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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 September 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
November 8, 2002 was 31,189,266.
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 September 30, 2002
(unaudited).................................................................................... 3
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended
September 30, 2001 and September 30, 2002 (unaudited).......................................... 4
Condensed Consolidated Statements of Comprehensive Loss for the Three and Nine
Months Ended September 30, 2001 and September 30, 2002 (unaudited)............................. 4
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30,
2001 and September 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..................................................................................... 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk....................................... 25
Item 4. Controls and Procedures Disclosures.............................................................. 25
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings................................................................................ 26
Item 6. Exhibits and Reports on Form 8-K................................................................. 26
SIGNATURES................................................................................................ 27
CERTIFICATIONS............................................................................................ 28
2
PART I -- FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
IMAGEX, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
December 31, September 30,
2001 2002
------------ -------------
Assets
Current assets:
Cash and cash equivalents .................................................... $ 17,375 $ 14,830
Accounts receivable (net of allowance for doubtful accounts and returns of
$924 and $322, respectively) .............................................. 8,062 4,820
Inventories, net ............................................................. 2,935 1,934
Prepaid expenses and other current assets .................................... 637 1,445
------------ ------------
Total current assets ...................................................... 29,009 23,029
Restricted cash ................................................................. 1,600 933
Property and equipment, net ..................................................... 16,493 10,601
Goodwill ........................................................................ 37,022 2,465
Other intangible assets, net .................................................... 8,875 2,720
------------ ------------
Total assets .............................................................. $ 92,999 $ 39,748
============ ============
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable ............................................................. $ 2,485 $ 1,879
Short-term note payable ...................................................... 5,000 --
Accrued liabilities .......................................................... 2,932 2,887
------------ ------------
Total current liabilities ................................................. 10,417 4,766
Shareholders' equity:
Common stock, $0.01 par value; 70,000 shares authorized; 30,876 and 31,184
shares issued and outstanding, respectively ............................... 309 312
Additional paid-in capital ................................................... 203,598 203,814
Deferred stock based compensation ............................................ (84) (8)
Notes receivable from shareholders ........................................... (52) (16)
Accumulated deficit .......................................................... (121,189) (169,120)
------------ ------------
Total shareholders' equity ................................................ 82,582 34,982
------------ ------------
Total liabilities and shareholders' equity ................................ $ 92,999 $ 39,748
============ ============
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 Nine Months Ended
September 30 September 30
------------ ------------
2001 2002 2001 2002
---- ---- ---- ----
Revenues ................................................. $ 9,702 $ 7,892 $ 33,840 $ 25,754
Cost of revenues ......................................... 7,783 5,946 26,676 19,858
-------- -------- -------- --------
Gross profit ............................................. 1,919 1,946 7,164 5,896
Operating expenses:
General and administrative (excluding
amortization of stock based compensation of
$97, ($52), $597 and $160) ........................... 4,274 3,797 16,864 13,657
Sales and marketing .................................... 2,171 1,763 8,509 5,261
Product development (excluding amortization of
stock based compensation of $0, $0, ($180)
and $0) .............................................. 1,484 854 6,126 2,645
Amortization of goodwill ............................... 76 -- 229 --
Amortization of stock based compensation and
other intangibles .................................... 499 183 1,626 855
Impairment charge ...................................... -- 5,646 -- 5,646
-------- -------- -------- --------
Total operating expenses ................................. 8,504 12,243 33,354 28,064
-------- -------- -------- --------
Loss from operations ..................................... (6,585) (10,297) (26,190) (22,168)
Interest income, net ................................... 153 26 745 113
-------- -------- -------- --------
Loss from continuing operations .......................... (6,432) (10,271) (25,445) (22,055)
Net (loss) income from discontinued operations ........... (1,859) 3,796 (7,944) 4,319
-------- -------- -------- --------
Net loss before cumulative effect of change in
accounting principle ................................... (8,291) (6,475) (33,389) (17,736)
Cumulative effect of change in accounting principle ...... -- -- -- (30,195)
-------- -------- -------- --------
Net loss ................................................. $ (8,291) $ (6,475) $(33,389) $(47,931)
======== ======== ======== ========
Basic and diluted net loss per share:
Loss from continuing operations ........................ $ (0.21) $ (0.33) $ (0.91) $ (0.71)
Net (loss) income from discontinued operations ......... (0.06) 0.12 (0.28) 0.14
-------- -------- -------- --------
Net loss before cumulative effect of change in
accounting principle ................................. (0.27) (0.21) (1.19) (0.57)
Cumulative effect of change in accounting principle .... -- -- -- (0.98)
-------- -------- -------- --------
Basic and diluted net loss per share ................... $ (0.27) $ (0.21) $ (1.19) $ (1.55)
======== ======== ======== ========
Weighted-average shares outstanding, basic and diluted ... 30,652 31,028 28,133 30,927
======== ======== ======== ========
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
Net loss ................................................. $ (8,291) $ (6,475) $(33,389) $(47,931)
Other comprehensive loss:
Foreign currency translation ........................... -- -- 27 --
-------- -------- -------- --------
Comprehensive loss ....................................... $ (8,291) $ (6,475) $(33,362) $(47,931)
======== ======== ======== ========
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)
Nine Months Ended
September 30
------------
2001 2002
---- ----
Cash flows from operating activities
Net loss ...................................................................... $(33,389) $(47,931)
Adjustments to reconcile net loss to net cash used in operating activities:
Cumulative effect of change in accounting principle ........................ -- 30,195
Impairment charge .......................................................... -- 5,646
Gain on sale of Extensis ................................................... -- (3,477)
Depreciation and amortization .............................................. 11,171 6,153
Amortization of stock based compensation ................................... 417 160
Loss on disposal of property and equipment and abandoned copyrights, net ... 1,739 1,333
Provision for doubtful accounts and returns ................................ (557) (227)
Other ...................................................................... (85) --
Change in operating assets and liabilities ................................. 1,820 1,915
-------- --------
Net cash used in operating activities .................................. (18,884) (6,233)
-------- --------
Cash flows from investing activities
Purchases of property and equipment ........................................ (3,291) (1,145)
Proceeds from sale of property and equipment ............................... -- 77
Proceeds from sale of Extensis ............................................. -- 9,000
Release of restricted cash collateralized for letter of credit ............. 812 667
-------- --------
Net cash (used in) provided by investing activities .................... (2,479) 8,599
-------- --------
Cash flows from financing activities
Repayments of line of credit ............................................... (3,975) (10,000)
Proceeds from line of credit ............................................... -- 5,000
Proceeds from exercise of employee stock options ........................... 21 12
Proceeds from issuance of common stock related to
the Employee Stock Purchase Plan ......................................... 451 41
Proceeds from sales of common stock ........................................ 4,850 --
Purchase price adjustment for Extensis ..................................... (277) --
Proceeds from repayment of notes receivable from shareholders .............. 36 36
-------- --------
Net cash provided by (used in) financing activities .................... 1,106 (4,911)
Effect of exchange rate changes on cash ....................................... 27 --
-------- --------
Net decrease in cash and cash equivalents ..................................... (20,230) (2,545)
Cash and cash equivalents at:
Beginning of period ........................................................ 40,420 17,375
-------- --------
End of period .............................................................. $ 20,190 $ 14,830
======== ========
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 and
traditional printing services. 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 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 ImageX Channel Marketing System, released in May 2002, is a
customized Internet-based solution, which enables corporate
customers to manage the distribution of sales and marketing
communications to sales channels.
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 the
Company's 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.
As described in Note 7, on September 15, 2002, the Company sold its wholly
owned subsidiary, Extensis, Inc. ("Extensis"). As such, in accordance with
generally accepted accounting principles, prior period results of operations
have been reclassified to reflect Extensis' operating results and the gain on
sale as Discontinued Operations.
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 approach. The Company adopted the provisions of SFAS No. 141 and
SFAS No. 142 on January 1, 2002. Pursuant to
6
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.
In order to assess the value of its goodwill and indefinite-lived
intangible assets as of January 1, 2002 in accordance with SFAS No. 142, the
Company engaged an independent valuation firm. The valuation process provided a
fair value 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 the
Company's best judgments and the Company recorded a transitional impairment
charge in March 2002 for a portion of the goodwill in 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 nine months ended September 30, 2002.
Goodwill and intangible assets in the Printing reporting units were not impaired
since the estimated fair value of these reporting units' assets exceeded their
book value at January 1, 2002. However, in the third quarter of 2002, the
Company's Howard Press, Inc. ("Howard Press") subsidiary, a separate reporting
unit in the Printing segment, continued to suffer from the slow economy. The
Company determined that this event was a triggering event and as such, goodwill
in this unit was tested for impairment. As a result, the Company recorded an
impairment charge of approximately $3.7 million in the third quarter of 2002 to
write off goodwill in its Howard Press subsidiary.
In the future in accordance with SFAS No. 142, impairment of goodwill and
indefinite-lived intangibles must be assessed at least annually, or when
indicators of impairment exist. The Company plans to perform its annual
assessment during the fourth quarter of its fiscal year. The Company's judgments
regarding the existence of impairment indicators include its assessment of the
impacts of legal factors, market and economic conditions; the results of its
operational performance and strategic plans; competition and market share; and
any potential for the sale or disposal of a significant portion of its 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. In September 2002, the Company sold Extensis (see Note 7) resulting in the
disposal of related goodwill. The changes in the carrying amount of goodwill for
the nine months ended September 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 ...................... 82 -- 82
Transitional impairment charge ............... -- (30,195) (30,195)
Impairment charge ............................ (3,735) -- (3,735)
Sale of Extensis ............................. -- (3,479) (3,479)
-------- -------- --------
Balance as of September 30, 2002 .............. $ 2,465 $ -- $ 2,465
======== ======== ========
7
In accordance with SFAS No. 142, the effect of the change in accounting
method 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 Nine months Ended
September 30, September 30,
------------- -------------
2001 2002 2001 2002
---- ---- ---- ----
Reported net loss ................... $ (8,291) $ (6,475) $(33,389) $(47,931)
Add back: Goodwill amortization ..... 76 -- 229 --
Add back: Goodwill amortization from
discontinued operations ......... 1,308 -- 4,226 --
-------- -------- -------- --------
Adjusted net loss ................... $ (6,907) $ (6,475) $(28,934) $(47,931)
======== ======== ======== ========
Reported basic and diluted net
loss per share .................. $ (0.27) $ (0.21) $ (1.19) $ (1.55)
Add back: Goodwill amortization ..... -- -- 0.01 --
Add back: Goodwill amortization from
discontinued operations ......... 0.04 -- 0.15 --
-------- -------- -------- --------
Adjusted basic and diluted net
loss per share .................. $ (0.23) $ (0.21) $ (1.03) $ (1.55)
======== ======== ======== ========
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 including those 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.
In the third quarter of 2002, the Company's Howard Press subsidiary, a
separate reporting unit in the Printing segment, continued to suffer from the
slow economy. In accordance with SFAS No. 144, management determined that an
indicator of impairment occurred at Howard Press. The Company engaged an
independent valuation firm to provide an estimated fair value of the
subsidiary's assets using a discounted cash flow model. The determination of
fair value is a critical and complex consideration when assessing impairment
under SFAS No. 144 that involves significant assumptions and estimates. These
assumptions and estimates were based on the Company's best judgments and the
Company recorded an impairment charge in the third quarter of 2002 for a portion
of the long-lived assets assigned to Howard Press. This impairment charge was
approximately $1.9 million and consisted of a write-down of customer list of
approximately $1.3 million and a write-down of fixed assets of approximately
$569,000.
3. INVENTORIES
Inventories consisted of the following at (in thousands):
December 31, September 30,
2001 2002
---- ----
Raw materials and supplies ......... $1,254 $ 769
Work-in-process .................... 568 209
Finished goods ..................... 1,113 956
------ ------
$2,935 $1,934
====== ======
8
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 September 30,
2002 are as follows (in thousands):
December 31, 2001 September 30, 2002
------------------------------------- -------------------------------------
Gross Gross
Carrying Accumulated Book Carrying Accumulated Book
Amount Amortization Value Amount Amortization Value
------ ------------ ----- ------ ------------ -----
Customer list .......... $ 5,200 $ 1,536 $ 3,664 $ 2,350 $ 725 $ 1,625
Trained workforce ...... 4,358 1,588 2,770 -- -- --
Existing technology .... 2,060 1,047 1,013 -- -- --
Patents and other ...... 1,983 555 1,428 1,103 8 1,095
------- ------- ------- ------- ------- -------
$13,601 $ 4,726 $ 8,875 $ 3,453 $ 733 $ 2,720
======= ======= ======= ======= ======= =======
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: $85,000, $340,000, $340,000, $340,000 and $274,000, for the remainder
of 2002, fiscal 2003, fiscal 2004, fiscal 2005 and fiscal 2006, respectively.
During the third quarter of 2002, the Company recorded an impairment charge
related to the customer list of Howard Press of approximately $1.3 million (see
Note 2) and the Company sold its wholly owned subsidiary, Extensis, resulting in
the reduction of the existing technology related to Extensis (see Note 7).
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
189,783 and 69,783 shares for the three months ended September 30, 2001 and
2002, respectively and 229,788 and 99,487 shares for the nine months ended
September 30, 2001 and 2002.
Dilutive securities include options, warrants, and restricted stock
subject to repurchase. Potentially dilutive securities totaling 6,332,932 and
5,974,853 shares as of September 30, 2001 and 2002, respectively, were excluded
from diluted loss per share because of their antidilutive effect.
6. SEGMENT INFORMATION
In September 2002, the Company disposed of its Software segment (see Note
7). Historically, the Company classified its business into two major segments:
Printing and Related Technology Services (the "Printing" segment) and Software
Products and Services (the "Software" segment). As a result of the disposal, the
Company now has one major operating segment.
7. DISCONTINUED OPERATIONS
On September 15, 2002, the Company completed the sale of its wholly owned
subsidiary, Extensis, to Celartem Technology USA, Inc., a Delaware corporation
and subsidiary of Celartem Technology Inc., a Japanese Corporation (collectively
"Celartem"). In connection with the sale of the Company's holdings in Extensis
to Celartem, the Company received a cash payment of $9.0 million, plus up to an
additional $2.0 million due over the next two years, if certain revenue targets
are met.
9
For segment reporting purposes, Extensis' operations were previously
reported in the Software segment. In accordance with generally accepted
accounting principles, Extensis' prior period results of operations have been
reclassified as Discontinued Operations. Components of amounts reflected in the
Company's condensed consolidated statements of operations and balance sheets
relating to discontinued operations are as follows (in thousands):
Statement of operations data Three Months Ended Nine months Ended
September 30, September 30,
------------- -------------
2001 2002 2001 2002
---- ---- ---- ----
Revenues ......................................... $ 3,066 $ 2,398 $ 9,105 $ 8,894
Net operating (loss) income ...................... (1,859) 319 (7,944) 842
Gain from sale of Extensis ....................... -- 3,477 -- 3,477
------- ------- ------- -------
Net (loss) income from discontinued operations ... $(1,859) $ 3,796 $(7,944) $ 4,319
======= ======= ======= =======
Balance Sheet December 31, September 30,
2001 2002
---- ----
Current assets ................................ $ 2,073 $ --
Property and equipment, net ................... 939 --
Other assets .................................. 28,161 --
------- -------
Total assets ................................ $31,173 $ --
======= =======
Current liabilities ........................... $ 1,520 --
Shareholders equity ........................... 29,653 --
------- -------
$31,173 $ --
======= =======
8. 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 expenses for the nine months ended
September 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 expenses for the nine months ended
September 30, 2002.
9. 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 expenses for the nine months
ended September 30, 2002.
10
Total rent expense incurred under operating leases for the three and nine
months ended September 30, 2001 and 2002 was approximately $802,000, $539,000,
$2.9 million and $2.4 million, respectively. At September 30, 2002, the
approximate future lease payments for the remainder of the lease terms were as
follows (in thousands):
December 31,
------------
2002 ................................. $ 525
2003 ................................. 1,742
2004 ................................. 1,379
2005 ................................. 378
2006 ................................. 168
Thereafter ........................... 8
------
$4,200
======
10. 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 September 30, 2002, the Company had an accumulated deficit of $169.1 million.
Although the Company has experienced revenue growth in the past, revenues may
not continue at their current levels, or increase in the future.
The Company's future capital requirements will depend on many factors that
are difficult to predict, including its rate of revenue growth, if any, its
operating losses, the cost of obtaining new customers and technical
capabilities, and the cost of upgrading and maintaining its network
infrastructure and other systems. The Company believes that its existing cash
and cash equivalents will be sufficient to meet its 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 the Company's capital requirements vary materially
from those currently planned, the Company may require additional financing
sooner than anticipated. As of September 30, 2002, the Company has access to 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, if any, is
due on December 31, 2002. The Company has no commitments for additional
financing, and the Company may experience difficulty in renewing this line of
credit on favorable terms, if at all. Any difficulty in obtaining additional
financial resources could force the Company to curtail its operations, dispose
of certain assets at less than book value or prevent the Company from pursuing
its growth strategy. In addition, any future funding may dilute the ownership of
its shareholders. The Company's stock is currently trading at prices less than
$1.00 per share. If the Company's stock continues to trade at this level, its
stock could be delisted from the NASDAQ SmallCap Market on February 24, 2003 and
the Company's ability to obtain financing may suffer as a result.
11. 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
currently 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 currently assessing what impact SFAS No. 146 will have on the
Company's results of operations and financial position.
11
12. SUBSEQUENT EVENTS
In November 2002, the Company reduced ten percent of its work force. The
Company expects to incur costs of approximately $422,000 related to severance
costs and may incur additional restructure costs in the fourth quarter of 2002.
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 nine months
ended September 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 Operations contained in the Company's 2001 Annual Report on Form
10-K.
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. This document, including 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. In particular, the statements herein regarding industry prospects and
our future results of operations or financial position are forward-looking
statements. Such forward-looking statements include, but are not limited to,
statements as to our expectations regarding:
o future net income or net losses of the Company;
o future capital needs and capital expenditures;
o the Company's need and ability to obtain financing in the future;
o the possible delisting of the Company from the NASDAQ SmallCap
Market;
o future charges for long-lived assets and goodwill;
o the continuance of offering volume discounts to customers;
o revenue growth in the future;
o consistent gross margins for the remainder of the fiscal year;
o future expense levels (including general and administrative, sales
and marketing, product development and the effect of cost-reduction
initiatives);
o the unpredictability of the Company's quarterly revenues, expenses
and operating results;
o future sales cycles for customers;
o the Company's ability to obtain additional customers through
acquisitions;
o the future effectiveness of the Company's intellectual property
rights; and
o future growth of our customer base.
Forward-looking statements reflect our current expectations and are
inherently uncertain. Our actual results could differ materially and adversely
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" and elsewhere in this Quarterly report on Form 10-Q.
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.
12
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 fair value
of such intangible assets requires management to make estimates and
assumptions that materially affect our financial condition and
results of operations.
o Impairment of goodwill and indefinite-lived intangibles. To assess
the fair value of its goodwill and indefinite-lived intangible
assets, the Company engages an independent valuation firm. The
valuation provides an estimate of a fair value of the assets using a
discounted cash flow model that also considers factors such as
market capitalization and appraised values of certain assets. The
valuation uses many assumptions and estimates in determining the
fair value of the assets. These assumptions and estimates are based
on our best judgments. In the future, impairment must be assessed at
least annually for these assets, or when indicators of impairment
exist. The Company plans to perform its annual assessment during the
fourth quarter of its fiscal year. 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. The Company periodically reviews long-lived
assets, other intangibles and reporting segments for 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 are
reviewed for impairment. 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. When the Company
determines that indicators of impairment exists, the Company then
assesses the fair value of these assets using an independent
valuation firm. The valuation process provides an estimate of a fair
value of these assets using a discounted cash flow model. The
valuation uses many assumptions and estimates in determining the
fair value of these assets.
OVERVIEW
The Company provides Internet-based business-to-business e-procurement
services for printed business materials and traditional printing services. 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 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.
13
o ImageX Channel Marketing System, released in May 2002, is a
customized Internet-based solution, which enables corporate
customers to manage the distribution of sales and marketing
communications to sales channels.
On September 15, 2002, the Company completed the sale of its wholly owned
subsidiary, Extensis, to Celartem Technology USA, Inc., a Delaware corporation
and subsidiary of Celartem Technology Inc., a Japanese Corporation (collectively
"Celartem"). In connection with the sale of the Company's holdings in Extensis
to Celartem, the Company received a cash payment of $9.0 million, plus up to an
additional $2.0 million due over the next two years, if certain revenue targets
are met.
RESULTS OF OPERATIONS
We have incurred significant net losses since our inception. As of
September 30, 2002, we had accumulated a deficit of $169.1 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 of operations are not necessarily meaningful. As a result, you should
not rely on such comparisons as indications of our future performance.
For segment reporting purposes, Extensis' operations were previously
reported in the Software segment. In accordance with generally accepted
accounting principles, Extensis' prior period results of operations have been
reclassified as Discontinued Operations.
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
14 vendors and our own three operating facilities and are shipped directly to
customers under the ImageX and Howard Press brands.
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 Nine months Ended
September 30, September 30,
------------- -------------
2001 2002 Change 2001 2002 Change
---- ---- ------ ---- ---- ------
Revenues .............. $ 9,702 $ 7,892 (19%) $33,840 $25,754 (24%)
The decrease in revenues for the three and nine months ended September 30,
2002 compared to the three and nine months ended September 30, 2001 was
primarily attributable to a change in the mix of product orders to lower priced
products, the loss of revenues from three major customers facing economic
difficulties in our east coast operations
14
and steeper volume discounts due to the continued general slow down in the U.S.
economy. We anticipate that revenues will increase slightly in the fourth
quarter of 2002 due to seasonality. 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. Revenues from
the Channel Marketing System, introduced in May 2002, and revenues from
licensing of our patents have not been material.
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. 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.
(in thousands) Three Months Ended Nine months Ended
September 30, September 30,
------------- -------------
2001 2002 Change 2001 2002 Change
---- ---- ------ ---- ---- ------
Gross profit ....... $1,919 $1,946 1% $7,164 $5,896 (18%)
Gross margin ....... 20% 25% 21% 23%
The increase in gross profit for the three months ended September 30, 2002
compared to the three months ended September 30, 2001 was primarily due to the
increased operating efficiencies realized from further utilization of our
patented technologies offset by decreased revenues in the east coast operations.
The decrease in gross profit for the nine months ended September 30, 2002
compared to the nine months ended September 30, 2001 was primarily due to
decreased revenues in the east coast operations. Gross margin for the three and
nine months ended September 30, 2002 increased due to operating efficiencies
realized from further utilization of our patented technologies offset by
decreased revenues. We expect gross margins to remain consistent with the first
nine months of 2002 for the remainder 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 nine months ended September 30, 2002, we
reduced our staff and implemented non-staff cost reductions. We believe that
cost-reduction initiatives implemented during the first, second and third
quarters of 2002 will continue to reduce our cash operating expenses 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 Nine months Ended
September 30, September 30,
------------- -------------
2001 2002 Change 2001 2002 Change
---- ---- ------ ---- ---- ------
General and administrative ..... $ 4,274 $ 3,797 (11%) $16,864 $13,657 (19%)
Percentage of revenues ......... 44% 48% 50% 53%
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 nine
months ended September 30, 2002 compared to the three and nine months ended
September 30, 2001 was 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 was partially offset by a lease termination fee of $667,000 related to
the restructuring of our office lease in Kirkland in March 2002 and by $1.3
million in losses related to disposal of certain equipment. Management expects
general and administrative expenses to continue to decrease slightly for the
remainder of fiscal 2002 due to a reduction in employees in November 2002.
Sales and Marketing Expenses
(in thousands) Three Months Ended Nine months Ended
September 30, September 30,
------------- -------------
2001 2002 Change 2001 2002 Change
---- ---- ------ ---- ---- ------
Sales and marketing .......... $2,171 $1,763 (19%) $8,509 $5,261 (38%)
Percentage of revenues ....... 22% 22% 25% 20%
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 nine months ended September 30,
2002 compared to the three and nine months ended September 30, 2001 primarily
resulted from a reduction in compensation and related expenses due to reductions
in staffing. Management expects sales and marketing expenses to decrease
slightly during the fourth quarter of fiscal 2002 due to the reduction of our
channel marketing sales force announced in November 2002.
Product Development Expenses
(in thousands) Three Months Ended Nine months Ended
September 30, September 30,
------------- -------------
2001 2002 Change 2001 2002 Change
---- ---- ------ ---- ---- ------
Product development .......... $1,484 $ 854 (42%) $6,126 $2,645 (57%)
Percentage of revenues ....... 15% 11% 18% 10%
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 for the three and nine months ended September 30, 2002
compared to the three and nine months ended September 30, 2001 was due entirely
to staff reductions implemented in 2001 and in the first quarter of 2002.
Management expects product development expenses to decrease slightly in the
fourth quarter of 2002 due to a reduction in employees in November 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 Howard Press in
2000. As of December 31, 2001, the amortization of goodwill and other intangible
assets was over periods ranging from 3 to 10 years. The amortization of goodwill
was approximately $76,000 and $229,000 for the three and nine months ended
September 30, 2001, respectively. Upon adoption of SFAS No. 142 on January 1,
2002, amortization of goodwill ceased.
16
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 approximately $97,000 and
($52,000) for the three months ended September 30, 2001 and 2002, respectively,
and approximately $417,000 and $160,000 for the nine months ended September 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 $402,000 and
$235,000 for the three months ended September 30, 2001 and 2002, respectively,
and approximately $1,209,000 and $695,000 for the nine months ended September
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.
Impairment Charge
In the third quarter of 2002, the Company's Howard Press subsidiary, a
separate reporting unit in the Printing segment, continued to suffer from the
slow economy. The Company determined that this event was a triggering event and
as such, goodwill in this unit was tested for impairment. As a result, the
Company recorded an impairment charge of approximately $3.7 million in the third
quarter of 2002 to write off goodwill in its Howard Press subsidiary.
In addition, as a result of the triggering event, the Company also
recorded an impairment charge pursuant to SFAS No. 144 in the third quarter of
2002. This impairment charge was approximately $1.9 million and consisted of a
write-down of customer list of approximately $1.3 million and a write-down of
fixed assets of approximately $569,000.
If the Company's revenues continue to decline, the Company may be required
to take additional impairment charges in the future pursuant to SFAS No. 142 and
SFAS No. 144.
Interest Income, Net
Interest income, net, consists primarily of interest income and interest
expense. Interest income was $242,000 and $80,000, and interest expense was
$88,000 and $54,000 for the three months ended September 30, 2001 and 2002,
respectively. Interest income was $1.1 million and $316,000, and interest
expense was $323,000 and $203,000 for the nine months ended September 30, 2001
and 2002, respectively. The decrease in interest income is due primarily to the
decrease in the cash and cash equivalents balance along with lower interest
rates. 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 September 30, 2002.
As of September 30, 2002, we had approximately $107 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
Discontinued Operations
On September 15, 2002, the Company completed the sale of its wholly owned
subsidiary, Extensis, to Celartem. The Company recognized a gain of
approximately $3.5 million and reclassified Extensis' prior period results of
operations and the gain on sale to Discontinued Operations.
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 nine months ended September 30, 2002 to
reduce goodwill recorded in the Company's acquisitions to its fair value. See
"Impact Of Recently Issued Accounting Standards."
LIQUIDITY AND CAPITAL RESOURCES
We have incurred significant net losses since our inception. As of
September 30, 2002, we have accumulated a deficit of $169.1 million. Our
principal source of liquidity is our cash and cash equivalents. Our cash and
cash equivalents balance was $17.4 million and $14.8 million at December 31,
2001 and September 30, 2002, respectively. The decrease in cash and cash
equivalents during the nine months ended September 30, 2002 resulted primarily
from our net cash loss of approximately $8.1 million (net loss of $47.9 million
less non-cash items of approximately $39.8 million), offset by a $1.9 million
decrease in working capital. Our working capital at September 30, 2002 was
approximately $18.3 million, compared to approximately $18.6 million at December
31, 2001.
As of September 30, 2002, the Company has a $5.0 million line of credit
available. 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, if any, 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 September 30, 2002 consisted of
operating leases of approximately $4.2 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, impairment charge, gain on sale of Extensis and
cumulative effect of change in accounting principle, and the effect of changes
in working capital. Net cash used by operating activities during the nine months
ended September 30, 2002 was $6.2 million, resulting from our net loss of $47.9
million, offset by non-cash items of $39.8 million and changes in working
capital of $1.9 million.
Net cash provided by investing activities was $8.6 million for the nine
months ended September 30, 2002 and consisted primarily of $9.0 million from the
sale of Extensis and $667,000 due to the release of restricted cash as a result
of renegotiating our office lease offset by purchases of equipment and software.
Net cash used by financing activities was $4.9 million for the nine months
ended September 30, 2002 and consisted primarily of cash repayments on the line
of credit offset by proceeds from 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
18
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 on February 24, 2003 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 estimate of those assets using a discounted
cash flow model that also considered factors such as market capitalization and
appraised values of certain assets. The Company recorded a transitional
impairment charge in March 2002 for a portion of the goodwill in 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 of these reporting units' assets exceeded
their book value at January 1, 2002.
In the third quarter of 2002, the Company's Howard Press subsidiary, a
separate reporting unit in the Printing segment, continued to suffer from the
slow economy. The Company determined that this event was a triggering event and
as such, goodwill in this unit was tested for impairment. As a result, the
Company recorded an impairment charge of approximately $3.7 million in the third
quarter of 2002 to write off goodwill in its Howard Press subsidiary.
Pursuant to SFAS No. 142, impairment must be assessed at least annually
for goodwill and indefinite-lived intangibles, 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 currently 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 including those 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. In the third quarter of
2002 in accordance with SFAS No. 144, management determined that an indicator of
impairment occurred at its wholly owned subsidiary, Howard Press, which
comprises a single reporting unit. The Company engaged an independent valuation
firm to estimate the fair value of the subsidiary's assets using a discounted
cash flow model. The determination of fair value is a critical and complex
consideration when assessing impairment under SFAS No. 144 that involves
significant assumptions and estimates. These assumptions and estimates were
based on our best judgments and the Company recorded an impairment charge in the
third quarter of 2002 for a portion of the long-lived assets assigned to Howard
Press. This impairment charge was approximately $1.9 million and consisted of a
write-down of customer list of approximately $1.3 million and a write-down of
fixed assets of approximately $569,000.
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
19
disposal activities. The adoption date for the Company will be January 1, 2003
and the Company is currently assessing what the impact of SFAS No. 146 will be
on its results of operations and financial position.
RISK FACTORS AFFECTING IMAGEX'S BUSINESS AND 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 condensed consolidated financial
statements and related notes.
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 On February 24, 2003 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; and
o Loss of significant customers.
The closing price of our common stock on September 30, 2002 was $0.22 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 on February 24, 2003, which will likely have a material adverse
effect on our common stock and would severely restrict our ability to raise
additional capital.
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 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.
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
September 30, 2002, we had an accumulated deficit of $169.1 million. Our
revenues may not continue at their current level or increase in the future. We
may continue to incur operating losses for some time.
20
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 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.
Our Future Earnings Could Be Negatively Affected By Significant Charges
Resulting From The Impairment In The Value Of Acquired Assets. For acquisitions
which we have accounted for using the purchase method, we regularly evaluate the
recorded amount of long-lived assets, consisting primarily of goodwill, customer
lists and fixed assets, to determine whether there has been any impairment of
the value of the assets and the appropriateness of their estimated remaining
lives. We evaluate impairment whenever events or changed circumstances indicate
that the carrying amount of the long-lived assets might not be recoverable.
In addition, recent changes in Generally Accepted Accounting Principles
("GAAP") require us to discontinue amortizing goodwill and certain intangibles.
We adopted these changes effective January 1, 2002. Under this approach,
goodwill and certain intangibles are not amortized, but instead are reviewed for
impairment and written down and charged to results of operations only in periods
in which the recorded value of goodwill or certain intangibles is more than fair
value. On January 1, 2002, we recorded a non-cash, non-operating charge of $30.2
million for the cumulative effect of adopting these new accounting standards. In
the third quarter of 2002, we recorded a non-cash impairment charge of $5.6
million to recognize the impairment of goodwill, customer lists and fixed assets
at our Howard Press subsidiary.
We will continue to regularly evaluate the recorded amount of our
long-lived assets and test for impairment. In the event we determine that any
long-lived asset has been impaired, we will record additional impairment charges
in future quarters. We are unable to predict the amount, if any, of potential
future impairments.
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
21
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.
A substantial majority of our revenues are derived from customers that we
have obtained through acquisitions of print providers. A significant portion 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, 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.
The Introduction Of Products And Services, From Both The Traditional
Printing Industry And The Internet And Software Commerce Sector That Employ New
Technologies And Standards, Could Render Our Existing Products Or Services
Obsolete And Unmarketable. To be successful, we must offer products and services
that keep pace with technological developments and emerging industry standards,
address the ever-changing and increasingly sophisticated needs of our customers
and achieve broad market acceptance. In our efforts to develop these types of
products and services, we may:
o be unable to cost-effectively or in a timely manner develop, market
or sell these products;
22
o encounter products, capabilities or technologies developed by other
companies or entities that render our products and services obsolete
or noncompetitive, or that shorten the life cycles of our existing
products and services; or
o experience difficulties that could delay or prevent the successful
development, introduction and adoption of these new products and
services.
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.
A Substantial Portion Of Our Revenues Will Be Derived From Customers With
Whom We Have Not Entered Into Long-Term Binding Contracts. As a result, these
customers will not be obligated to purchase the products and services we offer.
In addition, these customers have a variety of suppliers from which to choose
and therefore could make substantial demands on us. If we were unable or
unwilling to meet these demands, we could lose one or more of our key customers,
and our business, financial condition and results of operations could suffer.
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.
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
23
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, four Notices of Allowance and have over 40 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.
In Light Of Current Market Conditions, The Value Of Stock Options Granted
To Employees May Cease To Provide Sufficient Incentive To Our Employees. Stock
options, which typically vest over a four-year period, are an important means by
which we compensate employees. We face a significant challenge in retaining our
employees if the value of these stock options is either not substantial enough
or so substantial that the employees leave after their stock options have
vested. If our stock price does not increase significantly above the prices of
our options, we may in the future need to issue new options or other equity
incentives or increase other forms of compensation to motivate and retain our
employees. We may undertake or seek shareholder approval to undertake programs
to retain our employees that may be viewed as dilutive to our shareholders.
Unless We Are Able To Hire, Retain And Motivate Highly Qualified
Employees, We Will Be Unable To Execute Our Business Strategy. Our future
success depends on our ability to identify, attract, hire, train, retain and
motivate highly skilled technical, managerial, sales and marketing and business
development personnel. Our services
24
and the industries to which we provide our services are relatively new.
Qualified personnel with experience relevant to our business are scarce and
competition to recruit them is intense. If we fail to successfully attract,
assimilate and retain a sufficient number of highly qualified technical,
managerial, sales and marketing, business development and administrative
personnel, our business could suffer.
Insiders Own a Large Percentage Of Our Stock, Which Could Delay or Prevent
A Change In Control and May Negatively Affect Your Investment. As of November 7,
2002, our officers, directors and affiliated persons beneficially owned
approximately 29% of our voting securities, not including options or warrants
currently exercisable. These shareholders will be able to exercise significant
influence over all matters requiring shareholder approval, including the
election of directors and approval of significant corporate transactions, which
could have the effect of delaying or preventing a third party from acquiring
control over us and could affect the market price of our common stock. The
interests of those holding this concentrated ownership may not always coincide
with our interests or the interests of other shareholders, and, accordingly,
they could cause us to enter into transactions or agreements that we would not
otherwise consider or could prevent us from entering into transactions or
agreements that we may consider beneficial to our business. Except and in
accordance with securities laws and Company policies regarding insider trading,
none of our insiders are subject to contractual limitations on their ability to
sell their shares.
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 September 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.
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 September 30, 2002.
ITEM 4. CONTROLS AND PROCEDURES DISCLOSURES
Based on their evaluation as of a date within 90 days of the filing date
of this Quarterly Report on Form 10-Q, the principal executive officer and
principal financial officer of the Company have concluded that the Company's
disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c)
under the Securities Exchange Act of 1934) are effective to ensure that the
information required to be disclosed by the Company in reports that it files or
submits under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in SEC rules and
forms.
There were no significant changes in the Company's internal controls or in
other factors that could significantly affect those controls subsequent to the
date of their most recent evaluation.
25
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, ImageX and its affiliate companies are subject to 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 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits Required by Item 601 of Regulation S-K.
99.1 Certification of Richard P. Begert, President and Chief Executive
Officer of ImageX, Inc., Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Certification of Jose S. David, Chief Financial Officer of ImageX,
Inc., 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 September 4, 2002, announcing that Robin L.
Krueger has completed her departure transition from her role as chief
financial officer and that Gina Meyers, vice president of finance and
corporate controller, will take on Krueger's responsibilities until a
replacement is named.
The Company filed Form 8-K on September 12, 2002, announcing the signing
of a definitive agreement to sell its wholly owned subsidiary, Extensis,
Inc., to Celartem Technology USA, Inc.
The Company filed Form 8-K on September 16, 2002, announcing the
appointment of Jose S. David as Chief Financial Officer, effective October
1, 2002.
The Company filed Form 8-K on September 24, 2002, announcing the
resignation of Wayne M. Perry from its board of directors.
The Company filed Form 8-K on September 26, 2002, announcing the
completion of the sale of Extensis, Inc. to Celartem Technology USA, Inc.
Items 2, 3, 4 and 5 are not applicable and have been omitted.
26
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: November 14, 2002 By /s/ Richard P. Begert
-------------------------------
Richard P. Begert
President and Chief Executive Officer
(duly authorized officer)
By /s/ Jose S. David
-------------------------------
Jose S. David
Chief Financial Officer
(duly authorized accounting officer)
27
Form of Sarbanes-Oxley Section 302(a) Certification
I, Richard P. Begert, certify that:
1. I have reviewed this quarterly report on Form 10-Q of ImageX, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 14, 2002
By /s/ Richard P. Begert
-------------------------------
[Signature]
Richard P. Begert
President and Chief Executive Officer
* Provide a separate certification for each principal executive officer and
principal financial officer of the registrant. See Rules 13a-14 and 15d-14. The
required certification must be in the exact form set forth above.
Form of Sarbanes-Oxley Section 302(a) Certification
I, Jose S. David, certify that:
1. I have reviewed this quarterly report on Form 10-Q of ImageX, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 14, 2002
By /s/ Jose S. David
-------------------------------
[Signature]
Jose S. David
Chief Financial Officer
* Provide a separate certification for each principal executive officer and
principal financial officer of the registrant. See Rules 13a-14 and 15d-14. The
required certification must be in the exact form set forth above.