UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

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

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

Commission File Number: 001-32407

AMERICAN REPROGRAPHICS COMPANY

(Exact name of Registrant as specified in its Charter)

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

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 þ No o

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

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company o

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

As of August 2, 2011, there were 46,245,233 shares of the issuer’s common stock outstanding.

 

 

AMERICAN REPROGRAPHICS COMPANY

Quarterly Report on Form 10-Q

For the Quarter Ended June 30, 2011

Table of Contents

PART I—Financial Information
Item 1. Condensed Consolidated Financial Statements			4
Condensed Consolidated Balance Sheets as of June 30, 2011 and December 31, 2010			4
Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2011 and 2010			5
Condensed Consolidated Statements of Equity and Comprehensive Income (Loss) for the six months ended June 30, 2011 and 2010			6
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2011 and 2010			7
Notes to Condensed Consolidated Financial Statements			8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			28
Item 3. Quantitative and Qualitative Disclosures About Market Risk			43
Item 4. Controls and Procedures			43
PART II—Other Information			44
Item 1. Legal Proceedings			44
Item 1A. Risk Factors			44
Item 6. Exhibits			45
Signatures			46
Exhibit Index			47
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains statements that are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. When used in this Quarterly Report on Form 10-Q, the words “believe,” “expect,” “anticipate,” “estimate,” “intend,” “plan,” “targets,” “likely,” “will,” “would,” “could,” and variations of such words and similar expressions as they relate to our management or to the Company are intended to identify forward-looking statements. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those contemplated herein. We have described in Part II, Item 1A-“Risk Factors” a number of factors that could cause our actual results to differ from our projections or estimates. These factors and other risk factors described in this report are not necessarily all of the important factors that could cause actual results to differ materially from those expressed in any of our forward-looking statements. Other unknown or unpredictable factors also could harm our results. Consequently, there can be no assurance that the actual results or developments anticipated by us will be realized or, even if substantially realized, that they will have the expected consequences to, or effects on, us. Given these uncertainties, you are cautioned not to place undue reliance on such forward-looking statements.

Except where otherwise indicated, the statements made in this Quarterly Report on Form 10-Q are made as of the date we filed this report with the United States Securities and Exchange Commission and should not be relied upon as of any subsequent date. All future written and verbal forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. We undertake no obligation, and specifically disclaim any obligation, to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. You should, however, consult further disclosures we make in future filings of our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K, and any amendments thereto, as well as our proxy statements.

PART I—FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

AMERICAN REPROGRAPHICS COMPANY

		June 30,				December 31,
(In thousands, except per share amounts) (Unaudited)		2011				2010
Assets
Current assets:
Cash and cash equivalents		$	21,907			$	26,293
Accounts receivable, net of allowances for accounts receivable of $3,597 and $4,030			61,045				52,619
Inventories, net			11,350				10,689
Deferred income taxes			—				7,157
Prepaid expenses			4,223				4,074
Other current assets			20,775				6,870
Total current assets			119,300				107,702
Property and equipment, net of accumulated depreciation of $184,497 and $211,875			56,140				59,036
Goodwill			271,424				294,759
Other intangible assets, net			53,799				62,643
Deferred financing costs, net			4,669				4,995
Deferred income taxes			1,442				37,835
Other assets			2,219				2,115
Total assets		$	508,993			$	569,085
Liabilities and Equity
Current liabilities:
Accounts payable		$	23,167			$	23,593
Accrued payroll and payroll-related expenses			8,040				7,980
Accrued expenses			19,497				30,134
Current portion of long-term debt and capital leases			32,365				23,608
Total current liabilities			83,069				85,315
Long-term debt and capital leases			213,288				216,016
Deferred income taxes			29,486				—
Other long-term liabilities			3,298				5,072
Total liabilities			329,141				306,403
Commitments and contingencies (Note 6)
Stockholders’ equity:
American Reprographics Company stockholders’ equity:
Preferred stock, $0.001 par value, 25,000 shares authorized; 0 and 0 shares issued and outstanding			—				—
Common stock, $0.001 par value, 150,000 shares authorized; 46,215 and 46,183 shares issued, and 46,215 and 45,736 shares outstanding			46				46
Additional paid-in capital			99,396				96,251
Retained earnings			77,477				173,459
Accumulated other comprehensive loss			(3,219	)			(5,541	)
			173,700				264,215
Less cost of common stock in treasury, 0 and 447 shares			—				7,709
Total American Reprographics Company stockholders’ equity			173,700				256,506
Noncontrolling interest			6,152				6,176
Total equity			179,852				262,682
Total liabilities and equity		$	508,993			$	569,085

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

AMERICAN REPROGRAPHICS COMPANY

		Three Months Ended								Six Months Ended
		June 30,								June 30,
(In thousands, except per share amounts) (Unaudited)		2011				2010				2011				2010
Reprographics services		$	70,460			$	78,453			$	140,482			$	154,710
Facilities management			25,596				22,627				49,799				45,030
Equipment and supplies sales			13,534				14,008				25,813				27,509
Total net sales			109,590				115,088				216,094				227,249
Cost of sales			73,895				75,633				147,013				150,943
Gross profit			35,695				39,455				69,081				76,306
Selling, general and administrative expenses			26,804				28,169				54,636				55,300
Amortization of intangible assets			4,721				2,557				9,465				5,193
Goodwill impairment			23,335				—				23,335				—
(Loss) income from operations			(19,165	)			8,729				(18,355	)			15,813
Other income			(35	)			(34	)			(61	)			(77	)
Interest expense, net			7,699				5,754				15,866				11,642
(Loss) income before income tax provision			(26,829	)			3,009				(34,160	)			4,248
Income tax provision			57,913				1,276				54,264				1,806
Net (loss) income			(84,742	)			1,733				(88,424	)			2,442
Loss (income) attributable to noncontrolling interest			112				(54	)			151				(46	)
Net (loss) income attributable to American Reprographics Company		$	(84,630	)		$	1,679			$	(88,273	)		$	2,396
(Loss) earnings per share attributable to American Reprographics Company shareholders:
Basic		$	(1.87	)		$	0.04			$	(1.95	)		$	0.05
Diluted		$	(1.87	)		$	0.04			$	(1.95	)		$	0.05
Weighted average common shares outstanding:
Basic			45,360				45,196				45,341				45,174
Diluted			45,360				45,512				45,341				45,422

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

AMERICAN REPROGRAPHICS COMPANY

		American Reprographics Company Shareholders
																		Accumulated
		Common Stock								Additional								Other				Common
						Par				Paid-in				Retained				Comprehensive				Stock in				Noncontrolling
(In thousands) (Unaudited)		Shares				Value				Capital				Earnings				Loss				Treasury				Interest				Total
Balance at December 31, 2009			45,665			$	46			$	89,982			$	200,961			$	(7,273	)		$	(7,709	)		$	6,017			$	282,024
Stock-based compensation			29				—				2,918				—				—				—				—				2,918
Issuance of common stock under Employee Stock Purchase Plan			5				—				36				—				—				—				—				36
Stock options exercised			23				—				125				—				—				—				—				125
Tax benefit from stock-based compensation			—				—				21				—				—				—				—				21
Comprehensive income:
Net income			—				—				—				2,396				—				—				46				2,442
Foreign currency translation adjustments			—				—				—				—				50				—				—				50
Loss on derivative, net of tax effect			—				—				—				—				(174	)			—				—				(174	)
Comprehensive income:																															2,318
Balance at June 30, 2010			45,722			$	46			$	93,082			$	203,357			$	(7,397	)		$	(7,709	)		$	6,063			$	287,442

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

		American Reprographics Company Shareholders
																		Accumulated
		Common Stock								Additional								Other				Common
						Par				Paid-in				Retained				Comprehensive				Stock in				Noncontrolling
(In thousands) (Unaudited)		Shares				Value				Capital				Earnings				Loss				Treasury				Interest				Total
Balance at December 31, 2010			45,736			$	46			$	96,251			$	173,459			$	(5,541	)		$	(7,709	)		$	6,176			$	262,682
Stock-based compensation			459				—				3,258				—				—				—				—				3,258
Issuance of common stock under Employee Stock Purchase Plan			3				—				20				—				—				—				—				20
Stock options exercised			17				—				108				—				—				—				—				108
Tax deficiency from stock-based compensation, net of tax benefit			—				—				(241	)			—				—				—				—				(241	)
Retirement of 447 treasury shares			—				—				—				(7,709	)			—				7,709				—				-
Comprehensive loss:
Net loss			—				—				—				(88,273	)			—				—				(151	)			(88,424	)
Foreign currency translation adjustments			—				—				—				—				456				—				127				583
Amortization of derivative, net of tax effect			—				—				—				—				1,866				—				—				1,866
Comprehensive loss:																															(85,975	)
Balance at June 30, 2011			46,215			$	46			$	99,396			$	77,477			$	(3,219	)		$	—			$	6,152			$	179,852

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

AMERICAN REPROGRAPHICS COMPANY

		Six Months Ended June 30,
(In thousands) (Unaudited)		2011				2010
Cash flows from operating activities
Net (loss) income		$	(88,424	)		$	2,442
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Allowance for accounts receivable			417				317
Depreciation			15,187				17,571
Amortization of intangible assets			9,465				5,193
Amortization of deferred financing costs			437				770
Amortization of bond discount			267				—
Goodwill impairment			23,335				—
Stock-based compensation			3,258				2,918
Excess tax benefit related to stock-based compensation			(31	)			(38	)
Deferred income taxes			8,515				164
Deferred tax valuation allowance			64,340				—
Amortization of derivative, net of tax effect			1,866				—
Other non-cash items, net			(177	)			(314	)
Changes in operating assets and liabilities, net of effect of business acquisitions:
Accounts receivable			(8,705	)			(5,784	)
Inventory			(1,048	)			(1,285	)
Prepaid expenses and other assets			(14,047	)			(1,934	)
Accounts payable and accrued expenses			(2,782	)			7,726
Net cash provided by operating activities			11,873				27,746
Cash flows from investing activities
Capital expenditures			(7,622	)			(2,777	)
Payment for swap transaction			(9,729	)			—
Other			647				845
Net cash used in investing activities			(16,704	)			(1,932	)
Cash flows from financing activities
Proceeds from stock option exercises			108				125
Proceeds from issuance of common stock under Employee Stock Purchase Plan			23				16
Excess tax benefit related to stock-based compensation			31				38
Payments on long-term debt agreements and capital leases			(14,101	)			(21,596	)
Net borrowings (repayments) under revolving credit facilities			14,620				(123	)
Payment of loan fees			(541	)			—
Net cash provided by (used in) financing activities			140				(21,540	)
Effect of foreign currency translation on cash balances			305				22
Net change in cash and cash equivalents			(4,386	)			4,296
Cash and cash equivalents at beginning of period			26,293				29,377
Cash and cash equivalents at end of period		$	21,907			$	33,673
Supplemental disclosure of cash flow information
Noncash investing and financing activities
Noncash transactions include the following:
Capital lease obligations incurred		$	5,453			$	4,394
Accrued liabilities in connection with the acquisition of businesses		$	—			$	500
Net loss on derivative, net of tax effect		$	—			$	(174	)

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

AMERICAN REPROGRAPHICS COMPANY

1. Description of Business and Basis of Presentation

American Reprographics Company (“ARC” or the “Company”) is the largest reprographics company in the United States providing business-to-business document management services primarily to the architectural, engineering and construction (“AEC”) industry. ARC also provides these services to companies in non-AEC industries, such as aerospace, technology, financial services, retail, entertainment, and food and hospitality that require sophisticated document management services. The Company conducts its operations through its wholly-owned operating subsidiary, American Reprographics Company, L.L.C., a California limited liability company, and its subsidiaries.

Basis of Presentation

The accompanying interim Condensed Consolidated Financial Statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and in conformity with the requirements of the United States Securities and Exchange Commission (“SEC”). As permitted under those rules, certain footnotes or other financial information required by GAAP for complete financial statements have been condensed or omitted. In management’s opinion, the interim Condensed Consolidated Financial Statements presented herein reflect all adjustments of a normal and recurring nature that are necessary to fairly present the interim Condensed Consolidated Financial Statements. All material intercompany accounts and transactions have been eliminated in consolidation. The operating results for the three and six months ended June 30, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011.

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

The Company reclassified certain amounts in the prior year financial statements to conform to the current presentation. This reclassification had no effect on the Condensed Consolidated Statement of Operations, as previously reported. The Company reclassified $4,074 from prepaid expenses and other current assets at December 31, 2010, as a separate prepaid expenses caption, to conform to the current presentation.

These interim Condensed Consolidated Financial Statements and notes should be read in conjunction with the consolidated financial statements and notes included in the Company’s 2010 Annual Report on Form 10-K.

Recently Adopted Accounting Pronouncements

In December 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2010-29. The amendments in this update affect any public entity as defined by ASC 805, Business Combinations, that enters into business combinations that are material on an individual or aggregate basis. The objective in this update is to address diversity in practice about the interpretation of the pro forma revenue and earnings disclosure requirements for business combinations. ASU 2010-29 is effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. The Company adopted provisions of ASU 2010-29 effective January 1, 2011, which did not have a material effect on its Consolidated Financial Statements. The Company has not had any business combinations in 2011.

In December 2010, the FASB issued ASU 2010-28. This update provides amendments to the criteria of ASC 350, Intangibles-Goodwill and Other. The amendments to this update affect all entities that have recognized goodwill and have one or more reporting units whose carrying amount for purposes of performing step one of the goodwill impairment test is zero or negative. ASU 2010-28 is effective for financial statements issued for years beginning after December 15, 2010. Early adoption is not permitted. The Company adopted the provisions of ASU 2010-28 effective January 1, 2011, which did not have a material effect on its Consolidated Financial Statements.

In October 2009, the FASB issued ASU 2009-13. This update provides amendments to the criteria of ASC 605, Revenue Recognition, for separating consideration in multiple-deliverable arrangements. The amendments to this update establish a selling price hierarchy for determining the selling price of a deliverable. ASU 2009-13 is effective for financial statements issued for years beginning on or after June 15, 2010. The Company adopted the provisions of ASU 2010-06 effective January 1, 2011, which did not have a material effect on its Consolidated Financial Statements.

Recent Accounting Pronouncements Not Yet Adopted

In June 2011, the FASB issued ASU 2011-05. The new guidance eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. Instead, an entity will be required to present either a continuous statement of net income and other comprehensive income or in two separate but consecutive statements. The new guidance will be effective for the Company beginning January 1, 2012 and will have presentation changes only.

In May 2011, the FASB issued ASU 2011-04 which amends the accounting and disclosure requirements on fair value measurements. The new guidance limits the highest-and-best-use measure to nonfinancial assets, permits certain financial assets and liabilities with offsetting positions in market or counterparty credit risks to be measured at a net basis, and provides guidance on the applicability of premiums and discounts. Additionally, the new guidance expands the disclosures on Level 3 inputs by requiring quantitative disclosure of the unobservable inputs and assumptions, as well as description of the valuation processes and the sensitivity of the fair value to changes in unobservable inputs. The new guidance will be effective for the Company beginning January 1, 2012. Other than requiring additional disclosures, the Company does not anticipate material impacts to its Consolidated Financial Statements upon adoption.

Segment Reporting

The provisions of ASC 280, Disclosures about Segments of an Enterprise and Related Information, require public companies to report financial and descriptive information about their reportable operating segments. The Company identifies operating segments based on the various business activities that earn revenue and incur expense, whose operating results are reviewed by the chief operating decision maker. Based on the fact that operating segments have similar products and services, classes of customers, production processes and performance objectives, the Company is deemed to operate as a single reportable segment.

Risk and Uncertainties

The Company generates the majority of its revenue from sales of products and services provided to the AEC industry. As a result, the Company’s operating results and financial condition can be significantly affected by economic factors that influence the AEC industry, such as non-residential and residential construction spending, GDP growth, interest rates, unemployment rates, office vacancy rates, and government expenditures. The effects of the recent recession and current economic environment in the United States have resulted in a significant downturn in the non-residential and residential portions of the AEC industry. The AEC industry generally experiences a downturn several months after a downturn in the general economy and there may be a similar delay in the recovery of the AEC industry following a recovery in the general economy. Similar to the AEC industry, the reprographics industry typically lags a recovery in the broader economy. A prolonged downturn in the AEC industry and the reprographics industry would continue to diminish demand for ARC’s products and services, and would therefore negatively impact revenues and have a material adverse impact on its business, operating results and financial condition.

2. Earnings per Share

The Company accounts for earnings per share in accordance with ASC 260, formerly SFAS No. 128, Earnings per Share. Basic earnings per share is computed by dividing net income attributable to ARC by the weighted-average number of common shares outstanding for the period. Diluted earnings per share is computed similar to basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if common shares subject to outstanding options and acquisition rights had been issued and if the additional common shares were dilutive. Common stock equivalents are excluded from the computation if their effect is anti-dilutive. Stock options for 2.2 million common shares for the three and six months ended June 30, 2011, were excluded from the calculation of diluted net income attributable to ARC per common share because they were anti-dilutive. Stock options for 1.4 million common shares and 1.5 million common shares for the three and six months ended June 30, 2010, respectively, were excluded from the calculation of diluted net income attributable to ARC per common share because they were anti-dilutive.

Basic and diluted earnings per share were calculated using the following common shares for the three and six months ended June 30, 2011 and 2010:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
(In thousands)		2011				2010				2011				2010
Weighted average common shares outstanding during the period — basic			45,360				45,196				45,341				45,174
Effect of dilutive impact on equity based compensation awards			—				316				—				248
Weighted average common shares outstanding during the period — diluted			45,360				45,512				45,341				45,422

3. Goodwill and Other Intangibles Resulting from Business Acquisitions

Goodwill

In connection with acquisitions, the Company applies the provisions of ASC 805, using the acquisition method of accounting. The excess purchase price over the fair value of net tangible assets and identifiable intangible assets acquired is recorded as goodwill.

The Company assesses goodwill at least annually for impairment as of September 30 or more frequently if events and circumstances indicate that goodwill might be impaired. At June 30, 2011, the Company determined that there were sufficient indicators to trigger an interim goodwill impairment analysis. The indicators included, among other factors: (1) the current economic environment, (2) the performance against plan of reporting units which previously had goodwill impairment, and (3) revised forecasted future earnings. The results of the Company’s analysis indicated that six of its reporting units, all of which are located in the United States, had a goodwill impairment as of June 30, 2011. Accordingly, the Company recorded a pretax, non-cash charge for the three and six months ended June 30, 2011 to reduce the carrying value of goodwill by $23.3 million.

Goodwill impairment testing is performed at the 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.

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

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

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

The changes in the carrying amount of goodwill from January 1, 2010 through June 30, 2011 are summarized as follows:

						Accumulated				Net
		Gross				Impairment				Carrying
(In thousands)		Goodwill				Loss				Amount
January 1, 2010		$	405,054			$	72,536			$	332,518
Additions			500				—				500
Goodwill impairment			—				38,263				(38,263	)
Translation adjustment			4				—				4
December 31, 2010			405,558				110,799				294,759
Additions			—				—				—
Goodwill impairment			—				23,335				(23,335	)
Translation adjustment			—				—				—
June 30, 2011		$	405,558			$	134,134			$	271,424

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

Long-lived Assets

The Company periodically assesses potential impairments of its long-lived assets in accordance with the provisions of ASC 360, Accounting for the Impairment or Disposal of Long-lived Assets. An impairment review is performed whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. The Company groups its assets at the lowest level for which identifiable cash flows are largely independent of the cash flows of the other assets and liabilities. The Company has determined that the lowest level for which identifiable cash flows are available is the divisional level.

Factors considered by the Company include, but are not limited to, significant underperformance relative to historical or projected operating results; significant changes in the manner of use of the acquired assets or the strategy for the overall business; and significant negative industry or economic trends. When the carrying value of a long-lived asset may not be recoverable based upon the existence of one or more of the above indicators of impairment, the Company estimates the future undiscounted cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the expected future undiscounted cash flows and eventual disposition is less than the carrying amount of the asset, the Company recognizes an impairment loss. An impairment loss is reflected as the amount by which the carrying amount of the asset exceeds the fair value of the asset, based on the fair value if available, or discounted cash flows, if not.

The reporting units of the Company have been negatively impacted by the decline in commercial and residential construction. Before assessing the Company’s goodwill for impairment, the Company evaluated, as described above, the long-lived assets in its reporting units for impairment as of June 30, 2011 given the reduced level of expected sales, profits and cash flows. Based on this assessment, there was no impairment as of June 30, 2011.

Other intangible assets that have finite lives are amortized over their useful lives. Customer relationships are amortized using the accelerated method, based on customer attrition rates, over their estimated useful lives of 13 (weighted average) years.

During the fourth quarter of 2010, the Company decided to consolidate the various brands that previously represented the Company’s market presence around the country. Beginning in January 2011, each of the Company’s operating segments and their respective locations began to adopt ARC, the Company’s overall brand name. Original brand names will be used in conjunction with the new ARC brand name to reinforce the Company’s continuing presence in the business communities it serves, and ongoing relationships with its customers. Accordingly, the remaining estimated useful lives of the trade name intangible assets were revised down to 18 months. This change in estimate is accounted for on a prospective basis, resulting in increased amortization expense over the revised useful life of each trade name. The impact of this change in the three and six months ended June 30, 2011 was an increase in amortization expense of approximately $2.4 million and $4.7 million, respectively. Trade names are amortized using the straight-line method. The latest the Company expects to fully retire original trade names is April 2012.

Non-competition agreements are amortized over their term on a straight-line basis.

The following table sets forth the Company’s other intangible assets resulting from business acquisitions as of June 30, 2011 and December 31, 2010 which continue to be amortized:

		June 30, 2011												December 31, 2010
		Gross								Net				Gross								Net
		Carrying				Accumulated				Carrying				Carrying				Accumulated				Carrying
(In thousands)		Amount				Amortization				Amount				Amount				Amortization				Amount
Amortizable other intangible assets
Customer relationships		$	96,994			$	52,538			$	44,456			$	96,359			$	48,301			$	48,058
Trade names and trademarks			20,309				10,983				9,326				20,294				5,736				14,558
Non-competition agreements			100				83				17				100				73				27
		$	117,403			$	63,604			$	53,799			$	116,753			$	54,110			$	62,643

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

(In thousands)
2011		$	9,245
2012			10,879
2013			6,465
2014			5,636
2015			5,105
Thereafter			16,469
		$	53,799

4. Income Taxes

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

The Company’s effective income tax rate increased to 215.9% and 158.9% for the three and six months ended June 30, 2011 from 42.4% and 42.5% for the same periods in 2010. The increase is primarily due to the establishment of a $64.3 million non-cash valuation allowance against certain of the Company’s deferred tax assets during the three and six months ended June 30, 2011, as discussed below.

During the first quarter of 2011, the audit of the Company’s 2008 federal income tax return by the Internal Revenue Service was finalized and resulted in no adjustments. Due to this final result and other pertinent factors, the Company derecognized its liability for an uncertain tax position of $1.5 million and related accrued interest of $0.1 million.

In accordance with ASC 740-10, Income Taxes, the Company evaluates its deferred tax assets to determine if a valuation allowance is required based on the consideration of all available evidence using a “more likely than not” standard, with significant weight being given to evidence that can be objectively verified. This assessment considers, among other matters, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability; the length of statutory carryforward periods for operating losses and tax credit carryforwards; and available tax planning alternatives. As of June 30, 2011, the Company determined that cumulative losses for the preceding twelve quarters constituted sufficient objective evidence (as defined by ASC 740-10) that a valuation allowance was needed, and therefore established a $64.3 million valuation allowance against certain of its deferred tax assets.

Based on the Company’s assessment, the remaining net deferred tax assets of $1.4 million as of June 30, 2011 are considered to be more likely than not to be realized. The valuation allowance of $64.3 million may be increased or decreased as conditions change or if the Company is unable to implement certain available tax planning strategies. The realization of the Company’s net deferred tax assets ultimately depend on future taxable income, reversals of existing taxable temporary differences or through a loss carry back. The Company currently has $74.9 million and $264 thousand of federal taxable income available in 2008 and 2009, respectively, for carry back of federal tax losses generated in 2010 and 2011, respectively. The Company has income tax receivables of $18.2 million as of June 30, 2011 included in other current assets in its consolidated balance sheet primarily relating to 2010 losses that will be carried back to 2008.

5. Long-Term Debt

Long-term debt consists of the following:

		June 30,				December 31,
(In thousands)		2011				2010
Borrowings from foreign revolving credit facility; 6.0% interest rate at June 30, 2011		$	831			$	—
Borrowings from a domestic revolving credit facility; 2.3% interest rate at June 30, 2011			13,800				—
10.5% Senior Notes due 2016, net of bond discount of $4,041 and $4,308			195,959				195,692
Various subordinated notes payable; weighted average interest rate of 6.2% and 6.2%; principal and interest payable monthly through November 2013			3,949				8,635
Various capital leases; weighted average interest rate of 8.7% and 8.8%; principal and interest payable monthly through August 2016			31,114				35,297
			245,653				239,624
Less current portion			(32,365	)			(23,608	)
		$	213,288			$	216,016

10.5% Senior Notes due 2016

On December 1, 2010 (the “Closing Date”), the Company completed a private placement of 10.5% senior unsecured notes due 2016 (the “Notes”).

The Notes have an aggregate principal amount of $200 million. The Notes are general unsecured senior obligations of the Company and are subordinate to all existing and future senior secured debt of the Company to the extent of the assets securing such debt. The Company’s obligations under the Notes are jointly and severally guaranteed by all of the Company’s domestic subsidiaries. The issue price was 97.824% with a yield to maturity of 11.0%. Interest on the Notes accrues at a rate of 10.5% per annum and is payable semiannually in arrears on June 15 and December 15 of each year, commencing on June 15, 2011. The Company will make each interest payment to the holders of record of the Notes on the immediately preceding June 1 and December 1.

The Company received gross proceeds of $195.6 million from the Notes offering. In connection with the issuance of the Notes, the Company entered into an indenture, dated as of the Closing Date (the “Indenture”), among the Company, certain subsidiaries of the Company named therein, as guarantors (the “Guarantors”), and Wells Fargo Bank, National Association, as Trustee; and a Registration Rights Agreement, dated as of the Closing Date (the “Registration Rights Agreement”), among the Company, the Guarantors, and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as representatives of the initial purchasers of the Notes (the “Initial Purchasers”). The Notes were offered only to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”), and outside the United States to non-U.S. persons pursuant to Regulation S under the Securities Act.

Optional Redemption. At any time prior to December 15, 2013, the Company may redeem all or part of the Notes upon not less than 30 nor more than 60 days’ prior notice at a redemption price equal to the sum of (i) 100% of the principal amount thereof, plus (ii) a make-whole premium as of the date of redemption, plus (iii) accrued and unpaid interest, if any, to the date of redemption. In addition, the Company may redeem some or all of the Notes on or after December 15, 2013, at redemption prices set forth in the Indenture, together with accrued and unpaid interest, if any, to the date of redemption. At any time prior to December 15, 2013, the Company may use the proceeds of certain equity offerings to redeem up to 35% of the aggregate principal amount of the Notes, including any permitted additional notes, at a redemption price equal to 110.5% of the principal amount of the Notes redeemed, plus accrued and unpaid interest, if any, to the date of redemption.

Repurchase upon Change of Control. Upon the occurrence of a change in control (as defined in the Indenture), each holder of the Notes may require the Company to repurchase all of the then-outstanding Notes in cash at a price equal to 101% of the aggregate principal amount of the Notes to be repurchased, plus accrued and unpaid interest, if any, to the date of repurchase.

Other Covenants. The Indenture contains covenants that limit, among other things, the Company’s and certain of its subsidiaries’ ability to (1) incur additional debt and issue preferred stock, (2) make certain restricted payments, (3) consummate specified asset sales, (4) enter into certain transactions with affiliates, (5) create liens, (6) declare or pay any dividend or make any other distributions, (7) make certain investments, and (8) merge or consolidate with another person.

Events of Default. The Indenture provides for customary events of default (subject in certain cases to customary grace and cure periods), which include non-payment, breach of covenants in the Indenture, cross default and acceleration of other indebtedness, a failure to pay certain judgments and certain events of bankruptcy and insolvency. Generally, if an event of default occurs, the Trustee or holders of at least 25% in principal amount of the then outstanding Notes may declare the principal of and accrued but unpaid interest on all of the then-outstanding Notes to be due and payable.

Exchange Offer. Pursuant to a registered exchange offer in May 2011, the Company offered to exchange up to $200 million aggregate principal amount of the Notes, for new notes that were registered under the Securities Act of 1933, as amended. The terms of such registered notes are the same as the terms of the Notes, except that they are now registered under the Securities Act and the transfer restrictions, registration rights and additional interest provisions are not applicable to the registered notes. The Company accepted the exchange of $200 million aggregate principal amounts of the Notes that were properly tendered.

2010 Credit Agreement

On the Closing Date, the Company and certain of its subsidiaries also entered into a $50 million credit agreement (the “2010 Credit Agreement”) and paid off in full amounts outstanding under its prior credit agreement.

The 2010 Credit Agreement provides for a $50 million senior secured revolving line of credit, of which up to $20 million is available for the issuance of letters of credit. The line of credit is available on a revolving basis during the period commencing after the Closing Date and ending on December 1, 2015 and is secured by substantially all of the assets of the Company and certain of its subsidiaries. Advances under the revolving line of credit are subject to customary borrowing conditions, including the accuracy of representations and warranties and the absence of events of default. The Company may borrow, partially or wholly repay its outstanding borrowings and reborrow, subject to the terms and conditions contained in the 2010 Credit Agreement.

The Company’s obligations under the 2010 Credit Agreement are guaranteed by its domestic subsidiaries and, subject to certain exceptions, are secured by security interests granted in all of the Company’s and the domestic subsidiaries’ personal and real property.

Advances under the 2010 Credit Agreement bear interest at LIBOR plus the “applicable rate.” The initial applicable rate is 2.00%. The applicable rate is determined based upon the consolidated leverage ratio for the Company with a minimum and maximum applicable rate of 1.50% and 2.00%, respectively. During the continuation of certain events of default, all amounts due under the 2010 Credit Agreement bear interest at 4.0% above the rate otherwise applicable. In addition, the Company is required to pay an unused commitment fee on the average daily unused amount of the line of credit at the applicable rate, calculated and payable quarterly in arrears, as follows: if the consolidated leverage ratio is (i) greater than or equal to 3.00x, the unused commitment fee is 0.20%, (ii) less than or equal to 2.99x but greater than or equal to 2.00x, 0.15%, and (iii) less than 2.00x, 0.10%.

The 2010 Credit Agreement contains the following financial covenants:

•

Maximum consolidated leverage ratio as follows:

	•		4.35:1.00 for quarters ending December 31, 2010 through September 30, 2011
	•		4.25:1.00 for quarters ending December 31, 2011 through September 30, 2012
	•		4.15:1.00 for quarters ending December 31, 2012 through September 30, 2013
	•		4.00:1.00 for quarters ending December 31, 2013 through maturity;

	•		Maximum consolidated senior secured debt leverage ratio not greater than 1.50:1.00, determined on the last day of each fiscal quarter through maturity;
	•		Minimum consolidated interest coverage ratio as follows:

	•		1.70:1.00 for quarters ending December 31, 2010 through September 30, 2011
	•		1.75:1.00 for quarters ending December 31, 2011 through maturity;

The 2010 Credit Agreement also contains covenants which, subject to certain exceptions as set forth in the 2010 Credit Agreement, restrict the Company’s ability to incur additional debt, grant liens or guaranty other indebtedness, pay dividends, redeem stock, pay or redeem subordinated indebtedness, make investments or capital expenditures, dispose or acquire assets, dispose of equity interests in subsidiaries, enter into any merger, sale of assets, consolidation or liquidation transaction, or engage in transactions with stockholders and affiliates. Covenants in the 2010 Credit Agreement also require that the Company provide periodic financial reports to the lender, observe certain practices and procedures with respect to the collateral pledged as security, comply with applicable laws and maintain and preserve the Company and its subsidiaries’ properties and maintain insurance.

As of June 30, 2011 the Company was in compliance with the financial incurrence-based covenants under the Notes and financial maintenance-based covenants under the 2010 Credit Agreement. The Company’s trailing twelve months key financial covenant ratios under the 2010 Credit Agreement as of June 30, 2011 were 1.82:1.00 for minimum interest coverage, 3.76:1.00 for maximum total leverage and 0.69:1.00 for maximum senior secured leverage.

The Company expects to be in compliance with the financial covenants in the 2010 Credit Agreement through the term of the agreement. However, it is possible that a default under certain financial covenants may occur in the future, should the minimum required profitability levels not be achieved. If the Company defaults on the covenants under the 2010 Credit Agreement and is unable to obtain waivers from its lenders, the lenders will be able to exercise their rights and remedies under the 2010 Credit Agreement, including a call provision on outstanding debt, which would have a material adverse effect on the Company’s business and financial condition.

As of June 30, 2011, standby letters of credit aggregated to $3.9 million. The standby letters of credit and borrowings under the 2010 Credit Agreement reduced the Company’s borrowing availability under its 2010 Credit Agreement to $32.3 million.

Foreign Credit Facility

In the second quarter of 2011, in conjunction with its Chinese operations, UNIS Document Solutions Co. Ltd. (“UDS”) entered into a one-year revolving credit facility. This facility provides for a maximum credit amount of 8.0 million Chinese Yuan Renminbi. This translates to U.S. $1.2 million as of June 30, 2011. Draws on the facility are limited to 30 day periods and incur a fee of 0.5% of the amount drawn and no additional interest is charged.

Interest Rate Swap Transaction

On December 19, 2007, the Company entered into an interest rate swap transaction (the “Swap Transaction”) in order to hedge the floating interest rate risk on the Company’s long term variable rate debt. Under the terms of the Swap Transaction, the Company was required to make quarterly fixed rate payments to the counterparty calculated based on an initial notional amount of $271.6 million at a fixed rate of 4.1375%, while the counterparty was obligated to make quarterly floating rate payments to the Company based on the three month LIBOR. The notional amount of the Swap Transaction was scheduled to decline over the term of the then existing term loan facility consistent with the scheduled principal payments. The Swap Transaction had an effective date of March 31, 2008 and an original termination date of December 6, 2012.

On October 2, 2009, the Company amended the Swap Transaction (“the Amended Swap Transaction”). The Company entered into the Amended Swap Transaction in order to reduce the notional amount under the initial Swap Transaction from $271.6 million to $210.8 million to hedge the Company’s then-existing variable interest rate debt under the Company’s previous credit agreement.

In connection with the issuance of the Notes, the Amended Swap Transaction no longer qualified as a cash flow hedge and was de-designated.

As of December 31, 2010, the Amended Swap Transaction had a negative fair value of $9.7 million, all of which was recorded in accrued expenses. On January 3, 2011, the Amended Swap Transaction was terminated and settled. For further information, see Note 9 “Derivatives and Hedging Transactions”.

6. Commitments and Contingencies

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

Contingent Transaction Consideration. The Company is subject to earnout obligations entered into in connection with prior acquisitions. If the acquired businesses generate sales and/or operating profits in excess of predetermined targets, the Company is obligated to make additional cash payments in accordance with the terms of such earnout obligations. As of June 30, 2011, the Company has potential future earnout obligations for acquisitions consummated before the adoption of ASC 805 in the total amount of approximately $1.5 million through 2014 if predetermined financial targets are met or exceeded. These earnout payments are recorded as additional purchase price (as goodwill) when the contingent payments are earned and become payable.

Legal Proceedings. On October 21, 2010, a former employee, individually and on behalf of a purported class consisting of all non-exempt employees who work or worked for American Reprographics Company, LLC and American Reprographics Company in the State of California at any time from October 21, 2006 through October 21, 2010, filed an action against the Company in the Superior Court of California for the County of Orange. The complaint alleges, among other things, that the Company violated the California Labor Code by failing to (i) provide meal and rest periods, or compensation in lieu thereof, (ii) timely pay wages due at termination, and (iii) that those practices also violate the California Business and Professions Code. The relief sought includes damages, restitution, penalties, interest, costs, and attorneys’ fees and such other relief as the court deems proper. The Company has not included any liability in its Consolidated Financial Statements in connection with this matter. The Company cannot reasonably estimate the amount or range of possible loss, if any, at this time.

In addition to the matter described above, the Company is involved in various additional legal proceedings and other legal matters from time to time in the normal course of business. The Company does not believe that the outcome of any of these matters will have a material adverse effect on its consolidated financial position, results of operations or cash flows.

7. Comprehensive Loss

The Company’s comprehensive loss includes foreign currency translation adjustments and the amortized fair value of the Amended Swap Transaction, net of taxes. The Amended Swap Transaction was de-designated on December 1, 2010, as it no longer qualified as a cash flow hedge when the cash proceeds from the issuance of the Notes were used to pay off the Company’s previous credit agreement. At that time, the fair value of the Amended Swap Transaction was computed and the effective portion is stored in other comprehensive income and will be amortized into income, net of tax effect, on the straight-line method, based on the original notional schedule.

The differences between net (loss) income and comprehensive (loss) income attributable to ARC for the three and six months ended June 30, 2011 and 2010 are as follows:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
(In thousands)		2011				2010				2011				2010
Net (loss) income		$	(84,742	)		$	1,733			$	(88,424	)		$	2,442
Foreign currency translation adjustments			294				(66	)			583				50
Gain (loss) on derivative, net of tax effect			912				139				1,866				(174	)
Comprehensive (loss) income			(83,536	)			1,806				(85,975	)			2,318
Comprehensive loss (income) attributable to noncontrolling interest			17				(54	)			24				(46	)
Comprehensive (loss) income attributable to American Reprographics Company		$	(83,519	)		$	1,752			$	(85,951	)		$	2,272

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

8. Stock-Based Compensation

The Company adopted the American Reprographics Company 2005 Stock Plan (the “Stock Plan”) in February 2005. The Stock Plan provides for the grant of incentive and non-statutory stock options, stock appreciation rights, restricted stock purchase awards, restricted stock awards, and restricted stock units to employees, directors and consultants of the Company. The Stock Plan authorizes the Company to issue up to 5,000,000 shares of common stock. This amount automatically increased annually on the first day of the Company’s fiscal year, from 2006 through and including 2010, by the lesser of (i) 1.0% of the Company’s outstanding shares on the date of the increase; (ii) 300,000 shares; or (iii) such smaller number of shares determined by the Company’s board of directors. As of June 30, 2011, 2,309,753 shares remain available for issuance under the Stock Plan.

Stock options granted under the Stock Plan generally expire no later than ten years from the date of grant. Options generally vest and become fully exercisable over a period of two to five years, except that options granted to non-employee directors may vest over a shorter time period. The exercise price of options must be equal to at least 100% (110% in the case of an incentive stock option granted to a 10% stockholder) of the fair market value of the Company’s common stock on the date of grant. The Company allows for cashless exercises of vested outstanding options.

In February 2011, the Company granted options to acquire a total of 9,587 shares of the Company’s common stock to certain key employees with an exercise price equal to the fair market value of the Company’s common stock on the date of grant. The stock options granted to those key employees vest at a rate of 33 1/3% on each of the first three anniversaries from the date of grant and expire 10 years after the date of grant.

In March 2011, the Company granted an option to acquire 45,249 shares of the Company’s common stock to its Chief Operating Officer with an exercise price equal to the fair market value of the Company’s common stock on the date of grant. The stock option granted to the Company’s Chief Operating Officer vests at a rate of 25% on each of the first four anniversaries from the date of grant and expires 10 years after the date of grant. The Company also granted 1,444 shares of restricted stock to its President and Chief Executive Officer at a price per share of $8.66, which was the closing price of the Company’s common stock on the New York Stock Exchange (“NYSE”) on the date the restricted stock was granted. The shares of restricted stock will vest at a rate of 25% on each of the first four anniversaries from the date of grant.

In April 2011, the Company granted 15,000 shares of restricted stock to each of the Company’s Chief Accounting Officer and Chief Technology Officer at a price per share of $9.94 and $8.95, respectively, which was the closing price of the Company’s common stock on the NYSE on the date the restricted stock was granted. The shares of restricted stock will vest at a rate of 25% on each of the first four anniversaries of the date of grant. The Company also granted 404,000 shares of restricted stock to certain key employees at a price per share of $8.77, which was the closing price of the Company’s common stock on the NYSE on the date the restricted stock was granted. The shares of restricted stock will vest at a rate of 25% on each of the first four anniversaries from the date of grant. In addition, the Company granted 5,587 shares of restricted stock to each of the Company’s six non-employee members of its Board of Directors at a price per share of $8.95, which was the closing price of the Company’s common stock on the NYSE on the date the restricted stock was granted. The shares of restricted stock will vest on the one year anniversary from the date of grant.

The impact of stock-based compensation on the interim Condensed Consolidated Statements of Operations for the three months ended June 30, 2011 and 2010, before income taxes, was $1.8 million and $1.5 million, respectively.

The impact of stock-based compensation on the interim Condensed Consolidated Statements of Operations for the six months ended June 30, 2011 and 2010, before income taxes, was $3.3 million and $2.9 million, respectively.

As of June 30, 2011, total unrecognized compensation cost related to unvested stock-based payments totaled $5.6 million and is expected to be recognized over a weighted-average period of 3.5 years.

9. Derivatives and Hedging Transactions

As of June 30, 2011, the Company was not party to any derivative or hedging transactions.

As of December 31, 2010, the Company was party to the Amended Swap Transaction, in which the Company exchanged its floating-rate payments for fixed-rate payments. As of December 1, 2010, the Amended Swap Transaction was de-designated upon issuance of the Notes and payoff of the Company’s previous credit agreement. The Amended Swap Transaction no longer qualified as a cash flow hedge under ASC 815, as all the floating-rate debt was extinguished. The Amended Swap Transaction qualified as a cash flow hedge up to November 30, 2010. On January 3, 2011, the Company terminated and settled the Amended Swap Transaction.

As of June 30, 2011, $6.2 million is deferred in Accumulated Other Comprehensive Loss (“AOCL”) and will be recognized in earnings over the remainder of the original term of the Amended Swap Transaction which was scheduled to end in December 2012, but was terminated in January 2011. Over the next 12 months, the Company will amortize $5.0 million from AOCL to interest expense.

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

						Fair Value
		Balance Sheet				December 31,
(In thousands)		Classification				2010
Derivative not designated as hedging instrument under ASC 815
Amended Swap Transaction		Accrued expenses				$	9,729

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

		Amount of Gain or (Loss) Recognized in
		AOCL on Derivative
		Three Months Ended				Six Months Ended
(In thousands)		June 30, 2010				June 30, 2010
Derivative in ASC 815 cash flow hedging relationship
Amended Swap Transaction		$	222			$	(326	)
Tax effect			(83	)			152
Amended Swap Transaction, net of tax effect		$	139			$	(174	)

The following table summarizes the effect of the Amended Swap Transaction on the interim Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2011 and 2010:

		Amount of Gain or (Loss) Reclassified from AOCL into Income
		(effective portion)																(ineffective portion)
		Three Months Ended								Six Months Ended								Three Months Ended								Six Months Ended
		June 30,								June 30,								June 30,								June 30,
(In thousands)		2011				2010				2011				2010				2011				2010				2011				2010
Location of Gain or (Loss) Reclassified from AOCL into Income
Interest expense		$	(1,457	)		$	(1,968	)		$	(2,980	)		$	(3,934	)		$	—			$	(34	)		$	—			$	(106	)

The following table summarizes the loss recognized in income of derivatives, not designated as hedging instruments under ASC 815 for the three and six months ended June 30, 2011:

		Amount of Loss Recognized in Income on
		Derivative
		Three Months Ended				Six Months Ended
(In thousands)		June 30, 2011				June 30, 2011
Derivative not designated as hedging instrument under ASC 815
Amended Swap Transaction		$	—			$	(120	)
Tax effect			—				45
Amended Swap Transaction, net of tax effect		$	—			$	(75	)

10. Fair Value Measurements

In accordance with ASC 820, the Company has categorized its assets and liabilities that are measured at fair value into a three-level fair value hierarchy as set forth below. If the inputs used to measure fair value fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair value measurement. The three levels of the hierarchy are defined as follows:

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

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

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

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

		Significant Other
		Observable Inputs
		Level 2
(In thousands)		December 31, 2010
Recurring Fair Value Measure
Amended Swap Transaction		$	9,729

The Company has also included additional required disclosures about the Company’s Amended Swap Transaction in Note 9 “Derivatives and Hedging Transactions.”

The Amended Swap Transaction is valued at fair value with the use of an income approach based on current market interest rates using a discounted cash flow model and an adjustment for counterparty risk. This model reflects the contractual terms of the derivative instrument, including the time to maturity and debt repayment schedule, and market-based parameters such as interest rates and yield curves. This model does not require significant judgment, and the inputs are observable. Thus, the derivative instrument is classified within Level 2 of the valuation hierarchy. The Company terminated and settled the Amended Swap Transaction on January 3, 2011.

The following table summarizes the bases used to measure certain assets and liabilities at fair value on a nonrecurring basis in the consolidated financial statements as of June 30, 2011:

		Significant Other Unobservable Inputs
		June 30, 2011
(In thousands)		Level 3				Total Losses
Nonrecurring Fair Value Measure
Goodwill		$	271,424			$	23,335

In accordance with the provisions of ASC 350, goodwill was written down to its implied fair value of $271.4 million as of June 30, 2011, resulting in an impairment charge of $23.3 million during the three and six months ended June 30, 2011. See Note 3, “Goodwill and Other Intangibles Resulting from Business Acquisitions” for further information regarding the process of determining the implied fair value of goodwill.

Fair Values of Financial Instruments. The following methods and assumptions were used by the Company in estimating the fair value of its financial instruments for disclosure purposes:

Cash equivalents: Cash equivalents are time deposits with maturity of three months or less when purchased, which are highly liquid and readily convertible to cash. Cash equivalents reported in the Company’s Consolidated Balance Sheets were $10.8 million as of June 30, 2011, and are carried at cost and approximate fair value, due to the relatively short period to maturity of these instruments.

Short- and long-term debt: The carrying amount of the Company’s capital leases reported in the Consolidated Balance Sheets approximates fair value based on the Company’s current incremental borrowing rate for similar types of borrowing arrangements. The carrying amount reported in the Company’s Consolidated Balance Sheet as of June 30, 2011 for its Notes is $200.0 million and $3.9 million for its subordinated notes payable. Using a discounted cash flow technique that incorporates a market interest rate which assumes adjustments for duration, optionality, and risk profile, the Company has determined the fair value of its Notes is $221.8 million as of June 30, 2011 and the fair value and for its subordinated notes payable is $3.8 million as of June 30, 2011.

Interest rate hedge agreements: The fair value of the interest rate swap is based on market interest rates using a discounted cash flow model and an adjustment for counterparty risk.

11. Condensed Consolidating Financial Statements

The Notes are fully and unconditionally guaranteed, on a joint and several basis, by all of the Company’s domestic subsidiaries (the “Guarantor Subsidiaries”). The Company’s foreign subsidiaries have not guaranteed the Notes (the “Non-Guarantor Subsidiaries”). Each of the Guarantor Subsidiaries is 100% owned, directly or indirectly, by the Company. There are no significant restrictions on the ability of the Company to obtain funds from any of the Guarantor Subsidiaries by dividends or loan. In lieu of providing separate audited financial statements for the Guarantor Subsidiaries, condensed consolidating financial information is presented below.

Condensed Consolidating Balance Sheet
June 30, 2011

		American
		Reprographics				Guarantor				Non-Guarantor
(In thousands) (Unaudited)		Company				Subsidiaries				Subsidiaries				Eliminations				Total
Assets
Current assets:
Cash and cash equivalents		$	—			$	9,527			$	12,380			$	—			$	21,907
Accounts receivable, net			—				54,899				6,146				—				61,045
Intercompany operations			295				4,529				(4,824	)			—				—
Inventories, net			—				8,072				3,278				—				11,350
Deferred income taxes			—				—				—				—				—
Prepaid expenses			33				3,235				955				—				4,223
Other current assets			—				19,825				950				—				20,775
Total current assets			328				100,087				18,885				—				119,300
Property and equipment, net			—				48,914				7,226				—				56,140
Goodwill			—				271,424				—				—				271,424
Investment in subsidiaries			186,373				12,725				—				(199,098	)			—
Other intangible assets, net			—				51,827				1,972				—				53,799
Deferred financing costs, net			4,669				—				—				—				4,669
Deferred income taxes			—				—				1,442				—				1,442
Other assets			—				1,938				281				—				2,219
Total assets		$	191,370			$	486,915			$	29,806			$	(199,098	)		$	508,993
Liabilities and Equity
Current liabilities:
Accounts payable		$	45			$	21,135			$	1,987			$	—			$	23,167
Accrued payroll and payroll-related expenses			—				7,752				288				—				8,040
Accrued expenses			875				16,553				2,069				—				19,497
Intercompany loans			(193,009	)			191,487				1,522				—				—
Current portion of long-term debt and capital leases			13,800				16,841				1,724				—				32,365
Total current liabilities			(178,289	)			253,768				7,590				—				83,069
Long-term debt and capital leases			195,959				15,793				1,536				—				213,288
Deferred income taxes			—				29,486				—								29,486
Other long-term liabilities			—				1,495				1,803				—				3,298
Total liabilities			17,670				300,542				10,929				—				329,141
Commitments and contingencies
Total equity			173,700				186,373				18,877				(199,098	)			179,852
Total liabilities and equity		$	191,370			$	486,915			$	29,806			$	(199,098	)		$	508,993

Condensed Consolidating Balance Sheet
December 31, 2010

		American
		Reprographics				Guarantor				Non-Guarantor
(In thousands) (Unaudited)		Company				Subsidiaries				Subsidiaries				Eliminations				Total
Assets
Current assets:
Cash and cash equivalents		$	—			$	12,587			$	13,706			$	—			$	26,293
Accounts receivable, net			—				48,283				4,336				—				52,619
Intercompany operations			295				2,717				(3,012	)			—				—
Inventories, net			—				8,090				2,599				—				10,689
Deferred income taxes			—				7,157				—				—				7,157
Prepaid expenses			72				2,799				1,203				—				4,074
Other current assets			—				5,942				928				—				6,870
Total current assets			367				87,575				19,760				—				107,702
Property and equipment, net			—				52,376				6,660				—				59,036
Goodwill			—				294,759				—				—				294,759
Investment in subsidiaries			257,838				16,065				—				(273,903	)			—
Other intangible assets, net			—				60,585				2,058				—				62,643
Deferred financing costs, net			4,995				—				—				—				4,995
Deferred income taxes			708				34,453				2,674				—				37,835
Other assets			—				1,978				137				—				2,115
Total assets		$	263,908			$	547,791			$	31,289			$	(273,903	)		$	569,085
Liabilities and Equity
Current liabilities:
Accounts payable		$	—			$	21,137			$	2,456			$	—			$	23,593
Accrued payroll and payroll-related expenses			—				7,643				337				—				7,980
Accrued expenses			2,210				25,563				2,361				—				30,134
Intercompany loans			(190,500	)			190,241				259				—				—
Current portion of long-term debt and capital leases			—				22,787				821				—				23,608
Total current liabilities			(188,290	)			267,371				6,234				—				85,315
Long-term debt and capital leases			195,692				19,201				1,123				—				216,016
Other long-term liabilities			—				3,381				1,691				—				5,072
Total liabilities			7,402				289,953				9,048				—				306,403
Commitments and contingencies
Total equity			256,506				257,838				22,241				(273,903	)			262,682
Total liabilities and equity		$	263,908			$	547,791			$	31,289			$	(273,903	)		$	569,085