UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
(Mark One)
þ
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For The Quarterly Period Ended March 31, 2005
or
o
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number: 001-32407
AMERICAN REPROGRAPHICS COMPANY
| Delaware | 20-1700361 | |
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
700 North Central Avenue, Suite 550
Glendale, California 91203
(818) 500-0225
(Address, including zip code, and telephone number, including area code, of
Registrant’s principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes o No þ
As of April 30, 2005, there were 43,931,154 shares of the Registrant’s common stock outstanding.
1
AMERICAN REPROGRAPHICS COMPANY
Quarterly Report on Form 10-Q
For the Quarter Ended March 31, 2005
Table of Contents
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Index to Exhibits |
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| EXHIBIT 31.1 | ||||||||
| EXHIBIT 31.2 | ||||||||
| EXHIBIT 32.1 | ||||||||
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
AMERICAN REPROGRAPHICS COMPANY
CONSOLIDATED BALANCE SHEETS
| December 31, | March 31, | |||||||
| 2004 | 2005 | |||||||
| (Unaudited) | ||||||||
| (Dollars in thousands) | ||||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 13,826 | $ | 7,719 | ||||
Accounts receivable, net |
61,679 | 70,032 | ||||||
Inventories, net |
6,012 | 6,222 | ||||||
Deferred taxes |
1,364 | 2,661 | ||||||
Prepaid expenses and other current assets |
7,855 | 7,170 | ||||||
Total current assets |
90,736 | 93,804 | ||||||
Property and equipment, net |
35,023 | 33,807 | ||||||
Goodwill |
231,357 | 231,482 | ||||||
Other intangible assets, net |
12,095 | 11,972 | ||||||
Deferred financing costs, net |
6,619 | 5,272 | ||||||
Deferred taxes |
— | 19,715 | ||||||
Other assets |
1,504 | 1,631 | ||||||
Total assets |
$ | 377,334 | $ | 397,683 | ||||
Liabilities and Stockholders’ Equity |
||||||||
Liabilities: |
||||||||
Accounts payable |
$ | 21,170 | $ | 19,214 | ||||
Accrued payroll and payroll-related expenses |
11,683 | 10,439 | ||||||
Accrued expenses |
24,834 | 23,721 | ||||||
Current portion of long-term debt and capital leases |
10,276 | 11,480 | ||||||
Total current liabilities |
67,963 | 64,854 | ||||||
Long-term debt and capital leases, net of debt discount |
310,557 | 250,854 | ||||||
Mandatorily redeemable preferred membership units |
27,814 | — | ||||||
Deferred taxes |
5,634 | — | ||||||
Other long-term liabilities |
375 | 375 | ||||||
Total liabilities |
412,343 | 316,083 | ||||||
Commitments and contingencies (Note 5) |
||||||||
Stockholders’ equity (deficit): |
||||||||
Members’ deficit |
(32,688 | ) | — | |||||
Preferred stock, $.001 par value, 25,000,000 shares
authorized; zero and zero shares issued and outstanding |
— | — | ||||||
Common stock, $.001 par value, 150,000,000 shares
authorized; zero and 43,931,154 shares issued and
outstanding |
— | 44 | ||||||
Additional paid-in capital |
— | 49,753 | ||||||
Deferred stock-based compensation |
(2,527 | ) | (2,360 | ) | ||||
Retained earnings |
— | 33,649 | ||||||
Accumulated other comprehensive income |
206 | 514 | ||||||
Total stockholders’ equity (deficit) |
(35,009 | ) | 81,600 | |||||
Total liabilities and stockholders’ equity (deficit) |
$ | 377,334 | $ | 397,683 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
3
AMERICAN REPROGRAPHICS COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2004 | 2005 | |||||||
| (Unaudited) | ||||||||
| (Dollars in thousands, | ||||||||
| except per share data) | ||||||||
Reprographics services |
$ | 83,890 | $ | 87,695 | ||||
Facilities management |
16,909 | 19,172 | ||||||
Equipment and supplies sales |
9,719 | 9,599 | ||||||
Total net sales |
110,518 | 116,466 | ||||||
Cost of sales |
64,599 | 68,141 | ||||||
Gross profit |
45,919 | 48,325 | ||||||
Selling, general and administrative expenses |
26,901 | 26,881 | ||||||
Amortization of intangible assets |
430 | 384 | ||||||
Income from operations |
18,588 | 21,060 | ||||||
Other income |
274 | 118 | ||||||
Interest expense, net |
(8,125 | ) | (8,324 | ) | ||||
Income before income tax provision (benefit) |
10,737 | 12,854 | ||||||
Income tax provision (benefit) |
2,299 | (22,709 | ) | |||||
Net income |
$ | 8,438 | $ | 35,563 | ||||
Earnings per share: |
||||||||
Basic |
$ | 0.24 | $ | 0.87 | ||||
Diluted |
$ | 0.23 | $ | 0.85 | ||||
Weighted average common shares outstanding: |
||||||||
Basic |
35,487,511 | 40,749,833 | ||||||
Diluted |
37,321,596 | 41,901,845 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
4
AMERICAN REPROGRAPHICS COMPANY
CONDENSED CONSOLIDATED STATEMENT OF
CHANGES IN STOCKHOLDERS’ EQUITY
| Accumulated | ||||||||||||||||||||||||||||||||
| Common Stock | Additional | Other | Total | |||||||||||||||||||||||||||||
| Members’ | Par | Paid-In | Deferred | Retained | Comprehensive | Stockholders’ | ||||||||||||||||||||||||||
| Deficit | Shares | Value | Capital | Compensation | Earnings | Income | Equity | |||||||||||||||||||||||||
| (Unaudited) | ||||||||||||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||||||||||
Balance at December 31, 2004 |
$ | (32,688 | ) | — | $ | — | $ | — | $ | (2,527 | ) | $ | — | $ | 206 | $ | (35,009 | ) | ||||||||||||||
Amortization of deferred stock-based
compensation for the period from
January 1 to February 9, 2005 |
— | — | — | — | 61 | — | — | 61 | ||||||||||||||||||||||||
Comprehensive income for the period
from January 1 to
February 9, 2005: |
||||||||||||||||||||||||||||||||
Net income |
1,914 | — | — | — | — | — | — | 1,914 | ||||||||||||||||||||||||
Fair value adjustment of derivatives |
— | — | — | — | — | — | 195 | 195 | ||||||||||||||||||||||||
Comprehensive income |
2,109 | |||||||||||||||||||||||||||||||
Distributions to members |
(8,244 | ) | — | — | — | — | — | — | (8,244 | ) | ||||||||||||||||||||||
Reorganization from LLC to “C”
Corporation |
39,018 | 35,510,011 | 35 | (39,053 | ) | — | — | — | — | |||||||||||||||||||||||
Issuance of common stock in initial
public offering, net of underwriting
discounts |
— | 7,666,667 | 8 | 92,682 | — | — | — | 92,690 | ||||||||||||||||||||||||
Issuance of common stock in exchange
for warrants exercised upon initial
public offering |
— | 754,476 | 1 | — | — | — | — | 1 | ||||||||||||||||||||||||
Direct costs of initial public offering |
— | — | — | (3,876 | ) | — | — | — | (3,876 | ) | ||||||||||||||||||||||
Amortization of deferred stock-based
compensation for the period from
February 10 to March 31, 2005 |
— | — | — | — | 106 | — | — | 106 | ||||||||||||||||||||||||
Comprehensive income for the period
from February 10 to
March 31, 2005: |
||||||||||||||||||||||||||||||||
Net income |
— | — | — | — | — | 33,649 | — | 33,649 | ||||||||||||||||||||||||
Fair value adjustment of
derivatives, net of tax effects |
— | — | — | — | — | — | 113 | 113 | ||||||||||||||||||||||||
Comprehensive income |
33,762 | |||||||||||||||||||||||||||||||
Balance at March 31, 2005 |
$ | — | 43,931,154 | $ | 44 | $ | 49,753 | $ | (2,360 | ) | $ | 33,649 | $ | 514 | $ | 81,600 | ||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
5
AMERICAN REPROGRAPHICS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2004 | 2005 | |||||||
| (Unaudited) | ||||||||
| (Dollars in thousands) | ||||||||
Operating activities |
||||||||
Net income |
$ | 8,438 | $ | 35,563 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Accretion of yield on redeemable preferred member units |
913 | 449 | ||||||
Allowance for doubtful accounts |
391 | 335 | ||||||
Reserve for inventory obsolescence |
94 | 52 | ||||||
Depreciation |
4,084 | 4,046 | ||||||
Amortization of intangible assets |
430 | 384 | ||||||
Amortization of deferred financing costs |
468 | 418 | ||||||
Deferred income taxes |
174 | (26,646 | ) | |||||
Write-off of deferred financing costs |
— | 1,503 | ||||||
Amortization of deferred stock-based compensation |
— | 167 | ||||||
Changes in operating assets and liabilities, net of effect of business acquisitions: |
||||||||
Accounts receivable, net |
(10,044 | ) | (8,287 | ) | ||||
Inventory |
(55 | ) | (167 | ) | ||||
Prepaid expenses and other assets |
(744 | ) | (912 | ) | ||||
Accounts payable and accrued expenses |
4,405 | (4,346 | ) | |||||
Net cash provided by operating activities |
8,554 | 2,559 | ||||||
Investing activities |
||||||||
Capital expenditures |
(1,826 | ) | (1,303 | ) | ||||
Payments for businesses acquired, net of cash acquired and including other cash
payments associated with the acquisitions |
(1,105 | ) | (1,273 | ) | ||||
Other |
(179 | ) | (71 | ) | ||||
Net cash used in investing activities |
(3,110 | ) | (2,647 | ) | ||||
Financing activities |
||||||||
Proceeds from initial public offering, net of underwriting discounts |
— | 92,690 | ||||||
Direct costs of initial public offering |
— | (1,463 | ) | |||||
Redemption of preferred member units |
— | (28,263 | ) | |||||
Proceeds from borrowings under debt agreements |
— | 13,000 | ||||||
Payments on long-term debt under debt agreements |
(16,184 | ) | (73,616 | ) | ||||
Payment of loan fees |
(53 | ) | (123 | ) | ||||
Member distributions |
(90 | ) | (8,244 | ) | ||||
Net cash used in financing activities |
(16,327 | ) | (6,019 | ) | ||||
Net decrease in cash and cash equivalents |
(10,883 | ) | (6,107 | ) | ||||
Cash and cash equivalents at beginning of period |
17,315 | 13,826 | ||||||
Cash and cash equivalents at end of period |
$ | 6,432 | $ | 7,719 | ||||
Supplemental disclosure of cash flow information |
||||||||
Noncash investing and financing activities
|
||||||||
Noncash transactions include the following: |
||||||||
Capital lease obligations incurred |
$ | 2,015 | $ | 1,052 | ||||
Issuance of subordinated notes in connection with the acquisition of businesses |
$ | 250 | $ | 245 | ||||
Change in fair value of derivatives |
$ | (1,240 | ) | $ | 308 | |||
The accompanying notes are an integral part of these consolidated financial statements.
6
AMERICAN REPROGRAPHICS COMPANY
Notes to Consolidated Financial Statements (Unaudited)
1. Description of Business and Basis of Presentation
American Reprographics Company (ARC or the Company) is the leading reprographics company in the United States providing business-to-business document management services to the architectural, engineering and construction industry, or AEC industry. ARC also provides these services to companies in non-AEC industries, such as technology, financial services, retail, entertainment, and food and hospitality, that also require sophisticated document management services. The Company conducts its operations through its wholly-owned operating subsidiary, American Reprographics Company, L.L.C., a California limited liability company (Opco), and its subsidiaries.
Reorganization and Initial Public Offering
Prior to the consummation of the Company’s initial public offering on February 9, 2005, the Company was reorganized (the Reorganization) from a California limited liability company (American Reprographics Holdings, L.L.C. or Holdings) to a Delaware corporation (American Reprographics Company). In connection with the Reorganization, the members of Holdings exchanged their common member units for common stock of ARC. Each option issued to purchase Holdings’ common member units under Holding’s equity option plan was exchanged for an option exercisable for shares of ARC’s common stock with the same exercise prices and vesting terms as the original grants. In addition, all outstanding warrants to purchase common units of Holdings were exchanged for 754,476 shares of ARC’s common stock based on an initial public offering price of $13.00 per share.
On February 9, 2005, the Company closed an initial public offering (IPO) of its common stock consisting of 13,350,000 shares at $13.00 per share. Of these shares, 7,666,667 shares were newly issued shares sold by the Company and 5,683,333 shares were outstanding shares sold by the selling stockholders. On March 2, 2005, an additional 1,685,300 shares were sold by certain selling stockholders pursuant to the exercise by the underwriters of their over-allotment option. As required by the operating agreement of Holdings, the Company repurchased all of the preferred equity of Holdings upon the closing of the Company’s initial public offering with $28.3 million of the net proceeds from the IPO.
On February 9, 2005, the Company used a portion of the proceeds from its IPO to repay $50.7 million of its $225 million senior second priority secured term loan facility and $9 million of its $100 million senior first priority secured term loan facility. As a result of these debt prepayments from IPO proceeds, the Company wrote-off $1.5 million of deferred financing costs in February 2005.
Due to their tax attributes, certain members of Holdings have in the past elected to receive less than their proportionate share of distributions for income taxes as a result of a difference in the tax basis of their equity interest in Holdings. In accordance with the terms of the operating agreement of Holdings, the Company made a cash distribution of $8.2 million to such members on February 9, 2005 in connection with the consummation of its initial public offering to bring their proportionate share of tax distributions equal to the rest of the members of Holdings. These distributions have been reclassified into additional paid-in capital in the Company’s consolidated balance sheet as of March 31, 2005 in connection with the Reorganization in February 2005. See the accompanying condensed consolidated statement of changes in stockholders’ equity for the three months ended March 31, 2005 for additional details regarding the changes in the Company’s capital accounts resulting from the Reorganization.
In connection with the IPO, the Company adopted the American Reprographics Company 2005 Stock Plan (the 2005 Stock Plan) which provides for discretionary grants of incentive stock options to employees, including officers and employee directors, and for the discretionary grant of nonstatutory stock options, restricted stock, restricted stock units, and stock appreciation rights to employees, directors and consultants. The 2005 Stock Plan also provides for the periodic automatic grant of nonstatutory stock options to non-employee directors. The 2005 Stock Plan authorizes the Company to grant options to purchase up to 5,000,000 shares of common stock. The Company also adopted an Employee Stock Purchase Plan (“ESPP”) to provide an incentive to attract, retain and
7
reward eligible employees of the Company. A total of 750,000 shares of common stock are initially authorized and reserved for sale under the ESPP. During the three months ended March 31, 2005, no options were granted under the 2005 Stock Plan and no shares of common stock were sold under the ESPP.
ARC’s amended and restated certificate of incorporation authorizes its board of directors, without stockholder approval, to issue up to 25,000,000 shares of preferred stock in one or more series with voting and conversion rights that could adversely affect the voting power of the holders of common stock, without stockholder approval. No shares of preferred stock are outstanding and ARC has no present plan to issue any shares of preferred stock.
Basis of Presentation
The accompanying consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and in conformity with the requirements of the Securities and Exchange Commission. As permitted under those rules, certain footnotes or other financial information required by GAAP for complete financial statements have been condensed or omitted. In management’s opinion, the interim consolidated financial statements presented herein reflect all adjustments of a normal and recurring nature that are necessary to fairly present the interim consolidated financial statements. All material intercompany accounts and transactions have been eliminated in consolidation. The operating results for the three-month period ended March 31, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. We evaluate our estimates and assumptions on an ongoing basis and rely on historical experience and various other factors that we believe to be reasonable under the circumstances to determine such estimates. Actual results could differ from those estimates and such differences may be material to the consolidated financial statements.
These interim consolidated financial statements and notes should be read in conjunction with the consolidated financial statements and notes included in the Company’s 2004 Annual Report on Form 10-K. The accounting policies used in preparing these interim consolidated financial statements are the same as those described in our 2004 Annual Report on Form 10-K.
2. Accounting for Equity-Based Compensation
The Company accounts for grants of options to employees to purchase its common stock using the intrinsic value method in accordance with APB Opinion No. 25 and FIN No. 44, “Accounting for Certain Transactions Involving Stock Compensation”. As permitted by SFAS No. 123 and as amended by SFAS No. 148, the Company has chosen to continue to account for such option grants under APB Opinion No. 25 and provide the expanded disclosures specified in SFAS No. 123, as amended by SFAS No. 148.
8
Had compensation cost for the Company’s option grants been determined based on their fair value at the grant date for awards consistent with the provisions of SFAS No. 123, the Company’s net income attributable to common stockholders and earnings per share for the three months ended March 31, 2004 and 2005 would have been changed to the adjusted pro forma amounts indicated below:
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2004 | 2005 | |||||||
| (Unaudited) | ||||||||
| (Dollars in thousands, | ||||||||
| except per share data) | ||||||||
Net income: |
||||||||
As reported |
$ | 8,438 | $ | 35,563 | ||||
Equity-based employee compensation cost, net
of related tax effects, included in as
reported net income |
— | 99 | ||||||
Equity-based employee compensation cost, net
of related tax effects, that would have
been included in the determination of net
income if the fair value method had been
applied |
(22 | ) | (139 | ) | ||||
Proforma |
$ | 8,416 | $ | 35,523 | ||||
Basic earnings per share: |
||||||||
As reported |
$ | 0.24 | $ | 0.87 | ||||
Equity-based employee compensation cost, net
of related tax effects, included in as
reported net income |
— | — | ||||||
Equity-based employee compensation cost, net
of related tax effects, that would have been
included in the determination of net income
if the fair value method had been applied |
— | — | ||||||
Proforma |
$ | 0.24 | $ | 0.87 | ||||
Diluted earnings per share: |
||||||||
As reported |
$ | 0.23 | $ | 0.85 | ||||
Equity-based employee compensation cost, net
of related tax effects, included in as
reported net income |
— | — | ||||||
Equity-based employee compensation cost, net
of related tax effects, that would have been
included in the determination of net income
if the fair value method had been applied |
— | — | ||||||
Proforma |
$ | 0.23 | $ | 0.85 | ||||
For purposes of computing the pro forma disclosures required by SFAS No. 123, the fair value of each option granted to employees and directors is estimated using the Black-Scholes option-pricing model with the following weighted-average assumptions for the three months ended March 31, 2004 and 2005: dividend yields of 0% for all periods; expected volatility of 32.4% and 28.3%, respectively; risk-free interest rates of 3.0% and 2.9%, respectively; and expected lives of 2.5 years for all periods. Prior to 2004, the Company used the minimum value method to determine fair value of option grants.
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which do not have vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.
During 2004, the Company granted 307,915 options to purchase common membership units to employees with exercise prices ranging from $5.62 to $6.85 per unit. The fair market value of the Company’s common member units on the date of grant was $16 per unit. In connection with the issuances, the Company recorded a deferred compensation charge of $3.1 million in connection with the issuance as the exercise price of the units was less than the estimated fair market value of the Company’s membership units as of the date of grant after giving consideration to the anticipated fair value of the membership units during the one-year period preceding the Company’s initial public offering which was consummated on February 9, 2005. The Company will amortize the deferred compensation charge over the vesting period of the options, generally five years. As of March 31, 2005, the Company has cumulatively amortized $0.7 million of the deferred compensation charge.
9
In December 2004, the FASB issued SFAS No. 123R (revised 2004), “Share-Based Payment.” SFAS No. 123R addresses the accounting for share-based payment transactions in which a company receives employee services in exchange for either equity instruments of the company or liabilities that are based on the fair value of the company’s equity instruments or that may be settled by the issuance of such equity instruments. SFAS No. 123R eliminates the ability to account for share-based compensation transactions using the intrinsic method that is currently used and requires that such transactions be accounted for using a fair value-based method and recognized as expense in the consolidated statement of operations. The effective date of SFAS No. 123R is for annual periods beginning after June 15, 2005. The Company is currently assessing the provisions of SFAS No. 123R and its impact on its consolidated financial statements.
3. Long-Term Debt
Long-term debt consists of the following:
| December 31, | March 31, | |||||||
| 2004 | 2005 | |||||||
| (Unaudited) | ||||||||
| (Dollars in thousands) | ||||||||
Borrowings from senior secured First Priority —
Revolving Credit Facility; variable interest payable
quarterly (7.25% interest rate at March 31, 2005);
any unpaid principal and interest due December 18,
2008 |
$ | — | $ | 2,000 | ||||
Borrowings from senior secured First Priority — Term
Loan Credit Facility; variable interest payable
quarterly (5.26% and 5.75% interest rate at
December 31, 2004 and March 31, 2005, respectively);
principal payable in varying quarterly installments;
any unpaid principal and interest due June 18, 2009 |
94,800 | 85,550 | ||||||
Borrowings from senior secured Second Priority —
Term Loan Credit Facility; variable interest payable
quarterly (8.92% and 9.62% interest rate at December
31, 2004 and March 31, 2005, respectively); any
unpaid principal and interest due December 18, 2009 |
208,231 | 157,500 | ||||||
Various subordinated notes payable; interest ranging
from 5% to 11%; principal and interest payable
monthly through January 2007 |
4,833 | 4,084 | ||||||
Various capital leases; interest rates ranging to
15.9%; principal and interest payable monthly
through September 2009 |
14,688 | 14,499 | ||||||
| 322,552 | 263,633 | |||||||
Less debt discount on Second Priority Credit Facility |
(1,719 | ) | (1,299 | ) | ||||
| 320,833 | 262,334 | |||||||
Less current portion |
(10,276 | ) | (11,480 | ) | ||||
| $ | 310,557 | $ | 250,854 | |||||
On February 9, 2005, the Company used a portion of the proceeds from its initial public offering to repay $50.7 million of its $225 million senior second priority secured term loan facility and $9 million of its $100 million senior first priority secured term loan facility. As a result of these debt prepayments, the Company wrote off $1.5 million of deferred financing costs in February 2005 which is included in interest expense in the accompanying consolidated financial statements.
4. Income Taxes
Holdings and Opco, through which a substantial portion of the Company’s business was operated prior to the Reorganization, are limited liability companies which are taxed as partnerships. As a result, the members of Holdings pay income taxes on the earnings of Opco, which are passed through to Holdings. In accordance with Holdings’ operating agreement, Holdings made cash distributions to its members to provide them with funds to pay taxes owed for their share of Holdings profits as a limited liability company.
Certain divisions are consolidated in Holdings and are treated as separate corporate entities for income tax purposes (the consolidated corporations). Prior to the Reorganization, these consolidated corporations paid income taxes and recorded provisions for income taxes in their financial statements. As a result of the Company’s reorganization to a Delaware corporation in February 2005, ARC’s consolidated earnings became subject to federal, state and local taxes at a combined statutory rate of approximately 42%.
10
The Company’s income tax provision (benefit) for the three months ended March 31, 2004 and 2005 are as follows: