ARC DOCUMENT SOLUTIONS, INC., 10-K filed on 3/14/2014
Annual Report
Document and Entity Information (USD $)
12 Months Ended
Dec. 31, 2013
Feb. 26, 2014
Jun. 28, 2013
Document Document And Entity Information [Abstract]
 
 
 
Document Type
10-K 
 
 
Amendment Flag
false 
 
 
Document Period End Date
Dec. 31, 2013 
 
 
Document Fiscal Year Focus
2013 
 
 
Document Fiscal Period Focus
FY 
 
 
Entity Registrant Name
ARC Document Solutions, Inc. 
 
 
Entity Central Index Key
0001305168 
 
 
Current Fiscal Year End Date
--12-31 
 
 
Entity Filer Category
Accelerated Filer 
 
 
Entity Common Stock, Shares Outstanding
 
46,365,078 
 
Entity Current Reporting Status
Yes 
 
 
Entity Voluntary Filers
No 
 
 
Entity Well-known Seasoned Issuer
No 
 
 
Entity Public Float
 
 
$ 151,879,992 
Condensed Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Dec. 31, 2013
Dec. 31, 2012
Current assets:
 
 
Cash and cash equivalents
$ 27,362 
$ 28,021 
Accounts receivable, net of allowances for accounts receivable of $2,517 and $2,634
56,328 
51,855 
Inventories, net
14,047 
14,251 
Deferred income taxes
356 
   
Prepaid expenses
4,324 
3,277 
Other current assets
4,013 
6,819 
Total current assets
106,430 
104,223 
Property and equipment, net of accumulated depreciation of $206,636 and $197,830
56,181 
56,471 
Goodwill
212,608 
212,608 
Other intangible assets, net
27,856 
34,498 
Deferred financing fees, net
3,242 
4,219 
Deferred income taxes
1,186 
1,246 
Other assets
2,419 
2,574 
Total assets
409,922 
415,839 
Current liabilities:
 
 
Accounts payable
23,363 
21,215 
Accrued payroll and payroll-related expenses
11,497 
6,774 
Accrued expenses
21,365 
22,321 
Current portion of long-term debt and capital leases
21,500 
13,263 
Total current liabilities
77,725 
63,573 
Long-term debt and capital leases
198,228 
209,262 
Deferred income taxes
31,667 
28,936 
Other long-term liabilities
3,163 
3,231 
Total liabilities
310,783 
305,002 
Commitments and contingencies (Note 8)
   
   
ARC Document Solutions, Inc. stockholders' equity:
 
 
Preferred stock, $0.001 par value, 25,000 shares authorized; 0 shares issued and outstanding
Common stock, $0.001 par value, 150,000 shares authorized; 46,365 and 46,274 shares issued and 46,320 and 46,262 shares outstanding
46 
46 
Additional paid-in capital
105,806 
102,510 
Retained (deficit) earnings
(14,628)
695 
Accumulated other comprehensive income
634 
689 
Total stockholders equity before adjustment of treasury stock
91,858 
103,940 
Less cost of common stock in treasury, 45 and 12 shares
168 
44 
Total ARC Document Solutions, Inc. stockholders’ equity
91,690 
103,896 
Noncontrolling interest
7,449 
6,941 
Total equity
99,139 
110,837 
Total liabilities and equity
$ 409,922 
$ 415,839 
Condensed Consolidated Balance Sheets (Parenthetical) (USD $)
In Thousands, except Share data, unless otherwise specified
Dec. 31, 2013
Dec. 31, 2012
Statement of Financial Position [Abstract]
 
 
Allowances for accounts receivable
$ 2,517 
$ 2,634 
Accumulated depreciation on property and equipment
$ 206,636 
$ 197,830 
Preferred stock, par value
$ 0.001 
$ 0.001 
Preferred stock, shares authorized
25,000,000 
25,000,000 
Preferred stock, shares issued
Preferred stock, shares outstanding
Common stock, par value
$ 0.001 
$ 0.001 
Common stock, shares authorized
150,000,000 
150,000,000 
Common stock, shares issued
46,365,000 
46,274,000 
Common stock, shares outstanding
46,320,000 
46,262,000 
Treasury stock, shares
45,000 
12,000 
Condensed Consolidated Statements of Operations (USD $)
In Thousands, except Per Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2013
Dec. 31, 2012
Dec. 31, 2011
Income Statement [Abstract]
 
 
 
Service sales
$ 355,358 
$ 350,260 
$ 368,213 
Equipment and supplies sales
51,837 
55,858 
54,519 
Total net sales
407,195 
406,118 
422,732 
Cost of sales
272,858 
282,599 
288,434 
Gross profit
134,337 
123,519 
134,298 
Selling, general and administrative expenses
96,800 
93,073 
101,315 
Amortization of intangible assets
6,612 
11,035 
18,715 
Goodwill impairment
16,707 
65,444 
Restructuring expense
2,544 
3,320 
Income (loss) from operations
28,381 
(616)
(51,176)
Other income
(106)
(100)
(103)
Loss on extinguishment of debt
16,339 
Interest expense, net
23,737 
28,165 
31,104 
Loss before income tax provision
(11,589)
(28,681)
(82,177)
Income tax provision
2,986 
2,784 
50,931 
Net loss
(14,575)
(31,465)
(133,108)
(Income) loss attributable to noncontrolling interest
(748)
(503)
21 
Net loss attributable to ARC Document Solutions, Inc. shareholders
$ (15,323)
$ (31,968)
$ (133,087)
Loss per share attributable to ARC Document Solutions, Inc. shareholders:
 
 
 
Basic (dollars per share)
$ (0.33)
$ (0.70)
$ (2.93)
Diluted (dollars per share)
$ (0.33)
$ (0.70)
$ (2.93)
Weighted average common shares outstanding:
 
 
 
Basic (shares)
45,856 
45,668 
45,401 
Diluted (shares)
45,856 
45,668 
45,401 
Condensed Consolidated Statements of Comprehensive Income (Loss) (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2013
Dec. 31, 2012
Dec. 31, 2011
Statement of Comprehensive Income [Abstract]
 
 
 
Net loss
$ (14,575)
$ (31,465)
$ (133,108)
Other comprehensive income, net of tax
 
 
 
Foreign currency translation adjustments
190 
345 
449 
Amortization of derivative, net of tax effect of $0, $1,285 and $2,127
2,154 
3,565 
Other comprehensive income, net of tax
190 
2,499 
4,014 
Comprehensive loss
(14,385)
(28,966)
(129,094)
Comprehensive income attributable to noncontrolling interest
993 
553 
212 
Comprehensive loss income attributable to ARC Document Solutions, Inc. shareholders
$ (15,378)
$ (29,519)
$ (129,306)
Condensed Consolidated Statements of Comprehensive Income (Loss) (Parenthetical) (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2013
Dec. 31, 2012
Dec. 31, 2011
Statement of Comprehensive Income [Abstract]
 
 
 
Tax effect of amortization of derivative
$ 0 
$ 1,285 
$ 2,127 
Condensed Consolidated Statements of Equity (USD $)
In Thousands
Total
Common Stock [Member]
Additional Paid-in Capital [Member]
Retained Earnings [Member]
Accumulated Other Comprehensive Income (Loss) [Member]
Common Stock in Treasury [Member]
Noncontrolling Interest [Member]
Beginning Balance at Dec. 31, 2010
$ 262,682 
$ 46 
$ 96,251 
$ 173,459 
$ (5,541)
$ (7,709)
$ 6,176 
Beginning Balance, shares at Dec. 31, 2010
 
45,736 
 
 
 
 
 
Stock-based compensation
4,271 
 
4,271 
 
 
 
 
Stock-based compensation, shares
 
470 
 
 
 
 
 
Issuance of common stock under Employee Stock Purchase Plan
50 
 
50 
 
 
 
 
Issuance of common stock under Employee Stock Purchase Plan, shares
12 
12 
 
 
 
 
 
Stock options exercised
108 
 
108 
 
 
 
 
Stock options exercised, shares
 
17 
 
 
 
 
 
Tax benefit from stock-based compensation, net of tax deficiency
(952)
 
(952)
 
 
 
 
Treasury Stock, Retired, Cost Method, Amount
 
 
 
(7,709)
 
7,709 
 
Comprehensive income attributable to noncontrolling interest
212 
 
 
 
 
 
 
Comprehensive loss
(129,094)
 
 
(133,087)
3,781 
 
 
Ending Balance at Dec. 31, 2011
137,065 
46 
99,728 
32,663 
(1,760)
 
6,388 
Ending Balance, shares at Dec. 31, 2011
 
46,235 
 
 
 
 
 
Stock-based compensation
1,999 
 
1,999 
 
 
 
 
Stock-based compensation, shares
 
 
 
 
 
 
Issuance of common stock under Employee Stock Purchase Plan
28 
 
28 
 
 
 
 
Issuance of common stock under Employee Stock Purchase Plan, shares
 
 
 
 
 
Stock options exercised
79 
 
79 
 
 
 
 
Treasury shares
 
12 
 
 
 
 
 
Stock options exercised, shares
15 
15 
 
 
 
 
 
Treasury shares
(44)
 
 
 
 
(44)
 
Tax benefit from stock-based compensation, net of tax deficiency
676 
 
676 
 
 
   
 
Comprehensive income attributable to noncontrolling interest
553 
 
 
 
 
 
 
Comprehensive loss
(28,966)
 
 
(31,968)
2,449 
 
 
Ending Balance at Dec. 31, 2012
110,837 
46 
102,510 
695 
689 
(44)
6,941 
Ending Balance, shares at Dec. 31, 2012
46,274 
46,274 
 
 
 
 
 
Stock-based compensation
3,207 
 
3,207 
 
 
 
 
Stock-based compensation, shares
 
41 
 
 
 
 
 
Issuance of common stock under Employee Stock Purchase Plan
30 
 
30 
 
 
 
 
Issuance of common stock under Employee Stock Purchase Plan, shares
 
 
 
 
 
Stock options exercised
59 
 
59 
 
 
 
 
Treasury shares
 
33 
 
 
 
 
 
Stock options exercised, shares
11 
11 
 
 
 
 
 
Treasury shares
(124)
 
 
 
 
(124)
 
Dividends paid to noncontrolling interest
(485)
 
 
 
 
 
(485)
Comprehensive income attributable to noncontrolling interest
993 
 
 
 
 
 
 
Comprehensive loss
(14,385)
 
 
(15,323)
(55)
 
 
Ending Balance at Dec. 31, 2013
$ 99,139 
$ 46 
$ 105,806 
$ (14,628)
$ 634 
$ (168)
$ 7,449 
Ending Balance, shares at Dec. 31, 2013
46,365 
46,365 
 
 
 
 
 
Condensed Consolidated Statements of Equity (Parenthetical)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2011
Retirement of treasury stock (in shares)
447 
Condensed Consolidated Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2013
Dec. 31, 2012
Dec. 31, 2011
Cash flows from operating activities
 
 
 
Net loss
$ (14,575)
$ (31,465)
$ (133,108)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Allowance for accounts receivable
636 
456 
1,034 
Depreciation
28,133 
28,487 
29,161 
Amortization of intangible assets
6,612 
11,035 
18,715 
Amortization of deferred financing costs
1,098 
1,088 
887 
Amortization of bond discount
671 
611 
549 
Goodwill impairment
16,707 
65,444 
Stock-based compensation
3,207 
1,999 
4,271 
Deferred income taxes
(4,909)
(6,433)
673 
Deferred tax valuation allowance
7,277 
9,750 
68,546 
Restructuring expense, non-cash portion
244 
2,379 
Amortization of derivative, net of tax effect
2,154 
3,565 
Loss on early extinguishment of debt
16,339 
Other non-cash items, net
(323)
321 
(417)
Changes in operating assets and liabilities, net of effect of business acquisitions:
 
 
 
Accounts receivable
(5,133)
2,533 
(2,582)
Inventory
376 
(3,005)
(1,170)
Prepaid expenses and other assets
1,966 
1,032 
(453)
Accounts payable and accrued expenses
5,179 
(97)
(5,947)
Net cash provided by operating activities
46,798 
37,552 
49,168 
Cash flows from investing activities
 
 
 
Capital expenditures
(18,191)
(20,348)
(15,553)
Payments for businesses acquired, net of cash acquired and including other cash payments associated with the acquisitions
(823)
Payment for swap transaction
(9,729)
Other
741 
323 
923 
Net cash used in investing activities
(17,450)
(20,025)
(25,182)
Cash flows from financing activities
 
 
 
Proceeds from stock option exercises
59 
79 
108 
Proceeds from issuance of common stock under Employee Stock Purchase Plan
30 
28 
62 
Share repurchases, including shares surrendered for tax withholding
(124)
Proceeds from borrowings on long-term debt agreements
196,402 
Payments of debt extinguishment costs
(11,330)
Early extinguishment of long-term debt
(200,000)
Payments on long-term debt agreements and capital leases
(12,379)
(15,601)
(25,179)
Net (repayments) borrowings under revolving credit facilities
(237)
1,266 
701 
Payment of deferred financing costs
(2,220)
(839)
(799)
Dividends paid to noncontrolling interest
(485)
Net cash used in financing activities
(30,284)
(15,067)
(25,107)
Effect of foreign currency translation on cash balances
277 
124 
265 
Net change in cash and cash equivalents
(659)
2,584 
(856)
Cash and cash equivalents at beginning of period
28,021 
25,437 
26,293 
Cash and cash equivalents at end of period
27,362 
28,021 
25,437 
Supplemental Cash Flow Information [Abstract]
 
 
 
Cash paid for interest
22,873 
23,277 
25,215 
Income taxes (received) paid, net
(3,345)
(122)
(13,488)
Noncash financing activities
 
 
 
Capital lease obligations incurred
10,399 
10,047 
10,678 
Liabilities in connection with deferred financing costs
433 
107 
Liabilities in connection with the acquisition of businesses
$ 0 
$ 0 
$ 548 
Description of Business and Basis of Presentation
Description of Business and Basis of Presentation
DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
ARC Document Solutions, Inc. (“ARC Document Solutions,” “ARC” or the “Company”) is a leading document solutions company serving businesses of all types, with an emphasis on the non-residential segment of the architecture, engineering and construction (“AEC”) industry. ARC offers a variety of services including: Onsite Services, Digital Services, Color Services, and Traditional Reprographics Services. In addition, ARC also sells Equipment and Supplies. The Company conducts its operations through its wholly-owned operating subsidiary, American Reprographics Company, L.L.C., a California limited liability company, and its subsidiaries.
Basis of Presentation
The accompanying Consolidated Financial Statements include the accounts of the Company and its subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. The Company evaluates its estimates and assumptions on an ongoing basis and relies on historical experience and various other factors that it believes to be reasonable under the circumstances to determine such estimates. Actual results could differ from those estimates and such differences may be material to the Consolidated Financial Statements.
Risk and Uncertainties
The Company generates the majority of its revenue from sales of services and products to customers in the AEC industry. As a result, the Company’s operating results and financial condition can be significantly affected by economic factors that influence the AEC industry, such as non-residential construction spending, GDP growth, interest rates, unemployment rates, and office vacancy rates. Reduced activity (relative to historic levels) in the AEC industry would diminish demand for some of ARC’s services and products, and would therefore negatively affect revenues and have a material adverse effect on its business, operating results and financial condition.
As part of the Company’s growth strategy, ARC intends to continue to offer and grow a variety of service offerings that are relatively new to the Company. The success of the Company’s efforts will be affected by its ability to acquire new customers for the Company’s new service offerings as well as sell the new service offerings to existing customers. The Company’s inability to successfully market and execute these relatively new service offerings could significantly affect its business and reduce its long term revenue, resulting in an adverse effect on its results of operations and financial condition.
Summary of Significant Accounting Policies
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash Equivalents
Cash equivalents include demand deposits and short-term investments with a maturity of three months or less when purchased.
The Company maintains its cash deposits at numerous banks located throughout the United States, Canada, India, the United Kingdom and China, which at times, may exceed federally insured limits. UDS, the Company’s operations in China, held $15.1 million of the Company’s cash and cash equivalents as of December 31, 2013. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant risk on cash and cash equivalents.
Concentrations of Credit Risk and Significant Vendors
Concentrations of credit risk with respect to trade receivables are limited due to a large, diverse customer base. No individual customer represented more than 4% of net sales during the years ended December 31, 2013, 2012 and 2011.
The Company has geographic concentration risk as sales in California, as a percent of total sales, were approximately 31%, 31% and 32% for the years ended December 31, 2013, 2012 and 2011, respectively.
The Company contracts with various suppliers. Although there are a limited number of suppliers that could supply the Company’s inventory, management believes any shortfalls from existing suppliers would be absorbed from other suppliers on comparable terms. However, a change in suppliers could cause a delay in sales and adversely affect results.
Purchases from the Company’s three largest vendors during the years ended December 31, 2013, 2012 and 2011 comprised approximately 36%, 34%, and 37% respectively, of the Company’s total purchases of inventory and supplies.

Allowance for Doubtful Accounts
The Company performs periodic credit evaluations of the financial condition of its customers, monitors collections and payments from customers, and generally does not require collateral. The Company provides for the possible inability to collect accounts receivable by recording an allowance for doubtful accounts. The Company writes off an account when it is considered uncollectible. The Company estimates the allowance for doubtful accounts based on historical experience, aging of accounts receivable, and information regarding the credit worthiness of its customers. Additionally, the Company provides an allowance for returns and discounts based on historical experience. In 2013, 2012, and 2011 the Company recorded expenses of $0.6 million, $0.5 million and $1.0 million, respectively, related to the allowance for doubtful accounts.
Inventories
Inventories are valued at the lower of cost (determined on a first-in, first-out basis; or average cost) or market. Inventories primarily consist of reprographics materials for use and resale, and equipment for resale. On an ongoing basis, inventories are reviewed and adjusted for estimated obsolescence or unmarketable inventories to reflect the lower of cost or market. Charges to increase inventory reserves are recorded as an increase in cost of sales. Estimated inventory obsolescence has been provided for in the financial statements and has been within the range of management’s expectations. As of December 31, 2013 and 2012, the reserves for inventory obsolescence was $0.9 million and $1.1 million, respectively.
Income Taxes
Deferred tax assets and liabilities reflect temporary differences between the amount of assets and liabilities for financial and tax reporting purposes. Such amounts are adjusted, as appropriate, to reflect changes in tax rates expected to be in effect when the temporary differences reverse. A valuation allowance is recorded to reduce the Company's deferred tax assets to the amount that is more likely than not to be realized. Changes in tax laws or accounting standards and methods may affect recorded deferred taxes in future periods.

When establishing a valuation allowance, the Company considers future sources of taxable income such as future reversals of existing taxable temporary differences, future taxable income exclusive of reversing temporary differences and carryforwards and tax planning strategies. A tax planning strategy is an action that: is prudent and feasible; an enterprise ordinarily might not take, but would take to prevent an operating loss or tax credit carryforward from expiring unused; and would result in realization of deferred tax assets. In the event the Company determines that its deferred tax assets, more likely than not, will not be realized in the future, the valuation adjustment to the deferred tax assets will be charged to earnings in the period in which the Company makes such a determination.
As of June 30, 2011, the Company determined that cumulative losses for the preceding twelve quarters constituted sufficient objective evidence (as defined by Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 740-10, Income Taxes) that a valuation allowance was needed. As of December 31, 2013 and 2012, the valuation allowance against certain deferred tax assets was $85.6 million and $78.3 million, respectively.

In future quarters the Company will continue to evaluate its historical results for the preceding twelve quarters and its future projections to determine whether the Company will generate sufficient taxable income to utilize its deferred tax assets, and whether a partial or full valuation allowance is still required. Should the Company generate sufficient taxable income, however, a portion or all of the then current valuation allowance may be reversed.

The Company calculates its current and deferred tax provision based on estimates and assumptions that could differ from the actual results reflected in income tax returns filed in subsequent years. Adjustments based on filed returns are recorded when identified.

Income taxes have not been provided on certain undistributed earnings of foreign subsidiaries because such earnings are considered to be permanently reinvested.

The amount of taxable income or loss the Company reports to the various tax jurisdictions is subject to ongoing audits by federal, state and foreign tax authorities. The Company's estimate of the potential outcome of any uncertain tax issue is subject to management’s assessment of relevant risks, facts, and circumstances existing at that time. The Company uses a more-likely-than-not threshold for financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. The Company records a liability for the difference between the benefit recognized and measured and tax position taken or expected to be taken on its tax return. To the extent that the Company's assessment of such tax positions changes, the change in estimate is recorded in the period in which the determination is made. The Company report tax-related interest and penalties as a component of income tax expense.
The Company’s effective income tax rate differs from the statutory tax rate primarily due to the valuation allowance on the Company’s deferred tax assets, state income taxes, stock-based compensation, goodwill and other identifiable intangibles, and other discrete items. See Note 9 “Income Taxes” for further information.
Income tax deficiencies and benefits affecting stockholders’ equity are primarily related to employee stock-based compensation.
Property and Equipment
Property and equipment are stated at cost and are depreciated using the straight-line method over their estimated useful lives, as follows:
 
Buildings
  
10-20 years
Leasehold improvements
  
10-20 years or lease term, if shorter
Machinery and equipment
  
3-7 years
Furniture and fixtures
  
3-7 years

Assets acquired under capital lease arrangements are included in machinery and equipment and are recorded at the present value of the minimum lease payments and are depreciated using the straight-line method over the life of the asset or term of the lease, whichever is shorter. Expenses for repairs and maintenance are charged to expense as incurred, while renewals and betterments are capitalized. Gains or losses on the sale or disposal of property and equipment are reflected in operating income.

The Company accounts for computer software costs developed for internal use in accordance with ASC 350-40, Intangibles – Goodwill and Other, which requires companies to capitalize certain qualifying costs incurred during the application development stage of the related software development project. The primary use of this software is for internal use and, accordingly, such capitalized software development costs are depreciated on a straight-line basis over the economic lives of the related products not to exceed three years. The Company’s machinery and equipment (see Note 6 “Property and Equipment”) includes $0.3 million and $0.6 million of capitalized software development costs as of December 31, 2013 and 2012, respectively, net of accumulated amortization of $17.5 million and $17.1 million as of December 31, 2013 and 2012, respectively. Depreciation expense includes the amortization of capitalized software development costs which amounted to $0.3 million, $0.5 million and $0.9 million during the years ended December 31, 2013, 2012 and 2011, respectively.
Impairment of Long-Lived Assets
The Company periodically assesses potential impairments of its long-lived assets in accordance with the provisions of ASC 360, Property, Plant, and Equipment. An impairment review is performed whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. The Company groups its assets at the lowest level for which identifiable cash flows are largely independent of cash flows of the other assets and liabilities. The Company has determined that the lowest level for which identifiable cash flows are available is the divisional level, which is the reporting unit level.
Factors considered by the Company include, but are not limited to, significant underperformance relative to historical or projected operating results; significant changes in the manner of use of the acquired assets or the strategy for the overall business; and significant negative industry or economic trends. When the carrying value of a long-lived asset may not be recoverable based upon the existence of one or more of the above indicators of impairment, the Company estimates the future undiscounted cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the expected future undiscounted cash flows and eventual disposition is less than the carrying amount of the asset, the Company recognizes an impairment loss. An impairment loss is reflected as the amount by which the carrying amount of the asset exceeds the fair value of the asset, based on the fair value if available, or discounted cash flows, if fair value is not available.
The reporting units of the Company have been negatively affected by the decline in the Company’s sales. Before assessing the Company’s goodwill for impairment, the Company evaluated, as described above, the long-lived assets in its reporting units for impairment in 2013, 2012 and 2011. Based on these assessments, there were no long-lived asset impairments in 2013, 2012 or 2011.
Goodwill and Other Intangible Assets
In connection with acquisitions, the Company applies the provisions of ASC 805, Business Combinations, using the acquisition method of accounting. The excess purchase price over the assessed fair value of net tangible assets and identifiable intangible assets acquired is recorded as goodwill.
In accordance with ASC 350, Intangibles – Goodwill and Other, the Company assesses goodwill for impairment annually as of September 30, and more frequently if events and circumstances indicate that goodwill might be impaired.
Goodwill impairment testing is performed at the reporting unit level. Goodwill is assigned to reporting units at the date the goodwill is initially recorded. Once goodwill has been assigned to reporting units, it no longer retains its association with a particular acquisition, and all of the activities within a reporting unit, whether acquired or internally generated, are available to support the value of the goodwill.
Goodwill impairment testing is a two-step process. Step one involves comparing the fair value of the reporting units to its carrying amount. If the carrying amount of a reporting unit is greater than zero and its fair value is greater than its carrying amount, there is no impairment. If the reporting unit’s carrying amount is greater than the fair value, the second step must be completed to measure the amount of impairment, if any. Step two involves calculating the implied fair value of goodwill by deducting the fair value of all tangible and intangible assets, excluding goodwill, of the reporting unit from the fair value of the reporting unit as determined in step one. The implied fair value of goodwill determined in this step is compared to the carrying value of goodwill. If the implied fair value of goodwill is less than the carrying value of goodwill, an impairment loss is recognized equal to the difference.
The Company determines the fair value of its reporting units using an income approach. Under the income approach, the Company determined fair value based on estimated discounted future cash flows of each reporting unit. The cash flows are discounted by an estimated weighted-average cost of capital, which is intended to reflect the overall level of inherent risk of a reporting unit. Determining the fair value of a reporting unit is judgmental in nature and requires the use of significant estimates and assumptions, including revenue growth rates and EBITDA margins, discount rates and future market conditions, among others. The Company considered market information in assessing the reasonableness of the fair value under the income approach outlined above.
Other intangible assets that have finite lives are amortized over their useful lives. Customer relationships are amortized using the accelerated method, based on customer attrition rates, over their estimated useful lives of 13 (weighted average) years.
Deferred Financing Costs
Direct costs incurred in connection with debt agreements are capitalized as incurred and amortized based on the effective interest method for the Company's borrowings under its Term Loan Credit Agreement and on the straight line method for the Company’s $40.0 million revolving credit agreement, as amended (the “2012 Credit Agreement”). At December 31, 2013 and 2012, the Company had deferred financing costs of $3.2 million and $4.2 million, respectively, net of accumulated amortization of $0.5 million and $1.9 million, respectively.
In 2013, the Company added $2.7 million of deferred financing costs related to its Term Loan Credit Agreement and to the amendment to the Company's 2012 Credit Agreement. In addition, the Company wrote off $2.5 million of deferred financing costs due to the extinguishment, in full, of its 10.5% senior secured notes and the amendment to the Company's 2012 Credit Agreement.
In 2012, the Company added $0.6 million of deferred financing costs related to its 2012 Credit Agreement. In 2011, the Company added $0.5 million of deferred financing costs related to its Notes and its previous $50 million credit agreement. In December 2010, the Company wrote off $2.5 million of deferred financing costs due to the extinguishment, in full, of its previous credit agreement, and added $4.9 million of deferred financing costs related to its Notes and its previous $50 million credit agreement.
Derivative Financial Instruments
As of December 31, 2013 the Company was not party to any derivative or hedging transactions.
Historically, the Company enters into derivative instruments to manage its exposure to changes in interest rates. These instruments allow the Company to raise funds at floating rates and effectively swap them into fixed rates, without the exchange of the underlying principal amount. Such agreements are designated and accounted for under ASC 815, Derivatives and Hedging. Derivative instruments are recorded at fair value as either assets or liabilities in the Consolidated Balance Sheets.

Fair Values of Financial Instruments
The following methods and assumptions were used by the Company in estimating the fair value of its financial instruments for disclosure purposes:
Cash equivalents: Cash equivalents are time deposits with maturity of three months or less when purchased, which are highly liquid and readily convertible to cash. Cash equivalents reported in the Company’s Consolidated Balance Sheet were $12.9 million and $13.7 million as of December 31, 2013 and 2012, respectively, and are carried at cost and approximate fair value due to the relatively short period to maturity of these instruments.
Short- and long-term debt: The carrying amount of the Company’s capital leases reported in the Consolidated Balance Sheets approximates fair value based on the Company’s current incremental borrowing rate for similar types of borrowing arrangements. The carrying amount reported in the Company’s Consolidated Balance Sheet as of December 31, 2013 for borrowings under its Term Loan Credit Agreement and other notes payable is $200.0 million and $0.4 million, respectively. The Company has determined the fair value of its borrowings under its Term Loan Credit Agreement and other notes payable is $200.0 million and $0.4 million, respectively, as of December 31, 2013.
Interest rate hedge agreements: The fair value of the interest rate swap was based on market interest rates using a discounted cash flow model and an adjustment for counterparty risk. See Note 13 “Fair Value Measurements” for further information.
Insurance Liability
The Company maintains a high deductible insurance policy for a significant portion of its risks and associated liabilities with respect to workers’ compensation. The Company’s deductible is $250 thousand per individual. The accrued liabilities associated with this program are based on the Company’s estimate of the ultimate costs to settle known claims, as well as claims incurred but not yet reported to the Company, as of the balance sheet date. The Company’s estimated liability is not discounted and is based upon an actuarial report obtained from a third party. The actuarial report uses information provided by the Company’s insurance brokers and insurers, combined with the Company’s judgments regarding a number of assumptions and factors, including the frequency and severity of claims, claims development history, case jurisdiction, applicable legislation, and the Company’s claims settlement practices.
The Company is self-insured for healthcare benefits, with a stop-loss at $250 thousand per individual. Liabilities associated with the risks that are retained by the Company are estimated, in part, by considering historical claims experience, demographic factors, severity factors and other actuarial assumptions. The Company’s results could be materially affected by claims and other expenses related to such plans if future occurrences and claims differ from these assumptions and historical trends.
Commitments and Contingencies
In the normal course of business, the Company estimates potential future loss accruals related to legal, workers’ compensation, healthcare, tax and other contingencies. These accruals require management’s judgment on the outcome of various events based on the best available information. However, due to changes in facts and circumstances, the ultimate outcomes could differ from management’s estimates.
Revenue Recognition
The Company applies the provisions of ASC 605, Revenue Recognition. In general, the Company recognizes revenue when (i) persuasive evidence of an arrangement exists, (ii) shipment of products has occurred or services have been rendered, (iii) the sales price charged is fixed or determinable and (iv) collection is reasonably assured. Net sales include an allowance for estimated sales returns and discounts.
The Company recognizes service revenue when services have been rendered, while revenues from the resale of equipment and supplies are recognized upon delivery to the customer or upon customer pickup. Revenue from equipment service agreements are recognized over the term of the service agreement.
The Company has established contractual pricing for certain large national customer accounts (“Global Solutions”). These contracts generally establish uniform pricing at all operating segments for Global Solutions. Revenues earned from the Company’s Global Solutions are recognized in the same manner as non-Global Solutions revenues.
Included in revenues are fees charged to customers for shipping, handling, and delivery services. Such revenues amounted to $12.1 million, $12.9 million, and $14.8 million for the years ended December 31, 2013, 2012 and 2011, respectively.
Revenues from hosted software licensing activities are recognized ratably over the term of the license. Revenues from membership fees are recognized over the term of the membership agreement. Revenues from software licensing activities and membership revenues comprise less than 1% of the Company’s consolidated revenues during the years ended December 31, 2013, 2012 and 2011.
Management provides for returns, discounts and allowances based on historic experience and adjusts such allowances as considered necessary. To date, such provisions have been within the range of management’s expectations.
Comprehensive Income (Loss)
The Company’s comprehensive loss includes foreign currency translation adjustments and the amortized fair value of the company's previous swap transaction, net of taxes. The Amended Swap Transaction was de-designated on December 1, 2010, as it no longer qualified as a cash flow hedge when the cash proceeds from the issuance of the Notes were used to pay off the Company’s previous credit agreement. At that time, the fair value of the Amended Swap Transaction was computed and the effective portion was stored in other comprehensive income and was amortized into income, net of tax effect, on the straight-line method, based on the original notional schedule.
Asset and liability accounts of international operations are translated into the Company’s functional currency, U.S. dollars, at current rates. Revenues and expenses are translated at the weighted-average currency rate for the fiscal year.

Segment and Geographic Reporting
The provisions of ASC 280, Disclosures about Segments of an Enterprise and Related Information, require public companies to report financial and descriptive information about their reportable operating segments. The Company identifies operating segments based on the various business activities that earn revenue and incur expense, whose operating results are reviewed by the Company's Chief Executive Officer and Chief Operating Officer, who, acting jointly, are deemed to be the chief operating decision makers. Because its operating segments have similar products and services, classes of customers, production processes and economic characteristics, the Company is deemed to operate as a single reportable segment.
Net sales of the Company’s principal services and products were as follows:
 
 
Year Ended December 31,
 
2013
 
2012
 
2011
Service Sales
 
 
 
 
 
Traditional Reprographics
$
116,673

 
$
126,785

 
$
145,449

Color
83,601

 
79,080

 
84,062

Digital
33,534

 
35,578

 
38,020

Subtotal
233,808

 
241,443

 
267,531

Onsite Services(1)
121,550

 
108,817

 
100,682

Total services sales
355,358

 
350,260

 
368,213

Equipment and Supplies Sales
51,837

 
55,858

 
54,519

Total net sales
$
407,195

 
$
406,118

 
$
422,732

 

(1)
Represents work done at the Company’s customer sites which includes Facilities Management (“FM”) and Managed Print Services (“MPS”).
The Company recognizes revenues in geographic areas based on the location to which the product was shipped or services have been rendered. Operations outside the United States have been small but growing. See table below for revenues and long-lived assets, net, attributable to the Company’s U.S. operations and foreign operations. 
 
 
Year Ended December 31,
 
 
2013
 
2012
 
2011
 
 
U.S.
 
Foreign
Countries
 
Total
 
U.S.
 
Foreign
Countries
 
Total
 
U.S.
 
Foreign
Countries
 
Total
Revenues from external customers
 
$
354,995

 
$
52,200

 
$
407,195

 
$
353,763

 
$
52,355

 
$
406,118

 
$
378,705

 
$
44,027

 
$
422,732

Long-lived assets, net
 
$
292,290

 
$
10,016

 
$
302,306

 
$
299,426

 
$
10,944

 
$
310,370

 
$
325,795

 
$
10,397

 
$
336,192


Advertising and Shipping and Handling Costs
Advertising costs are expensed as incurred and approximated $1.4 million, $1.5 million, and $1.7 million during the years ended December 31, 2013, 2012 and 2011, respectively. Shipping and handling costs incurred by the Company are included in cost of sales.
Stock-Based Compensation
The Company applies the Black-Scholes valuation model in determining the fair value of share-based payments to employees, which is then amortized on a straight-line basis over the requisite service period. Upon the adoption of FSP FAS 123(R-3), Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards, the Company used the “shortcut method” for determining the historical windfall tax benefit.
Total stock-based compensation for the years ended December 31, 2013, 2012 and 2011, was $3.2 million, $2.0 million and $4.3 million, respectively and was recorded in selling, general, and administrative expenses, consistent with the classification of the underlying salaries. In accordance with ASC 718, Income Taxes, the excess tax benefit resulting from stock-based compensation, in the Consolidated Statements of Cash Flows, are classified as financing cash inflows.
The weighted average fair value at the grant date for options issued in the fiscal years ended December 31, 2013, 2012 and 2011, was $1.57, $2.97 and $4.43 respectively. The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model using the following weighted average assumptions for the years ended December 31, 2013 and 2012 and 2011: 
 
 
Year Ended December 31,
 
 
2013
 
2012
 
2011
Weighted average assumptions used:
 
 
 
 
 
 
Risk free interest rate
 
1.36
%
 
1.17
%
 
2.01
%
Expected volatility
 
59.7
%
 
54.8
%
 
48.1
%
Expected dividend yield
 
%
 
%
 
%

Using historical exercise data as a basis, the Company determined that the expected term for stock options issued in 2013, 2012 and 2011 was 7.0 years, 7.1 years and 6.9 years, respectively.
For fiscal years 2013, 2012 and 2011, expected stock price volatility is based on a the Company’s historical volatility for a period equal to the expected term. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant with an equivalent remaining term. The Company has not paid dividends in the past and does not currently plan to pay dividends in the near future. The Company assumed a forfeiture rate of 3% in 2013, 2% in 2012 and 0% in 2011. The Company’s assumed forfeiture rate is based on the historical forfeiture rate for employees at similar levels in the Company. The Company reviews its forfeiture rate at least on an annual basis.
As of December 31, 2013, total unrecognized stock-based compensation expense related to nonvested stock-based compensation was approximately $4.8 million, which is expected to be recognized over a weighted average period of approximately 2.1 years.
For additional information, see Note 10 “Employee Stock Purchase Plan and Stock Option Plan.”
Research and Development Expenses
Research and development activities relate to costs associated with the design and testing of new technology or enhancements and maintenance to existing technology and are expensed as incurred. In total, research and development amounted to $5.5 million, $5.4 million and $4.9 million during the fiscal years ended December 31, 2013, 2012 and 2011, respectively.
Noncontrolling Interest
The Company accounted for its investment in UNIS Document Solutions Co. Ltd., (“UDS”) under the purchase method of accounting, in accordance with ASC 805, Business Combinations. UDS is consolidated in the Company’s financial statements from the date of commencement. Noncontrolling interest, which represents the 35 percent non-controlling interest in UDS, is reflected on the Company’s Consolidated Financial Statements.
Sales Taxes
The Company bills sales taxes, as applicable, to its customers. The Company acts as an agent and bills, collects, and remits the sales tax to the proper government jurisdiction. The sales taxes are accounted for on a net basis, and therefore are not included as part of the Company’s revenue.
Earnings Per Share
The Company accounts for earnings per share in accordance with ASC 260, Earnings Per Share. Basic earnings per share are computed by dividing net income attributable to ARC by the weighted-average number of common shares outstanding for the period. Diluted earnings per common share is computed similarly to basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if common shares subject to outstanding options and acquisition rights had been issued and if the additional common shares were dilutive. Common share equivalents are excluded from the computation if their effect is anti-dilutive. There were 2.1 million, 2.3 million and 2.2 million common stock options excluded as their effect would have been anti-dilutive for the years ended December 31, 2013, 2012 and 2011, respectively. The Company’s common share equivalents consist of stock options issued under the Company’s Stock Plan.
Basic and diluted earnings per common share were calculated as follows for the years ended December 31, 2013, 2012 and 2011:
 
 
Year Ended December 31,
 
2013
 
2012
 
2011
Weighted average common shares outstanding during the period — basic
45,856

 
45,668

 
45,401

Effect of dilutive stock options

 

 

Weighted average common shares outstanding during the period — diluted
45,856

 
45,668

 
45,401


Recent Accounting Pronouncements
In March 2013, the FASB issued Accounting Standards Update (“ASU”) 2013-05. The new guidance covers the accounting for a cumulative translation adjustment on the parent entity upon de-recognition of a subsidiary or group of assets within a foreign entity. This new guidance requires that the parent release any related cumulative translation adjustment into net income only if the sale or transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets had resided. The adoption of ASU 2013-05 will be effective beginning January 1, 2014. The Company does not anticipate the adoption to materially impact the Company’s Consolidated Financial Statements.
In February 2013, the FASB issued ASU 2013-02. This new guidance requires entities to present (either on the face of the income statement or in the notes) the effects on the line items of the income statement for amounts reclassified out of accumulated other comprehensive income. The adoption of ASU 2013-02 had no impact to the Company’s Consolidated Financial Statements.
Restructuring Expenses
RESTRUCTURING EXPENSES
RESTRUCTURING EXPENSES
To ensure that the Company’s costs and resources were in line with demand for its current portfolio of services and products, management initiated a restructuring plan in the fourth quarter of 2012. As of December 31, 2013, the restructuring plan included the closure or downsizing of 56 of the Company’s service centers, which represented more than 25% of its total number of service center locations. In addition, as part of the restructuring plan, the Company reduced headcount and middle management associated with its service center locations, streamlined the senior operational management team, and allocated more resources into growing sales categories such as Onsite Services. The reduction in headcount totaled approximately 300 full-time employees, which represented approximately 10% of the Company’s total workforce.
Restructuring expenses include employee termination costs, estimated lease termination and obligation costs, and other restructuring expenses. The Company’s restructuring efforts included service center closures in both 2012 and 2013. For the twelve months ended December 31, 2013, the Company closed or downsized 23 service center locations, in addition to 33 service center locations in 2012.
The following table summarizes restructuring expenses incurred in 2013 and 2012:
 
 
Year Ended December 31,
 
2013
 
2012
Employee termination costs
$
15

 
$
784

Estimated lease termination and obligation costs
1,803

 
2,168

Other restructuring expenses
726

 
368

Total restructuring expenses
$
2,544

 
$
3,320


The changes in the restructuring liability from December 31, 2011 through December 31, 2013 are summarized as follows:
 
 
 
Balance, December 31, 2011
$

Restructuring expenses
3,320

Payments
(940
)
Adjustments
(81
)
Balance, December 31, 2012
$
2,299

Restructuring expenses
2,544

Payments
(4,304
)
Balance, December 31, 2013
$
539

Acquisitions
ACQUISITIONS
ACQUISITIONS
During 2013 or 2012, the Company had no business acquisitions.
During 2011, the Company acquired one Chinese business through UDS, its business venture with Unisplendour Corporation Limited (“Unisplendour”) for $1.4 million in the aggregate.
The results of operations of the companies acquired have been included in the Consolidated Financial Statements from their respective dates of acquisition.
For U.S. income tax purposes, $1.2 million of intangibles resulting from the acquisition completed during 2011 are amortized over a 15-year period. None of the Company’s acquisitions were related or contingent upon any other acquisitions.
Certain acquisition agreements entered into by the Company contain earnout agreements which provide for additional consideration (Earnout Payments) to be paid to the former owners if the acquired entity’s results of operations, or sales, exceed certain targeted levels measured on an annual basis generally three years after the acquisition. The earnout provisions generally contain limits on the amount of Earnout Payments that may be payable over the term of the agreement. The Company’s estimate of the aggregate amount of additional consideration that may be payable over the terms of the earnout agreements subsequent to December 31, 2013 is approximately $1.8 million.
Goodwill and Other Intangibles Resulting from Business Acquisitions
Goodwill and Other Intangibles Resulting from Business Acquisitions
GOODWILL AND OTHER INTANGIBLES RESULTING FROM BUSINESS ACQUISITIONS
In connection with acquisitions, the Company applies the provisions of ASC 805, Business Combinations, using the acquisition method of accounting. The excess purchase price over the assessed fair value of net tangible assets and identifiable intangible assets acquired is recorded as goodwill.
In accordance with ASC 350, Intangibles-Goodwill and Other, the Company assesses goodwill for impairment annually as of September 30, and more frequently if events and circumstances indicate that goodwill might be impaired. At December 31, 2013, the Company assessed goodwill for impairment and determined that goodwill was not impaired.
At September 30, 2012, absent the fact that the Company assesses goodwill for impairment annually as of September 30, the Company determined that there were sufficient indicators to trigger a goodwill impairment analysis. The indicators included, among other factors: (1) the Company’s underperformance relative to its plan in the third quarter of 2012, (2) the performance against plan of reporting units which previously had goodwill impairment, (3) the economic environment, and (4) the continued decrease in large and small format printing at the Company’s service centers, which the Company management believes is partly due to customers’ increasing adoption of technology. The Company’s analysis indicated that seven of its 27 reporting units, six in the United States and one in Canada, had a goodwill impairment as of September 30, 2012. Accordingly, the Company recorded a pretax, non-cash charge for the three months ended September 30, 2012 to reduce the carrying value of goodwill by $16.7 million. Based upon its assessment, the Company concluded that no goodwill impairment triggering events have occurred during the fourth quarter of 2013 that would require an additional impairment test.
Goodwill impairment testing is performed at the reporting unit level. Goodwill is assigned to reporting units at the date the goodwill is initially recorded. Once goodwill has been assigned to reporting units, it no longer retains its association with a particular acquisition, and all of the activities within a reporting unit, whether acquired or internally generated, are available to support the value of the goodwill.
Goodwill impairment testing is a two-step process. Step one involves comparing the fair value of the reporting units to its carrying amount. If the carrying amount of a reporting unit is greater than zero and its fair value is greater than its carrying amount, there is no impairment. If the reporting unit’s carrying amount is greater than the fair value, the second step must be completed to measure the amount of impairment, if any. Step two involves calculating the implied fair value of goodwill by deducting the fair value of all tangible and intangible assets, excluding goodwill, of the reporting unit from the fair value of the reporting unit as determined in step one. The implied fair value of goodwill determined in this step is compared to the carrying value of goodwill. If the implied fair value of goodwill is less than the carrying value of goodwill, an impairment loss is recognized equal to the difference.
The Company determines the fair value of its reporting units using an income approach. Under the income approach, the Company determined fair value based on estimated discounted future cash flows of each reporting unit. The cash flows are discounted by an estimated weighted-average cost of capital, which is intended to reflect the overall level of inherent risk of a reporting unit. Determining the fair value of a reporting unit is judgmental in nature and requires the use of significant estimates and assumptions, including revenue growth rates and EBITDA margins, discount rates and future market conditions, among others. The Company considered market information in assessing the reasonableness of the fair value under the income approach outlined above.
Given the current economic environment, the changing document and printing needs of the Company’s customers, and the uncertainties regarding the related impact on the Company’s business, there can be no assurance that the estimates and assumptions made for purposes of the Company’s goodwill impairment testing in 2013 will prove to be accurate predictions of the future. If the Company’s assumptions, including forecasted EBITDA of certain reporting units, are not achieved, the Company may be required to record additional goodwill impairment charges in future periods, whether in connection with the Company’s next annual impairment testing in the third quarter of 2014, or on an interim basis, if any such change constitutes a triggering event (as defined under ASC 350, Intangibles—Goodwill and Other ) outside of the quarter when the Company regularly performs its annual goodwill impairment test. It is not possible at this time to determine if any such future impairment charge would result or, if it does, whether such charge would be material.
At September 30, 2011, the results of the Company’s analysis indicated that nine of its 37 reporting units, eight in the United States and one in Canada, had a goodwill impairment. Accordingly, the Company recorded a pretax, non-cash charge for the three months ended September 30, 2011 to reduce the carrying value of goodwill by $42.1 million. Given the increased uncertainty in the timing of the recovery of the construction industry, and the increased uncertainty in the economy as a whole, as well as the significant decline in the price of the Company’s senior notes (resulting in a higher yield) and a decline of the Company’s stock price during the third quarter of 2011, the Company concluded that it was appropriate to increase the estimated weighted average cost of capital (“WACC”) of its reporting units as of September 30, 2011. The increase in the Company’s WACC was the main driver in the decrease in the estimated fair value of reporting units during the third quarter of 2011, which in turn resulted in the goodwill impairment.
At June 30, 2011, the Company determined that there were sufficient indicators to trigger an interim goodwill impairment analysis. The indicators included, among other factors: (1) the economic environment, (2) the performance against plan of reporting units which previously had goodwill impairment, and (3) revised forecasted future earnings. The Company’s analysis indicated that six of its 36 reporting units, all of which are located in the United States, had a goodwill impairment as of June 30, 2011. Accordingly, the Company recorded a pretax, non-cash charge for the three and six months ended June 30, 2011 to reduce the carrying value of goodwill by $23.3 million.
The changes in the carrying amount of goodwill from January 1, 2012 through December 31, 2013 are summarized as follows:
 
 
Gross
Goodwill
 
Accumulated
Impairment
Loss
 
Net
Carrying
Amount
January 1, 2012
$
405,558

 
$
176,243

 
$
229,315

Additions

 

 

Goodwill impairment

 
16,707

 
(16,707
)
December 31, 2012
405,558

 
192,950

 
212,608

Additions

 

 

Goodwill impairment

 

 

December 31, 2013
$
405,558

 
$
192,950

 
$
212,608


Other intangible assets that have finite lives are amortized over their useful lives. Customer relationships are amortized using the accelerated method, based on customer attrition rates, over their estimated useful lives of 13 (weighted average) years.
During the fourth quarter of 2010, the Company decided to consolidate the various brands that previously represented the Company’s market presence in North America. Beginning in January 2011, each of the Company’s North American operating segments and their respective locations began to adopt ARC, the Company’s overall brand name. Original brand names were used in conjunction with the new ARC brand name to reinforce the Company’s continuing presence in the business communities it serves, and ongoing relationships with its customers. Accordingly, the remaining estimated useful lives of the trade name intangible assets were revised down to 18 months. This change in estimate was accounted for on a prospective basis, resulting in increased amortization expense over the revised useful life of each trade name. There was no related impact for the year ended December 31, 2013. The impact of this change for the twelve months ended December 31, 2012 was an increase in amortization expense of approximately $3.2 million. Trade names were amortized using the straight-line method. The Company retired the original North American trade names in April 2012.
The following table sets forth the Company’s other intangible assets resulting from business acquisitions as of December 31, 2013 and December 31, 2012 which continue to be amortized:
 
 
December 31, 2013
 
December 31, 2012
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
Amortizable other intangible assets
 
 
 
 
 
 
 
 
 
 
 
Customer relationships
$
97,775

 
$
70,495

 
$
27,280

 
$
97,926

 
$
64,024

 
$
33,902

Trade names and trademarks
20,375

 
19,799

 
576

 
20,350

 
19,754

 
596

 
$
118,150

 
$
90,294

 
$
27,856

 
$
118,276

 
$
83,778

 
$
34,498


Based on current information, estimated future amortization expense of other intangible assets for each of the next five fiscal years and thereafter are as follows:
 
2014
$
5,755

2015
5,213

2016
4,513

2017
3,998

2018
3,631

Thereafter
4,746

 
$
27,856

Property and Equipment
Property and Equipment
PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
 
December 31,
 
2013
 
2012
Machinery and equipment
$
241,626

 
$
231,879

Buildings and leasehold improvements
17,255

 
18,182

Furniture and fixtures
3,936

 
4,240

 
262,817

 
254,301

Less accumulated depreciation
(206,636
)
 
(197,830
)
 
$
56,181

 
$
56,471


Depreciation expense was $28.1 million, $28.5 million, and $29.2 million for the years ended December 31, 2013, 2012 and 2011, respectively.
The two facilities that the Company owns are subject to liens under its credit facility.
Long-Term Debt
Long-Term Debt
LONG-TERM DEBT
Long-term debt consists of the following:
 
 
December 31,
 
2013
 
2012
10.5% senior notes due 2016, net of bond discount of $0 and $3,148
$

 
$
196,852

Term loan credit agreement maturing 2018, net of original issue discount of $4,000; 6.25% interest rate at December 31, 2013
196,000

 

Various capital leases; weighted average interest rate of 7.5% at December 31, 2013 and 2012; principal and interest payable monthly through December 2018
21,516

 
23,445

Borrowings from foreign revolving credit facilities; 0.6% interest rate at December 31, 2013 and 2012
1,811

 
1,985

Various other notes payable with a weighted average interest rate of 6.4% and 6.0% at December 31, 2013 and 2012, respectively; principal and interest payable monthly through June 2016
401

 
243

 
219,728

 
222,525

Less current portion
(21,500
)
 
(13,263
)
 
$
198,228

 
$
209,262


10.5% Senior Notes
On December 1, 2010, the Company completed a private placement of 10.5% senior unsecured notes due 2016 (the “Notes”). During the third and fourth quarters of 2013, the Company repurchased $12.3 million in aggregate principal amount of the Notes in the open market using available cash. In December 2013 the Company commenced a cash tender offer and consent solicitation for all of the remaining outstanding Notes and accepted for payment all Notes that were validly tendered, followed by a redemption of all Notes which remained outstanding following the tender offer. In addition, the Company discharged all of its obligations under the indenture governing the Notes by causing to be delivered a notice of redemption to holders of the remaining outstanding Notes and the Company deposited funds sufficient to pay and discharge all remaining indebtedness on the Notes, including accrued and unpaid interest. The purchase and redemption of the Notes resulted in a loss on early extinguishment of debt of $16.3 million in 2013.
Term Loan Credit Agreement

On December 20, 2013, the Company entered into a Term Loan Credit Agreement (the “Term Loan Credit Agreement”) among the Company, as borrower, JPMorgan Chase Bank., N.A, as administrative agent and as collateral agent, and the lenders party thereto.

The credit facility provided under the Term Loan Credit Agreement consists of an initial term loan facility of $200.0 million the entirety of which was disbursed in order to pay for the purchase of the Notes that were accepted under a cash tender offer and the subsequent redemption of the remaining outstanding Notes and to pay associated fees and expenses in connection with the cash tender offer and redemption. The Company has the right to request increases to the aggregate amount of term loans by an amount not to exceed $50.0 million in the aggregate.

By refinancing the Notes with this Term Loan Credit Agreement, the Company was able to reduce the effective interest rate on its long-term debt from 10.5% (or $21.0 million of interest per year on $200.0 million of principal) to 6.25% (or $12.5 million of interest per year on $200.0 million of principal). In addition, it moved the principal portion of the Company's long-term debt into a structure that is efficiently pre-payable without a premium. This allows the Company to use its cash flow to efficiently deliver value to the Company.

The Term Loan Credit Agreement maturity date, with respect to the initial $200.0 million term loan, is December 20, 2018. Under the Term Loan Credit Agreement, the Company is required to make regularly scheduled principal payments of $2.5 million each quarter, with all remaining unpaid principal due at maturity.

The term loan extended under the Term Loan Credit Agreement can be maintained in different tranches consisting of Eurodollar loans or as base rate loans. It is expected that the borrowings under the Term Loan Credit Agreement will be maintained in Eurodollars and therefore will bear interest, for any interest period, at a rate per annum equal to (i) the higher of (A) the LIBOR rate for U.S. dollar deposits for a period equal to the applicable interest period as determined by the administrative agent in accordance with the Term Loan Credit Agreement and (B) with respect to the initial term loans only, 1.00%, plus (ii) an applicable margin of 5.25%

The Company will pay certain recurring fees with respect to the credit facility, including administration fees to the administrative agent.
In accordance with the Term Loan Credit Agreement, the Company is required to maintain an Interest Expense Coverage Ratio (as defined in the Term Loan Credit Agreement) greater than or equal to 2.00:1.00 as of the end of each fiscal quarter. In addition, the Company is required to maintain a Total Leverage Ratio less than or equal to (i) 4.50:1.00 for any fiscal quarter ending through December 31, 2014; (ii) 4.25:1.00 for any fiscal quarter ending between March 31, 2015 and December 31, 2015; (iii)4.00:1.00 for any fiscal quarter ending between March 31, 2016 and December 31, 2016; (iv) 3.75:1.00 for any fiscal quarter ending between March 31, 2017 and December 31, 2017; and (v) 3.50:1.00 for any fiscal quarter ending March 31, 2018 and thereafter. The Company was in compliance with the Term Loan Credit Agreement covenants as of December 31, 2013.

Subject to certain exceptions, the term loan extended under the Term Loan Credit Agreement is subject to customary mandatory prepayments provisions with respect to: the net cash proceeds from certain asset sales; the net cash proceeds from certain issuances or incurrences of debt (other than debt permitted to be incurred under the terms of the Term Loan Credit Agreement); a portion (with stepdowns based upon the achievement of a financial covenant linked to the total leverage ratio) of annual excess cash flow of the Company and certain of its subsidiaries, and with such required prepayment amount to be reduced dollar-for-dollar by the amount of voluntary prepayments of term loans made with internally generated funds; and, the net cash proceeds in excess of a certain amount from insurance recovery (other than business interruption insurance) and condemnation events of the Company and certain of its subsidiaries, subject to certain reinvestment rights.

The Term Loan Credit Agreement contains customary representations and warranties, subject to limitations and exceptions, and customary covenants restricting the ability (subject to various exceptions) of the Company and certain of its subsidiaries to: incur additional indebtedness (including guarantee obligations); incur liens; engage in mergers or other fundamental changes; sell certain property or assets; pay dividends of other distributions; consummate acquisitions; make investments, loans and advances; prepay certain indebtedness; change the nature of their business; engage in certain transactions with affiliates; and, incur restrictions on the ability of the Company’s subsidiaries to make distributions, advances and asset transfers. In addition, under the Term Loan Credit Agreement the Company will be required to comply with a specific leverage ratio and a minimum interest coverage ratio.

The Term Loan Credit Agreement contains customary events of default, including with respect to: nonpayment of principal, interest, fees or other amounts; material inaccuracy of a representation or warranty when made; failure to perform or observe covenants; cross-default to other material indebtedness; bankruptcy and insolvency events; inability to pay debts; monetary judgment defaults; actual or asserted invalidity or impairment of any definitive loan documentation; and a change of control.

The obligations of the Company under the Term Loan Credit Agreement are guaranteed by each United States domestic subsidiary of the Company. The Term Loan Credit Agreement and any interest rate protection and other hedging arrangements provided by any lender party to the Senior Secured Credit Facilities or any affiliate of such a lender are secured on a first priority basis by a perfected security interest in substantially all of the Company’s and each guarantor’s assets (subject to certain exceptions), except that such lien is second priority in the case of inventory, receivables and related assets that are subject to a first priority security interest under the 2012 Credit Agreement (as defined below).
2012 Credit Agreement
On January 27, 2012, the Company entered into a new Credit Agreement (the “2012 Credit Agreement”). The 2012 Credit Agreement was amended on December 20, 2013 in connection with the Company's entry int o the Term Loan Credit Agreement for the principal purpose of making the 2012 Credit Agreement consistent with the Term Loan Credit Agreement. The 2012 Credit Agreement, as amended, provides revolving loans in an aggregate principal amount not to exceed $40.0 million with a Canadian sublimit of $5.0 million, based on inventory and accounts receivable of the Company’s subsidiaries organized in the US ("United States Domestic Subsidiaries") and Canada (“Canadian Domestic Subsidiaries”) that meet certain eligibility criteria. The 2012 Credit Agreement has a maturity date of January 27, 2017.
Amounts borrowed in US dollars under the 2012 Credit Agreement bear interest, in the case of LIBOR loans, at a per annum rate equal to LIBOR plus the LIBOR Rate Margin (as defined in the 2012 Credit Agreement), which may range from 1.75% to 2.25%, based on Average Daily Net Availability (as defined in the 2012 Credit Agreement). All other amounts borrowed in US dollars that are not LIBOR loans bear interest at a per annum rate equal to (i) the greatest of (A) the Federal Funds rate plus 0.5%, (B) the LIBOR rate (calculated based upon an interest period of three months and determined on a daily basis), plus 1.0% per annum, and (C) the rate of interest announced, from time to time, within Wells Fargo Bank, National Association at its principal office in San Francisco as its “prime rate,” plus (ii) the Base Rate Margin (as defined in the 2012 Credit Agreement), which may range from 0.75% to 1.25%, based on Average Daily Net Availability (as defined in the 2012 Credit Agreement). Amounts borrowed in Canadian dollars bear interest at a per annum rate equal to the Canadian Base Rate (as defined in the 2012 Credit Agreement) plus the LIBOR Rate Margin, which may range from 1.75% to 2.25%, based on Average Daily Net Availability.
The 2012 Credit Agreement contains various loan covenants that restrict the Company’s ability to take certain actions, including restrictions on incurrence of indebtedness, creation of liens, mergers or consolidations, dispositions of assets, repurchase or redemption of capital stock, making certain investments, entering into certain transactions with affiliates or changing the nature of the Company’s business. In addition, at any time when Excess Availability (as defined in the 2012 Credit Agreement) is less than $8.0 million, the Company is required to maintain a Fixed Charge Coverage Ratio (as defined in the 2012 Credit Agreement) of at least 1.0. The Company’s obligations under the 2012 Credit Agreement are secured by substantially all of the Company’s and its United States Domestic Subsidiaries’ assets. The Company's United States Domestic Subsidiaries have also guaranteed all of the Company’s obligations under the 2012 Credit Agreement. The obligations of the Company’s Canadian Domestics Subsidiaries which are borrowers under the 2012 Credit Agreement are secured by substantially all of the assets the Company’s Canadian Domestic Subsidiaries.
As of and during the year December 31, 2013, the Company did not have any outstanding debt under the 2012 Credit Agreement, other than contingent reimbursement obligations for undrawn standby letters of credit described below that were issued under the 2012 Credit Agreement.
As of December 31, 2013, based on inventory and accounts receivable of the Company’s subsidiaries organized in the US and Canada, the Company’s borrowing availability under the 2012 Credit Agreement was $39.7 million; however, outstanding standby letters of credit issued under the 2012 Credit Agreement totaling $2.5 million further reduced the Company’s borrowing availability under the 2012 Credit Agreement to $37.2 million as of December 31, 2013.
Foreign Credit Agreement
In the third quarter of 2013, in conjunction with its Chinese operations, UNIS Document Solutions Co. Ltd. (“UDS”), the Company’s Chinese business venture with Beijing-based Unisplendour, entered into a revolving credit facility with a term of 18 months. The facility provides for a maximum credit amount of 20.0 million Chinese Yuan Renminbi, which translates to U.S. $3.3 million as of December 31, 2013. Draws on the facility are limited to 30 day periods and incur a fee of 0.05% of the amount drawn and no additional interest is charged.
Other Notes Payable
Includes notes payable collateralized by equipment previously purchased and subordinated seller notes payable related to prior acquisitions.
Minimum future maturities of long-term debt and capital lease obligations as of December 31, 2013 are as follows:
 
 
Long-Term Debt
 
Capital Lease Obligations
Year ending December 31:
 
 
 
2014
$
12,013

 
$
9,487

2015
10,139

 
6,144

2016
10,060

 
3,634

2017
10,000

 
1,784

2018
160,000

 
467

Thereafter

 

 
$
202,212

 
$
21,516

Commitments and Contingencies
Commitments and Contingencies
COMMITMENTS AND CONTINGENCIES
The Company leases machinery, equipment, and office and operational facilities under noncancelable operating lease agreements. Certain lease agreements for the Company’s facilities generally contain renewal options and provide for annual increases in rent based on the local Consumer Price Index. The following is a schedule of the Company’s future minimum lease payments as of December 31, 2013:
 
 
 
Third Party
 
Related Party
 
Total
Year ending December 31:
 
 
 
 
 
 
2014
 
$
17,619

 
$
43

 
$
17,662

2015
 
13,026

 

 
13,026

2016
 
8,480

 

 
8,480

2017
 
5,118

 

 
5,118

2018
 
2,196

 

 
2,196

Thereafter
 
366

 

 
366

 
 
$
46,805

 
$
43

 
$
46,848


Total rent expense under operating leases, including month-to-month rentals, amounted to $24.1 million, $26.3 million, and $28.0 million during the years ended December 31, 2013, 2012 and 2011, respectively. Under certain lease agreements, the Company is responsible for other costs such as property taxes, insurance, maintenance, and utilities.
The Company leases several of its facilities under lease agreements with entities owned by certain of its current and former executive officers which expire through March 2014. Rental expense on these facilities amounted to $0.9 million, $1.1 million and $1.5 million during the years ended December 31, 2013, 2012 and 2011, respectively.
The Company has entered into indemnification agreements with each director and named executive officer which provide indemnification under certain circumstances for acts and omissions which may not be covered by any directors’ and officers’ liability insurance. The indemnification agreements may require the Company, among other things, to indemnify its officers and directors against certain liabilities that may arise by reason of their status or service as officers and directors (other than liabilities arising from willful misconduct of a culpable nature), to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified, and to obtain officers’ and directors’ insurance if available on reasonable terms. There have been no events to date which would require the Company to indemnify its officers or directors.
On October 21, 2010, a former employee, individually and on behalf of a purported class consisting of all non-exempt employees who work or worked for American Reprographics Company, L.L.C. and American Reprographics Company in the State of California at any time from October 21, 2006 through the present, filed an action against the Company in the Superior Court of California for the County of Orange. The complaint alleges, among other things, that the Company violated the California Labor Code by failing to (i) provide meal and rest periods, or compensation in lieu thereof, (ii) timely pay wages due at termination, and (iii) that those practices also violate the California Business and Professions Code. The relief sought includes damages, restitution, penalties, interest, costs, and attorneys’ fees and such other relief as the court deems proper. On March 15, 2013, the Company participated in a private mediation session with claimants’ counsel which did not result in resolution of the claim. Subsequent to the mediation session, the mediator issued a proposal that was accepted by both parties. A continued hearing on the motion for preliminary approval of the settlement will be held on March 19, 2014. The Company recorded a liability of $0.9 million as of December 31, 2013 related to the claim, which represents management's best estimate of the probable outcome based on information available. As such, the ultimate resolution of the claim could result in a loss different than the estimated loss recorded.
In addition to the matter described above, the Company is involved in various additional legal proceedings and other legal matters from time to time in the normal course of business. The Company does not believe that the outcome of any of these matters will have a material effect on its consolidated financial position, results of operations or cash flows.
Income Taxes
Income Taxes
INCOME TAXES
The following table includes the consolidated income tax provision for federal, state, and local income taxes related to the Company’s total earnings before taxes for 2013, 2012 and 2011:
 
 
 
Year Ended December 31,
 
 
2013
 
2012
 
2011
Current:
 
 
 
 
 
 
Federal
 
$

 
$
59

 
$
(16,449
)
State
 
264

 
370

 
353

Foreign
 
354

 
322

 
48

 
 
618

 
751

 
(16,048
)
Deferred:
 
 
 
 
 
 
Federal
 
1,898

 
1,356

 
57,249

State
 
869

 
489

 
8,321

Foreign
 
(399
)
 
188

 
1,409

 
 
2,368

 
2,033

 
66,979

Income tax provision
 
$
2,986

 
$
2,784

 
$
50,931


The Company's foreign earnings (losses) before taxes was $2.3 million, $2.9 million and ($1.2) million for 2013, 2012 and 2011.
The consolidated deferred tax assets and liabilities consist of the following:
 
 
December 31,
 
2013
 
2012
Deferred tax assets:
 
 
 
Financial statement accruals not currently deductible
$
3,980

 
$
3,641

Deferred revenue
418

 
617

State taxes
162

 
69

Fixed assets
6,408

 
5,079

Goodwill and other identifiable intangibles
32,111

 
38,015

Stock-based compensation
6,061

 
6,040

Federal tax net operating loss carryforward
31,817

 
21,237

State tax net operating loss carryforward, net
4,584

 
3,145

State tax credits, net
942

 
942

Foreign tax credit carryforward
249

 

Foreign tax net operating loss carryforward
361

 
721

Gross deferred tax assets
87,093

 
79,506

Less: valuation allowance
(85,551
)
 
(78,260
)
Net deferred tax assets
1,542

 
1,246

 
 
 
 
Deferred tax liabilities:
 
 
 
Goodwill and other identifiable intangibles
$
(31,667
)
 
$
(28,936
)
Net deferred tax liabilities
$
(30,125
)
 
$
(27,690
)


A reconciliation of the statutory federal income tax rate to the Company’s effective tax rate is as follows:
 
 
Year Ended December 31,
 
2013
 
2012
 
2011
Statutory federal income tax rate
35
 %
 
35
 %
 
35
 %
State taxes, net of federal benefit
3

 
1

 
2

Foreign taxes
4

 
2

 

Goodwill impairment

 
(8
)
 
(16
)
Valuation allowance
(63
)
 
(34
)
 
(83
)
Non-deductible expenses and other
(3
)
 
(1
)
 
(1
)
Stock-based compensation
(8
)
 
(4
)
 

Discrete item for state taxes
8

 

 

Discrete items for other
(2
)
 
(1
)
 
1

Effective income tax rate
(26
)%
 
(10
)%
 
(62
)%


In accordance with ASC 740-10, Income Taxes, the Company evaluates its deferred tax assets to determine if a valuation allowance is required based on the consideration of all available evidence using a “more likely than not” standard, with significant weight being given to evidence that can be objectively verified. This assessment considers, among other matters, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability; the length of statutory carryover periods for operating losses and tax credit carryovers; and available tax planning alternatives. During 2013 and 2012, the Company determined that cumulative losses for the preceding twelve quarters constituted sufficient objective evidence (as defined by ASC 740-10, Income Taxes) that a valuation allowance on certain deferred assets was needed.

Based on the Company’s assessment, the remaining net deferred tax assets of $1.5 million as of December 31, 2013 are considered to be more likely than not to be realized. The valuation allowance of $85.6 million may be increased or decreased as conditions change or if the Company is unable to implement certain available tax planning strategies. The realization of the Company’s net deferred tax assets ultimately depend on future taxable income, reversals of existing taxable temporary differences or through a loss carry back. The Company has income tax receivables of $0.2 million as of December 31, 2013 included in other current assets in its consolidated balance sheet primarily related to income tax refunds for prior years under audit.
As of December 31, 2013, the Company had approximately $90.8 million of consolidated federal, $94.4 million of state and $1.4 million of foreign net operating loss and charitable contribution carryforwards available to offset future taxable income, respectively. The federal net operating loss carryforward began in 2011 and will begin to expire in varying amounts between 2031 and 2033. The charitable contribution carryforward began in 2009 and will begin to expire in varying amounts between 2014 and 2017. The state net operating loss carryforwards expire in varying amounts between 2015 and 2033. The foreign net operating loss carryforwards expire in varying amounts between 2015 and 2033.

Goodwill impairment item represents non-deductible goodwill impairment related to stock acquired in prior years. Non-deductible other items include meals and entertainment and other items that, individually, are not significant.

The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2009. In 2010, the IRS commenced an examination of the Company’s U.S. income tax return for 2008, which was completed in February of 2011. The IRS did not propose any adjustments to the Company’s 2008 U.S. income tax return. In 2011, the IRS commenced an examination of the Company’s 2009 and 2010 U.S. income tax returns. The IRS did not propose any significant adjustments to the Company’s 2009 and 2010 U.S. income tax returns as of December 31, 2013.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
 
 
2013
 
2012
 
2011
Beginning balance at January 1,
$
266

 
$

 
$
1,549

Additions based on tax positions related to the current year

 
266

 

Reductions based on tax positions related to the prior year

 

 
(1,549
)
Reductions for tax positions due to expiration of statute of limitations

 

 

Ending balance at December 31,
$
266

 
$
266

 
$


All of the unrecognized tax benefits, reflected above affected the Company’s effective tax rate. The Company recognized a tax benefit of $1.5 million in 2011 due to the reduction, reflected above.
The Company recognizes penalties and interest related to unrecognized tax benefits in tax expense. Interest expense of $27 thousand is included in the ASC 740-10, Income Taxes, liability on the Company’s balance sheet as of December 31, 2013 and 2012.
Employee Stock Purchase Plan and Stock Option Plan
Employee Stock Purchase Plan and Stock Option Plan
EMPLOYEE STOCK PURCHASE PLAN AND STOCK OPTION PLAN
Employee Stock Purchase Plan
Under the Company’s Employee Stock Purchase Plan (the “ESPP”) eligible employees may purchase up to a calendar year maximum per eligible employee of the lesser of (i) 2,500 shares of common stock, or (ii) a number of shares of common stock having an aggregate fair market value of $25 thousand as determined on the date of purchase at 85% of the fair market value of such shares of common stock on the applicable purchase date. The compensation expense in connection with the ESPP in 2013, 2012, and 2011 was $5 thousand, $5 thousand and $9 thousand, respectively.

Employees purchased the following shares in the periods presented:
 
 
Year Ended December 31,
 
2013
 
2012
 
2011
Shares purchased
6

 
6

 
12

Average price per share
$
4.90

 
$
4.51

 
$
4.22


Stock Plan
The Company’s Stock Plan provides for the grant of incentive and non-statutory stock options, stock appreciation rights, restricted stock purchase awards, restricted stock awards, and restricted stock units to employees, directors and consultants of the Company. The Stock Plan authorizes the Company to issue up to 5.0 million shares of common stock. This amount automatically increased annually on the first day of the Company’s fiscal year, from 2006 through and including 2010, by the lesser of (i) 1.0% of the Company’s outstanding shares on the date of the increase; (ii) 0.3 million shares; or (iii) such smaller number of shares determined by the Company’s board of directors. At December 31, 2013, 0.8 million shares remain available for grant under the Stock Plan.
Options granted under the Stock Plan generally expire no later than ten years from the date of grant. Options generally vest and become fully exercisable over a period of three to five years, except options granted to non-employee directors may vest over a shorter time period. The exercise price of options must be equal to at least 100% (110% in the case of an incentive stock option granted to a 10% stockholder) of the fair market value of the Company’s common stock as of the date of grant. The Company allows for cashless exercises and grants new authorized shares upon the exercise of a vested stock option.
During the year ended December 31, 2013, the Company granted options to acquire a total of 1.5 million shares of the Company’s common stock to certain key employees with an exercise price equal to the fair market value of the Company’scommon stock on the date of grant.
In 2012 and 2011, the Company granted options to acquire a total of 631 thousand shares and 55 thousand shares, respectively, of the Company’s common stock to certain key employees with an exercise price equal to the fair market value of the Company’s common stock on the respective dates of grant.
The following is a further breakdown of the stock option activity under the Stock Plan:
 
 
Year Ended December 31, 2013
 
Shares
 
Weighted
Average
Exercise
Price
 
Weighted
Average
Contractual
Life
(In years)
 
Aggregate
Intrinsic
Value
(In thousands)
Outstanding at December 31, 2011
2,166

 
$
7.83

 
 
 
 
Granted
631

 
$
5.35

 
 
 
 
Exercised
(15
)
 
$
5.25

 
 
 
 
Forfeited/Cancelled
(446
)
 
$
5.41

 
 
 
 
Outstanding at December 31, 2012
2,336

 
$
7.64

 
 
 
 
Granted
1,508

 
$
2.67

 
 
 
 
Exercised
(11
)
 
$
5.62

 
 
 
 
Forfeited/Cancelled
(220
)
 
$
7.61

 
 
 
 
Outstanding at December 31, 2013
3,613

 
$
5.57

 
7.23
 
$
10,600

Vested or expected to vest at December 31, 2013
3,549

 
$
5.57

 
7.23
 
$
10,300

Exercisable at December 31, 2013
1,671

 
$
8.20

 
5.18
 
$
1,053

The aggregate intrinsic value in the table above represents the total pretax intrinsic value (the difference between the closing stock price on December 31, 2013 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all the option holders exercised their options on December 31, 2013. This amount changes based on the fair market value of the common stock. Total intrinsic value of options exercised during the years ended December 31, 2013, 2012 and 2011 was $27 thousand, $1 thousand and $45 thousand, respectively.

A summary of the Company’s non-vested stock options as of December 31, 2013, and changes during the fiscal year then ended is as follows:
 
 
 
Weighted
Average Grant Date
Non-vested Options
Shares
 
Fair Market Value
Non-vested at December 31, 2012
671

 
$
3.11

Granted
1,508

 
$
1.57

Vested
(219
)
 
$
3.08

Forfeited/Cancelled
(18
)
 
$
3.05

Non-vested at December 31, 2013
1,942

 
$
1.90

The following table summarizes certain information concerning outstanding options at December 31, 2013:
 
 
 
Range of Exercise Price
Options Outstanding at
December 31, 2013
$2.37 – $3.99
1,527

$4.75 – $6.20
791

$8.20 – $9.03
1,245

$23.85 – $35.42
50

$2.37 – $35.42
3,613

Restricted Stock
The Stock Plan provides for automatic grants of restricted stock awards to non-employee directors of the Company, as of each annual meeting of the Company’s stockholders having a then fair market value equal to $50 thousand.
In 2013, the Company granted 15 thousand shares of restricted stock to each of the Company’s six non-employee members of its Board of Directors at a price per share equal to the closing price of the Company’s common stock on the respective dates the restricted stock was granted. The shares of restricted stock granted to the non-employee board members vested on the one-year anniversary of the grant date.
In 2012, the Company granted 9 thousand shares of restricted stock to each of the Company’s six non-employee members of its Board of Directors at a price per share equal to the closing price of the Company’s common stock on the respective date the restricted stock was granted. The shares of restricted stock granted to the non-employee board members will vest on the one-year anniversary of the grant date.
In 2011, the Company granted 465 thousand shares of restricted stock to certain key employees, and 6 thousand shares of restricted stock to each of the Company’s six non-employee members of its Board of Directors at a price per share equal to the closing price of the Company’s common stock on the respective dates the restricted stock was granted. The shares of restricted stock granted to certain key employees will vest ratably over four years. The shares of restricted stock granted to the non-employee board members will vest on the one-year anniversary of the grant date.

A summary of the Company’s non-vested restricted stock as of December 31, 2013, and changes during the fiscal year then ended is as follows:
 
 
 
Weighted
Average Grant Date
Non-vested Restricted Stock
Shares
 
Fair Market Value
Non-vested at December 31, 2012
481

 
$
7.70

Granted
92

 
$
3.26

Vested
(208
)
 
$
7.22

Forfeited/Cancelled
(20
)
 
$
7.57

Non-vested at December 31, 2013
345

 
$
6.83


The Company recognized compensation expense from restricted stock of $3.2 million, $1.6 million and $2.1 million in 2013, 2012 and 2011, respectively.
Retirement Plans
Retirement Plans
RETIREMENT PLANS
The Company sponsors a 401(k) Plan, which covers substantially all employees of the Company who have attained age 21. Under the Company’s 401(k) Plan, eligible employees may contribute up to 75% of their annual eligible compensation (or in the case of highly compensated employees, up to 6% of their annual eligible compensation), subject to contribution limitations imposed by the Internal Revenue Service. During a portion 2009, the Company made an employer matching contribution equal to 20% of an employee’s contributions, up to a total of 4% of that employee’s compensation. In July 2009, the Company amended its 401(k) Plan to eliminate the mandatory company contribution and to provide for discretionary company contributions. In 2013, the Company reinstated the mandatory company contribution. An independent third party administers the Company’s 401(k) Plan. The Company's total expense under these plans amounted to $50 thousand during the year ended December 31, 2013. The Company did not make any discretionary contributions to its 401(k) plan in 2013, 2012 or 2011.
Derivatives and Hedging Transactions
Derivatives and Hedging Transactions
DERIVATIVES AND HEDGING TRANSACTIONS
As of December 31, 2013 the Company was not party to any derivative or hedging transactions.
As of December 31, 2010, the Company was party to a swap transaction, in which the Company exchanged its floating-rate payments for fixed-rate payments. The swap transaction qualified as a cash flow hedge up to November 30, 2010. As of December 1, 2010, the swap transaction was de-designated upon issuance of the Notes and payoff of the Company’s previous credit agreement. The swap transaction no longer qualified as a cash flow hedge under ASC 815, Derivatives and Hedging, as all the floating-rate debt was extinguished. As of December 31, 2010, the swap transaction had a negative fair value of $9.7 million, all of which was recorded in accrued expenses. On January 3, 2011, the swap transaction was terminated and settled.
As of December 31, 2013, there is no amount deferred in accumulated other comprehensive income related to any swap transactions.

The following table summarizes the effect of the Amended Swap Transaction on the Consolidated Statements of Operations for the year ended December 31, 2013, 2012 and 2011:
 
 
Amount of Gain or (Loss)
Reclassified from AOCL into Income
 
Amount of Gain or (Loss)
Recognized in Income
 
(effective portion)
 
(ineffective portion)
 
Year Ended December 31,
 
Year Ended December 31,
 
2013
 
2012
 
2011
 
2013
 
2012
 
2011
Location of Loss Reclassified from AOCL into Income
 
 
 
 
 
 
 
 
 
 
 
Interest expense
$

 
$
3,440

 
$
5,691

 
$

 
$

 
$

Fair Value Measurements
Fair Value Measurements
FAIR VALUE MEASUREMENTS
In accordance with ASC 820, Fair Value Measurement, the Company has categorized its assets and liabilities that are measured at fair value into a three-level fair value hierarchy as set forth below. If the inputs used to measure fair value fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair value measurement. The three levels of the hierarchy are defined as follows:
Level 1-inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2-inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level 3-inputs to the valuation methodology are unobservable and significant to the fair value measurement.

The following table summarizes the bases used to measure certain assets and liabilities at fair value on a nonrecurring basis in the consolidated financial statements as of and for the year ended December 31, 2013 and 2012:
 
 
 
Significant Other Unobservable Inputs
December 31,
 
 
2013
 
2012
 
 
Level 3
 
Total Losses
 
Level 3
 
Total Losses
Nonrecurring Fair Value Measure
 
 
 
 
 
 
 
 
Goodwill
 
$
212,608

 
$

 
$
212,608

 
$
16,707


Fair value measurements of assets and liabilities are used primarily in the impairment analysis of goodwill using discounted cash flows with Level 3 inputs in the fair value hierarchy. In accordance with the provisions of ASC 350, Intangibles – Goodwill and Other, goodwill was written down to its implied fair value of $212.6 million as of December 31, 2012, resulting in an impairment charge of $16.7 million during the year ended December 31, 2012. See Note 2, “Summary of Significant accounting policies” and Note 5, “Goodwill and other intangibles resulting from business acquisitions” for further information regarding the process of determining the implied fair value of goodwill and change in goodwill.
Valuation and Qualifying accounts (Notes)
Valuation and Qualifying Accounts
Schedule II
ARC DOCUMENT SOLUTIONS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(Dollars in thousands)
 
 
Balance at
Beginning
of Period
 
Charges to
Cost and
Expenses
 
Deductions
(1)
 
Balance at
End of
Period
Year ended December 31, 2013
 
 
 
 
 
 
 
Allowance for accounts receivable
$
2,634

 
$
636

 
$
(753
)
 
$
2,517

Year ended December 31, 2012
 
 
 
 
 
 
 
Allowance for accounts receivable
$
3,309

 
$
456

 
$
(1,131
)
 
$
2,634

Year ended December 31, 2011
 
 
 
 
 
 
 
Allowance for accounts receivable
$
4,030

 
$
1,034

 
$
(1,755
)
 
$
3,309

 
(1)
Deductions represent uncollectible accounts written-off net of recoveries.
Description of Business and Basis of Presentation Accounting Policies (Policies)
Basis of Presentation
The accompanying Consolidated Financial Statements include the accounts of the Company and its subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. The Company evaluates its estimates and assumptions on an ongoing basis and relies on historical experience and various other factors that it believes to be reasonable under the circumstances to determine such estimates. Actual results could differ from those estimates and such differences may be material to the Consolidated Financial Statements.
Risk and Uncertainties
The Company generates the majority of its revenue from sales of services and products to customers in the AEC industry. As a result, the Company’s operating results and financial condition can be significantly affected by economic factors that influence the AEC industry, such as non-residential construction spending, GDP growth, interest rates, unemployment rates, and office vacancy rates. Reduced activity (relative to historic levels) in the AEC industry would diminish demand for some of ARC’s services and products, and would therefore negatively affect revenues and have a material adverse effect on its business, operating results and financial condition.
As part of the Company’s growth strategy, ARC intends to continue to offer and grow a variety of service offerings that are relatively new to the Company. The success of the Company’s efforts will be affected by its ability to acquire new customers for the Company’s new service offerings as well as sell the new service offerings to existing customers. The Company’s inability to successfully market and execute these relatively new service offerings could significantly affect its business and reduce its long term revenue, resulting in an adverse effect on its results of operations and financial condition.
Summary of Significant Accounting Policies (Policies)
Cash Equivalents
Cash equivalents include demand deposits and short-term investments with a maturity of three months or less when purchased.
The Company maintains its cash deposits at numerous banks located throughout the United States, Canada, India, the United Kingdom and China, which at times, may exceed federally insured limits. UDS, the Company’s operations in China, held $15.1 million of the Company’s cash and cash equivalents as of December 31, 2013. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant risk on cash and cash equivalents.
Concentrations of Credit Risk and Significant Vendors
Concentrations of credit risk with respect to trade receivables are limited due to a large, diverse customer base. No individual customer represented more than 4% of net sales during the years ended December 31, 2013, 2012 and 2011.
The Company has geographic concentration risk as sales in California, as a percent of total sales, were approximately 31%, 31% and 32% for the years ended December 31, 2013, 2012 and 2011, respectively.
The Company contracts with various suppliers. Although there are a limited number of suppliers that could supply the Company’s inventory, management believes any shortfalls from existing suppliers would be absorbed from other suppliers on comparable terms. However, a change in suppliers could cause a delay in sales and adversely affect results.
Purchases from the Company’s three largest vendors during the years ended December 31, 2013, 2012 and 2011 comprised approximately 36%, 34%, and 37% respectively, of the Company’s total purchases of inventory and supplies.
Allowance for Doubtful Accounts
The Company performs periodic credit evaluations of the financial condition of its customers, monitors collections and payments from customers, and generally does not require collateral. The Company provides for the possible inability to collect accounts receivable by recording an allowance for doubtful accounts. The Company writes off an account when it is considered uncollectible. The Company estimates the allowance for doubtful accounts based on historical experience, aging of accounts receivable, and information regarding the credit worthiness of its customers. Additionally, the Company provides an allowance for returns and discounts based on historical experience. In 2013, 2012, and 2011 the Company recorded expenses of $0.6 million, $0.5 million and $1.0 million, respectively, related to the allowance for doubtful accounts.
Inventories
Inventories are valued at the lower of cost (determined on a first-in, first-out basis; or average cost) or market. Inventories primarily consist of reprographics materials for use and resale, and equipment for resale. On an ongoing basis, inventories are reviewed and adjusted for estimated obsolescence or unmarketable inventories to reflect the lower of cost or market. Charges to increase inventory reserves are recorded as an increase in cost of sales. Estimated inventory obsolescence has been provided for in the financial statements and has been within the range of management’s expectations. As of December 31, 2013 and 2012, the reserves for inventory obsolescence was $0.9 million and $1.1 million, respectively.
Income Taxes
Deferred tax assets and liabilities reflect temporary differences between the amount of assets and liabilities for financial and tax reporting purposes. Such amounts are adjusted, as appropriate, to reflect changes in tax rates expected to be in effect when the temporary differences reverse. A valuation allowance is recorded to reduce the Company's deferred tax assets to the amount that is more likely than not to be realized. Changes in tax laws or accounting standards and methods may affect recorded deferred taxes in future periods.

When establishing a valuation allowance, the Company considers future sources of taxable income such as future reversals of existing taxable temporary differences, future taxable income exclusive of reversing temporary differences and carryforwards and tax planning strategies. A tax planning strategy is an action that: is prudent and feasible; an enterprise ordinarily might not take, but would take to prevent an operating loss or tax credit carryforward from expiring unused; and would result in realization of deferred tax assets. In the event the Company determines that its deferred tax assets, more likely than not, will not be realized in the future, the valuation adjustment to the deferred tax assets will be charged to earnings in the period in which the Company makes such a determination.
As of June 30, 2011, the Company determined that cumulative losses for the preceding twelve quarters constituted sufficient objective evidence (as defined by Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 740-10, Income Taxes) that a valuation allowance was needed. As of December 31, 2013 and 2012, the valuation allowance against certain deferred tax assets was $85.6 million and $78.3 million, respectively.

In future quarters the Company will continue to evaluate its historical results for the preceding twelve quarters and its future projections to determine whether the Company will generate sufficient taxable income to utilize its deferred tax assets, and whether a partial or full valuation allowance is still required. Should the Company generate sufficient taxable income, however, a portion or all of the then current valuation allowance may be reversed.

The Company calculates its current and deferred tax provision based on estimates and assumptions that could differ from the actual results reflected in income tax returns filed in subsequent years. Adjustments based on filed returns are recorded when identified.

Income taxes have not been provided on certain undistributed earnings of foreign subsidiaries because such earnings are considered to be permanently reinvested.

The amount of taxable income or loss the Company reports to the various tax jurisdictions is subject to ongoing audits by federal, state and foreign tax authorities. The Company's estimate of the potential outcome of any uncertain tax issue is subject to management’s assessment of relevant risks, facts, and circumstances existing at that time. The Company uses a more-likely-than-not threshold for financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. The Company records a liability for the difference between the benefit recognized and measured and tax position taken or expected to be taken on its tax return. To the extent that the Company's assessment of such tax positions changes, the change in estimate is recorded in the period in which the determination is made. The Company report tax-related interest and penalties as a component of income tax expense.
The Company’s effective income tax rate differs from the statutory tax rate primarily due to the valuation allowance on the Company’s deferred tax assets, state income taxes, stock-based compensation, goodwill and other identifiable intangibles, and other discrete items. See Note 9 “Income Taxes” for further information.
Income tax deficiencies and benefits affecting stockholders’ equity are primarily related to employee stock-based compensation.
Property and Equipment
Property and equipment are stated at cost and are depreciated using the straight-line method over their estimated useful lives, as follows:
 
Buildings
  
10-20 years
Leasehold improvements
  
10-20 years or lease term, if shorter
Machinery and equipment
  
3-7 years
Furniture and fixtures
  
3-7 years

Assets acquired under capital lease arrangements are included in machinery and equipment and are recorded at the present value of the minimum lease payments and are depreciated using the straight-line method over the life of the asset or term of the lease, whichever is shorter. Expenses for repairs and maintenance are charged to expense as incurred, while renewals and betterments are capitalized. Gains or losses on the sale or disposal of property and equipment are reflected in operating income.

The Company accounts for computer software costs developed for internal use in accordance with ASC 350-40, Intangibles – Goodwill and Other, which requires companies to capitalize certain qualifying costs incurred during the application development stage of the related software development project. The primary use of this software is for internal use and, accordingly, such capitalized software development costs are depreciated on a straight-line basis over the economic lives of the related products not to exceed three years. The Company’s machinery and equipment (see Note 6 “Property and Equipment”) includes $0.3 million and $0.6 million of capitalized software development costs as of December 31, 2013 and 2012, respectively, net of accumulated amortization of $17.5 million and $17.1 million as of December 31, 2013 and 2012, respectively. Depreciation expense includes the amortization of capitalized software development costs which amounted to $0.3 million, $0.5 million and $0.9 million during the years ended December 31, 2013, 2012 and 2011, respectively.
Impairment of Long-Lived Assets
The Company periodically assesses potential impairments of its long-lived assets in accordance with the provisions of ASC 360, Property, Plant, and Equipment. An impairment review is performed whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. The Company groups its assets at the lowest level for which identifiable cash flows are largely independent of cash flows of the other assets and liabilities. The Company has determined that the lowest level for which identifiable cash flows are available is the divisional level, which is the reporting unit level.
Factors considered by the Company include, but are not limited to, significant underperformance relative to historical or projected operating results; significant changes in the manner of use of the acquired assets or the strategy for the overall business; and significant negative industry or economic trends. When the carrying value of a long-lived asset may not be recoverable based upon the existence of one or more of the above indicators of impairment, the Company estimates the future undiscounted cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the expected future undiscounted cash flows and eventual disposition is less than the carrying amount of the asset, the Company recognizes an impairment loss. An impairment loss is reflected as the amount by which the carrying amount of the asset exceeds the fair value of the asset, based on the fair value if available, or discounted cash flows, if fair value is not available.
Goodwill and Other Intangible Assets
In connection with acquisitions, the Company applies the provisions of ASC 805, Business Combinations, using the acquisition method of accounting. The excess purchase price over the assessed fair value of net tangible assets and identifiable intangible assets acquired is recorded as goodwill.
In accordance with ASC 350, Intangibles – Goodwill and Other, the Company assesses goodwill for impairment annually as of September 30, and more frequently if events and circumstances indicate that goodwill might be impaired.
Goodwill impairment testing is performed at the reporting unit level. Goodwill is assigned to reporting units at the date the goodwill is initially recorded. Once goodwill has been assigned to reporting units, it no longer retains its association with a particular acquisition, and all of the activities within a reporting unit, whether acquired or internally generated, are available to support the value of the goodwill.
Goodwill impairment testing is a two-step process. Step one involves comparing the fair value of the reporting units to its carrying amount. If the carrying amount of a reporting unit is greater than zero and its fair value is greater than its carrying amount, there is no impairment. If the reporting unit’s carrying amount is greater than the fair value, the second step must be completed to measure the amount of impairment, if any. Step two involves calculating the implied fair value of goodwill by deducting the fair value of all tangible and intangible assets, excluding goodwill, of the reporting unit from the fair value of the reporting unit as determined in step one. The implied fair value of goodwill determined in this step is compared to the carrying value of goodwill. If the implied fair value of goodwill is less than the carrying value of goodwill, an impairment loss is recognized equal to the difference.
The Company determines the fair value of its reporting units using an income approach. Under the income approach, the Company determined fair value based on estimated discounted future cash flows of each reporting unit. The cash flows are discounted by an estimated weighted-average cost of capital, which is intended to reflect the overall level of inherent risk of a reporting unit. Determining the fair value of a reporting unit is judgmental in nature and requires the use of significant estimates and assumptions, including revenue growth rates and EBITDA margins, discount rates and future market conditions, among others. The Company considered market information in assessing the reasonableness of the fair value under the income approach outlined above.
Other intangible assets that have finite lives are amortized over their useful lives. Customer relationships are amortized using the accelerated method, based on customer attrition rates, over their estimated useful lives of 13 (weighted average) years.
Deferred Financing Costs
Direct costs incurred in connection with debt agreements are capitalized as incurred and amortized based on the effective interest method for the Company's borrowings under its Term Loan Credit Agreement and on the straight line method for the Company’s $40.0 million revolving credit agreement, as amended (the “2012 Credit Agreement”). At December 31, 2013 and 2012, the Company had deferred financing costs of $3.2 million and $4.2 million, respectively, net of accumulated amortization of $0.5 million and $1.9 million, respectively.
In 2013, the Company added $2.7 million of deferred financing costs related to its Term Loan Credit Agreement and to the amendment to the Company's 2012 Credit Agreement. In addition, the Company wrote off $2.5 million of deferred financing costs due to the extinguishment, in full, of its 10.5% senior secured notes and the amendment to the Company's 2012 Credit Agreement.
In 2012, the Company added $0.6 million of deferred financing costs related to its 2012 Credit Agreement. In 2011, the Company added $0.5 million of deferred financing costs related to its Notes and its previous $50 million credit agreement. In December 2010, the Company wrote off $2.5 million of deferred financing costs due to the extinguishment, in full, of its previous credit agreement, and added $4.9 million of deferred financing costs related to its Notes and its previous $50 million credit agreement.
Derivative Financial Instruments
As of December 31, 2013 the Company was not party to any derivative or hedging transactions.
Historically, the Company enters into derivative instruments to manage its exposure to changes in interest rates. These instruments allow the Company to raise funds at floating rates and effectively swap them into fixed rates, without the exchange of the underlying principal amount. Such agreements are designated and accounted for under ASC 815, Derivatives and Hedging. Derivative instruments are recorded at fair value as either assets or liabilities in the Consolidated Balance Sheets.
Fair Values of Financial Instruments
The following methods and assumptions were used by the Company in estimating the fair value of its financial instruments for disclosure purposes:
Cash equivalents: Cash equivalents are time deposits with maturity of three months or less when purchased, which are highly liquid and readily convertible to cash. Cash equivalents reported in the Company’s Consolidated Balance Sheet were $12.9 million and $13.7 million as of December 31, 2013 and 2012, respectively, and are carried at cost and approximate fair value due to the relatively short period to maturity of these instruments.
Short- and long-term debt: The carrying amount of the Company’s capital leases reported in the Consolidated Balance Sheets approximates fair value based on the Company’s current incremental borrowing rate for similar types of borrowing arrangements. The carrying amount reported in the Company’s Consolidated Balance Sheet as of December 31, 2013 for borrowings under its Term Loan Credit Agreement and other notes payable is $200.0 million and $0.4 million, respectively. The Company has determined the fair value of its borrowings under its Term Loan Credit Agreement and other notes payable is $200.0 million and $0.4 million, respectively, as of December 31, 2013.
Interest rate hedge agreements: The fair value of the interest rate swap was based on market interest rates using a discounted cash flow model and an adjustment for counterparty risk. See Note 13 “Fair Value Measurements” for further information.
Insurance Liability
The Company maintains a high deductible insurance policy for a significant portion of its risks and associated liabilities with respect to workers’ compensation. The Company’s deductible is $250 thousand per individual. The accrued liabilities associated with this program are based on the Company’s estimate of the ultimate costs to settle known claims, as well as claims incurred but not yet reported to the Company, as of the balance sheet date. The Company’s estimated liability is not discounted and is based upon an actuarial report obtained from a third party. The actuarial report uses information provided by the Company’s insurance brokers and insurers, combined with the Company’s judgments regarding a number of assumptions and factors, including the frequency and severity of claims, claims development history, case jurisdiction, applicable legislation, and the Company’s claims settlement practices.
The Company is self-insured for healthcare benefits, with a stop-loss at $250 thousand per individual. Liabilities associated with the risks that are retained by the Company are estimated, in part, by considering historical claims experience, demographic factors, severity factors and other actuarial assumptions. The Company’s results could be materially affected by claims and other expenses related to such plans if future occurrences and claims differ from these assumptions and historical trends.
Commitments and Contingencies
In the normal course of business, the Company estimates potential future loss accruals related to legal, workers’ compensation, healthcare, tax and other contingencies. These accruals require management’s judgment on the outcome of various events based on the best available information. However, due to changes in facts and circumstances, the ultimate outcomes could differ from management’s estimates.
Revenue Recognition
The Company applies the provisions of ASC 605, Revenue Recognition. In general, the Company recognizes revenue when (i) persuasive evidence of an arrangement exists, (ii) shipment of products has occurred or services have been rendered, (iii) the sales price charged is fixed or determinable and (iv) collection is reasonably assured. Net sales include an allowance for estimated sales returns and discounts.
The Company recognizes service revenue when services have been rendered, while revenues from the resale of equipment and supplies are recognized upon delivery to the customer or upon customer pickup. Revenue from equipment service agreements are recognized over the term of the service agreement.
The Company has established contractual pricing for certain large national customer accounts (“Global Solutions”). These contracts generally establish uniform pricing at all operating segments for Global Solutions. Revenues earned from the Company’s Global Solutions are recognized in the same manner as non-Global Solutions revenues.
Included in revenues are fees charged to customers for shipping, handling, and delivery services. Such revenues amounted to $12.1 million, $12.9 million, and $14.8 million for the years ended December 31, 2013, 2012 and 2011, respectively.
Revenues from hosted software licensing activities are recognized ratably over the term of the license. Revenues from membership fees are recognized over the term of the membership agreement. Revenues from software licensing activities and membership revenues comprise less than 1% of the Company’s consolidated revenues during the years ended December 31, 2013, 2012 and 2011.
Management provides for returns, discounts and allowances based on historic experience and adjusts such allowances as considered necessary. To date, such provisions have been within the range of management’s expectations.
Comprehensive Income (Loss)
The Company’s comprehensive loss includes foreign currency translation adjustments and the amortized fair value of the company's previous swap transaction, net of taxes. The Amended Swap Transaction was de-designated on December 1, 2010, as it no longer qualified as a cash flow hedge when the cash proceeds from the issuance of the Notes were used to pay off the Company’s previous credit agreement. At that time, the fair value of the Amended Swap Transaction was computed and the effective portion was stored in other comprehensive income and was amortized into income, net of tax effect, on the straight-line method, based on the original notional schedule.
Asset and liability accounts of international operations are translated into the Company’s functional currency, U.S. dollars, at current rates. Revenues and expenses are translated at the weighted-average currency rate for the fiscal year.
Segment and Geographic Reporting
The provisions of ASC 280, Disclosures about Segments of an Enterprise and Related Information, require public companies to report financial and descriptive information about their reportable operating segments. The Company identifies operating segments based on the various business activities that earn revenue and incur expense, whose operating results are reviewed by the Company's Chief Executive Officer and Chief Operating Officer, who, acting jointly, are deemed to be the chief operating decision makers. Because its operating segments have similar products and services, classes of customers, production processes and economic characteristics, the Company is deemed to operate as a single reportable segment.
Net sales of the Company’s principal services and products were as follows:
 
 
Year Ended December 31,
 
2013
 
2012
 
2011
Service Sales
 
 
 
 
 
Traditional Reprographics
$
116,673

 
$
126,785

 
$
145,449

Color
83,601

 
79,080

 
84,062

Digital
33,534

 
35,578

 
38,020

Subtotal
233,808

 
241,443

 
267,531

Onsite Services(1)
121,550

 
108,817

 
100,682

Total services sales
355,358

 
350,260

 
368,213

Equipment and Supplies Sales
51,837

 
55,858

 
54,519

Total net sales
$
407,195

 
$
406,118

 
$
422,732

 

(1)
Represents work done at the Company’s customer sites which includes Facilities Management (“FM”) and Managed Print Services (“MPS”).
The Company recognizes revenues in geographic areas based on the location to which the product was shipped or services have been rendered. Operations outside the United States have been small but growing. See table below for revenues and long-lived assets, net, attributable to the Company’s U.S. operations and foreign operations. 
 
 
Year Ended December 31,
 
 
2013
 
2012
 
2011
 
 
U.S.
 
Foreign
Countries
 
Total
 
U.S.
 
Foreign
Countries
 
Total
 
U.S.
 
Foreign
Countries
 
Total
Revenues from external customers
 
$
354,995

 
$
52,200

 
$
407,195

 
$
353,763

 
$
52,355

 
$
406,118

 
$
378,705

 
$
44,027

 
$
422,732

Long-lived assets, net
 
$
292,290

 
$
10,016

 
$
302,306

 
$
299,426

 
$
10,944

 
$
310,370

 
$
325,795

 
$
10,397

 
$
336,192

Advertising and Shipping and Handling Costs
Advertising costs are expensed as incurred and approximated $1.4 million, $1.5 million, and $1.7 million during the years ended December 31, 2013, 2012 and 2011, respectively. Shipping and handling costs incurred by the Company are included in cost of sales.
Stock-Based Compensation
The Company applies the Black-Scholes valuation model in determining the fair value of share-based payments to employees, which is then amortized on a straight-line basis over the requisite service period. Upon the adoption of FSP FAS 123(R-3), Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards, the Company used the “shortcut method” for determining the historical windfall tax benefit.
Total stock-based compensation for the years ended December 31, 2013, 2012 and 2011, was $3.2 million, $2.0 million and $4.3 million, respectively and was recorded in selling, general, and administrative expenses, consistent with the classification of the underlying salaries. In accordance with ASC 718, Income Taxes, the excess tax benefit resulting from stock-based compensation, in the Consolidated Statements of Cash Flows, are classified as financing cash inflows.
The weighted average fair value at the grant date for options issued in the fiscal years ended December 31, 2013, 2012 and 2011, was $1.57, $2.97 and $4.43 respectively. The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model using the following weighted average assumptions for the years ended December 31, 2013 and 2012 and 2011: 
 
 
Year Ended December 31,
 
 
2013
 
2012
 
2011
Weighted average assumptions used:
 
 
 
 
 
 
Risk free interest rate
 
1.36
%
 
1.17
%
 
2.01
%
Expected volatility
 
59.7
%
 
54.8
%
 
48.1
%
Expected dividend yield
 
%
 
%
 
%

Using historical exercise data as a basis, the Company determined that the expected term for stock options issued in 2013, 2012 and 2011 was 7.0 years, 7.1 years and 6.9 years, respectively.
For fiscal years 2013, 2012 and 2011, expected stock price volatility is based on a the Company’s historical volatility for a period equal to the expected term. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant with an equivalent remaining term. The Company has not paid dividends in the past and does not currently plan to pay dividends in the near future. The Company assumed a forfeiture rate of 3% in 2013, 2% in 2012 and 0% in 2011. The Company’s assumed forfeiture rate is based on the historical forfeiture rate for employees at similar levels in the Company. The Company reviews its forfeiture rate at least on an annual basis.
As of December 31, 2013, total unrecognized stock-based compensation expense related to nonvested stock-based compensation was approximately $4.8 million, which is expected to be recognized over a weighted average period of approximately 2.1 years.
For additional information, see Note 10 “Employee Stock Purchase Plan and Stock Option Plan.”
Research and Development Expenses