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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________to__________
Commission File Number 0-78271
IMAGEX, INC.
(Exact name of registrant as specified in its charter)
Washington 91-1727170
(State of Incorporation) (IRS Employer Identification No.)
10210 NE Points Dr., Suite 200
Kirkland, WA 98033
(Address of principal executive offices)
(425) 576-6500
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No |_|
The number of shares of common stock, $0.01 par value, outstanding on July
29, 2002 was 31,080,139.
IMAGEX, INC.
CONTENTS
Page No.
PART I -- FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (unaudited) .............................. 3
Condensed Consolidated Balance Sheets as of December 31, 2001 and June 30, 2002
(unaudited) ........................................................................ 3
Condensed Consolidated Statements of Operations for the Three and Six Months Ended
June 30, 2001 and June 30, 2002 (unaudited) ........................................ 4
Condensed Consolidated Statements of Comprehensive Loss for the Three and Six
Months Ended June 30, 2001 and June 30, 2002 (unaudited) ........................... 4
Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30,
2001 and June 30, 2002 (unaudited) ................................................. 5
Notes To Condensed Consolidated Financial Statements (unaudited) ..................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations ......................................................................... 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk ........................... 24
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings .................................................................... 25
Item 4. Submissions of Matters to a Vote of Security Holders ................................. 25
Item 6. Exhibits and Reports on Form 8-K ..................................................... 25
SIGNATURES ................................................................................... 26
2
PART I -- FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
IMAGEX, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
December 31, June 30,
2001 2002
------------ ---------
Assets
Current assets:
Cash and cash equivalents .................................................... $ 17,375 $ 13,053
Accounts receivable (net of allowance for doubtful accounts and returns of
$924 and $788, respectively) .............................................. 8,062 6,553
Inventories, net ............................................................. 2,935 2,441
Prepaid expenses and other current assets .................................... 637 826
--------- ---------
Total current assets ...................................................... 29,009 22,873
Restricted cash ................................................................. 1,600 933
Property and equipment, net ..................................................... 16,493 12,700
Goodwill ........................................................................ 37,022 9,662
Other intangible assets, net .................................................... 8,875 5,216
--------- ---------
Total assets .............................................................. $ 92,999 $ 51,384
========= =========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable ............................................................. $ 2,485 $ 1,701
Short-term note payable ...................................................... 5,000 5,000
Accrued liabilities .......................................................... 2,932 3,207
--------- ---------
Total current liabilities ................................................. 10,417 9,908
Shareholders' equity:
Common stock, $0.01 par value; 70,000 shares authorized; 30,876 and 31,080
shares issued and outstanding, respectively ............................... 309 311
Additional paid-in capital ................................................... 203,598 203,862
Deferred stock based compensation ............................................ (84) (24)
Notes receivable from shareholders ........................................... (52) (28)
Accumulated deficit .......................................................... (121,189) (162,645)
--------- ---------
Total shareholders' equity ................................................ 82,582 41,476
--------- ---------
Total liabilities and shareholders' equity ................................ $ 92,999 $ 51,384
========= =========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
IMAGEX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share data)
(unaudited)
Three Months Ended Six Months Ended
June 30 June 30
------- -------
2001 2002 2001 2002
---- ---- ---- ----
Revenues .................................................. $ 15,551 $ 12,225 $ 30,176 $ 24,358
Cost of revenues .......................................... 10,030 7,283 20,003 15,143
-------- -------- -------- --------
Gross profit .............................................. 5,521 4,942 10,173 9,215
Operating expenses:
General and administrative (excluding
amortization of stock based compensation of
$242, $25, $500 and $212) ............................. 6,416 4,438 15,079 11,088
Sales and marketing ..................................... 4,288 2,930 10,237 5,942
Product development (excluding amortization of
stock based compensation of $0, $0, ($180)
and $0) ............................................... 3,101 1,386 6,631 2,847
Amortization of goodwill ................................ 1,213 -- 2,785 --
Amortization of stock based compensation and
other intangibles ..................................... 644 268 1,127 685
-------- -------- -------- --------
Total operating expenses .................................. 15,662 9,022 35,859 20,562
-------- -------- -------- --------
Loss from operations ...................................... (10,141) (4,080) (25,686) (11,347)
Interest income, net .................................... 212 49 588 86
-------- -------- -------- --------
Loss before cumulative effect of change in accounting
principle ............................................... (9,929) (4,031) (25,098) (11,261)
Cumulative effect of change in accounting principle ....... -- -- -- (30,195)
-------- -------- -------- --------
Net loss .................................................. $ (9,929) $ (4,031) $(25,098) $(41,456)
======== ======== ======== ========
Basic and diluted net loss per share:
Loss before cumulative effect of change in
accounting principle .................................. $ (0.36) $ (0.13) $ (0.93) $ (0.36)
Cumulative effect of change in accounting principle ..... -- -- -- (0.98)
-------- -------- -------- --------
Basic and diluted net loss per share .................... $ (0.36) $ (0.13) $ (0.93) $ (1.34)
======== ======== ======== ========
Weighted-average shares outstanding, basic and diluted .... 27,342 30,893 26,853 30,860
======== ======== ======== ========
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
Net loss .................................................. $ (9,929) $ (4,031) $(25,098) $(41,456)
Other comprehensive loss:
Foreign currency translation ............................ 42 -- 27 --
-------- -------- -------- --------
Comprehensive loss ........................................ $ (9,887) $ (4,031) $(25,071) $(41,456)
======== ======== ======== ========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
IMAGEX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Six Months Ended
June 30
-------
2001 2002
---- ----
Cash flows from operating activities
Net loss ...................................................................... $(25,098) $(41,456)
Adjustments to reconcile net loss to net cash used in operating activities:
Cumulative effect of change in accounting principle ........................ -- 30,195
Depreciation and amortization .............................................. 7,611 4,318
Amortization of stock based compensation ................................... 320 212
Loss on disposal of property and equipment and abandoned copyrights, net ... 1,456 1,129
Provision for doubtful accounts and returns ................................ 311 (136)
Other ...................................................................... (85) --
Change in operating assets and liabilities ................................. 414 1,346
-------- --------
Net cash used in operating activities ................................... (15,071) (4,392)
-------- --------
Cash flows from investing activities
Purchases of property and equipment, net ................................... (2,859) (742)
Proceeds from sale of property and equipment ............................... -- 73
Release of restricted cash collateralized for letter of credit ............. 812 667
-------- --------
Net cash used in investing activities ................................... (2,047) (2)
-------- --------
Cash flows from financing activities
Repayments of line of credit ............................................... (3,975) (5,000)
Proceeds from line of credit ............................................... -- 5,000
Proceeds from exercise of employee stock options ........................... 13 12
Proceeds from issuance of common stock related to
the Employee Stock Purchase Plan ........................................ 376 36
Proceeds from sales of common stock ........................................ 4,850 --
Purchase price adjustment for Extensis ..................................... (277) --
Proceeds from repayment of notes receivable from shareholders .............. 24 24
-------- --------
Net cash provided by financing activities ............................... 1,011 72
Effect of exchange rate changes on cash ....................................... 27 --
-------- --------
Net decrease in cash and cash equivalents ..................................... (16,080) (4,322)
Cash and cash equivalents at:
Beginning of period ........................................................ 40,420 17,375
-------- --------
End of period .............................................................. $ 24,340 $ 13,053
======== ========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
IMAGEX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION
ImageX, Inc. ("the Company") was incorporated on August 21, 1995 and is
headquartered in Kirkland, Washington. The Company provides Internet-based
business-to-business e-procurement services for printed business materials,
traditional printing services, and designs and markets graphic-design software.
The Company's printing products include business cards, general office products
and marketing and promotional materials. The Company's products and services
include the following:
o ImageX Channel Marketing System, a customized, Internet-based
solution which enables medium to large corporate customers to manage
the distribution of sales and marketing communications to both
direct and indirect sales channels. The system integrates all the
functions required for channel support and includes a transaction
engine, which facilitates automated ordering and fulfillment of
printed material. This system was released in May 2002.
o ImageX Print System, a customized, secure Web site product suite for
medium to large corporate customers providing four product
offerings: e-Procure, e-Brand, e-Print and Enterprise. This system
reflects the Company's focus on quality printing delivered through
technology.
o Extensis graphic-design software including Portfolio media asset
manager, Suitcase font manager, a Web-based digital file-checking
software, Preflight Online, and product plug-ins which extend the
capability of certain third-party software products.
The accompanying unaudited condensed consolidated financial statements
have been prepared in conformity with generally accepted accounting principles
and reflect all adjustments that, in the opinion of management, are necessary
for a fair presentation of the results for the periods shown and which are of a
normal recurring nature. Certain information and note disclosures normally
included in the financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted in accordance with
the rules and regulations of the Securities and Exchange Commission. Portions of
the accompanying financial statements are derived from the audited financial
statements as of and for the year ended December 31, 2001. The results of
operations for interim periods are not necessarily indicative of the results
expected for the full fiscal year or for any future periods. Generally accepted
accounting principles require management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates and assumptions.
The accompanying unaudited condensed consolidated financial statements
should be read in conjunction with the audited financial statements in our
annual report filed on Form 10-K for the fiscal year ended December 31, 2001 and
the notes thereto filed with the Securities and Exchange Commission on April 1,
2002.
The financial statements of the Company are consolidated and include the
accounts of the Company and its wholly-owned subsidiaries. Significant
intercompany transactions and balances have been eliminated. Certain
reclassifications have been made to previously reported balances to conform to
the Company's current financial statement format.
2. ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141 "Business
Combinations" and SFAS No. 142 "Goodwill and Other Intangible Assets." SFAS No.
141 establishes new standards for accounting and reporting requirements for
business combinations closed after June 30, 2001 and prohibits the use of the
pooling of interests method for combinations initiated after June 30, 2001. SFAS
No. 142 changes the accounting for goodwill from an amortization method to an
impairment only
6
approach. Pursuant to SFAS No. 142, goodwill is tested at the reporting unit
annually and upon the occurrence of any event indicating a potential impairment
of goodwill. Amortization of goodwill ceased on January 1, 2002.
The Company adopted the provisions of SFAS No. 141 and SFAS No. 142 on
January 1, 2002. In order to assess the value of its goodwill and
indefinite-lived intangible assets as of January 1, 2002, the Company engaged an
independent valuation firm. The valuation process assigned the Company's assets
and liabilities to its reporting units and then provided a fair value opinion of
those assets using a discounted cash flow model that also considered factors
such as market capitalization and appraised values of certain assets. The
determination of fair value is a critical and complex consideration when
assessing impairment under SFAS No. 142 that involves significant assumptions
and estimates. These assumptions and estimates were based on our best judgments.
Based upon the results of the valuation opinion, the Company recorded a
transitional impairment charge in March 2002 for a portion of the goodwill
assigned to its Software reporting unit. This transitional impairment charge was
approximately $30.2 million. The effect of adopting SFAS No. 142 has been
reported as a cumulative effect of change in accounting principle for the six
months ended June 30, 2002. Goodwill and intangible assets assigned to the
Printing reporting units were not impaired since the fair value opinion of these
reporting units' assets exceeded their book value at the measurement date.
In the future, impairment must be assessed at least annually for these
assets, or when indicators of impairment exist. Our judgments regarding the
existence of impairment indicators include our assessment of the impacts of
legal factors, market and economic conditions; the results of our operational
performance and strategic plans; competition and market share; and any potential
for the sale or disposal of a significant portion of our principal operations.
In the future, it is possible that such assessments could cause us to conclude
that impairment indicators exist and that certain assets are impaired resulting
in a material write down of assets to the then determined fair value.
In accordance with SFAS No. 141, approximately $2.8 million of net trained
workforce was reclassified from intangible assets to goodwill on January 1,
2002. The changes in the carrying amount of goodwill for the six months ended
June 30, 2002 are as follows (in thousands):
Segment
---------------------
Printing Software Consolidated
-------- -------- ------------
Goodwill:
Balance as of December 31, 2001 ............... $4,099 $ 32,923 $ 37,022
Trained workforce reclassified as goodwill ... 2,019 751 2,770
Purchase price earn out ...................... 65 -- 65
Transitional impairment charge ............... -- (30,195) (30,195)
------ -------- --------
Balance as of June 30, 2002 ................... $6,183 $ 3,479 $ 9,662
====== ======== ========
In accordance with SFAS No. 142, the effect of this accounting change is
reflected prospectively. A reconciliation of the previously reported net income
and earnings per share, as if SFAS No. 142 had been adopted as of January 1,
2001, is as follows (in thousands except per share data):
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2001 2002 2001 2002
---- ---- ---- ----
Reported net loss ............................... $(9,929) $(4,031) $(25,098) $(41,456)
Add back: Goodwill amortization ................. 1,213 -- 2,785 --
------- ------- -------- --------
Adjusted net loss ............................... $(8,716) $(4,031) $(22,313) $(41,456)
======= ======= ======== ========
Reported basic and diluted net loss per share ... $ (0.36) $ (0.13) $ (0.93) $ (1.34)
Add back: Goodwill amortization ................. 0.04 -- 0.10 --
------- ------- -------- --------
Adjusted basic and diluted net loss per share ... $ (0.32) $ (0.13) $ (0.83) $ (1.34)
======= ======= ======== ========
7
On October 3, 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 supersedes SFAS No.
121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." SFAS No. 144 applies to all long-lived assets
(including discontinued operations) and consequently amends Accounting
Principles Board Opinion No. 30, "Reporting Results of Operations -Reporting the
Effects of Disposal of a Segment of a Business." SFAS No. 144 develops one
accounting model for long-lived assets that are to be disposed of by sale and
requires these assets to be measured at the lower of book value or fair value
less cost to sell. Additionally, SFAS No. 144 expands the scope of discontinued
operations to include all components of an entity with operations that (i) can
be distinguished from the rest of the entity and (ii) will be eliminated from
the ongoing operations of the entity in a disposal transaction. The Company
adopted this statement on January 1, 2002. The Company's adoption of SFAS 144
has not had a material impact on its financial statements.
In the future, impairment of long-lived assets must be assessed in
accordance with SFAS No. 144 at least annually, or when indicators of impairment
exist. Our judgments regarding the existence of impairment indicators include
our assessment of the impacts of legal factors, market and economic conditions;
the results of our operational performance and strategic plans; competition and
market share; and any potential for the sale or disposal of a significant
portion of our principal operations. In the future, it is possible that such
assessments could cause us to conclude that impairment indicators exist and that
certain assets are impaired resulting in a material write down of long-lived
assets to the then determined fair value.
3. INVENTORIES
Inventories consisted of the following at (in thousands):
December 31, June 30,
2001 2002
------------ --------
Raw materials and supplies ................. $1,254 $ 916
Work-in-process ............................ 568 521
Finished goods ............................. 1,113 1,004
------ ------
$2,935 $2,441
====== ======
4. OTHER INTANGIBLE ASSETS, NET
The gross carrying amount and accumulated amortization of the Company's
intangible assets other than goodwill as of December 31, 2001 and June 30, 2002
are as follows (in thousands):
December 31, 2001 June 30, 2002
------------------------------- -------------------------------
Gross Gross
Carrying Accumulated Book Carrying Accumulated Book
Amount Amortization Value Amount Amortization Value
------ ------------ ----- ------ ------------ -----
Customer list .......... $ 5,200 $1,536 $3,664 $5,200 $2,005 $3,195
Trained workforce ...... 4,358 1,588 2,770 -- -- --
Existing technology .... 2,060 1,047 1,013 2,060 1,390 670
Patents and other ...... 1,983 555 1,428 1,895 544 1,351
------- ------ ------ ------ ------ ------
$13,601 $4,726 $8,875 $9,155 $3,939 $5,216
======= ====== ====== ====== ====== ======
Based on the current amount of intangible assets subject to amortization,
the estimated amortization expense for each of the succeeding five years is as
follows: $0.8 million, $1.3 million, $0.9 million, $0.6 million and $0.2
million, for the remainder of 2002, fiscal 2003, fiscal 2004, fiscal 2005 and
fiscal 2006, respectively.
8
5. BASIC AND DILUTED NET LOSS PER SHARE
Basic and diluted net loss per share is computed using the
weighted-average number of common shares outstanding excluding shares subject to
repurchase.
Basic net loss per share excludes the effect of restricted stock subject
to repurchase from the weighted average shares of common stock outstanding. The
weighted average shares of restricted stock subject to repurchase totaled
225,837 and 99,670 shares for the three months ended June 30, 2001 and 2002,
respectively and 250,122 and 114,586 shares for the six months ended June 30,
2001 and 2002.
Dilutive securities include options, warrants, and restricted stock
subject to repurchase. Potentially dilutive securities totaling 5,713,044 and
6,713,495 shares as of June 30, 2001 and 2002, respectively, were excluded from
diluted loss per share because of their antidilutive effect.
6. SEGMENT INFORMATION
The Company classifies its business into two major segments: Printing and
Related Technology Services (the "Printing" segment) and Software Products and
Services (the "Software" segment). The Printing segment includes an aggregation
of operations that provide Internet-based e-procurement solutions as well as
traditional print services for printed business materials to corporate
customers. The Software segment includes development and sales of graphic-design
and print file preparation software applications for corporate customers and
individuals.
Segment information is presented in accordance with SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." This
standard is based on a management approach, which requires segmentation based
upon the Company's internal organization and disclosure of revenues and income
based upon internal accounting methods. The Company's measure of profit or loss
used for each reportable segment is net income or loss. Corporate costs and
interest expense are included in the Printing segment. The Company records no
inter-segment revenue on transactions between reportable segments.
Information on reportable segments and reconciliation to consolidated
financial information is as follows (in thousands):
Three months ended June 30, Printing Software Consolidated
- --------------------------- -------- -------- ------------
2001
----
Revenues .............................................. $ 12,627 $ 2,924 $ 15,551
Net loss .............................................. (6,997) (2,932) (9,929)
2002
----
Revenues .............................................. $ 8,771 $ 3,454 $ 12,225
Net (loss) income ..................................... (4,438) 407 (4,031)
Six months ended June 30, Printing Software Consolidated
- ------------------------- -------- -------- ------------
2001
----
Revenues .............................................. $ 24,138 $ 6,038 $ 30,176
Net loss .............................................. (19,014) (6,084) (25,098)
Total assets .......................................... 74,888 35,336 110,224
2002
----
Revenues .............................................. $ 17,863 $ 6,495 $ 24,358
(Loss) income before cumulative effect of change in
accounting principle ................................ (11,784) 523 (11,261)
Cumulative effect of change in accounting principle ... -- (30,195) (30,195)
Net loss .............................................. (11,784) (29,672) (41,456)
Total assets .......................................... 50,255 1,129 51,384
9
7. LOSS ON DISPOSAL OF PROPERTY AND EQUIPMENT AND ABANDONED COPYRIGHTS
During the first quarter of 2001, the Company closed its PrintBid.com
marketplace and implemented other cost saving measures. As a result of these
actions, it was determined that certain property and equipment, primarily
internally developed software designed to support this marketplace, was unlikely
to provide future benefit to the Company. Accordingly, approximately $1.5
million was written off as a loss on disposal of property and equipment and was
included in general and administrative expense for the six months ended June 30,
2001.
During the quarter ended March 31, 2002, it was determined that certain
property and equipment, primarily leasehold improvements related to surrendered
office space, and certain abandoned copyrights would not provide future benefit
to the Company. Accordingly, approximately $1.2 million was written off as a
loss on disposal of property and equipment and abandoned copyrights, and is
included in general and administrative expense for the six months ended June 30,
2002.
8. COMMITMENTS
The Company leases its facilities and certain equipment under
noncancelable operating leases, which expire between January 2003 and December
2007. In April 2002, the Company renewed the lease for one of its printing
facilities. In January 2002, the Company renegotiated the lease for its Kirkland
headquarters. As a result, the Company paid a lease termination fee of $667,000
and surrendered approximately 42% of its Kirkland space. The fee was paid by a
partial draw-down on a $1.6 million Letter of Credit (restricted cash) held by
the landlord as a security deposit for the lease. The $667,000 lease termination
fee was recorded as general and administrative expense for the six months ended
June 30, 2002. Total rent expense incurred under operating leases for the three
and six months ended June 30, 2001 and 2002 was approximately $1.0 million, $0.4
million, $2.4 million and $1.5 million, respectively. At June 30, 2002, the
approximate future lease payments for the remainder of the lease terms were as
follows (in thousands):
June 30, 2002
-------------
2002 ......... $1,083
2003 ......... 1,784
2004 ......... 1,417
2005 ......... 415
2006 ......... 175
Thereafter ... 8
------
$4,882
======
9. LIQUIDITY
The Company has never been profitable and it is anticipated that the
Company will continue to incur net losses in future periods. To become
profitable, the Company must significantly increase revenues by obtaining new
customers and generating additional revenues from existing customers, control
expenses and improve gross margins. The Company has experienced revenue declines
in recent periods and may continue to incur operating losses for some time. As
of June 30, 2002, the Company had an accumulated deficit of $162.6 million.
Although the Company has experienced revenue growth in the past, revenues may
not continue at their current level, or increase in the future.
10
Our future capital requirements will depend on many factors that are
difficult to predict, including our rate of revenue growth, if any, our
operating losses, the cost of obtaining new customers and technical
capabilities, and the cost of upgrading and maintaining our network
infrastructure and other systems. We believe that our existing cash and cash
equivalents will be sufficient to meet our anticipated cash needs for working
capital and capital expenditures for at least the next 12 months. However, any
projections of future cash needs and cash flows are subject to substantial
uncertainty. If our capital requirements vary materially from those currently
planned, we may require additional financing sooner than anticipated. As of June
30, 2002, outstanding debt consisted of a line of credit totaling $5.0 million.
Pursuant to the terms of the line of credit, the Company must maintain a minimum
balance of cash and cash equivalents of $3.5 million. If the Company's cash and
cash equivalents balances fall below $3.5 million, the line may not be available
to the Company. In addition, the line of credit expires in December 2002 and the
principal balance is due on December 31, 2002. We have no commitments for
additional financing, and we may experience difficulty in renewing this line of
credit on favorable terms, if at all. Any difficulty in obtaining additional
financial resources could force us to curtail our operations, dispose of certain
assets at less than book value or prevent us from pursuing our growth strategy.
In addition, any future funding may dilute the ownership of our shareholders.
Our stock is currently trading at prices less than $1.00 per share. If our stock
continues to trade at this level, our stock could be delisted from the NASDAQ
SmallCap Market and our ability to obtain financing may suffer as a result.
10. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" which establishes requirements for the financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. The
adoption date for the Company will be January 1, 2003 and the Company is
assessing what impact SFAS No. 143 will have on the Company's results of
operations and financial position.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" which establishes requirements for
the financial accounting and reporting for costs associated with exit or
disposal activities. The adoption date for the Company will be January 1, 2003
and the Company is assessing what impact SFAS No. 146 will have on the Company's
results of operations and financial position.
11. SUBSEQUENT EVENTS
In July 2002, the Company repaid the outstanding balance on its line of
credit in the amount of $5.0 million. This $5.0 million line of credit is
available to the Company through December 31, 2002.
In August 2002, the Company entered into a purchase contract for
computer-to-plate equipment for approximately $450,000.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis presents a review of ImageX, Inc.
and its subsidiaries (collectively, the "Company") for the three and six months
ended June 30, 2001 and 2002. This review should be read in conjunction with the
condensed consolidated financial statements and other data presented herein as
well as Management's Discussion and Analysis of Financial Condition and Results
of Operation contained in the Company's 2001 Annual Report on Form 10-K.
11
FORWARD-LOOKING STATEMENTS
When you read this section of our Form 10-Q, it is important that you also
read the financial statements and related notes included elsewhere in this
report. The following "Management's Discussion and Analysis of Financial
Condition and Results of Operations" includes "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. This
Act provides a "safe harbor" for forward-looking statements to encourage
companies to provide prospective information about themselves so long as they
identify these statements as forward-looking and provide meaningful cautionary
statements identifying important factors that could cause actual results to
differ from the projected results. All statements we make in this Form 10-Q,
other than statements of historical fact, are forward-looking. In particular,
the statements herein regarding industry prospects and our future results of
operations or financial position are forward-looking statements. Forward-looking
statements reflect our current expectations and are inherently uncertain. Our
actual results could differ materially from those anticipated in these
forward-looking statements for many reasons, including the factors described in
the section entitled "Risk Factors Affecting ImageX's Operating Results". You
should not place undue reliance on these forward-looking statements, which apply
only as of the date of this report. We do not assume any obligation to revise
forward-looking statements, except as required by the securities laws.
CRITICAL ACCOUNTING POLICIES
We believe you must take into account certain of our accounting policies
to fully understand our results of operations. The impact and any associated
risks related to these policies on our business operations is discussed
throughout Management's Discussion and Analysis of Financial Condition and
Results of Operations where such policies affect our reported and expected
financial results. For a detailed discussion on the application of these and
other accounting policies, see Note 1 in the Notes to Consolidated Financial
Statements in Item 8 of the Annual Report on Form 10-K for the year ended
December 31, 2001. Note that our preparation of this Quarterly Report on Form
10-Q requires us to make estimates and assumptions that affect the reported
amount of assets and liabilities, disclosure of contingent assets and
liabilities at the date of our financial statements, and the reported amounts of
revenues and expenses during the reporting period. Actual results may differ
from those estimates.
o Valuation of acquired businesses and assets. Our business acquisitions
typically result in goodwill and other intangible assets, which may affect
the amount of future period amortization expense and impairment expense.
The determination of the value of such intangible assets requires
management to make estimates and assumptions that materially affect our
financial condition and results of operations. Effective January 1, 2002,
the Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 142, "Goodwill and Other Intangible Assets." Under SFAS No. 142,
goodwill and intangible assets deemed to have indefinite lives are no
longer amortized, but are instead subject to a periodic impairment test at
least annually, or when indicators of impairment exist.
o Impairment of goodwill and indefinite lived intangibles. In order to
assess the value of its goodwill and indefinite-lived intangible assets as
of January 1, 2002, the Company engaged an independent valuation firm. The
valuation process assigned the Company's assets and liabilities to its
reporting units and then provided a fair value opinion of those assets
using a discounted cash flow model that also considered factors such as
market capitalization and appraised values of certain assets. The
valuation opinion used many assumptions and estimates in determining the
fair value of the assets. These assumptions and estimates were based on
our best judgments. In the future, impairment must be assessed at least
annually for these assets, or when indicators of impairment exist. Our
judgments regarding the existence of impairment indicators include our
assessment of the impacts of legal factors, market and economic
conditions; the results of our operational performance and strategic
plans; competition and market share; and any potential for the sale or
disposal of a significant portion of our principal operations. In the
future, it is possible that such assessments could cause us to conclude
that impairment indicators exist and that certain assets are impaired
resulting in a material write down of assets to the then determined fair
value.
o Impairment of long-lived assets and other intangibles. Property and
equipment, definite-lived intangibles and certain other long-lived assets
are amortized over their estimated useful lives. Useful lives are based on
management's estimates of the period that the assets will generate
revenue. Effective January 1, 2002, the Company adopted the provisions of
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets". SFAS No. 144 applies to all long-lived assets including
discontinued operations. SFAS No. 144 requires the Company to periodically
review long-lived assets, other intangibles and reporting segments for
12
impairment. Long-lived assets, other intangibles and reporting segments
that the Company is "more likely than not" to sell or otherwise dispose of
before the end of the asset's previously estimated useful life must be
reviewed for impairment. In the future, impairment must be assessed at
least annually for these assets, or when indicators of impairment exist.
Management's judgments regarding the existence of impairment indicators
and the determination of assets that may be sold or otherwise disposed are
based on legal factors, market conditions and the operational performance
of our long-lived assets, other intangibles and reporting segments. Future
events could cause us to conclude that impairment indicators exist and
that certain assets are impaired resulting in a material write down of
assets to the then determined fair value.
OVERVIEW
General
ImageX provides Internet-based business-to-business e-procurement services
for printed business materials and designs and markets graphic-design software.
We derive substantially all our revenues from traditional printing services and
sale of printed business materials and software products and services, which
include graphic-design and print file preparation software applications.
Significant milestones during the quarter ended June 30, 2002 included:
o Version 2.0 of the ImageX Channel Marketing System launched. During the
second quarter, the Company successfully released version 2.0 of the
ImageX Channel Marketing System, and signed its first contract with a
Channel Marketing System customer.
o Growth of patent portfolio. During the second quarter, the Company
received two additional patents bringing the total to four patents on its
print production technology. We received two additional patents in August
2002.
o Enterprise sales force on board. In the second quarter, the Company added
10 highly-experienced account managers to its sales force. Additionally,
an enterprise-selling approach was implemented that includes a rigorous,
customized, hard and soft dollar return on investment analysis for
customers, based in part on documented customer cost savings.
o Cost savings measures implemented. During the second quarter, the Company
reduced its staff by approximately 6%. Total operating expenses declined
by $6.6 million, or approximately 42%, compared to the three months ended
June 30, 2001. Total cash used by operating activities declined by $5.2
million, or approximately 71%, compared to the three months ended June 30,
2001.
o Continued enhancements to the ImageX Print System. During the second
quarter, the Company released version 4.5 of the ImageX Print System. This
version offers a shopping cart feature, which streamlines the ordering
process.
o New Web sites, new products and order volume. During the second quarter, 4
new customized corporate Web sites went live and 245 new products were set
up on customer Web sites. Order volume for the quarter ended June 30, 2002
grew to 58,152 items, an increase of 6% compared to 54,880 in the prior
quarter and down 11% from 65,033 items, for the quarter ended June 30,
2001.
RESULTS OF OPERATIONS
We have incurred significant net losses since our inception. As of June
30, 2002, we had accumulated a deficit of $162.6 million. Our limited operating
history and the uncertain and emerging nature of our products and market make it
difficult to assess our prospects or predict our future results of operations.
Our prospects are subject to the risks and uncertainties frequently encountered
in establishing a new business enterprise, particularly in the new and rapidly
evolving markets for online products and services. Because of our short
operating history, period-to-period comparisons of our results
13
of operations are not necessarily meaningful. As a result, you should not rely
on such comparisons as indications of our future performance.
Revenues
Our printing products include business cards, general office products and
marketing and promotional materials. Through the ImageX Print System and our
wholly-owned subsidiaries, Image Press, Inc. ("Image Press"), FA Graphics, Inc.
("FA Graphics"), and Howard Press, Inc. ("Howard Press"), we generally recognize
printing revenues when orders are shipped to the customer and when we have
fulfilled all of our contractual obligations. Service revenues generated from
the creation of Web sites for customers to use our ImageX Print System are
deferred and recognized over the estimated life of the customer relationship.
Incremental direct costs for creating such Web sites are deferred over the same
period. Web site maintenance fees are recognized over the maintenance contract
period, typically 12 months. We charge customers for printed products they order
in accordance with negotiated customer-specific pricing arrangements. In the
commercial printing industry, prices tend to move in correlation with paper
prices. We generally have been able to pass fluctuations in paper pricing
through to our customers, an industry standard practice, although this cannot be
assured in the future. We also offer volume discounts to customers, which we
expect will continue. Orders are fulfilled through our network of approximately
17 vendors and our own three operating facilities and are shipped directly to
customers under the ImageX brand.
In 2000, we acquired Extensis, Inc. ("Extensis") and began selling
Extensis software products and services. We sell these software products and
services to distributors, resellers, end user customers and to some distributors
that reproduce, localize, and package our products. Revenues from these sales
are recognized when persuasive evidence of a contract exists, software has been
delivered, the fee is fixed or determinable and collectibility is probable. We
generally provide distributors and resellers a sixty-day right of return. An
allowance is recorded for estimated product returns.
Our customers include a wide variety of businesses, from Fortune 1000
companies to medium size companies. A substantial portion of our revenues has
been derived from customers that have come to ImageX by means of our
acquisitions in 1999 and 2000.
(in thousands) Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2001 2002 Change 2001 2002 Change
---- ---- ------ ---- ---- ------
Revenues:
Printing segment ... $12,627 $ 8,771 (31%) $24,138 $17,863 (26%)
Software segment ... 2,924 3,454 18% 6,038 6,495 8%
------- ------- ------- -------
Total revenues ... $15,551 $12,225 (21%) $30,176 $24,358 (19%)
======= ======= ======= =======
The decrease in revenues for the three and six months ended June 30, 2002
compared to the three and six months ended June 30, 2001 was primarily
attributable to the Printing segment. Printing segment revenues decreased due to
a change in the mix of product orders to lower priced products, the loss of
revenue from three major customers facing economic difficulties in our east
coast operations and the general slow down in the U.S. economy. Revenues in the
Software segment for the three and six months ended June 30, 2002 compared to
the three and six months ended June 30, 2001 increased primarily due to the
release of new product enhancements and international product launches in late
March 2002. We anticipate that revenue growth in both business segments will be
modest to flat in the second half of 2002, as we begin building a revenue
pipeline for the new Channel Marketing System. We expect the sales cycle for
this new product to range between two months for small customers to more than 12
months for large customers. As such, we believe that revenues generated by the
Channel Marketing System will not be material to revenue growth in the second
half of 2002. However, our revenue has been volatile over the last few quarters
and future trends are difficult to predict. Actual results may be materially
different than we predict and may even decline.
Gross Profit
For products sold through our ImageX Print System that are produced by our
network of vendors, gross profit is calculated as the selling price of a
specific product (including freight) less the price our vendor charges us and
freight costs.
14
For products sold through our ImageX Print System that we produce in our own
facilities, gross profit is calculated as the selling price of the product
(including freight), less manufacturing costs, freight costs and certain
allocated overhead. For software products, gross profit is the selling price
less manufacturing costs, royalties and amortization of acquired technology.
(in thousands) Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2001 2002 Change 2001 2002 Change
---- ---- ------ ---- ---- ------
Gross profit:
Printing segment ... $3,177 $2,145 (32%) $ 5,245 $3,950 (25%)
Software segment ... 2,344 2,797 19% 4,928 5,265 7%
------ ------ ------- ------
Gross profit ..... $5,521 $4,942 (10%) $10,173 $9,215 (9%)
====== ====== ======= ======
Gross margin:
Printing segment ... 25% 24% 22% 22%
Software segment ... 80 81 82 81
Gross margin ....... 36 40 34 38
The decrease in gross profit for the three and six months ended June 30,
2002 compared to the three and six months ended June 30, 2001 was primarily due
to the decrease in revenues from the Printing segment. Gross margin for the
three months ended June 30, 2002 in the Printing segment decreased slightly due
to decreased revenues in this segment partially offset by increased operating
efficiencies realized from further utilization of our patented technologies.
Gross margin on a consolidated basis increased for the three and six months
ended June 30, 2002 due to an increase in the portion of total gross profit
attributable the Software segment, as the Software segment achieves higher gross
margins than the Printing segment. We expect gross margins to remain consistent
with the first six months of 2002.
Operating Expenses
Our business incurs operating expenses in three broad expense categories:
general and administrative, sales and marketing, and product development.
Throughout fiscal 2001 and during the six months ended June 30, 2002, we reduced
our staff and implemented non-staff cost reductions. These cost reduction
initiatives resulted in a decrease in operating expenses of $6.6 million and
$15.3 million compared to the three and six months ended June 30, 2001,
respectively. We believe that cost-reduction initiatives implemented during the
first and second quarter of 2002 will reduce our operating expenses both on an
absolute dollar basis and as a percentage of sales in 2002 compared to 2001.
General and Administrative Expenses
(in thousands) Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2001 2002 Change 2001 2002 Change
---- ---- ------ ---- ---- ------
General and administrative:
Printing segment ............ $5,181 $3,838 (26%) $12,590 $ 9,847 (22%)
Software segment ............ 1,235 600 (51%) 2,489 1,241 (50%)
------ ------ ------- -------
Total ..................... $6,416 $4,438 (31%) $15,079 $11,088 (26%)
====== ====== ======= =======
Percentage of revenues ........ 41% 36% 50% 46%
General and administrative expenses consist primarily of salaries and
benefits for executive, finance, administrative and information technology
personnel, as well as depreciation and amortization on property and equipment
excluding machinery, loss on disposal of property and equipment and abandonment
of copyrights, outside professional services and facilities-related expenses.
15
The decrease in general and administrative expenses for the three and six
months ended June 30, 2002 compared to the three and six months ended June 30,
2001 was primarily due to a decrease in the Printing segment of $1.3 million and
$2.7 million, respectively, and decreases in the Software segment of $0.6
million and $1.2 million, respectively. Decreases in the Printing and Software
segments were primarily related to the cost-reduction initiatives implemented
during 2001, which significantly reduced compensation expense and related
contractor and consulting fees, rent and related facility costs. The decrease in
the Printing segment was partially offset by a lease termination fee of $667,000
related to the restructuring of our office lease in Kirkland in March 2002.
Management expects general and administrative expenses to remain consistent with
the second quarter of 2002 for the remainder of fiscal 2002.
Sales and Marketing Expenses
(in thousands) Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2001 2002 Change 2001 2002 Change
---- ---- ------ ---- ---- ------
Sales and marketing:
Printing segment ......... $2,581 $1,692 (34%) $ 6,338 $3,497 (45%)
Software segment ......... 1,707 1,238 (27%) 3,899 2,445 (37%)
------ ------ ------- ------
Total .................. $4,288 $2,930 (32%) $10,237 $5,942 (42%)
====== ====== ======= ======
Percentage of revenues ..... 28% 24% 34% 24%
Sales and marketing expenses consist primarily of salaries and related
benefits for sales, marketing, customer service and technical support personnel,
advertising expenses, marketing expenses and travel expenses. The decrease in
sales and marketing expenses for the three and six months ended June 30, 2002
compared to the three and six months ended June 30, 2001 was primarily due to a
decrease in expenses in the Printing segment. The decrease in the Printing
segment primarily resulted from a reduction in compensation and related expenses
due to reductions in staffing. Sales and marketing expenses in the Software
segment decreased for the three and six months ended June 30, 2002 compared to
the three and six months ended June 30, 2001 primarily due to reductions of
approximately $208,000 and $716,000, respectively, in advertising expenses,
reductions of approximately $206,000 and $568,000, respectively, in compensation
and related expenses from a reduction in staffing, and reductions of
approximately $55,000 and $170,000, respectively, in travel, telephone and other
related expenses. Management expects sales and marketing expenses to increase
slightly during the second half of fiscal 2002 due to the expansion of our sales
force and the implementation of our new enterprise selling approach.
Product Development Expenses
(in thousands) Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2001 2002 Change 2001 2002 Change
---- ---- ------ ---- ---- ------
Product development:
Printing segment ......... $1,903 $ 835 (56%) $4,642 $1,791 (61%)
Software segment ......... 1,198 551 (54%) 1,989 1,056 (47%)
------ ------ ------ ------
Total .................. $3,101 $1,386 (55%) $6,631 $2,847 (57%)
====== ====== ====== ======
Percentage of revenues ..... 20% 11% 22% 12%
Product development expenses consist primarily of salaries and benefits
for developers, product managers, quality assurance personnel and payments to
outside contractors for programming services. The decrease in product
development expenses in the Printing segment for the three and six months ended
June 30, 2002 compared to the three and
16
six months ended June 30, 2001 was due entirely to staff reductions implemented
in 2001 and staff reductions implemented in the first quarter of 2002. Product
development expenses in the Software segment for the three and six months ended
June 30, 2002 compared to the three and six months ended June 30, 2001 decreased
primarily due to staff reductions implemented in 2001. Management expects
product development expenses to remain consistent with the second quarter of
2002 for the remainder of fiscal 2002.
Amortization of goodwill
The amortization of goodwill and other intangible assets is a result of
the acquisitions of FA Graphics and Image Press in 1999 and Extensis and Howard
Press in 2000. As of December 31, 2001, the amortization of goodwill and other
intangible assets is over periods ranging from 3 to 10 years. The amortization
of goodwill was approximately $1.2 million and $2.8 million for the three and
six months ended June 30, 2001, respectively. Upon adoption of SFAS No. 142 on
January 1, 2002, amortization of goodwill ceased.
Amortization of stock based compensation and other intangible assets
Amortization consists of the amortization of stock based compensation and
other intangible assets. The amortization of stock based compensation is a
result of recording the difference between the fair value of our common stock at
the date of grant of stock options and the exercise or purchase price of such
securities, as applicable. Stock based compensation is amortized over the
remaining vesting period of the stock or options.
The amortization of stock based compensation was $242,000 and $25,000 for
the three months ended June 30, 2001 and 2002, respectively, and $320,000 and
$212,000 for the six months ended June 30, 2001 and 2002, respectively. The
unamortized portion of total stock based compensation is reflected as a
reduction of shareholders' equity and is being amortized over the vesting period
of the individual options, generally four years, using an accelerated method.
The amortization of other intangibles was approximately $631,000 and
$415,000 for the three months ended June 30, 2001 and 2002, respectively, and
approximately $1,094,000 and $817,000 for the six months ended June 30, 2001 and
2002, respectively. The decline in amortization of intangibles primarily
resulted in the adoption of SFAS No 141, which resulted in $2.8 million of
intangible assets being subsumed into goodwill.
Interest Income, Net
Interest income, net, consists primarily of interest income and interest
expense. Interest income was $316,000 and $103,000, and interest expense was
$104,000 and $54,000 for the three months ended June 30, 2001 and 2002,
respectively. Interest income was $823,000 and $236,000, and interest expense
was $235,000 and $150,000 for the six months ended June 30, 2001 and 2002,
respectively. The decrease in interest income is due primarily to the decrease
in the cash and cash equivalents balance. The decrease in interest expense was
due primarily to the decrease in notes payable.
Income Taxes
No provision for federal and state income taxes has been recorded to date
because we have incurred net losses from inception through June 30, 2002. As of
June 30, 2002, we had approximately $112.0 million of net operating loss
carryforwards for federal income tax purposes, expiring in 2010 through 2022.
These losses are available to offset future taxable income. Given our limited
operating history, losses incurred to date and the difficulty in accurately
forecasting our future results, we do not believe that the deferred income tax
assets meet the criteria for realization required by generally accepted
accounting principles and, accordingly, no tax benefit has been recorded.
17
Change in Accounting Principle
On January 1, 2002, the Company adopted the provisions of SFAS No. 141 and
SFAS No. 142. Accordingly, the Company recorded a transitional impairment charge
of approximately $30.2 million for the six months ended June 30, 2002. See
"Impact Of Recently Issued Accounting Standards." In the future, impairment must
be assessed at least annually for these assets, or when indicators of impairment
exist. Our judgments regarding the existence of impairment indicators include
our assessment of the impacts of legal factors, market and economic conditions;
the results of our operational performance and strategic plans; competition and
market share; and any potential for the sale or disposal of a significant
portion of our principal operations. In the future, it is possible that such
assessments could cause us to conclude that impairment indicators exist and that
certain assets are impaired. In addition, if the Company's revenues continue to
decline, the Company may be required to take additional impairment charges in
future periods.
LIQUIDITY AND CAPITAL RESOURCES
We have incurred significant net losses since our inception. As of June
30, 2002, we have accumulated a deficit of $162.6 million. Our principal source
of liquidity is our cash and cash equivalents. Our cash and cash equivalents
balance was $17.4 million and $13.1 million at December 31, 2001 and June 30,
2002, respectively. The decrease in cash and cash equivalents during the six
months ended June 30, 2002 resulted primarily from our net cash loss of
approximately $5.8 million (net loss of $41.5 million less non-cash items of
approximately $35.7 million), offset by a $1.5 million decrease in accounts
receivable. Our working capital at June 30, 2002 was approximately $13.0
million, compared to approximately $18.6 million at December 31, 2001.
As of June 30, 2002, outstanding debt consisted of a line of credit
totaling $5.0 million. Pursuant to the terms of the line of credit, the Company
must maintain a minimum balance of cash and cash equivalents of $3.5 million. If
the Company's cash and cash equivalents balances fall below $3.5 million, the
line of credit may not be available to the Company. In addition, the line of
credit expires in December 2002 and the principal balance is due on December 31,
2002. In July 2002, the Company repaid the outstanding balance on the line of
credit in the amount of $5.0 million. We have no commitments for additional
financing, and we may experience difficulty in renewing this line of credit on
favorable terms, if at all. Other commitments at June 30, 2002 consisted of
operating leases of $4.9 million.
Net cash used by operating activities consists of net loss offset by
certain adjustments not affecting current-period cash flows, such as
depreciation, amortization and cumulative effect of change in accounting
principle, and the effect of changes in working capital. Net cash used by
operating activities during the six months ended June 30, 2002 was $4.4 million,
resulting from our net loss of $41.5 million, offset by non-cash items of $35.7
million and changes in working capital of $1.3 million.
Net cash used in investing activities was $2,000 for the six months ended
June 30, 2002 and consisted primarily of $667,000 release of restricted cash as
a result of renegotiating our office lease offset by purchases of equipment and
software.
Net cash provided by financing activities was $72,000 for the six months
ended June 30, 2002 and consisted primarily of cash proceeds from the line of
credit offset by repayments of the line of credit and cash received from the
sale of common stock pursuant to the Company's Employee Stock Purchase Plan.
Our future capital requirements will depend on many factors that are
difficult to predict, including our rate of revenue growth, if any, our
operating losses, the cost of obtaining new customers and technical
capabilities, and the cost of upgrading and maintaining our network
infrastructure and other systems. We believe that our existing cash and cash
equivalents will be sufficient to meet our anticipated cash needs for working
capital and capital expenditures for at least the next 12 months. However, any
projections of future cash needs and cash flows are subject to substantial
uncertainty. If our capital requirements vary materially from those currently
planned, we may require additional financing sooner than anticipated. We have no
commitments for additional financing, and we may experience difficulty in
obtaining additional funding on favorable terms, if at all. Any difficulty in
obtaining additional financial resources could force us to curtail our
operations, dispose of certain assets at less than book value or prevent us from
pursuing our growth strategy. In addition, any future funding may dilute the
ownership of our shareholders. Our stock is currently trading at
18
prices less than $1.00 per share. If our stock continues to trade at this level,
our stock could be delisted from the NASDAQ SmallCap Market and our ability to
obtain financing may suffer as a result.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
The Company adopted the provisions of SFAS No. 141 "Business Combinations"
and SFAS No. 142 "Goodwill and Other Intangible Assets" on January 1, 2002. In
order to assess the value of its goodwill and indefinite-lived intangible assets
as of January 1, 2002, the Company engaged an independent valuation firm. The
valuation process assigned the Company's assets and liabilities to its reporting
units and then provided a fair value opinion of those assets using a discounted
cash flow model that also considered factors such as market capitalization and
appraised values of certain assets. Based upon the results of the valuation
opinion, the Company recorded a transitional impairment charge for a portion of
the goodwill assigned to its Software reporting unit. The transitional
impairment charge was approximately $30.2 million. Goodwill and intangible
assets assigned to the Printing reporting units were not impaired since the fair
value opinion of these reporting units' assets exceeded their book value at the
measurement date.
According to SFAS No. 142, impairment must be assessed at least annually
for these assets, or when indicators of impairment exist. Our judgments
regarding the existence of impairment indicators include our assessment of the
impacts of legal factors, market and economic conditions; the results of our
operational performance and strategic plans; competition and market share; and
any potential for the sale or disposal of a significant portion of our principal
operations. In the future, it is possible that such assessments could cause us
to conclude that impairment indicators exist and that certain assets are
impaired resulting in a material write down of assets to the then determined
fair value.
In June 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 143, "Accounting for Asset Retirement Obligations" which establishes
requirements for the financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. The adoption date for the Company will be January 1,
2003 and the Company is assessing what the impact of SFAS No. 143 will be on its
results of operations and financial position.
On October 3, 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 supersedes SFAS No.
121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of". SFAS No. 144 applies to all long-lived assets
(including discontinued operations) and consequently amends Accounting
Principles Board Opinion No. 30, "Reporting Results of Operations Reporting the
Effects of Disposal of a Segment of a Business." SFAS No. 144 develops one
accounting model for long-lived assets that are to be disposed of by sale and
requires these assets to be measured at the lower of book value or fair value
less cost to sell. Additionally, SFAS No. 144 expands the scope of discontinued
operations to include all components of an entity with operations that (i) can
be distinguished from the rest of the entity and (ii) will be eliminated from
the ongoing operations of the entity in a disposal transaction. The Company
adopted this statement on January 1, 2002. The Company's adoption of this SFAS
has not had a material impact on its financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" which establishes requirements for
the financial accounting and reporting for costs associated with exit or
disposal activities. The adoption date for the Company will be January 1, 2003
and the Company is assessing what the impact of SFAS No. 146 will be on its
results of operations and financial position.
RISK FACTORS AFFECTING IMAGEX'S OPERATING RESULTS
You should carefully consider the risks described below and the other
information in this report. While we have attempted to identify all risks that
are material to our business, additional risks that we have not yet identified
or that we currently think are immaterial may also impair our business
operations. The trading price of our common stock could decline as a result of
any of these risks. In assessing these risks, you should also refer to the other
information in this report, including the consolidated financial statements and
related notes.
We May Be Unable To Meet Our Future Capital Requirements And Execute On
Our Business Strategy. Because we are not currently generating sufficient cash
to fund operations, we may need to raise additional capital in the future, in
order
19
to fund our operations and pursue our growth strategy. We believe our existing
cash and cash equivalents will be sufficient to meet our anticipated cash needs
for working capital and capital expenditures for at least the next 12 months.
However, our future capital requirements will depend on many factors that are
difficult to predict, including our rate of revenue growth, our operating
losses, the cost of obtaining new customers and technical capabilities, and the
cost of upgrading and maintaining our network infrastructure and other systems.
As a result, we cannot predict with certainty the timing or amount of our future
capital needs. If our capital requirements vary materially from those currently
planned, we may require additional financing sooner than anticipated. We have no
commitments for additional financing, and we may experience difficulty in
obtaining additional funding on favorable terms, if at all. Any difficulty in
obtaining additional financial resources could force us to curtail our
operations, dispose of certain assets at less than book value, or prevent us
from pursuing our growth strategy.
We May Need To Raise Additional Capital In The Future, Which Can Cause
Dilution. Any future funding may dilute the ownership of our shareholders.
Shareholders could experience additional dilution if we issue shares of our
stock to pay for acquisitions of other businesses or assets. In addition, our
board of directors has broad discretion to determine the rights and preferences
of securities issued to investors or shareholders of acquired businesses in the
future. If we issue securities with senior or superior rights and powers,
existing shareholders may be adversely affected.
The Market Price Of Our Common Stock Has Been And May Continue To Be
Volatile, Which Could Result In Losses For Security Holders and Our Securities
May Be Delisted From The NASDAQ SmallCap Market Due To An Insufficient Minimum
Bid Price. The trading price of our common stock has historically been highly
volatile. Trading prices of our common stock may fluctuate in response to a
number of events and factors, such as:
o General economic conditions;
o Changes in interest rates;
o Conditions or trends in the Internet, the e-commerce industry and
print industry;
o Fluctuations in the stock market in general and market prices for
Internet-related companies in particular;
o Actual or anticipated variations in our quarterly operating results;
o Changes in financial estimates by us or securities analysts and
recommendations by security analysts
o Changes in capital structure, including issuance of additional debt
or equity to the public
The closing price of our common stock on June 30, 2002 was $0.45 per
share. The NASDAQ SmallCap Market generally requires listed issuers to maintain
a minimum bid price of $1.00, and may delist an issuer whose share price falls
below that threshold for an extended period of time. If we are unable to meet
the minimum listing requirements, we may be subject to delisting from the NASDAQ
SmallCap Market, which will likely have a material adverse effect on our common
stock and would severely restrict our ability to raise additional capital.
We Have A History Of Losses And Expect Losses Will Continue. We have never
been profitable, and we anticipate that we will continue to incur net losses in
future periods. To become profitable, we must significantly increase our
revenues by obtaining new customers and generating additional revenues from
existing customers, control our expenses and improve our gross margins. As of
June 30, 2002, we had an accumulated deficit of $162.6 million. Although we have
experienced revenue growth in recent periods, our revenues may not continue at
their current level or increase in the future. We may continue to incur
operating losses for some time.
If we are unable to increase our revenues and operating margins, our
operating losses may continue to increase in future periods. Increased
competition or other changes in printing industry economics may also adversely
affect our ability to eventually become profitable.
We Have A Limited Operating History And Are Subject To The Risks Of New
Enterprises. We began operations in 1996 and commercially introduced our
Internet-enabled printing services in October 1997. Our limited operating
history and the uncertain and emerging nature of the market in which we compete
make it difficult to assess our prospects or predict our future operating
results. Our prospects are subject to the risks and uncertainties frequently
encountered in the establishment of a new business enterprise, particularly in
the new and rapidly evolving markets for Internet products and services.
Our Quarterly Results Are Difficult To Predict And Are Likely To
Fluctuate, Which May Have An Impact On Our Stock Price. Our quarterly revenues,
expenses and operating results have varied significantly in the past and are
likely to vary significantly from quarter to quarter in the future. Our
operating results may fall below market analysts' expectations in some
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future quarters, which could lead to a significant decline in the market price
of our common stock. In addition to the risk factors described elsewhere,
quarterly fluctuations may also result from:
o our ability to obtain new customers for the ImageX Print System and
the Channel Marketing System;
o changes in our operating expenses and capital expenditure
requirements;
o our ability to retain our existing customers and increase sales to
them;
o changes in the mix of printing and software services we sell;
o the timing of customer orders;
o impairment of long-lived assets;
o cumulative effect of accounting change;
o increased competition; and
o general or industry-specific economic conditions.
Based on all these factors, we believe that our quarterly revenues,
expenses and operating results will be difficult to predict. Moreover, because
of our short operating history and our acquisitions, period-to-period
comparisons of our operating results are not necessarily meaningful. As a
result, you should not rely on such comparisons as indications of our future
performance.
To Obtain New Customers, We Must Overcome Long-Standing Customer
Relationships And Long Sales Cycles. Many of the potential customers that we
pursue through our direct sales process have long-standing business
relationships and personal ties with their existing printers, which they are
reluctant to disrupt. Customers are also often reluctant to change their
existing ordering and production processes to take advantage of our
Internet-based printing services. To successfully sell our products, we
generally must educate our potential customers on the use and benefits of our
systems, which can require significant time and resources. Consequently, we must
incur substantial expenses in acquiring new customers and converting them to the
ImageX Print System and the Channel Marketing System. The period between initial
contact and the purchase of our products through our online system or the
Channel Marketing System is often long and subject to delays associated with the
lengthy approval and competitive evaluation processes that typically accompany a
customer's decision to change its outsourcing relationships. For typical
customers, the sales cycle takes between two to twelve weeks, but for large
customers, the sales cycle may require more than one year. In addition our
success will depend on revenues from the Channel Marketing System, which was
released in the second quarter of 2002.
A substantial majority of our revenues are derived from customers that we
have obtained through acquisitions of print providers. A significant of this
revenue is currently generated through traditional offline orders rather than
through our online procurement system. We have historically made acquisitions
using our common stock as a major portion of the consideration. With the recent
closing prices of our common stock, it has become impractical to use it for such
acquisitions. Furthermore, with the current state of capital markets, we are
cognizant of our need to conserve cash. These factors together make it more
difficult for us to obtain additional customers through acquisitions.
Increases In Paper Prices And Shortages In Paper Supply Could Adversely
Affect Our Gross Margins And Operating Results. The cost of paper is a principal
factor in the pricing we receive from our network of commercial printing vendors
and our own pricing through our three production facilities. We have generally
been able to pass increases in the cost of paper on to customers. Decreases in
paper costs generally result in lower prices to customers. If we are unable to
pass future paper cost increases on to our customers, or if our customers reduce
their order volume, our profit margins and cash flows could be adversely
affected.
In recent years, increases or decreases in demand for paper have led to
corresponding pricing changes. In periods of high demand, certain paper grades
have been in short supply, including grades we and our commercial printing
vendors use. Any loss of the sources for paper supply or any disruption in our
suppliers' businesses or their failure to meet our product needs on a timely
basis could cause, at a minimum, temporary shortages in needed materials, which
could have a material adverse effect on our operating results, sales, profit
margins and cash flows.
We May Be Exposed To Environmental Liabilities And May Face Increased
Costs Of Compliance With Environmental Laws And Regulations. The printing
business generates substantial quantities of inks, solvents and other waste
products requiring disposal. The printing facilities that we operate are subject
to federal and state environmental laws and regulations concerning emissions
into the air, discharges into waterways and the generation, handling and
disposal of waste materials. We believe our facilities are in substantial
compliance with these laws and regulations at this time. However,
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changes to these laws and regulations could increase the cost of our doing
business or otherwise have a material adverse effect on our business, financial
condition and operating results. In addition, although we maintain commercial
property insurance at all our facilities, this insurance may not be adequate to
cover any claims against us for environmental liabilities.
If Businesses Do Not Accept The Internet As A Means Of Procuring Printed
Business Materials, Our Business May Not Be Able To Grow Sufficiently. For us to
succeed, the Internet must continue to be adopted as an important means of
buying and selling products and services. Even if the Internet is widely adopted
for business procurement, it may not achieve broad market acceptance for
printing services procurement.
We have expended, and will continue to expend, significant resources
educating potential customers about our services, capabilities and benefits. We
may not be successful in achieving market acceptance of the ImageX Print System,
or the Channel Marketing System, or in achieving significant market share before
competitors offer products, applications or services with features similar or
superior to our current or proposed offerings.
If We Are Unable To Compete Successfully Against Traditional Printing
Companies Or Other Businesses Offering Internet-Based Procurement and/or
Printing Services, Our Business May Not Succeed. The market for printed business
materials is intensely competitive. We compete primarily with local and regional
printers, which are either independent or owned by print industry consolidators.
The U.S. commercial printing industry is highly fragmented, with over 31,000
local and regional commercial printers operating nationwide in 2000. These local
and regional printers typically have significant excess production capacity.
Therefore, they compete aggressively for business printing orders in the markets
they serve.
Traditional commercial printers often have long-standing relationships
with customers. We face substantial challenges in convincing businesses to
consider alternatives to their traditional printers. In addition, printers
typically have extensive local sales forces that regularly canvass and solicit
businesses in the areas they serve. Commercial printers compete primarily on
product pricing, product and service quality and, to a lesser extent, on
innovation in printing technologies and techniques. To attract new customers and
retain our existing customers, we must compete effectively in each of these
areas.
We also face substantial competition from printing services
brokers-companies that contract with businesses to select and procure printing
services from a variety of printers. Brokers are able to offer customers a
relatively wide variety of products and services, and are often able to obtain
favorable pricing for their customers by soliciting bids from a variety of
printers. Like local and regional printers, printing services brokers often have
long-standing customer relationships and extensive local direct sales forces.
We also face direct competition from other companies that market
integrated Internet-based business printing services similar to ours. Potential
developers of competing electronic commerce services may include:
o consumer printing services providers, including Internet-based
providers;
o office services providers;
o equipment manufacturers; and
o financial printers and publishers.
Many of our current and potential future competitors have substantially
greater financial, marketing and other resources than we do. As a result, they
may be able to market their products, services and branding more aggressively
than we are able to, and may be able to significantly undercut our pricing for
extended periods of time. They may also be able to respond more quickly and
effectively to emerging new technologies and to changes in customer requirements
and preferences.
Difficulties With Third-Party Services And Technologies Could Disrupt Our
Business And Undermine Our Reputation. Our success in attracting and retaining
customers and convincing them to increase their reliance on our Internet-based
services depends on our ability to offer customers reliable, secure and
continuous service. This in turn requires us to ensure continuous and error-free
operation of our systems and network infrastructure. We rely on third parties to
provide key components of our networks and systems. For instance, we rely on a
third-party Internet services provider for the high-speed connections that link
our Web servers and office systems to the Internet. We also rely on third-party
communications services providers to provide secure connections to relay
customer order information to our network of commercial printing vendors.
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As the volume of data traffic on our network and other systems increases,
we must continuously upgrade and enhance our technical infrastructure to
accommodate the increased demands placed on our systems. If we fail to rapidly
scale up the speed and data capacity of our systems, our customers may
experience a deterioration of response times from our systems or periodic
systems failures. Such difficulties would reduce customer loyalty and use of our
services.
Possible Electronic Commerce Security Breaches And Systems Failures Could
Harm Our Business. We rely on encryption and authentication technology to effect
secure transmission of confidential information. It is possible that advances in
computer capabilities, new discoveries in the field of cryptography, or other
events or developments will result in a compromise or breach of the codes used
by us to protect customer transaction data. If any such compromise of our
security were to occur, it could have a material adverse effect on our
reputation and on our ability to conduct business. It also could expose us to a
risk of loss or litigation and possible liability. It is possible that our
security measures will not prevent security breaches.
The performance of our computer and telecommunications equipment is
critical to our reputation and to our ability to achieve market acceptance of
our services. Any system failure, including any network, software or hardware
failure, that causes interruption or an increase in response time of our online
services could decrease usage of our services. Frequent systems failures could
reduce the attractiveness of our services to our customers. An increase in the
volume of printing orders could strain the capacity of our hardware, which could
lead to slower response time or systems failures. Our operations also depend in
part on our ability to protect our operating systems against physical damage
from fire, earthquakes, power loss, telecommunications failures, computer
viruses, hacker attacks, physical break-ins and similar events.
Potential Imposition Of Governmental Regulation On Electronic Commerce And
Legal Uncertainties Could Limit Our Growth. The adoption of new laws or the
adaptation of existing laws to the Internet may decrease the growth in the use
of the Internet, which could in turn decrease the demand for our services,
increase our cost of doing business or otherwise have a material adverse effect
on our business, financial condition and operating results. Few laws or
regulations currently directly apply to access to commerce on the Internet.
Federal, state, local and foreign governments are considering a number of
legislative and regulatory proposals relating to Internet commerce. As a result,
a number of laws or regulations may be adopted regarding Internet user privacy,
taxation, pricing, quality of products and services, and intellectual property
ownership. How existing laws will be applied to the Internet in areas such as
property ownership, copyright, trademark, trade secret, obscenity and defamation
is uncertain.
Possible Infringement Of Intellectual Property Rights Could Harm Our
Business. Our success depends in part on our proprietary technologies. We rely,
and plan to continue to rely, on a combination of patents, copyrights,
trademarks, trade secrets and confidentiality provisions to establish and
protect our intellectual property rights. Although we currently have 6 patents
issued and have over 80 U.S. patent applications pending, we cannot be certain
that any new patents will ultimately be issued. Furthermore, we cannot be
certain that the steps we have taken to protect our intellectual property rights
will be adequate or that third parties will not infringe or misappropriate our
proprietary rights, nor can we be sure that competitors will not independently
develop technologies that are substantially equivalent or superior to the
proprietary technologies employed in our Web-based services. In addition, we
cannot be certain that our business activities will not infringe on the
proprietary rights of others or that other parties will not assert infringement
claims against us. Any claim of infringement of proprietary rights of others,
even if ultimately decided in our favor, could result in substantial costs and
diversion of resources. If a claim is asserted that we infringed the
intellectual property of a third party, we may be required to seek licenses to
such third-party technology. We cannot be sure that licenses to third-party
technology will be available to us at a reasonable cost, if at all. If we were
unable to obtain such a license on reasonable terms, we could be forced to cease
using the third-party technology.
Our Articles Of Incorporation And Bylaws And Washington Law Contain
Provisions That Could Discourage A Takeover. Certain provisions of our articles
of incorporation, our bylaws and Washington law could make it more difficult for
a third party to obtain control of ImageX, even if doing so might be beneficial
to our shareholders.
Our Revenues Are Attributable to A Small Number of Customers; The Loss of
Any One of Which Could Harm Our Financial Results. We derive a substantial
portion of our revenues from a small number of customers. We expect that this
will continue in the foreseeable future, however, no single customer accounted
for more than 10% of revenues for the three and six months ended June 30, 2002.
If we lose any of these customers, or if any of these customers are unable or
unwilling to pay us amounts that they owe us, our financial results will suffer.
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Extensis is Dependent On The Apple Mac Operating System And Can Be
Adversely Affected By Market Developments That Are Adverse to Mac As Well As By
Delays Caused By Extensis' Failure to Develop And Introduce New Products That
Respond to Rapidly Evolving Industry Standards. Although Extensis sells products
for both the Mac and Microsoft Windows operating systems, a substantial portion
of Extensis' revenues are derived from sales of products that are designed to
work with the Mac operating system and are primarily marketed to Mac users. As a
result, sales of Extensis products would be materially affected by market
developments adverse to Mac based products, or Mac's decision to introduce or
acquire products that compete directly with Extensis products. In this regard,
Extensis' future success will depend on its ability to enhance its current
products, to develop new products that meet changing customer needs on a timely
and cost-effective basis and to respond to emerging industry standards and other
technological changes brought on by both Mac and Microsoft's Windows operating
systems. Any failure by Extensis to anticipate or respond adequately to changes
in technology and customer preferences, or any significant delays in product
development or introduction, would have a material adverse effect on the
Company's operating results and financial condition.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to financial market risks, including changes in interest
rates. We typically do not attempt to reduce or eliminate our market exposures
on our investment securities because the majority of our investments are
short-term. We do not have any derivative instruments.
The fair value of our investment portfolio or related income would not be
significantly impacted by either a 100 basis point increase or decrease in
interest rates due mainly to the short-term nature of the major portion of our
investment portfolio. Our $5.0 million line of credit bears interest at 4.7% and
was repaid in July 2002. Interest expense would not be significantly impacted by
either a 100 basis point increase or decrease in interest rates.
All of the potential changes noted above are based on sensitivity analysis
performed on our balances as of June 30, 2002.
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PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, ImageX and its affiliate companies are subject to other
legal proceedings and claims in the ordinary course of business. The Company
currently is not aware of any such legal proceedings or claims that it believes
will have, individually or in the aggregate, a material adverse effect on its
business, prospects, financial condition, operating results or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the annual shareholders' meeting held on May 7, 2002, the following
proposal was adopted by the margin indicated:
1. To re-elect three directors to our board of directors to serve for a term
described in the proxy statement filed on March 29, 2002.
NOMINEE SHARES SHARES
FOR WITHHELD
- --------------------------------------------------------------------------------
F. Joseph Verschueren 24,039,000 280,694
Elwood D. Howse, Jr 24,044,400 274,294
Bernee D.L. Strom 24,052,941 266,753
- --------------------------------------------------------------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) 99.1 Certification Pursuant To 18 U.S.C. Section 1350, As Adopted
Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002
99.2 Certification Pursuant To 18 U.S.C. Section 1350, As Adopted
Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002
(b) Reports on Form 8-K
The Company filed Form 8-K on July 1, 2002, announcing the intention of
Robin L. Krueger to resign as Chief Financial Officer.
Items 2, 3 and 5 are not applicable and have been omitted.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IMAGEX, INC.
(Registrant)
Date: August 8, 2002 By /s/ Richard P. Begert
---------------------
Richard P. Begert
President and Chief Executive Officer
(duly authorized officer)
By /s/ Gina M. Meyers
------------------
Gina M. Meyers
Vice President of Finance and Corporate
Controller
(duly authorized accounting officer)
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