UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

(Mark One)

þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 2009

or

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 001-32407

AMERICAN REPROGRAPHICS COMPANY

(Exact name of Registrant as specified in its Charter)

Delaware (State or other jurisdiction of incorporation or organization)		20-1700361 (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)

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class		Name of Each Exchange on Which Registered
Common Stock, par value $0.001 per share		New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:
NONE

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ

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

Indicate by check mark 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, 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 Exchange Act). Yes o No þ

Based on the closing price of $8.32 of the registrant’s Common Stock on the New York Stock Exchange on June 30, 2009 (the last business day of the registrant’s most recently completed second fiscal quarter), the aggregate market value of the voting common equity held by non-affiliates of the registrant on that date was approximately $303,848,080.

As of February 23, 2010, there were 45,664,999 shares of the Registrant’s common stock outstanding.

Portions of the Registrant’s Proxy Statement for its 2010 Annual Meeting of Stockholders to be held on April 29, 2010 are incorporated by reference in the Annual Report on Form 10-K in response to Part III, Items 10, 11, 12, 13 and 14.

 

 

AMERICAN REPROGRAPHICS COMPANY
ANNUAL REPORT ON FORM 10-K
for the fiscal year ended December 31, 2009

Table of Contents

		Page
PART I			4
Item 1. Business			4
Item 1A. Risk Factors			11
Item 1B. Unresolved Staff Comments			15
Item 2. Properties			16
Item 3. Legal Proceedings			16
Item 4. Submission of Matters to a Vote of Security Holders			16
PART II			17
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			17
Item 6. Selected Financial Data			19
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations			21
Item 7A. Quantitative and Qualitative Disclosures About Market Risk			43
Item 8. Financial Statements and Supplementary Data			44
Item 9. Changes in and Disagreements with Accountants On Accounting And Financial Disclosure			44
Item 9A. Controls and Procedures			44
Item 9B. Other Information			45
PART III			46
Item 10. Directors, Executive Officers and Corporate Governance			46
Item 11. Executive Compensation			46
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			46
Item 13. Certain Relationships and Related Transactions, and Director Independence			46
Item 14. Principal Accountant Fees and Services			46
PART IV			47
Item 15. Exhibits and Financial Statement Schedules			47
SIGNATURES			55
Exhibit 10.79
Exhibit 10.80
Exhibit 10.81
Exhibit 10.82
Exhibit 21.1
Exhibit 23.1
Exhibit 23.2
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

AMERICAN REPROGRAPHICS COMPANY
2009 ANNUAL REPORT ON FORM 10-K

In this Annual Report on Form 10-K, “American Reprographics Company,” “ARC,” “the Company,” “we,” “us,” and “our” refer to American Reprographics Company, a Delaware corporation, and its consolidated subsidiaries, unless the context otherwise dictates.

FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K 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 Annual Report on Form 10-K, 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 I, 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 Annual Report on Form 10-K 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.

TRADEMARKS AND TRADE NAMES

We own or have rights to a number of trademarks, service marks, and trade names that we use in conjunction with the operation of our business, including the name and design mark “ARC American Reprographics Company ^®,” “PlanWell ^®,” “PlanWell PDS ^®,” “PlanWell Enterprise ^SM,” and various design marks associated therewith. In addition, we own or have rights to various trademarks, service marks, and trade names that we use regionally in conjunction with the operation of our segments. This report also includes trademarks, service marks and trade names of other companies.

PART I

Item 1.		Business

Our Company

We are the leading reprographics company in the United States. Reprographics companies generally provide business-to-business document-related services that typically include document management, document distribution and logistics, and print-on-demand. Unlike most reprographics companies, however, we develop technology applications to support and enhance our services. Specifically, our technology increases the productivity of document managers and other reprographers, streamlines document workflows, and makes it easier for other software to interact with our services and hosted data. For many of our customers, we offer our services on-site in our customers’ offices. We typically refer to this service line as “facilities management” or “FM’s.”

Our primary market is the architectural, engineering and construction industry, or AEC industry. We also provide services and technology to companies in non-AEC industries, such as aerospace, technology, financial services, retail, entertainment, and food and hospitality.

We conduct our business through hundreds of locally-branded reprographics service centers, and in thousands of our customers’ offices. We also sell reprographics equipment and supplies to complement our service offerings.

Our services are critical to our customers because they shorten their document processing and distribution time, improve the quality of their document management tasks, and provide a secure, controlled environment in which to manage, distribute and produce their documents.

In support of our strategy to create technology standards in the reprographics industry, we license several of our reprographics technology products, including our flagship internet-based application, PlanWell, to independent reprographers.

As of December 31, 2009, we operated 272 reprographics service centers, including 259 service centers in 208 cities in 38 states throughout the United States and the District of Columbia, seven reprographics service centers in Canada, one in United Kingdom and a business venture company in China with five locations. Our reprographics service centers are located in close proximity to the majority of our customers and we offer pickup and delivery services within a 15 to 30 mile radius of our main locations. These service centers are digitally connected as a cohesive network, allowing us to provide our services both locally and nationally. We service approximately 138,000 active customers and employ approximately 3,500 people, including a sales and customer service staff of approximately 550 employees. In terms of revenue, number of service facilities and number of customers, we believe we are the largest company in our industry, operating in at least ten times as many cities and with more than nine times the number of service facilities as our next largest competitor.

We identify 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. See Note 2 “Summary of Significant Accounting Policies” for further information.

While we began operations in California and currently derive approximately 33% of our net sales from operations in that state, our company has grown and our market share has increased through more than 140 acquisitions of local reprographics and related companies with well-recognized local brand names and, in most cases, more than 25 years of operating history. Our preferred practice is to maintain the senior management of companies we acquire.

Our main office is located at 1981 N. Broadway, Suite 385, Walnut Creek, California, 94596, and our telephone number at that location is (925) 949-5100.

Available Information

We file annual, quarterly and current reports, proxy statements, and other information with the Securities and Exchange Commission (the “SEC”). You may read and copy any document we file with the SEC at the SEC’s public reference room at 100 F Street, N.E, Washington, DC 20549. Please call the SEC at 1-800-SEC-0330 for information on the public reference room. The SEC maintains an internet site that contains annual, quarterly and current reports, proxy statements and other information that issuers file electronically with the SEC. The SEC’s internet site is www.sec.gov.

Our internet address is www.e-arc.com. You can access our Investor Relations webpage through our website, www.e-arc.com, by clicking on the “Investor Relations” link at the top of the page. We make available free of charge, through our Investor Relations webpage, our proxy statements, Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. We also make available, through our Investor Relations webpage, statements of beneficial ownership of our equity securities filed by our directors, officers, 10% or greater stockholders and others under Section 16 of the Exchange Act. The reference to our website does not constitute incorporation by reference of the information contained in the website and should not be considered part of this document. You can request a printed copy of these documents, excluding exhibits, at no cost, by contacting our Investor Relations department by telephone at 925-949-5100 or in writing to 1981 North Broadway, Suite 385, Walnut Creek, California 94596, Attention: David Stickney, Vice President of Corporate Communications.

Corporate Background and Reorganization

Our predecessor, Ford Graphics, a sole proprietorship, was founded in Los Angeles, California in 1960. In 1967, that sole proprietorship was dissolved and a new corporate structure was established under the name Micro Device, Inc., which continued to provide reprographics services under the name Ford Graphics. In 1989, certain current and former members of our senior management purchased Micro Device, Inc., and in November 1997 our company was recapitalized as a California limited liability company, with management retaining a 50% ownership position and the remainder owned by outside investors.

In February 2005, we reorganized from American Reprographics Holdings, L.L.C., a California limited liability company, or Holdings, into a Delaware corporation, American Reprographics Company. In the reorganization, the members of Holdings exchanged their common units and options to purchase common units for shares of our common stock and options to purchase shares of our common stock. As part of our reorganization, all outstanding warrants to purchase common units of Holdings were exchanged for shares of our common stock. We conduct our operations through our wholly-owned operating subsidiary, American Reprographics Company, L.L.C., a California limited liability company, or Opco, and its subsidiaries.

Acquisitions

In addition to growing the business organically, we have pursued acquisitions to expand and complement our existing service offerings and to expand our geographic locations where we believe we could be a market leader. Since 1997, we have acquired more than 140 companies. Our recent acquisitions include two reprographics companies and one Chinese reprographics company for an aggregate purchase price of $2.9 million in 2009, and 13 reprographics companies acquired in 2008 for an aggregate purchase price of $31.9 million.

On August 1, 2008, we commenced operations of UNIS Document Solutions Co., Ltd. (“UDS”), our business venture with Unisplendour Corporation Limited (“Unisplendour” or “UNIS”). The purpose of UDS is to pair the digital document management solutions of our Company with the brand recognition and Chinese distribution channel of Unisplendour to deliver digital reprographics services to China’s growing construction industry. Under the terms of the agreement, our Company and Unisplendour have an economic ownership interest of 65 percent and 35 percent, respectively.

While our interest in acquisitions remains high, we have abstained from purchasing reprographics companies during the current economic recession until business valuations have stabilized. Our intent is to resume our acquisition program once an economic improvement in our industry is evident.

Industry Overview

According to the International Reprographics Association, or IRgA, which is the only third-party organization with research statistics on the reprographics industry in the United States, the reprographics industry in the United States is approximately $4.5 billion in size. The IRgA indicates that the reprographics industry is highly fragmented, consisting of approximately 3,000 firms with average annual sales of approximately $1.5 million and 20 to 25 employees. Since construction documents are the primary medium of communication for the AEC industry, demand for reprographics services in the AEC market is closely tied to the level of activity in the construction industry which, in turn, is driven by macroeconomic trends such as gross domestic product, or GDP, growth, interest rates, job creation, office vacancy rates, and tax revenues. According to FMI Corporation, or FMI, a consulting firm to the construction industry, construction industry spending “put in place” in the United States for 2009 was estimated at $935.0 billion, with expenditures divided between residential construction at 27.6% and commercial and public, or non-residential, construction at 72.4%. The $4.5 billion reprographics industry is approximately 0.5% of the $935.0 billion construction industry in the United States.

Reprographics customers in the AEC market are comprised of many companies in a wide variety of trades and service categories. One construction project may involve hundreds of construction services providers, each of whom is typically invoiced by the reprographer for their use of documents and document management services. While these individual providers are responsible for paying their reprographer for services rendered, reprographics invoices are typically passed through to their customers for reimbursement. It is rare when reprographics companies bill a project or project owner directly. It is this common industry practice that contributes to market fragmentation, and makes it difficult to segment service revenues based on type of construction, project type and project sector (public or private).

Market opportunities for business-to-business document management services such as ours continue to expand into non-AEC industries. For example, non-AEC customers are increasingly using large and small format color imaging for point-of-purchase displays, digital publishing, presentation materials, educational materials and marketing materials as these services have become more efficient and available on a short-run, on-demand basis through digital technology. As a result, we believe that our addressable market is substantially larger than the core AEC reprographics market. We believe that the growth of non-AEC industries is generally tied to growth in the United States GDP, which is estimated to have increased 5.7% in 2009’s fourth quarter versus the third, on an annualized basis

Our Competitive Strengths

We believe that our competitive strengths include the following:

	•		Leading Market Position in Fragmented Industry. Our size and national footprint provide us with significant purchasing power, economies of scale, the ability to invest in industry-leading technologies, and the resources to service large, national customers.
	•		Leader in Technology and Innovation. We believe several of our technology products are well positioned to become industry standards for managing and procuring reprographics services within the AEC industry, as well as managing reprographics businesses themselves. We have developed other proprietary software applications that complement these applications, which enabled us to improve the efficiency of our services, add services, and increase our revenue.
	•		Extensive National Footprint with Regional Expertise. Our national network of service centers maintains local customer relationships while benefiting from centralized corporate functions and national scale. Our service facilities are organized as hub and satellite structures within individual markets, allowing us to balance production capacity and minimize capital expenditures through technology-sharing and the consolidation of administrative and accounting functions among our service centers within each market or region. In addition, we serve our national and regional customers under a single contract through our Global Services (formerly Premier Accounts) program, while offering centralized access to project specific services, billing, and tracking information.
	•		Flexible Operating Model. Information from our local businesses heavily influence our decision making for marketing, pricing, and selling practices. It allows us to remain responsive to our customers while benefiting from the cost structure advantages of our centralized administrative functions. Our flexible operating model also allows us to capitalize on any business environment, quickly scaling up or down as needed within a given marketplace.
	•		Consistent, Strong Cash Flow. Through management of our inventory and receivables and our low capital expenditure requirements, we have consistently generated strong cash flows from operations in a variety of industry and economic conditions.
	•		Low Cost Operator. We believe we are one of the lowest cost operators in the reprographics industry. We have achieved this status by minimizing branch level expenses and capitalizing on our significant scale for purchasing efficiencies.
	•		Experienced Management Team and Highly Trained Workforce. Members of our executive and divisional senior management teams have an average of more than 20 years of industry experience. It is also our preferred practice to maintain the senior management of the companies we acquire.

Our Services

Reprographics services typically encompass business-to-business services including document management, document distribution and logistics, and print-on-demand. We also develop technology applications to support and enhance these services that improve control and efficiency in document workflows, and increase productivity.

Document Management. We store, organize, print and track AEC and non-AEC project documents using a variety of digital tools and our industry expertise. The documents we manage for the construction industry are typically larger than 11"×17”, requiring specialized production equipment, and the documents are iterative in nature; frequently 10 or more versions of a single document must be tracked and managed throughout the course of a project.

Document Distribution and Logistics. We provide fully-integrated document distribution and logistics, which consist of tracking document users, packaging prints, addressing and coordinating services for shipment (either in hard copy or electronic form), as well as local pick-up and delivery of documents to multiple locations within tight time constraints.

Print-on-demand. We produce small and large-format documents in black and white or color using digital scanning and printing devices. We can reproduce documents when and where they are needed by balancing production capacity between the high-volume equipment in our network of reprographics service centers, sending production jobs from one location to another, as well as producing work on equipment placed in our customers’ facilities.

We also provide any combination of the above services supplied on-site at our customers’ locations. These services are typically referred to as facilities management, or FMs.

These broad categories of services are provided to our AEC industry customers, as well as to our customers in non-AEC industries that have similar document management and production requirements. Our AEC customers work primarily with high volumes of large-format construction plans and small-format specification documents that are technical, complex, constantly changing and frequently confidential. Our non-AEC customers generally require services that apply to black and white and color small format documents, promotional documents of all sizes, and the digital distribution of document files to multiple locations for a variety of print-on-demand needs including short-run digital publishing.

These services include:

	•		Offering PlanWell Enterprise (“PlanWell”), our proprietary, internet-based planroom software application launched in June 2000, and our suite of other reprographics technology products that enable online purchase and fulfillment of document management services.
	•		Production services, including print-on-demand, document assembly, document finishing, mounting, laminating, binding, and kitting.
	•		Document distribution and logistics, including the physical pick-up, delivery, and shipping of time-sensitive, critical documents. Documents can be digitally transferred from one service facility to another to balance production capacity or take advantage of a “distribute and print” production model.
	•		Highly customized large and small format reprographics in color and black and white. This includes digital reproduction of posters, tradeshow displays, plans, banners, signage, and maps.
	•		Facilities management services, including recurring on-site document management services and staffing at our customers’ locations.
	•		Sales of reprographics equipment and supplies and licensing of software to other reprographics companies and end-users in the AEC industry.

We also design and develop other document management and reprographics software products, in addition to PlanWell, that supports ordering, tracking, job estimating, and other customer-specific accounting information for a variety of projects and services. These proprietary applications include:

	•		Electronic Work Order (“EWO”), which offers our customers access to the services of all of our service centers through the internet.
	•		MetaPrint Abacus, which provides a suite of software modules for reprographers and their customers to track documents produced from equipment installed as a part of a facilities management program.
	•		BidCaster Invitation-to-Bid, a data management internet application inside PlanWell that issues customizable “invitations to bid” from a customer’s desktop using email and a hosted fax server.
	•		MetaPrint Print Automation and Device Manager, a universal print driver that facilitates the printing of documents with output devices manufactured by multiple vendors, and allows the reprographer to print multiple documents in various formats as a single print submission.

	•		OneView Document Access and Customer Administration System, an internet-based application that leverages the security attributes of PlanWell to provide a single point of access to all of a customer’s project documents inside PlanWell planrooms, regardless of which of our local production facilities stores the relevant documents.
	•		Sub-Hub, an internet-based application that notifies subscribers of upcoming construction jobs in their markets and allows them to view plans online and order paper copies from a reprographer.
	•		PlanWell Databridge, which allows construction project management software users to share common data between applications, synchronize project information, bid packages and contacts, eliminate redundant data entry, and easily start projects in project management applications by leveraging indexed data in PlanWell Enterprise.
	•		ishipdocs, a web-based software application that allows users to upload documents to a local reprographics business for local production and printing.

To further support and promote our major categories of services, we also:

	•		License our suite of reprographics technology products, including our flagship online planroom, PlanWell, to independent reprographers.
	•		Operate Profit and Education in Reprographics (“PEiR”) Group, a trade organization wholly-owned by us, through which we charge membership fees and provide purchasing, technology, and educational benefits to other reprographers. PEiR members are required to license PlanWell and may purchase equipment and supplies at a lower cost than they could obtain independently. We also distribute our educational programs to PEiR members to help establish and promote best practices within the reprographics industry.

Customers

Our business is not dependent on any single customer or few customers, the loss of any one or more of whom would have a material adverse effect on our business. Our customers are both local and national companies, with no single customer accounting for more than 2.5% of our net sales in 2009.

We have a geographic concentration risk as sales in California, as a percentage of total sales, were approximately 33%, 36% and 42% for the years ended December 31, 2009, 2008 and 2007, respectively.

Operations

Geographic Presence. We operate 272 reprographics service centers, including 259 service centers in 208 cities in 38 states throughout the United States and in the District of Columbia, seven service centers in Canada, one in the United Kingdom and we also have a business venture in China with five locations. Our reprographics service centers are located in close proximity to the majority of our customers and offer pick-up and delivery services within a 15 to 30 mile radius. In our three prior fiscal years, sales outside the United States have been small but growing, amounting to $28.2 million, $24.2 million and $13.2 million for the years ending December 31, 2009, 2008, and 2007, respectively.

Hub and Satellite Configuration. We organize our business into operating segments that typically consist of a cluster configuration of at least one large service facility, or hub, and several smaller facilities, or satellites, that are digitally connected as a cohesive network, allowing us to provide all of our services both locally and nationwide. Our hub and satellite configuration enables us to shorten our customers’ document processing and distribution time, as well as achieve higher utilization of output devices by coordinating the distribution of work orders digitally among our service centers.

Management Systems and Controls. We operate with a largely centralized administrative function and business decisions are heavily influenced by local and regional business information and business trends. Acquired companies typically retain their local business identities, managers, sales force, and marketing efforts in order to maintain strong local customer relationships. Our local management maintains autonomy over the day-to-day operations of their business units, including profitability, customer billing, receivables collection, and service mix decisions.

Our senior management closely monitors and reviews each of our segments through daily reports that contain operating and financial information such as sales, inventory levels, purchasing commitments, collections, and receivables. In addition, our operating segments submit monthly reports to senior management that track each segments’ financial and operating performance in comparison to historical performance.

Suppliers and Vendors

We purchase raw materials, consisting primarily of paper, toner, and other consumables. Our reprographics equipment, which includes imaging and printing equipment, is typically leased for use in our service facilities and facilities management sites. We use a two-tiered approach to purchasing in order to maximize the economies associated with our size, while maintaining the local efficiencies and time sensitivity required to meet customer demands. We continually monitor market conditions and product developments to take advantage of our buying power.

Our primary vendors of equipment, maintenance services, and reprographics supplies include Oce N.V., Azerty, and Xpedx, a division of International Paper Company. We have long-standing relationships with all of our suppliers and we believe we receive favorable prices as compared to our competition, due to the large quantities we purchase and strong relationships with our vendors. Significant market fluctuations in our raw material costs have historically been limited to paper prices and we have typically maintained strong gross margins as the result of our ability to pass increased material costs through to our customers.

Sales and Marketing

Divisional Sales Force. We market our products and services throughout the United States through localized sales forces and marketing efforts at the divisional level. We had approximately 550 sales and customer service representatives as of December 31, 2009. Each sales force generally consists of a sales manager and a staff of sales and customer service representatives that target various customer segments. Sales teams serve both the central hub service facility and satellite facilities, or if market demographics require, operate on behalf of a single service facility.

Global Services (formerly “Premier Accounts”). To further enhance our market share and service portfolio on a national level, we offer, on a consolidated basis, the services of all of ARC operating locations to large regional and national customers. We created Global Services to take advantage of growing globalization within the AEC market, and to establish ourselves at the corporate level as the leading national reprographer with extensive geographic and service capabilities. This consolidated service offering allows us to attract large AEC and non-AEC companies with document management, distribution and logistics, and print-on-demand needs that span wide geographical or organizational boundaries. As of December 31, 2009, we maintained 36 Global Services accounts.

PEiR Group. We established the PEiR Group in July 2003, a separate operating segment of our corporate structure that is a membership-based organization for the reprographics industry. Comprised of independent reprographers and reprographics vendors, PEiR members are required to license PlanWell technology, facilitating the promotion of our applications as industry standards. We also provide general purchasing discounts to PEiR members through our preferred vendors. This provides other reprographics companies the opportunity to purchase equipment and supplies at a lower cost than they could obtain independently, while increasing our influence and purchasing power with our vendors. Through PEiR, we also present educational programs to members to establish and promote best practices within the industry. As of December 31, 2009, the PEiR Group had 154 domestic and international members.

Competition

According to the IRgA, most firms in the United States reprographics services industry are small, privately-held entrepreneurial businesses. The larger reprographers in the United States, besides ourselves, include Service Point USA, a subsidiary of Service Point Solutions, S.A., Thomas Reprographics, Inc., ABC Imaging, LLC, and National Reprographics Inc. While we have no nationwide competitors, we do compete at the local level with a number of privately-held reprographics companies, commercial printers, digital imaging firms, and to a limited degree, retail copy shops. Competition is primarily based on customer service, technological leadership, product performance and price. See Item 1A — “Risk Factors — Competition in our industry and innovation by our competitors may hinder our ability to execute our business strategy and maintain our profitability.”

Research and Development

We believe that to compete effectively we must address the growing adoption of technology by our customers, and thus conduct research and development toward enhancing our existing software and web-based applications, as well as create new ones. As of December 31, 2009, we employed 43 engineers and technical specialists with expertise in software, internet-based applications, database management, internet security and quality assurance. In total, research and development amounted to $4.0 million, $5.1 million and $5.5 million during the fiscal years ended December 31, 2009, 2008 and 2007, respectively.

Proprietary Rights

Our success depends on our proprietary information and technology. We rely on a combination of copyright, trademark and trade secret laws, license agreements, nondisclosure and non-compete agreements, reseller agreements, customer contracts, and technical measures to establish and protect our rights in our proprietary technology. Our PlanWell license agreements grant our customers a nonexclusive, nontransferable, limited license to use our products and receive our services and contain terms and conditions prohibiting the unauthorized reproduction or transfer of our proprietary technologies. We retain all title and rights of ownership in our software products. In addition, we enter into agreements with some of our employees, third-party consultants and contractors that prohibit the disclosure or use of our confidential information and require the assignment to us of any new ideas, developments, discoveries or inventions related to our business. We also require other third parties to enter into nondisclosure agreements that limit use of, access to, and distribution of our proprietary information. We also rely on a variety of technologies that are licensed from third parties to perform key functions.

We have registered our “American Reprographics Company” combined name and design as a trademark with the United States Patent and Trademark Office (USPTO), and we have registered “PlanWell” and “PlanWell PDS” as trademarks with the USPTO and in Canada, Australia and the European Union. We have also registered “Sub-Hub” as a service mark with the USPTO, in the European Union, United Kingdom, Benelux and Mexico. Additionally, we have registered “MetaPrint” as a trademark with the USPTO and we have applied for registration of “MetaPrint” as a trademark in the European Union.

We do not own any other registered trademarks or service marks, or any patents, that are material to our business.

For a discussion of the risks associated with our proprietary rights, see Item 1A — “Risk Factors — Our failure to adequately protect the proprietary aspects of our technology, including PlanWell, may cause us to lose market share.”

Information Technology

We operate two technology centers in Silicon Valley to support our reprographics services and software development. We also have a facility in Kolkata, India which gives us a powerful and cost effective resource to support our research and development. Our technology centers also serve as design and development facilities for our software applications, and house our North American database administration team and networking engineers.

From these technology centers, our technical staff is able to remotely manage, control and troubleshoot the primary databases and connectivity of each of our operating segments. This allows us to avoid the costs and expenses of employing costly database administrators and network engineers in each of our service facilities.

All of our reprographics service centers are connected via a high performance, dedicated wide area network, with additional capacity and connectivity through a virtual private network to handle customer data transmissions and e-commerce transactions. Our technology centers use both commonly available software and custom applications running in a clustered computing environment and employ industry-leading technologies for redundancy, backup, and security.

Employees

As of December 31, 2009, we had approximately 3,500 employees, 16 of whom are covered by two collective bargaining agreements. The collective bargaining agreement with our subsidiary, Ridgway’s, LLC, covers nine employees and the collective bargaining agreement with our subsidiary, BPI Repro, LLC, covers seven employees. We have not experienced a work stoppage during the past five years and believe that our relationships with our employees and collective bargaining units are good.

Executive Officers of the Registrant

The following sets forth certain information regarding all of our executive officers as of February 26, 2010:

Name		Age				Position
Kumarakulasingam Suriyakumar			56			Chairman, President and Chief Executive Officer
Jonathan R. Mather			59			Chief Financial Officer and Secretary
Rahul K. Roy			50			Chief Technology Officer
Dilantha Wijesuriya			47			Senior Vice President-National Operations

Kumarakulasingam (“Suri”) Suriyakumar has served as our President and Chief Executive Officer since June 1, 2007, and he served as the Company’s President and Chief Operating Officer from 1991 until his appointment as Chief Executive Officer. On July 24, 2008, Mr. Suriyakumar was appointed Chairman of our Board of Directors. Mr. Suriyakumar served as an advisor of Holdings from March 1998 until his appointment as a director of American Reprographics Company in October 2004. Mr. Suriyakumar joined Micro Device, Inc. (our predecessor company) in 1989. He became the Vice President of Micro Device, Inc. in 1990. Prior to joining the Company, Mr. Suriyakumar was employed with Aitken Spence & Co. LTD, a highly diversified conglomerate and one of the five largest corporations in Sri Lanka. Mr. Suriyakumar is an active member of the International Reprographics Association (IRgA).

Jonathan R. Mather joined American Reprographics Company as its Chief Financial Officer in December 2006. From 2001 to 2006, Mr. Mather was employed at NETGEAR, a manufacturer of computer networking products, as its Executive Vice President and Chief Financial Officer. Before NETGEAR, from July 1995 to March 2001, Mr. Mather worked at Applause Inc., a consumer products company, where he served as President and Chief Executive Officer from 1998 to 2001, as Chief Financial Officer and Chief Operating Officer from 1997 to 1998 and as Chief Financial Officer from 1995 to 1997. From 1985 to 1995, Mr. Mather was employed with Home Fashions Inc., a consumer products company, where he served as Chief Financial Officer from 1992 to 1995, and as Vice President, Finance, of an operating segment, Louverdrape, from 1988 to 1992. Prior to that, he spent more than two years at the semiconductor division of Harris Corporation, a communications equipment company, where he served as the Finance Manager of the offshore manufacturing division. He also worked in public accounting for four years with Coopers & Lybrand (now part of PricewaterhouseCoopers LLP) and for two years with Ernst & Young. Mr. Mather has an M.B.A. from Cornell University. He is a Certified Management Accountant (C.M.A.) and a Fellow Chartered Accountant (F.C.A.).

Rahul K. Roy joined Holdings as its Chief Technology Officer in September 2000. Prior to joining the Company, Mr. Roy was the founder, President and Chief Executive Officer of MirrorPlus Technologies, Inc., which developed software for the reprographics industry, from August 1993 until it was acquired by the Company in 1999. Mr. Roy also served as the Chief Operating Officer of InPrint, a provider of printing, software, duplication, packaging, assembly, and distribution services to technology companies, from 1993 until it was acquired by the Company in 1999.

Dilantha Wijesuriya was appointed as the Company’s Senior Vice President — National Operations effective August 7, 2008. Mr. Wijesuriya joined Ford Graphics, a segment of the Company, in January of 1991. He subsequently became president of that segment in 2001, and became a Company regional operations head in 2004, which position he retained until his appointment as the Company’s Senior Vice President — National Operations. Prior to his employment with the Company, Mr. Wijesuriya was a divisional manager with Aitken Spence & Co. LTD, a highly diversified conglomerate and one of the five largest corporations in Sri Lanka.

Item 1A.		Risk Factors

Our business faces significant risks. The following risk factors could adversely affect our results of operations and financial condition and the price of our common stock. We may encounter risks in addition to those described below. Additional risks and uncertainties not currently known to us or that we currently deem immaterial may also impair or adversely affect our results of operations and financial condition.

Adverse domestic and global economic conditions and disruption of financial markets could have a material adverse impact on our business and results of operations.

During the last year, domestic and international financial markets have experienced extreme disruption, including, among other things, extreme volatility in stock prices (which was more pronounced through the first quarter of fiscal year 2009) and severely diminished liquidity and credit availability. These developments and the related severe domestic and international economic downturn, have continued to adversely impact our business and financial condition in a number of ways, including effects beyond those that were experienced in previous recessions in the United States and foreign economies. The current restrictions in financial markets and the severe economic downturn may adversely affect the ability of our customers and suppliers to obtain financing for operations and purchases and to perform their obligations under agreements with us. These restrictions could result in a decrease in, or cancellation of, existing business, could limit new business, and could negatively impact our ability to collect on our accounts receivable on a timely basis, if at all. Although there have been recent signs of certain areas of economic improvement, we are unable to predict the duration and severity of the current economic recession and disruption in financial markets and their effects on our business and results of operations. These events are more severe than previous economic recessions and may, in the aggregate, have a material adverse effect on our results of operations and financial condition.

The residential and non-residential architectural, engineering and construction (AEC) industry is in the midst of a severe downturn. A continuing decline in the residential AEC industry, and a downturn in the non-residential AEC industry, could adversely affect our future revenue and profitability.

We believe that the residential and non-residential AEC markets together accounted for approximately 78% of our net sales for the year ended December 31, 2009, of which we believe the non-residential AEC industry accounted for approximately 92% of our net sales to the AEC market and the residential AEC industry accounted for approximately 8% of our net sales to the AEC market. Our historical operating results reflect the cyclical and variable nature of the AEC industry. Both the residential and non-residential portions of the AEC industry are in the midst of a severe downturn. The effects of the current recession in the United States economy and weakness in global economic conditions have resulted in a downturn in the residential and non-residential portions of the AEC industry. 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 in the AEC industry following a recovery in the general economy. A prolonged downturn in the AEC industry would diminish demand for our products and services, and would therefore negatively impact our revenues and have a material adverse impact on our business, operating results and financial condition.

Since we derive a majority of our revenues from reprographics products and services provided to the AEC industry, our operating results are more sensitive to this industry than other companies that serve more diversified markets. In addition, because approximately 55% of our overall costs are fixed, changes in economic activity, positive or negative, affect our results of operations. As a consequence, our results of operations are subject to volatility and could deteriorate rapidly in an environment of declining revenues. Failure to maintain adequate cash reserves and to effectively manage our costs could adversely affect our ability to offset our fixed costs and may have a material adverse effect on our results of operations and financial condition.

Covenants in our credit and guaranty agreement could adversely affect our financial condition. Although we have adjusted certain financial ratio covenants in our amended credit agreement, we may not be able to comply with the adjusted covenants in the future.

Our credit and guaranty agreement contains customary restrictions and covenants, including, without limitation, interest coverage ratios, fixed charge coverage ratios, leverage coverage ratios and limitations on maximum capital expenditures, which we must maintain. On October 5, 2009, we entered into an amendment to our credit and guaranty agreement (the “Amended Credit Agreement”). Pursuant to the Amended Credit Agreement, certain of the financial ratio covenants in our credit and guaranty agreement were adjusted. Our ability to meet the adjusted financial covenants under the Amended Credit Agreement may be affected by a number of events, including events beyond our control, and we may not be able to continue to meet those ratios in the future. There can be no assurance that we will be able to comply in the future with the financial ratio covenants, as adjusted pursuant to our Amended Credit Agreement. If we fail to comply with the financial covenants under our Amended Credit Agreement, we would be in default. A default, if not cured or waived, may permit acceleration of our indebtedness. In addition, our lenders could terminate their commitments to make further extensions of credit under our credit facilities. If our indebtedness is accelerated, we cannot be certain that we will have sufficient funds to pay the accelerated indebtedness or that we will have the ability to refinance accelerated indebtedness on terms favorable to us or at all. Any or all of these events would have a material adverse effect on our business operations and our financial condition.

Impairment of goodwill may adversely impact future results of operations.

We have intangible assets, including goodwill and other identifiable acquired intangibles on our balance sheet due to prior acquisitions. The initial identification and valuation of these intangible assets and the determination of the estimated useful lives at the time of acquisition involve management judgments and estimates. Based on our annual goodwill impairment assessment, we recorded a $37.4 million impairment during 2009.

The results of our impairment analysis are as of a particular point in time. If our assumptions regarding future forecasted revenue or gross margins of our operating segments (or “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 2010 or prior to that, if any such change constitutes a triggering event prior to the quarter in which we 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.

Competition in our industry and innovation by our competitors may hinder our ability to execute our business strategy and maintain our profitability.

The markets for our products and services are highly competitive, with competition primarily at local and regional levels. We compete primarily based on the level and quality of customer service, technological leadership, product performance and price. Our future success depends, in part, on our ability to continue to improve our service offerings, and develop and integrate technological advances. If we are unable to effectively develop and integrate technological advances into our service offerings and technology products in a timely manner, our operating results may be adversely affected. Technological innovation by our existing or future competitors could put us at a competitive disadvantage. In particular, our business could be adversely affected if any of our competitors develop or acquire superior technology that competes directly with or offers greater functionality than our proprietary technology, including our flagship product, PlanWell.

We also face the possibility that competition will continue to increase, particularly if copy and printing or business services companies choose to expand into the reprographics services industry. Many of these companies are substantially larger and have significantly greater financial resources than us, which could place us at a competitive disadvantage. In addition, we could encounter competition in the future from large, well-capitalized companies such as equipment dealers, system integrators, and other reprographics associations, that can produce their own technology and leverage their existing distribution channels. We could also encounter competition from non-traditional reprographics service providers that offer reprographics services as a component of the other services that they provide to the AEC industry, such as vendors to our industry that provide services directly to our customers, bypassing reprographers. Any such future competition could adversely affect our business and impair our future revenue and profitability.

The reprographics industry has undergone vast changes in recent years and will continue to evolve. Our failure to anticipate and adapt to future changes in the reprographics industry could harm our competitive position.

The reprographics industry has undergone vast changes in recent years. The industry’s main production technology has migrated from analog to digital. This has prompted a number of trends in the reprographics industry, including a rapid shift toward decentralized production and lower labor utilization. As digital output devices become smaller, less expensive, easier to use and interconnected, end users of construction drawings are placing these devices within their offices and other locations. On-site reprographics equipment allows a customer to print documents and review hard copies without the delays or interruptions associated with sending documents out for duplication. Also, as a direct result of advancements in digital technology, labor demands have decreased. Instead of producing one print job at a time, reprographers now have the capability to produce multiple sets of documents with a single production employee. By linking output devices through a single print server, a production employee simply directs output to the device that is best suited for the job. As a result of these trends, reprographers have had to modify their operations to decentralize printing and shift costs from labor to technology.

We expect the reprographics industry to continue to evolve. Our industry is expected to continue to embrace digital technology, not only in terms of production services, but also in terms of network technology, digital document storage and management, and information distribution, all of which will require investment in, and continued development of, technological innovation. If we fail to keep pace with current changes or fail to anticipate or adapt to future changes in our industry, our competitive position could be harmed which may have a material adverse impact on our future profitability.

If we fail to continue to develop and introduce new services and technologies successfully, our competitive positioning and our ability to grow our business could be harmed.

In order to remain competitive, we must continually invest in new technologies that will enable us to meet the evolving demands of our customers. We cannot guarantee that we will be successful in the introduction, marketing and adoption of any of our new services, or that we will develop and introduce in a timely manner innovative services that satisfy customer needs or achieve market acceptance. Our failure to develop new services and introduce them successfully could harm our competitive position and our ability to grow our business, and our revenues and operating results could suffer.

In addition, as reprographics technologies continue to develop, one or more of our current service offerings may become obsolete. In particular, digital technologies may significantly reduce the need for high volume printing. Digital technology makes traditional reprographics equipment smaller and cheaper, which may cause larger AEC customers to discontinue outsourcing their reprographics needs. Any such developments could adversely affect our business and impair future revenue and profitability.

If we are unable to charge for our value-added services to offset potential declines in print volumes, our long term revenue could decline.

Our customers value the ability to view and order prints over the internet and print to output devices in their own offices and other locations throughout the country and other locations in the world. In 2009, our reprographics services excluding digital revenues represented approximately 61% of our total net sales, and our facilities management services represented approximately 19% of our total net sales. Both categories of revenue are generally derived from a charge per square foot of printed material. Future technological advances may further facilitate and improve our customers’ ability to print in their own offices or at a job site. As technology continues to improve, this trend toward consuming information on an “as needed” basis could result in decreasing printing volumes and declining revenues in the longer term. Failure to offset these potential declines in printing volumes by changing how we charge for our services and developing additional revenue sources could significantly affect our business and reduce our long term revenue, resulting in an adverse effect on our results of operations and financial condition.

We derive a significant percentage of net sales from within the State of California and our business could be disproportionately harmed by an economic downturn or natural disaster affecting California.

We derived approximately 33% of our net sales in 2009 from our operations in California. As a result, we are dependent to a large extent upon the AEC industry in California and, accordingly, are sensitive to economic factors affecting California, including general and local economic conditions, macroeconomic trends, and natural disasters (including earthquakes and wildfires). In recent years, the real estate development projects (both residential and non-residential) in California have significantly declined which, in turn, has resulted in a decline in orders from within the California-based AEC industry. Any adverse developments affecting California could have a disproportionately negative effect on our results of operations and financial condition.

Our growth strategy depends, in part, on our ability to successfully complete and manage our acquisitions and branch openings. Failure to do so could impede our future growth and adversely affect our competitive position.

As part of our growth strategy, we intend to prudently pursue strategic acquisitions within the reprographics industry. Since 1997, we have acquired more than 140 businesses, most of which were long established in the communities in which they conduct their business. Our efforts to execute our acquisition strategy may be affected by our ability to continue to identify, negotiate, close acquisitions and effectively integrate acquired businesses. In addition, any governmental review or investigation of our proposed acquisitions, such as by the Federal Trade Commission, may impede, limit or prevent us from proceeding with an acquisition. Acquisition activities have not been a significant part of our growth strategy in fiscal year 2009 due to potential risks inherent in a depressed economy. As the economy improves, we currently expect to resume acquisition activity as a substantial component of our growth strategy. There can be no assurance, however, that any future acquisition activity, and any resulting growth, will equal or exceed prior levels of acquisition activity and growth.

Acquisitions involve a number of unique risks. For example, there may be difficulties integrating acquired personnel and distinct business cultures. Additional financing may be necessary and, if used, would increase our debt level, dilute our outstanding equity, or both. Acquisitions may divert management’s time and our other resources from existing operations. It is possible that there could be a negative effect on our financial statements from the impairment related to goodwill and other intangibles acquired through implementation of our acquisition strategy. We may experience the loss of key employees or customers of acquired companies. In addition, risks may include high transaction costs and expenses of integrating acquired companies, as well as exposure to unforeseen liabilities of acquired companies and failure of the acquired business to achieve expected results. These risks could hinder our future growth and adversely affect our competitive position and operating results.

In addition to acquisitions, we expand our geographic coverage by opening additional satellite branches in regions near our established operations to capture new customers and greater market share. Although we believe that the capital investment for a new branch is generally modest, the branches that we open in the future may not ultimately produce returns that justify our investment.

If we are unable to successfully monitor and manage operations of our subsidiaries and segments, our business and profitability could suffer.

Since 1997, we have acquired more than 140 businesses and, in most cases, have delegated the responsibility for marketing, pricing, and selling practices with the local and operational managers of those businesses. If we do not successfully manage our subsidiaries and segments under this decentralized operating structure, we risk having disparate results, lost market opportunities, lack of economic synergies, and a loss of vision and planning, all of which could harm our business and profitability.

We depend on certain key vendors for reprographics equipment, maintenance services and supplies, making us vulnerable to supply shortages and price fluctuations.

We purchase reprographics equipment and maintenance services, as well as paper, toner and other supplies, from a limited number of vendors. Our three largest vendors in 2009 were Oce N.V., Azerty, and Xpedx, a division of International Paper Company. Adverse developments concerning key vendors or our relationships with them could force us to seek alternate sources for our reprographics equipment, maintenance services and supplies, or to purchase such items on unfavorable terms. An alternative source of supply of reprographics equipment, maintenance services and supplies may not be readily available. A delay in procuring reprographics equipment, maintenance services or supplies, or an increase in the cost to purchase these items could limit our ability to provide services to our customers on a timely and cost-effective basis and could harm our results of operations and financial condition.

Our failure to adequately protect the proprietary aspects of our technology, including PlanWell, may cause us to lose market share.

Our success depends on our ability to protect and preserve the proprietary aspects of our technologies, including PlanWell. We rely on a combination of copyright, trademark and trade secret protection, confidentiality agreements, license agreements, non-compete agreements, reseller agreements, customer contracts, and technical measures to establish and protect our rights in our proprietary technologies. For example, under our PlanWell license agreements, we grant other reprographers a non-exclusive, non-transferable, limited license to use our PlanWell technology and services. Our license agreements contain terms and conditions prohibiting the unauthorized reproduction or transfer of our products. These protections, however, may not be adequate to remedy harm we suffer due to misappropriation of our proprietary rights by third parties. In addition, United States law provides only limited protection of proprietary rights and the laws of some foreign countries may offer less protection than the laws of the United States. Third parties may unlawfully copy aspects of our technology products, unlawfully distribute them, impermissibly reverse engineer them or otherwise obtain and use information that we regard as proprietary. If competitors are able to develop such technologies and we cannot successfully enforce our rights against them, they may be able to market and sell or license products that compete with ours, and this competition could adversely affect our results of operations and financial condition. Furthermore, we may, from time to time, be subject to intellectual property litigation which can be expensive, a burden on management’s time and our Company’s resources, and the outcome of any such litigation may be uncertain.

Damage or disruption to our facilities, our technology centers, our vendors or a majority of our customers could impair our ability to effectively provide our services and may have a significant impact on our revenues, expenses and financial condition.

We currently store most of our customer data at our two technology centers located in Silicon Valley near known earthquake fault zones. Damage to or destruction of one or both of these technology centers or a disruption of our data storage processes resulting from sustained process abnormalities, human error, acts of terrorism, violence, war or a natural disaster, such as fire, earthquake or flood, could have a material adverse effect on the markets in which we operate and on our business operations. We store and maintain critical customer data on computer servers at our technology centers that our customers access remotely through the internet and/or directly through telecommunications lines. If our back-up power generators fail during any power outage, if our telecommunications lines are severed or internet access is impaired for any reason, our remote access customers would be unable to access their critical data, causing an interruption in their operations. In such event, our remote access customers and their customers could seek to hold us responsible for any losses that they may incur in this regard. We may also potentially lose these customers and our reputation could be harmed. In addition, such damage or destruction, particularly that directly impacting our technology centers or our vendors or customers, could have an impact on our sales, supply chain, production capability, costs, and our ability to provide services to our customers.

Although we currently maintain general property damage insurance, we do not maintain insurance for loss from earthquakes, acts of terrorism or war. If we incur losses from uninsured events, we could incur significant expenses which would adversely affect our results of operations and financial condition.

If we lose key personnel or qualified technical staff, our ability to manage the day-to-day aspects of our business will be adversely affected.

We believe that our ability to attract and retain qualified personnel is critical to our success. If we lose key personnel and/or are unable to recruit qualified personnel, our ability to manage the day-to-day aspects of our business will be adversely affected. Our operations and prospects depend in large part on the performance of our senior management team and the managers of our principal operating segments. Outside of the implementation of succession plans and executive transitions done in the normal course of business, the loss of the services of one or more members of our senior management team, in particular, the sudden loss of the services of Mr. Suriyakumar, our Chairman, President and Chief Executive Officer, would disrupt our business and impede our ability to execute our business strategy. Because the other members of our executive and divisional management team have on average more than 20 years of experience within the reprographics industry, it would be difficult to replace them.

Downgrades in our credit rating may adversely affect our business, financial condition and results of operations.

From time to time, independent credit rating agencies rate our creditworthiness. Credit market deterioration and its actual or perceived effects on our business, financial condition and results of operation, along with deterioration in general economic conditions, may increase the likelihood that major independent credit agencies will downgrade our credit rating. Any downgrade in our credit rating could increase our cost of borrowing, which would adversely affect our financial condition and results of operations, perhaps materially. Any downgrade in our credit rating may also cause a decline in the market price of our common stock.

Item 1B.		Unresolved Staff Comments

None.

Item 2.		Properties

At the end of 2009, we operated 272 reprographics service centers, of which 259 were in the United States, seven were in Canada, five were in China, and one in London, England. We also occupied two technology centers in Silicon Valley, California, a software programming facility in Kolkata, India, as well as other facilities including our executive offices located in Walnut Creek, California, and our finance and purchasing offices located in Glendale, California.

In total the company occupied approximately 1.8 million square feet as of December 31, 2009.

We lease nearly all of our reprographics service centers, each of our administrative facilities and our technology centers. The two facilities that we own are subject to liens under our credit facilities. In addition to the facilities that are owned, our fixed assets are comprised primarily of machinery and equipment, trucks, and computer equipment. We believe that our facilities are adequate and appropriate for the purposes for which they are currently used in our operations and are well maintained.

Item 3.		Legal Proceedings

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 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 Consolidated Financial Statements or will not have a material adverse effect on its consolidated financial position, results of operations or cash flows.

Item 4.		Submission of Matters to a Vote of Security Holders

None.

PART II

Item 5.		Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock, par value $0.001, is listed on the NYSE under the stock symbol “ARP”. The following table sets forth for the fiscal periods indicated the high and low sales prices per share of our common stock as reported by the NYSE.

		High				Low
Fiscal Year 2008
First Quarter		$	17.06			$	13.49
Second Quarter			19.96				14.65
Third Quarter			21.83				14.93
Fourth Quarter			17.15				5.36
Fiscal Year 2009
First Quarter		$	7.11			$	2.55
Second Quarter			10.26				3.26
Third Quarter			10.21				7.20
Fourth Quarter			9.74				5.43

Performance Graph

The graph below compares the cumulative 59-month total return of holders of our common stock with the cumulative total returns of the Russell 2000 index, and a customized peer group of six companies that includes G & K Services Inc., Healthcare Services Group Inc., Mobile Mini Inc., School Specialty Inc., Tetra Tech Inc., and Viad Corp. The graph below tracks the performance of a $100 investment in our common stock, in the peer group, and the index (with the reinvestment of all dividends) from February 4, 2005 through December 31, 2009. The stock price performance included in the graph below is not necessarily indicative of future stock price performance.

The following graph and related information shall not be deemed “soliciting material” or be deemed to be “filed” with the SEC, nor shall such information be incorporated by reference into any future filing under the Securities Act or the Exchange Act, whether made before or after the date hereof, except to the extent that we specifically incorporate it by reference into such filing.

		2/05				2/05				3/05				4/05				5/05				6/05				7/05				8/05				9/05				10/05
American Reprographics Company			100.00				105.09				104.36				102.18				108.36				117.02				129.45				123.56				124.36				122.55
Russell 2000			100.00				99.54				96.69				91.15				97.12				100.86				107.25				105.26				105.59				102.31
Diversified Commercial & Professional Services			100.00				102.58				98.35				91.36				98.07				103.73				109.99				112.20				112.57				103.34

11/05		12/05				1/06				2/06				3/06				4/06				5/06				6/06				7/06				8/06				9/06				10/06				11/06				12/06				1/07
156.44			184.80				198.55				208.73				252.29				257.96				252.15				263.64				232.58				221.96				233.16				258.18				227.35				242.25				227.78
107.28			106.79				116.37				116.05				121.68				121.66				114.82				115.56				111.80				115.11				116.07				122.75				125.98				126.41				128.52
109.24			107.66				109.53				112.34				121.37				122.89				115.98				110.84				110.58				112.18				117.52				126.66				121.23				124.73				124.86
2/07		3/07				4/07				5/07				6/07				7/07				8/07				9/07				10/07				11/07				12/07				1/08				2/08				3/08				4/08
240.80			223.93				241.45				224.00				223.93				181.24				177.67				136.15				147.49				112.58				119.85				113.82				117.67				107.93				115.42
127.50			128.87				131.18				136.55				134.56				125.35				128.19				130.39				134.14				124.50				124.43				115.94				111.64				112.11				116.80
121.46			122.85				126.48				132.66				132.06				125.03				125.43				124.89				123.89				120.17				118.14				114.23				113.21				115.26				108.78
5/08		6/08				7/08				8/08				9/08				10/08				11/08				12/08				1/09				2/09				3/09				4/09				5/09				6/09				7/09
133.02			121.09				116.44				128.80				125.45				77.38				56.95				50.18				44.22				28.36				25.75				46.91				63.35				60.51				62.91
122.17			112.77				116.94				121.16				111.51				88.31				77.87				82.39				73.22				64.32				70.07				80.90				83.33				84.56				92.70
124.63			106.64				122.73				126.00				114.88				95.03				88.83				95.08				88.27				79.26				79.58				96.67				93.27				101.63				108.08

8/09		9/09				10/09				11/09				12/09
66.47			69.24				43.64				40.44				50.98
95.36			100.86				94.02				96.97				104.77
108.27			105.01				101.13				103.31				108.25

Holders

As of February 22, 2010, the approximate number of stockholders of record of our common stock was 123 and the closing price of our common stock was $7.32 per share as reported by the NYSE. Because many of the shares of our common stock are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of beneficial owners represented by these stockholders of record.

Dividends

We have never declared or paid cash dividends on our common stock. We currently intend to retain all available funds and any future earnings for use in the operation of our business and do not anticipate paying any cash dividends in the foreseeable future. Any future determination to declare cash dividends will be made at the discretion of our board of directors, subject to compliance with Delaware corporate law, certain covenants under our credit facility which restrict or limit our ability to declare or pay dividends, and will depend on our financial condition, results of operations, capital requirements, general business conditions, and other factors that our board of directors may deem relevant.

Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities

None.

Item 6.		Selected Financial Data

The selected historical financial data presented below is derived from the audited financial statements of American Reprographics Company for the fiscal years ended December 31, 2009, 2008, 2007, 2006 and 2005. The selected historical financial data does not purport to represent what our financial position or results of operations might be for any future period or date. The financial data set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited financial statements included elsewhere in this report.

		Fiscal Year Ended December 31,
		2009				2008				2007				2006				2005
		(Dollars in thousands)
Statement of Operations Data:
Reprographics services		$	350,491			$	518,062			$	513,630			$	438,375			$	369,123
Facilities management			97,401				120,983				113,848				100,158				83,125
Equipment and supplies sales			53,657				61,942				60,876				53,305				41,956
Total net sales			501,549				700,987				688,354				591,838				494,204
Cost of sales			323,360				415,715				401,317				337,509				289,580
Gross profit			178,189				285,272				287,037				254,329				204,624
Selling, general and administrative expenses			115,020				154,728				143,811				131,743				112,679
Litigation (gain) reserve			—				—				(2,897	)			11,262				—
Amortization of intangibles			11,367				12,004				9,083				5,055				2,120
Goodwill impairment			37,382				35,154				—				—				—
Impairment of long-lived assets			781				—				—				—				—
Income from operations			13,639				83,386				137,040				106,269				89,825
Other income, net			(171	)			(517	)			—				(299	)			(381	)
Interest expense, net			25,781				25,890				24,373				23,192				26,722
Loss on early extinguishment of debt			—				—				1,327				—				9,344
(Loss) income before income tax (benefit) provision			(11,971	)			58,013				111,340				83,376				54,140
Income tax provision (benefit) (1)			3,018				21,200				42,203				31,982				(6,336	)
Net (loss) income			(14,989	)			36,813				69,137				51,394				60,476
Loss (income) attributable to noncontrolling interest			104				(59	)			—				—				—
Net (loss) income attributable to American Reprographics Company		$	(14,885	)		$	36,754			$	69,137			$	51,394			$	60,476

		Fiscal Year Ended December 31,
		2009				2008				2007				2006				2005
		(In thousands, except per share amounts)
(Loss) earnings per share attributable to ARC shareholders:
Basic		$	(0.33	)		$	0.82			$	1.52			$	1.14			$	1.43
Diluted		$	(0.33	)		$	0.81			$	1.51			$	1.13			$	1.40
Weighted average common shares outstanding:
Basic			45,123				45,060				45,421				45,015				42,264
Diluted			45,123				45,398				45,829				45,595				43,178

		Fiscal Year Ended December 31,
		2009				2008				2007				2006				2005
		(Dollars in thousands)
Other Financial Data:
Depreciation and amortization		$	49,543			$	50,121			$	39,445			$	27,749			$	19,165
Capital expenditures		$	7,506			$	9,033			$	8,303			$	7,391			$	5,237
Interest expense, net		$	25,781			$	25,890			$	24,373			$	23,192			$	26,722

		As of December 31,
		2009				2008				2007				2006				2005
		(Dollars in thousands)
Balance Sheet Data:
Cash and cash equivalents		$	29,377			$	46,542			$	24,802			$	11,642			$	22,643
Total assets		$	620,954			$	725,931			$	722,611			$	547,581			$	442,362
Long term obligations		$	228,711			$	315,165			$	324,724			$	253,419			$	253,371
Total ARC stockholders’ equity		$	282,024			$	287,902			$	251,651			$	184,244			$	113,569
Working capital		$	(3,739	)		$	29,798			$	4,695			$	21,150			$	35,797

Item 7.		Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with our consolidated financial statements and the related notes and other financial information appearing elsewhere in this Annual Report. This Annual Report contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those indicated in forward-looking statements. See “Forward-Looking Statements” and “Risk Factors.”

Executive Summary

ARC is the leading reprographics company in the United States. We provide business-to-business document management services primarily to the 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 distribution and logistics;
	•		Print-on-demand; and
	•		On-site services, frequently referred to as facilities management (“FMs”), which is any combination of the above services supplied at a customer’s location.

We deliver these services through our specialized technology, more than 550 sales and customer service employees interacting with our customers every day, and approximately 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 approximately 138,000 customers throughout the country.

Our operating segments operate under local brand names. Each brand name typically represents a business or group of businesses that has been acquired by us. We coordinate these operating segments and consolidate their service offerings for large regional or national customers through our central “Global Services” program.

A significant component of our historical growth has been from acquisitions. In 2009, we acquired two U.S. businesses that consisted of “stand-alone acquisitions” and “fold-in acquisitions” (refer to page 24 for an explanation of these terms) and one Chinese business acquisition through UNIS Document Solutions Co. Ltd., (“UDS”), our business venture with Unisplendour Corporation Limited (“Unisplendour”) for $2.9 million. In 2008, we acquired 13 businesses for $31.9 million. In 2007, we acquired 19 businesses for $146.3 million. In connection with acquisitions completed in 2009, we have applied the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) ASC 805, formerly Statement of Financial Accounting Standards (“SFAS”) No. 141 (Revised 2007), Business Combinations, using the acquisition method of accounting, however, acquisitions completed prior to 2009 were accounted for by applying the provisions SFAS No. 141, Business Combinations, (“SFAS 141”), our Consolidated Statements of Operations reflect sales and expenses of acquired businesses only for post-acquisition periods.

On August 1, 2008, we commenced operations of UDS, our business venture with Unisplendour. The purpose of UDS is to pair the digital document management solutions of our Company with the brand recognition and Chinese distribution channel of Unisplendour to deliver digital reprographics services to China’s growing construction industry. Under the terms of the agreement, our Company and Unisplendour have an economic ownership interest of 65 percent and 35 percent, respectively.

As part of our growth strategy, we sometimes open or acquire branch or satellite service centers in contiguous markets, which we view as a low cost, rapid form of market expansion. Our branch openings require modest capital expenditures and are expected to generate operating profit within 12 months from opening. We had 272 and 299 reprographic service centers for the years ended December 31, 2009 and 2008, respectively.

Evaluating our Performance. We measure our success in delivering value to our stockholders by striving for the following:

	•		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 as measured by our geographical footprint, market share and revenue generation;
	•		Continuing to develop and invest in our products, services, and technology to meet the changing needs of our customers;
	•		Maintaining 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 and amortization (“EBITDA”) and operating cash flow to operate and assess the performance of our business.

Net Sales. Net sales represent total sales less returns and discounts. These sales consist of document management services, document distribution and logistics services, print-on-demand services, and reprographics equipment and supplies sales. We generate sales by individual orders through commissioned sales personnel and, in some cases, through national contracts.

Net sales are categorized as reprographics services, facilities management, and equipment and supplies. Our current revenue sources are likely to change in the future if our digital services revenue commands a greater and more distinctive role in our service mix. Digital services currently comprise approximately 8.5% of our overall revenue.

Software licenses and membership fees are derived over the term of the license or the membership agreement. Licensed technology includes PlanWell online planrooms, PlanWell EWO, PlanWell BidCaster and MetaPrint, among others. Revenues from these agreements are separate from digital services and typically are derived from other reprographics companies licensing the applications as opposed to end users. Digital services we provide to our customers include digital document management tasks, scanning and archiving digital documents, posting documents to the web and other related work performed on a computer. Software licenses, membership fees and digital services are categorized and reported as a part of “Reprographics services”.

Revenue from reprographics services is produced from document management, document distribution and logistics, and print-on-demand services. We include revenues for all these services under the caption “Reprographics services”.

On-site services, or facilities management, revenues are generated from providing reprographics services in our customers’ locations using machines that we own or lease. Generally, this revenue is derived from a single cost per-square-foot of printed material, similar to our reprographics services.

Revenue from equipment and supplies is derived from the resale of such items to our customers. We do not manufacture such items but rather purchase them from our vendors at wholesale costs.

While our services are now most frequently delivered through the use of computers and digital production equipment as opposed to manual document management processes and analog printing devices, our primary revenue model remains based on the price of printing. Our progress in charging for digital services has increased to 8.5% of our overall revenue, but the common practices in the construction industry have yet to fully support a pricing model that takes services other than print into a pricing equation. We believe the adoption of our technology applications by our customers has begun to reshape our pricing justification, and we also believe that the current economic hardship facing most construction companies will create more opportunities to promote and charge for the full value of our digital services given the productivity enhancements our technology provides to our customers’ workflows.

In 2009, our reprographics services represented 69.9% of net sales, facilities management 19.4%, and sales of reprographics equipment and supplies 10.7%. Digital services revenue, which are included in reprographics services, approximated 8.5% of our net sales. Software licenses, including PlanWell, and PEiR memberships have not, to date, contributed significant revenue. While we achieve modest cost recovery through membership, licensing and maintenance fees charged by the PEiR Group, we measure success in this area primarily by the adoption rate of our programs and products.

We identify 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, our Company is deemed to operate as a single reportable business segment.

While large orders involving thousands of documents and hundreds of recipients are common, the bulk of our customer orders consist of organizing, printing or distributing less than 200 drawings at a time. Such “short-run” orders are usually recurring, despite their tendency to arrive with no advance notice and a short turnaround requirement. Since we do not operate with a backlog, it is difficult to predict the number, size and profitability of reprographics work that we expect to undertake more than a few weeks in advance.

Costs and Expenses. Our cost of sales consists primarily of paper, toner and other consumables, labor, and expenses for facilities and equipment. Facilities and equipment expenses include maintenance, repairs, rents, insurance, and depreciation. Paper is the largest component of our material cost. However, paper pricing typically does not affect our operating margins because changes are generally passed on to our customers. We closely monitor material cost as a percentage of net sales to measure volume and waste. We also track labor utilization, or net sales per employee, to measure productivity and determine staffing levels.

We maintain low levels of inventory and other working capital. Capital expenditure requirements are also low; most facilities and equipment are leased, with overall cash capital spending averaging approximately 1.3% of annual net sales over the last three years. Since we typically lease our reprographics equipment for three to five year terms, we are able to upgrade equipment in response to rapid changes in technology.

Research and development costs consist mainly of the salaries, leased building space, and computer equipment that comprise our data storage and development centers in Silicon Valley, California and Kolkata, India. Such costs are recorded to cost of sales.

Our selling expenses generally include salaries and commissions paid to our sales professionals, along with promotional, travel, and entertainment costs. Our general and administrative expenses generally include salaries and benefits paid to support personnel at our reprographics businesses and our corporate staff, as well as office rent, utilities, communications expenses, and various professional services.

One of the primary methods we have used to maintain our margins during periods of economic or industry decline has been to quickly and aggressively reduce our variable operating costs. The largest portions of our variable costs are labor-related. Given that we manage production capacity primarily through labor utilization during a given daily production schedule or shift, we achieve cost containment objectives through the reduction of full-time employees, and the close management of hourly schedules.

Operating Cash. “Operating Cash” or “Cash Flow from Operations” includes net income less common expenditures requiring cash and is used as a measure to control working capital.

Other Common Financial Measures. We also use a variety of other common financial measures as indicators of our performance, including:

	•		Net income and earnings per share;
	•		Material 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 78% of revenues derived from the AEC industry, and 22% 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 being experienced by the AEC industry. Given our 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 disclosures 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 application of financial best practices, significantly greater purchasing power, and productivity-enhancing technology.

Based on our experience of 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. Although none of the individual acquisitions in the past three years has added a material percentage of sales to our overall business, in the aggregate they have fueled the bulk of our historical annual sales growth. Acquisition activities have not been a meaningful part of our 2009 operations due to the potential risks inherent in a depressed economy. As the economy improves, it is our current intention to resume acquisition activity as a substantial component of our growth strategy.

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. This goodwill typically represents the purchase price of an acquired business less the fair market value of tangible assets and identifiable intangible assets. We test our goodwill components annually for impairment on September 30 or more frequently if events and circumstances indicate that goodwill might be impaired. See Note 2 “Summary of Significant Accounting Policies” to our Consolidated Financial Statements for further information.

Economic Factors Affecting Financial Performance. We estimate that sales to the AEC industry accounted for 78% of our net sales for the period ended December 31, 2009, with the remaining 22% consisting of sales to non-AEC industries (based on a compilation of approximately 90% of revenues from our operating segments and designating revenues using certain assumptions as derived from either AEC or non-AEC based customers). 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, office vacancy rates, and government expenditures. The effects of the current economic recession 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 24 months. 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 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 and amortization. Amortization does not include $4.9 million, $4.3 million and $3.5 million of stock based compensation expense recorded in selling, general and administrative expenses, for the years ended December 31, 2009, 2008 and 2007, respectively. 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. The following is a discussion of our use of these measures.

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 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 Consolidated Financial Statements and related notes elsewhere in this report.

We have presented adjusted net income attributable to ARC and adjusted earnings per share attributable to ARC shareholders for the years ended December 31, 2009 and 2008 to reflect the exclusion of the goodwill impairment charge, long-lived assets impairment charge and costs related to the 2009 amendments to our credit agreement and swap transaction, as discussed below on page 38. This presentation facilitates a meaningful comparison of our operating results for the years ended December 31, 2009, 2008 and 2007. We presented adjusted EBITDA in 2009 and 2008 to exclude the non-cash impairment charges of $38.2 million and $35.2 million, respectively, as we believe this was a result of the current economic environment and not indicative of our operations. The exclusion of the goodwill impairment charges and long-lived assets impairment charge, and costs related to the 2009 amendments to our credit agreement and swap transaction to arrive at adjusted EBITDA is consistent with the definition of adjusted EBITDA in the amendment (the “Amended Credit Agreement”) to our 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) income attributable to ARC (amounts in thousands):

		Fiscal Year Ended
		December 31,
		2009				2008				2007
Cash flows provided by operating activities		$	97,425			$	127,266			$	101,386
Changes in operating assets and liabilities			(19,919	)			(4,829	)			13,856
Non-cash (expenses) income, including depreciation and amortization			(92,495	)			(85,624	)			(46,105	)
Income tax provision			3,018				21,200				42,203
Interest expense, net			25,781				25,890				24,373
Loss on early extinguishment of debt			—				—				1,327
Net loss (income) attributable to the noncontrolling interest			104				(59	)			—
EBIT			13,914				83,844				137,040
Depreciation and amortization			49,543				50,121				39,445
EBITDA			63,457				133,965				176,485
Interest expense			(25,781	)			(25,890	)			(24,373	)
Loss on early extinguishment of debt			—				—				(1,327	)
Income tax provision			(3,018	)			(21,200	)			(42,203	)
Depreciation and amortization			(49,543	)			(50,121	)			(39,445	)
Net (loss) income attributable to American Reprographics Company		$	(14,885	)		$	36,754			$	69,137

The following is a reconciliation of net (loss) income attributable to ARC to EBIT, EBITDA and adjusted EBITDA (amounts in thousands):

		Fiscal Year Ended
		December 31,
		2009				2008				2007
Net (loss) income attributable to American Reprographics Company		$	(14,885	)		$	36,754			$	69,137
Interest expense, net			25,781				25,890				24,373
Loss on early extinguishment of debt			—				—				1,327
Income tax provision			3,018				21,200				42,203
EBIT			13,914				83,844				137,040
Depreciation and amortization			49,543				50,121				39,445
EBITDA			63,457				133,965				176,485
Special items:
Goodwill impairment			37,382				35,154				—
Impairment of long-lived assets			781				—				—
Adjusted EBITDA		$	101,620			$	169,119			$	176,485

The following is a reconciliation of our net (loss) income margin to EBIT margin, EBITDA margin and Adjusted EBITDA margin:

		Fiscal Year Ended
		December 31,
		2009 (1)				2008 (1)				2007 (1)
Net (loss) income margin			(3.0	)%			5.2	%			10.0	%
Interest expense, net			5.1	%			3.7	%			3.5	%
Loss on early extinguishment of debt			0.0	%			0.0	%			0.2	%
Income tax provision			0.6	%			3.0	%			6.1	%
EBIT margin			2.8	%			12.0	%			19.9	%
Depreciation and amortization			9.9	%			7.2	%			5.7	%
EBITDA margin			12.7	%			19.1	%			25.6	%
Special items:
Goodwill impairment			7.5	%			5.0	%			0.0	%
Impairment of long-lived assets			0.2	%			0.0	%			0.0	%
Adjusted EBITDA margin			20.3	%			24.1	%			25.6	%

The following is a reconciliation of net (loss) income attributable to ARC to adjusted net income attributable to ARC and (loss) earnings per share to adjusted earnings per share (amounts in thousands, except share and per share data):

		Fiscal Year Ended
		December 31,
		2009				2008				2007
Net (loss) income attributable to American Reprographics Company		$	(14,885	)		$	36,754			$	69,137
Litigation gain			—				—				(2,897	)
Interest income due to litigation gain			—				—				(418	)
Goodwill impairment			37,382				35,154				—
Impairment of long-lived assets			781				—				—
Amended Credit Agreement and Swap Transaction costs			2,632				—				—
Income tax (benefit) provision, related to items above			(8,748	)			(12,932	)			1,260
Adjusted net income attributable to ARC		$	17,162			$	58,976			$	67,082
(Loss) Earnings Per Share (Actual):
Basic		$	(0.33	)		$	0.82			$	1.52
Diluted		$	(0.33	)		$	0.81			$	1.51
Earnings Per Share (Adjusted):
Basic		$	0.38			$	1.31			$	1.48
Diluted		$	0.38			$	1.30			$	1.46
Weighted average common shares Outstanding (Adjusted):
Basic			45,123,110				45,060,482				45,421,498
Diluted			45,266,310				45,398,086				45,829,010

Results of Operations

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

		As a Percentage of Net Sales
		Fiscal Year Ended December 31,
		2009 (1)				2008 (1)				2007 (1)
Net sales			100.0	%			100.0	%			100.0	%
Cost of sales			64.5				59.3				58.3
Gross profit			35.5				40.7				41.7
Selling, general and administrative expenses			22.9				22.1				20.9
Litigation gain			0.0				0.0				(0.4	)
Amortization of intangibles			2.3				1.7				1.3
Goodwill impairment			7.5				5.0				0.0
Impairment of long-lived assets			0.2				0.0				0.0
Income from operations			2.7				11.9				19.9
Other income, net			(0.0	)			(0.1	)			0.0
Interest expense, net			5.1				3.7				3.5
Loss on early extinguishment of debt			0.0				0.0				0.2
(Loss) income before income tax provision			(2.4	)			8.3				16.2
Income tax provision			0.6				3.0				6.1
Net (loss) income			(3.0	)			5.3				10.0	%
Loss attributable to the noncontrolling interest			0.0				0.0				0.0
Net (loss) income attributable to ARC			(3.0	)%			5.2	%			10.0	%

Year Ended December 31, 2009 Compared to Year Ended December 31, 2008

		Fiscal Year Ended
		December 31,								Increase (decrease)
		2009 (1)				2008				(In dollars)				(Percent)
		(In millions)
Reprographics services		$	350.5			$	518.1			$	(167.6	)			-32.3	%
Facilities management			97.4				121.0				(23.6	)			-19.5	%
Equipment and supplies sales			53.7				61.9				(8.2	)			-13.2	%
Total net sales		$	501.5			$	701.0			$	(199.5	)			-28.5	%
Gross profit		$	178.2			$	285.3			$	(107.1	)			(37.5	)%
Selling, general and administrative expenses		$	115.0			$	154.7			$	(39.7	)			(25.7	)%
Amortization of intangible assets		$	11.4			$	12.0			$	(0.6	)			(5.0	)%
Goodwill impairment		$	37.4			$	35.2			$	2.2				6.3	%
Impairment of long-lived assets		$	0.8			$	—			$	0.8				100.0	%
Interest expense, net		$	25.8			$	25.9			$	(0.1	)			(0.4	)%
Income taxes provision		$	3.0			$	21.2			$	(18.2	)			(85.8	)%
Net (loss) income attributable to ARC		$	(14.9	)		$	36.8			$	(51.7	)			(140.5	)%
EBITDA		$	63.5			$	134.0			$	(70.5	)			(52.6	)%

Net Sales

Net sales in 2009 decreased by 28.5%, the decrease in net sales was primarily due to overall weakness in the global economy, and a significant slowdown in the construction market and AEC industry. In 2009, sales were favorably impacted by sales growth of approximately 2% from our standalone acquisitions completed since 2008.

Reprographics services. Net sales decreased by $167.6 million or 32.3% in 2009 compared to 2008.

Overall reprographics services sales nationwide were negatively affected by the recession in the global economy and slow down in the construction market and AEC industry. The revenue category that was most affected was large-format black and white printing, as this revenue category is more closely tied to non-residential and residential construction. Large-format black and white printing revenues represented approximately 40% of reprographics services in 2009; large-format black and white printing revenues decreased by approximately 41% in 2009 compared to 2008.

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 construction industry. As was the case with our overall sales, digital service revenue was also negatively affected by current market conditions. During 2009, digital service revenue decreased by $11.4 million or 21.1%, compared to 2008, but as a percentage of our overall sales it increased to 8.5% from 7.7% in 2009 compared to 2008.

Facilities management. On-site, or FM sales in 2009 compared to 2008, decreased by $23.6 million or 19.5%. 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 despite a difficult market, as evidenced by a net increase of approximately 100 facilities management accounts during 2009, bringing our total FM accounts to approximately 5,700 as of December 31, 2009. By placing such equipment on-site and billing on a per use and per project basis, the invoice continues to be issued by us, just as if the work 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 increase in FM accounts, sales decreased as the volume of prints at FM locations significantly declined due to the current economic conditions described above. As a percentage of total sales, FM sales has increased to 19.4% in 2009, compared to 17.3% in 2008.

Equipment and supplies sales. Equipment and supplies sales decreased by $8.2 million or 13.2% over the same period in 2008. During 2009, the decrease in equipment and supplies sales was due primarily to current economic conditions. This trend was partially offset by the operations of UDS, which commenced operations during the third quarter of 2008 and the operations of Shanghai UNIS Document Printing Co., Ltd., a wholly-owned subsidiary of UDS which 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 as opposed to acquiring it via an on-site services or FM arrangement. Chinese operations had sales of equipment and supplies of $13.1 million in 2009. Excluding the impact of acquisitions and continuing equipment and supplies sales in China, we do not anticipate growth in equipment and supplies sales in the U.S., as we are placing more focus on facilities management sales programs.

Gross Profit

During the 12 months ended December 31, 2009, gross profit and gross profit margin decreased to $178.2 million or 35.5%, compared to $285.3 million or 40.7% during the same period in 2008, on a sales decline of $199.5 million.

The primary driver of the decrease in gross margins was the absorption of overhead resulting from the decrease in sales. Overhead as a percentage of sales was 440 basis points higher in 2009, as compared to 2008, of which depreciation and facility rental were the primary components and accounted for 320 basis points. The decrease in margins was also attributable to an increase in material costs as a percentage of sales of 160 basis points in 2009, as compared to 2008. This was primarily due to an increase in lower margin equipment and supplies sales as a percentage of total sales due to the performance of UDS. Specifically, lower margin equipment and supplies sales comprised 10.7% of total sales in 2009, compared to 8.8% in 2008. The decrease in margins was partially offset by a favorable decrease as a percentage of sales of direct labor of 80 basis points in 2009, as compared to 2008, that was driven by cost cutting initiatives that were implemented in 2009 in response to lower sales.

Selling, General and Administrative Expenses

In 2009, selling, general and administrative expenses decreased by $39.7 million or 25.7% over 2008. The decrease is primarily due to the decline in sales and the implementation of cost reduction programs initiated in response to the decline in sales. Specifically, sales personnel compensation decreased by $10.0 million in 2009, compared to 2008, and general and administrative compensation decreased by $16.0 million in 2009, compared to 2008. The decrease in sales compensation, which includes commissions, is primarily attributed to the decline in sales volume explained above, and the decrease in general and administrative compensation is primarily due to staff reductions and bonus performance targets not being met. The cost reduction programs have also resulted in a decrease in professional fees, consulting fees, advertising, and travel expenses. These expenses have decreased by approximately $5.6 million in 2009, as compared to 2008. Also contributing to the decrease is a $1.9 million decrease in bad debt expense in 2009, compared to 2008 as a result of improved collections and because the majority of the bad debt expense related to the deterioration of the residential home building industry was recognized in 2008.

Selling, general and administrative expenses as a percentage of net sales increased from 22.1% in 2008 to 22.9% in 2009 as compared to 2008, primarily due to the significant decline in sales resulting in unabsorbed administrative costs.

On April 22, 2009, we commenced a stock option exchange program to allow certain of our employees the opportunity to exchange all or a portion of their eligible outstanding stock options for an equivalent number of new, replacement options. In connection with the exchange program, we issued 1,479,250 nonstatutory stock options with an exercise price of $8.20, equal to the closing price of our common stock on the New York Stock Exchange on May 21, 2009. Generally, all employees who held options upon expiration of the exchange program, other than our board members, were eligible to participate in the program. The number of shares of our common stock subject to outstanding options did not change as a result of the exchange offer. New options issued as part of the exchange offer are subject to a two-year vesting schedule, with 50% of the shares subject to an option vesting on the one-year anniversary of the date of grant of the replacement option, and the remaining 50% of the shares subject to an option vesting on the second anniversary of the date of grant of the replacement option. The total incremental cost of the repriced options is approximately $2.4 million of which $0.7 million has been recognized in our Consolidated Statements of Operations for the twelve months ended December 31, 2009. For further information see Note 2 “Summary of Significant Accounting Policies” to our Consolidated Financial Statements.

Amortization of Intangibles

Amortization of intangibles of $11.4 million in 2009 remained consistent with the amount in prior year due to the fact that acquisition activity and the size of acquisitions decreased significantly since September 30, 2008. In 2009, we only completed three acquisitions, as compared to 13 in 2008 and 19 in 2007.

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. We concluded that, in the absence of the annual goodwill impairment test, there were sufficient indicators to require us to perform a goodwill impairment analysis as of September 30, 2009. The indicators were based on a combination of factors, including the current economic recession and revised forecasted 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. Based on our annual goodwill impairment assessment, we recorded a $37.4 million impairment in the third quarter of 2009. We continue to assess, among other things, the current economic recession, reporting unit and consolidated performance against plan and the outlook for our business and industry in general. A downward trend in one or more of these factors, or a significant decrease in our stock price, could cause us to reduce the estimated fair value of our reporting units and recognize a corresponding impairment of the goodwill in connection with a future goodwill impairment analysis. Given the current economic environment, we have and will continue to monitor the need to test our intangibles for impairment as required by ASC 805. Based upon our assessment, we concluded that no goodwill impairment triggering events have occurred during the fourth quarter of 2009 that would require an additional impairment test.

During the quarter ended December 31, 2008, based on a combination of factors, including the then current economic environment, and a significant decline in market capitalization, we concluded that there were sufficient indicators to require us to perform an interim goodwill impairment analysis as of December 31, 2008. The result of such analysis indicated that eight of our reporting units, six in the United States, one in Canada, and one in the United Kingdom had a goodwill impairment. Accordingly, we recorded a pretax, non-cash charge for the year ended December 31, 2008 to reduce the carrying value of goodwill by $35.2 million.

See Note 2 “Summary of Significant Accounting Policies” to our Consolidated Financial Statements for further information.

Impairment of Long-Lived Assets

Our operating segments are being negatively impacted by the drop in commercial and residential construction resulting from the current economic recession. Before assessing our goodwill for impairment, we evaluated, the long-lived assets of our operating segments for impairment. Based on this assessment, 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 in 2009 to reduce the carrying value of other intangible assets by $0.8 million. See Note 2 “Summary of Significant Accounting Policies” to our Consolidated Financial Statements for further information.

Other Income

Other income of $0.5 million for the twelve months ended December 31, 2008 was primarily related to the sale of the Auto Desk sales department of our Imaging Technologies Services operating segment. In 2009, we have not sold any departments, hence the decrease in other income.

Interest Expense, Net

Net interest expense was $25.8 million in 2009, compared with $25.9 million in 2008. The slight decrease is primarily due to our reduction of our principal balances of bank debt, capital leases and seller notes payable which was mostly offset by additional interest expense due to the cost of amending our credit facility and interest rate swap transaction in the fourth quarter of 2009. Our total debt has decreased by over $86.0 million in 2009. Our interest expense in 2009 includes an $0.8 million expense due to the amendment to our interest rate swap (“Swap Transaction”) and $1.8 million related to fees to amend our credit facility in the fourth quarter of 2009. In 2010, we expect to have a higher weighted average interest rate by 200 basis points over the same period in 2009 due to the increase in our interest rate spread on our first lien term loan facility.

Income Taxes

Our effective income tax rate in 2009 was primarily impacted by the impairment of goodwill related to stock acquisitions in prior years. The goodwill and long-lived asset impairment of $38.2 million resulted in a tax benefit of $7.5 million, a 19.6% benefit. This was due to that $17.5 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. Additionally, $0.6 million of impairment related to goodwill in Canada, which is not tax deductible for Canadian tax purposes, contributed to the negative impact on our effective tax rate in 2009.

Barring discrete items and impairments, our effective income tax rate increased to 40.1% in 2009, from 39.0% in 2008. This increase is primarily due to a lower federal tax benefit in relation to our domestic production activities deduction in 2009 as allowed by Internal Revenue Code Section 199. The amount of deduction and related tax benefit is directly impacted by our expected federal taxable income for the fiscal year 2009, which has dropped significantly in light of the recent decrease in sales and the corresponding pretax income.

Noncontrolling Interest

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

Net (Loss) Income Attributable to ARC

Net loss attributable to ARC was $14.9 million in 2009, as compared to net income attributable to ARC of $36.8 million in 2008. The decrease is primarily due to the decrease in sales and gross margins, partially offset by the decrease in selling, general and administrative expenses described above.

EBITDA

EBITDA margin decreased to 12.7% in 2009, as compared to 19.1% in 2008. EBITDA margin in 2009 compared 2008 was negatively impacted primarily due to 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. Excluding the impact of the non-cash $37.4 million goodwill impairment and $0.8 million long-lived assets impairment charges, our adjusted EBITDA margin was 20.3% in 2009.

Year Ended December 31, 2008 Compared to Year Ended December 31, 2007

		Fiscal Year Ended
		December 31,								Increase (decrease)
		2008				2007				(In dollars)				(Percent)
		(In millions)
Reprographics services		$	518.1			$	513.6			$	4.5				0.9	%
Facilities management			121.0				113.8				7.2				6.3	%
Equipment and supplies sales			61.9				60.9				1.0				1.6	%
Total net sales		$	701.0			$	688.3			$	12.7				1.8	%
Gross profit		$	285.3			$	287.0			$	(1.7	)			(0.6	)%
Selling, general and administrative expenses		$	154.7			$	143.8			$	10.9				7.6	%
Litigation gain		$	—			$	(2.9	)		$	2.9				(100.0	)%
Amortization of intangibles		$	12.0			$	9.1			$	2.9				31.9	%
Goodwill impairment		$	35.2			$	—			$	35.2				100.0	%
Interest expense, net		$	25.9			$	24.4			$	1.5				6.1	%
Income taxes provision		$	21.2			$	42.2			$	(21.0	)			(49.8	)%
Net income attributable to ARC		$	36.8			$	69.1			$	(32.3	)			(46.7	)%
EBITDA		$	134.0			$	176.5			$	(42.5	)			(24.1	)%

Net Sales

Net sales in 2008 increased by 1.8%; the increase in net sales was primarily due to two factors: first, our standalone acquisitions acquired since the beginning of 2007 as they contributed approximately 9.3% to our sales growth; and second, new sales acquired through our Global Services (formerly Premier Accounts) program. The increase in sales due to standalone acquisitions was partially offset by a drop in sales in our existing locations due to overall weakness in the global economy, and a significant slowdown in the construction market driven by a lack of commercial credit, especially in the second half of the year.

Reprographics services. Net sales increase of $4.5 million in 2008 compared to 2007 was due primarily to the expansion of our market share through acquisitions, our Global Services program and an increase in our digital sales. We acquired 13 businesses in 2008 and acquired 19 businesses in 2007, each with a primary focus on reprographics services. These acquired businesses added sales from their pre-existing customers to our own, and in some cases, also allowed us to aggregate regional work from larger clients. Our Global Services program also added significant incremental sales from Global Services customers in 2008, contributing more than $8.0 million of revenue, compared to 2007 most of which was for reprographics services.

Overall reprographics services sales nationwide were negatively affected by the economic recession and slow-down in the construction industry, which partially offset the sales increases described above. The largest negative contributor affecting reprographics services sales was the decrease in our Southern California region reprographics services sales of approximately $21 million, resulting from the significant downturn in residential construction in Southern California and significant decreases in commercial construction in the area.

While most of our customers in the AEC industry still prefer paper plans, we have seen an increase in our digital service revenue. This increase is presumably due to the greater efficiency 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 construction industry. During 2008, digital services revenue increased by $11.8 million compared to 2007.

Facilities management. On-site, or facilities management services, posted solid dollar volume and year-over-year percentage gains. Specifically, sales for the twelve months ended December 31, 2008, compared to the same period in 2007 increased by $7.2 million or 6.3%. FM revenue is derived from a single cost per-square-foot of printed material, similar to our reprographics services sales. 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, which is evidenced by an increase of approximately 1,000 facilities management accounts in 2008, bringing our total FM accounts to approximately 5,600. By placing such equipment on-site and billing on a per use and per project basis, the invoice continues to be issued by us, just as if the work were produced in one of our centralized production facilities. The resulting benefit is the convenience of on-site production with a pass-through or reimbursable cost of business that many customers continue to find attractive, particularly in light of customer cost savings initiatives.

Equipment and supplies sales. Equipment and supplies sales increased by $1.0 million or 1.6% over the same period in 2007. The increase in equipment and supplies sales was due primarily to the commencement of operations of UDS during the third quarter of 2008. UDS had sales of equipment and supplies of $5.8 million during 2008.

Gross Profit

During the 12 months ended December 31, 2008, gross profit margin decreased to $285.3 million and was 40.7%, compared to $287.0 million and 41.7% for the same period in 2007, on sales growth of $12.7 million.

The primary driver of the decrease in gross margins was the absorption of overhead resulting from the drop in sales, and acquisitions which carry lower gross margins than existing operating segments. Specifically, the overhead increase was 115 basis points as a percentage of sales of which depreciation was the primary component and accounted for 100 of the 115 basis point increase. Until our typical performance standards can be applied, acquisitions temporarily depress gross margins, as do new branch openings. The drop in margins was also attributable to unabsorbed labor costs of approximately 25 basis points due to the drop in sales noted above. The decrease in gross margins due to overhead and labor were partially offset by a drop in material costs as a percentage of sales of 40 basis points primarily due to a favorable product mix. Specifically, higher margin digital sales comprised 7.7% of total sales for 2008 compared to 6.1% for the same period in 2007.

Selling, General and Administrative Expenses

In 2008, selling, general and administrative expenses increased by $10.9 million or 7.6% over 2007. The increase is primarily attributable to a $3.7 million increase in bad debt expense and an increase in our sales volume explained above. Specifically, sales personnel compensation increased by $1.8 million that accompany the sales growth driven by acquisitions. The increase in bad debt expense primarily related to the continued deterioration of the residential home building industry and the recession in the economy. Some of our customers have been slow paying due to liquidity issues.

Stock-based compensation expense also contributed to the increase in selling, general and administrative expenses as stock-based compensation increased by $0.8 million primarily due to stock options granted in April 2008.

Also contributing to the increase in selling, general and administrative expenses was a $3.3 million favorable settlement of two related lawsuits in the second quarter of 2007. Excluding costs related to that litigation, which included legal fees and compensation payments related to the settlement, the settlement returned a $1.7 million benefit to us for the 12 months ended December 31, 2007. For more information on the details of these lawsuits and settlement, please refer to Note 9 “Commitments and Contingencies” to our Consolidated Financial Statements included in this report.

As a percentage of net sales, selling, general and administrative expenses increased by 120 basis points in 2008 as compared to 2007 primarily due to the increase in bad debt expense and the financial benefit in 2007 of the lawsuit settlement described above.

Litigation Gain

In 2006, we accounted for the judgment entered against us in the previously-disclosed Louis Frey bankruptcy litigation in the United States Bankruptcy Court, Southern District of New York, by recording a litigation charge of $14 million that included a $11.3 million litigation reserve ($11.1 million in awarded damages, and $0.2 million in preference claims that we paid in 2006), and interest expense of $2.7 million. We settled and paid this for $10.5 million during the fourth quarter of 2007 and accordingly recognized a benefit of $3.3 million ($2.9 million litigation gain, and $0.4 million in interest) in 2007. For more information on the Louis Frey litigation, please refer to Note 9 “Commitments and Contingencies” to our Consolidated Financial Statements included in this Annual Report on Form 10-K.

Amortization of Intangibles

Amortization of intangibles increased $2.9 million during 2008, compared to 2007 primarily due to an increase in identified amortizable intangible assets such as customer relationships and trade names associated with our 13 business acquisitions completed throughout 2008. Also contributing to the increase is the full year impact of 2007 acquisitions. The three acquisitions that had the biggest impact on amortization expense were the acquisition of MBC Precision Imaging in March 2007, the acquisition of Imaging Technologies Services in April 2007, and the acquisition of NGI USA in December 2007.

Goodwill Impairment

We assess goodwill at least annually for impairment as of September 30th or more frequently if events and circumstances indicate that goodwill might be impaired. During the quarter ended December 31, 2008, based on a combination of factors, including the then current economic environment, and a significant decline in our market capitalization, we concluded that there were sufficient indicators to require us to perform an interim goodwill impairment analysis as of December 31, 2008. The results of our analysis indicated that eight of our reporting units, six in the United States, one in Canada, and one in the United Kingdom had a goodwill impairment. Accordingly, we recorded a pretax, non-cash charge for the year ended December 31, 2008 to reduce the carrying value of goodwill by $35.2 million.

Other Income

The biggest contributor to other income of $0.5 million for the 12 months ended December 31, 2008 was the sale of the Autodesk sales department of our Imaging Technologies Services operating segment. The Autodesk sales department was sold in February of 2008 for $0.4 million and resulted in a gain of $0.2 million.

Interest Expense

Net interest expense was $25.9 million in 2008 compared with $24.4 million in 2007, an increase of $1.5 million or 6.1% year-over-year. The net interest expense increase is primarily due to a weighted average increase of approximately $57 million in our interest bearing debt comprised of capital leases for our operations and bank debt and subordinated notes payable for business acquisitions which was partially offset by a decrease of approximately 100 basis points in our effective annual interest rate primarily due to our refinancing of our $350 million credit facility in December 2007 and related interest rate hedge.

Loss on the extinguishment of debt

In 2008, we had no loss on the extinguishment of debt. In December 2007, we entered into a new Credit and Guaranty Agreement and extinguished the debt under our previous credit facility. Accordingly, we wrote off unamortized deferred financing costs of $0.9 million and recognized a $0.4 million expense resulting from the termination of an interest rate collar associated with the extinguished debt.

Noncontrolling Interest

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

Income Taxes

Our effective income tax rate decreased to 36.6% in 2008 from 37.9% in 2007. The decrease is primarily due to a discrete item of $1.5 million related to federal and state income tax credits recognized with respect to hiring employees and the purchase and lease of tangible assets in certain qualified enterprise zones in 2007, 2006 and 2005. During the second half of 2008, we researched and determined that we qualified for these credits.

Net Income Attributable to ARC

Net income decreased by $32.3 million to $36.8 million in 2008 compared to $69.1 million in 2007 primarily due to the $35.2 million goodwill impairment charge noted above, the decrease in gross margins, the increase in selling, general and administrative expenses in 2008, and the litigation settlement in 2007. The litigation settlement, net of taxes, resulted in a positive $2.1 million impact on 2007 net income.

EBITDA

Our EBITDA margin decreased to 19.1% in 2008 compared to 25.6% in 2007 primarily due to the goodwill charge, the increase in cost of sales and selling, general and administrative expenses explained above and was also affected by the litigation gain from the Louis Frey litigation settlement in 2007. Excluding the impact of the non-cash goodwill impairment charge of $35.2 million, our adjusted EBITDA margin was 24.1%.

Quarterly Results of Operations

The following table sets forth certain quarterly financial data for the eight quarters ended December 31, 2009. This quarterly information has been prepared on the same basis as the annual financial statements and, in our opinion, reflects all adjustments, necessary for a fair presentation of the information for periods presented. Operating results for any quarter are not necessarily indicative of results for any future period.

		Quarter Ended
		Mar. 31,				June 30,				Sept. 30,				Dec. 31,				Mar. 31,				June 30,				Sept. 30,				Dec. 31,
		2009																2008
Reprographics services		$	99,769			$	92,905			$	81,989			$	75,828			$	142,496			$	139,211			$	127,455			$	108,900
Facilities management			26,865				24,898				23,395				22,243				29,551				31,209				30,977				29,246
Equipment and supplies sales			12,849				13,251				13,966				13,591				15,396				14,521				16,153				15,872
Total net sales		$	139,483			$	131,054			$	119,350			$	111,662			$	187,443			$	184,941			$	174,585			$	154,018
Quarterly sales as a % of annual sales			27.8	%			26.1	%			23.8	%			22.3	%			26.7	%			26.4	%			24.9	%			22.0	%
Gross profit		$	51,979			$	49,155			$	41,131			$	35,924			$	79,603			$	79,088			$	70,015			$	56,566
Income (loss) from operations		$	18,030			$	16,202			$	(27,139	)		$	6,546			$	36,894			$	36,776			$	28,228			$	(18,512	)
EBITDA		$	30,816			$	28,990			$	(14,885	)		$	18,536			$	49,213			$	49,035			$	41,136			$	(5,419	)
Net income (loss) attributable to ARC		$	7,547			$	6,307			$	(28,164	)		$	(575	)		$	18,498			$	18,876			$	15,067			$	(15,687	)

The following is a reconciliation of EBITDA to net income for each respective quarter.

		Quarter Ended
		Mar. 31,				June 30,				Sept. 30,				Dec. 31,				Mar. 31,				June 30,				Sept. 30,				Dec. 31,
		2009																2008
EBITDA		$	30,816			$	28,990			$	(14,885	)		$	18,536			$	49,213			$	49,035			$	41,136			$	(5,419	)
Interest expense, net			(5,796	)			(5,836	)			(6,428	)			(7,721	)			(7,146	)			(6,559	)			(6,180	)			(6,005	)
Income tax (provision) benefit			(4,758	)			(4,096	)			5,334				502				(11,452	)			(11,384	)			(7,041	)			8,677
Depreciation and amortization			(12,715	)			(12,751	)			(12,185	)			(11,892	)			(12,117	)			(12,216	)			(12,848	)			(12,940	)
Net income (loss) attributable to ARC		$	7,547			$	6,307			$	(28,164	)		$	(575	)		$	18,498			$	18,876			$	15,067			$	(15,687	)