| American Reprographics CO Item 1A Risk Factors The following risk factors could adversely affect our results of operations and financial condition and/or the per share trading price of our common stock |
| We may encounter risks in addition to those described below |
| Additional risks and uncertainties not currently known to us or that we currently deem immaterial may also impair or adversely affect our results of operations and financial condition |
| 10 _________________________________________________________________ [65]Table of Contents Future downturns in the architectural, engineering and construction industry, or AEC industry, could diminish demand for our products and services, which would impair our future revenue and profitability |
| We believe that AEC markets accounted for approximately 80prca of our net sales for the year ended December 31, 2005 |
| This industry historically experiences alternating periods of inadequate supplies of housing, commercial and industrial space coupled with low vacancies, causing a surge in construction activity and increased demand for reprographics services, followed by periods of oversupply and high vacancies and declining demand for reprographics services |
| In addition, existing and future government policies and programs may greatly influence the level of construction spending in the public sector, such as highways, schools, hospitals, sewers, and heavy construction |
| Since we derive a majority of our revenues from reprographics products and services provided to the AEC industry, our operating results are more sensitive to the nature of this industry than other companies who serve more diversified markets |
| Our experience has shown that the AEC industry generally experiences economic downturns several months after a downturn in the general economy |
| We expect that there may be a similar delay in the rebound of the AEC industry following a rebound in the general economy |
| Future economic and industry downturns may be characterized by diminished demand for our products and services and, therefore, any continued weakness in our customers’ markets and overall global economic conditions could adversely affect our future revenue and profitability |
| In addition, because approximately 60prca of our overall costs are fixed, changes in economic activity, positive or negative, affect our results of operations |
| As a result, our results of operations are subject to volatility and could deteriorate rapidly in an environment of declining revenues |
| Failure to maintain adequate cash reserves and effectively manage our costs could adversely affect our ability to offset our fixed costs and may have an adverse effect on our results of operations and financial condition |
| Competition in our industry and innovation by our competitors may hinder our ability to execute our business strategy and maintain our profitability |
| The markets for our products and services are highly competitive, with competition primarily at a local and regional level |
| We compete primarily based on customer service, technological leadership, product performance and price |
| Our future success depends, in part, on our ability to continue to improve our service offerings, and develop and integrate technological advances |
| If we are unable to integrate technological advances into our service offerings to successfully meet the evolving needs of our customers in a timely manner, our operating results may be adversely affected |
| Technological innovation by our existing or future competitors could put us at a competitive disadvantage |
| In particular, our business could be adversely affected if any of our competitors develop or acquire superior technology that competes directly with or offers greater functionality than our technology, including PlanWell |
| We also face the possibility that competition will continue to increase, particularly if copy and printing or business services companies choose to expand into the reprographics services industry |
| Many of these companies are substantially larger and have significantly greater financial resources than us, which could place us at a competitive disadvantage |
| In addition, we could encounter competition in the future from large, well capitalized companies such as equipment dealers, system integrators, and other reprographics associations, that can produce their own technology and leverage their existing distribution channels |
| We could also encounter competition from non-traditional reprographics service providers that offer reprographics services as a component of the other services they provide to the AEC industry, such as vendors to our industry that provide services directly to our customers, bypassing reprographers |
| Any such future competition could adversely affect our business and impair our future revenue and profitability |
| The reprographics industry has undergone vast changes in the last six years and will continue to evolve, and our failure to anticipate and adapt to future changes in our industry could harm our competitive position |
| Since 2000, the reprographics industry has undergone vast changes |
| The industry’s main production technology has migrated from analog to digital |
| This has prompted a number of trends in the reprographics 11 _________________________________________________________________ [66]Table of Contents industry, including a rapid shift toward decentralized production and lower labor utilization |
| As digital output devices become smaller, less expensive, easier to use and interconnected, end users of construction drawings are placing these devices within their offices and other locations |
| On-site reprographics equipment allows a customer to print documents and review hard copies without the delays or interruptions associated with sending documents out for duplication |
| Also, as a direct result of advancements in digital technology, labor demands have decreased |
| Instead of producing one print at a time, reprographers now have the capability to produce multiple sets of documents with a single production employee |
| By linking output devices through a single print server, a production employee simply directs output to the device that is best suited for the job |
| As a result of these trends, reprographers have had to modify their operations to decentralize printing and shift costs from labor to technology |
| Looking forward, we expect the reprographics industry to continue to evolve |
| Our industry will continue to embrace digital technology, not only in terms of production services, but also in terms of network technology, digital document storage and management, and information distribution, all of which will require investment in, and continued development of, technological innovation |
| If we fail to keep pace with current changes or fail to anticipate or adapt to future changes in our industry, our competitive position could be harmed |
| If we fail to continue to develop and introduce new services successfully, our competitive positioning and our ability to grow our business could be harmed |
| In order to remain competitive, we must continually invest in new technologies that will enable us to meet the evolving demands of our customers |
| We cannot assure you that we will be successful in the introduction and marketing of any new services, or that we will develop and introduce in a timely manner innovative services that satisfy customer needs or achieve market acceptance |
| Our failure to develop new services and introduce them successfully could harm our competitive position and our ability to grow our business, and our revenues and operating results could suffer |
| In addition, as reprographics technologies continue to be developed, one or more of our current service offerings may become obsolete |
| In particular, digital technologies may significantly reduce the need for high volume printing |
| Digital technology may also make traditional reprographics equipment smaller and cheaper, which may cause larger AEC customers to discontinue outsourcing their reprographics needs |
| Any such developments could adversely affect our business and impair future revenue and profitability |
| If we are unable to charge for our value-added services to offset potential declines in print volumes, our long term revenue could decline |
| Our customers value the ability to view and order prints via the internet and print to output devices in their own offices and other locations throughout the country |
| In 2005, our reprographics services represented approximately 74dtta7prca and our facilities management services represented approximately 16dtta8prca of our total net sales |
| Both categories of revenue are generally derived via a charge per square foot of printed material |
| Future technological advances may further facilitate and improve our customers’ ability to print in their own offices or at a job site |
| As technology continues to improve, this trend toward consuming information on an “as needed” basis could result in decreasing printing volumes and declining revenues in the longer term |
| Failure to offset these potential declines in printing volumes by changing how we charge for our services and developing additional revenue sources could significantly affect our business and reduce our long term revenue, resulting in an adverse effect on our results of operations and financial condition |
| We derive a significant percentage of net sales from within the State of California and our business could be disproportionately harmed by an economic downturn or natural disaster affecting California |
| We derived approximately half of our net sales in 2005 from our operations in California |
| As a result, we are dependent to a large extent upon the AEC industry in California and, accordingly, are sensitive to economic factors affecting California, including general and local economic conditions, macroeconomic 12 _________________________________________________________________ [67]Table of Contents trends, and natural disasters |
| Any adverse developments affecting California could have a disproportionately negative effect on our revenue, operating results and cash flows |
| Our growth strategy depends in part on our ability to successfully identify and manage our acquisitions and branch openings |
| Failure to do so could impede our future growth and adversely affect our competitive position |
| As part of our growth strategy, we intend to prudently pursue strategic acquisitions within the reprographics industry |
| Since 1997, we have acquired 100 businesses, most of which were long established in the communities in which they conduct their business |
| Our efforts to execute our acquisition strategy may be affected by our ability to continue to identify, negotiate, integrate, and close acquisitions |
| In addition, any governmental review or investigation of our proposed acquisitions, such as by the Federal Trade Commission, or FTC, may impede, limit or prevent us from proceeding with an acquisition |
| We regularly evaluate potential acquisitions, although we currently have no agreements or active negotiations with respect to any material acquisitions |
| Acquisitions involve a number of special risks |
| There may be difficulties integrating acquired personnel and distinct business cultures |
| Additional financing may be necessary and, if used, would increase our leverage, dilute our equity, or both |
| Acquisitions may divert management’s time and our resources from existing operations |
| It is possible that there could be a negative effect on our financial statements from the impairment related to goodwill and other intangibles |
| In addition, risks may include high transaction costs and expenses of integrating acquired companies, as well as exposure to unforeseen liabilities of acquired companies and failure of the acquired business to achieve expected results |
| These risks could hinder our future growth and adversely affect our competitive position and operating results |
| We expand our geographic coverage by opening additional satellite branches in regions near our established operations to capture new customers and greater market share |
| Since December 31, 2004, we have opened 19 new branches in areas that expand or further penetrate our existing markets, and we expect to open an additional 15 branches by the end of 2006 |
| Although the capital investment for a new branch is modest, our growth strategy with respect to branch openings is in the early stages of implementation and the branches we open in the future may not ultimately produce returns that justify our investment |
| If we are unable to successfully monitor and manage the business operations of our subsidiaries, our business and profitability could suffer |
| We operate our company under a dual operating structure of centralized administrative functions and regional decision making on marketing, pricing, and selling practices |
| Since 1997, we have acquired 100 businesses and, in most cases, have delegated the responsibility for marketing, pricing, and selling practices with the local and operational managers of these businesses |
| If we do not successfully manage our subsidiaries under this decentralized operating structure, we risk having disparate results, lost market opportunities, lack of economic synergies, and a loss of vision and planning, all of which could harm our business and profitability |
| We depend on certain key vendors for reprographics equipment, maintenance services and supplies, making us vulnerable to supply shortages and price fluctuations |
| We purchase reprographics equipment and maintenance services, as well as paper, toner and other supplies, from a limited number of vendors |
| Our four largest vendors in 2005, are Oce NV, Xerox Corporation, Canon Inc, and Xpedx, a division of International Paper Company |
| Adverse developments concerning key vendors or our relationships with them could force us to seek alternate sources for our reprographics equipment, maintenance services and supplies or to purchase such items on unfavorable terms |
| An alternative source of supply of reprographics equipment, maintenance services and supplies may not be readily available |
| A delay in procuring reprographics equipment, maintenance services or supplies, or an 13 _________________________________________________________________ [68]Table of Contents increase in the cost to purchase such reprographics equipment, maintenance services or supplies could limit our ability to provide services to our customers on a timely and cost-effective basis |
| Our failure to adequately protect the proprietary aspects of our technology, including PlanWell, may cause us to lose market share |
| Our success depends on our ability to protect and preserve the proprietary aspects of our technologies, including PlanWell |
| We rely on a combination of copyright, trademark and trade secret protection, confidentiality agreements, license agreements, non-compete agreements, reseller agreements, customer contracts, and technical measures to establish and protect our rights in our proprietary technologies |
| Under our PlanWell license agreements, we grant other reprographers a non-exclusive, non-transferable, limited license to use our technology and receive our services |
| Our license agreements contain terms and conditions prohibiting the unauthorized reproduction or transfer of our products |
| These protections, however, may not be adequate to remedy harm we suffer due to misappropriation of our proprietary rights by third parties |
| In addition, US law provides only limited protection of proprietary rights and the laws of some foreign countries may offer less protection than the laws of the United States |
| Unauthorized third parties may copy aspects of our products, reverse engineer our products or otherwise obtain and use information that we regard as proprietary |
| Others may develop non-infringing technologies that are similar or superior to ours |
| If competitors are able to develop such technology and we cannot successfully enforce our rights against them, they may be able to market and sell or license the marketing and sale of products that compete with ours, and this competition could adversely affect our results of operations and financial condition |
| Furthermore, intellectual property litigation can be expensive, a burden on management’s time and our company’s resources, and its results can be uncertain |
| Damage or disruption to our facilities, our technology centers, our vendors or a majority of our customers could impair our ability to effectively provide our services and may have a significant impact on our revenues, expenses and financial condition |
| We currently store most of our customer data at our two technology centers located in Silicon Valley near known earthquake fault zones |
| Damage or destruction of one or both of these technology centers or a disruption of our data storage processes resulting from sustained process abnormalities, human error, acts of terrorism, violence, war or a natural disaster, such as fire, earthquake or flood, could have a material adverse effect on the markets in which we operate, our business operations, our expectations and other forward-looking statements contained in this report |
| In addition, such damage or destruction on a national scale resulting in a general economic downturn could adversely affect our results of operations and financial condition |
| We store and maintain critical customer data on computer servers at our technology centers that our customers access remotely through the internet and/or directly through telecommunications lines |
| If our back-up power generators fail during any power outage, if our telecommunications lines are severed or those lines on the internet are impaired for any reason, our remote access customers would be unable to access their critical data, causing an interruption in their operations |
| In such event, our remote access customers and their customers could seek to hold us responsible for any losses |
| We may also potentially lose these customers and our reputation could be harmed |
| In addition, such damage or destruction, particularly those that directly impact our technology centers or our vendors or customers could have an impact on our sales, supply chain, production capability, costs, and our ability to provide services to our customers |
| Although we currently maintain general property damage insurance, we do not maintain insurance for loss from earthquakes, acts of terrorism or war |
| If we incur losses from uninsured events, we could incur significant expenses which would adversely affect our results of operations and financial condition |
| If we lose key personnel or qualified technical staff, our ability to manage the day-to-day aspects of our business will be adversely affected |
| We believe that the attraction and retention of qualified personnel is critical to our success |
| If we lose key personnel or are unable to recruit qualified personnel, our ability to manage the day-to-day aspects of our business will be adversely affected |
| Our operations and prospects depend in large part on the performance of 14 _________________________________________________________________ [69]Table of Contents our senior management team and the managers of our principal operating divisions |
| The loss of the services of one or more members of our senior management team, in particular, Mr |
| Chandramohan, our Chief Executive Officer, and Mr |
| Suriyakumar, our President and Chief Operating Officer, could disrupt our business and impede our ability to execute our business strategy |
| Because our executive and divisional management team has on average more than 20 years of experience within the reprographics industry, it would be difficult to replace them |
| If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud |
| Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002 and related regulations implemented by the Securities and Exchange Commission, or SEC, and the New York Stock Exchange, or NYSE, are creating uncertainty for public companies, increasing legal and financial compliance costs and making some activities more time consuming |
| We will be evaluating our internal controls systems to allow management to report on, and our independent auditors to attest to, our internal controls |
| We will be performing the system and process evaluation and testing (and any necessary remediation) required to comply with the management certification and auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act |
| As a result, we expect to incur substantial additional expenses and diversion of management’s time |
| While we anticipate being able to fully implement the requirements relating to internal controls and all other aspects of Section 404 by our December 31, 2006 deadline, we cannot be certain as to the timing of completion of our evaluation, testing and remediation actions or the impact of the same on our operations since there is presently no precedent available by which to measure compliance adequacy |
| If we are not able to implement the requirements of Section 404 in a timely manner or with adequate compliance, we may not be able to accurately report our financial results or prevent fraud and might be subject to sanctions or investigation by regulatory authorities, such as the SEC or the NYSE Any such action could harm our business or investors’ confidence in our company, and could cause our stock price to fall |