Dailystocks.com - Ticker-based level links to all the information for the Stocks you own. Portal for Daytrading and Finance and Investing Web Sites
DailyStocks.com
What's New
Site Map
Help
FAQ
Log In
Home Quotes/Data/Chart Warren Buffett Fund Letters Ticker-based Links Education/Tips Insider Buying Index Quotes Forums Finance Site Directory
OTCBB Investors Daily Glossary News/Edtrl Company Overviews PowerRatings China Stocks Buy/Sell Indicators Company Profiles About Us
Nanotech List Videos Magic Formula Value Investing Daytrading/TA Analysis Activist Stocks Wi-fi List FOREX Quote ETF Quotes Commodities
Make DailyStocks Your Home Page AAII Ranked this System #1 Since 1998 Bookmark and Share


Welcome!
Welcome to the investing community at DailyStocks where we believe we have some of the most intelligent investors around. While we have had an online presence since 1997 as a portal, we are just beginning the forums section now. Our moderators are serious investors with MBA and CFAs with practical experience wwell-versed in fundamental, value, or technical investing. We look forward to your contribution to this community.

Recent Topics
Article by DailyStocks_admin    (04-10-08 09:55 AM)

The Daily Magic Formula Stock for 04/10/2008 is American Reprographics Co. According to the Magic Formula Investing Web Site, the ebit yield is 13% and the EBIT ROIC is > 100%.

Dailystocks.com only deals with facts, not biased journalism. What is a better way than to go to the SEC Filings? It's not exciting reading, but it makes you money. We cut and paste the important information from SEC filings for you to get started on your research on a specific company.


Dailystocks.com makes NO RECOMMENDATIONS whatsoever, and provides this for informational purpose only.

BUSINESS OVERVIEW

Our Company

We are the leading reprographics company in the United States providing business-to-business document management services to the architectural, engineering and construction industry, or AEC industry. We also provide these services to companies in non-AEC industries, such as technology, financial services, retail, entertainment, and food and hospitality, that require sophisticated document management services similar to our core AEC offerings. Reprographics services typically encompass the digital management and reproduction of construction documents or other graphics-related material and the corresponding finishing and distribution services. The business-to-business services we provide to our customers include document management, document distribution and logistics, print-on-demand, and a combination of these services in our customers’ offices as on-site services, often referred to as “facilities management.” We provide our core services through our suite of reprographics technology products, a national network of approximately 230 locally branded reprographics service centers, and approximately 3,300 facilities management programs at our customers’ locations throughout the country. We also sell reprographics equipment and supplies to complement our full range of service offerings. Our services are critical to our customers because they shorten their document processing and distribution time, improve the quality of their document information management, and provide a secure, controlled document management environment.

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. Most of our licensees are members of our wholly-owned trade organization, the PEiR Group (Profit and Education in Reprographics), through which we charge membership fees and provide purchasing, technology and educational benefits to other reprographers, while continuing to promote our reprographics technology as an industry standard.

We operate more than 230 reprographics service centers, including 225 service centers in 170 cities in 34 states throughout the United States and the District of Columbia, five reprographics service centers in Canada, and one in Mexico City, Mexico. Our reprographics service centers are located in close proximity to the majority of our customers and offer pickup and delivery services within a 15 to 30 mile radius. These service centers are arranged in a hub and satellite structure and are digitally connected as a cohesive network, allowing us to provide our services both locally and nationally. We service approximately 107,000 active customers and employ approximately 4,400 people, including a sales and customer service staff of approximately 730 employees.

In terms of revenue, number of service facilities and number of customers, we believe we are the largest company in our industry, operating in approximately eight times as many cities and with more than six times the number of service facilities as our next largest competitor. We believe that our national footprint, our suite of reprographics technology products, and our value-added services, including logistics and facilities management, provide us with a distinct competitive advantage.

While we began our operations in California and currently derive approximately 46% of our net sales from our operations in the state, we have continued to expand our geographic coverage and market share by entering complementary markets through strategic acquisitions of high-quality companies with well-recognized local brand names and, in most cases, more than 25 years of operating history. Since 1997, we have acquired more than 100 companies. It is our preferred practice to maintain the senior management of companies we acquire. 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 opened or acquired an additional 47 production facilities in 2006, closed or consolidated 14, and ended the year with a net gain of 33 locations.

Our main office is located at 700 North Central Avenue, Suite 550, Glendale, California 91203, and our telephone number is (818) 500-0225.


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, NW, 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 and information 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 internet site, 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 address 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 Investor Relations at 925-945-5100 or 1981 N. Broadway, Suite 385, Walnut Creek, California 94596. Attention: David Stickney, Vice President of Corporate Communications.

Corporate Background and Reorganization

Our predecessor, Ford Graphics, was founded in Los Angeles, California in 1960. In 1967 this sole proprietorship was dissolved and a new corporate structure was established under the name Micro Device, Inc., which continued to provide reprographics services under the name Ford Graphics. In 1989, our current senior management team purchased Micro Device, Inc., and in November 1997 our company was recapitalized as a California limited liability company, with management retaining a 50% ownership position and the remainder owned by outside investors. In April 2000, Code Hennessy & Simmons LLC, or CHS, through its affiliates acquired a 50% stake in our company from these outside investors in the 2000 recapitalization.

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

Acquisitions

In addition to 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 100 companies. Our recent acquisitions include 14 reprographics companies acquired in 2005 for an aggregate purchase price of $32.1 million, and in 2006, we acquired 16 reprographics companies for an aggregate purchase price of $87.7 million. All aggregate purchase price figures include acquisition related costs. None of our acquisitions were related or contingent upon any other acquisitions. See Note 3 to our consolidated financial statements for further details concerning our acquisitions.

No acquisitions have been made subsequent to December 31, 2006.

Industry Overview

According to the International Reprographics Association, or IRgA, and other industry sources, the reprographics industry in the United States is estimated to be approximately $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 GDP growth, interest rates, job creation, office vacancy rates, and tax revenues. According to FMI Corporation, or FMI, a consulting firm to the construction industry, construction industry spending in the United States for 2006 was estimated at $1.2 trillion, with expenditures divided between residential construction 53.1% and commercial and public, or non-residential, construction 46.9%. The $4.5 billion reprographics industry is approximately 0.4% of the $1.2 trillion construction industry in the United States. Our AEC revenues are most closely correlated to the non-residential sectors of the construction industry, which sectors are the largest users of reprographics services. According to FMI, the non-residential sectors of the construction industry are projected to grow at an average of 8.3% per year over the next three years.

Market opportunities for business-to-business document management services such as ours are rapidly expanding into non-AEC industries. For example, non-AEC customers are increasingly using large and small format color imaging for point-of-purchase displays, digital publishing, presentation materials, educational materials and marketing materials as these services have become more efficient and available on a short-run, on-demand basis through digital technology. As a result, we believe that our addressable market is substantially larger than the core AEC reprographics market. We believe that the growth of non-AEC industries is generally tied to growth in the U.S. gross domestic product, or GDP, which is estimated to have grown 2.2% in 2006.

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 our PlanWell online planrooms are well positioned to become the industry standard for managing and procuring reprographics services within the AEC industry. In addition, we have developed other proprietary software applications that complement PlanWell and have enabled us to improve the efficiency of our services, add 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 among our service centers within each market. In addition, we serve our national and regional customers under a single contract through our Premier Accounts business unit, while offering centralized access to project specific services, billing, and tracking information.

• Flexible Operating Model. By promoting regional decision making for marketing, pricing, and selling practices, we remain responsive to our customers while benefiting from the cost structure advantages of our centralized administrative functions. Our flexible operating model also allows us to capitalize on an improving business environment.

• Consistent, Strong Cash Flow. Through management of our inventory and receivables and our low capital expenditure requirements, we have consistently generated strong cash flow from operations after capital expenditures regardless of industry and economic conditions.

• Low Cost Operator. We believe we are one of the lowest cost operators in the reprographics industry, which we have accomplished by minimizing branch level expenses and capitalizing on our significant scale for purchasing efficiencies.


• Experienced Management Team and Highly Trained Workforce. Our senior management team has an average of over 20 years of industry experience and it is our preferred practice to maintain the senior management of the companies we acquire.

Our Services

Reprographics services typically encompass the digital management and reproduction of graphics-related material and corresponding finishing and distribution services. We provide these business-to-business services to our customers in three major categories: document management, document distribution and logistics, and print-on-demand.

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 are typically larger than 11Ă—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 reprographic service centers, as well as equipment placed on site in our customers’ facilities.

On-site services. Frequently referred to as facilities management, or FMs, this service includes any combination of the above services supplied on-site at our customers’ locations.

These broad categories of services are provided to our 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:


• PlanWell, our proprietary, internet-based planroom launched in June 2000, and our suite of other reprographics software products that enable the online purchase and fulfillment of document management services.

• Production services, including print-on-demand, document assembly, document finishing, mounting, laminating, binding, and kitting. Documents can be digitally transferred from one service facility to another to balance production capacity or take advantage of a “distribute and print” operating system.

• Document distribution and logistics, including the physical pick up, delivery, and shipping of time-sensitive, critical documents.

• 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, 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.


• The design and development of other document management and reprographics software, in addition to PlanWell, that supports ordering, tracking, job costing, and other customer specific accounting information for a variety of projects and services. These proprietary applications include:


• Electronic Work Order (EWO) , which offers our customers access to the services of all of our service centers through the internet.

• Abacus Print Cost Recovery (PCR) System , which provides a suite of software modules for reprographers and their customers to track documents produced from equipment installed as a part of a facilities management program.

• BidCaster “Invitation-to-Bid” (ITB) , a data management internet application inside PlanWell Enterprise 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.

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

Customers

Our business is not dependent on any single customer or few customers, the loss of any one or more of whom would have a material adverse effect on our business. Our customers are both local and national companies, with no single customer accounting for more than 2% of our net sales in 2006.

Operations

Geographic Presence. We operate 231 reprographics service centers, including 225 service centers in 170 cities in 34 states throughout the United States and the District of Columbia, five service centers in Canada, and one in Mexico City, Mexico. Our reprographics service centers are located in close proximity to the majority of our customers and offer pickup and delivery services within a 15 to 30 mile radius.

Hub and Satellite Configuration. We organize our business into operating divisions that typically consist of a cluster configuration of at least one large service facility, or hub, 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.



• Central Hub Facilities. In each of our major markets, we operate one or more large scale full service facilities that have high production capacity and sophisticated equipment. These larger facilities offer specialized services such as laser digital imaging on photographic material, large format color printing, and finishing services that may not be economically viable for smaller facilities to provide. Our central hub facilities also coordinate our facilities management programs.

• Satellite Facilities. To supplement the capabilities of our central hub facilities, we operate satellite facilities that are typically located closer to our customers than the central hubs. Our satellite facilities have quick turnaround capabilities, responsive, localized service, and handle the majority of digital processes.

• Management Systems and Controls. We operate our business under a dual operating structure of centralized administrative functions and regional decision making. Acquired companies typically retain their local business identities, managers, sales force, and marketing efforts in order to maintain strong local relationships. Our local management maintains autonomy over the day-to-day operations of their business units, including profitability, customer billing, receivables collection, and service mix decisions.

Although we operate on a decentralized basis, our senior management closely monitors and reviews each of our divisions through daily reports that contain operating and financial information such as sales, inventory levels, purchasing commitments, collections, and receivables. In addition, our operating divisions submit monthly reports to senior management that track each division’s financial and operating performance in comparison to historical performance.

Suppliers and Vendors

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

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


CEO BACKGROUND

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 at 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 division, 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 has also worked in public accounting for four years with Coopers & Lybrand (now part of PricewaterhouseCoopers LLP) and for two years with Ernst & Young.

Rahul K. Roy joined Holdings as its Chief Technology Officer in September 2000. Prior to joining our company, Mr. Roy was the Founder, President and Chief Executive Officer of MirrorPlus Technologies, Inc., which developed software for the reprographics industry, from August 1993 until it was acquired by us 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 us in 1999.


SHARE OWNERSHIP

Thomas J. Formolo number of beneficially shares owned 767,494
Mark W. Legg number of beneficially shares owned 329,482
Dewitt Kerry McCluggage number of beneficially shares owned 3,997
Mark W. Mealy number of beneficially shares owned 63,851
Manuel Perez de la Mesanumber of beneficially shares owned 59,351
Rahul K. Roy number of beneficially shares owned 415,253
Eriberto R. Scocimara number of beneficially shares owned 3,997

MANAGEMENT DISCUSSION FROM LATEST 10K

Executive Summary

American Reprographics Company is the leading reprographics company in the United States. We provide business-to-business document management services to the architectural, engineering and construction industry, or AEC industry, through a nationwide network of 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 & logistics;

• Print-on-demand; and
• On-site services, frequently referred to as facilities management, or FMs, (any combination of the above services supplied at a customer’s location).

We deliver these services through our specialized technology, though more than 900 sales and customer service employees interacting with our customers every day, and more than 4,600 facilities management programs 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 140,000 companies throughout the country.

Our divisions operate under local brand names. Each brand name typically represents a business or group of businesses that has been acquired by us. We coordinate these operating divisions and consolidate their service offerings for large regional or national customers through a corporate-controlled “Premier Accounts” division.

A significant component of our growth has been from acquisitions. In 2007, we acquired 19 businesses that consisted of “stand-alone acquisitions” and “fold-in acquisitions” (refer to page 24 for an explanation of these terms) for $146.3 million, in 2006 we acquired 16 businesses for $87.7 million and in 2005 we acquired 14 businesses for $32.1 million. Each acquisition was accounted for using the purchase method, so consolidated income statements reflect sales and expenses of acquired businesses only for post-acquisition periods. All acquisition amounts include acquisition-related costs.

As part of our growth strategy, 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 have opened or acquired 82 production facilities since December 31, 2006 and we have consolidated 23 in the same period. The Company ended the year with a net gain of 59 branch locations for the year ended December 31, 2007.

In the following pages, we offer descriptions of how we manage and measure financial performance throughout the Company. Our comments in this report represent our best estimates of current business trends and future trends that we think may affect our business. Actual results, however, may differ from what is presented here.

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


• Creating consistent, profitable growth;

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

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

• Maintaining the lowest cost structure in the industry; and

• Maintaining a flexible capital structure that provides for both responsible debt service and pursuit of acquisitions and other high-return investments.

Primary Financial Measures. We use net sales, costs and expenses, EBIT, 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 comprise approximately 6.1% 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 Electronic Work Order (EWO), PlanWell BidCaster and MetaPrint. Revenues from these agreements are separate from digital services. Digital services include digital document management tasks, scanning and archiving digital documents, posting documents to the web and other related work performed on a computer. Software licenses, membership fees and digital services are categorized and reported as a part of “Reprographics services”.

Revenue from reprographics services is produced from document management, document distribution and logistics, and print-on-demand services, including the use of PlanWell by our customers. Though these services are becoming an increasingly distinct part of our service pricing, they are frequently invoiced to a customer as part of a combined per-square-foot printing cost. As such, it is impractical to allocate revenue levels for each item separately. We include revenues for these services under the caption “Reprographics services”.

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

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

In 2007, our reprographics services represented 74.7% of net sales, facilities management 16.5%, and sales of reprographics equipment and supplies 8.8%. Digital services revenue, which are included in reprographics services, approximated 6.1% 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, whose operating results are reviewed by management. Based on the fact that operating segments have similar products and services, class of customers, production process and performance objectives, the 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 1.2% of annual net sales over the last three years. Since we typically lease our reprographics equipment for a three-to-five year term, we are able to upgrade equipment in response to rapid changes in technology.

Technology development costs consist mainly of the salaries, leased building space, and computer equipment that comprise our data storage and development centers in Silicon Valley, California and Kolkata, India.

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

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

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


• Net income and earnings per share;

• EBIT;

• EBITDA;

• Material costs as a percentage of net sales; and

• Days Sales Outstanding/Days Sales Inventory/Days Accounts Payable.

In addition to using these financial measures at the corporate level, we monitor some of them daily and location-by-location through use of our proprietary company intranet and reporting tools. Our corporate operations staff also conducts a monthly variance analysis on the income statement, balance sheet, and cash flows of each operating division.

We believe our current customer segment mix is approximately 80% of our revenues coming from the AEC market, and 20% coming from non-AEC sources. We believe this mix is optimal because it offers us the advantages of diversification without diminishing our focus on our core competencies.

Not all of these financial measurements are represented directly on the Company’s 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 reprographic 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 120 acquisitions since 1997, we believe that the reprographics industry is highly-fragmented and comprised primarily of small businesses with less than $7 million in annual sales. Although none of the individual acquisitions we made in the past three years added a material percentage of sales to our overall business, in the aggregate they fuel the bulk of our annual sales growth. Specifically, an increase of net sales in 2007 of approximately 11.4% was related to stand-alone acquisitions. Also, each acquisition was strategic from a marketing and regional market share point of view.

When we acquire businesses, our management typically uses the previous year’s sales figures as an informal basis for estimating future revenues for the Company. We do not use this approach for formal accounting or reporting purposes but as an internal benchmark with which to measure the future effect of operating synergies, best practices and sound financial management on the acquired entity.

We also use previous year’s sales figures to assist us in determining how the acquired business will be integrated into the overall management structure of the Company. We categorize newly acquired businesses in one of two ways:

1. Stand-Alone 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 are equivalent to our opening a new or “green field” branch. They support an outlying portion of a larger market and rely on a larger centralized production facility nearby for strategic management, load balancing, for 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 identified intangible assets. We test our goodwill components annually for impairment on September 30. The methodology for such testing is detailed further in Note 2 — “Summary of Significant Accounting Policies” to our consolidated financial statements included in this report.

Recent Developments. On December 6, 2007, we entered into a new Credit and Guaranty Agreement (Credit Agreement). The Credit Agreement provides for senior secured credit facilities aggregating up to $350 million, consisting of a $275 million term loan facility and a $75 million revolving credit facility. We used proceeds under the Credit Agreement in the amount of $289.4 million to prepay in full all principal and interest payable under our Second Amended and Restated Credit and Guaranty Agreement dated as of December 21, 2005. As a result of this prepayment, we wrote off $0.9 million of deferred financing costs and recognized a $0.4 million expense resulting from the termination of an interest rate collar associated with the extinguishment of debt during the year ended December 31, 2007. Please refer to Note 5 — “Long Term Debt” to our consolidated financial statements included in this report.

Economic Factors Affecting Financial Performance. We estimate that sales to the AEC market accounted for 80% of our net sales for the year ended December 31, 2007, with the remaining 20% consisting of sales to non-AEC markets (based on a compilation of approximately 90% of revenues from our divisions 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 non-residential and residential construction spending, GDP growth, interest rates, employment rates, office vacancy rates, and government expenditures. Similar to the AEC industry, the reprographics industry typically lags a recovery in the broader economy.

Non-GAAP Measures

EBIT and EBITDA and related ratios presented in this report are supplemental measures of our performance that are not required by or presented in accordance with GAAP. These measures are not measurements of our financial performance under GAAP and should not be considered as alternatives to net income, income from operations, or any other performance measures derived in accordance with GAAP or as an alternative to cash flow from operating, investing or financing activities as a measure of our liquidity.

EBIT represents net income before interest and taxes. EBITDA represents net income before interest, taxes, depreciation and amortization. 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 and EBITDA and related ratios because we consider them important supplemental measures of our performance and liquidity. We believe investors may also find these measures meaningful, given how our management makes use of them. The following is a discussion of our use of these measures.

We use EBIT to measure and compare the performance of our 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. 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 division-level compensation and use EBITDA to measure performance for determining consolidated-level compensation. We also use EBITDA as a metric to manage cash flow from our divisions to the corporate level and to determine the financial health of each division. As noted above, since debt and taxation are managed at the corporate level the cash flow from each operating segment should be approximately equal to the corresponding EBITDA of each operating segment, assuming no other changes to a operating segment’s balance sheet. As a result, we reconcile EBITDA to cash flow monthly as one of our key internal controls. We also use EBIT and EBITDA to evaluate potential acquisitions and to evaluate whether to incur capital expenditures.

EBIT, 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 and EBITDA only as supplements.

We have presented adjusted net income and adjusted earnings per share for the years ended December 31, 2006 and 2007 to reflect the exclusion of the one-time litigation charge and corresponding gain on settlement related to the Louis Frey bankruptcy litigation. This presentation facilitates a meaningful comparison of our operating results for the years ended December 31, 2006 and 2007 to the same period in 2005, excluding a one-time income tax benefit taken in February of 2005 related to our reorganization from a California LLC to a Delaware corporation.

Results of Operations

Year Ended December 31, 2007 Compared to Year Ended December 31, 2006

Net Sales.

Net sales in 2007 increased by 16.3%; an increase of net sales in 2007 of approximately 11.4% was related to our stand-alone acquisitions.

Reprographics services. Net sales increased in 2007 compared to 2006 primarily due to the expansion of our market share through acquisitions, and increases in our digital revenue. We acquired 19 businesses at various times throughout the year, each with a primary focus on reprographics services. We also benefited from a full year impact from our 2006 acquisitions, each of which had a primary focus on reprographics services. These acquired businesses added sales from their book of business to our own, and in some cases, also allowed us to aggregate regional work from larger clients. The increase in reprographics services was partially offset by a sales decrease in our Southern California region of approximately $12 million, excluding stand-alone acquisitions, resulting primarily from the downturn in residential construction in Southern California. Residential business in other areas of the country where our business is highly concentrated, including Arizona and Florida, also contributed to the reduction in overall sales volume. The decrease in sales resulting from the residential construction downturn was partially offset by the addition of significant new business acquired through our Premier Accounts division, which included more than $10 million of sales from new non-AEC customers in 2007.

Our price levels for the most part remained the same, although we had selective increases in some markets. While most of our customers in the AEC industry still prefer paper prints, we have seen an increase in our digital services revenue. During 2007 digital services revenue increased by $11.5 million or 38% compared to 2006.

Facilities management. On-site, or facilities management services, continued to post solid dollar volume and year-over-year percentage gains. Specifically, sales for the twelve months ended December 31, 2007, compared to the same period in 2006 increased by $13.7 million or 13.7%. As a percentage of overall revenue, however, FM services decreased slightly due to the dilutive effects of acquisitions which had small or non-existent FM programs of their own. FM revenue is derived from a single cost per-square-foot of printed material, similar to our “Reprographics services” revenue. As convenience and speed continue to characterize our customers’ needs, and as printing equipment continues to become smaller and more affordable, the trend of placing equipment (and sometimes staff) in an architectural studio or construction company office remains strong, as evidenced by an increase of approximately 1,350 facilities management accounts in 2007, bringing our total FM accounts to approximately 4,600. 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. We believe this service segment will continue to have strong sales growth in the foreseeable future.

Equipment and supplies sales. Equipment and supplies sales increased by 14.3% over the same period in 2006, of which approximately 12% of the increase was related to our stand-alone acquisitions in 2007. Acquisition activity in the past three years has increased our focus on equipment sales, as several of these new businesses possess a strong equipment and supplies business unit and we have continued to focus on the evolving needs of our customers. Trends in smaller, less expensive and more convenient printing equipment are gaining popularity with customers who want the convenience of in-house production, but have no compelling reimbursable invoice volume to offset the cost of a facilities management contract.

Gross Profit.

During the 12 months ended December 31, 2007, gross profit margin increased to $287 million and was 41.7%, compared to $254.3 million and 43% for the same period in 2006, on sales growth of $96.5 million.

The increase in revenue was the primary factor for the dollar volume increase in gross profit during the 12 months ended December 31, 2007. The decrease in gross margins was partly due to the fact that a significant portion of our sales increases were driven by acquisitions with gross margins lower than existing operating divisions. Until our typical performance standards can be applied, such acquisitions temporarily depress gross margins, as do new branch openings and fold-in acquisitions. Specifically, 2007 stand alone acquisitions negatively impacted the gross profit percentage by approximately 90 basis points. The drop in margins was also attributable to unabsorbed labor costs of approximately 90 basis points, as expected sales during 2007 did not materialize due to regional sales decreases in our residential construction-related business as noted in the “Net Revenue” section above. Material costs as a percentage of net sales had a slight improvement, as our purchasing power as one of the largest purchasers of reprographics equipment in the country continued to keep our material cost and purchasing costs low by industry standards.

Facilities management revenues are a significant component of our gross margins. We believe that this service segment will continue to be our strongest margin producer in the foreseeable future. Customers continue to view on-site services and digital equipment as a high-value convenience offering, and we believe the market for this service will continue to expand. We believe that more customers will adopt these services, as the equipment continues to become smaller and more affordable.

Selling, General and Administrative Expenses. In 2007, selling, general and administrative expenses increased by $12.1 million or 9.2% over 2006. The increase is primarily attributable to the increase in our sales volume and acquisitions explained above. Expenses rose primarily due to the increase in administrative wages and sales personnel compensation of $5.2 million and $4.4 million, respectively that accompany sales growth. Stock-based compensation expense also contributed to the increase in general and administrative expense as stock-based compensation increased by $1.3 million primarily due to stock options granted in the first quarter of 2007. Additionally, in March 2007, we incurred expenses of approximately $0.5 million in connection with a secondary stock offering, primarily to facilitate the sale of shares owned by our former financial sponsor, Code Hennessy & Simmons LLC. Partially offsetting the increase in selling, general and administrative expense was a $3.3 million favorable settlement of two related lawsuits in which we were plaintiff. Excluding costs related to that litigation, which included legal fees and accrued 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 7- “Commitments and Contingencies” to our consolidated financial statements included in this report.

As a percentage of net sales, selling, general and administrative expenses declined by 1.4% in 2007 as compared to 2006 due to increases in sales, the fixed cost nature of some of these expenses in our existing operating divisions and corporate offices, and the financial benefit of the litigation settlement described above, which yielded a $1.7 million benefit in 2007. We continue to expect that our selling, general and administrative expenses will increase in absolute dollars due to our expected growth, but we believe these costs as a percentage of overall sales will decline in the future as we continue to refine their management.

Amortization of Intangibles. Amortization of intangibles increased $4 million during 2007, compared to 2006 primarily due to an increase in identified amortizable intangible assets such as customer relationships and trade names associated with our 19 business acquisitions completed throughout 2007. Also contributing to the increase is the full year impact of 2006 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 Reliable Graphics in July 2006.

Litigation Reserve. 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 the Company paid in 2006), and interest expense of $2.7 million. We settled 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 Company litigation, please refer to Note 7 -“Commitments and Contingencies” to our consolidated financial statements included in this report.

Interest Expense. Net interest expense was $24.4 million in 2007 compared with $23.2 million in 2006, an increase of 5.2% year-over-year. The increase of $1.2 million is related to an increase of interest expense of $4.3 million, primarily due to borrowings to finance acquisitions and additional capital leases. Specifically, we borrowed $18 million and $50 million to finance the acquisitions of MBC Precision Imaging and Imaging Technology Services in March and April 2007, respectively. This increase is offset by a decrease of $3.1 million of interest expense related to the Louis Frey litigation reserve in 2006 and settlement in 2007.

Loss on the extinguishment of debt. In December of 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.

Income Taxes. Our effective income tax rate decreased from 38.3% in 2006 to 37.9% in 2007. The decrease is primarily due to a Domestic Production Activities Deduction (DPAD) to be taken in our consolidated federal income tax return for the 2007 tax year. This decrease was partially offset by a slightly higher effective state income tax rate for the same period. We expect our effective income tax rate to be in the range of 37% to 39% in 2008, assuming no material change to the geographical revenue mix.

Net Income. Net income increased to $69.1 million in 2007 compared to $51.4 million in 2006 due to the increase in sales in 2007, and the litigation charge taken in 2006 and associated settlement in 2007. The litigation charge taken in 2006 associated with the Louis Frey litigation resulted in an $8.4 million negative impact on 2006 net income and a positive $2.1 million impact on 2007 net income.

EBITDA. Our EBITDA margin increased to 25.6% in 2007 compared to 22.7% in 2006 primarily due to the litigation reserve in 2006 and gain upon the Louis Frey litigation settlement in 2007, and an increase in sales in 2007.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Three and Nine Months Ended September 30, 2007 Compared to Three and Nine Months Ended September 30, 2006

Net Sales.
Net sales increased by 15.5% for the three months ended September 30, 2007, compared to the three months ended September 30, 2006. Net sales increased by 15.6% for the nine months ended September 30, 2007 compared to the same period in 2006.
In the three months ended September 30, 2007, approximately 10.9% of the 15.5% net sales increase was related to our standalone acquisitions since September 30, 2006. See Item 2 “Acquisitions” of this report for an explanation of acquisition type.
In the nine months ended September 30, 2007, 11.1% of the 15.6% net sales increase was related to our standalone acquisitions since September 30, 2006.
The table below reflects revenue by geographical region for the three and nine months ended September 30, 2007 compared to the three and nine months ended September 30, 2006.

Reprographics services. Net sales during the three months ended September 30, 2007, increased by $20.5 million compared to the same period in 2006, due to increased non-residential construction spending throughout the U.S., and the expansion of our market share through branch openings and acquisitions. We acquired two businesses during the three month period ended September 30, 2007, that had a primary focus on reprographics services. The Southern region and the Pacific Northwest reported strong sales increases due primarily to market strength and our ability to sell our products and services to a new and larger customer base. The Southern region’s sales growth can also be attributed, in part, to the acquisition of Imaging Technologies Services. The Company’s Northeastern region also reported sales gains attributed, in part, to the acquisition of MBC in the Baltimore-Washington D.C. area. The Southern California region decreased primarily due to the down turn in residential construction in Southern California.
During the nine months ended September 30, 2007, we acquired a total of eight businesses, each with its primary focus on reprographics services. In addition to significant sales increases in the Southern, Pacific Northwest, and Northeastern region, Northern California also showed solid sales growth during the nine months ended September 30, 2007.
Company-wide pricing remained at similar levels to the same period in 2006, indicating that revenue increases were due primarily to volume. While most of our customers in the AEC industry still prefer paper plans, we have seen an increase in our digital service revenue. During the three and nine months ended September 30, 2007 digital services revenue increased by $2.2 million or 26% and $8.2 million or 36%, respectively, over the same periods in 2006. Digital services are typically invoiced to a customer as part of a combined per-square-foot printing cost and, as such, it is impractical to allocate revenue levels for each item separately, hence these services are included under the caption “Reprographics Services Revenue”.
Facilities management . On-site, or facilities management services, continued to post solid dollar volume and period-over-period percentage gains in the three and nine months ended September 30, 2007. Specifically, sales for the three months ended September 30, 2007, compared to the same period in 2006 increased by $3.4 million or 13.2%. Sales for the nine months ended September 30, 2007 compared to the same period in 2006 increased $11.2 million or 15.3%. This revenue is derived from a single cost per square foot of printed material, similar to our “Reprographics Services” revenue. As convenience and speed continue to characterize our customers’ needs, and as printing equipment continues to become smaller and more affordable, the trend of placing equipment (and sometimes staff) in an architectural studio or construction company office remains strong as evidenced by an increase of approximately 272 facilities management contracts in the third quarter of 2007, bringing our total FM contracts to approximately 4,195. 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.

Equipment and supplies sales. During the three month period ended September 30, 2007, our equipment and supplies sales decreased by 1.3% as compared to the same period in 2006.
In the nine month period ending September 30, 2007, equipment and supply sales increased by 10.0%.
In the early years of our facilities management sales programs, the service line made steady progress against the outright sale of equipment and supplies by converting such sales contracts to on-site service agreements. Acquisition activity in the past three years reversed this trend, as several of these new businesses possess strong equipment and supplies business units and more focus has been brought to bear on the evolving needs of our customers. Trends in smaller, less expensive, and more convenient printing equipment are gaining popularity with customers who want the convenience of in-house production, but have no compelling reimbursable invoice volume to offset the cost of placing the equipment. We do not anticipate continued high growth in equipment and supplies sales as we are placing more focus on facilities management sales programs. The recent trend has been a slight drop in equipment and supplies sales, as sales during the third quarter of 2007 compared to the second quarter of 2007 reflect a 1.5% drop in revenue.
Gross Profit.
Our gross profit and gross profit margin was $72.7 million and 41.2% during the three months ended September 30, 2007, compared to $67.0 million and 43.9% during the same period in 2006, on sales growth of $23.7 million.
During the nine month period ended September 30, 2007, gross profit margin increased to $215.3 million and 41.9% compared to $193.2 million and 43.4% for the nine months ended September 30, 2006, on sales growth of $69.3 million.
The increase in revenue explained above was the primary factor for the dollar volume increases in gross profit during the three and nine months ended September 30, 2007. The decrease in gross margins was partly due to the fact that a significant portion of our sales increases during the three and nine months ended September 30, 2007 were driven by acquisitions with gross margins lower than existing operating divisions. Until our typical performance standards can be applied, such acquisitions temporarily depress gross margins, as do new branch openings and fold in acquisitions. Specifically, 2007 stand alone acquisitions negatively impacted the gross profit percentage for the three and nine months ended September 30, 2007 by 100 and 60 basis points, respectively. The drop in margins was also attributable to unabsorbed labor and overhead costs, as expected sales for the three and nine months ended 2007 did not materialize.
Selling, General and Administrative Expenses.
Selling, general and administrative expenses increased by $2.7 million or 7.8% during the third quarter of 2007 over the same period in 2006.
Selling, general and administrative expenses increased by $6.8 million or 6.9% during the nine months ended September 30, 2007 over the same period in 2006.
Increases during the three and nine month periods ended September 30, 2007, are primarily attributable to the increase in our sales volume during the same periods. Specifically, expenses rose primarily due to increases in administrative and sales salaries and commissions of $0.8 million and $5.5 million that accompany the sales growth and an increase in stock based compensation expense of $0.6 million and $1.2 million for the three and nine months ended September 30, 2007, respectively. Additionally, in March 2007, the Company incurred expenses of approximately $0.5 million in connection with a secondary stock offering, primarily to facilitate the sale of shares owned by its former financial sponsors, Code Hennessy & Simmons LLC. Partially offsetting the increase in selling, general and administrative expense was a $3.3 million favorable settlement of two related lawsuits. Excluding costs related to that litigation, which included legal fees and accrued compensation payments related to the settlement, the settlement returned a $1.7 million benefit to the Company for the nine months ended September 30, 2007. For more information on the details of these lawsuits and settlement, please refer to Note 8 “Commitments and Contingencies.”
Selling, general and administrative expenses, as a percentage of net sales decreased from 22.6% in the third quarter of 2006 to 21.0% in the third quarter of 2007 and from 22.3% in the nine months ended September 30, 2006 to 20.6% in the same period in 2007 due to increases in sales, the fixed cost nature of some of these expenses in our existing operating divisions, and the financial benefit of the law suit settlement described above which yielded a $1.7 million or 0.3% benefit to the company for the nine months ended September 30, 2007.

Litigation Reserve.
In accordance with generally accepted accounting principles (GAAP), we accounted for the judgment entered against the Company in the previously disclosed Louis Frey Company bankruptcy litigation in the United States Bankruptcy Court, Southern District of New York, by recording a one-time, non-recurring litigation charge of $13.8 million that includes a $11.3 million litigation reserve ($11.1 million in awarded damages and $0.2 million in preference claims), and interest expense of $2.5 million. These charges were offset by a corresponding tax benefit of $5.5 million, resulting in a net impact of $8.3 million to the net income during the nine months ended September 30, 2006. For more information on the Louis Frey Company litigation, please refer to Note 8 under “Commitments and Contingencies.”
Amortization of Intangibles.
Amortization of intangibles increased $0.8 million during the three months ended September 30, 2007, compared to the same period in 2006 primarily due to an increase in identified amortizable intangible assets such as customer relationships associated with acquired businesses since September 30, 2006. The two acquisitions primarily causing the increase were the acquisition of MBC Precision Imaging in March 2007, and the acquisition of Imaging Technologies Services in April 2007.
Amortization of intangibles increased $3.4 million during the nine months ended September 30, 2007 for the same reasons discussed above and the acquisition of Reliable Graphics in July 2006.
Interest Expense, Net.
Net interest expense increased to $6.9 million during the three months ended September 30, 2007, compared to $5.8 million during the same period in 2006. Increases were primarily due to additional borrowings to finance acquisitions and additional capital leases. Interest expense in the three months ended September 30, 2006 and 2007 included $0.2 million of interest expense related to the Louis Frey litigation reserve which continues to accrue interest as we pursue a settlement.
Net interest expense increased to $18.7 million during the nine months ended September 30, 2007, compared to $17.3 million during the same period in 2006. Excluding the interest related to the Louis Frey litigation reserve, interest increased by $3.3 million primarily due to borrowings to finance acquisitions and additional capital leases. Specifically, we borrowed $18 million and $50 million to finance the acquisitions of MBC Precision Imaging and Imaging Technology Services in March and April 2007, respectively.
Income Taxes.
Our effective income tax rate increased from 36.3% and decreased from 38.6% for the three and nine months ended September 30, 2006 to 39.1% and 37.7% for the three and nine months ended September 30, 2007, respectively. The increase is primarily due to expiring statutes not giving rise to a discrete item in the three months ended September 30, 2007 compared to the three months ended September 30, 2006. The decrease is primarily due to a Domestic Production Activities Deduction (“DPAD”) to be taken in the Company’s consolidated federal income tax return and certain state income tax returns for the 2006 and 2007 tax years. A discrete item of $0.1 million and $0.8 million related to the 2006 DPAD is reflected in the effective income tax rate in the three and nine months ended September 30, 2007, respectively, due to the Company’s ability to now claim the deduction for 2006 activities based upon a change in a tax accounting method in 2007 that is applied retroactive to 2006. See Note 7, Income Taxes, for further discussion.
Net Income.
Net income increased to $15.9 million during the three months ended September 30, 2007, compared to $15.8 million in the same period in 2006, primarily due to net profits generated from the increase in sales, offset by an increase in amortization, interest and taxes. During the nine months ended September 30, 2007, net income increased to $52.4 million compared to $38.6 million in the same period in 2006, primarily due to the Louis Frey litigation charge in 2006 and increase in sales in 2007.

EBITDA.
EBITDA margin decreased to 24.7% during the three months ended September 30, 2007, compared to 24.9% during the same period in 2006 primarily due to the drop in gross profit margin partly offset by the increase in depreciation and amortization. For a reconciliation of EBITDA to net income, please see “Non-GAAP Measures” above.
Impact of Inflation
Inflation has not had a significant effect on our operations. Price increases for raw materials such as paper typically have been, and we expect will continue to be, passed on to customers in the ordinary course of business.
Liquidity and Capital Resources
Our principal sources of cash have been operations and borrowings under our bank credit facilities or debt agreements. Our historical uses of cash have been for acquisitions of reprographics businesses, payment of principal and interest on outstanding debt obligations, and capital expenditures. Supplemental information pertaining to our historical sources and uses of cash is presented as follows and should be read in conjunction with our consolidated statements of cash flows and notes thereto included elsewhere in this report.

Operating Activities
Net cash of $71.1 million provided by operating activities for the nine months ended September 30, 2007, represents a year-over-year decrease primarily related to the timing of tax payments, as 2006 income tax extension payments of $6.5 million were accrued as of December 31, 2006, but paid in 2007. This decrease was partially offset by the increase in net income of $5.9 million, excluding the Louis Frey charge. The cash flows from operating activities remained strong as evidenced by the fact that operating cash flows for the nine months ended September 30, 2007 represents $1.55 per diluted weighted average common shares outstanding or 13.8% of revenue. Net cash flows generated from operating activities in 2007 have and will be used to pay for acquisitions and debt obligations.
Investing Activities
Net cash of $104.6 million for the nine months ended September 30, 2007, used in investing activities primarily relates to the acquisition of businesses, and capital expenditures at all our operating divisions. Payments for businesses acquired, net of cash acquired and including other cash payments and earnout payments associated with acquisitions, amounted to $97.8 million during the nine months ended September 30, 2007. Cash payments for capital expenditures totaled $7.1 million for the nine months ended September 30, 2007. Cash used in investing activities will vary depending on the timing and the size of acquisitions completed, and funds required to finance acquisitions will come from operating cash flows and additional borrowings.

Financing Activities
Net cash of $41.8 million provided by financing activities during the nine months ended September 30, 2007, primarily relate to a borrowing of $25 million on our existing revolving credit facility and a $50 million borrowing from our term loan facility in order to facilitate the consummation of certain acquisitions. The proceeds from our borrowings were offset by scheduled payments of $21.5 million on our debt agreements and capital leases and a $14 million pay down on our revolving credit facility. Also included in financing activities is a $1.5 million excess tax benefit related to stock options exercised during the nine months ended September 30, 2007.

SHARE THIS PAGE:  Add to Delicious Delicious  Share    Bookmark and Share



 
Icon Legend Permissions Topic Options
You can comment on this topic
Print Topic

Email Topic

2226 Views