ARC DOCUMENT SOLUTIONS, INC. - Quarter Report: 2010 September (Form 10-Q)

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q


(Mark One)
þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the quarterly period ended September 30, 2010
or
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the transition period from to

Commission File Number: 001-32407

AMERICAN REPROGRAPHICS COMPANY

(Exact name of Registrant as specified in its Charter)


Delaware		20-1700361
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

1981 N. Broadway, Suite 385
Walnut Creek, California 94596
(925) 949-5100
(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer o	Accelerated filer þ	Non-accelerated filer o	Smaller reporting company o

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ

As of November 3, 2010, there were 45,724,468 shares of the issuer’s common stock outstanding.

AMERICAN REPROGRAPHICS COMPANY

Quarterly Report on Form 10-Q

For the Quarter Ended September 30, 2010

Table of Contents


PART I—Financial Information
	Item 1.	Condensed Consolidated Financial Statements (Unaudited)	4
		Condensed Consolidated Balance Sheets as of September 30, 2010 and December 31, 2009	4
		Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2010 and 2009	5
		Condensed Consolidated Statements of Equity and Comprehensive Loss for the nine months ended September 30, 2010 and 2009	6
		Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2010 and 2009	7
		Notes to Condensed Consolidated Financial Statements	8
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	41
	Item 4.	Controls and Procedures	41
PART II—Other Information
	Item 1.	Legal Proceedings	43
	Item 1A.	Risk Factors	43
	Item 6.	Exhibits	44
SIGNATURES			45
Index to Exhibits			46
EX-31.1
EX-31.2
EX-32.1
EX-32.2

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. When used in this Quarterly Report on Form 10-Q, the words “believe,” “expect,” “anticipate,” “estimate,” “intend,” “plan,” “targets,” “likely,” “will,” “would,” “could,” and variations of such words and similar expressions as they relate to our management or to the Company are intended to identify forward-looking statements. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those contemplated herein. We have described in Part II, Item 1A-“Risk Factors” a number of factors that could cause our actual results to differ from our projections or estimates. These factors and other risk factors described in this report are not necessarily all of the important factors that could cause actual results to differ materially from those expressed in any of our forward-looking statements. Other unknown or unpredictable factors also could harm our results. Consequently, there can be no assurance that the actual results or developments anticipated by us will be realized or, even if substantially realized, that they will have the expected consequences to, or effects on, us. Given these uncertainties, you are cautioned not to place undue reliance on such forward-looking statements.

Except where otherwise indicated, the statements made in this Quarterly Report on Form 10-Q are made as of the date we filed this report with the Securities and Exchange Commission and should not be relied upon as of any subsequent date. 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 disclaim any obligation, to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. You should, however, consult further disclosures we make in future filings of our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K, and any amendments thereto, as well as our proxy statements.

PART I—FINANCIAL INFORMATION


Item 1.	*Condensed Consolidated Financial Statements (Unaudited)*

AMERICAN REPROGRAPHICS COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS


	September 30,			December 31,
	2010			2009
	(Dollars in thousands,
	except per share data)
	(Unaudited)

Assets
Current assets:
Cash and cash equivalents		$29,755			$29,377
Accounts receivable, net of allowances for accounts receivable of $4,021
and $4,685 at September 30, 2010 and December 31, 2009, respectively		58,432			53,919
Inventories, net		11,034			10,605
Deferred income taxes		5,640			5,568
Prepaid expenses and other current assets		13,082			7,011

Total current assets		117,943			106,480
Property and equipment, net		60,402			74,568
Goodwill		294,759			332,518
Other intangible assets, net		66,592			74,208
Deferred financing costs, net		2,923			4,082
Deferred income taxes		36,816			26,987
Other assets		2,157			2,111

Total assets		$581,592			$620,954

Liabilities and Equity
Current liabilities:
Accounts payable		$24,180			$23,355
Accrued payroll and payroll-related expenses		11,575			8,804
Accrued expenses		24,353			24,540
Current portion of long-term debt and capital leases		64,444			53,520

Total current liabilities		124,552			110,219
Long-term debt and capital leases		183,802			220,711
Other long-term liabilities		9,067			8,000

Total liabilities		317,421			338,930

Commitments and contingencies (Note 9)
Stockholders’ equity:
American Reprographics Company stockholders’ equity:
Preferred stock, $0.001 par value, 25,000,000 shares authorized; zero and zero shares issued and outstanding		—			—
Common stock, $0.001 par value, 150,000,000 shares authorized; 46,172,122 and 46,112,653 shares issued and 45,724,468 and 45,664,999 shares outstanding in 2010 and 2009, respectively		46			46
Additional paid-in capital		94,550			89,982
Retained earnings		178,213			200,961
Accumulated other comprehensive loss		(7,078	)		(7,273	)

		265,731			283,716
Less cost of common stock in treasury, 447,654 shares in 2010 and 2009		7,709			7,709

Total American Reprographics Company stockholders’ equity		258,022			276,007
Noncontrolling interest		6,149			6,017

Total equity		264,171			282,024

Total liabilities and equity		$581,592			$620,954

The accompanying notes are an integral part of these condensed consolidated financial statements.

AMERICAN REPROGRAPHICS COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2010			2009			2010			2009
	(Dollars in thousands, except per share data)
	(Unaudited)

Reprographics services		$72,709			$81,989			$227,419			$274,663
Facilities management		22,602			23,395			67,632			75,158
Equipment and supplies sales		14,110			13,966			41,619			40,066

Total net sales		109,421			119,350			336,670			389,887
Cost of sales		74,403			78,219			225,346			247,622

Gross profit		35,018			41,131			111,324			142,265
Selling, general and administrative expenses		26,612			27,330			81,912			88,335
Amortization of intangible assets		2,466			2,777			7,659			8,674
Goodwill impairment		38,263			37,382			38,263			37,382
Impairment of long-lived assets		—			781			—			781

(Loss) income from operations		(32,323	)		(27,139	)		(16,510	)		7,093
Other income		(52	)		(41	)		(129	)		(138	)
Interest expense, net		5,614			6,428			17,256			18,060

Loss before income tax (benefit) provision		(37,885	)		(33,526	)		(33,637	)		(10,829	)
Income tax (benefit) provision		(12,668	)		(5,334	)		(10,862	)		3,520

Net loss		(25,217	)		(28,192	)		(22,775	)		(14,349	)
Loss attributable to the noncontrolling interest		73			28			27			39

Net loss attributable to American Reprographics Company		$(25,144	)		$(28,164	)		$(22,748	)		$(14,310	)

Earnings per share attributable to American Reprographics
Company shareholders:
Basic		$(0.56	)		$(0.62	)		$(0.50	)		$(0.32	)

Diluted		$(0.56	)		$(0.62	)		$(0.50	)		$(0.32	)

Weighted average common shares outstanding:
Basic		45,224,369			45,138,446			45,190,660			45,115,059
Diluted		45,224,369			45,138,446			45,190,660			45,115,059

The accompanying notes are an integral part of these condensed consolidated financial statements.

AMERICAN REPROGRAPHICS COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY AND COMPREHENSIVE LOSS


	American Reprographics Company Shareholders
													Accumulated
					Additional								Other
	Common Stock				Paid-in		Deferred			Retained			Comprehensive			Common Stock			Noncontrolling
	Shares		Par Value		Capital		Compensation			Earnings			Loss			in Treasury			Interest			Total
	(Dollars in thousands, except per share data)
	(Unaudited)

Balance at December 31, 2008		45,227,156		$46		$85,207		$(195	)		$215,846			$(11,414	)		$(7,709	)		$6,121			$287,902
Stock-based compensation		46,512		—		3,351		195			—			—			—			—			3,546
Issuance of common stock under Employee Stock Purchase Plan		27,275		—		167		—			—			—			—			—			167
Stock options exercised		11,800		—		63		—			—			—			—			—			63
Tax benefit from stock based compensation		—		—		18		—			—			—			—			—			18
Comprehensive loss:
Net loss		—		—		—		—			(14,310	)		—			—			(39	)		(14,349	)
Foreign currency translation adjustments		—		—		—		—			—			732			—			—			732
Gain on derivative, net of tax effect		—		—		—		—			—			2,476			—			—			2,476

Comprehensive loss																							(11,141	)

Balance at September 30, 2009		45,312,743		$46		$88,806		$—			$201,536			$(8,206	)		$(7,709	)		$6,082			$280,555


	American Reprographics Company Shareholders
										Accumulated
					Additional					Other
	Common Stock				Paid-in		Retained			Comprehensive			Common Stock			Noncontrolling
	Shares		Par Value		Capital		Earnings			Loss			in Treasury			Interest			Total

Balance at December 31, 2009		45,664,999		$46		$89,982		$200,961			$(7,273	)		$(7,709	)		$6,017			$282,024
Stock-based compensation		29,100		—		4,371		—			—			—			—			4,371
Issuance of common stock under Employee Stock Purchase Plan		7,119		—		51		—			—			—			—			51
Stock options exercised		23,250		—		125		—			—			—			—			125
Tax benefit from stock based compensation		—		—		21		—			—			—			—			21
Comprehensive loss:
Net loss		—		—		—		(22,748	)		—			—			(27	)		(22,775	)
Foreign currency translation adjustments		—		—		—		—			314			—			159			473
Loss on derivative, net of tax effect		—		—		—		—			(119	)		—			—			(119	)

Comprehensive loss:																				(22,421	)

Balance at September 30, 2010		45,724,468		$46		$94,550		$178,213			$(7,078	)		$(7,709	)		$6,149			$264,171

The accompanying notes are an integral part of these condensed consolidated financial statements.

AMERICAN REPROGRAPHICS COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


	Nine Months Ended
	September 30,
	2010			2009
	(Dollars in thousands)
	(Unaudited)

Cash flows from operating activities
Net loss		$(22,775	)		$(14,349	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Allowance for accounts receivable		598			2,842
Depreciation		25,862			28,977
Amortization of intangible assets		7,659			8,674
Amortization of deferred financing costs		1,159			972
Goodwill impairment		38,263			37,382
Impairment of long-lived assets		—			781
Stock-based compensation		4,371			3,564
Excess tax benefit related to stock-based compensation		(38	)		(18	)
Deferred income taxes		(9,750	)		(2,258	)
Other non-cash items, net		102			(54	)
Changes in operating assets and liabilities, net of effect of business acquisitions:
Accounts receivable		(5,033	)		11,237
Inventory		(456	)		355
Prepaid expenses and other assets		(5,516	)		3,675
Accounts payable and accrued expenses		3,562			(6,416	)

Net cash provided by operating activities		38,008			75,364

Cash flows from investing activities
Capital expenditures		(5,696	)		(5,852	)
Payments for businesses acquired, net of cash acquired and including other cash payments associated with the acquisitions		(500	)		(2,023	)
Other		754			716

Net cash used in investing activities		(5,442	)		(7,159	)

Cash flows from financing activities
Proceeds from stock option exercises		125			63
Proceeds from issuance of common stock under Employee Stock Purchase Plan		37			116
Excess tax benefit related to stock-based compensation		38			18
Payments on long-term debt agreements and capital leases		(32,203	)		(55,838	)
Net (repayments) borrowings under revolving credit facility		(450	)		—
Payment of loan fees		—			(44	)

Net cash used in financing activities		(32,453	)		(55,685	)

Effect of foreign currency translation on cash balances		265			117

Net change in cash and cash equivalents		378			12,637
Cash and cash equivalents at beginning of period		29,377			46,542

Cash and cash equivalents at end of period		$29,755			$59,179

Supplemental disclosure of cash flow information
Noncash investing and financing activities
Noncash transactions include the following:
Capital lease obligations incurred		$6,802			$12,134
Issuance of subordinated notes in connection with the acquisition of businesses		$—			$246
(Loss) gain on derivative, net of tax effect		$(119	)		$2,476

The accompanying notes are an integral part of these condensed consolidated financial statements.

AMERICAN REPROGRAPHICS COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

(Unaudited)


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 primarily to the architectural, engineering and construction (“AEC”) industry. ARC also provides these services to companies in non-AEC industries, such as aerospace, technology, financial services, retail, entertainment, and food and hospitality that 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, and its subsidiaries.

Basis of Presentation

The accompanying interim Condensed Consolidated Financial Statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and in conformity with the requirements of the United States Securities and Exchange Commission (“SEC”). As permitted under those rules, certain footnotes or other financial information required by GAAP for complete financial statements have been condensed or omitted. In management’s opinion, the interim Condensed Consolidated Financial Statements presented herein reflect all adjustments of a normal and recurring nature that are necessary to fairly present the interim Condensed Consolidated Financial Statements. All material intercompany accounts and transactions have been eliminated in consolidation. All subsequent events have been evaluated through the date the interim Condensed Consolidated Financial Statements were issued. The operating results for the three and nine months ended September 30, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the interim Condensed Consolidated Financial Statements and accompanying notes. The Company evaluates its estimates and assumptions on an ongoing basis and relies on historical experience and various other factors that it believes to be reasonable under the circumstances to determine such estimates. Actual results could differ from those estimates and such differences may be material to the interim Condensed Consolidated Financial Statements.

These interim Condensed Consolidated Financial Statements and notes should be read in conjunction with the consolidated financial statements and notes included in the Company’s 2009 Annual Report on Form 10-K. The accounting policies used in preparing these interim Condensed Consolidated Financial Statements are the same as those described in the Company’s 2009 Annual Report on Form 10-K, except for the adoption of Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) No. 2010-06, Fair Value Measurements and Disclosures, improving disclosures about Fair Value Measurements (“ASU 2010-06”), which is further described in Note 13, “Recent Accounting Pronouncements.”

Risk and Uncertainties

The Company generates the majority of its revenue from sales of products and services provided to the AEC industry. As a result, the Company’s operating results and financial condition can be significantly affected by economic factors that influence the AEC industry, such as non-residential and residential construction spending, GDP growth, interest rates, employment rates, office vacancy rates, and government expenditures. The effects of the current economic environment in the United States, and weakness in global economic conditions, have resulted in a significant downturn in the non-residential and residential portions of

AMERICAN REPROGRAPHICS COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands, except per share data)

(Unaudited)

the AEC industry. The AEC industry generally experiences downturns several months after a downturn in the general economy and that there may be a similar delay in the recovery of the AEC industry following a recovery in the general economy. Similar to the AEC industry, the reprographics industry typically lags a recovery in the broader economy. A prolonged downturn in the AEC industry and the reprographics industry would diminish demand for ARC’s products and services, and would therefore negatively impact revenues and have a material adverse impact on its business, operating results and financial condition.


2.	Stock-Based Compensation

The Company adopted the American Reprographics Company 2005 Stock Plan (the “Stock Plan”) 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 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 Company’s fiscal year, from 2006 through and including 2010, by the lesser of (i) 1.0% of the Company’s outstanding shares on the date of the increase; (ii) 300,000 shares; or (iii) such smaller number of shares determined by the Company’s board of directors. At September 30, 2010, 2,767,655 shares remain available for issuance under the Stock Plan.

Options granted under the Stock Plan generally expire no later than ten years from the date of grant. Options generally vest and become fully exercisable over a period of two to five years, except those 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 Company’s common stock as of the date of grant. The Company allows for cashless exercises of vested outstanding options.

The impact of stock-based compensation on the interim Condensed Consolidated Statements of Operations for the three months ended September 30, 2010 and 2009, before income taxes, was $1.5 million and $1.4 million, respectively.

The impact of stock-based compensation on the interim Condensed Consolidated Statements of Operations for the nine months ended September 30, 2010 and 2009, before income taxes, was $4.4 million and $3.6 million, respectively.

As of September 30, 2010, total unrecognized compensation cost related to unvested stock-based payments totaled $5.8 million and is expected to be recognized over a weighted-average period of 1.8 years.


3.	Employee Stock Purchase Plan

The Company adopted the American Reprographics Company 2005 Employee Stock Purchase Plan (the “ESPP”) in February 2005. Effective as of April 29, 2009, the ESPP was amended so that eligible employees may purchase up to a calendar year maximum per eligible employee of the lesser of (i) 2,500 shares of common stock, or (ii) a number of shares of common stock having an aggregate fair market value of $25 thousand as determined on the date of purchase.

Under the April 29, 2009 amendment to the ESPP, the purchase price of common stock acquired pursuant to the ESPP in any offering on or after June 30, 2009 was decreased from 95% to 85% of the fair

AMERICAN REPROGRAPHICS COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands, except per share data)

(Unaudited)

market value of such shares of common stock on the applicable purchase date. The compensation expense in connection with the amended ESPP for the three months ended September 30, 2010 and 2009 was $3 thousand and $6 thousand, respectively. The compensation expense in connection with the amended ESPP for the nine months ended September 30, 2010 and 2009 was $9 thousand and $18 thousand, respectively. During the nine months ended September 30, 2010, the Company issued 7,119 shares of its common stock to employees under the ESPP at a weighted average price of $7.24 per share.


4.	Goodwill and Other Intangibles Resulting from Business Acquisitions

Goodwill

In connection with acquisitions, the Company applies the provisions of ASC 805, using the acquisition method of accounting. Acquisitions completed prior to 2009 were accounted for by applying the provisions of SFAS No. 141, Business Combinations, (“SFAS 141”), pursuant to which the assets and liabilities assumed were recorded at their estimated fair values. The excess purchase price over the fair value of net tangible assets and identifiable intangible assets acquired was recorded as goodwill.

The Company assesses goodwill at least annually for impairment as of September 30 or more frequently if events and circumstances indicate that goodwill might be impaired. Since the Company’s previous goodwill impairment analysis in September 30, 2009, there were no triggering events that required a subsequent interim impairment analysis. However, even if the procedures did not include an annual assessment of goodwill, there were sufficient indicators in the third quarter of 2010 to require a goodwill impairment analysis as of September 30, 2010. The indicators included among other factors, the Company’s 2010 third quarter results and the revision of projected future earnings.

Goodwill impairment testing is performed at the operating segment (or “reporting unit”) level. Goodwill is assigned to reporting units at the date the goodwill is initially recorded. Once goodwill has been assigned to reporting units, it no longer retains its association with a particular acquisition, and all of the activities within a reporting unit, whether acquired or internally generated, are available to support the value of the goodwill. The results of the Company’s analysis in 2010 indicated that 13 of its reporting units, 12 in the United States, one in China, had a goodwill impairment as of September 30, 2010. Accordingly, the Company recorded a pretax, non-cash charge for the three and nine months ended September 30, 2010 to reduce the carrying value of goodwill by $38.3 million.

The results of the Company’s goodwill impairment analysis in the quarter ended September 30, 2009 indicated that 11 of the Company’s reporting units, nine in the United States, one in the United Kingdom, and one in Canada, had a goodwill impairment as of September 30, 2009. Accordingly, the Company recorded a pretax, non-cash charge for the three and nine months ended September 30, 2009 to reduce the carrying value of goodwill by $37.4 million.

Goodwill impairment testing is a two-step process. Step one involves comparing the fair value of the Company’s reporting units to their carrying amount. If the fair value of the reporting unit is greater than its carrying amount, there is no impairment. If the reporting unit’s carrying amount is greater than the fair value, the second step must be completed to measure the amount of impairment, if any. Step two involves calculating the implied fair value of goodwill by deducting the fair value of all tangible and intangible assets, excluding goodwill, of the reporting unit from the fair value of the reporting unit as determined in Step one. The implied fair value of goodwill determined in this step is compared to the carrying value of goodwill. If the implied fair

AMERICAN REPROGRAPHICS COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands, except per share data)

(Unaudited)

value of goodwill is less than the carrying value of goodwill, an impairment loss is recognized equal to the difference.

The Company determines the fair value of its reporting units using an income approach. Under the income approach, the Company determined fair value based on estimated discounted future cash flows of each reporting unit. The cash flows are discounted by an estimated weighted-average cost of capital, which reflects the overall level of inherent risk of a reporting unit. Determining the fair value of a reporting unit is judgmental in nature and requires the use of significant estimates and assumptions, including revenue growth rates and operating margins, discount rates and future market conditions, among others. The Company considered market information in assessing the reasonableness of the fair value under the income approach outlined above.

Given the current economic environment and the uncertainties regarding the impact on the Company’s business, there can be no assurance that the estimates and assumptions regarding the duration of the ongoing economic downturn in the Company’s industry, or the period or strength of recovery, made for purposes of the Company’s goodwill impairment testing during the nine months ended September 30, 2010, will prove to be accurate predictions of the future. If the Company’s assumptions regarding forecasted revenue or gross margins of certain reporting units are not achieved, it may be required to record additional goodwill impairment charges in future periods, whether in connection with the Company’s next annual impairment testing in the third quarter of 2011, or prior to that, if any such change constitutes a triggering event outside of the quarter when it regularly perform its annual goodwill impairment test. It is not possible at this time to determine if any such future impairment charge would result or, if it does, whether such charge would be material.

The changes in the carrying amount of goodwill from January 1, 2009 through September 30, 2010 are summarized as follows:


	Gross		Accumulated		Net Carrying
	Goodwill		Impairment Loss		Amount

January 1, 2009		$401,667		$35,154		$366,513
Additions		3,136		—		3,136
Goodwill impairment		—		37,382		(37,382	)
Translation adjustment		251		—		251

December 31, 2009		405,054		72,536		332,518
Additions		500		—		500
Goodwill impairment		—		38,263		(38,263	)
Translation adjustment		4		—		4

September 30, 2010		$405,558		$110,799		$294,759

The additions to goodwill include the excess purchase price over fair value of net assets acquired, purchase price adjustments, and certain earnout payments.

Long-lived Assets

The Company periodically assesses potential impairments of its long-lived assets in accordance with the provisions of ASC 360, formerly SFAS No. 144, Accounting for the Impairment or Disposal of Long-lived

AMERICAN REPROGRAPHICS COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands, except per share data)

(Unaudited)

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 historical or projected 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 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 value if available, or discounted cash flows, if not.

The operating segments of the Company have been negatively impacted by the drop in commercial and residential construction resulting from the current economic downturn. Before assessing the Company’s goodwill for impairment, the Company evaluated, as described above, the long-lived assets in its operating segments for impairment as of September 30, 2010 and 2009 given the reduced level of expected sales, profits and cash flows. Based on this assessment, there was no impairment in 2010. In 2009 the Company determined that there was an impairment of long-lived assets for its operating segment in the United Kingdom. Accordingly, the Company recorded a pretax, non-cash charge for the nine months ended September 30, 2009 to reduce the carrying value of other intangible assets by $0.8 million.

Other intangible assets that have finite lives are amortized over their useful lives. Customer relationships and trade names acquired are amortized over their estimated useful lives of 13 (weighted average) and 20 years, respectively. Customer relationships are amortized using the accelerated method (based on customer attrition rates) and trade names are amortized using the straight-line method. Non-compete agreements are amortized over their weighted average term on a straight-line basis.

The following table sets forth the Company’s other intangible assets resulting from business acquisitions at September 30, 2010 and December 31, 2009 which continue to be amortized:


	September 30, 2010						December 31, 2009
	Gross				Net		Gross				Net
	Carrying		Accumulated		Carrying		Carrying		Accumulated		Carrying
	Amount		Amortization		Amount		Amount		Amortization		Amount

Amortizable other intangible assets:
Customer relationships		$96,279		$46,111		$50,168		$96,219		$39,243		$56,976
Trade names and trademarks		20,294		3,902		16,392		20,294		3,139		17,155
Non-compete agreements		100		68		32		303		226		77

		$116,673		$50,081		$66,592		$116,816		$42,608		$74,208

AMERICAN REPROGRAPHICS COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands, except per share data)

(Unaudited)

Based on current information, estimated future amortization expense of amortizable intangible assets for the remainder of this fiscal year, each of the next four fiscal years and thereafter are as follows:


2010			$2,417
2011			9,127
2012			8,231
2013			7,327
2014			6,518
Thereafter			32,972

			$66,592


5.	Long-Term Debt

Long-term debt consists of the following:


	September 30,			December 31,
	2010			2009

Borrowings from foreign revolving credit facilities; 6.0% interest rate at September 30, 2010 and December 31, 2009, respectively; principal payable through October 2010		$1,096			$1,523
Borrowings from senior secured term loan credit facility; interest payable quarterly (weighted average 8.2% and 8.1% interest rate at September 30, 2010 and December 31, 2009, respectively, inclusive of amended swap transaction); principal payable in varying quarterly installments; any unpaid principal and interest due December 6, 2012		199,375			205,625
Various subordinated notes payable; weighted average 6.2% interest rate at September 30, 2010 and December 31, 2009, respectively; principal and interest payable monthly through June 2012		11,160			21,755
Various capital leases; weighted average 8.8% and 9.2% interest rate at September 30, 2010 and December 31, 2009, respectively; principal and interest payable monthly through May 2015		36,615			45,328

		248,246			274,231
Less current portion		(64,444	)		(53,520	)

		$183,802			$220,711

Amended Credit and Guaranty Agreement

On October 5, 2009, the Company entered into an amendment to its credit and guaranty agreement (the “Amended Credit Agreement”) with an initial term loan of $209.7 million, class B term loans of $36.1 million and a revolving credit facility of $49.5 million. On October 6, 2009, the Company prepaid on a pro-rata basis $35.0 million to reduce the initial term loan installments due on March 31, 2010, June 30, 2010 and September 30, 2010.

AMERICAN REPROGRAPHICS COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands, except per share data)

(Unaudited)

Loans to the Company under the Amended Credit Agreement bear interest, at the Company’s option, at either the base rate, which is equal to the higher of the bank prime lending rate or the federal funds rate plus 0.5% or LIBOR, plus, in each case, the applicable rate. The applicable rate is determined based upon the leverage ratio (as defined in the Amended Credit Agreement), with a minimum and maximum applicable rate of 2.25% and 2.75% (formerly 0.25% and 0.75%), respectively, for base rate initial term loans, a minimum and maximum applicable rate of 3.25% and 3.75%, respectively, for base rate class B term loans, a minimum and maximum applicable rate of 3.25% and 3.75% (formerly 1.25% and 1.75%), respectively, for initial term loans on LIBOR and a minimum and maximum applicable rate of 4.25% and 4.75%, respectively, for class B term loans on LIBOR. In the event of the occurrence of certain events of default, all amounts due under the Amended Credit Agreement will bear interest at 2.0% above the rate otherwise applicable.

Financial ratios under the Amended Credit Agreement are as follows:


	•	The interest coverage ratio is 2.00:1.00 for the period ended December 31, 2009; 1.75:1.00 for the periods ending March 31, 2010 through September 30, 2010; 2.00:1.00 for the periods ending December 31, 2010 through September 30, 2011; 2.50:1.00 for the period ending December 31, 2011; and 3.00:1.00 for all periods thereafter.

	•	The fixed charge coverage ratio is 1.00:1.00 for the period ended December 31, 2009 through maturity.

	•	The leverage ratio is 3.25:1.00 for the period ended December 31, 2009; 3.50:1.00 for the period ended March 31, 2010; 3.85:1.00 for the periods ending June 30, 2010 through September 30, 2010; 3.25:1.00 for the period ending December 31, 2010; and 3.00:1.00 for all periods thereafter.

	•	The senior secured leverage ratio is 3.00:1.00 for the period ended December 31, 2009; 3.25:1.00 for the period ended March 31, 2010; 3.65:1.00 for the periods ending June 30, 2010 through September 30, 2010; 3.00:1.00 for the periods ending December 31, 2010 through March 31, 2011; and 2.50:1.00 for all periods thereafter.

The Amended Credit Agreement also contains customary events of default, including failure to make payments when due under the Amended Credit Agreement; cross-default to other material indebtedness; breach of covenants; breach of representations and warranties; bankruptcy; material judgments; dissolution; ERISA events; change of control; invalidity of guarantees or security documents or repudiation by the Company of its obligations thereunder. The Amended Credit Agreement is secured by substantially all of the assets of the Company.

Under the revolving facility under the Amended Credit Agreement, the Company is required to pay a fee, on a quarterly basis, for the total unused commitment amount. This fee ranges from 0.30% to 0.50% based on the Company’s leverage ratio at the time. The Company may also draw upon this credit facility through letters of credit, which carries a fee of 0.25% of the outstanding letters of credit.

The Amended Credit Agreement allows the Company to borrow incremental term loans to the extent the Company’s senior secured leverage ratio remains below 2.50:1.00.

The Company had $29.8 million of cash and cash equivalents as of September 30, 2010.

AMERICAN REPROGRAPHICS COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands, except per share data)

(Unaudited)

As of September 30, 2010, the Company was in compliance with the financial covenants in its Amended Credit Agreement and currently anticipates to be in compliance through the term of that agreement. The Company’s trailing twelve months key financial covenant ratios as of September 30, 2010 were 2.11:1.00 for interest coverage, 1.20:1.00 for fixed charge coverage, 3.12:1.00 for leverage and 2.98:1.00 for senior secured leverage.

The Company’s ability to maintain compliance under the financial covenants of the Amended Credit Agreement is highly sensitive to, and dependent upon, achieving projected levels of EBITDA and related operating expenses. Based on the Company’s 2010 and 2011 projected revenue, the Company believes that it is operating in such a way that will enable it to achieve levels of EBITDA and related operating expenses that conform to the financial covenants under the Amended Credit Agreement.

If the Company defaults on the covenants under the Amended Credit Agreement and is unable to obtain waivers from its lenders, the lenders will be able to exercise their rights and remedies under the Amended Credit Agreement, including a call provision on outstanding debt, which would have a material adverse effect on its business, financial condition and liquidity. Because its Amended Credit Agreement contains cross-default provisions, triggering a default provision under its Amended Credit Agreement may require it to repay all debt outstanding under the credit facilities, including any amounts outstanding under its revolving senior secured credit facility (which currently has no debt outstanding) and may also temporarily or permanently restrict its ability to draw additional funds under the revolving senior secured credit facility.

As of September 30, 2010 and December 31, 2009, standby letters of credit totaled $4.0 million. Standby letters of credit and borrowings under the revolving credit facility reduced the Company’s borrowing availability under its senior secured revolving credit facility to $45.5 million as of September 30, 2010 and December 31, 2009, respectively.

All material terms and conditions, including the maturity dates of the Company’s existing senior secured credit facilities, remained the same as those described in Note 5, “Long-Term Debt,” to the Company’s consolidated financial statements included in its 2009 Annual Report on Form 10-K.

Foreign Credit Facilities

In the fourth quarter of 2009, in conjunction with its Chinese operations, UNIS Document Solutions Co. Ltd. (“UDS”) entered into one-year revolving credit facilities. The facilities provide for a maximum credit amount of 14.5 million Chinese Yuan Renminbi. This translates to U.S. $2.2 million as of September 30, 2010. Draws on the facilities are limited to 30 day periods and incur a fee of 0.5% of the amount drawn and no additional interest is charged.

Amended Swap Transaction

On October 2, 2009, the Company amended its interest rate swap transaction (“Amended Swap Transaction”), in which the Company exchanges its floating rate payments for fixed rate payments. The Company entered into the Amended Swap Transaction in order to reduce the notional amount under the initial swap transaction from $271.6 million to $210.8 million to hedge the Company’s then existing variable interest rate debt under the Amended Credit Agreement.

AMERICAN REPROGRAPHICS COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands, except per share data)

(Unaudited)

As of September 30, 2010, the Amended Swap Transaction had a negative fair value of $11.3 million of which $6.7 million was recorded in accrued expenses and $4.6 million was recorded in other long-term liabilities.


6.	Derivatives and Hedging Transactions

The Company enters into derivative instruments to manage its exposure to changes in interest rates. These instruments allow the Company to raise funds at floating rates and effectively swap them into fixed rates, without the exchange of the underlying principal amount. Such agreements are designated and accounted for under ASC 815, formerly SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. Derivative instruments are recorded at fair value as either assets or liabilities in the interim Condensed Consolidated Balance Sheets.

As of September 30, 2010 and December 31, 2009, the Company was party to the Amended Swap Transaction. The Amended Swap Transaction has a current notional amount of $199.4 million which is scheduled to amortize to $65.3 million at maturity in December 2012. Such agreement qualifies as a cash flow hedge under ASC 815. The effective portion of the change in the fair value of the derivative instrument is deferred in Accumulated Other Comprehensive Loss (“AOCL”), net of taxes, until the underlying hedged item is recognized in earnings. The ineffective portion of a fair value change on a qualifying cash flow hedge is recognized in earnings immediately. Over the next 12 months, the Company expects to reclassify $6.7 million from AOCL to interest expense.

The following table summarizes the fair value and classification on the interim Condensed Consolidated Balance Sheets of the Amended Swap Transaction as of September 30, 2010 and December 31, 2009:


		Fair Value
	Balance Sheet	September 30,		December 31,
	Classification	2010		2009

Derivative designated as hedging instrument under ASC 815
Amended Swap Transaction—current portion	Accrued expenses		$6,678		$6,908
Amended Swap Transaction—long term portion	Other long-term liabilities		4,624		4,010

Total derivatives designated as hedging			$11,302		$10,918

AMERICAN REPROGRAPHICS COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands, except per share data)

(Unaudited)

The following table summarizes the loss recognized in AOCL of derivatives, designated and qualifying as cash flow hedges for the three and nine months ended September 30, 2010, and 2009:


	Amount of Gain or (Loss) Recognized in AOCL on Derivative
	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2010			2009			2010			2009

Derivative in ASC 815 Cash Flow Hedging Relationship
Amended Swap Transaction		$92			$452			$(234	)		$4,196
Tax effect		(37	)		(163	)		115			(1,720	)

Amended Swap Transaction, net of tax effect		$55			$289			$(119	)		$2,476

The following table summarizes the effect of the Amended Swap Transaction on the interim Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2010 and 2009:


	Amount of Gain or (Loss) Reclassified from AOCL into Income
	(Effective Portion)												(Ineffective Portion)
	Three Months Ended						Nine Months Ended						Three Months Ended						Nine Months Ended
	September 30,						September 30,						September 30,						September 30,
	2010			2009			2010			2009			2010			2009			2010			2009

Location of Gain or (Loss) Reclassified from AOCL into Income
Interest expense		$(1,841	)		$(2,252	)		$(5,775	)		$(5,844	)		$ (44	)	$	(960	)		$(150	)	$	(960	)


7.	Fair Value Measurements

The Company adopted ASC 820 with respect to nonfinancial assets and liabilities on January 1, 2009. The Company has no non-financial assets and liabilities that are required to be measured at fair value on a recurring basis as of September 30, 2010 and December 31, 2009. In accordance with ASC 820, the Company has categorized its assets and liabilities that are measured at fair value into a three-level fair value hierarchy as set forth below. If the inputs used to measure fair value fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair value measurement. The three levels of the hierarchy are defined as follows:

Level 1—inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2—inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

Level 3—inputs to the valuation methodology are unobservable and significant to the fair value measurement.

AMERICAN REPROGRAPHICS COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands, except per share data)

(Unaudited)

The following table sets forth, by level within the fair value hierarchy, the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of September 30, 2010 and December 31, 2009. As required by ASC 820, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels.


	Significant Other Observable Inputs Level 2
	September 30,		December 31,
	2010		2009

Recurring Fair Value Measure
Amended Swap Transaction		$11,302		$10,918

Additionally, the Company has included additional required disclosures about the Company’s Amended Swap Transaction in Note 6 “Derivatives and Hedging Transactions.”

The Amended Swap Transaction is valued at fair value with the use of an income approach based on current market interest rates using a discounted cash flow model and an adjustment for counterparty risk. This model reflects the contractual terms of the derivative instrument, including the time to maturity and debt repayment schedule, and market-based parameters such as interest rates and yield curves. This model does not require significant judgment, and the inputs are observable. Thus, the derivative instrument is classified within Level 2 of the valuation hierarchy. The Company does not intend to terminate the Amended Swap Transaction prior to its expiration date of December 6, 2012.

The following table summarizes the bases used to measure certain assets and liabilities at fair value on a nonrecurring basis in the consolidated financial statements as of September 30, 2010:


	Significant Other Unobservable Inputs
	Level 3		Total Losses

Nonrecurring Fair Value Measure
Goodwill		$294,759		$38,263

In accordance with the provisions of ASC 350, goodwill was written down to its implied fair value of $294,759, resulting in an impairment charge of $38,263. See Note 4 “Goodwill and Other Intangibles Resulting from Business Acquisitions”, for further information regarding the process of determining the implied fair value of goodwill.

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 Company’s interim Condensed Consolidated Balance Sheets for cash and cash equivalents approximate their fair value due to the relatively short period to maturity of these instruments.

Short- and long-term debt: The carrying amount of the Company’s capital leases reported in the interim Condensed Consolidated Balance Sheets approximates fair value based on the Company’s current incremental borrowing rate for similar types of borrowing arrangements. The

AMERICAN REPROGRAPHICS COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands, except per share data)

(Unaudited)

carrying amount reported in the Company’s interim Condensed Consolidated Balance Sheets as of September 30, 2010 for its term loan credit facility is $199.4 million and $11.2 million for its subordinated notes payable. Using a discounted cash flow technique that incorporates a market interest rate which assumes adjustments for duration, optionality, and risk profile, the Company has determined the fair value of its term loan credit facility is $202.3 million as of September 30, 2010, and the fair value of its subordinated notes payable is $10.3 million as of September 30, 2010.

Interest rate hedge agreements: The fair value of the Amended Swap Transaction is based on market interest rates using a discounted cashflow model and an adjustment for counterparty risk.


8.	Income Taxes

On a quarterly basis, the Company estimates its effective tax rate for the full fiscal year and records a quarterly income tax provision based on the anticipated rate in conjunction with the recognition of any discrete items within the quarter.

The Company’s effective income tax rate for the three and nine months ended September 30, 2010 was impacted by the goodwill impairment, taken in the three months ended September 30, 2010. The total impairment of $38.3 million resulted in a tax benefit of $12.8 million, a 33.5% benefit. The effective tax rates for the three and nine months ended September 30, 2010 were negatively impacted by the fact that $3.9 million of the impairment charges related to stock basis goodwill, which is not tax deductible until the stock is disposed of and is treated as a permanent item for financial reporting purposes.

Excluding impairments, the Company’s effective income tax rate increased to 42.1% for the nine months ended September 30, 2010 from 40.9% for the same period in 2009. This increase is primarily due to significantly lower pretax income in conjunction with nondeductible items and lack of any tax benefit related to domestic production activities deduction projected for 2010.


9.	Commitments and Contingencies

Operating Leases. The Company has entered into various non-cancelable operating leases primarily related to facilities, equipment and vehicles used in the ordinary course of business.

Contingent Transaction Consideration. The Company is subject to earnout obligations entered into in connection with prior acquisitions. If the acquired businesses generate sales and/or operating profits in excess of predetermined targets, the Company is obligated to make additional cash payments in accordance with the terms of such earnout obligations. As of September 30, 2010, the Company has potential future earnout obligations for acquisitions consummated before the adoption of ASC 805 in the total amount of approximately $1.5 million through 2014 if predetermined financial targets are met or exceeded. These earnout payments are recorded as additional purchase price (as goodwill) when the contingent payments are earned and become payable.

Uncertain Tax Position Liability. The Company had a $1.6 million and $1.8 million contingent liability for uncertain tax positions as of September 30, 2010 and December 31, 2009, respectively.

Legal Proceedings. The Company is involved in various legal proceedings and claims from time to time in the normal course of business. The Company does not believe, based on currently available facts and

AMERICAN REPROGRAPHICS COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands, except per share data)

(Unaudited)

circumstances, that the final outcome of any of these matters, taken individually or as a whole, will have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows. The Company believes the amounts provided in its interim Condensed Consolidated Financial Statements, which are not material, are adequate in light of the probable and estimable liabilities. However, because such matters are subject to many uncertainties, the ultimate outcomes are not predictable and there can be no assurances that the actual amounts required to satisfy alleged liabilities will not exceed the amounts reflected in the Company’s interim Condensed Consolidated Financial Statements or will not have a material adverse effect on its consolidated financial position, results of operations or cash flows.


10.	Comprehensive Loss

The Company’s comprehensive loss includes foreign currency translation adjustments and changes in the fair value of the Amended Swap Transaction, net of taxes, which qualifies for hedge accounting.

The differences between net loss and comprehensive loss attributable to ARC for the three and nine months ended September 30, 2010 and 2009 are as follows:


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2010			2009			2010			2009

Net loss		$(25,217	)		$(28,192	)		$(22,775	)		$(14,349	)
Foreign currency translation adjustments		423			377			473			732
Gain (loss) on derivative, net of tax effect		55			289			(119	)		2,476

Comprehensive loss		(24,739	)		(27,526	)		(22,421	)		(11,141	)
Comprehensive income (loss) attributable to the noncontrolling interest		86			(28	)		132			(39	)

Comprehensive loss attributable to ARC		$(24,825	)		$(27,498	)		$(22,553	)		$(11,102	)

Asset and liability accounts of international operations are translated into U.S. dollars, the Company’s functional currency, at current rates. Revenues and expenses are translated at the weighted-average currency rate for the fiscal period.


11.	Earnings per Share

The Company accounts for earnings per share in accordance with ASC 260, formerly SFAS No. 128, Earnings per Share. Basic earnings per share is computed by dividing net income attributable to ARC by the weighted-average number of common shares outstanding for the period. Diluted earnings per 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 common shares subject to outstanding options and acquisition rights had been issued and if the additional common shares were dilutive. Common stock equivalents are excluded from the computation if their effect is anti-dilutive. Stock options totaling 2.2 million for the three and nine months ended September 30, 2010, respectively, were excluded from the calculation of diluted net income attributable to ARC per common share because they were anti-dilutive. Stock options totaling 2.2 million for the three and nine months ended September 30, 2009, were excluded from the calculation of diluted net income attributable to ARC per common share because they were anti-dilutive.

AMERICAN REPROGRAPHICS COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands, except per share data)

(Unaudited)

Basic and diluted earnings per share were calculated using the following common shares for the three and nine months ended September 30, 2010 and 2009:


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2010		2009		2010		2009

Weighted average common shares outstanding during the period—basic		45,224,369		45,138,446		45,190,660		45,115,059
Effect of dilutive stock options		—		—		—		—

Weighted average common shares outstanding during the period—diluted		45,224,369		45,138,446		45,190,660		45,115,059


12.	Segment and Geographic Reporting

The provisions of ASC 280, formerly 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 operating segments based on the various business activities that earn revenue and incur expense, whose operating results are reviewed by the chief operating decision maker. Based on the fact that operating segments have similar products and services, classes of customers, production processes and performance objectives, the Company is deemed to operate as a single reportable segment.

The Company recognizes revenues in geographic areas based on the location to which the product was shipped or in which services were rendered. Operations outside the United States, have been small but growing. See table below for revenues for the three and nine months ended September 30, 2010 and 2009, respectively, and long-lived assets, net, attributable to the Company’s U.S. operations and foreign operations as of September 30, 2010 and December 31, 2009, respectively.


	Three Months Ended												Nine Months Ended
	September 30,												September 30,
	2010						2009						2010						2009
			Foreign						Foreign						Foreign						Foreign
	U.S.		Countries		Total		U.S.		Countries		Total		U.S.		Countries		Total		U.S.		Countries		Total

Revenues from external customers	$	99,993	$	9,428	$	109,421	$	111,740	$	7,610	$	119,350	$	310,561	$	26,109	$	336,670	$	369,961	$	19,926	$	389,887

September 30, 2010

December 31, 2009

Foreign

U.S.

Countries

Total

U.S.

Countries

Total

Long-lived assets, net

$419,128

$7,705

$426,833

$478,489

$8,998

$487,487

AMERICAN REPROGRAPHICS COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONCLUDED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)


13.	Recent Accounting Pronouncements

In January 2010, the FASB issued ASU 2010-06. This update provides amendments to the criteria of ASC 820-10, Fair Value Measurements and Disclosures. The amendments to this update (i) require new disclosures for transfers in and out of level 1 and 2, and activity in level 3 fair value measurements, (ii) provides amendments that clarify existing disclosures for level of disaggregation and disclosures about inputs and valuation techniques and (iii) includes conforming amendments to the guidance on employers’ disclosures about postretirement benefit plan assets. ASU 2010-06 is effective for financial statements issued for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in level 3 fair value measurements, which are effective for fiscal years beginning on or after December 15, 2010, and for interim periods within those fiscal years. The Company adopted the provisions of ASU 2010-06 effective March 31, 2010. See Note 7 “Fair Value Measurements” for required disclosures.

In October 2009, the FASB issued ASU No. 2009-13, Multiple-Deliverable Revenue Arrangements a consensus of the FASB Emerging Issues Task Force , (“ASU 2009-13”). This update provides amendments to the criteria of ASC 605, Revenue Recognition, for separating consideration in multiple-deliverable arrangements. The amendments to this update establish a selling price hierarchy for determining the selling price of a deliverable. ASU 2009-13 is effective for financial statements issued for years beginning on or after June 15, 2010, therefore, the Company will implement in its Consolidated Financial Statements effective January 1, 2011. The Company is currently evaluating the impact, if any, that the adoption of ASU 2009-13 may have on its Consolidated Financial Statements.


Item 2.	*Management’s Discussion and Analysis of Financial Condition and Results of Operations*

The following discussion should be read in conjunction with our interim Condensed Consolidated Financial Statements and the related notes and other financial information appearing elsewhere in this report as well as Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our 2009 Annual Report on Form 10-K and our Quarterly Report on Form 10-Q for the first and second quarters of fiscal year 2010.

Executive Summary

American Reprographics Company (“ARC,” the “Company,” “we” or “us”) is the leading reprographics company in the United States. We provide business-to-business document management services primarily to the architectural, engineering and construction (“AEC”) industry, through a nationwide network of locally-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 similar to our core AEC offerings.

Our services apply to time-sensitive and graphic-intensive documents and fall into four primary categories:


	•	Document management. Document management typically involves storing, tracking and providing authorized access to documents we maintain on our customers behalf. This activity is largely accomplished through digital database management as documents enter our digital infrastructure and are maintained on our production workstations, servers and networks.

	•	Document distribution and logistics. Document distribution and logistics involves transferring digital documents throughout our local and wide-area computer networks, and over the internet, as well as pickup, delivery and shipping of hardcopy documents to and from locations around the world.

	•	Print-on-demand. Print-on-demand usually involves quick-turnaround digital printing of documents in black and white and color, and in a wide variety of sizes and formats

	•	On-site services, frequently referred to as facilities management (“FMs”), which is any combination of the above services supplied at a customer’s location. On-site services typically involve placing equipment and sometimes staff in our customers’ locations to provide convenience printing and other reprographic services. This category is evolving to include the management of entire print networks in our customers’ offices, which we refer to as “managed print services” or “MPS.”

We deliver these services through our specialized technology, more than 550 sales and customer service employees, and more than 5,700 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 more than 138,000 customers throughout the United States.

Historically our operating segments have functioned under local brand names. Each brand name typically represents a business or group of businesses that has been acquired by us. In the past, industry conventions have led us to maintain acquired brands wherever practical due to the local nature of construction activity. Today, however, the local nature of construction is changing as reflected by the consolidation activity in the industry. This suggests that consolidating our local operations under a single brand may provide us with a unique marketing advantage in light of our scope and scale, especially as it relates to customers that have a

national presence. We are currently exploring whether or not to implement such a marketing strategy while continuing to maintain our existing local brands.

A significant component of our historical growth has been from acquisitions. The timing and number of acquisitions depends on various factors, including but not limited to, market conditions and availability of funding. As part of our growth strategy, we sometimes open or acquire branch or satellite service centers in contiguous markets, which we view as a low-cost, rapid form of market expansion. Our branch openings require modest capital expenditures and are expected to generate operating profit within the first 12 months of operations.

Acquisition activity has not been a meaningful part of our 2010 operations due to the potential risks inherent in a depressed economy. As a result, in the first nine months of 2010, we did not acquire any businesses. As the economy improves, it is our current intention to resume acquisition activity as a substantial component of our growth strategy, and we have a growing interest in pursuing international acquisitions, especially as they relate to UNIS Document Solutions Co. Ltd. (“UDS”), our business venture with Unisplendour Corporation Limited (“Unisplendour”). In 2009, we acquired two U.S. businesses, one of which consisted of a “stand-alone acquisition” and the other which consisted of a “fold-in acquisition” (refer to the “Acquisitions” section below for an explanation of these terms), and one Chinese business through UDS for $2.9 million.

Evaluating our Performance. We believe we are able to deliver value to our stockholders by:


	•	Creating consistent, profitable-growth, or in the absence of growth due to market conditions beyond our control, stable margins superior to commonly understood industry benchmarks;

	•	Maintaining our industry leadership position as measured by our geographical footprint, market share and revenue generation capabilities;

	•	Continuing to develop and invest in our products, services, and technology to meet the changing needs of our customers;

	•	Maintaining a low cost structure; 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, earnings before taxes (“EBT”), earnings before interest and taxes (“EBIT”), earnings before interest, taxes, depreciation, amortization and stock-based compensation (“EBITDA”) and operating cash flow to operate and assess the performance of our business.

We identify operating segments based on the various business activities that earn revenue and incur expense, the operating results of which are reviewed by management. Based on the fact that our operating segments have similar products and services, class of customers, production process and performance objectives, we are determined to operate as a single reportable business segment.

Please refer to our 2009 Annual Report on Form 10-K for more information regarding our primary financial measures.

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;


	•	Material and labor costs as a percentage of net sales; and

	•	Days sales outstanding/days sales inventory/days payable outstanding.

In addition to using these financial measures at the corporate level, we monitor some of them daily and operating segment by operating segment 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 flows of each operating segment.

We believe our current customer segment mix is approximately 76% of revenues derived from the AEC industry, and 24% derived from non-AEC sources. We believe that non-AEC sources of revenue currently offer more attractive revenue opportunities in light of current credit and spending constraints affecting the AEC industry, therefore, we plan to increasingly focus our business on the non-AEC industry. Given this focus, we expect non-AEC revenues to continue to grow relative to our overall revenue in the future.

Not all of these financial measurements are represented directly on our Consolidated Financial Statements, but meaningful discussions of each are part of our Quarterly Reports on Form 10-Q and presentations to the investment community.

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 post-acquisition application of financial best practices, significantly greater purchasing power, and productivity-enhancing technology.

Based on our experience derived from completing more than 140 acquisitions since 1997, we believe that the reprographics industry is highly fragmented and comprised primarily of small businesses with less than $7.0 million in annual sales. None of our individual acquisitions in the past three years have added a material percentage of sales to our overall business. In the aggregate, however, our prior acquisitions have fueled the bulk of our historical annual sales growth. Acquisition activity has not been a meaningful part of our 2010 operations due to the potential risks of such activity inherent in a depressed economy. As the economy improves in the United States, it is our current intention to resume acquisition activity as a substantial component of our growth strategy. Currently, we are actively reviewing acquisition opportunities in China with UDS, our business venture with Unisplendour, and selectively in other countries as individual national economies emerge from the recent economic downturn.

When we acquire businesses, our management typically uses the previous year’s 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 the previous year’s sales figures to assist us in determining how the acquired business will be integrated into the overall management structure of our Company. We categorize newly acquired businesses in one of two ways:


	1.	Standalone Acquisitions. Post-acquisition, these businesses maintain their existing local brand and act as strategic platforms for the Company to acquire market share in and around the specific geographical location.

	2.	Branch/Fold-in Acquisitions. These acquisitions are equivalent to 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, 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. Goodwill typically represents the purchase price of an acquired business less the fair value of tangible assets and identifiable intangible assets. We test our goodwill components for impairment annually on September 30 and more frequently if events and circumstances indicate that goodwill might be impaired. See Note 4 “Goodwill and Other Intangibles Resulting from Business Acquisitions” to our interim Condensed Consolidated Financial Statements for further information.

Economic Factors Affecting Financial Performance. Based on a compilation of approximately 90% of revenues from our operating segments and certain assumptions derived from data relating to AEC and non-AEC customers, we estimate that sales to the AEC industry accounted for 76% of our net sales for the period ended September 30, 2010, with the remaining 24% consisting of sales to non-AEC industries. As a result, our operating results and financial condition can be significantly affected by economic factors that influence the AEC industry, such as the availability of commercial credit at reasonably attractive rates, non-residential and residential construction spending, GDP growth, interest rates, employment rates, commercial vacancy rates, and government expenditures. The effects of the current economic environment in the United States, and weakness in global economic conditions, have resulted in a significant reduction of activity in the non-residential and residential portions of the AEC industry, which in turn, has produced a decline in our revenues over the past two years. We believe that the AEC industry generally experiences downturns several months after a downturn in the general economy and that there may be a similar delay in the recovery of the AEC industry following a recovery in the general economy. Similar to the AEC industry, the reprographics industry typically lags a recovery in the broader economy.

Non-GAAP Financial Measures.

EBIT, EBITDA and related ratios presented in this report are supplemental measures of our performance that are not required by or presented in accordance with accounting principles generally accepted in the United States of America (“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 flows 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, amortization and stock-based compensation. Deducting stock-based compensation in calculating EBITDA is consistent with the definition of EBITDA in our amended credit and guaranty agreement, therefore we believe this information is useful to investors in assessing our ability to meet our debt covenants. EBIT margin is a non-GAAP measure calculated by dividing EBIT by net sales. EBITDA margin is a non-GAAP measure calculated by dividing EBITDA by net sales.

We present EBIT, 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.

We use EBIT and EBITDA to measure and compare the performance of our operating segments. Our operating segments’ financial performance includes all of the operating activities except for debt and taxation which are managed at the corporate level for U.S. operating segments. 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 operating segments. We also use EBIT to measure performance for determining operating segment-level compensation and we use EBITDA to measure performance for determining consolidated-level compensation.

We also use EBIT and EBITDA to evaluate potential acquisitions and to evaluate whether to incur capital expenditures.

EBIT, EBITDA and related ratios have limitations as analytical tools, and you should not consider them in isolation, or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are as follows:


	•	They do not reflect our cash expenditures, or future requirements for capital expenditures and contractual commitments;

	•	They do not reflect changes in, or cash requirements for, our working capital needs;

	•	They do not reflect the significant interest expense, or the cash requirements necessary, to service interest or principal payments on our debt;

	•	Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA does not reflect any cash requirements for such replacements; and

	•	Other companies, including companies in our industry, may calculate these measures differently than we do, limiting their usefulness as comparative measures.

Because of these limitations, EBIT, EBITDA, and related ratios should not be considered as measures of discretionary cash available to us to invest in business growth or to reduce our indebtedness. We compensate for these limitations by relying primarily on our GAAP results and using EBIT, EBITDA and related ratios only as supplements. For more information, see our interim Condensed Consolidated Financial Statements and related notes elsewhere in this report. Additionally, please refer to our 2009 Annual Report on Form 10-K.

We have presented adjusted net loss attributable to ARC and adjusted earnings per share attributable to ARC shareholders for the three and nine months ended September 30, 2010 and 2009 to reflect the exclusion of the goodwill impairment charges, long-lived assets impairment charge and the ineffective portion of the Swap Transaction. This presentation facilitates a meaningful comparison of our operating results for the three and nine months ended September 30, 2010 and 2009. We presented adjusted EBITDA in the three and nine months ended September 30, 2010 and 2009 to exclude the non-cash goodwill and long-lived assets impairment total charges of $38.3 million and $38.2 million, respectively, as we believe this was a result of the current macroeconomic environment and not indicative of our operations. The exclusion of the goodwill and long-lived assets impairment charges to arrive at adjusted EBITDA is consistent with the definition of adjusted EBITDA in the amendment (the “Amended Credit Agreement”) to the Credit Agreement, therefore we believe this information is useful to investors in assessing our ability to meet our debt covenants.

The following is a reconciliation of cash flows provided by operating activities to EBIT, EBITDA, and net loss attributable to ARC:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
	(Dollars in thousands)

Cash flows provided by operating activities		$10,262			$19,566			$38,008			$75,364
Changes in operating assets and liabilities, net of effect of business acquisitions		6,166			704			7,443			(8,851	)
Non-cash (expenses) income, including depreciation and amortization		(41,645	)		(48,462	)		(68,226	)		(80,862	)
Income tax (benefit) provision		(12,668	)		(5,334	)		(10,862	)		3,520
Interest expense, net		5,614			6,428			17,256			18,060
Net loss attributable to the noncontrolling interest		73			28			27			39

EBIT		(32,198	)		(27,070	)		(16,354	)		7,270
Depreciation and amortization		10,757			12,185			33,521			37,651
Stock-based compensation		1,453			1,403			4,371			3,564

EBITDA		(19,988	)		(13,482	)		21,538			48,485
Interest expense, net		(5,614	)		(6,428	)		(17,256	)		(18,060	)
Income tax benefit (provision)		12,668			5,334			10,862			(3,520	)
Depreciation and amortization		(10,757	)		(12,185	)		(33,521	)		(37,651	)
Stock-based compensation		(1,453	)		(1,403	)		(4,371	)		(3,564	)

Net loss attributable to ARC		$(25,144	)		$(28,164	)		$(22,748	)		$(14,310	)

The following is a reconciliation of net loss attributable to ARC to EBIT, EBITDA and adjusted EBITDA:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
	(Dollars in thousands)

Net loss attributable to ARC		$(25,144	)		$(28,164	)		$(22,748	)		$(14,310	)
Interest expense, net		5,614			6,428			17,256			18,060
Income tax (benefit) provision		(12,668	)		(5,334	)		(10,862	)		3,520

EBIT		(32,198	)		(27,070	)		(16,354	)		7,270
Depreciation and amortization		10,757			12,185			33,521			37,651
Stock-based compensation		1,453			1,403			4,371			3,564

EBITDA		$(19,988	)		$(13,482	)		$21,538			$48,485

Special items:
Goodwill impairment		38,263			37,382			38,263			37,382
Impairment of long-lived assets		—			781			—			781

Adjusted EBITDA		$18,275			$24,681			$59,801			$86,648

The following is a reconciliation of net loss margin to EBIT margin, EBITDA margin and adjusted EBITDA margin:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2010 (1)			2009			2010			2009 (1)

Net loss margin attributable to ARC		(23.0	)%		(23.6	)%		(6.8	)%		(3.7	)%
Interest expense, net		5.1			5.4			5.1			4.6
Income tax provision		(11.6	)		(4.5	)		(3.2	)		0.9

EBIT margin		(29.4	)		(22.7	)		(4.9	)		1.9
Depreciation and amortization		9.8			10.2			10.0			9.7
Stock-based compensation		1.3			1.2			1.3			0.9

EBITDA margin		(18.3	)%		(11.3	)%		6.4	%		12.4	%

Special items:
Goodwill impairment		35.0			31.3			11.4			9.6
Impairment of long-lived assets		—			0.7			—			0.2

Adjusted EBITDA margin		16.7	%		20.7	%		17.8	%		22.2	%


(1)		column does not foot due to rounding

The following is a reconciliation of net loss attributable to ARC to unaudited adjusted net income attributable to ARC and earnings per share to adjusted earnings per share:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009

Net loss attributable to ARC		$(25,144	)		$(28,164	)		$(22,748	)		$(14,310	)
Goodwill impairment		38,263			37,382			38,263			37,382
Impairment of long-lived assets		—			781			—			781
Ineffective portion of Swap Transaction		44			960			150			960
Income tax benefit, related to above items		(12,838	)		(8,041	)		(12,880	)		(8,041	)

Unaudited adjusted net income attributable to ARC		$325			$2,918			$2,785			$16,772

Earnings per share attributable to ARC shareholders (actual):
Basic		$(0.56	)		$(0.62	)		$(0.50	)		$(0.32	)

Diluted		$(0.56	)		$(0.62	)		$(0.50	)		$(0.32	)

Weighted average common shares outstanding:
Basic		45,224,369			45,138,446			45,190,660			45,115,059
Diluted		45,224,369			45,138,446			45,190,660			45,115,059
Earnings per share attributable to ARC shareholders (adjusted)
Basic		$0.01			$0.06			$0.06			$0.37

Diluted		$0.01			$0.06			$0.06			$0.37

Weighted average common shares outstanding (adjusted):
Basic		45,224,369			45,138,446			45,190,660			45,115,059
Diluted		45,439,385			45,352,608			45,432,553			45,229,386

Results of Operations for the Three and Nine Months Ended September 30, 2010 and 2009

The following table provides information on the percentages of certain items of selected financial data compared to net sales for the periods indicated:


	As Percentage of Net Sales						As Percentage of Net Sales
	Three Months Ended September 30,						Nine Months Ended September 30,
	2010 (1)			2009			2010			2009

Net Sales		100.0	%		100.0	%		100.0	%		100.0	%
Cost of sales		68.0			65.5			66.9			63.5

Gross profit		32.0			34.5			33.1			36.5
Selling, general and administrative expenses		24.3			22.9			24.3			22.7
Amortization of intangibles		2.3			2.3			2.3			2.2
Goodwill impairment		35.0			31.3			11.4			9.6
Impairment of long-lived assets		—			0.7			—			0.2

(Loss) income from operations		(29.5	)		(22.7	)		(4.9	)		1.8
Other income		—			—			—			—
Interest expense, net		5.1			5.4			5.1			4.6

Loss before income tax (benefit) provision		(34.6	)		(28.1	)		(10.0	)		(2.8	)
Income tax (benefit) provision		(11.6	)		(4.5	)		(3.2	)		0.9

Net loss		(23.0	)		(23.6	)		(6.8	)		(3.7	)
Loss attributable to the noncontrolling interest		0.1			—			—			—

Net loss attributable to ARC		(23.0	)%		(23.6	)%		(6.8	)%		(3.7	)%


(1)		column does not foot due to rounding

Three and Nine Months Ended September 30, 2010 Compared to Three and Nine Months Ended September 30, 2009


	Three Months Ended September 30,						Increase (Decrease)						Nine Months Ended September 30,						Increase (Decrease)
	2010			2009			(In dollars)			(Percent)			2010 (1)			2009			(In dollars)			(Percent)
				(In millions)												(In millions)

Reprographics services		$72.7			$82.0			$(9.3	)		(11.3	)%		$227.4			$274.7			$(47.3	)		(17.2	)%
Facilities management		22.6			23.4			(0.8	)		(3.4	)%		67.6			75.2			(7.6	)		(10.1	)%
Equipment and supplies sales		14.1			14.0			0.1			0.7	%		41.6			40.1			1.5			3.7	%

Total net sales		$109.4			$119.4			$(10.0	)		(8.3	)%		336.7			$390.0			(53.3	)		(13.6	)%
Gross profit		$35.0			$41.1			$(6.1	)		(14.8	)%		$111.3			$142.3			$(31.0	)		(21.8	)%
Selling, general and administrative expenses		26.6			27.3			(0.7	)		(2.6	)%		81.9			88.3			(6.4	)		(7.2	)%
Amortization of intangibles		2.5			2.8			(0.3	)		(10.7	)%		7.7			8.7			(1.0	)		(11.5	)%
Goodwill impairment		38.3			37.4			0.9			2.4	%		38.3			37.4			0.9			2.4	%
Impairment of long-lived assets		—			0.8			(0.8	)		(100.0	)%		—			0.8			(0.8	)		(100.0	)%
Interest expense, net		5.6			6.4			(0.8	)		(12.5	)%		17.3			18.1			(0.8	)		(4.4	)%
Income tax (benefit) provision		(12.7	)		(5.3	)		(7.4	)		139.6	%		(10.9	)		3.5			(14.4	)		(411.4	)%
Net loss attributable to ARC		(25.1	)		(28.2	)		3.1			(11.0	)%		(22.7	)		(14.3	)		(8.4	)		58.7	%
EBITDA		(20.0	)		(13.5	)		(6.5	)		48.1	%		21.5			48.5			(27.0	)		(55.7	)%


(1)		column does not foot due to rounding

Net Sales

Net sales decreased by 8.3% for the three months ended September 30, 2010, compared to the three months ended September 30, 2009. Net sales decreased by 13.6% for the nine months ended September 30, 2010, compared to the same period in 2009.

In the three and nine months ended September 30, 2010, the decrease in net sales was due primarily to overall continued weakness in the global economy and a continuing lack of new construction activity in the AEC industry.

Reprographics services. Net sales during the three months ended September 30, 2010 decreased by $9.3 million, or 11.3%, compared to the three months ended September 30, 2009. Net sales during the nine months ended September 30, 2010 decreased by $47.3 million, or 17.2%, compared to the same period in 2009.

Overall reprographics services sales nationwide were negatively affected by the continued depressed national economy and continuing lack of new construction activity in the AEC industry. These conditions caused the decrease in revenue for the three and nine months ended September 30, 2010. Large-format black-and-white printing revenue was affected most, as this revenue category is more closely tied to construction activity. Large-format black-and-white printing revenues represented approximately 36% of reprographics services for the three and nine months ended September 30, 2010; large-format black-and-white printing revenues decreased by approximately 20% and 27% for the three and nine months ended September 30, 2010, respectively, compared to the three and nine months ended September 30, 2009.

Large and small-format color printing in both the AEC market, and in the non-AEC market, comprised approximately 25% of our overall reprographics services revenue for the three and nine months ended September 30, 2010. Net sales of digital color printing services has increased 1.6% in the third quarter of 2010 compared to the same period in 2009, and decreased 2.3% during the nine months ended September 30, 2010, compared to the same period in 2009.

We believe there is a growing demand for digital color printing services across all market segments due to increased equipment availability and lower production prices than have been seen in the past. We have branded a portion of our operations to address this growing demand. Our new marketing unit, Riot Creative Imaging, now features seven dedicated production facilities in major metropolitan areas around the United States, with three more centers scheduled to open by the end of 2010.

While most of our customers in the AEC industry still prefer to receive documents in hardcopy, paper format, we have seen an increase in our digital service revenue as a percentage of total sales. This increase is presumably due to the greater efficiency that digital document workflows bring to our customers’ businesses, and also due to greater consistency in the way that we charge for these services as they become more widely accepted throughout the AEC industry. As was the case with our overall sales, however, digital service revenue was negatively affected by current market conditions. During the three and nine months ended September 30, 2010, digital service revenue decreased by $0.2 million or 2.4% and $2.9 million, or 8.7%, respectively, over the same period in 2009, but as a percentage of our overall sales it increased from 8.6% to 9.1% and 8.5% to 9.0%, respectively.

Facilities management. FM or “on-site” sales for the three and nine months ended September 30, 2010, decreased by $0.8 million or 3.4% and $7.6 million or 10.1%, compared to the same periods in 2009. FM revenue is derived from a single cost per square foot of printed material, similar to our reprographics services revenue. As convenience and speed continue to characterize our customers’ needs, and as printing equipment continues to become smaller and more affordable, the trend of placing equipment, and sometimes staff, in an architectural studio or construction company office remains strong, as evidenced by a net increase of approximately 90 facilities management accounts during the nine months ended September 30, 2010,

bringing our total FM accounts to approximately 5,790 as of September 30, 2010. By placing 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 was produced in one of our centralized production facilities. The resulting benefit is the convenience of on-site production with a pass-through or reimbursable cost of business that many customers continue to find attractive. Despite the net increase in FM accounts, however, sales decreased as the volume of prints at FM locations declined due to the economic conditions described above. We have seen growing interest in the marketplace for managed print services (MPS), an expanded variation on our traditional FM services. Involving the outsourced management of print-based networks within our customers’ offices, this service typically requires a longer sales cycle than our traditional FM offering. We are in the early stages of introducing this service to our customers and results from our sales and marketing efforts will be reviewed in future quarters.

Equipment and supplies sales. Equipment and supplies sales for the three months ended September 30, 2010 increased by $0.1 million, or 0.7%, as compared to the same period in 2009. In the nine months ended September 30, 2010, equipment and supplies sales increased by $1.5 million, or 3.7%, as compared to the same period in 2009. During the three and nine months ended September 30, 2010, the increase in equipment and supplies sales was primarily due to increased sales in UDS, our Chinese operations. UDS commenced operations during the third quarter of 2008 and acquired the assets of Shanghai Light Business Machines Co., Ltd. in July 2009. To date, the Chinese market has shown a preference for owning reprographics equipment in which the equipment is operated “in-house.” Chinese operations had sales of equipment and supplies of $4.8 million and $12.6 million during the three and nine months ended September 30, 2010, respectively, compared to $3.6 million and $9.0 million during the same period of 2009. In the U.S., facilities management sales programs have made steady progress as compared to outright sales of equipment and supplies through conversion of such sales contracts to on-site service accounts.

Gross Profit

Our gross profit and gross profit margin was $35.0 million, and 32.0%, during the three months ended September 30, 2010, respectively, compared to $41.1 million, and 34.5%, during the same period in 2009, respectively, during which time we experienced a year-over-year sales decline of $10.0 million.

During the nine month period ended September 30, 2010, gross profit and gross margin decreased to $111.3 million, and 33.1%, respectively, compared to $142.3 million, and 36.5%, during the same period in 2009, respectively, on a year-over-year sales decline of $53.3 million.

The primary reason for the decrease in gross margins was a change in our product mix. Material costs as a percentage of sales were 280 and 290 basis points higher for the three and nine months ended September 30, 2010, respectively, as compared to the same period in 2009. This was mainly due to an increase in lower margin equipment and supplies sales as a percentage of total sales. Specifically, lower margin equipment and supplies sales comprised 12.9% and 12.4% of total sales for the three and nine months ended September 30, 2010, respectively, compared to 11.7% and 10.3% for the same period in 2009. In response to the decline in sales, we implemented cost cutting initiatives that resulted in a decline in labor and overhead costs that were in line with the drop in sales. Therefore, overhead and labor costs as a percentage of sales for the three and nine months ended September 30, 2010 were consistent with 2009 percentages for the same time periods.

Selling, General and Administrative Expenses

Selling, general and administrative expenses decreased by $0.7 million, or 2.6%, during the three months ended September 30, 2010, compared to the same period in 2009.

Selling, general and administrative expenses decreased by $6.4 million, or 7.2% during the nine months ended September 30, 2010, compared to the same period in 2009.

The decrease was primarily due to the implementation of cost reduction programs initiated in response to the decline in sales and a decrease in bad debt expense. Specifically, general and administrative compensation decreased by $0.6 million and $2.3 million for the three and nine months ended September 30, 2010, respectively, compared to the same period in 2009. The decrease in general and administrative compensation was primarily due to the consolidation of certain back office functions performed across operating segments. Bad debt expense decreased by $18 thousand and $2.2 million for the three and nine months ended September 30, 2010, respectively, compared to the same period in 2009, as a result of improved collections and lack of significant write-offs in 2010. Despite the significant decrease in sales, sales compensation remained relatively consistent to prior year amounts because we hired additional sales personnel to implement new sales initiatives, such as our new marketing unit, Riot Creative Imaging, and our MPS offering. The increase in expense due to the hiring of additional personnel was offset by a drop in commissions resulting from the significant decline in sales.

Selling, general and administrative expenses as a percentage of net sales increased from 22.9% in the third quarter of 2009 to 24.3% in the third quarter of 2010 and from 22.7% in the nine months ended September 30, 2009 to 24.3% in the same period in 2010. This increase was primarily due to unabsorbed administrative and sales compensation costs resulting from the significant sales decline.

Amortization of Intangibles

Amortization of intangibles of $2.5 million and $7.7 million for the three and nine months ended September 30, 2010, respectively, remained consistent with the amount in the same period in 2009 due to the fact that acquisition activity and the size of acquisitions have decreased significantly since 2008. During the nine months ended September 30, 2010, we did not have any acquisitions, as compared to three small acquisitions in 2009 and 13 in 2008.

Goodwill Impairment

We assess goodwill at least annually for impairment as of September 30 or more frequently if events and circumstances indicate that goodwill might be impaired. Since our previous goodwill impairment analysis in September 30, 2009, there were no triggering events that required a subsequent interim impairment analysis. However, even if our procedures did not include an annual assessment of goodwill, there were sufficient indicators in the third quarter of 2010 to require a goodwill impairment analysis as of September 30, 2010. The indicators included among other factors, were our 2010 third quarter results and our revision of projected future earnings.

Goodwill impairment testing is performed at the operating segment (or “reporting unit”) level. Goodwill is assigned to reporting units at the date the goodwill is initially recorded. Once goodwill has been assigned to reporting units, it no longer retains its association with a particular acquisition, and all of the activities within a reporting unit, whether acquired or internally generated, are available to support the value of the goodwill. The results of our analysis in 2010 indicated that 13 of our reporting units, 12 in the United States, one in China, had a goodwill impairment as of September 30, 2010. Accordingly, we recorded a pretax, non-cash charge for the three and nine months ended September 30, 2010 to reduce the carrying value of goodwill by $38.3 million.

The results of our goodwill impairment analysis in the quarter ended September 30, 2009 indicated that 11 of our reporting units, nine in the United States, one in the United Kingdom, and one in Canada, had a goodwill impairment as of September 30, 2009. Accordingly, we recorded a pretax, non-cash charge for the three and nine months ended September 30, 2009 to reduce the carrying value of goodwill by $37.4 million.

Goodwill impairment testing is a two-step process. Step one involves comparing the fair value of our reporting units to their carrying amount. If the fair value of the reporting unit is greater than its carrying amount, there is no impairment. If the reporting unit’s carrying amount is greater than the fair value, the

second step must be completed to measure the amount of impairment, if any. Step two involves calculating the implied fair value of goodwill by deducting the fair value of all tangible and intangible assets, excluding goodwill, of the reporting unit from the fair value of the reporting unit as determined in Step one. The implied fair value of goodwill determined in this step is compared to the carrying value of goodwill. If the implied fair value of goodwill is less than the carrying value of goodwill, an impairment loss is recognized equal to the difference.

We determined the fair value of our reporting units using an income approach. Under the income approach, we determined fair value based on estimated future discounted cash flows of each reporting unit. The cash flows are discounted by an estimated weighted-average cost of capital, which reflects the overall level of inherent risk of a reporting unit. Determining the fair value of a reporting unit is judgmental in nature and requires the use of significant estimates and assumptions, including revenue growth rates and operating margins, discount rates and future market conditions, among others. We considered market information in assessing the reasonableness of the fair value under the income approach outlined above.

Given the current economic environment and the uncertainties regarding the impact on our business, there can be no assurance that our estimates and assumptions regarding the duration of the ongoing economic downturn in our industry, or the period or strength of recovery, made for purposes of our goodwill impairment testing during the nine months ended September 30, 2010, will prove to be accurate predictions of the future. If our assumptions regarding forecasted revenue or gross margins of certain reporting units are not achieved, we may be required to record additional goodwill impairment charges in future periods, whether in connection with our next annual impairment testing in the third quarter of 2011, or prior to that, if any such change constitutes a triggering event outside of the quarter when we regularly perform our annual goodwill impairment test. It is not possible at this time to determine if any such future impairment charge would result or, if it does, whether such charge would be material.

Impairment of Long-Lived Assets

We periodically assess potential impairments of long-lived assets in accordance with the provisions of ASC 360, formerly 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 we considered include, but are not limited to, significant underperformance relative to historical or projected 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, we estimate 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, we recognize 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 value, if available, or discounted cash flows, if not.

Our operating segments are being negatively impacted by the drop in commercial and residential construction resulting from the current economic downturn. Before assessing our goodwill for impairment, we evaluated, as described above, the long-lived assets of our operating segments for impairment as of September 30, 2010 and 2009 given the reduced level of expected sales, profits and cash flows. Based on this assessment there was no impairment in 2010. In 2009 we determined that there was an impairment of long-lived assets of our operating segment in the United Kingdom. Accordingly, we recorded a pretax, non-cash charge as of September 30, 2009 to reduce the carrying value of other intangible assets by $0.8 million.

Interest Expense, Net

Net interest expense decreased during the three and nine months ended September 30, 2010 compared to the same period in 2009. During the three and nine months ended September 30, 2010 our average debt

decreased by $71.1 million and $78.1 million, respectively, compared to the same period in 2009. The decrease in interest expense related to the debt reduction was partially offset by an increase in weighted average interest rates of 95 and 171 basis points, respectively, pertaining to the same periods, above.

Income Taxes

Our effective income tax rate for the three and nine months ended September 30, 2010 was affected by the goodwill impairment in the three months ended September 30, 2010. The impairment of $38.3 million resulted in a tax benefit of $12.8 million, a 33.5% benefit. Our effective tax rates for the three and nine months ended September 30, 2010 were negatively affected by $3.9 million of the impairment charges related to stock basis goodwill. This charge is not tax deductible until the stock is disposed of and is treated as a permanent item for financial reporting purposes.

Excluding impairments, our effective income tax rate increased to 42.1% for the nine months ended September 30, 2010 from 40.9% for the same period in 2009. This increase is primarily due to significantly lower pretax income in conjunction with nondeductible items and lack of any tax benefit related to domestic production activities deduction projected for 2010.

Noncontrolling Interest

Net loss attributable to noncontrolling interest represents 35% of the (income) loss attributable to UDS, our Chinese operations, which commenced operations on August 1, 2008.

Net Loss Attributable to ARC

Net loss attributable to ARC was $25.1 million and $22.7 million during the three and nine months ended September 30, 2010, respectively, compared to net loss of $28.2 million and $14.3 million in the same periods in 2009, respectively. The net loss attributable to ARC in 2010 and 2009 are primarily due to the $38.3 million and $37.4 million goodwill impairment charges, respectively, described above. The decrease, excluding the impairment charges, is primarily due to the decrease in sales and gross margins, partially offset by the decrease in general and administrative expenses described above.

EBITDA

EBITDA margin decreased to (18.3)% and 6.4% during the three and nine months ended September 30, 2010, respectively, compared to (11.3)% and 12.4% during the same period in 2009. Excluding the impact of the non-cash goodwill impairments and long-lived assets impairment charges, our adjusted EBITDA margin was 16.7% and 17.8% for the three and nine months ended September 30, 2010, respectively, as compared to 20.7% and 22.2% for the three and nine months ended September 30, 2009, respectively. Adjusted EBITDA margin for the three and nine months ended September 30, 2010 compared to 2009 was negatively affected by the decrease in gross profit, excluding the impact of depreciation, and the increase in selling, general and administrative expenses as a percentage of sales described above.

Impact of Inflation

Inflation has not had a significant effect on our operations. Price increases for raw materials, such as paper and fuel charges, 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 from operations and borrowings under our Amended Credit Agreement. Our historical uses of cash have been for acquisitions of reprographics businesses, payment of

principal and interest on outstanding debt obligations, and capital expenditures. Supplemental information pertaining to our historical sources and uses of cash is presented as follows and should be read in conjunction with our interim Condensed Consolidated Statements of Cash Flows and notes thereto included elsewhere in this report.


	Nine Months Ended
	September 30,
	2010			2009
	(Dollars in thousands)

Net cash provided by operating activities		$38,008			$75,364

Net cash used in investing activities		$(5,442	)		$(7,159	)

Net cash used in financing activities		$(32,453	)		$(55,685	)

Operating Activities

Our cash flows from operations are primarily driven by sales and net profit generated from these sales. The overall decrease in cash flows from operations in 2010 was due to the significant decline in sales and related profits and receivables. With the downturn in the general economy, we will continue to focus on our accounts receivable collections. As evidence of our continued focus on receivable collection efforts, our days sales outstanding (DSO) of 48 days has remained identical to our DSO in September 30, 2009. Cash flows from operations for the nine months ended September 30, 2010 were negatively affected by an increase in prepaid taxes of approximately $4.0 million. If the recent negative sales trends continue throughout 2010 and 2011, this will significantly impact our cash flows from operations in the future.

Investing Activities

Net cash used in investing activities of $5.4 million for the nine months ended September 30, 2010 relates to capital expenditures of $5.7 million at all of our operating segments, $0.5 million for an earnout payment related to a 2008 acquisition, partially offset by $0.8 million of cash inflows from other investing activities. Cash flows from other investing activities primarily relate to the cash proceeds generated from the sale of fixed assets. Payments for businesses acquired, net of cash acquired and including other cash payments and earnout payments associated with acquisitions, will vary depending on the timing and the size of acquisitions. Funds required to finance our business expansion will come from operating cash flows and additional borrowings.

Financing Activities

Net cash of $32.5 million used in financing activities during the nine months ended September 30, 2010 primarily relates to scheduled payments under the Amended Credit Agreement, capital leases and seller notes. During the nine months ended September 30, 2009 cash used in financing activities included approximately $11.0 million in early pay-downs of capital lease obligations, in addition to scheduled payments.

Our cash position, working capital, and debt obligations as of September 30, 2010, and December 31, 2009 are shown below and should be read in conjunction with our Consolidated Balance Sheets and notes thereto contained elsewhere in this report.


	September 30,			December 31,
	2010			2009
	(Dollars in thousands)

Cash and cash equivalents		$29,755			$29,377
Working capital		$(6,609	)		$(3,739	)
Borrowings from senior secured credit facilities		$199,375			$205,625
Other debt obligations		48,871			68,606

Total debt obligations		$248,246			$274,231

The decrease of $2.9 million in working capital in 2010 was primarily due to a $18.3 million net increase in the short-term portion of our senior secured debt, partially offset by a $4.5 million increase in accounts receivable, $4.1 million decrease in the current portion of seller notes and $2.8 million decrease in the current portion of capital lease obligations and $4.0 million increase in prepaid taxes. To manage our working capital, we focus on our number of days sales outstanding and monitor the aging of our accounts receivable, as receivables are the most significant element of our working capital.

We believe that our current cash balance of $29.8 million, availability under our revolving credit facility and additional cash flows provided by operations should be adequate to cover the next twelve months working capital needs, debt service requirements which consists of scheduled principal and interest payments, and planned capital expenditures, to the extent such items are known or are reasonably determinable based on current business and market conditions. In addition, we may elect to finance certain of our capital expenditure requirements through borrowings under our senior secured revolving credit facility, which had no debt outstanding nor did we draw any funds during the nine months ended September 30, 2010, or the issuance of additional debt which is dependent on availability of third party financing. See “Debt Obligations” section for further information related to our Amended Credit Agreement.

We generate the majority of our revenue from sales of products and services provided to the AEC industry. 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 and residential construction spending. The effects of the current economic environment in the United States, and weakness in global economic conditions, have resulted in a downturn in the residential and non-residential construction spending of the AEC industry, which have adversely affected our operating results. The current diminished liquidity and credit availability in financial markets and the general economic environment may adversely affect the ability of our customers and suppliers to obtain financing for significant operations and purchases, and to perform their obligations under their agreements with us. We believe the credit constraints in the financial markets are resulting in a decrease in, or cancellation of, existing business, could limit new business, and could negatively impact our ability to collect our accounts receivable on a timely basis. We are unable to predict the duration and severity of the current economic environment and disruption in financial markets or their effects on our business and results of operations, but the consequences may be materially adverse and more severe than other recent economic slowdowns.

Our ability to maintain compliance under the financial covenants of our Amended Credit Agreement is highly sensitive to, and dependent upon, achieving projected levels of EBITDA and related operating expenses. Based on our 2010 and 2011 projected revenue, we believe we are operating the company in such a way that will enable us to achieve levels of EBITDA and related operating expenses that conform to the financial covenants under our Amended Credit Agreement. As of September 30, 2010, we were in compliance with the financial covenants in our Amended Credit Agreement, and we currently anticipate to be in compliance through the term of that agreement. We believe that, although difficult, further cost reductions could be implemented in the event that projected revenue levels are not achieved. However, if actual sales are lower than our current projections and/or we do not successfully implement cost reduction plans, we could be at risk of default under the financial covenants of our Amended Credit Agreement.

If we default on the covenants under the Amended Credit Agreement and are unable to obtain waivers from our lenders, the lenders will be able to exercise their rights and remedies under the Amended Credit Agreement, including a call provision on outstanding debt, which would have a material adverse effect on our business, financial condition and liquidity. Because our Amended Credit Agreement contains cross-default provisions, triggering a default provision under our Amended Credit Agreement may require us to repay all debt outstanding under the credit facilities, including any amounts outstanding under our senior secured revolving credit facility (which currently has no debt outstanding), and may also temporarily or permanently restrict our ability to draw additional funds under the revolving senior secured credit facility. There is no assurance that we would receive waivers should we not meet our financial covenant requirements. Even if we are able to obtain a waiver, we may be required to agree to other adverse economic changes to our Amended Credit Agreement, including increased interest rates, amended covenants or lower availability thresholds and to pay a fee for any such waiver. If we are not able to comply with revised terms and conditions under our Amended Credit Agreement and we are unable to obtain waivers, we would need to obtain additional sources of liquidity. Given the unprecedented instability in worldwide credit markets, however, there can be no assurance that we would be able to obtain additional sources of liquidity on terms acceptable to us, or at all, which would have a material adverse effect on our business and financial condition. As we look forward, we are exploring various debt refinancing options that may be currently available to us.

During December 2007, we repurchased 447,654 shares of our common stock for $7.7 million which were funded through cash flows from operations. During the first nine months of 2010, we did not repurchase any common stock. Our Amended Credit Agreement allows us to repurchase stock and/or pay cash dividends in an amount not to exceed $15 million in aggregate over the term of the facility. As of September 30, 2010, we had $7.3 million available to repurchase stock and/or pay cash dividends under the credit facility. Additional share repurchases, if any, will be made in such amounts and at such times as we deem appropriate based upon prevailing market and business conditions and would be purchased primarily using subordinated debt in accordance with our credit facility.

We continually evaluate potential acquisitions. Our historical focus for this activity has been within North America, but we have recently begun to evaluate strategic international acquisitions in select nations where economic growth is beginning to emerge. 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 flows provided by operations and additional borrowings. 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 October 5, 2009 we entered into our Amended Credit Agreement with a beginning initial term loan of $209.7 million, class B term loan of $36.1 million and revolving credit facility of $49.5 million. On October 6, 2009, we prepaid on a pro-rata basis $35.0 million to reduce the initial term loan installments due on March 31, 2010, June 30, 2010 and September 30, 2010.

Loans under the Amended Credit Agreement bear interest, at our option, at either the base rate, which is equal to the higher of the bank prime lending rate or the federal funds rate plus 0.5% or LIBOR, plus, in each case, the applicable rate. The applicable rate is determined based upon the leverage ratio (as defined in the Amended Credit Agreement), with a minimum and maximum applicable rate of 2.25% and 2.75% (formerly 0.25% and 0.75%), respectively, for base rate initial term loans, a minimum and maximum applicable rate of 3.25% and 3.75%, respectively, for base rate class B term loans, a minimum and maximum applicable rate of 3.25% and 3.75% (formerly 1.25% and 1.75%), respectively, for initial term loans on LIBOR and a minimum and maximum applicable rate of 4.25% and 4.75%, respectively, for class B term

loans on LIBOR. In the event of the occurrence of certain events of default, all amounts due under the Amended Credit Agreement will bear interest at 2.0% above the rate otherwise applicable.

Financial ratios under the Amended Credit Agreement are as follows:


	•	The interest coverage ratio is 2.00:1.00 for the period ended December 31, 2009, 1.75:1.00 for the periods ending March 31, 2010 through September 30, 2010, 2.00:1.00 for the periods ending December 31, 2010 through September 30, 2011, 2.50:1.00 for the period ending December 31, 2011 and 3.00:1.00 for all periods thereafter.

	•	The fixed charge coverage ratio is 1.00:1.00 for the period ended December 31, 2009 through maturity.

	•	The leverage ratio is 3.25:1.00 for the period ended December 31, 2009, 3.50:1.00 for the period ended March 31, 2010, 3.85:1.00 for the periods ending June 30, 2010 through September 30, 2010, 3.25:1.00 for the period ending December 31, 2010 and 3.00:1.00 for all periods thereafter.

	•	The senior secured leverage ratio is 3.00:1.00 for the period ended December 31, 2009, 3.25:1.00 for the period ended March 31, 2010, 3.65:1.00 for the periods ending June 30, 2010 through September 30, 2010, 3.00:1.00 for the periods ending December 31, 2010 through March 31, 2011 and 2.50:1.00 for all periods thereafter.

The Amended Credit Agreement also contains customary events of default, including failure to make payments when due under the Amended Credit Agreement; cross-default to other material indebtedness; breach of covenants; breach of representations and warranties; bankruptcy; material judgments; dissolution; ERISA events; change of control; invalidity of guarantees or security documents or repudiation by our obligations thereunder. The Amended Credit Agreement is secured by substantially all of our assets.

Under the revolving facility under the Amended Credit Agreement, we are required to pay a fee, on a quarterly basis, for the total unused commitment amount. This fee ranges from 0.30% to 0.50% based on our leverage ratio at the time. We may also draw upon this credit facility through letters of credit, which carries a fee of 0.25% of the outstanding letters of credit.

The Amended Credit Agreement allows us to borrow incremental term loans to the extent our senior secured leverage ratio remains below 2.50:1.00.

Term loans under the Amended Credit Agreement are amortized over the term with the final payment due on December 6, 2012. Amounts borrowed under the revolving credit facility under the Amended Credit Agreement must be repaid by December 6, 2012. Outstanding obligations under the Amended Credit Agreement may be prepaid in whole or in part without premium or penalty.

As of September 30, 2010, we were in compliance with the financial covenants in our Amended Credit Agreement. Our trailing twelve months key financial covenant ratios as of September 30, 2010 were 2.11:1.00 for interest coverage, 1.20:1.00 for fixed charge coverage, 3.12:1.00 for leverage and 2.98:1.00 for senior secured leverage. See “Financing Activities” section for our discussion regarding our projected compliance with debt covenants.

On October 2, 2009, we entered into the Amended Swap Transaction in order to reduce the notional amount under the initial swap transaction from $271.6 million to $210.8 million to hedge our then existing variable interest rate debt under the Amended Credit Agreement.

Capital Leases. As of September 30, 2010, we had $36.6 million of capital lease obligations outstanding, with a weighted average interest rate of 8.8% and maturities between 2010 and 2015.

Seller Notes. As of September 30, 2010, we had $11.2 million of seller notes outstanding, with a weighted average interest rate of 6.2% and maturities between 2010 and 2012. These notes were issued in connection with prior acquisitions.

Off-Balance Sheet Arrangements

As of September 30, 2010 and December 31, 2009, 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

Operating Leases. We have entered into various non-cancelable operating leases primarily related to facilities, equipment and vehicles used in the ordinary course of business.

Contingent Transaction Consideration. We have entered into earnout obligations in connection with prior acquisitions. If the acquired businesses generate sales and/or operating profits in excess of predetermined targets, we are obligated to make additional cash payments in accordance with the terms of such earnout obligations. As of September 30, 2010, we had potential future earnout obligations for acquisitions consummated before the adoption of ASC 805 in the total amount of approximately $1.5 million through 2014 if predetermined financial targets are met or exceeded. These earnout payments are recorded as additional purchase price (as goodwill) when the contingent payments are earned and become payable.

Uncertain Tax Position Liability. We had a $1.6 million and $1.8 million contingent liability for uncertain tax positions as of September 30, 2010 and December 31, 2009, respectively.

Legal Proceedings. We are involved in various legal proceedings and claims from time to time in the normal course of business. We do not believe, based on currently available facts and circumstances, that the final outcome of any of these matters, taken individually or as a whole, will have a material adverse effect on our consolidated financial position, results of operations or cash flows. We believe the amounts provided in our interim Condensed Consolidated Financial Statements, which are not material, are adequate in light of the probable and estimable liabilities. However, because such matters are subject to many uncertainties, the ultimate outcomes are not predictable and there can be no assurances that the actual amounts required to satisfy alleged liabilities will not exceed the amounts reflected in our interim Condensed Consolidated Financial Statements or will not have a material adverse effect on our consolidated financial position, results of operations or cash flows.

Critical Accounting Policies

Our management prepares financial statements in conformity with GAAP. When we prepare these financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets and liabilities and 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. On an on-going basis, we evaluate our estimates and judgments, including those related to accounts receivable, inventories, deferred tax assets, goodwill and intangible assets and long-lived assets. We base our estimates and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for our judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

For further information regarding the accounting policies that we believe to be critical accounting policies and that affect our more significant judgments and estimates used in preparing our interim Condensed

Consolidated Financial Statements see our 2009 Annual Report on Form 10-K, except for the adoption of Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) No. 2010-06, Fair Value Measurements and Disclosures, improving disclosures about Fair Value Measurements (“ASU 2010-06”), which is further described in Note 13, “Recent Accounting Pronouncements” to our interim Condensed Consolidated Financial Statements.

Recent Accounting Pronouncements

See Note 13, “Recent Accounting Pronouncements” to our interim Condensed Consolidated Financial Statements for disclosure on recent accounting pronouncements.


Item 3.	*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. We enter into derivative instruments to manage our exposure to changes in interest rates. These instruments allow us to raise funds at floating rates and effectively swap them into fixed rates, without the exchange of the underlying principal amount.

Our Amended Swap Transaction is designed to reduce the notional amount under our initial swap transaction from $271.6 million to $210.8 million to hedge our existing term loan debt after taking into effect the amendment to our credit facility in October 2009.

The Amended Swap Transaction has a termination date of December 6, 2012 which is also the maturity date under our Amended Credit Agreement. As of September 30, 2010, the Amended Swap Transaction had a negative fair value of $11.3 million of which $6.7 million was recorded in accrued expenses and $4.6 million was recorded in other long-term liabilities.

As of September 30, 2010, we had $248.2 million of total debt and capital lease obligations, none of which bore interest at variable rates, after factoring in the Amended Swap Transaction.

We have not entered, and do not plan to enter, into any derivative financial instruments for trading or speculative purposes. As of September 30, 2010, we had no other significant material exposure to market risk, including foreign exchange risk and commodity risks.


Item 4.	*Controls and Procedures*

Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities and Exchange Act of 1934, as amended (the “Exchange Act”) are recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of September 30, 2010. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that, as of September 30, 2010, our disclosure controls and procedures were effective.

Changes in Internal Control over Financial Reporting

There were no changes to internal control over financial reporting during the quarter ended September 30, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II—OTHER INFORMATION


Item 1.	*Legal Proceedings*

We are involved in various legal proceedings and claims from time to time in the normal course of business. We do not believe, based on currently available information, that the final outcome of any of these matters, taken individually or as a whole, will have a material adverse effect on our consolidated financial position, results of operations or cash flows. The Company believes the amounts provided in its interim Condensed Consolidated Financial Statements, which are not material, are adequate in light of the probable and estimable liabilities. However, because such matters are subject to many uncertainties, the ultimate outcomes are not predictable and there can be no assurances that the actual amounts required to satisfy alleged liabilities will not exceed the amounts reflected in the Company’s interim Condensed Consolidated Financial Statements or will not have a material adverse effect on its consolidated financial position, results of operations or cash flows.


Item 1A.	*Risk Factors*

Information concerning certain risks and uncertainties appears in Part I, Item 1A “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2009. You should carefully consider those risks and uncertainties, which could materially affect our business, financial condition and results of operations. There have been no material changes to the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2009.


Item 6.	*Exhibits*


Exhibit
Number			Description

	10	.1	Sixth Amendment to Executive Employment Agreement, dated August 2, 2010, by and between American Reprographics Company and Kumarakulasingam Suriyakumar (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on August 3, 2010).
	10	.2	Fourth Amendment to Executive Employment Agreement, dated August 2, 2010, by and between American Reprographics Company and Jonathan R. Mather (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed on August 3, 2010).
	10	.3	Fifth Amendment to Executive Employment Agreement, dated August 2, 2010, by and between American Reprographics Company and Rahul K. Roy (incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K filed on August 3, 2010).
	10	.4	Third Amendment to Executive Employment Agreement, dated August 2, 2010, by and between American Reprographics Company and Dilantha Wijesuriya (incorporated by reference to Exhibit 10.4 to the Current Report on Form 8-K filed on August 3, 2010).
	31	.1	Certification of Principal Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
	31	.2	Certification of Principal Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
	32	.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
	32	.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*


*		Filed herewith

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: November 5, 2010

AMERICAN REPROGRAPHICS COMPANY


	By:	/s/ Kumarakulasingam Suriyakumar

Kumarakulasingam Suriyakumar

Chairman, President and Chief Executive Officer


	By:	/s/ Jonathan R. Mather

Jonathan R. Mather

Chief Financial Officer and Secretary

EXHIBIT INDEX


Exhibit
Number		Description

10.1		Sixth Amendment to Executive Employment Agreement, dated August 2, 2010, by and between American Reprographics Company and Kumarakulasingam Suriyakumar (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on August 3, 2010).
10.2		Fourth Amendment to Executive Employment Agreement, dated August 2, 2010, by and between American Reprographics Company and Jonathan R. Mather (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed on August 3, 2010).
10.3		Fifth Amendment to Executive Employment Agreement, dated August 2, 2010, by and between American Reprographics Company and Rahul K. Roy (incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K filed on August 3, 2010).
10.4		Third Amendment to Executive Employment Agreement, dated August 2, 2010, by and between American Reprographics Company and Dilantha Wijesuriya (incorporated by reference to Exhibit 10.4 to the Current Report on Form 8-K filed on August 3, 2010).
31.1		Certification of Principal Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
31.2		Certification of Principal Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*


*		Filed herewith