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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 March 31, 2005 or o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 Commission File Number:   001-32407   AMERICAN REPROGRAPHICS COMPANY  Delaware
    
    20-1700361(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)
 700 North Central Avenue, Suite 550
Glendale, California 91203
(818) 500-0225 (Address, including zip code, and telephone number, including area code, of
Registrants principal executive offices) 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 is an accelerated filer (as defined in Exchange
Act Rule 12b-2).
Yes  o   No  þ As of April 30, 2005, there were 43,931,154 shares of the Registrants common stock
outstanding.   1




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AMERICAN REPROGRAPHICS COMPANY
Quarterly Report on Form 10-Q
For the Quarter Ended March 31, 2005 Table of Contents PART I Financial Information
    
    
    3Item 1. Financial Statements
    
    
    3Consolidated Balance Sheets as of December 31, 2004 and March 31, 2005 (unaudited)
    
    
    3Consolidated Statements of Operations for the three months ended March 31, 2004 and 2005 (unaudited)
    
    
    4Condensed Consolidated Statement of Changes in Stockholders Equity for the three months ended March 31, 2005 (unaudited)
    
    
    5Consolidated Statements of Cash Flows for the three months ended March 31, 2004 and 2005 (unaudited)
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    13Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    22Item 4. Controls and Procedures
    
    
    23PART II
    
    
    23Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    23Item 6. Exhibits
    
    
    24SIGNATURES
    
    
    25Index to ExhibitsEXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1
 2




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PART I. FINANCIAL INFORMATION 
 Item 1. Financial Statements AMERICAN REPROGRAPHICS COMPANY 
 CONSOLIDATED BALANCE SHEETS December 31,
    
    
    March 31,2004
    
    
    2005(Unaudited)(Dollars in thousands)AssetsCurrent assets:Cash and cash equivalents
    
    $
    13,826
    
    
    $
    7,719Accounts receivable, net
    
    
    61,679
    
    
    
    70,032Inventories, net
    
    
    6,012
    
    
    
    6,222Deferred taxes
    
    
    1,364
    
    
    
    2,661Prepaid expenses and other current assets
    
    
    7,855
    
    
    
    7,170Total current assets
    
    
    90,736
    
    
    
    93,804Property and equipment, net
    
    
    35,023
    
    
    
    33,807Goodwill
    
    
    231,357
    
    
    
    231,482Other intangible assets, net
    
    
    12,095
    
    
    
    11,972Deferred financing costs, net
    
    
    6,619
    
    
    
    5,272Deferred taxes
    
    
    
    
    
    
    19,715Other assets
    
    
    1,504
    
    
    
    1,631Total assets
    
    $
    377,334
    
    
    $
    397,683Liabilities and Stockholders EquityLiabilities:Accounts payable
    
    $
    21,170
    
    
    $
    19,214Accrued payroll and payroll-related expenses
    
    
    11,683
    
    
    
    10,439Accrued expenses
    
    
    24,834
    
    
    
    23,721Current portion of long-term debt and capital leases
    
    
    10,276
    
    
    
    11,480Total current liabilities
    
    
    67,963
    
    
    
    64,854Long-term debt and capital leases, net of debt discount
    
    
    310,557
    
    
    
    250,854Mandatorily redeemable preferred membership units
    
    
    27,814
    
    
    
    Deferred taxes
    
    
    5,634
    
    
    
    Other long-term liabilities
    
    
    375
    
    
    
    375Total liabilities
    
    
    412,343
    
    
    
    316,083Commitments and contingencies (Note 5)Stockholders equity (deficit):Members deficit
    
    
    (32,688
    )
    
    
    Preferred stock, $.001 par value, 25,000,000 shares
authorized; zero and zero shares issued and outstanding
    
    
    
    
    
    
    Common stock, $.001 par value, 150,000,000 shares
authorized; zero and 43,931,154 shares issued and
outstanding
    
    
    
    
    
    
    44Additional paid-in capital
    
    
    
    
    
    
    49,753Deferred stock-based compensation
    
    
    (2,527
    )
    
    
    (2,360
    )Retained earnings
    
    
    
    
    
    
    33,649Accumulated other comprehensive income
    
    
    206
    
    
    
    514Total stockholders equity (deficit)
    
    
    (35,009
    )
    
    
    81,600Total liabilities and stockholders equity (deficit)
    
    $
    377,334
    
    
    $
    397,683
 The accompanying notes are an integral part of these consolidated financial statements. 3




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AMERICAN REPROGRAPHICS COMPANY 
 CONSOLIDATED STATEMENTS OF OPERATIONS Three Months EndedMarch 31,2004
    
    
    2005(Unaudited)(Dollars in thousands,except per share data)Reprographics services
    
    $
    83,890
    
    
    $
    87,695Facilities management
    
    
    16,909
    
    
    
    19,172Equipment and supplies sales
    
    
    9,719
    
    
    
    9,599Total net sales
    
    
    110,518
    
    
    
    116,466Cost of sales
    
    
    64,599
    
    
    
    68,141Gross profit
    
    
    45,919
    
    
    
    48,325Selling, general and administrative expenses
    
    
    26,901
    
    
    
    26,881Amortization of intangible assets
    
    
    430
    
    
    
    384Income from operations
    
    
    18,588
    
    
    
    21,060Other income
    
    
    274
    
    
    
    118Interest expense, net
    
    
    (8,125
    )
    
    
    (8,324
    )Income before income tax provision (benefit)
    
    
    10,737
    
    
    
    12,854Income tax provision (benefit)
    
    
    2,299
    
    
    
    (22,709
    )Net income
    
    $
    8,438
    
    
    $
    35,563Earnings per share:Basic
    
    $
    0.24
    
    
    $
    0.87Diluted
    
    $
    0.23
    
    
    $
    0.85Weighted average common shares outstanding:Basic
    
    
    35,487,511
    
    
    
    40,749,833Diluted
    
    
    37,321,596
    
    
    
    41,901,845
 The accompanying notes are an integral part of these consolidated financial statements. 4




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AMERICAN REPROGRAPHICS COMPANY 
 CONDENSED CONSOLIDATED STATEMENT OF
CHANGES IN STOCKHOLDERS EQUITY AccumulatedCommon Stock
    
    
    Additional
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    TotalMembers
    
    
    
    
    
    
    Par
    
    
    Paid-In
    
    
    Deferred
    
    
    Retained
    
    
    Comprehensive
    
    
    StockholdersDeficit
    
    
    Shares
    
    
    Value
    
    
    Capital
    
    
    Compensation
    
    
    Earnings
    
    
    Income
    
    
    Equity(Unaudited)(Dollars in thousands)Balance at December 31, 2004
    
    $
    (32,688
    )
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    $
    (2,527
    )
    
    $
    
    
    
    $
    206
    
    
    $
    (35,009
    )Amortization of deferred stock-based
compensation for the period from
January 1 to February 9, 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    61
    
    
    
    
    
    
    
    
    
    
    
    61Comprehensive income for the period
from January 1 to
February 9, 2005:Net income
    
    
    1,914
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,914Fair value adjustment of derivatives
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    195
    
    
    
    195Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    

    
    
    
    
    
    
    
    
    
    
    2,109Distributions to members
    
    
    (8,244
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,244
    )Reorganization from LLC to C
Corporation
    
    
    39,018
    
    
    
    35,510,011
    
    
    
    35
    
    
    
    (39,053
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Issuance of common stock in initial
public offering, net of underwriting
discounts
    
    
    
    
    
    
    7,666,667
    
    
    
    8
    
    
    
    92,682
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    92,690Issuance of common stock in exchange
for warrants exercised upon initial
public offering
    
    
    
    
    
    
    754,476
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1Direct costs of initial public offering
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,876
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,876
    )Amortization of deferred stock-based
compensation for the period from
February 10 to March 31, 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    106
    
    
    
    
    
    
    
    
    
    
    
    106Comprehensive income for the period
from February 10 to
March 31, 2005:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    33,649
    
    
    
    
    
    
    
    33,649Fair value adjustment of
derivatives, net of tax effects
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    113
    
    
    
    113Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    33,762Balance at March 31, 2005
    
    $
    
    
    
    
    43,931,154
    
    
    $
    44
    
    
    $
    49,753
    
    
    $
    (2,360
    )
    
    $
    33,649
    
    
    $
    514
    
    
    $
    81,600
 The accompanying notes are an integral part of these consolidated financial statements. 5




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AMERICAN REPROGRAPHICS
COMPANY 
 CONSOLIDATED STATEMENTS OF CASH FLOWS Three Months EndedMarch 31,2004
    
    
    2005(Unaudited)(Dollars in thousands)Operating activitiesNet income
    
    $
    8,438
    
    
    $
    35,563Adjustments to reconcile net income to net cash provided by operating activities:Accretion of yield on redeemable preferred member units
    
    
    913
    
    
    
    449Allowance for doubtful accounts
    
    
    391
    
    
    
    335Reserve for inventory obsolescence
    
    
    94
    
    
    
    52Depreciation
    
    
    4,084
    
    
    
    4,046Amortization of intangible assets
    
    
    430
    
    
    
    384Amortization of deferred financing costs
    
    
    468
    
    
    
    418Deferred income taxes
    
    
    174
    
    
    
    (26,646
    )Write-off of deferred financing costs
    
    
    
    
    
    
    1,503Amortization of deferred stock-based compensation
    
    
    
    
    
    
    167Changes in operating assets and liabilities, net of effect of business acquisitions:Accounts receivable, net
    
    
    (10,044
    )
    
    
    (8,287
    )Inventory
    
    
    (55
    )
    
    
    (167
    )Prepaid expenses and other assets
    
    
    (744
    )
    
    
    (912
    )Accounts payable and accrued expenses
    
    
    4,405
    
    
    
    (4,346
    )Net cash provided by operating activities
    
    
    8,554
    
    
    
    2,559Investing activitiesCapital expenditures
    
    
    (1,826
    )
    
    
    (1,303
    )Payments for businesses acquired, net of cash acquired and including other cash
payments associated with the acquisitions
    
    
    (1,105
    )
    
    
    (1,273
    )Other
    
    
    (179
    )
    
    
    (71
    )Net cash used in investing activities
    
    
    (3,110
    )
    
    
    (2,647
    )Financing activitiesProceeds from initial public offering, net of underwriting discounts
    
    
    
    
    
    
    92,690Direct costs of initial public offering
    
    
    
    
    
    
    (1,463
    )Redemption of preferred member units
    
    
    
    
    
    
    (28,263
    )Proceeds from borrowings under debt agreements
    
    
    
    
    
    
    13,000Payments on long-term debt under debt agreements
    
    
    (16,184
    )
    
    
    (73,616
    )Payment of loan fees
    
    
    (53
    )
    
    
    (123
    )Member distributions
    
    
    (90
    )
    
    
    (8,244
    )Net cash used in financing activities
    
    
    (16,327
    )
    
    
    (6,019
    )Net decrease in cash and cash equivalents
    
    
    (10,883
    )
    
    
    (6,107
    )Cash and cash equivalents at beginning of period
    
    
    17,315
    
    
    
    13,826Cash and cash equivalents at end of period
    
    $
    6,432
    
    
    $
    7,719Supplemental disclosure of cash flow informationNoncash investing and financing activitiesNoncash transactions include the following:Capital lease obligations incurred
    
    $
    2,015
    
    
    $
    1,052Issuance of subordinated notes in connection with the acquisition of businesses
    
    $
    250
    
    
    $
    245Change in fair value of derivatives
    
    $
    (1,240
    )
    
    $
    308
 The accompanying notes are an integral part of these consolidated financial statements. 6




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AMERICAN REPROGRAPHICS COMPANY
Notes to Consolidated Financial Statements (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 to the architectural,
engineering and construction industry, or AEC industry. ARC also provides these services to
companies in non-AEC industries, such as technology, financial services, retail, entertainment, and
food and hospitality, that also require sophisticated document management services. The Company
conducts its operations through its wholly-owned operating subsidiary, American Reprographics
Company, L.L.C., a California limited liability company (Opco), and its subsidiaries. Reorganization and Initial Public Offering Prior to the consummation of the Companys initial public offering on February 9, 2005, the
Company was reorganized (the Reorganization) from a California limited liability company (American
Reprographics Holdings, L.L.C. or Holdings) to a Delaware corporation (American Reprographics
Company). In connection with the Reorganization, the members of Holdings exchanged their common
member units for common stock of ARC. Each option issued to purchase Holdings common member units
under Holdings equity option plan was exchanged for an option exercisable for shares of ARCs
common stock with the same exercise prices and vesting terms as the original grants. In addition,
all outstanding warrants to purchase common units of Holdings were exchanged for 754,476 shares of
ARCs common stock based on an initial public offering price of $13.00 per share. On February 9, 2005, the Company closed an initial public offering (IPO) of its common stock
consisting of 13,350,000 shares at $13.00 per share. Of these shares, 7,666,667 shares were newly
issued shares sold by the Company and 5,683,333 shares were outstanding shares sold by the selling
stockholders. On March 2, 2005, an additional 1,685,300 shares were sold by certain selling
stockholders pursuant to the exercise by the underwriters of their over-allotment option. As
required by the operating agreement of Holdings, the Company repurchased all of the preferred
equity of Holdings upon the closing of the Companys initial public offering with $28.3 million of
the net proceeds from the IPO. On February 9, 2005, the Company used a portion of the proceeds from its IPO to repay $50.7
million of its $225 million senior second priority secured term loan facility and $9 million of its
$100 million senior first priority secured term loan facility. As a result of these debt
prepayments from IPO proceeds, the Company wrote-off $1.5 million of deferred financing costs in
February 2005. Due to their tax attributes, certain members of Holdings have in the past elected to receive
less than their proportionate share of distributions for income taxes as a result of a difference
in the tax basis of their equity interest in Holdings. In accordance with the terms of the
operating agreement of Holdings, the Company made a cash distribution of $8.2 million to such
members on February 9, 2005 in connection with the consummation of its initial public offering to
bring their proportionate share of tax distributions equal to the rest of the members of Holdings.
These distributions have been reclassified into additional paid-in capital in the Companys
consolidated balance sheet as of March 31, 2005 in connection with the Reorganization in February
2005. See the accompanying condensed consolidated statement of changes in stockholders equity for
the three months ended March 31, 2005 for additional details regarding the changes in the Companys
capital accounts resulting from the Reorganization. In connection with the IPO, the Company adopted the American Reprographics Company 2005 Stock
Plan (the 2005 Stock Plan) which provides for discretionary grants of incentive stock options to
employees, including officers and employee directors, and for the discretionary grant of
nonstatutory stock options, restricted stock, restricted stock units, and stock appreciation rights
to employees, directors and consultants. The 2005 Stock Plan also provides for the periodic
automatic grant of nonstatutory stock options to non-employee directors. The 2005 Stock Plan
authorizes the Company to grant options to purchase up to 5,000,000 shares of common stock. The
Company also adopted an Employee Stock Purchase Plan (ESPP) to provide an incentive to attract,
retain and 7




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reward eligible employees of the Company. A total of 750,000 shares of common stock are
initially authorized and reserved for sale under the ESPP. During the three months ended March 31,
2005, no options were granted under the 2005 Stock Plan and no shares of common stock were sold
under the ESPP. ARCs amended and restated certificate of incorporation authorizes its board of directors,
without stockholder approval, to issue up to 25,000,000 shares of preferred stock in one or more
series with voting and conversion rights that could adversely affect the voting power of the
holders of common stock, without stockholder approval. No shares of preferred stock are outstanding
and ARC has no present plan to issue any shares of preferred stock. Basis of Presentation The accompanying consolidated financial statements are prepared in conformity with accounting
principles generally accepted in the United States of America (GAAP) for interim financial
information and in conformity with the requirements of the Securities and Exchange Commission. 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
consolidated financial statements presented herein reflect all adjustments of a normal and
recurring nature that are necessary to fairly present the interim consolidated financial
statements. All material intercompany accounts and transactions have been eliminated in
consolidation. The operating results for the three-month period ended March 31, 2005 are not
necessarily indicative of the results that may be expected for the year ending December 31, 2005. The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates and assumptions that
affect the amounts reported in the consolidated financial statements and accompanying notes. We
evaluate our estimates and assumptions on an ongoing basis and rely on historical experience and
various other factors that we believe 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 consolidated financial statements. These interim consolidated financial statements and notes should be read in conjunction with
the consolidated financial statements and notes included in the Companys 2004 Annual Report on
Form 10-K. The accounting policies used in preparing these interim consolidated financial
statements are the same as those described in our 2004 Annual Report on Form 10-K. 2. Accounting for Equity-Based Compensation The Company accounts for grants of options to employees to purchase its common stock using the
intrinsic value method in accordance with APB Opinion No. 25 and FIN No. 44, Accounting for
Certain Transactions Involving Stock Compensation. As permitted by SFAS No. 123 and as amended by
SFAS No. 148, the Company has chosen to continue to account for such option grants under APB
Opinion No. 25 and provide the expanded disclosures specified in SFAS No. 123, as amended by SFAS
No. 148. 8




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Had compensation cost for the Companys option grants been determined based on their fair
value at the grant date for awards consistent with the provisions of SFAS No. 123, the Companys
net income attributable to common stockholders and earnings per share for the three months ended
March 31, 2004 and 2005 would have been changed to the adjusted pro forma amounts indicated below: Three Months EndedMarch 31,2004
    
    
    2005(Unaudited)(Dollars in thousands,except per share data)Net income:As reported
    
    $
    8,438
    
    
    $
    35,563Equity-based employee compensation cost, net
of related tax effects, included in as
reported net income
    
    
    
    
    
    
    99Equity-based employee compensation cost, net
of related tax effects, that would have
been included in the determination of net
income if the fair value method had been
applied
    
    
    (22
    )
    
    
    (139
    )Proforma
    
    $
    8,416
    
    
    $
    35,523Basic earnings per share:As reported
    
    $
    0.24
    
    
    $
    0.87Equity-based employee compensation cost, net
of related tax effects, included in as
reported net income
    
    
    
    
    
    
    Equity-based employee compensation cost, net
of related tax effects, that would have been
included in the determination of net income
if the fair value method had been applied
    
    
    
    
    
    
    Proforma
    
    $
    0.24
    
    
    $
    0.87Diluted earnings per share:As reported
    
    $
    0.23
    
    
    $
    0.85Equity-based employee compensation cost, net
of related tax effects, included in as
reported net income
    
    
    
    
    
    
    Equity-based employee compensation cost, net
of related tax effects, that would have been
included in the determination of net income
if the fair value method had been applied
    
    
    
    
    
    
    Proforma
    
    $
    0.23
    
    
    $
    0.85
 For purposes of computing the pro forma disclosures required by SFAS No. 123, the fair
value of each option granted to employees and directors is estimated using the Black-Scholes
option-pricing model with the following weighted-average assumptions for the three months ended
March 31, 2004 and 2005: dividend yields of 0% for all periods; expected volatility of 32.4% and
28.3%, respectively; risk-free interest rates of 3.0% and 2.9%, respectively; and expected lives of
2.5 years for all periods. Prior to 2004, the Company used the minimum value method to determine
fair value of option grants. The Black-Scholes option valuation model was developed for use in estimating the fair value of
traded options, which do not have vesting restrictions and are fully transferable. In addition,
option valuation models require the input of highly subjective assumptions, including the expected
stock price volatility. Because the Companys employee stock options have characteristics
significantly different from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in managements opinion, the existing
models do not necessarily provide a reliable single measure of the fair value of its employee stock
options. During 2004, the Company granted 307,915 options to purchase common membership units to
employees with exercise prices ranging from $5.62 to $6.85 per unit. The fair market value of the
Companys common member units on the date of grant was $16 per unit. In connection with the
issuances, the Company recorded a deferred compensation charge of $3.1 million in connection with
the issuance as the exercise price of the units was less than the estimated fair market value of
the Companys membership units as of the date of grant after giving consideration to the
anticipated fair value of the membership units during the one-year period preceding the Companys
initial public offering which was consummated on February 9, 2005. The Company will amortize the
deferred compensation charge over the vesting period of the options, generally five years. As of
March 31, 2005, the Company has cumulatively amortized $0.7 million of the deferred compensation
charge. 9




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In December 2004, the FASB issued SFAS No. 123R (revised 2004), Share-Based Payment. SFAS
No. 123R addresses the accounting for share-based payment transactions in which a company receives
employee services in exchange for either equity instruments of the company or liabilities that are
based on the fair value of the companys equity instruments or that may be settled by the issuance
of such equity instruments. SFAS No. 123R eliminates the ability to account for share-based
compensation transactions using the intrinsic method that is currently used and requires that such
transactions be accounted for using a fair value-based method and recognized as expense in the
consolidated statement of operations. The effective date of SFAS No. 123R is for annual periods
beginning after June 15, 2005. The Company is currently assessing the provisions of SFAS No. 123R
and its impact on its consolidated financial statements. 3. Long-Term Debt Long-term debt consists of the following: December 31,
    
    
    March 31,2004
    
    
    2005(Unaudited)(Dollars in thousands)Borrowings from senior secured First Priority 
Revolving Credit Facility; variable interest payable
quarterly (7.25% interest rate at March 31, 2005);
any unpaid principal and interest due December 18,
2008
    
    $
    
    
    
    $
    2,000Borrowings from senior secured First Priority  Term
Loan Credit Facility; variable interest payable
quarterly (5.26% and 5.75% interest rate at
December 31, 2004 and March 31, 2005, respectively);
principal payable in varying quarterly installments;
any unpaid principal and interest due June 18, 2009
    
    
    94,800
    
    
    
    85,550Borrowings from senior secured Second Priority 
Term Loan Credit Facility; variable interest payable
quarterly (8.92% and 9.62% interest rate at December
31, 2004 and March 31, 2005, respectively); any
unpaid principal and interest due December 18, 2009
    
    
    208,231
    
    
    
    157,500Various subordinated notes payable; interest ranging
from 5% to 11%; principal and interest payable
monthly through January 2007
    
    
    4,833
    
    
    
    4,084Various capital leases; interest rates ranging to
15.9%; principal and interest payable monthly
through September 2009
    
    
    14,688
    
    
    
    14,499322,552
    
    
    
    263,633Less debt discount on Second Priority Credit Facility
    
    
    (1,719
    )
    
    
    (1,299
    )320,833
    
    
    
    262,334Less current portion
    
    
    (10,276
    )
    
    
    (11,480
    )$
    310,557
    
    
    $
    250,854
 On February 9, 2005, the Company used a portion of the proceeds from its initial public
offering to repay $50.7 million of its $225 million senior second priority secured term loan
facility and $9 million of its $100 million senior first priority secured term loan facility. As a
result of these debt prepayments, the Company wrote off $1.5 million of deferred financing costs in
February 2005 which is included in interest expense in the accompanying consolidated financial
statements. 4. Income Taxes Holdings and Opco, through which a substantial portion of the Companys business was operated
prior to the Reorganization, are limited liability companies which are taxed as partnerships. As a
result, the members of Holdings pay income taxes on the earnings of Opco, which are passed through
to Holdings. In accordance with Holdings operating agreement, Holdings made cash distributions to
its members to provide them with funds to pay taxes owed for their share of Holdings profits as a
limited liability company. Certain divisions are consolidated in Holdings and are treated as separate corporate entities
for income tax purposes (the consolidated corporations). Prior to the Reorganization, these
consolidated corporations paid income taxes and recorded provisions for income taxes in their
financial statements. As a result of the Companys reorganization to a Delaware corporation in
February 2005, ARCs consolidated earnings became subject to federal, state and local taxes at a
combined statutory rate of approximately 42%. 10




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The Companys income tax provision (benefit) for the three months ended March 31, 2004 and
2005 are as follows: Three Months EndedMarch 31,2004
    
    
    2005(Unaudited)(Dollars in thousands)Current:Federal
    
    $
    1,660
    
    
    $
    3,176State
    
    
    465
    
    
    
    7612,125
    
    
    
    3,937Deferred:Deferred income tax provision, excluding the effects of the Reorganization.
    
    
    174
    
    
    
    1,055Income tax provision, excluding the effects of the Reorganization
    
    
    2,299
    
    
    
    4,992Deferred income tax benefit as a result of the Reorganization
    
    
    
    
    
    
    (27,701
    )Income tax provision (benefit)
    
    $
    2,299
    
    
    $
    (22,709
    )
 The Companys income tax benefit of $22.7 million during the three months ended March 31,
2005 includes a one-time deferred income tax benefit of $27.7 million recorded in February 2005 in
connection with the Companys reorganization from a California limited liability company (LLC) to a
Delaware corporation. This non-recurring income tax benefit is related to the setting up of the
deferred income tax accounts from the assets and liabilities that were previously in the LLC,
primarily comprised of tax-deductible goodwill and other temporary differences. This resulted in
an increase in net deferred tax assets of $27.7 million and a corresponding deferred income tax
benefit for the same amount. The Companys consolidated deferred tax assets and liabilities as of December 31, 2004 and
March 31, 2005 consist of the following: December 31,
    
    
    March 31,2004
    
    
    2005(Unaudited)(Dollars in thousands)Deferred tax assets (liabilities):Current portion:Financial statement accruals not currently deductible
    
    $
    1,206
    
    
    $
    2,502State taxes
    
    
    158
    
    
    
    159Net current deferred tax assets
    
    
    1,364
    
    
    
    2,661Non-current portion:Excess of income tax basis over net book value for
financial reporting purposes of intangible assets
    
    
    
    
    
    
    32,789Excess of income tax basis over net book value for
financial reporting purposes of property, plant and
equipment
    
    
    
    
    
    
    510Deferred stock-based compensation
    
    
    
    
    
    
    239Excess of net book value for financial reporting
purposes over income tax basis of property, plant
and equipment
    
    
    (1,653
    )
    
    
    Excess of net book value for financial reporting
purposes over income tax basis of intangible assets
    
    
    (3,981
    )
    
    
    (13,823
    )Net non-current deferred tax assets (liabilities)
    
    
    (5,634
    )
    
    
    19,715Net deferred tax assets (liabilities)
    
    $
    (4,270
    )
    
    $
    22,376
 11




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##### Table of Contents



A reconciliation of the statutory federal income tax rate to the Companys effective tax
rate is as follows: Three Months EndedMarch 31,2004
    
    
    2005(Unaudited)Statutory federal income tax rate
    
    
    34.0
    %
    
    
    35.0
    %State taxes
    
    
    3.5
    %
    
    
    5.0
    %Income of the LLC not taxed at the LLC level
    
    
    (17.2
    )%
    
    
    (1.1
    )%Other
    
    
    1.1
    %
    
    
    (0.1
    )%Effective income tax rate before non-recurring income tax benefit due to Reorganization.
    
    
    21.4
    %
    
    
    38.8
    %Non-recurring income tax benefit due to reorganization
    
    
    
    
    
    
    (215.4
    )%Effective income tax rate
    
    
    21.4
    %
    
    
    (176.6
    )%
 5. Commitments and Contingencies The Company is a creditor and participant in the Chapter 7 Bankruptcy of Louis Frey Company,
Inc., or LF Co., which is pending in the United States Bankruptcy Court, Southern District of New
York. The Company managed LF Co. under a contract from May through September of 2003. LF Co. filed
for Bankruptcy protection in August 2003, and the proceeding was converted to a Chapter 7
liquidation in October 2003. On or about June 30, 2004, the Bankruptcy Estate Trustee filed a
complaint in the LF Co. Bankruptcy proceeding against the Company, which was amended on or about
July 19, 2004, alleging, among other things, breach of contract, breach of fiduciary duties,
conversion, unjust enrichment, tortious interference with contract, unfair competition and false
commercial promotion in violation of The Lanham Act, misappropriation of trade secrets and fraud
regarding the Companys handling of the assets of LF Co. The Trustee claims damages of not less
than $9.5 million, as well as punitive damages and treble damages with respect to the Lanham Act
claims. Previously, on or about October 10, 2003, a secured creditor of LF Co., Merrill Lynch
Business Financial Services, Inc., or Merrill, had filed a complaint in the LF Co. Bankruptcy
proceeding against the Company, which was most recently amended on or about July 6, 2004. Merrills
claims are duplicated in the Trustees suit. The Company, in turn, has filed answers and
counterclaims denying liability to the Trustee and seeking reimbursement of all costs and damages
sustained as a result of the Trustees actions and in the Companys efforts to assist LF Co.
Discovery has commenced and is ongoing in each of these cases. The Company believes that it has
meritorious defenses as well as substantial counterclaims against Merrill Lynch and the Trustee.
The Company intends to vigorously contest the above matters. Based on the discovery and depositions
to date, the Company does not believe that the outcome of the above matters will have a material
adverse impact on its results of operations or financial condition. The Company may be involved in litigation and other legal matters from time to time in the
normal course of business. Management does not believe that the outcome of any of these matters
will have a material adverse effect on the Companys consolidated financial position, results of
operations or cash flows. 6. Comprehensive Income Comprehensive income included changes in the fair value of certain financial derivative
instruments, which qualify for hedge accounting. Comprehensive income totaled $7.2 million and
$35.9 million, respectively, for the three months ended March 31, 2004 and 2005, respectively. The
differences between net income and comprehensive income for each of these periods were as follows: Three Months EndedMarch 31,2004
    
    
    2005(Unaudited)(Dollars in thousands)Net income
    
    $
    8,438
    
    
    $
    35,563Increase (Decrease) in fair value of
financial derivative instruments, net of
tax effects
    
    
    (1,240
    )
    
    
    308Comprehensive income
    
    $
    7,198
    
    
    $
    35,871
 12




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##### Table of Contents



7. Earnings Per Share The Company accounts for earnings per share in accordance with SFAS No. 128, Earnings per
Share. Basic earnings per share is computed by dividing net income 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 the potential common shares 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. There are no common stock equivalents
excluded for anti-dilutive effects for the periods presented below. The Companys common stock
equivalents consist of stock options issued under the Companys equity option plan, as well as
warrants to purchase common stock issued during 2000 to certain creditors of the Company. All of
such warrants were exchanged for shares of common stock of the Company in connection with the
Companys reorganization in February 2005 as discussed in the Reorganization section in Note 1. Basic and diluted earnings per share were calculated using the following common shares for the
three months ended March 31, 2004 and 2005: Three Months EndedMarch 31,2004
    
    
    2005(Unaudited)Weighted average common shares outstanding during the period  basic
    
    
    35,487,511
    
    
    
    40,749,833Effect of dilutive stock options
    
    
    1,002,016
    
    
    
    898,349Effect of dilutive warrants
    
    
    832,069
    
    
    
    253,663Weighted average common shares outstanding during the period  diluted
    
    
    37,321,596
    
    
    
    41,901,845
 8. Recent Accounting Pronouncements In November 2004, the FASB issued SFAS No. 151, Inventory Costs, an amendment of Accounting
Research Bulletin No. 43, Chapter 4. SFAS No. 151 requires that abnormal amounts of idle facility
expense, freight, handling costs and wasted materials (spoilage) be recorded as current period
charges and that the allocation of fixed production overheads to inventory be based on the normal
capacity of the production facilities. SFAS No. 151 is effective for the Company on January 1,
2006. The Company does not believe that the adoption of SFAS No. 151 will have a material impact on
its consolidated financial statements. In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets, an amendment
of APB Opinion No. 29. SFAS No. 153 is based on the principle that exchanges of nonmonetary assets
should be measured based on the fair value of the assets exchanged. APB Opinion No. 29, Accounting
for Nonmonetary Transactions, provided an exception to its basic measurement principle (fair
value) for exchanges of similar productive assets. Under APB Opinion No. 29, an exchange of a
productive asset for a similar productive asset was based on the recorded amount of the asset
relinquished. SFAS No. 153 eliminates this exception and replaces it with an exception of exchanges
of nonmonetary assets that do not have commercial substance. The Company does not believe that the
adoption of SFAS No. 153 will have a material impact 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 consolidated financial
statements and the related notes included in this report, as well as Managements Discussion and
Analysis included in our 2004 Annual Report onForm 10-K. In addition to historical information, this report onForm 10-Qcontains certain
forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended. These statements relate to future events or future financial performance, and
include statements regarding the Companys business strategy, timing of, and plans for, the
introduction of new products and enhancements, future sales, market growth and direction,
competition, market share, revenue growth, operating margins and profitability. All
forward-looking 13




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##### Table of Contents



statements involve known and unknown risks, uncertainties and other factors that may cause
our actual results, levels of activity, performance or achievements to be materially different from
any future results, levels of activity, performance or achievements, expressed or implied, by these
forward looking statements. In some cases, you can identify forward-looking statements by
terminology such as may, will, should, expects, intends, plans, anticipates,
believes, estimates, predicts, potential, continue, or the negative of these terms or
other comparable terminology. These statements are only predictions and are based upon information
available to the Company as of the date of this report. We undertake no on-going obligation, other
than that imposed by law, to update these forward-looking statements. Actual results could differ materially from our current expectations. Factors that could
cause actual results to differ materially from current expectations, include among others, the
following: (i) general economic conditions, such as changes in non-residential construction
spending, GDP growth, interest rates, employment rates, office vacancy rates, and government
expenditures; (ii) a downturn in the architectural, engineering and construction industry; (iii)
competition in our industry and innovation by our competitors; (iv) our failure to anticipate and
adapt to future changes in our industry; (v) failure to continue to develop and introduce new
products and services successfully; (vi) our inability to charge for value-added services we
provide our customers to offset potential declines in print volume; (vii) adverse developments
affecting the State of California, including general and local economic conditions, macroeconomic
trends, and natural disasters; (viii) our inability to successfully identify and manage our
acquisitions or open new branches; (ix) our inability to successfully monitor and manage the
business operations of our subsidiaries and uncertainty regarding the effectiveness of financial
and management policies and procedures we established to improve accounting controls; (x) adverse
developments concerning our relationships with certain key vendors; and (xi) the loss of key
personnel and qualified technical staff. Although we believe that the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, levels of activity, performance or achievements.
These forward-looking statements are subject to numerous risks and uncertainties, including, but
not limited to, the risks and uncertainties described in the Risk Factors section of our 2004
Annual Report onForm 10-K. You are urged to carefully consider these factors. All
forward-looking statements attributable to us are expressly qualified in their entirety by the
foregoing cautionary statements. Overview We are the leading reprographics company in the United States providing business-to-business
document management services to the architectural, engineering and construction industry, or AEC
industry. We also provide these services to companies in non-AEC industries, such as the
technology, financial services, retail, entertainment, and food and hospitality industries, that
also require sophisticated document management services. We operate more than 180 reprographics service centers, including 176 service centers in over
140 cities in 30 states throughout the United States and the District of Columbia and four
reprographics service centers in the Toronto metropolitan area and one in Mexico City, Mexico. In
addition, we recently opened an ancillary technology development center in Calcutta, India. Our
reprographics service centers are located in close proximity to the majority of our customers and
offer pickup and delivery services within a 15 to 30 mile radius. These service centers are
arranged in a hub and satellite structure and are digitally connected as a cohesive network,
allowing us to provide our services both locally and nationally. We service more than 65,000 active
customers and employ over 3,430 people, including a sales force of approximately 260 employees. On February 9, 2005, we closed an initial public offering of our common stock consisting of
13,350,000 shares at $13.00 per share. Of these shares, 7,666,667 shares were newly issued shares
sold by us and 5,683,333 shares were outstanding shares sold by the selling stockholders. On March
2, 2005, an additional 1,685,300 shares were sold by certain selling stockholders pursuant to the
exercise by the underwriters of their over-allotment option. As required by the operating
agreement of Holdings, we repurchased all of the preferred equity of Holdings upon the closing of
our initial public offering with $28.3 million of net proceeds from our initial public offering. On February 9, 2005 we used a portion of the proceeds from our initial public offering to
repay $50.7 million of our $225 million senior second priority secured term loan facility and $9.0
million of our $100 million 14




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##### Table of Contents



senior first priority secured term loan facility. As a result of the prepayments on our
secured term loan credit facilities from our initial public offering proceeds, we wrote off
approximately $1.5 million of deferred financing costs in February 2005. For further information
concerning this debt repayment, see Note 3 to our Consolidated Financial Statements set forth in
Item 1 of this report. We believe that sales to the AEC market accounted for approximately 80% of our net sales
during the three months ended March 31, 2004 and 2005, with the remaining 20% consisting of sales
to non-AEC markets. As a result, our operating results and financial condition are significantly
impacted by various economic factors affecting the AEC industry, such as non-residential
construction spending, GDP growth, interest rates, employment rates, office vacancy rates, and
government expenditures. The key financial measures used by our management to operate and assess the performance of our
business are Net Sales and Costs and Expenses. These factors are discussed in the Key Financial
Measures section of Managements Discussion and Analysis of Financial Condition and Results of
Operation in our 2004 Annual Report on Form 10-K. Non-GAAP Measures EBIT and EBITDA (and related ratios presented in this report) are supplemental measures of our
performance that are not required by, or presented in accordance with GAAP. These measures are not
measurements of our financial performance under GAAP and should not be considered as alternatives
to net income, income from operations, or any other performance measures derived in accordance with
GAAP or as an alternative to cash flow from operating, investing or financing activities as a
measure of our liquidity. EBIT represents net income before interest and taxes. EBITDA represents net income before
interest, taxes, depreciation and amortization. We present EBIT and EBITDA (and related ratios
presented in this report) because we consider them important supplemental measures of our
performance and liquidity and believe that such measures are meaningful to investors because they
are used by management for the reasons discussed below. We use EBIT as a metric to measure and compare the performance of our divisions. We operate
our [40] divisions as separate business units, but manage debt and taxation at the corporate level.
As a result, EBIT is the best measure of divisional profitability and the most useful metric by
which to measure and compare the performance of our divisions. We also use EBIT as a metric to
measure performance for the purpose of determining compensation at the division level and use
EBITDA to measure performance and determine compensation at the consolidated level. We also use
EBITDA as a metric to manage cash flow from our divisions to the corporate level and to determine
the financial health of each division. As noted above, because our divisions do not incur interest
or income tax expense, the cash flow from each division should be equal to the corresponding EBITDA
of each division, assuming no other changes to a divisions balance sheet. As a result, we
reconcile EBITDA to cash flow on a monthly basis as one of our key internal controls. We also use
EBIT and EBITDA to evaluate potential acquisitions and to evaluate whether to incur capital
expenditures. In addition, certain covenants in our credit agreements require compliance with
financial ratios based on EBITDA, adjusted for certain items as defined in our credit agreements. EBIT and EBITDA (and related ratios presented in this report) 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:      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; 15




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##### Table of Contents



     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; Because of these limitations, EBIT and EBITDA (and related ratios presented in this report)
should not be considered as measures of discretionary cash available to us to invest in the growth
of our business or reduce our indebtedness. We compensate for these limitations by relying
primarily on our GAAP results and using EBIT and EBITDA only supplementally. The following is a reconciliation of cash flows provided by operating activities to EBIT,
EBITDA and net income: Three Months EndedMarch 31,2004
    
    
    2005(Unaudited)(Dollars in thousands)Cash flows provided by operating activities
    
    $
    8,554
    
    
    $
    2,559Changes in operating assets and liabilities
    
    
    6,438
    
    
    
    13,712Non-cash
expenses, including depreciation and amortization, and excluding
deferred income taxes
    
    
    (6,380
    )
    
    
    (7,354
    )Deferred income taxes
    
    
    (174
    )
    
    
    26,646Income tax provision (benefit)
    
    
    2,299
    
    
    
    (22,709
    )Interest expense
    
    
    8,125
    
    
    
    8,324EBIT
    
    
    18,862
    
    
    
    21,178Depreciation and amortization
    
    
    4,514
    
    
    
    4,430EBITDA
    
    
    23,376
    
    
    
    25,608Interest expense
    
    
    (8,125
    )
    
    
    (8,324
    )Income tax (provision) benefit
    
    
    (2,299
    )
    
    
    22,709Depreciation and amortization
    
    
    (4,514
    )
    
    
    (4,430
    )Net income
    
    $
    8,438
    
    
    $
    35,563
 The following is a reconciliation of net income to EBIT and EBITDA: Three Months EndedMarch 31,2004
    
    
    2005(Unaudited)(Dollars in thousands)Net income
    
    $
    8,438
    
    
    $
    35,563Interest expense, net
    
    
    8,125
    
    
    
    8,324Income tax provision (benefit)
    
    
    2,299
    
    
    
    (22,709
    )EBIT
    
    
    18,862
    
    
    
    21,178Depreciation and amortization
    
    
    4,514
    
    
    
    4,430EBITDA
    
    $
    23,376
    
    
    $
    25,608
 16




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##### Table of Contents



The following is a reconciliation of our net income margin to our EBIT margin and EBITDA
margin: Three Months EndedMarch 31,2004
    
    
    2005(Unaudited)Net income margin
    
    
    7.6
    %
    
    
    30.5
    %Interest expense, net
    
    
    7.4
    %
    
    
    7.2
    %Income tax provision (benefit)
    
    
    2.1
    %
    
    
    (19.5
    )%EBIT margin
    
    
    17.1
    %
    
    
    18.2
    %Depreciation and amortization
    
    
    4.1
    %
    
    
    3.8
    %EBITDA margin
    
    
    21.2
    %
    
    
    22.0
    %
 Impact of Conversion from an LLC to a Corporation Immediately prior to our initial public offering in February 2005, we reorganized from a
California limited liability company (LLC) to a Delaware corporation, American Reprographics
Company (the Reorganization). In the Reorganization, the members of Holdings exchanged their common
units and options to purchase common units for shares of our common stock and options to purchase
shares of our common stock. As required by the operating agreement of Holdings, we repurchased all
of the preferred equity of Holdings upon the closing of our initial public offering with a portion
of the net proceeds from our initial public offering. As part of the Reorganization, all
outstanding warrants to purchase common units were exchanged for shares of our common stock. In connection with the Reorganization, we recorded a one-time deferred income tax benefit of
$27.7 million in February 2005 related to the setting up of the deferred income tax accounts from
the assets that were previously in the LLC, primarily comprised of tax-deductible goodwill. This
resulted in an increase in our deferred tax assets of $27.7 million and a corresponding deferred
income tax benefit for the same amount. See Note 4  Income Taxes to our consolidated financial
statements included in this report for additional details concerning this non-recurring deferred
income tax benefit recorded in connection with the Reorganization. Going forward after the consummation of the Reorganization, we do not expect any significant
impact on our operations as a result of the Reorganization apart from an increase in our effective
tax rate due to corporate level taxes, which will be offset by the elimination of tax distributions
to our members and the recognition of deferred income taxes upon our conversion from a California
limited liability company to a Delaware corporation. Income Taxes Holdings and Opco, through which a substantial portion of our business was operated prior to
our reorganization in February 2005, are limited liability companies which are taxed as
partnerships. As a result, the members of Holdings pay income taxes on the earnings of Opco which
are passed through to Holdings. Certain divisions are consolidated in Holdings and are treated as
separate corporate entities for income tax purposes (the consolidated corporations). Prior to the Reorganization, these
consolidated corporations paid income taxes and recorded provisions for income taxes in their financial
statements. As a result of the Companys reorganization to a
Delaware corporation in February 2005, ARCs consolidated earnings became subject to federal, state and local taxes at a combined statutory rate of approximately 42%. See Note 4  Income Taxes to our consolidated financial statements included in this
report for additional details concerning income taxes. 17




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##### Table of Contents



The unaudited pro forma incremental income tax provision and unaudited proforma earnings per
common member unit amounts reflected in the following table were calculated as if our
reorganization became effective on January 1, 2004, and excludes the one-time deferred income tax
benefit of $27.7 million recorded in February 2005 in connection with our reorganization from a
California limited liability company to a Delaware corporation. Our effective income tax rate
during the first quarter of 2005, excluding the $27.7 million non-recurring deferred income tax
benefit, was 41.4% which is lower than our effective income tax rate of 45.2% for the same period
in 2004 primarily due to the nondeductible interest expense on our preferred equity which was
redeemed in February 2005. Three Months EndedMarch 31,2004
    
    
    2005(Unaudited)(Dollars in thousands,except per share data)Net income
    
    $
    8,438
    
    
    $
    35,563Deferred income tax benefit due to Reorganization
    
    
    
    
    
    
    (27,701
    )Proforma net income, excluding deferred income
tax benefit due to Reorganization
    
    
    8,438
    
    
    
    7,862Unaudited pro forma incremental
income tax provision
    
    
    (2,555
    )
    
    
    (333
    )Unaudited pro forma net income
    
    $
    5,883
    
    
    $
    7,529Unaudited pro forma earnings per share:Basic
    
    $
    0.17
    
    
    $
    0.18Diluted
    
    $
    0.16
    
    
    $
    0.18
 Results of Operations The following table provides information on the percentages of certain items of selected
financial data compared to total net sales for the periods indicated: As a Percentage of Net SalesThree Months EndedMarch 31,2004
    
    
    2005Reprographics services
    
    
    75.9
    %
    
    
    75.3
    %Facilities management
    
    
    15.3
    
    
    
    16.5Equipment and supplies sales
    
    
    8.8
    
    
    
    8.2Total net sales
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales
    
    
    58.5
    
    
    
    58.5Gross profit
    

    
    41.5
    
    
    
    41.5Selling, general and administrative expenses
    
    
    24.3
    
    
    
    23.1Amortization of intangibles
    
    
    0.4
    
    
    
    0.3Income from operations
    
    
    16.8
    
    
    
    18.1Other income
    
    
    0.2
    
    
    
    0.1Interest expense, net
    
    
    (7.4
    )
    
    
    (7.2
    )Income before income tax provision (benefit)
    
    
    9.7
    
    
    
    11.0Income tax provision (benefit)
    
    
    2.1
    
    
    
    (19.5
    )Net income
    
    
    7.6
    %
    
    
    30.5
    %
 Our operating results continued to improve during the first quarter of 2005 due to an
increase in our net sales as non-residential construction spending nationwide continues to rebound,
driven by an improving job market 18




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and declining office vacancy rates. Our efforts to expand our national footprint of
reprographics centers as well as our facilities management programs have also been important
contributors to the growth in our net sales. We have opened 23 new branches in key markets since
March 31, 2004 and expect to open an additional six branches by the end of 2005. We have also
increased the number of our facilities management programs from approximately 1,640 as of March 31,
2004 to approximately 2,000 facilities management programs as of March 31, 2005. During the three
months ended March 31, 2005, revenues from our facilities management programs amounted to $19.2
million, representing a 13.6% increase from the same period last year. We continue to focus on our key opportunities, which include: the expansion of our market
share, our national footprint of reprographics centers and our facilities management programs; the
establishment of our PlanWell technology as the industry standard for procuring digital
reprographics online; and the expansion of our service offerings to non-AEC related industries. Three Months Ended March 31, 2005 Compared to Three Months Ended March 31, 2004 Three Months EndedMarch 31,
    
    
    Increase (decrease)2004
    
    
    2005
    
    
    (Dollars)
    
    
    (Percent)(Unaudited)(Dollars in millions)Reprographics services
    
    $
    83.9
    
    
    $
    87.7
    
    
    $
    3.8
    
    
    
    4.5
    %Facilities management
    
    
    16.9
    
    
    
    19.2
    
    
    
    2.3
    
    
    
    13.6
    %Equipment and supplies sales
    
    
    9.7
    
    
    
    9.6
    
    
    
    (0.1
    )
    
    
    (1.0
    )%Total net sales
    
    $
    110.5
    
    
    $
    116.5
    
    
    $
    6.0
    
    
    
    5.4
    %Gross profit
    
    $
    45.9
    
    
    $
    48.3
    
    
    $
    2.4
    
    
    
    5.2
    %Selling, general and administrative expenses
    
    $
    26.9
    
    
    $
    26.9
    
    
    $
    
    
    
    
    
    %Interest expense, net
    
    $
    8.1
    
    
    $
    8.3
    
    
    $
    0.2
    
    
    
    2.5
    %Income tax provision (benefit)
    
    $
    2.3
    
    
    $
    (22.7
    )
    
    $
    (25.0
    )
    
    
    (1,087.0
    )%Net income
    
    $
    8.4
    
    
    $
    35.6
    
    
    $
    27.2
    
    
    
    323.8
    %EBITDA
    
    $
    23.4
    
    
    $
    25.6
    
    
    $
    2.2
    
    
    
    9.4
    %
 Net Sales. Net sales during the first quarter increased in 2005 compared to 2004
primarily due to the improvement of the U.S. economy, particularly in the Western United States,
the growth of our facilities management business, the expansion of our revenue base through the
opening of new branches, and by increasing our market share in certain markets. Of the $6.0
million increase in our first quarter 2005 net sales, approximately $2.3 million came from the
increase in our facilities management business and approximately $1.8 million is attributable to
business derived from new branches we opened since the end of the first quarter of 2004. Prices
during this period remained relatively stable, indicating that our revenue increases were primarily
volume driven. As job creation in the United States continues to move forward, and commercial
vacancy rates in the United States continue to decline, we expect to see similar revenue trends in
our reprographics services. While revenue from reprographics services and facilities management increased, our revenue
generated from sales of equipment and supplies sales decreased. This was due to our ability to
convert many of our equipment sales contracts into facilities management contracts. We believe that
the recurring revenues from such facilities management contracts that span over several years
should make our revenue profile more stable. This ability to convert our equipment sales contracts
into facilities management contracts, coupled with the increased decentralized nature of the
architectural, engineering and construction, or AEC industry, leads us to believe that facilities
management revenue will continue to increase in the near term. Gross Profit.Our gross profit increased by $2.4 million during the first quarter of 2005
compared to the same period in 2004 primarily due to the increase in our net sales. We were able
to reduce our material cost as a percentage of net sales from 15.6% in 2004 to 15.2% in 2005 due to
a negotiated reduction in the cost of material from one of our major vendors, coupled with better
waste control procedures. In addition, our production overhead 19




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as a percentage of net sales decreased from 18.2% in 2004 to 17.4% in 2005 due to the fixed
cost nature of this expense coupled with the increase in our net sales. However, these gains were
offset by the increase in our production labor cost as a percentage of net sales which increased
from 21.5% in 2004 to 23.0% in 2005 due in part to new branch openings and the hiring of additional
production labor in anticipation of continued growth in revenues, coupled with an increase in the
cost of employee health benefits. As a result, our overall gross margin remained unchanged at
41.5% during both the first quarter of 2005 and 2004. Selling, General and Administrative Expenses.Selling, general and administrative expenses
(SG&A) remained unchanged at $26.9 million during the first quarter of 2005 and 2004. During 2005,
our SG&A costs have increased due to higher sales commissions related to increased sales, higher
incentive bonus accruals related to improved operating results compared to last year, and increased
legal and accounting fees as a result of the reporting and compliance requirements we became
subject to since our initial public offering in February 2005. Offsetting these increases in our
SG&A costs are the cost reductions we have achieved from our efforts to consolidate back-office
functions such as payroll and accounting among our operating divisions. As a percentage of net
sales, SG&A decreased from 24.3% in 2004 to 23.1% in 2005 primarily due to higher net sales during
the first quarter of 2005. Interest Expense.Net interest expense increased from $8.1 million in 2004 to $8.3 million in
2005 due to the $1.5 million write-off of deferred financing costs in February 2005 resulting from
the $59.7 million in aggregate principal prepayment on our senior credit facilities with the
proceeds from our initial public offering. Excluding this write-off of deferred financing costs in
February 2005, our net interest expense during the first quarter decreased by $1.3 million in 2005
because we have reduced our total debt obligations by approximately $109.5 million since March 31,
2004 as a result of our debt prepayments from our IPO proceeds in February 2005 in addition to our
debt payments made from internally generated cash flow during 2004. The decline in our net
interest expense resulting from the reduction of our total debt obligations has been partially
offset by an increase in interest rates. The weighted average interest rate on our variable rate
debt has increased from 7.2% as of March 31, 2004 to 8.2% as of March 31, 2005. Income Taxes.The income tax benefit during the first quarter of 2005 resulted from the
one-time income tax benefit of $27.7 million recorded in connection with our reorganization from a
California limited liability company (LLC) to a Delaware corporation in February 2005. This
non-recurring income tax benefit is related to the setting up of the deferred income tax accounts
from the assets that were previously in the LLC, primarily comprised of tax-amortizable goodwill.
This resulted in an increase in our deferred tax assets of $27.7 million and a corresponding
deferred income tax benefit for the same amount. Excluding this non-recurring deferred income tax
benefit, our income tax provision during the first quarter of 2005 amounted to $5.0 million
compared to $2.3 million in 2004, or an increase of $2.7 million over last year. This is primarily
due to our reorganization from an LLC to a Delaware corporation in February 2005. Prior to our
reorganization, a substantial portion of our companys business was operated in an LLC, taxed as a
partnership. As a result, the members of the LLC pay the income taxes on the earnings, not the
LLC. Accordingly, no income taxes were provided on these earnings. During the first quarter of
2005 and 2004, the LLC had book income of $0.4 million and $5.4 million, respectively, which are
not subject to tax at the LLC level. Effective from our reorganization in February 2005, all of
our earnings are subject to federal, state and local taxes at a combined statutory rate of
approximately 42%. Net Income.Net income increased in 2005 compared to 2004 primarily due to the $27.7 million
non-recurring income tax benefit recognized during 2005. This was offset by the increase in our
income tax provision due to our companys reorganization from an LLC to a Delaware corporation and
the $1.5 million write-off of deferred financing costs during the first quarter of 2005. EBITDA.Our EBITDA margin increased to 22.0% in 2005 compared to 21.2% in 2004 primarily due
to higher revenues. For a reconciliation of EBITDA to net income, please see - Non-GAAP Measures
above. 20




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Liquidity and Capital Resources Our principal sources of cash have been cash provided by operations and borrowings under our
bank credit facilities or debt agreements. Our historical uses of cash have been for acquisitions
of reprographics businesses, payment of principal and interest on outstanding debt obligations,
capital expenditures, and, prior to the Reorganization in February 2005, tax-related distributions
to Holdings members. Supplemental information pertaining to our historical sources and uses of
cash is presented as follows and should be read in conjunction with our consolidated statements of
cash flows and notes thereto included in this report. Three Months EndedMarch 31,2004
    
    
    2005(Unaudited)(Dollars in thousands)Net cash provided by operating activities
    
    $
    8,554
    
    
    $
    2,559Net cash used in investing activities
    
    $
    (3,110
    )
    
    $
    (2,647
    )Net cash used in financing activities
    
    $
    (16,327
    )
    
    $
    (6,019
    )
 Net cash provided by operating activities of $2.6 million for the three months ended
March 31, 2005 primarily comprised of net income, net of non-cash related expenses which includes a
$1.5 million non-recurring write-off of our deferred financing costs in connection with the early
retirement of debt from our IPO proceeds during February 2005. This was offset by the non-cash
related benefit from net deferred income taxes of $26.6 million. The primary working capital uses
of cash were the increase in our accounts receivables of $8.3 million primarily related to our
increased sales and the $4.3 million decrease in our accounts payable and accrued expenses mainly
due to the timing of interest payments, as well as payments on trade payables and 2004 incentive
bonus accruals during the first quarter of 2005. Net cash used in investing activities of $2.6 million for the three months ended March 31,
2005 primarily relates to acquisition of businesses and capital expenditures. Our cash used in
investing activities decreased in 2005 because of lower capital expenditures due to improved
utilization of our existing production capacity and stronger cost controls. Net cash used in financing activities of $6.0 million for the three months ended March 31,
2005 primarily relates to payments on long-term debt under our debt agreements and cash
distributions to members. These are offset by the proceeds from borrowings under our debt
agreements. We utilized the net proceeds from our IPO in February 2005 to redeem Holdings
preferred equity and to pay down our senior secured credit facilities. In connection with our IPO,
we also made a cash distribution of $8.2 million to certain members of Holdings which we funded
through borrowings on our revolving credit facility. During the first quarter of 2005, we had $13
million of total borrowings on our revolving credit facility. As a result of our payments to our
revolving credit facility during the first quarter of 2005, we have reduced our outstanding
borrowings on our revolving credit facility to $2 million as of March 31, 2005. Subsequent to
March 31, 2005, we paid this balance from cash provided by our operating activities and we
currently have no outstanding borrowings on our revolving credit facility. 21




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##### Table of Contents



Our cash position, working capital and debt obligations as of December 31, 2004 and March 31,
2005 are shown below and should be read in conjunction with our consolidated balance sheets and
notes thereto included in this report. December 31,
    
    
    March 31,2004
    
    
    2005(Unaudited)(Dollars in thousands)Cash and cash equivalents
    
    $
    13,826
    
    
    $
    7,719Working capital
    
    
    22,773
    
    
    
    28,950Debt obligations:Borrowings from senior secured credit facilities
    
    
    301,312
    
    
    
    243,751Mandatorily redeemable preferred membership units
    
    
    27,814
    
    
    
    Other debt obligations
    
    
    19,521
    
    
    
    18,583Total debt obligations
    
    $
    348,647
    
    
    $
    262,334
 We expect a positive impact on our liquidity and results of operations going forward due
to lower interest expense resulting from the $88.0 million in aggregate pay down on our debt
obligations in February 2005 from our IPO proceeds. However, this will be offset to a certain
extent by rising market interest rates on our debt obligations under our senior secured credit
facilities which are subject to variable interest rates. As discussed in Quantitative and
Qualitative Disclosure About Market Risk, we had $262.3 million of total debt obligations
outstanding as of March 31, 2005 of which $243.8 million was bearing interest at variable rates
approximating 8.2% on a weighted average basis as of March 31, 2005. A 1.0% change in interest
rates on our variable rate debt would have resulted in interest expense fluctuating by
approximately $0.7 million during the quarter ended March 31, 2005. We believe that our cash flow provided by operations will be adequate to cover our 2005
working capital needs, debt service requirements and planned capital expenditures to the extent
such items are known or are reasonably determinable based on current business and market
conditions. However, we may elect to finance certain of our capital expenditure requirements
through borrowings under our credit facilities or the issuance of additional debt through capital
lease agreements. We continually evaluate potential acquisitions. Absent a compelling strategic reason, we
expect that all future acquisitions will be cash flow accretive within six months. Currently, we
are not party to any agreements or engaged in any negotiations regarding a material acquisition. We
expect to fund future acquisitions through cash flow provided by operations, additional borrowings
or the issuance of our equity. The extent to which we will be willing or able to use our equity or
a mix of equity and cash payments to make acquisitions will depend on the market value of our
shares from time to time and the willingness of potential sellers to accept equity as full or
partial payment. Off-Balance Sheet Arrangements There have been no changes in our off-balance sheet arrangements from the information provided
in Item 7  Off-Balance Sheet Arrangements in our Form 10-K for the year ended December 31,
2004. Contractual Obligations and Other Commitments There have been no changes to our future contractual obligations during the quarter ended
March 31, 2005 from the information provided in our Form 10-K for the year ended December 31, 2004. 
 Item 3. Quantitative and Qualitative Disclosure 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 have an interest
rate hedge agreement which expires in 22




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##### Table of Contents



September 2005 and two interest rate collar agreements, one of which expires in September 2005
and the other expires in December 2006. Except as set forth below, there have been no material
changes in market risk from the information reported in Item 7A  Quantitative and Qualitative
Disclosures about Market Risk in our 2004 Annual Report on Form 10-K. At March 31, 2005, we had $262.3 million of total debt obligations of which $243.8 million was
bearing interest at variable rates approximating 8.2% on a weighted average basis. A 1.0% change in
interest rates on variable rate debt would have resulted in interest expense fluctuating by
approximately $0.7 million during the quarter ended March 31, 2005. We have not, and do not plan to, enter into any derivative financial instruments for trading
or speculative purposes. As of March 31, 2005, 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 Exchange Act of 1934 is recorded,
processed, summarized, and reported within the time periods specified in the Securities and
Exchange Commissions rules and forms, and that such information is accumulated and communicated to
our management, including our Chief Executive Officer and 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
Securities Exchange Act of 1934) as of March 31, 2005. Based on that evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that as of March 31, 2005, these disclosure
controls and procedures were effective. Changes in Internal Controls Over Financial Reporting There were no changes to internal controls over financial reporting during the first quarter
of 2005 that has materially affected, or is reasonably likely to materially affect, our internal
controls over financial reporting. 
 PART II 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Our senior secured credit facilities contain restrictive covenants which, among other things,
provide limitations on capital expenditures, restrictions on indebtedness and dividend
distributions to our stockholders. Additionally, we are required to meet debt covenants based on
certain financial ratio thresholds, including minimum interest coverage, maximum leverage and
minimum fixed charge coverage ratios. The credit facilities also limit our ability and the ability
of our domestic subsidiaries to, among other things, incur liens, make certain investments, sell
certain assets, engage in reorganizations or mergers, or change the character of our business. We
are in compliance with all such covenants as of March 31, 2005. 23




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##### Table of Contents



Item 6. Exhibits Number
    
    Description31.1
    
    Certification by the Chief Executive Officer pursuant to Rules
13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.*31.2
    
    Certification by the Chief Financial Officer pursuant to Rules
13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.*32.1
    
    Certification by the Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. *
    24




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##### Table of Contents



SIGNATURE PAGE 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 on May
13, 2005. AMERICAN REPROGRAPHICS COMPANYBy:
    /s/ Sathiyamurthy ChandramohanChairman of the Board of Directors andChief Executive Officer By:
    /s/ Mark W. LeggChief Financial Officer and Secretary 25




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##### Table of Contents



INDEX TO EXHIBITS EXHIBIT NUMBER
    
    DESCRIPTION31.1
    
    Certification by the Chief Executive Officer pursuant to Rules 13a-14(a)/15d-14(a) of the
Securities Exchange Act of 1934.31.2
    
    Certification by the Chief Financial Officer pursuant to Rules 13a-14a/15d-14(a) of the
Securities Exchange Act of 1934.32.1
    
    Certification by the Chief Executive Officer and Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.