
1.43 |
|
|
Equity-based employee compensation
cost, net of related tax effects, included in as reported net
income attributed to common shares
|
|
|
- |
|
|
|
0.02 |
|
|
|
0.01 |
|
|
Equity-based employee compensation
cost, net of related tax effects, that would have been included
in the determination of net income attributed to common shares
if the fair value method had been applied
|
|
|
(0.01 |
) |
|
|
(0.02 |
) |
|
|
(0.02 |
) |
|
|
|
|
Adjusted
|
|
$ |
0.04 |
|
|
$ |
0.83 |
|
|
$ |
1.42 |
|
|
|
|
Diluted earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$ |
0.05 |
|
|
$ |
0.79 |
|
|
$ |
1.40 |
|
|
Equity-based employee compensation
cost, net of related tax effects, included in as reported net
income attributed to common shares
|
|
|
- |
|
|
|
0.02 |
|
|
|
0.01 |
|
|
Equity-based employee compensation
cost, net of related tax effects, that would have been included
in the determination of net income attributed to common shares
if the fair value method had been applied
|
|
|
(0.01 |
) |
|
|
(0.02 |
) |
|
|
(0.02 |
) |
|
|
|
|
Adjusted
|
|
$ |
0.04 |
|
|
$ |
0.79 |
|
|
$ |
1.39 |
|
|
For purposes of computing the pro forma disclosures required by
SFAS No. 123, the fair value of each option granted to
employees and directors is estimated using the Black-Scholes
option-pricing model with the following weighted-average
assumptions for the years ended December 31, 2003, 2004 and
2005: dividend yields of 0% for all periods; expected volatility
of 0%, 36% and 28.3%, respectively; risk-free interest rates of
2.6%, 2.9% and 3.8%, respectively; and expected lives of
2.0 years, 2.5 years and 6.0 years, respectively.
Prior to the one-year
F-18
period preceding the anticipated initial public offering, the
Company used the minimum value method to determine fair value of
option grants.
Research and development expenses
Research and development activities relate to the development of
software primarily for internal use. Costs incurred for research
and development are comprised of a) amounts capitalized in
accordance with
SOP 98-1 as
discussed in Property and Equipment in Note 2,
and b) amounts which are expensed as incurred. Cash outlays
for research and development which include both capitalized and
expensed items amounted to $2,775, $2,514, and $2,902 during the
twelve months ended December 31, 2003, 2004 and 2005, of
which $874, $769 and $977 were expensed as incurred during 2003,
2004, and 2005, respectively.
Use of estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues
and expenses during the reporting period. Actual results could
differ from those estimates.
Earnings per share
The Company accounts for earnings per share in accordance with
SFAS No. 128, Earnings per Share. Basic
earnings per share are computed by dividing net income by the
weighted-average number of common shares outstanding. Diluted
earnings per common share is computed similar to basic earnings
per share except that the denominator is increased to include
the number of additional common shares that would have been
outstanding if the potential common shares had been issued and
if the additional common shares were dilutive. Common share
equivalents are excluded from the computation if their effect is
anti-dilutive. There are no common share equivalents excluded
for antidilutive effects for the periods presented below. The
Companys common share equivalents consist of stock options
issued under the Companys Stock Option Plan as well as
warrants to purchase common shares issued during 2000 to certain
creditors of the Company as discussed further in the long-term
debt section (Note 5).
Basic and diluted earnings per common share were calculated
using the following units for the years ended December 31,
2003, 2004 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Year ended December 31, |
|
2003 | |
|
2004 | |
|
2005 | |
| |
Weighted average common shares
outstandingbasic
|
|
|
35,480,289 |
|
|
|
35,493,136 |
|
|
|
42,264,001 |
|
Effect of dilutive stock options
|
|
|
985,991 |
|
|
|
1,138,918 |
|
|
|
833,579 |
|
Effect of dilutive warrants
|
|
|
832,069 |
|
|
|
832,069 |
|
|
|
80,420 |
|
|
|
|
Weighted average common shares
outstandingdiluted
|
|
|
37,298,349 |
|
|
|
37,464,123 |
|
|
|
43,178,001 |
|
|
F-19
Recent accounting pronouncements
In November 2004, the FASB issued SFAS No. 151,
Inventory Costs, an amendment of Accounting Research
Bulletin No. 43, Chapter 4.
SFAS No. 151 requires that abnormal amounts of idle
facility expense, freight, handling costs and wasted materials
(spoilage) be recorded as current period charges and that
the allocation of fixed production overheads to inventory be
based on the normal capacity of the production facilities.
SFAS No. 151 is effective for the Company on
January 1, 2006. The Company has concluded that
SFAS No. 151 will not have a material impact on its
consolidated financial statements.
In December 2004, the FASB issued SFAS No. 123 (revised
2004), Share-Based Payment
(SFAS 123R), which replaces SFAS No. 123,
Accounting for Stock-based Compensation,
(SFAS 123) and supercedes APB Opinion
No. 25, Accounting for Stock Issued to
Employees. SFAS 123R requires all share-based
payments to employees, including grants of employee stock
options, to be recognized in the financial statements based on
their grant date fair values. The provisions of SFAS 123R,
as supplemented by SEC Staff Accounting Bulletin No. 107,
Share-Based Payment, are effective no later than the
beginning of the next fiscal year that begins after
June 15, 2005. The Company will adopt the new requirements
using the modified prospective transition method in the first
quarter of fiscal 2006, and as a result, will not
retroactively adjust results from prior periods. Under this
transition method, compensation expense associated with stock
options recognized in the first quarter of fiscal 2006 will
include: 1) expense related to the remaining unvested
portion of all stock option awards granted prior to
January 1, 2006, based on the grant date fair value
estimated in accordance with the original provisions of
SFAS No. 123; and 2) expense related to all stock
option awards granted subsequent to January 1, 2006, based
on the grant date fair value estimated in accordance with the
provisions of SFAS No. 123R. The Company will apply
the Black-Scholes valuation model in determining the fair value
of share-based payments to employees, which will then be
amortized on a straight-line basis over the requisite service
period. The Company is currently assessing the provisions of
SFAS 123 and the impact that it will have on its
consolidated financial statements.
In December 2004, the FASB issued SFAS No. 153,
Exchanges of Nonmonetary Assets, an amendment of APB
Opinion No. 29. SFAS No. 153 is based on
the principle that exchanges of nonmonetary assets should be
measured based on the fair value of the assets exchanged. APB
Opinion No. 29, Accounting for Nonmonetary
Transactions, provided an exception to its basic
measurement principle (fair value) for exchanges of similar
productive assets. Under APB Opinion No. 29, an exchange of
a productive asset for a similar productive asset was based on
the recorded amount of the asset relinquished.
SFAS No. 153 eliminates this exception and replaces it
with an exception of exchanges of nonmonetary assets that do not
have commercial substance. The Company has concluded that
SFAS No. 153 will not have a material impact on its
consolidated financial statements.
In March 2005, the FASB issued FIN 47, Accounting for
Conditional Asset Retirement Obligations, an
interpretation of SFAS 143. This statement clarified the
term conditional asset retirement obligation and is effective
for the Companys fourth quarter ending December 31,
2005. Adoption of FIN 47 did not have an impact on the
Companys consolidated financial statements.
In September 2005, the EITF amended and ratified previous
consensus on EITF
No. 05-6,
Determining the Amortization Period for Leasehold
Improvements Purchased after Lease Inception or Acquired in a
Business Combination which addresses the amortization
period for
F-20
leasehold improvements in operating leases that are either
placed in service significantly after and not contemplated at or
near the beginning of the initial lease term or acquired in a
business combination. This consensus applies to leasehold
improvements that are purchased or acquired in reporting periods
beginning after ratification. Adoption of the provisions of EITF
No. 05-6 did not
have an impact on the Companys consolidated financial
statements.
In May 2005, the FASB issued FAS 154, which changes the
requirements for the accounting and reporting of a change in
accounting principle. FAS 154 eliminates the requirement to
include the cumulative effect of changes in accounting principle
in the income statement and instead requires that changes in
accounting principle be retroactively applied. FAS 154 is
effective for accounting changes and correction of errors made
on or after January 1, 2006, with early adoption permitted.
The Company began applying the provisions of this statement
during the fourth quarter of 2005.
3. Acquisitions
During 2003, the Company acquired the assets and liabilities of
four reprographics companies in the United States. In
addition, the Company also acquired certain assets of a
reprographics company in bankruptcy. The aggregate purchase
price of such acquisitions, including related acquisition costs,
amounted to approximately $870, which the Company paid in
cash.
During 2004, the Company acquired the assets and liabilities of
six reprographics companies in the United States. The aggregate
purchase price of such acquisitions, including related
acquisition costs, amounted to approximately $3,740, for which
the Company paid $2,825 in cash and issued $915 of notes payable
to the former owners of the acquired companies.
During 2005, the Company acquired the assets and liabilities of
14 reprographics companies in the United States. The aggregate
purchase price of such acquisitions, including related
acquisition costs, amounted to approximately $32,080, for which
the Company paid $21,786 in cash and issued $10,293 of notes
payable to the former owners of the acquired companies.
The results of operations of the companies acquired during the
years ended December 31, 2003, 2004 and 2005 have been
included in the consolidated financial statements from their
respective dates of acquisition. Such acquisitions were
accounted for using the purchase method of accounting, and,
accordingly, the assets and liabilities of the acquired entities
have been recorded at their estimated fair values at the dates
of acquisition. The excess purchase price over the net assets
acquired has been allocated to goodwill and other intangible
assets. For income tax purposes, $217, $1,912 and $21,069 of
goodwill resulting from acquisitions completed during the years
ended December 31, 2003, 2004 and 2005, respectively, are
amortized over a
15-year period.
F-21
The assets and liabilities of the entities acquired during each
period are as follows:
|
|
|
|
|
|
|
|
|
|
| |
December 31, |
|
2004 | |
|
2005 | |
| |
Purchase price
|
|
$ |
3,740 |
|
|
$ |
32,080 |
|
|
|
|
Cash and cash equivalents
|
|
|
97 |
|
|
|
1,235 |
|
Accounts receivable
|
|
|
518 |
|
|
|
5,767 |
|
Property and equipment
|
|
|
1,476 |
|
|
|
2,735 |
|
Inventories
|
|
|
550 |
|
|
|
1,729 |
|
Other assets
|
|
|
52 |
|
|
|
821 |
|
|
|
|
|
Total assets
|
|
|
2,693 |
|
|
|
12,287 |
|
Accounts payable
|
|
|
576 |
|
|
|
2,568 |
|
Accrued expenses
|
|
|
316 |
|
|
|
1,594 |
|
Long-term debt
|
|
|
40 |
|
|
|
853 |
|
|
|
|
|
Net assets acquired
|
|
|
1,761 |
|
|
|
7,272 |
|
|
|
|
Excess purchase price over net
tangible assets acquired
|
|
$ |
1,979 |
|
|
$ |
24,808 |
|
|
|
|
Intangible assets:
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
$ |
1,049 |
|
|
$ |
10,780 |
|
|
Trade names
|
|
|
86 |
|
|
|
630 |
|
|
Goodwill
|
|
|
844 |
|
|
|
13,398 |
|
|
|
|
|
|
|
$ |
1,979 |
|
|
$ |
24,808 |
|
|
Customer relationships and trade names acquired are amortized
over their estimated useful lives of thirteen and twenty years
using accelerated (based on customer attrition rates) and
straight-line methods, respectively.
The following summary presents the Companys unaudited pro
forma results, as if the acquisitions had been completed at the
beginning of each year presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Year ended December 31, |
|
2003 | |
|
2004 | |
|
2005 | |
| |
Net sales
|
|
$ |
430,130 |
|
|
$ |
450,906 |
|
|
$ |
524,630 |
|
Net income attributable to common
equity
|
|
$ |
2,286 |
|
|
$ |
29,813 |
|
|
$ |
69,022 |
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.06 |
|
|
$ |
0.84 |
|
|
$ |
1.63 |
|
|
Diluted
|
|
$ |
0.06 |
|
|
$ |
0.80 |
|
|
$ |
1.60 |
|
|
The above pro forma information is presented for comparative
purposes only and is not necessarily indicative of what actually
would have occurred had the acquisitions been completed as of
the beginning of each period presented, nor are they necessarily
indicative of future consolidated results.
F-22
Certain acquisition agreements entered into by the Company
contain earnout agreements which provide for additional
consideration (Earnout Payments) to be paid if the acquired
entitys results of operations exceed certain targeted
levels measured on an annual basis generally from four to five
years after the acquisition. Targeted levels are generally set
above the historical experience of the acquired entity at the
time of acquisition. Earnout Payments are recorded as additional
purchase price and are to be paid annually in cash. Accrued
expenses in the accompanying consolidated balance sheets include
$222 and $458 of Earnout Payments payable as of
December 31, 2004 and 2005, respectively, to former owners
of acquired companies based on the earnings of acquired
entities. The increase to goodwill as of December 31, 2004
and 2005 as a result of the accrued earnouts was $222 and $458,
respectively.
The earnout provisions generally contain limits on the amount of
Earnout Payments that may be payable over the term of the
agreement. The Companys estimate of the aggregate amount
of additional consideration that may be payable over the terms
of the earnout agreements subsequent to December 31, 2005
is approximately $1,516.
In accordance with FAS 141, the Company made certain
adjustments to goodwill as a result of changes to the purchase
price of acquired entities, during the one year period
subsequent to the acquisition. The net increase to goodwill as
of December 31, 2004 and 2005 as a result of purchase price
adjustments was $1,232 and $58, respectively.
4. Property and equipment
Property and equipment consist of the following:
|
|
|
|
|
|
|
|
|
| |
December 31, |
|
2004 | |
|
2005 | |
| |
Machinery and equipment
|
|
$ |
82,796 |
|
|
$ |
119,335 |
|
Buildings and leasehold improvements
|
|
|
15,463 |
|
|
|
17,700 |
|
Furniture and fixtures
|
|
|
3,417 |
|
|
|
4,998 |
|
|
|
|
|
|
|
101,676 |
|
|
|
142,033 |
|
Less accumulated depreciation and
amortization
|
|
|
(66,653 |
) |
|
|
(96,260 |
) |
|
|
|
|
|
$ |
35,023 |
|
|
$ |
45,773 |
|
|
F-23
Long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
| |
December 31, |
|
2004 | |
|
2005 | |
| |
Borrowings from senior secured
First PriorityRevolving Credit Facility; variable interest
payable quarterly (8.25% interest rate at December 31,
2005); any unpaid principal and interest due December 18,
2008
|
|
$ |
|
|
|
$ |
5,000 |
|
Borrowings from senior secured
First PriorityTerm Loan Credit Facility; variable
interest payable quarterly (5.26% and 7.25% interest rate at
December 31, 2004 and 2005, respectively); principal
payable in varying quarterly installments; any unpaid principal
and interest due June 18, 2009
|
|
|
94,800 |
|
|
|
230,423 |
|
Borrowings from senior secured
Second PriorityTerm Loan Credit Facility; variable
interest payable quarterly (8.92% and 10.64% interest rate at
December 31, 2004 and 2005, respectively); any unpaid
principal and interest due December 18, 2009
|
|
|
208,231 |
|
|
|
|
|
Various subordinated notes payable;
interest ranging from 5% to 8%; principal and interest payable
monthly through January 2010
|
|
|
4,833 |
|
|
|
11,262 |
|
Various capital leases; interest
rates ranging to 15.9%; principal and interest payable monthly
through September 2010
|
|
|
14,688 |
|
|
|
27,127 |
|
|
|
|
|
|
|
322,552 |
|
|
|
273,812 |
|
Less debt discount on Second
Priority Credit Facility
|
|
|
(1,719 |
) |
|
|
|
|
|
|
|
|
|
|
320,833 |
|
|
|
273,812 |
|
Less current portion
|
|
|
(10,276 |
) |
|
|
(20,441 |
) |
|
|
|
|
|
$ |
310,557 |
|
|
$ |
253,371 |
|
|
During 2000, the Company received $54,412 and $38,088 in gross
cash proceeds from the issuance of senior subordinated Opco
Notes (the Opco Notes) and senior subordinated Holdings Notes
(the Holdings Notes, and collectively with the Opco Notes, the
Notes), respectively. Concurrent with the issuance of the Notes,
the Company granted the holders of the Notes warrants to
purchase up to an aggregate of 1,168,842 common units of the
Company. Such warrants (the Warrants) are exercisable at any
time subsequent to the grant date at an exercise price of
$4.61 per warrant. The estimated aggregate fair value of
the Warrants was $1,039 using the Black-Scholes option-pricing
model based on the following assumptions: expected volatility of
15%, risk-free interest rate of 6%, and an expected life of
10 years. The fair value of the Warrants was recorded as a
discount on the related Notes and was being amortized as
interest expense over the term of the Notes. As a result of the
debt refinancing completed by the Company in December 2003 (as
discussed further below), the Company wrote off $616 of
unamortized discount on the Warrants in December 2003. As
discussed in Note 1Initial Public Offering and
Reorganization, all of the Warrants were exchanged for
common stock in connection with the Companys initial
public offering which was consummated on February 9, 2005.
Interest on the Holdings Notes accreted monthly based on an
accretion schedule specified in the Holdings Notes agreement and
was added to the outstanding principal balance of the Holdings
Notes (the Accreted Value) until April 2005. The effective
interest rate on the
F-24
Holdings Notes during its entire nine-year term through April
2009 was approximately 19.6%. The difference between the
Accreted Value and the carrying amount of the Holdings Notes
represented a discount (the Accretion Discount) which was
amortized over the nine-year term of the Holdings Notes using
the effective interest method. The Holdings Notes were repaid in
December 2003 in connection with the Companys refinancing
of its borrowings discussed below.
In December 2003, the Company refinanced its borrowings under
its then existing senior credit facilities, by entering into a
new credit agreement with a group of financial institutions
which provides the Company a $355,000 Senior Secured Credit
Facility (the 2003 Senior Credit Facility). Such credit facility
is comprised of a $130,000 First Priority Facility (consisting
of a $30,000 Senior Revolving Credit Facility and a $100,000
Senior Term Loan Credit Facility) and a $225,000 Second
Priority Facility.
In December 2005, the Company refinanced its borrowings under
its then existing senior credit facilities, by entering into a
new credit agreement with a group of financial institutions
which provides the Company a $310,600 Senior Secured Credit
Facility. Such credit facility is comprised of a $280,600 term
loan facility and a $30,000 revolving credit facility.
As a result of the debt refinancing completed in December 2003
and 2005, the Company recorded a $14,921 loss and a $9,344 loss,
respectively, on early debt extinguishment, comprised of the
following: a) the write-off of $6,318 and $5,406,
respectively, in capitalized loan fees related to the
Companys credit facilities existing prior to the debt
refinancing; b) $4,728 and $3,938, respectively, in early
redemption premiums related to the Notes paid by the Company
upon completion of the debt refinancing; and c) the write
off of $3,875 and $0, respectively, in unamortized discounts
related to the Warrants and the Accretion Discount.
Interest on borrowings under the First Priority Revolving Credit
Facility was at either (i) a Eurodollar rate plus a margin
(the Applicable Margin) that ranges from 2% to 2.75% per
annum, depending on the Companys Leverage Ratio, as
defined, or (ii) an Index Rate, as defined, plus the
Applicable Margin less 1% per annum. 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 3% per annum, or (ii) an Index Rate, as
defined, plus 2% per annum.
Borrowings under the Second Priority Facility bear interest at
either (i) a Eurodollar rate, subject to a Eurodollar rate
minimum of 1.75% per annum, plus a margin of either 6.875%
or 7.875% per annum, depending on the Companys
Leverage Ratio, as defined in the credit agreement, or
(ii) a Base Rate, as defined in the credit agreement, plus
a margin of either 5.875% or 6.875% per annum, depending on
the Companys Leverage Ratio, as defined in the credit
agreement.
Under the terms of the 2003 Senior Credit Facility, the Company
is subject to mandatory principal prepayments equal to 75% of
Consolidated Excess Cash Flow, as defined, starting during the
year ended December 31, 2004, or up to 75% of the net
proceeds of equity offerings. Mandatory prepayments from such
sources (the Permitted Payments) are applied first to the Second
Priority Facility in an aggregate amount not to exceed $67,500,
with any excess above $67,500 applied to the First Priority
Facility. During 2004, the Company made mandatory principal
prepayments on its Second Priority Credit Facility in an
aggregate amount of $16,769 based on 75% of its Consolidated
Excess Cash Flow, as defined, during the year ended
December 31, 2004. Mandatory principal prepayments are also
required equal to 100% of the
F-25
net proceeds from asset sales and insurance proceeds that each
exceed $5 million in aggregate, as well as 100% of net
proceeds from new debt offerings. Mandatory prepayments from
such sources are applied to the First Priority Facility until it
is fully paid, followed by the Second Priority Facility. With
the exception of Permitted Payments as discussed above,
prepayments on the Second Priority Facility carry a penalty
during the first three years of its term equal to a percentage
of the prepayment, as follows: Year 111%; Year
27.5%; and Year 32.5%.
Borrowings under the 2003 and 2005 Senior Credit Facilities are
secured by substantially all of the assets of the Company. The
Senior Credit Facility also contains restrictive covenants
which, among other things, provide limitations on capital
expenditures, and restrictions on indebtedness and distributions
to the Companys equity holders. Additionally, the Company
is required to meet debt covenants based on certain financial
ratio thresholds applicable to the First and Second Priority
Facilities, as follows with ratio thresholds as of
December 31, 2005: (i) First Priority
FacilityInterest Coverage Ratio not lower than 1.70, Fixed
Charge Coverage Ratio not lower than 1.10, Leverage Ratio not
higher than 3.50, and First Priority Senior Debt Leverage Ratio
not higher than 1.65, each as defined; and (ii) Second
Priority FacilityLeverage Ratio not higher than 5.30, as
defined. The Company is in compliance with all such covenants as
of December 31, 2005.
Minimum future maturities of long-term debt and capital lease
obligations as of December 31, 2005 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term | |
|
Capital lease | |
|
|
debt |
|
obligations | |
|
Year ending December 31:
|
|
|
|
|
|
|
|
|
|
2006
|
|
$ |
10,756 |
|
|
$ |
11,904 |
|
|
2007
|
|
|
4,423 |
|
|
|
9,604 |
|
|
2008
|
|
|
115,522 |
|
|
|
6,162 |
|
|
2009
|
|
|
114,495 |
|
|
|
2,337 |
|
|
2010
|
|
|
1,369 |
|
|
|
1,020 |
|
Thereafter
|
|
|
120 |
|
|
|
162 |
|
|
|
|
|
|
$ |
246,685 |
|
|
|
31,189 |
|
|
|
|
Less interest
|
|
|
|
|
|
|
(4,062 |
) |
|
|
|
|
|
|
|
|
|
$ |
27,127 |
|
|
A portion of the Companys business was operated as a
limited liability company (LLC), taxed as a partnership. As a
result, the members of the LLC pay the income taxes on the
earnings, not the LLC. Accordingly, no income taxes have been
provided on these earnings. The LLC had book income of $370,
$19,212 and $384 during the years ended December 31, 2003,
2004 and 2005, respectively, which are not subject to tax at the
LLC level.
F-26
As discussed in Note 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. The following table includes
the consolidated provision for income taxes related to that
portion of the Companys business not operated as an LLC
prior to the Reorganization in February 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Year ended December 31, |
|
2003 | |
|
2004 | |
|
2005 | |
| |
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$ |
1,562 |
|
|
$ |
6,079 |
|
|
$ |
14,401 |
|
|
State
|
|
|
947 |
|
|
|
1,574 |
|
|
|
4,078 |
|
|
|
|
|
|
|
2,509 |
|
|
|
7,653 |
|
|
|
18,479 |
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
1,411 |
|
|
|
310 |
|
|
|
(21,713 |
) |
|
State
|
|
|
211 |
|
|
|
557 |
|
|
|
(3,102 |
) |
|
|
|
|
|
|
1,622 |
|
|
|
867 |
|
|
|
(24,815 |
) |
|
|
|
Income tax provision (benefit)
|
|
|
4,131 |
|
|
|
8,520 |
|
|
|
(6,336 |
) |
Deferred income tax benefit as a
result of the Reorganization
|
|
|
|
|
|
|
|
|
|
|
27,701 |
|
|
|
|
Income tax provision excluding
effects of Reorganization
|
|
$ |
4,131 |
|
|
$ |
8,520 |
|
|
$ |
21,365 |
|
|
The consolidated deferred tax assets and liabilities consist of
the following:
|
|
|
|
|
|
|
|
|
|
| |
December 31, |
|
2004 | |
|
2005 | |
| |
Current portion of deferred tax
assets (liabilities):
|
|
|
|
|
|
|
|
|
|
Financial statement accruals not
currently deductible
|
|
$ |
1,206 |
|
|
$ |
3,538 |
|
|
State taxes
|
|
|
158 |
|
|
|
734 |
|
|
|
|
|
Net current deferred tax assets
|
|
|
1,364 |
|
|
|
4,272 |
|
|
|
|
Non-current portion of deferred tax
assets and (liabilities):
|
|
|
|
|
|
|
|
|
|
Excess of income tax basis over net
book value of intangible assets
|
|
|
|
|
|
|
31,612 |
|
|
Excess of income tax basis over net
book value of property, plant and equipment
|
|
|
|
|
|
|
1,993 |
|
|
Deferred stock-based compensation
|
|
|
|
|
|
|
364 |
|
|
Excess of net book value over
income tax basis of intangible assets
|
|
|
(3,981 |
) |
|
|
(17,753 |
) |
|
Excess of net book value over
income tax basis of property, plant and equipment
|
|
|
(1,653 |
) |
|
|
|
|
|
|
|
|
Net non-current deferred tax assets
(liabilities)
|
|
|
(5,634 |
) |
|
|
16,216 |
|
|
|
|
Net deferred tax assets
(liabilities)
|
|
$ |
(4,270 |
) |
|
$ |
20,488 |
|
|
F-27
A reconciliation of the statutory federal income tax rate to the
Companys effective tax rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Year ended December 31, |
|
2003 | |
|
2004 | |
|
2005 | |
| |
Statutory federal income tax rate
|
|
|
34 |
% |
|
|
35 |
% |
|
|
35 |
% |
State taxes
|
|
|
14 |
|
|
|
4 |
|
|
|
5 |
|
Non-deductible expenses
|
|
|
8 |
|
|
|
|
|
|
|
(1 |
) |
Income of the LLC not taxed at the
LLC level
|
|
|
(2 |
) |
|
|
(17 |
) |
|
|
|
|
Non-recurring income tax benefit
due to reorganization
|
|
|
|
|
|
|
|
|
|
|
(51 |
) |
|
|
|
Effective income tax rate
|
|
|
54 |
% |
|
|
22 |
% |
|
|
(12 |
)% |
|
Non-deductible other items include meals and entertainment,
certain acquisition costs and other items that, individually,
are not significant.
|
|
7. |
Commitments and contingencies |
The Company leases machinery, equipment, and office and
operational facilities under noncancelable operating lease
agreements. Certain lease agreements for the Companys
facilities generally contain renewal options and provide for
annual increases in rent based on the local Consumer Price
Index. The following is a schedule of the Companys future
minimum lease payments as of December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Third | |
|
Related | |
|
|
|
|
party | |
|
party | |
|
Total | |
| |
Year ending December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
$ |
25,732 |
|
|
$ |
2,585 |
|
|
$ |
28,317 |
|
|
2007
|
|
|
16,903 |
|
|
|
2,550 |
|
|
|
19,453 |
|
|
2008
|
|
|
9,897 |
|
|
|
2,562 |
|
|
|
12,459 |
|
|
2009
|
|
|
6,197 |
|
|
|
2,270 |
|
|
|
8,468 |
|
|
2010
|
|
|
3,314 |
|
|
|
1,981 |
|
|
|
5,295 |
|
|
Thereafter
|
|
|
5,435 |
|
|
|
6,225 |
|
|
|
11,660 |
|
|
|
|
|
|
$ |
67,480 |
|
|
$ |
18,173 |
|
|
$ |
85,653 |
|
|
Total rent expense under operating leases, including
month-to-month rentals,
amounted to $36,161, $37,490 and $36,965 during the years ended
December 31, 2003, 2004 and 2005, respectively. Under
certain lease agreements, the Company is responsible for other
costs such as property taxes, insurance, maintenance, and
utilities.
The Company had an agreement to pay its Chief Executive Officer
(CEO) and its Chief Operating Officer (COO) each a fee
equal to 1% of the aggregate consideration paid by the Company
in connection with any acquisition. The Company recorded fees of
$9, $74 and $0 during the years ended December 31, 2003,
2004 and 2005, respectively, for which the Company is obligated
to pay its CEO and COO in connection with this agreement. Such
fees are expensed as incurred and are included in selling,
general and administrative expenses. This agreement terminated
upon the consummation of our initial public offering.
F-28
The Company has entered into employment agreements with its CEO,
its COO, its Chief Financial Officer (CFO), and its Chief
Technology Officer (CTO). Such agreements became effective on
February 3, 2005. Each employment agreement provides for a
three-year term which automatically renews for additional
one-year terms subject to the provisions thereof.
The employment agreements with the CEO and the COO each provide
for an annual base salary of $650,000. The CEO and the COO each
may also earn an annual bonus equal to $60,000 for each full
percentage point by which our pre-tax earnings per share for a
fiscal year exceed by more than 10% our pre-tax earnings per
share for the previous year. The employment agreement with the
CFO provides for an annual base salary of $250,000. The
employment agreement with the CTO provides for an annual base
salary of $400,000. The CFO and the CTO may also earn an annual
bonus of up to $250,000 and $300,000, respectively, under
performance criteria to be established annually. Each of the
employment agreements provide for standard employee benefits.
The Company has entered into employment agreements with certain
of its management employees which require annual gross salary
payments which range from $40 to $200 per annum. The
employment agreements range from a period of one to three years
and include a provision for annual bonuses based on specific
performance criteria. In the event that such key management
employees are terminated without cause, the Company is
contractually obligated to pay the remaining balance due on the
employment contracts.
The following is a schedule of the Companys future minimum
annual payments under such employment agreements as of
December 31, 2005:
|
|
|
|
|
|
Year ending December 31:
|
|
|
|
|
2006
|
|
$ |
2,540 |
|
2007
|
|
|
2,405 |
|
2008
|
|
|
163 |
|
|
|
|
|
|
|
$ |
5,108 |
|
|
In December 2004, the Company agreed to issue shares of
restricted common stock at the prevailing market price in the
amount of $1,000 to the CTO upon the CTOs development of
certain software applications. In the event that such shares of
restricted common stock are granted, they will vest five years
after the date of grant, subject to the employees
continued employment. As of December 31, 2005, no
restricted common stocks have been issued in connection with
this agreement.
The Company has entered into indemnification agreements with
each director and named executive officer which provide
indemnification under certain circumstances for acts and
omissions which may not be covered by any directors and
officers liability insurance. The indemnification
agreements may require the Company, among other things, to
indemnify its 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.
There have been no events to date which would require the
Company to indemnify its officers or directors.
F-29
The Company is a creditor and participant in the Chapter 7
Bankruptcy of Louis Frey Company, Inc., or LF Co., which is
pending in the United States Bankruptcy Court, Southern District
of New York. We managed LF Co. under a contract from May through
September of 2003. LF Co. filed for Bankruptcy protection in
August 2003, and the proceeding was converted to a
Chapter 7 liquidation in October 2003. On or about
June 30, 2004, the Bankruptcy Estate Trustee filed a
complaint in the LF Co. Bankruptcy proceeding against the
Company, which was amended on or about July 19, 2004,
alleging, among other things, breach of contract, breach of
fiduciary duties, conversion, unjust enrichment, tortious
interference with contract, unfair competition and false
commercial promotion in violation of The Lanham Act,
misappropriation of trade secrets and fraud regarding the
Companys handling of the assets of LF Co. The Trustee
claims damages of not less than $9.5 million, as well as
punitive damages and treble damages with respect to the Lanham
Act claims. Previously, on or about October 10, 2003, a
secured creditor of LF Co., Merrill Lynch Business Financial
Services, Inc., or Merrill, had filed a complaint in the LF Co.
Bankruptcy proceeding against the Company, which was most
recently amended on or about July 6, 2004. Merrills
claims are duplicated in the Trustees suit. The Company,
in turn, has filed answers and counterclaims denying liability
to the Trustee and seeking reimbursement of all costs and
damages sustained as a result of the Trustees actions and
in the Companys efforts to assist LF Co. These cases are
set for trial in April 2006. The Company believes that it has
meritorious defenses as well as substantial counterclaims
against Merrill Lynch and the Trustee. The Company intends to
vigorously contest the above matters. Based on the discovery and
depositions to date, the Company does not believe that the
outcome of the above matters will have a material adverse impact
on its results of operations or financial condition.
The Company may be involved in litigation and other legal
matters from time to time in the normal course of business.
Management does not believe that the outcome of any of these
matters will have a material adverse effect on the
Companys consolidated financial position, results of
operations or cash flows.
|
|
8. |
Related party transactions |
The Company leases several of its facilities under operating
lease agreements with entities owned by certain of its executive
officers and other related parties which expire through 2013.
Rental expense on these facilities amounted to $2,209, $2,793
and $2,738 during the years ended December 31, 2003, 2004
and 2005, respectively.
The Company had a management agreement (the Management
Agreement) with Code Hennessy & Simmons LLC
(CHS) which required the Company to pay annual management
fees to CHS as compensation for certain management services
rendered to the Company. In accordance with the Management
Agreement, the management fees charged to the Company are
subject to an annual increase based on the Companys
earnings but shall not exceed $1,000 annually. The Management
Agreement terminated upon the consummation of the Companys
initial public offering. Management fees paid by the Company to
CHS amounted to $858, $835, and $217 during the years ended
December 31, 2003, 2004, and 2005, respectively.
The Company sells certain products and services to Thomas
Reprographics, Inc. and Albinson Inc., each of which is owned or
controlled by Billy E. Thomas, who beneficially owns more than
5% of the common equity in the Company. These companies
purchased products and services from the Company of
approximately $95, $64 and $54 during the twelve months ended
December 31, 2003, 2004, and 2005, respectively.
F-30
The Company sponsors a 401(k) Plan, which covers substantially
all employees of the Company who have attained age 21.
Under the Companys 401(k) Plan, eligible employees may
contribute up to 75% of their annual eligible compensation (or
in the case of highly compensated employees, up to 6% of their
annual eligible compensation), subject to contribution
limitations imposed by the Internal Revenue Service. The Company
makes an employer matching contribution equal to 20% of an
employees contributions, up to a total of 4% of that
employees compensation. An independent third party
administers the 401(k) Plan. The Companys total expense
under these plans amounted to $544, $595, and $593 during the
years ended December 31, 2003, 2004, and 2005, respectively.
|
|
10. |
Employee stock purchase plan and stock option plan |
Employee Stock Purchase Plan
The Company has adopted the American Reprographics Company 2005
Employee Stock Purchase Plan, or ESPP, in connection with the
consummation of its IPO in February 2005. Under the ESPP,
purchase rights may be granted to eligible employees subject to
a calendar year maximum per eligible employee of the lesser of
(i) 400 shares of common stock, or (ii) a number
of shares of common stock having an aggregate fair market value
of $10,000 as determined on the date of purchase.
In January 2005, the Companys board of directors
authorized an initial offering of purchase rights under the
ESPP. The initial offering period began on February 3, 2005
and was originally scheduled to end on April 30, 2007,
unless terminated earlier by the board of directors. In December
2005, the board terminated the initial offering effective
immediately after the last scheduled purchase on
December 31, 2005. There were two purchase dates under the
initial offering: July 31, 2005 and December 31, 2005.
The purchase price of shares of common stock offered under the
ESPP pursuant to the initial offering was equal to the lesser of
85% of the fair market value of such shares of common stock
(i) on the first day of the offering, or (ii) on the
purchase date.
In December 2005, the board of directors authorized quarterly
offerings of purchase rights under the ESPP, with each such
offering scheduled to commence on the first day of the calendar
quarter, and end on the last day of such calendar quarter. The
first such quarterly offering commences on January 1, 2006
and is scheduled to end on March 31, 2006. The purchase
price of shares of common stock offered under the ESPP pursuant
to such quarterly offerings is equal to 95% of the fair market
value of such shares on the purchase date.
In 2005, the Company issued 362,061 shares of its common
stock to approximately 840 eligible employees in accordance with
the ESPP at a purchase price of $11.05 per share, resulting
in $4.0 million of cash proceeds to the Company.
American Reprographics Holdings, L.L.C. Unit Option
Plan II
On January 1, 2001, American Reprographics Holdings,
L.L.C., or Holdings, adopted the American Reprographics
Holdings, L.L.C. Unit Option Plan II, or Unit Plan, under
which selected employees, independent advisors, members of the
board of advisors of Holdings (or any subsidiary) or members of
the board of directors of any subsidiary may be granted options
to acquire common membership units of Holdings.
F-31
The exercise price of an option under the Unit Plan was
determined by the board of advisors, but in no event could the
exercise price be less than 85% of the fair market value, as
determined by the board of advisors, of a membership unit at the
time such option was granted, or, in the case of a person who
owned units possessing more than 10% of the total combined
voting power of all units of Holdings, 110% of the fair market
value of such unit at the time such option was granted.
The following summarizes activity related to the Unit Plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
2003 | |
|
2004 | |
|
|
| |
|
| |
|
|
|
|
Weighted | |
|
|
|
Weighted | |
|
|
|
|
average | |
|
|
|
average | |
|
|
Number | |
|
exercise | |
|
Number | |
|
exercise | |
Year ended December 31, |
|
of shares | |
|
price | |
|
of shares | |
|
price | |
| |
Outstanding at beginning of the
period
|
|
|
1,421,500 |
|
|
$ |
5.07 |
|
|
|
1,446,000 |
|
|
$ |
5.09 |
|
Granted
|
|
|
39,500 |
|
|
|
5.55 |
|
|
|
307,915 |
|
|
|
5.91 |
|
Canceled
|
|
|
(15,000 |
) |
|
|
(4.87 |
) |
|
|
(41,000 |
) |
|
|
(5.52 |
) |
Expired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
(22,500 |
) |
|
|
(5.25 |
) |
|
|
|
Outstanding at end of the period
|
|
|
1,446,000 |
|
|
$ |
5.09 |
|
|
|
1,690,415 |
|
|
$ |
5.22 |
|
|
Of the total options outstanding under the Unit Plan, 806,250
and 1,051,500 options were exercisable at December 31, 2003
and December 31, 2004, respectively, at exercise prices
ranging from $4.75 to $5.62 per option.
During 2004, Holdings granted 307,915 options under the Unit
Plan to employees with exercise prices ranging from $5.62 to
$6.85 per unit. The fair market value of Holdings
common membership units on the date of grant was $16 per
unit. In connection with the issuances, Holdings recorded a
deferred compensation charge of $3,074 as the exercise price of
the options under the Unit Plan was less than the estimated fair
market value of Holdings membership units as of the date
of grant after giving consideration to the anticipated fair
value of the membership units during the one-year period
preceding the IPO in February 2005. The Company will amortize
the deferred compensation charge over the vesting period of the
unit options, generally five years.
In February 2005, all outstanding options under the Unit Plan
were canceled in exchange for stock options under the American
Reprographics Company 2005 Stock Plan, which stock options are
exercisable for shares of the Companys common stock equal
to the same number of unit options and with the equivalent
exercise price and vesting terms as those provided under the
Unit Plan. Although 22,500 options remained available for future
issuance under the Unit Plan as of December 31, 2004, the
Unit Plan was terminated in February 2005 in connection with the
IPO and options are no longer issuable under the Unit Plan.
Employee Stock Plan
The Company adopted the American Reprographics Company 2005
Stock Plan, or Stock Plan, in connection with the Companys
IPO in February 2005. The Stock Plan provides for the grant of
incentive and non-statutory stock options, stock appreciation
rights, restricted stock purchase awards, restricted stock
awards, and restricted stock units to employees, directors and
F-32
consultants of the Company. The Stock Plan authorizes the
Company to issue up to 5,000,000 shares of common stock.
This amount will automatically increase annually on the first
day of the Companys fiscal year, from 2006 through and
including 2010, by the lesser of (i) 1.0% of the
Companys outstanding shares on the date of the increase;
(ii) 300,000 shares; or (iii) such smaller number
of shares determined by the Companys board of directors.
At December 31, 2005, 3,254,315 shares remain
available for grant under the Stock Plan.
Options granted under the Stock Plan generally expire no later
than ten years from the date of grant (five years in the case of
an incentive stock option granted to a 10% stockholder). Options
generally vest and become fully exercisable over a period of
four or five years, except options granted to non-employee
directors may vest over a shorter time period. The exercise
price of options must be equal to at least 100% (110% in the
case of an incentive stock option granted to a 10% stockholder)
of the fair market value of the Companys common stock as
of the date of grant.
In addition, the Stock Plan provides for automatic grants, as of
each annual meeting of the Companys stockholders
commencing with the first such meeting, of non-statutory stock
options to directors of the Company who are not employees of, or
consultants to, the Company or any affiliate of the Company
(non-employee directors). Each non-employee director
automatically will receive a non-statutory stock option with a
fair market value, as determined under the Black-Scholes option
pricing formula, equal to $50,000 (or 55.56%) of such
non-employee directors annual cash compensation (exclusive
of committee fees). Each non-statutory stock option will cover
the non-employee directors service since either the
previous annual meeting or the date on which he or she was first
elected or appointed. Options granted to non-employee directors
vest in 1/16 increments for each month from the date of grant.
The Companys board of directors approved a one time
discretionary grant of 9,854 options to purchase shares of
common stock to each of the Companys five non-employee
directors as part of their compensation for 2005 service since
no annual meeting of the Companys stockholders was held in
2005.
The following is a further breakdown of the options outstanding
as of December 31, 2005:
|
|
|
|
|
|
|
|
|
| |
|
|
Weighted | |
|
|
average | |
|
|
Number | |
|
exercise | |
Year ended December 31, 2005 |
|
of shares | |
|
price | |
| |
Outstanding at beginning of the
period
|
|
|
1,690,415 |
|
|
$ |
5.22 |
|
Granted
|
|
|
49,270 |
|
|
|
23.85 |
|
Canceled
|
|
|
(11,500 |
) |
|
|
(5.82 |
) |
Expired
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(305,600 |
) |
|
|
(5.03 |
) |
|
|
|
Outstanding at end of the period
|
|
|
1,422,585 |
|
|
$ |
5.90 |
|
|
During 2005, the Company granted 49,270 options to purchase
common stock to employees with exercise price of $23.85 per
unit. The fair market value of the Companys common stock
on the date of grant was $23.85 per unit.
F-33
Of the total options outstanding, 1,032,183 options were
exercisable at December 31, 2005, at exercise prices
ranging from $4.75 to $23.85. As of December 31, 2005, the
1,422,585 options outstanding had a weighted average remaining
contractual life of 61 months.
|
|
11. |
Members equity and redeemable preferred units |
Mandatorily redeemable preferred membership units
Holders of the Companys mandatorily redeemable preferred
units are entitled to receive a yield of 13.25% of 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 mandatorily redeemable preferred units. This
discount was amortized as a dividend over the initial three
years. Of the total yield on the mandatorily redeemable
preferred units, 48% is mandatorily payable quarterly in cash to
the mandatorily redeemable preferred unit holders. The unpaid
portion of the yield accumulates annually and is added to the
Liquidation Value of the mandatorily redeemable preferred units.
Such units have an aggregate liquidation preference over common
units of $20 million plus accumulated and unpaid yield.
Mandatorily redeemable preferred units have no voting rights.
Mandatorily redeemable preferred units are redeemable without
premium or penalty, wholly or in part, at the Companys
option at any time, for the Liquidation Value, including any
unpaid yield. Redeemable preferred units are mandatorily
redeemable on the earlier to occur of (i) an initial public
offering of the Company (to the extent of 25% of the net
proceeds thereof), (ii) a sale of equity or assets of the
Company or any of its principal operating subsidiaries after
retirement in full of the Companys debt under its senior
credit facilities, or (iii) April 10, 2010. At
December 31, 2002, 2003, and 2004, the Company had 20,000
redeemable preferred membership units issued and outstanding. As
discussed in Note 1 Initial Public Offering and
Reorganization, the Company redeemed all of the Preferred
Units on February 9, 2005 in connection with the
consummation of its initial public offering (IPO). The
redemption price amounted to $28,263 based on the Preferred
Units Liquidation Value at the IPO date.
Distributions to members
In accordance with the Companys Amended and Restated
Operating Agreement, cash distributions were made first, to all
preferred members; second, to all common members, based on their
tax liability imposed on the Companys net LLC earnings
before the reorganization. The Amended and Restated Operating
Agreement also provides for certain members who receive less
than their proportionate share of cash distributions, at their
election or the election of the Companys management, to be
granted an additional cash distribution to bring their
proportionate share of cash distributions equal to the rest of
the Companys common members. Any remaining cash available
for distribution will be distributed, at the discretion of the
Companys board of advisors, first to all preferred members
to the extent of the Liquidation Value of their preferred units;
second, to all common members, except to those common members
where such distribution would cause or increase a deficit to
their capital accounts.
F-34
|
|
12. |
Quarterly financial data (Unaudited) |
Quarterly financial data for the years ended December 31,
2004 and 2005 are as follows:
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
March 31, | |
|
June 30, | |
|
September 30, | |
|
December 31, | |
Quarter ended |
|
2004 | |
|
2004 | |
|
2004 | |
|
2004 | |
| |
Net sales
|
|
$ |
110,518 |
|
|
$ |
115,615 |
|
|
$ |
110,165 |
|
|
$ |
107,566 |
|
Gross profit
|
|
$ |
45,919 |
|
|
$ |
49,424 |
|
|
$ |
44,287 |
|
|
$ |
40,447 |
|
Net income
|
|
$ |
8,438 |
|
|
$ |
9,845 |
|
|
$ |
7,191 |
|
|
$ |
4,074 |
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.24 |
|
|
$ |
0.28 |
|
|
$ |
0.20 |
|
|
$ |
0.11 |
|
|
Diluted
|
|
$ |
0.23 |
|
|
$ |
0.26 |
|
|
$ |
0.19 |
|
|
$ |
0.11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
March 31, | |
|
June 30, | |
|
September 30, | |
|
December 31, | |
Quarter ended |
|
2005 | |
|
2005 | |
|
2005 | |
|
2005 | |
| |
Net sales
|
|
$ |
116,466 |
|
|
$ |
125,560 |
|
|
$ |
127,487 |
|
|
$ |
124,691 |
|
Gross profit
|
|
$ |
48,325 |
|
|
$ |
53,654 |
|
|
$ |
52,522 |
|
|
$ |
50,124 |
|
Net income
|
|
$ |
35,563 |
|
|
$ |
11,383 |
|
|
$ |
10,518 |
|
|
$ |
3,012 |
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.87 |
|
|
$ |
0.26 |
|
|
$ |
0.24 |
|
|
$ |
0.07 |
|
|
Diluted
|
|
$ |
0.85 |
|
|
$ |
0.25 |
|
|
$ |
0.23 |
|
|
$ |
0.07 |
|
|
Acquisitions
Subsequent to December 31, 2005, the Company completed the
acquisition of 2 reprographics companies in the United States
for a total purchase price of $11 million.
F-35
Schedule II
American Reprographics Company and subsidiaries
Valuation and qualifying accounts
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|
|
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|
| |
|
|
Balance at | |
|
Charges to | |
|
|
|
Balance at | |
|
|
beginning | |
|
cost and | |
|
|
|
end of | |
(dollars in thousands) |
|
of period | |
|
expenses | |
|
Deductions | |
|
period | |
| |
Year ended December 31, 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$ |
2,148 |
|
|
$ |
1,698 |
|
|
$ |
(1,056 |
) |
|
$ |
2,790 |
|
|
Allowance for inventory obsolescence
|
|
|
273 |
|
|
|
248 |
|
|
|
(243 |
) |
|
|
278 |
|
|
|
|
|
|
$ |
2,421 |
|
|
$ |
1,946 |
|
|
$ |
(1,299 |
) |
|
$ |
3,068 |
|
|
|
|
Year ended December 31, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$ |
2,790 |
|
|
$ |
1,281 |
|
|
$ |
(1,018 |
) |
|
$ |
3,053 |
|
|
Allowance for inventory obsolescence
|
|
|
278 |
|
|
|
89 |
|
|
|
(46 |
) |
|
|
321 |
|
|
|
|
|
|
$ |
3,068 |
|
|
$ |
1,370 |
|
|
$ |
(1,064 |
) |
|
$ |
3,374 |
|
|
|
|
Year ended December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$ |
3,053 |
|
|
$ |
1,241 |
|
|
$ |
(1,122 |
) |
|
$ |
3,172 |
|
|
Allowance for inventory obsolescence
|
|
|
321 |
|
|
|
109 |
|
|
|
|
|
|
|
430 |
|
|
|
|
|
|
$ |
3,374 |
|
|
$ |
1,350 |
|
|
$ |
(1,122 |
) |
|
$ |
3,602 |
|
|
F-36
The information
in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed
with the Securities and Exchange Commission is effective. This
prospectus is not an offer to sell these securities and it is
not soliciting an offer to buy these securities in any state
where the offer or sale is not permitted.
|
SUBJECT TO COMPLETION, DATED
MARCH 28, 2006
Prospectus
7,000,000 Shares
Common Stock
Certain stockholders named in this prospectus or in any
supplement to this prospectus may sell up to
7,000,000 shares of common stock from time to time. In the
prospectus supplement relating to such sales, we will identify
each selling stockholder and the number of shares of our common
stock that each selling stockholder will be selling. We will not
receive any proceeds from the sale of common stock by the
selling stockholders.
This prospectus may not be used to sell securities unless
accompanied by the applicable prospectus supplement. We urge you
to read carefully this prospectus and the applicable prospectus
supplement before you make your investment decision.
Our common stock trades on the New York Stock Exchange under the
symbol ARP. On March 27, 2006, the last
reported sales price of a share of our common stock was $35.15.
Investing in our securities involves risks. You should
carefully consider the risk factors set forth in the applicable
supplement to this prospectus before investing in any securities
that may be offered. See Risk Factors on
page 2.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or passed upon the adequacy or the accuracy of this
prospectus. Any representation to the contrary is a criminal
offense.
The date of this prospectus
is ,
2006
Table of contents
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1 |
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2 |
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2 |
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4 |
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4 |
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5 |
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11 |
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11 |
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12 |
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You should rely only on the information contained or
incorporated by reference in this prospectus. We have not
authorized any other person to provide you with different or
additional information. If anyone provides you with different or
additional information, you should not rely on it. You should
assume that the information contained or incorporated by
reference in this prospectus is accurate as of the date on the
front cover of this prospectus or the date of the document
incorporated by reference. Our business, financial condition,
results of operations and prospects may have changed since then.
We are not making an offer to sell the securities offered by
this prospectus in any jurisdiction where the offer or sale is
not permitted.
i
About this prospectus
This prospectus is part of a registration statement that we
filed with the Securities and Exchange Commission, or SEC, using
the SECs shelf registration process. Under this shelf
registration process, certain stockholders named in this
prospectus or in any supplement to this prospectus may sell up
to 7,000,000 shares of common stock in one or more
offerings. This prospectus provides you with a general
description of the securities the selling stockholders may sell.
Each time the selling stockholders sell securities under this
prospectus, we will provide a prospectus supplement that will
contain specific information about the terms of that offering.
The prospectus supplement may also add, update or change
information contained in this prospectus. If so, the prospectus
supplement should be read as superseding this prospectus. You
should read this prospectus, the applicable prospectus
supplement, and the additional information described below under
the headings Where you can find more information and
Certain documents incorporated by reference.
In this prospectus we use the terms American
Reprographics, we, us,
our, and our company and similar phrases
to refer to American Reprographics Company, a Delaware
corporation, and its consolidated subsidiaries.
American Reprographics 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 also require sophisticated document
management services. 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. We
provide our core services through our suite of reprographics
technology products, a national network of approximately 200
locally branded reprographics service centers, and approximately
2,300 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. In further support of our core services, we license
our suite of reprographics technology products, including our
flagship internet-based application, PlanWell, to independent
reprographers. We also operate PEiR (Profit and Education in
Reprographics) through which we charge membership fees and
provide purchasing, technology and educational benefits to other
reprographers, while promoting our reprographics technology as
the industry standard. 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.
Our main office is located at 700 North Central Avenue,
Suite 550, Glendale, California 91203 and our telephone
number is (818) 500-0225.
1
Risk factors
Investing in the securities to be offered pursuant to this
prospectus may involve a high degree of risk. These risks will
be set forth in a prospectus supplement relating to the
securities to be offered by that prospectus supplement. You
should carefully consider the important factors set forth under
the heading Risk factors in the applicable
supplement to this prospectus and in our periodic reports filed
with the SEC before investing in any securities that may be
offered.
Forward-looking statements
Some statements and disclosures in this prospectus, including
the documents incorporated by reference, are
forward-looking statements. Forward-looking
statements include statements concerning our plans, objectives,
goals, strategies, future events, future revenues or
performance, capital expenditures, financing needs, plans or
intentions relating to acquisitions, our competitive strengths
and weaknesses, our business strategy and the trends we
anticipate in the industry and economies in which we operate and
other information that is not historical information. When used
in this prospectus, the words estimates,
expects, anticipates,
projects, plans, intends,
believes and variations of such words or similar
expressions are intended to identify forward-looking statements.
All forward-looking statements, including, without limitation,
our examination of historical operating trends, are based upon
our current expectations and various assumptions. Our
expectations, beliefs and projections are expressed in good
faith, and we believe there is a reasonable basis for them, but
we cannot assure you that our expectations, beliefs and
projections will be realized.
There are a number of risks and uncertainties that could cause
our actual results to differ materially from the forward-looking
statements contained in this prospectus, including the documents
incorporated by reference. Important factors that could cause
our actual results to differ materially from the forward-looking
statements we make in this prospectus are set forth in, or
incorporated by reference into, this prospectus, including the
factors described in the sections entitled Risk
Factors in our Annual Report on
Form 10-K and any
related prospectus supplement. If any of these risks or
uncertainties materialize, or if any of our underlying
assumptions are incorrect, our actual results may differ
significantly from the results that we express in, or imply by,
any of our forward-looking statements. We do not undertake any
obligation to revise these forward-looking statements to reflect
future events or circumstances. Presently known risk factors
include, but are not limited to, the following factors:
|
|
|
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; |
2
|
|
|
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 write-down 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; |
|
|
the increased expenses and administrative workload associated
with being a public company; |
|
|
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. In light of these risks, uncertainties and
assumptions, the forward-looking events discussed in this
prospectus might not occur.
3
Use of proceeds
We are registering the shares of our common stock offered by
this prospectus and the applicable prospectus supplement for the
account of the selling stockholders identified in the section of
this prospectus and the applicable prospectus supplement
entitled Selling Stockholders. All of the net
proceeds from the sale of our common stock by this prospectus
and the applicable prospectus supplement will go to the selling
stockholders who offer and sell their shares of our common
stock. We will not receive any part of the proceeds from the
sale of these shares.
Selling stockholders
This prospectus covers the offering for resale of up to:
|
|
|
4,900,000 shares of common stock held by ARC Acquisition
Co., L.L.C. and related entities, which were issued on
February 3, 2005 in exchange for ownership units in our
predecessor. The units were originally acquired in April 2000
from certain unitholders of our predecessor company. Such shares
are currently held by such purchasers, and their transferees. |
|
|
1,900,000 shares of common stock held by Micro Device,
Inc., OCB Reprographics, Inc., Brownies Blueprint, Inc. and
Dietrich-Post Company, which were issued on February 3,
2005 in exchange for ownership units in our predecessor. The
units were originally issued in connection with the acquisition
of these businesses, all of which occurred in
November 1997. Such shares are currently held by such
companies. |
|
|
200,000 shares of common stock issuable upon the exercise
of certain vested outstanding options held by Rahul Roy, our
Chief Technology Officer. |
The applicable prospectus supplement will set forth, with
respect to each selling stockholder:
|
|
|
the name of the selling stockholder; |
|
|
the nature of the position, office or other material
relationship which the selling stockholder will have had within
the prior three years with us or any of our affiliates; |
|
|
the number of shares of common stock owned by the selling
stockholder prior to the offering; |
|
|
the number of shares of common stock to be offered for the
selling stockholders account; and |
|
|
the amount and (if one percent or more) the percentage of shares
of common stock to be owned by the selling stockholder after the
completion of the offering. |
Pursuant to our agreements with certain of the selling
stockholders, all expenses incurred, excluding underwriting
discounts and commissions, in connection with the registration
of the shares of common stock owned by the selling stockholders
named above, other than OCB Reprographics, Inc. and Rahul Roy,
will be borne by us. OCB Reprographics and Rahul Roy each will
bear its or his pro-rata share of such expenses.
Additional selling stockholders may be identified by prospectus
supplement.
4
Description of common stock and preferred stock
Our authorized capital stock consists of 150 million shares
of common stock, $.001 par value per share, and
25 million shares of undesignated preferred stock,
$.001 par value per share. As of March 1, 2006,
44,625,815 shares of common stock were issued and
outstanding, and no shares of our preferred stock were
outstanding.
The following description of our capital stock does not purport
to be complete and is subject to and is qualified in its
entirety by the description of our capital stock contained in
our amended and restated certificate of incorporation, a copy of
which is filed as an exhibit to the registration statement of
which this prospectus is a part. Reference is made to such
exhibit for a detailed description of the provisions thereof
summarized below.
Common stock
The holders of common stock are entitled to one vote for each
share held of record on all matters submitted to a vote of the
stockholders. Subject to preferences that may be applicable to
any outstanding preferred stock, holders of common stock are
entitled to receive ratably such dividends as may be declared by
the board of directors out of funds legally available for that
purpose. In the event of our liquidation, dissolution or winding
up, the holders of common stock are entitled to share ratably in
all assets remaining after payment of liabilities, subject to
the prior distribution rights of any outstanding preferred
stock. The common stock has no preemptive or conversion rights
or other subscription rights. The outstanding shares of common
stock are, and any shares of common stock to be issued pursuant
to this prospectus will be, fully paid and non-assessable.
Preferred stock
The board of directors has the authority, without further action
by the stockholders, to issue up to 25 million shares of
preferred stock, $.001 par value, in one or more series.
The board of directors also has the authority to designate the
rights, preferences, privileges, and restrictions of each such
series, including dividend rights, dividend rates, conversion
rights, voting rights, terms of redemption, redemption prices,
liquidation preferences, and the number of shares constituting
any series.
The issuance of preferred stock may have the effect of delaying,
deferring or preventing a change in control of our company
without further action by the stockholders. The issuance of
preferred stock with voting and conversion rights may also
adversely affect the voting power of the holders of common
stock. In certain circumstances, an issuance of preferred stock
could have the effect of decreasing the market price of the
common stock.
Certain effects of authorized but unissued stock
We have shares of common stock and preferred stock available for
future issuance without stockholder approval. These additional
shares may be used for a variety of corporate purposes,
including future public offerings to raise additional capital,
facilitate corporate acquisitions or payable as a dividend on
the capital stock.
The existence of unissued and unreserved common stock and
preferred stock may enable our board of directors to issue
shares in a strategic transaction to persons friendly to current
management or to issue preferred stock with terms that could
render more difficult or discourage an attempt to obtain control
of us by means of a merger, tender offer, proxy
5
contest or otherwise, thereby protecting the continuity of our
management. In addition, the issuance of preferred stock could
adversely affect the voting power of holders of common stock and
the likelihood that such holders will receive dividend payments
and payments upon liquidation.
Registration rights agreement
As of March 1, 2006, holders of 20,483,627 shares of
common stock are entitled to rights with respect to the
registration of their shares under the Securities Act. These
registration rights are contained in a registration rights
agreement and are described below.
Demand Registrations. The holders of a majority of
the registrable securities held by ARC Acquisition Co., L.L.C.
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) are each
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.
Delaware anti-takeover law and charter and bylaw
provisions
Provisions of Delaware law and our charter documents could make
the acquisition of our company and the removal of incumbent
officers and directors more difficult. These provisions are
expected to discourage certain types of coercive takeover
practices and inadequate takeover bids and to encourage persons
seeking to acquire control of our company to negotiate with it
first. We believe that the benefits of increased protection of
its potential ability to negotiate with the proponent of an
unfriendly or unsolicited proposal to acquire or restructure our
company outweigh the disadvantages of discouraging such
proposals because, among other things, negotiation of such
proposals could result in an improvement of their terms.
Section 203. We are subject to the provisions
of Section 203 of the Delaware General Corporation Law. In
general, the statute prohibits a publicly-held Delaware
corporation from engaging in a business combination
with an interested stockholder for a period of three
6
years after the date that the person became an interested
stockholder unless, subject to exceptions, the business
combination or the transaction in which the person became an
interested stockholder is approved in a prescribed manner.
Generally, a business combination includes a merger,
asset or stock sale, or other transaction resulting in a
financial benefit to the stockholder. Generally, an
interested stockholder is a person who, together
with affiliates and associates, owns, or within three years
prior, did own, 15% or more of the corporations voting
stock. These provisions may have the effect of delaying,
deferring or preventing a change in control of our company
without further action by the stockholders.
Special Stockholder Meetings. Our amended and
restated certificate of incorporation provides that special
meetings of the stockholders for any purpose or purposes, unless
required by law, may only be called by the board of directors,
the chairman of the board, if any, the chief executive officer
or the president. This limitation on the ability to call a
special meeting could make it more difficult for stockholders to
initiate actions that are opposed by the board. These actions
could include the removal of an incumbent director or the
election of a stockholder nominee as a director. They could also
include the implementation of a rule requiring stockholder
ratification of specific defensive strategies that have been
adopted by the board with respect to unsolicited takeover bids.
In addition, the limited ability to call a special meeting of
stockholders may make it more difficult to change the existing
board and management.
Board of Directors. Subject to the rights of the
holders of any outstanding series of preferred stock, our
amended and restated certificate of incorporation authorizes
only the board of directors to fill vacancies, including newly
created directorships. Our amended and restated certificate of
incorporation also provides that directors may be removed by
stockholders only by affirmative vote of holders of two-thirds
of the outstanding shares of voting stock.
Supermajority Vote to Amend Charter and Bylaws. Our
amended and restated certificate of incorporation and amended
and restated bylaws each provide that our bylaws may be amended
by our stockholders only with a two-thirds vote of the
outstanding shares. In addition, our amended and restated
certificate of incorporation provides that its provisions
related to, among other things, limitation of director liability
and indemnification may only be amended by a two-thirds vote of
the outstanding shares.
No Stockholder Action by Written Consent. Our
amended and restated certificate of incorporation provides that,
after this offering, stockholder action can be taken only at an
annual or special meeting of stockholders and may not be taken
by written consent. The amended and restated bylaws provide that
special meetings of stockholders can be called only by the board
of directors, the chairman of the board, if any, the chief
executive officer and the president. Moreover, the business
permitted to be conducted at any special meeting of stockholders
is limited to the business brought before the meeting by the
board of directors, the chairman of the board, if any, and the
President.
Advance Notice Procedures. Our amended and restated
bylaws provide for an advance notice procedure for the
nomination, other than by or at the direction of our board of
directors, of candidates for election as directors as well as
for other stockholder proposals to be considered at annual
meetings of stockholders.
Indemnification provisions
Our amended and restated certificate of incorporation limit the
liability of directors to the maximum extent permitted by
Delaware law. Delaware law expressly permits a corporation to
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provide that its directors will not be personally liable for
monetary damages for breach of their fiduciary duties as
directors, except liability for:
any breach of their duty of loyalty to the
corporation or its stockholders;
acts or omissions that are not in good faith or
that involve intentional misconduct or a knowing violation of
law;
unlawful payments of dividends or unlawful stock
repurchases or redemptions; or
any transaction from which the director derived an
improper personal benefit.
These express limitations do not apply to liabilities arising
under the federal securities laws and do not affect the
availability of equitable remedies, including injunctive relief
or rescission.
The provisions of Delaware law that relate to indemnification
expressly state that the rights provided by the statute are not
exclusive and are in addition to any rights provided in a
certificate of incorporation, bylaws, agreement or otherwise.
Our amended and restated certificate of incorporation provides
that we will indemnify our directors and officers, to the
maximum extent permitted by law and that we may indemnify other
employees and agents. Our amended and restated bylaws also
permit us to secure insurance on behalf of any officer,
director, employee or agent for any liability arising out of
actions in his or her capacity as an officer, director, employee
or agent. We have an insurance policy that insures our directors
and officers against losses, above a deductible amount, from
specified types of claims. We believe that these provisions and
policies will help us attract and retain qualified persons.
The limited liability and indemnification provisions in our
amended and restated certificate of incorporation, amended and
restated bylaws and any related indemnification agreements may
discourage stockholders from bringing a lawsuit against our
directors for breach of their fiduciary duties and may reduce
the likelihood of derivative litigation against our directors
and officers, even though a derivative action, if successful,
might otherwise benefit us and our stockholders. A
stockholders investment in us may be adversely affected to
the extent we pay the costs of settlement or damage awards
against our directors and officers under these indemnification
provisions.
At present, there is no pending litigation or proceeding
involving any of our directors, officers or employees in which
indemnification is sought, nor are we aware of any threatened
litigation that may result in claims for indemnification.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to our directors, officers,
employees, and agents under our restated certificate of
incorporation or any related indemnification agreements we have
been advised that, in the opinion of the SEC, this
indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable.
Transfer agent and registrar
The transfer agent and registrar for our common stock is Mellon
Investor Services LLC.
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Plan of distribution
The selling stockholders may sell the common stock:
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through underwriters or dealers; |
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through agents; or |
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directly to purchasers. |
We will describe in a prospectus supplement, the particular
terms of the offering of the common stock, including the
following:
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the names of any underwriters; |
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the purchase price and the proceeds the selling stockholders
will receive from the sale; |
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any underwriting discounts and other items constituting
underwriters compensation; |
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any initial public offering price and any discounts or
concessions allowed or reallowed or paid to dealers; and |
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any other information we think is important. |
If the selling stockholders use underwriters in the sale, such
underwriters will acquire the securities for their own account.
The underwriters may resell the securities in one or more
transactions, including negotiated transactions, at a fixed
public offering price or at varying prices determined at the
time of sale.
The securities may be either offered to the public through
underwriting syndicates represented by managing underwriters or
by underwriters without a syndicate. The obligations of the
underwriters to purchase the securities will be subject to
certain conditions. The underwriters will be obligated to
purchase all the securities offered if any of the securities are
purchased. The underwriters may change from time to time any
initial public offering price and any discounts or concessions
allowed or reallowed or paid to dealers.
The selling stockholders may sell offered securities through
agents designated by the selling stockholders. Any agent
involved in the offer or sale of the securities for which this
prospectus is delivered will be named, and any commissions
payable to that agent will be set forth, in the prospectus
supplement. Unless indicated in the prospectus supplement, the
agents have agreed to use their reasonable best efforts to
solicit purchases for the period of their appointment.
The selling stockholders also may sell offered securities
directly. In this case, no underwriters or agents would be
involved.
The selling stockholders may enter into derivative transactions
with third parties, or sell securities not covered by this
prospectus to third parties in privately negotiated
transactions. If the applicable prospectus supplement indicates,
in connection with those derivatives, the third parties may sell
securities covered by this prospectus and the applicable
prospectus supplement, including in short sale transactions.
If so, the third parties may use securities pledged by the
selling stockholders or borrowed from the selling stockholders
or others to settle those sales or to close out any related open
borrowings of stock, and may use securities received from the
selling stockholders in settlement of those derivatives to close
out any related open borrowings of stock. The third parties in
such sale transactions will be underwriters and, if not
identified in this prospectus, will be identified in the
applicable prospectus supplement (or a post-effective amendment).
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The selling stockholders may loan or pledge securities to a
financial institution or other third party that in turn may sell
the securities using this prospectus.
Underwriters, dealers and agents that participate in the
distribution of the common stock may be underwriters as defined
in the Securities Act of 1933, as amended, or Securities Act,
and any discounts or commissions received by them from the
selling stockholders and any profit on the resale of the offered
securities by them may be treated as underwriting discounts and
commissions under the Securities Act. We will identify any
underwriters or agents, and describe their compensation, in a
prospectus supplement. In compliance with the guidelines of the
NASD, the maximum commission or discount to be received by any
NASD member of independent broker-dealer may not exceed 8% of
the aggregate principal amount of the securities offered
pursuant to a prospectus supplement.
Certain of any such underwriters and agents, including their
associates, may be customers of, engage in transactions with and
perform services for us and our subsidiaries in the ordinary
course of business.
We or the selling stockholders may have agreements with the
underwriters, dealers and agents to indemnify them against
certain civil liabilities, including liabilities under the
Securities Act, or to contribute with respect to payments which
the underwriters, dealers or agents may be required to make.
Underwriters, dealers and agents may engage in transactions
with, or perform services for, us or our subsidiaries in the
ordinary course of their businesses.
In order to facilitate the offering of the securities, any
underwriters or agents, as the case may be, involved in the
offering of such securities may engage in transactions that
stabilize, maintain or otherwise affect the price of such
securities or any other securities the prices of which may be
used to determine payments on such securities. Specifically, the
underwriters or agents, as the case may be, may overallot in
connection with the offering, creating a short position in such
securities for their own account. In addition, to cover
overallotments or to stabilize the price of such securities or
any such other securities, the underwriters or agents, as the
case may be, may bid for, and purchase, such securities or any
such other securities in the open market. Finally, in any
offering of such securities through a syndicate of underwriters,
the underwriting syndicate may reclaim selling concessions
allotted to an underwriter or a dealer for distributing such
securities in the offering if the syndicate repurchases
previously distributed securities in transactions to cover
syndicate short positions, in stabilization transaction or
otherwise. Any of these activities may stabilize or maintain the
market price of the securities above independent market levels.
The underwriters or agents, as the case may be, are not required
to engage in these activities, and may end any of these
activities at any time.
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Validity of the securities
The validity of the shares of common stock will be passed upon
for American Reprographics Company by Hanson, Bridgett, Marcus,
Vlahos & Rudy, LLP, San Francisco, California.
Experts
The consolidated financial statements incorporated in this
prospectus by reference from American Reprographics
Companys Annual Report on
Form 10-K for the
year ended December 31, 2005 have been so incorporated in
reliance on the report of PricewaterhouseCoopers LLP, an
independent registered public accounting firm, given on the
authority of said firm as experts in auditing and accounting.
Where you can find more information
We file annual, quarterly and other reports and other
information with the SEC. You may read and copy any document we
file at the SECs public reference room at 100 F Street,
NE, Room 1580 Washington, D.C. 20549. Please call the
SEC at 1-800-732-0330
for further information on their public reference room. Our SEC
filings are also available at the SECs web site at
http://www.sec.gov. You can also obtain information about us at
the offices of the New York Stock Exchange, 20 Broad
Street, New York, New York 10005. You may also obtain
information about us at our Internet website at
http://www.e-arc.com. However, the information on our website
does not constitute a part of this prospectus.
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Certain documents incorporated by reference
In this document, we incorporate by reference the
information we file with the SEC, which means that we can
disclose important information to you by referring to that
information. The information incorporated by reference is
considered to be a part of this prospectus, and later
information filed with the SEC will update and supersede this
information. Notwithstanding this statement, however, you may
rely on information that has been filed at the time you made
your investment decision. We incorporate by reference the
documents listed below:
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(a) Our Annual Report on
Form 10-K for the
fiscal year ended December 31, 2005; |
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(b) Our Current Reports on
Form 8-K filed
January 11, 2006, January 12, 2006, February 2,
2006, March 2, 2006 and March 23, 2006; and |
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(c) The description of our common stock that is contained
in the registration statement on
Form 8-A filed on
January 13, 2005 (File No. 001-32407) under the Securities
Exchange Act of 1934, as amended (the Exchange Act),
including any amendment or report filed for the purpose of
updating such description. |
We also incorporate by reference all future filings we make with
the SEC under Sections 13(a), 13(c), 14 or 15(d) of the
Exchange Act on or (1) after the date of the filing of the
registration statement containing this prospectus and prior to
the effectiveness of such registration statement and
(2) after the date of this prospectus and prior to the
termination of any offering made hereby.
You may request a copy of these filings, at no cost, by writing
or telephoning us at the following address:
American Reprographics Company
1981 N. Broadway, Suite 385
Walnut Creek, California 94596
Attention: Investor Relations
Telephone: 1-925-945-5100
You should rely only on the information provided in this
document or incorporated in this document by reference. We have
not authorized anyone to provide you with different information.
You should not assume that the information in this document,
including any information incorporated herein by reference, is
accurate as of any date other than that on the front of the
document. Any statement incorporated herein shall be deemed to
be modified or superseded for purposes of this prospectus to the
extent that a statement contained herein modifies or supersedes
such statement. Any statement so modified or superseded shall
not be deemed, except as so modified or superseded, to
constitute a part of this prospectus.
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6,087,000 shares
Common stock
Prospectus Supplement
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JPMorgan |
Goldman, Sachs & Co. |
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Robert W. Baird & Co. |
CIBC World Markets |
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Credit Suisse |
William Blair & Company |
Prospectus Supplement dated
April , 2006
You should rely only on the information contained or
incorporated by reference in this prospectus supplement and the
accompanying prospectus. We have not, and the underwriters have
not, authorized anyone to provide you with different
information. We are not making an offer of these securities in
any jurisdiction where the offer or sale is not permitted. The
information contained or incorporated by reference in this
prospectus supplement and the accompanying prospectus is
accurate as of the date of each such document only, regardless
of the time of delivery of this prospectus supplement or any
sale of our common stock.
No action is being taken in any jurisdiction outside the
United States to permit a public offering of our common stock or
possession or distribution of this prospectus supplement and the
accompanying prospectus in that jurisdiction. Persons who come
into possession of this prospectus supplement and the
accompanying prospectus in jurisdictions outside the United
States are required to inform themselves about and to observe
any restrictions as to this offering and the distribution of
this prospectus supplement and the accompany prospectus
applicable to those jurisdictions.