Back to GetFilings.com
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the year ended December 31, 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 or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
10210 NE Points Dr., Suite 200 98033
Kirkland, WA (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (425) 576-6500
Securities registered pursuant to Section 12(b) of the act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock $0.01 Par Value
----------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K |X|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2) Yes |_| No |X|
The aggregate market value of the voting stock held by non-affiliates of
the registrant at June 28, 2002 was $9,968,267 (based on the closing sale price
of $0.45 per share on the NASDAQ SmallCap Market on such date).
The number of shares outstanding of the registrant's common stock on March
6, 2003 was 31,211,967.
DOCUMENTS INCORPORATED BY REFERENCE
None
================================================================================
Table of Contents
Page
----
Part I:
Item 1. Business..................................................................................... 3
Risk Factors Affecting ImageX, Inc.'s Operating Results...................................... 8
Item 2. Properties................................................................................... 16
Item 3. Legal Proceedings............................................................................ 16
Item 4. Submission of Matters to a Vote of Security Holders.......................................... 16
Part II:
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters........................ 17
Item 6. Selected Consolidated Financial Data......................................................... 18
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations........ 20
Item 7A. Quantitative and Qualitative Disclosures About Market Risk................................... 32
Item 8. Financial Statements......................................................................... 33
Item 9. Change in and Disagreements with Accountants on Accounting and Financial Disclosure.......... 59
Part III:
Item 10. Directors and Executive Officers of the Registrant........................................... 59
Item 11. Executive Compensation....................................................................... 61
Item 12. Security Ownership of Certain Beneficial Owners and Management............................... 67
Item 13. Certain Relationships and Related Transactions............................................... 70
Item 14. Controls and Procedures...................................................................... 70
Part IV:
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.............................. 71
Signatures................................................................................................ 74
2
PART I
Item 1. Business
This annual report on Form 10-K contains forward-looking statements. These
statements relate to future events or our future financial performance. In some
cases, you can identify forward-looking statements by terminology such as "may,"
"will", "should," "expect," "plan," "intend," "anticipate," "believe,"
"estimate," "predict," "potential" or "continue," the negative of such terms or
other comparable terminology. These statements are only predictions. Actual
events or results may differ materially. In evaluating these statements, you
should specifically consider various factors, including the risks outlined in
the "Risk Factors Affecting ImageX, Inc.'s Operating Results" below. These
factors may cause our actual results to differ materially from any
forward-looking statements.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other person
assumes responsibility for the accuracy and completeness of the forward-looking
statements. We do not assume any obligation to revise forward-looking statements
except as required by the securities laws.
The Company has announced the signing of a definitive merger agreement
with Kinko's, Inc., where Kinko's will offer to acquire for cash all the
outstanding common shares of the Company. We expect that this merger will be
completed in the second quarter of 2003. Forward-looking statements do not apply
if the merger closes within that expected time frame.
Overview
ImageX, Inc. (the "Company" or "ImageX") provides traditional printing
services and Internet-based e-procurement services for branded print materials,
and until the sale of our wholly-owned subsidiary, Extensis, Inc. ("Extensis")
on September 15, 2002, we also designed and marketed graphic-design software.
Until the sale of Extensis, we operated in two business segments, the Printing
segment and the Software segment. As of September 15, 2002, we now operate in
one business segment, the Printing segment. Branded print materials include
marketing and promotional materials as well as business cards, stationery and
envelopes. Our Internet-based technology includes the ImageX Print System and
the ImageX Channel Marketing System. The ImageX Print System is a customized
secure Web site product suite for medium to large corporate customers providing
four service offerings: e-Procure, e-Brand, e-Print and Enterprise. The 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, we completed the sale of 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 our holdings in Extensis to Celartem, we received a cash
payment of approximately $9.1 million. In addition, Celartem will pay us up to
an additional $2.0 million over the next two years if Extensis meets certain
revenue targets.
Subsequent Event
On March 3, 2003, we signed a definitive merger agreement with Kinko's
Washington, Inc., a Washington corporation ("Kinko's Washington") and a
wholly-owned subsidiary of Kinko's Inc., a privately held Delaware corporation
("Kinko's"), the world's leading provider of document solutions and business
services. Under the terms of the agreement, Kinko's Washington will offer to
acquire for cash all the outstanding common shares of ImageX for $0.512 per
common share in a transaction valued at approximately $16.5 million. The
3
transaction is subject to customary conditions and is expected to be completed
in the second quarter of 2003. In connection with the tender offer and proposed
merger, Kinko's has filed with the SEC a tender offer statement on Schedule TO
(including an offer to purchase, letter of transmittal and related tender offer
documents) and ImageX has filed a solicitation/recommendation statement on
Schedule 14D-9. These documents contain important information and shareholders
of ImageX are advised to carefully read these documents.
General Development of Business
ImageX was incorporated on August 21, 1995 and is headquartered in
Kirkland, Washington. In 1999, we completed our initial public offering,
followed by a follow-on offering in early 2000. We operate in one business
segment, the Printing segment with the following wholly-owned subsidiaries which
were acquired by us during 1999 and 2000: (i) Howard Press, Inc. ("Howard
Press"), a New Jersey based, full-service printing company providing Fortune
1000 companies with a broad range of printing, publishing and warehousing and
fulfillment services; (ii) FA Graphics, Inc. ("FA Graphics"), an Oregon based
full-service printing company and (iii) Image Press, Inc. ("Image Press") a
California based print broker. During the third quarter of 2002, we sold
Extensis. During the first quarter of 2001, we closed our PrintBid.com
marketplace, retaining the technology acquired with PrintBid.com in 1999, for
use with the ImageX Print System.
Our customers include AT&T, Automatic Data Processing (ADP), CB Richard
Ellis, GE, Kraft, Merck and Co. and many others. As of December 31, 2002, we had
265 employees.
ImageX Products and Services
We operate four printing facilities, one in Oregon and three in New
Jersey, that supplement our network of commercial printing vendors. In addition
to printing custom materials ordered through traditional means, we also print
items ordered through the ImageX Print System and the ImageX Channel Marketing
System.
Our end-to-end Web-based solutions include several services that address
specific customer needs in the print industry workflow. These services
streamline and can reduce the cost of the print management procurement,
manufacturing and fulfillment processes.
The ImageX Print System is an enterprise-wide e-procurement solution that
enables companies to order, manage and distribute branded communications
materials through their own customized, secure Web site that contains a digital
catalog of their custom-printed business materials. A user can modify, proof,
procure and manage their printed business materials from most Windows-based,
Internet-enabled personal computers.
Our ImageX Channel Marketing System is a customized Internet-based
solution targeted at large corporations that possess a need for a comprehensive
marketing materials production and distribution solution. This solution allows
customers to simplify and automate the production, management and coordinated
distribution of personalized sales and marketing collateral across large
geographically dispersed third party sales organizations via a Web-based
application.
Our two technology solutions help customers reduce print procurement
costs, streamline processes and control their brands more effectively resulting
in rapid delivery of consistent, high-quality printed business materials.
Specifically, these systems offer our customers the following key features:
o Accuracy-Enables our customers to directly access their corporate
information online through a screen rendering that is designed to be
color-consistent and dimensionally accurate. Customers can order
their products from their own digital online catalog that includes
employee data,
4
company graphics and logos, delivery information, reporting
requirements and prototypes of the customer's printed business
materials. Our systems reduce errors associated with data reentry,
typesetting and the use of outdated document versions.
o Single Source-Eliminates any need for customers to engage several
different printers to supply their printing needs. Individual
printers are typically constrained to a limited range of products
that can be supported by their equipment. Through our network of
commercial printing vendors and four wholly-owned print production
and fulfillment facilities, we are able to provide a wide range of
printed business materials from one source. The ImageX solution is
technology-neutral and geography-neutral, aggregating a broad set of
printing needs for our customers.
o Security and Control-Enables customers to monitor print orders
through a password protected, secure Web site. Authorized customer
employees can individually access a wide variety of printed business
materials within the centralized parameters and rules established by
the customer. This is designed to bring a uniform look to a
customer's printed business materials and helps to maintain
consistency of the customer's corporate identity.
o Convenience-Allows customers to modify and order their printed
business materials, at any time, on any day, without any degradation
of services; provides online order status reports; and enables
central order management, which allows customers to queue their
orders and release them in batches.
o Scalability-Scales to a large number of new employees and new
products, providing the ability to handle increasing order volume
without compromising system integrity and performance.
o Streamlined Manufacturing-Eliminates the typesetting process and
certain pre-press manufacturing steps by providing our commercial
printing vendors with print-ready files that are routed directly to
their print manufacturing equipment. This significantly reduces
print production costs.
Customers and Markets
Our target customers are medium to large companies in major markets
nationwide. Printed business materials, which include promotional marketing
materials and general stationery products, are employed throughout business
organizations today. Based on data provided by CapVentures, a print industry
analysis firm, the amount of these materials printed on an outsourced basis by
commercial printers was estimated to be $23 billion in 2001. CapVentures
forecasts this market to grow to $33 billion by 2005.
Sales and marketing
Organization
We sell our products through our direct sales force. As of December 31,
2002, our sales and marketing team consisted of 25 employees.
5
Promotion
We market our products and services primarily to senior purchasing and
marketing executives of our customers. Our solutions allow employees and
purchasing departments to quickly process their orders for general office
materials, such as business cards, stationery and labels, and allow marketing
departments to more efficiently provide promotional marketing materials, such as
brochures and sell sheets, to their sales organizations, channel partners and
customers.
Technology
The technology behind the ImageX Print System and the ImageX Channel
Marketing System solutions is based on an integrated view of the entire print
procurement and manufacturing process. Our corporate print procurement solution
combines both the print manufacturing process and the customer procurement
process into one coherent system, and drives the entire ordering and
manufacturing processes. These solutions were designed as a scalable
manufacturing system to process thousands of printing orders daily. ImageX hosts
substantially all elements of the systems for all customers and print vendors.
Customers use standard Internet browsers to access the systems. Every component
of the ImageX corporate print procurement solution architecture was chosen with
scalability as a primary consideration.
Operations
The ImageX Print System leverages a network of approximately 14 commercial
printing vendors and four of our own printing operations. At December 31, 2002
our operations team consisted of 194 employees. Our network of commercial
printing vendors includes printers located across the United States, all of
which can ship nationwide. A substantial majority of our vendors are small,
regional operators. With this network of vendors and our own operating
facilities, we are able to deliver printed business materials nationwide and
globally. We believe that the ImageX Print System offers improved corporate
utilization within our vendor network, direct cost and overhead cost reduction
and improved vendor management.
Product Development
Our future success will depend on our ability to maintain and develop
competitive technologies, to continue to enhance our current services, and to
develop and introduce new services in a timely and cost-effective manner that
meets evolving customer needs, new competitive service offerings, emerging
industry standards and rapidly changing technology. We have a dedicated product
development organization that creates new features and functionality for our
existing services, as well as the software that supports new services. The
product development team has expertise in database systems, network technology,
digital print imaging systems, Internet protocols and security, distributed
computing and computer-integrated manufacturing. At December 31, 2002, we had 13
employees engaged in product development.
Intellectual Property
We rely on intellectual property laws in the United States and other
jurisdictions to protect our proprietary rights. We have trademark registrations
for the ImageX name in the U.S., European Community, Argentina, Australia,
Israel, New Zealand, Norway, Singapore, South Korea, Switzerland and Taiwan.
Trademark applications are currently pending in several other countries as well.
We have been issued eight patents and have 43 patent applications pending
relating to the ImageX Print System. We believe we have taken all reasonable
steps to ensure the ownership of all copyrights in our online materials that we
have developed.
6
Competition
The market for printed business materials is very competitive. We
primarily compete with local and regional commercial printers, which are either
independent or owned by print industry consolidators, and with print brokers or
other Internet-based print providers. The U.S. commercial printing industry is
highly fragmented, with over 31,000 local and regional commercial printers
operating nationwide in 2000. These printers aggressively compete for business
printing orders in the markets they serve.
Traditional commercial printers often have long standing relationships
with customers. We face challenges in convincing prospective customers to
consider alternatives to their traditional printer. Commercial printers
primarily compete 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 effectively compete in
each of these areas.
We also face direct competition from printing services brokers who offer
customers a relatively wide variety of products and services and are 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.
We also face competition from other Internet-based companies that offer
business printing services, as well as others that may develop such services in
the future. Potential developers of competing electronic commerce services may
include consumer printing service providers, office service providers, equipment
manufacturers and financial printers and publishers.
Our Executive Officers
The name, age and position, as of March 6, 2003, of each of our executive
officers is as follows:
Name Age Position
---- --- --------
Richard P. Begert............................ 46 President, Chief Executive Officer and Director
Cory E. Klatt................................ 34 Chief Technology Officer
Jose S. David................................ 46 Chief Financial Officer
Gary L. Madson............................... 50 Vice President of Operations
Mariam J. Naini.............................. 39 Vice President, General Counsel and Secretary
Richard P. Begert has been President, Chief Executive Officer and a
director of ImageX since November 1998. From 1993 to 1998, Mr. Begert was
Regional President of AT&T Wireless Services (and its predecessor, McCaw
Cellular Communications, Inc.), a telecommunications company. From 1986 to 1993,
Mr. Begert held various other senior positions at McCaw Cellular. Mr. Begert
received his B.A. in business administration from the University of Washington.
Cory E. Klatt is a co-founder of ImageX and holds the position of Chief
Technology Officer. He has spent the last six years pioneering the development
of the systems and technology behind the ImageX solution. In 1992, as a partner
at Practical Applications, Inc., he created one of the first client/server
systems to manage the ordering, imaging, manufacturing and billing of
software-compatible forms. Prior to co-founding ImageX in 1995, Mr. Klatt
managed a team of developers that designed and implemented several of the first
e-commerce solutions for Microsoft Corporation.
Jose S. David joined the Company in October 2002 as Chief Financial
Officer. From 1992 to 2002, Mr. David was Chief Financial Officer of Active
Voice Corporation, a leading manufacturer of call
7
processing systems. From 1989 to 1992, Mr. David held various other senior
positions at Active Voice. From 1984 to 1989, Mr. David was Manager of Finance
for Wang Laboratories, Inc., a computer manufacturer. From 1978 to 1983, Mr.
David was employed by Price Waterhouse LLP, an independent public accounting
firm. Mr. David was a Certified Public Accountant and received his B.A. in
business administration from the University of Washington.
Gary L. Madson has been Vice President of Operations since September 2000.
Prior to joining ImageX, Mr. Madson was Global Microsoft Business Manager at
Zomax, Inc., an outsource service provider to the software industry. Prior to
working at Zomax, Mr. Madson was the General Manager of KAO Infosystems, Inc.
Mr. Madson holds a B.S. in biological oceanography from the University of
Washington.
Mariam J. Naini has been Vice President, General Counsel and Secretary of
ImageX, Inc. since November 1999 and Secretary since December 1999. From April
1999 to October 1999, Ms. Naini was an Associate General Counsel at Amazon.com,
Inc. From April 1998 to March 1999, she was an Of Counsel with Irell & Manella
LLP's Los Angeles, California office. From July 1994 to March 1998, Ms. Naini
was a Senior Associate with Morgan, Lewis & Bockius LLP's Washington, D.C.
office, and from December 1988 to June 1994, she was an associate with Howrey &
Simon LLP's Washington, D.C. office. Ms. Naini received her B.A. degree with
honors, in three years, from Wellesley College and a Juris Doctorate degree in
1988 from Georgetown University Law Center.
Employees
As of December 31, 2002, we had 265 employees. We also employ a limited
number of independent contractors and temporary employees on a periodic basis.
None of our employees are represented by a labor union, and we consider our
labor relations to be good. We believe our success depends to a significant
extent on our ability to attract, motivate and retain highly skilled management
and employees. To this end, we focus on incentive programs such as employee
stock options, competitive compensation and benefits for our employees.
Available Information
Our corporate Internet address is www.imagex.com. We make available free
of charge on www.imagex.com our annual, quarterly and current reports as soon as
reasonably practicable after we electronically file such material with, or
furnish it to, the SEC. However, the information found on our Web site is not
part of this or any other report.
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 consolidated financial statements and
related notes.
Our business and stock price may be adversely affected if the merger with
Kinko's is not completed. On March 3, 2003, we entered into a merger agreement
with Kinko's. If the merger is not completed, we could be subject to a number of
risks that may adversely affect our business and stock price, including:
o we would not realize the benefits we expect by being part of a
combined company with Kinko's, as well as the potentially enhanced
financial and competitive position as a result of being part of the
combined company;
8
o the diversion of management attention from our day-to-day business
and the unavoidable disruption to our employees and our
relationships with customers as a result of efforts and
uncertainties relating to our anticipated merger with Kinko's may
detract from our ability to grow revenues and minimize costs;
o the market price of shares of our common stock may decline to the
extent that the current market price of those shares reflects a
market assumption that the merger will be completed;
o we must pay the costs related to the merger, such as legal and
accounting fees; and
o we may not be able to continue our present level of operations, may
need to scale back our business, may have to consider additional
reductions in force, may have to consider alternative sources of
funding and may not be able to take advantage of future
opportunities or effectively respond to competitive pressures, any
of which could have a material adverse effect on our business and
results of operations.
In connection with the tender offer and proposed merger, Kinko's has filed
with the SEC a tender offer statement on Schedule TO (including an offer to
purchase, letter of transmittal and related tender offer documents) and ImageX
has filed a solicitation/recommendation statement on Schedule 14D-9. These
documents contain important information and shareholders of ImageX are advised
to carefully read these documents.
The Market Price Of Our Common Stock Has Been And May Continue To Be
Volatile, Which Could Result In Losses For Security Holders and Our Securities
May Be Delisted From The NASDAQ SmallCap Market Due To An Insufficient Minimum
Bid Price. The trading price of our common stock has historically been highly
volatile. Trading prices of our common stock may fluctuate in response to a
number of events and factors, such as:
o general economic conditions;
o changes in interest rates;
o conditions or trends in the Internet, the e-commerce industry and
print industry;
o fluctuations in the stock market in general and market prices for
Internet-related companies in particular;
o actual or anticipated variations in our quarterly operating results;
o changes in financial estimates by us or securities analysts and
recommendations by securities 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 December 31, 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 or are unable to successfully seek a reversal
of NASDAQ's decision, we may be subject to delisting from the NASDAQ SmallCap
Market, which will likely have a material adverse effect on our common stock and
would severely restrict our ability to raise additional capital.
We 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. Our future capital
requirements will depend on many factors
9
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. 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
December 31, 2002, we had an accumulated deficit of $183.8 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.
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.
Recent Efforts To Reduce Expenses May not Achieve the Results We Intend
and May Harm Our Business. We have initiated a number of measures to streamline
operations and reduce expenses, including cuts in discretionary spending,
reductions in capital expenditures, reductions in our workforce and
consolidation of certain office locations, as well as other steps to reduce
expenses. In connection with our cost reduction efforts, we were required to
make certain product and service development decisions with limited information
regarding future demand. There can be no assurance that we decided to pursue the
correct product and service offerings to take advantage of future market
opportunities. Furthermore, the implementation of such measures may place a
strain on our managerial, operational, financial, employee and other resources.
Additionally, the restructuring may negatively affect our recruiting and
retention of key employees. It is possible that these reductions could impair
our marketing, sales and customer support efforts or alter our product and
service development plans. If we experience difficulties in carrying out such
measures, our expenses could increase more quickly than we expect. If we find
that our planned reductions do not achieve our objectives, it may be necessary
to implement further streamlining of our expenses or undertake additional
cost-cutting measures.
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 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
10
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 ImageX 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 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 Of Long-Lived Assets. 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 in
the value of these 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 these standards,
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 charge of approximately $30.2 million
for the cumulative effect of adopting these new accounting standards. In
addition, in fiscal 2002, we recorded an impairment charge of approximately
$16.4 million to recognize the impairment of goodwill, customer lists, fixed
assets and capitalized patent costs.
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 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 ImageX Channel Marketing System. The period between
initial contact and the purchase of our products through the ImageX Print System
or the ImageX 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
11
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 four 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 ImageX 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-
12
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;
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 service providers, including Internet-based
providers;
o office service providers;
o equipment manufacturers; and
o financial printers and publishers.
Many of our current and potential future competitors have longer operating
histories, larger customer bases, greater brand recognition and 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,
13
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 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 8 patents
issued and have 43 U.S. patent applications pending, we cannot be certain that
any new patents will ultimately be issued.
14
We generally enter into confidentiality and nondisclosure agreements with
our employees, consultants, vendors and other third parties and otherwise
control access to propriety information. However, 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 Attract, Motivate and Retain 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 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. In addition, our
recent reductions in workforce may affect our ability to attract new qualified
personnel as required. 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.
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 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.
15
Item 2. Properties
We are headquartered in Kirkland, Washington, where we lease 25,722
square-feet of office space, pursuant to a lease that expires on December 31,
2004. FA Graphics leases approximately 50,000 square-feet for production
facilities in Tualatin, Oregon pursuant to a lease that expires June 30, 2006
and 15,000 square-feet for production facilities in Union, New Jersey pursuant
to a lease that expires October 31, 2003. Howard Press currently leases
approximately 109,104 square-feet of production and office space in Linden, New
Jersey and Roselle, New Jersey pursuant to leases expiring May 31, 2003 and
45,560 square-feet of warehouse space pursuant to a lease expiring March 31,
2005. Image Press currently leases approximately 5,000 square-feet of office
space in San Leandro, California pursuant to a lease that expires July 31, 2004.
Item 3. Legal Proceedings
We are involved from time to time in claims and proceedings arising in the
ordinary course of business. We are not currently involved in any claim or
proceeding, which we believe will alone, or in the aggregate with all other such
claims, have a material adverse effect on our financial position or results of
operations or cash flows.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders during the
fourth quarter of 2002.
16
Part II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters
Our common stock has been quoted on the NASDAQ National Market or the
NASDAQ SmallCap Market under the symbol "IMGX" since August 26, 1999, the date
of our initial public offering. Prior to that time, there was no public market
for our stock.
The following table sets forth, for the periods indicated, the high and
low sales prices per share of our common stock as reported on the NASDAQ
National Market or the NASDAQ SmallCap Market, as applicable.
High Low
---- ---
2001 Fiscal Year
First Quarter ............................................. $ 4.69 $ 0.69
Second Quarter ............................................ 2.03 0.66
Third Quarter ............................................. 1.50 0.48
Fourth Quarter............................................. 1.15 0.50
2002 Fiscal Year
First Quarter ............................................. $ 1.10 $ 0.69
Second Quarter ............................................ 0.81 0.36
Third Quarter ............................................. 0.44 0.17
Fourth Quarter............................................. 0.36 0.18
On March 6, 2003, the Company had 417 shareholders of record. The last
reported sales price per share on March 6, 2003 was $0.49.
We have never paid dividends on our common stock. We currently intend to
retain any future earnings to fund the development and growth of our business.
Therefore, we do not currently anticipate declaring or paying cash dividends in
the foreseeable future.
The information required by this Item regarding equity compensation plans
is incorporated by reference to the information set forth in Item 12 of this
Form 10-K.
17
Item 6. Selected Consolidated Financial Data
You should read the following selected consolidated financial data in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements and related
notes of ImageX. Historical results are not necessarily indicative of future
results.
SELECTED CONSOLIDATED FINANCIAL DATA
(In thousands, except per share data)
Year Ended December 31,
-----------------------
1998(2) 1999(2)(3) 2000(4)(5) 2001(5) 2002(5)
---- ---- ---- ---- ----
STATEMENT OF OPERATIONS DATA:
Revenues .................................. $ 968 $ 11,499 $ 41,861 $ 44,423 $ 34,888
Cost of revenues .......................... 998 8,541 32,690 34,682 26,698
------------------------------------------------------------
Gross profit (loss) ....................... (30) 2,958 9,171 9,741 8,190
------------------------------------------------------------
Operating expenses:
General and administrative ............. 3,929 12,946 26,057 21,660 17,250
Sales and marketing .................... 2,207 6,815 19,228 11,500 7,798
Product development .................... 2,750 4,116 8,314 7,235 3,625
Amortization of goodwill and assembled
workforce ........................... -- 157 369 973 --
Impairment charge (7) .................. -- -- -- -- 16,358
------------------------------------------------------------
Total operating expenses .......... 8,886 24,034 53,968 41,368 45,031
------------------------------------------------------------
Loss from operations ...................... (8,916) (21,076) (44,797) (31,627) (36,841)
Interest income (expense), net ......... (48) 241 3,721 850 159
------------------------------------------------------------
Loss from continuing operations ........... (8,964) (20,835) (41,076) (30,777) (36,682)
Net (loss) income from discontinued
operations (5) ......................... -- -- (6,379) (9,125) 4,308
------------------------------------------------------------
Net loss before cumulative effect of change
in accounting principle ................ (8,964) (20,835) (47,455) (39,902) (32,374)
Cumulative effect of change in accounting
principle (6) .......................... -- -- -- -- (30,195)
------------------------------------------------------------
Net loss .................................. (8,964) (20,835) (47,455) (39,902) (62,569)
Preferred stock accretion ................. (221) (84) -- -- --
------------------------------------------------------------
Net loss used in calculating net loss per
share .................................. $ (9,185) $(20,919) $(47,455) $(39,902) $(62,569)
============================================================
Basic and diluted net loss per share:
Loss from continuing operations ........... $ (12.25) $ (3.07) $ (1.75) $ (1.07) $ (1.18)
Net (loss) income from discontinued
operations (5) ......................... -- -- (0.27) (0.32) 0.14
------------------------------------------------------------
Net loss before cumulative effect of change
in accounting principle ................ (12.25) (3.07) (2.02) (1.39) (1.04)
Cumulative effect of change in accounting
principle (6) .......................... -- -- -- -- (0.98)
------------------------------------------------------------
Basic and diluted net loss per share (1) .. $ (12.25) $ (3.07) $ (2.02) $ (1.39) $ (2.02)
============================================================
Shares used in computation of basic and
diluted net loss per share (1) ......... 750 6,805 23,534 28,783 30,983
============================================================
18
December 31,
------------
1998(2) 1999(2)(3) 2000 2001 2002
---- ---- ---- ---- ----
BALANCE SHEET DATA:
Cash and cash equivalents.................................. $ 967 $ 18,257 $ 40,420 $ 17,375 $ 12,366
Working capital (deficit).................................. (293) 18,053 47,386 18,592 15,909
Total assets............................................... 2,469 35,668 136,306 92,999 25,222
Notes payable.............................................. 907 - 8,800 5,000 -
Long-term capital lease obligation......................... - - - - 175
Mandatorily redeemable convertible preferred stock......... 11,350 - - - -
Accumulated deficit........................................ (12,997) (33,832) (81,287) (121,189) (183,758)
Total shareholders' equity (deficit)....................... (10,887) 30,774 117,106 82,582 20,369
- ----------
(1) See Note 1 to ImageX Financial Statements for an explanation of the method
used in computing basic and diluted net loss per share.
(2) During December 1999, ImageX acquired PrintBid.com. The acquisition was
accounted for under the pooling-of-interest method and all consolidated
financial statements of ImageX have been restated to include the results
and balances of PrintBid.com for all prior periods presented.
(3) The 1999 results include the post-acquisition operations of FA Graphics
and Image Press, which ImageX acquired in April 1999 and September 1999,
respectively.
(4) The 2000 results include the post-acquisition operations of Extensis and
Howard Press, both of which ImageX acquired in June 2000. See Note 14 to
ImageX's consolidated financial statements.
(5) On September 15, 2002, the Company sold its wholly-owned subsidiary,
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.
(6) On January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other
Intangibles." Pursuant to SFAS No. 142, the Company recorded a
transitional impairment charge to write down goodwill, related to its
investment in Extensis, to its fair value. The amount was recorded as a
cumulative effect of change in accounting principle. See Note 2 to
ImageX's consolidated financial statements.
(7) On January 1, 2002, the Company adopted SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." Pursuant to SFAS No. 142 and
SFAS No. 144, the Company recorded an impairment charge to write down
goodwill, fixed assets and intangible assets to their fair value. See Note
2 to ImageX's consolidated financial statements.
19
Item 7. 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 twelve months ended
December 31, 2000, 2001 and 2002. This review should be read in conjunction with
the consolidated financial statements and related notes and other data presented
herein.
The Company has announced the signing of a definitive merger agreement
with Kinko's Inc., where Kinko's will offer to acquire for cash all the
outstanding common shares of the Company. We expect that this merger will be
completed in the second quarter of 2003. Forward-looking statements do not apply
if the merger closes within that expected time frame.
Forward-Looking Statements
When you read this section of our Form 10-K, it is important that you also
read the consolidated 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. 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 in the future;
o future operating expense levels and the effect of cost-reduction
initiatives;
o the unpredictability of our quarterly revenues, expenses and
operating results;
o future sales cycles for customers and future growth of our customer
base;
o our ability to obtain additional customers through acquisitions; and
o the future effectiveness of our intellectual property rights.
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 Business and Operating Results" in Item 1 and elsewhere of this Form
10-K. You should not place undue reliance on these forward-looking statements,
which apply only as of the date of this report. We do not assume any obligation
to revise forward-looking statements, except as required by the securities laws.
Critical Accounting Policies
We believe you must take into account certain of our accounting policies
to fully understand our results of operations. The impact and any associated
risks related to these policies on our business operations is discussed
throughout "Management's Discussion and Analysis of Financial Condition and
Results of Operations" where such policies affect our reported and expected
financial results. Note that our preparation of financial statements in
conformity with accounting principles generally accepted in the United States
requires us to make estimates and assumptions that affect the reported amount of
assets and liabilities, disclosure of contingent assets
20
and liabilities at the date of our consolidated financial statements and
accompanying notes, and the reported amounts of revenues and expenses during the
reporting period. Actual results may differ from those estimates.
The SEC has defined a company's critical accounting policies as the ones
that are most important to the portrayal of the company's financial condition
and results of operations, and which require the company to make its most
difficult and subjective judgments, often as a result of the need to make
estimates of matters that are inherently uncertain. Based on this definition, we
have identified our critical accounting policies below. We also have other key
accounting policies, which involve the use of estimates, judgments and
assumptions that are significant to understanding our 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 this Annual
Report on Form 10-K.
o Revenue recognition and Web site costs. We derive revenues primarily
from two sources (i) the sale of printed business materials, service
revenues from Web site creation and maintenance fees, and (ii) until
we sold our wholly-owned subsidiary, Extensis, Inc. ("Extensis"), we
sold software licenses. Significant management judgments and
estimates must be made and used in connection with revenues
recognized in any accounting period. Material differences may result
in the amount and timing of our revenues for any period if our
management made different judgments or utilized different estimates.
The Company recognizes printing revenues when orders are shipped to
the customer and when the Company has fulfilled all of its
contractual obligations. Service revenues generated from the
creation of Web sites for customers to use our ImageX Print System
and our ImageX Channel Marketing System are deferred and recognized
over the life of the customer relationship which is estimated by
management. Incremental direct costs for creating such Web sites are
estimated by management and deferred over the same period. Web site
maintenance fees are recognized over the maintenance contract
period, typically 12 months.
Prior to the Company's sale of Extensis, the Company recognized
software revenues when persuasive evidence of a contract with a
customer existed, software was delivered, the fee was fixed or
determinable and collectibility was probable. We provided
distributors and resellers a sixty-day right of return. We recorded
a provision for estimated product returns. At the time of the
transaction, we assessed whether the fee associated with our revenue
transaction was fixed and determinable and whether or not collection
was reasonably assured. Significant management judgments and
estimates were made and used in connection with establishing the
sales return provision, in assessing whether a fee was fixed or
determinable and in determining whether a fee was collectible in any
accounting period.
o Allowance for doubtful accounts. Our management must estimate the
uncollectibility of our accounts receivable. Management analyzes
accounts receivable and analyzes historical bad debts, customer
concentrations, customer credit-worthiness, current economic trends
and changes in our customer payment terms when evaluating the
adequacy of the allowance for doubtful accounts. Material
differences may result in the amount and timing of our bad debt
expenses for any period if management made different judgments or
utilized different estimates.
o Capitalized internally developed software for internal use. We
capitalize internally developed software costs subsequent to
establishing technological feasibility of a project. Such costs are
amortized over the projects useful lives. Useful lives are based on
management's estimates of the period that the assets will generate
revenues. Material differences may result in the amount and timing
of our depreciation expense for any period if management made
different judgments or utilized different estimates.
21
o Valuation of acquired businesses and assets. Our business
acquisitions typically result in goodwill and other intangible
assets, which affect the amount of future period amortization
expense and possible impairment expense that we will incur. The
determination of the value of such intangible assets requires
management to make estimates and assumptions that materially affect
our financial condition and results of operations.
o Impairment of goodwill and indefinite-lived intangibles. To assist
us in assessing the fair value of our goodwill and indefinite-lived
intangible assets, we engaged an independent valuation firm. The
valuation provided an estimate of a fair value of the assets using a
discounted cash flow model that also considered factors such as
market capitalization and appraised values of certain assets. The
valuation used many assumptions and estimates in determining the
fair value of the assets. These assumptions and estimates are based
on our best judgments. We assess impairment at least annually for
these assets, or when indicators of impairment exist. We perform our
annual assessment during the fourth quarter of our 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. If we conclude that impairment indicators exist and that
certain assets are impaired, we will write down those assets to
their determined fair value.
o Impairment of long-lived assets and other intangibles. Property and
equipment, identifiable intangibles and certain other long-lived
assets are amortized over their useful lives. Useful lives are based
on management's estimates of the period that the assets will
generate revenue. We periodically review long-lived assets, other
intangibles and reporting segments that we are more likely than not
to sell or otherwise dispose of before the end of the asset's
previously estimated useful life for impairment. We assess the
impairment of these assets whenever events or changes in
circumstances indicate that the carrying value may not be
recoverable. Our judgments regarding the existence of impairment
indicators are based on legal factors, market conditions and
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 we determine that indicators of
impairment exist, we then assess 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
ImageX provides traditional printing services and Internet-based
e-procurement services for branded print materials, and until the sale of
Extensis on September 15, 2002, we also designed and marketed graphic-design
software. Until the sale of Extensis, we operated in two business segments, the
Printing segment and the Software segment. As of September 15, 2002, we now only
operate in one business segment, the Printing segment. We derive substantially
all our revenues from traditional printing services including the e-procurement
and sale of printed business materials. Printed business materials include
marketing and promotional materials as well as business cards, stationery and
general office products. Our services include the ImageX Print System and the
ImageX Channel Marketing System. The ImageX Print System is a customized secure
Web site product suite for medium to large corporate customers providing four
service offerings: e-Procure, e-Brand, e-Print and Enterprise. The 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.
22
On September 15, 2002, we completed the sale of 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 our holdings in Extensis to Celartem, we received a cash
payment of approximately $9.1 million. In addition, Celartem will pay us up to
an additional $2.0 million over the next two years, if Extensis meets certain
revenue targets.
Subsequent Event
On March 3, 2003, we signed a definitive merger agreement with Kinko's
Washington, Inc., a Washington corporation ("Kinko's Washington") and a
wholly-owned subsidiary of Kinko's Inc., a privately held Delaware corporation
("Kinko's"), the world's leading provider of document solutions and business
services. Under the terms of the agreement, Kinko's Washington will offer to
acquire for cash all the outstanding common shares of ImageX for $0.512 per
common share in a transaction valued at approximately $16.5 million. The
transaction is subject to customary conditions and is expected to be completed
in the second quarter of 2003. In connection with the tender offer and proposed
merger, Kinko's has filed with the SEC a tender offer statement on Schedule TO
(including an offer to purchase, letter of transmittal and related tender offer
documents) and ImageX has filed a solicitation/recommendation statement on
Schedule 14D-9. These documents contain important information and shareholders
of ImageX are advised to carefully read these documents.
23
Results of Operations
The following table sets forth, for the periods indicated, certain
statement of operations data expressed as a percentage of revenues. Historical
periods have been restated to reflect our acquisition of PrintBid.com in
December 1999, which was accounted for using the pooling-of-interest method. In
accordance with generally accepted accounting principles, Extensis' prior period
results of operations have been reclassified as Discontinued Operations.
SELECTED STATEMENT OF OPERATIONS DATA
Year Ended December 31,
-----------------------
2000 2001 2002
---- ---- ----
Revenues.................................................... 100% 100% 100%
Cost of revenues............................................ 78 78 77
-------------------------------
Gross margin................................................ 22 22 23
-------------------------------
Operating expenses:
General and administrative............................... 62 49 50
Sales and marketing...................................... 46 26 22
Product development...................................... 20 16 10
Amortization of goodwill and assembled workforce......... 1 2 -
Impairment charge........................................ - - 47
-------------------------------
Total operating expenses............................ 129 93 129
-------------------------------
Loss from operations........................................ (107) (71) (106)
Interest income (expense), net........................... 9 2 1
-------------------------------
Loss from continuing operations............................. (98) (69) (105)
Net (loss) income from discontinued operations.............. (15) (21) 12
-------------------------------
Net loss before cumulative effect of change in accounting
principle................................................ (113) (90) (93)
Cumulative effect of change in accounting principle......... - - (86)
-------------------------------
Net loss.................................................... (113)% (90)% (179)%
===============================
We have incurred significant net losses since our inception. As of
December 31, 2002, we had accumulated a deficit of $183.8 million. Our limited
operating history and the uncertain and emerging nature of our 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.
Revenues
The Company's printing products include marketing and promotional
materials as well as business cards, stationery and envelopes. ImageX and its
wholly-owned subsidiaries, Image Press, Inc. ("Image Press"), FA Graphics, Inc.
("FA Graphics"), and Howard Press, Inc. ("Howard Press"), 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 and
ImageX Channel Marketing 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 customer-specific
pricing arrangements negotiated with each customer.
24
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, 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 four
operating facilities and are shipped directly to customers under the ImageX
brand.
In June 2000, the Company acquired Extensis and began selling software
products and services up until we sold Extensis in September 2002. During that
time, we sold software products and services to distributors, resellers, end
user customers and to some distributors that reproduced, localized, and packaged
our products. The revenues from these sales were recognized when persuasive
evidence of a contract existed, software was delivered, the fee was fixed or
determinable and collectibility was probable. We generally provided distributors
and resellers a sixty-day right of return. A provision was recorded for
estimated product returns. In accordance with generally accepted accounting
principles, all of Extensis' revenues have been reclassified as Discontinued
Operations. See Note 3 to ImageX's consolidated financial statements.
Our customers include a wide variety of businesses, from Fortune 1000
companies to small size companies. A substantial portion of our revenues have
been derived from customers that have come to ImageX by means of our
acquisitions in 1999 and 2000.
(In thousands) For the Year Ended December 31,
-------------------------------
% %
2000 2001 Growth 2002 Growth
---- ---- ------ ---- ------
Revenues................. $ 41,861 $ 44,423 6% $ 34,888 (21)%
The increase in revenues in fiscal 2001 compared to fiscal 2000 was
primarily attributable to revenues generated by Howard Press, which was acquired
in 2000. Revenues for fiscal 2000 include approximately six months of revenues
for Howard Press, whereas revenues for fiscal 2001 include 12 months of revenues
for Howard Press. In addition, revenues increased as a result of an increase in
the number of customers introduced to the ImageX Print System from 331 to 369,
and an increase in the number of products sold to existing customers.
The decrease in revenues in fiscal 2002 compared to fiscal 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 Howard Press operations and steeper volume discounts due to
the continued general slow down in the U.S. economy. Our revenues have been
volatile over the last several quarters and future trends are difficult to
predict. Actual results may be materially different than we predict and may even
decline.
Gross Profit
For products 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 vendors charge us for printing and freight costs. For products
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) For the Year Ended December 31,
-------------------------------
2000 2001 Change 2002 Change
---- ---- ------ ---- ------
Gross profit.............. $ 9,171 $ 9,741 6% $ 8,190 (16)%
Gross margin.............. 22% 22% 23%
Gross profit increased in fiscal 2001 compared to fiscal 2000 as a result
of the increase in revenues attributable to the acquisition of Howard Press in
June 2000. Gross margin in fiscal 2001 remained consistent with gross margins in
fiscal 2000.
25
Gross profit decreased in fiscal 2002 compared to fiscal 2001 due to the
decrease in revenues in fiscal 2002 compared to fiscal 2001. Gross margin
increased in fiscal 2002 compared to fiscal 2001 due to increased operating
efficiencies realized from further utilization of our patented technologies and
cost-reduction initiatives offset by decreased revenues in our Howard Press
operations. In fiscal 2003, management expects gross margin to remain consistent
with fiscal 2002.
Operating Expenses
Our business incurs operating expenses in three broad expense categories:
general and administrative, sales and marketing, and product development. During
2001, we reduced our staff by 44% and implemented non-staff cost reductions.
These cost-reduction initiatives resulted in a decrease in operating expenses of
$12.6 million compared to fiscal 2000. During 2002, operating expenses increased
approximately $3.7 million primarily as a result of an impairment charge of
approximately $16.4 million. Excluding this impairment charge, operating
expenses in fiscal 2002 decreased approximately $12.7 million from fiscal 2001.
In fiscal 2002, we reduced our staff by 42% and implemented additional non-staff
cost reductions. In the future, we intend to focus on increasing our revenue
base and scalability by acquiring new customers, increasing revenues from
existing customers, and continuing to improve efficiencies. Our future viability
and success will depend on our ability to achieve these objectives. We believe
that cost-reduction initiatives implemented throughout 2001 and 2002 will reduce
our operating expenses both on an absolute dollar basis and as a percentage of
revenues in 2003 compared to 2002.
General and Administrative Expenses
(In thousands) For the Year Ended December 31,
-------------------------------
2000 2001 Change 2002 Change
---- ---- ------ ---- ------
General and administrative..... $ 26,057 $21,660 (17)% $ 17,250 (20)%
Percentage of revenues......... 62% 49% 50%
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, amortization of stock option expense, outside professional
services and facilities related expenses. The decrease in general and
administrative expenses in fiscal 2001 compared to 2000 was primarily due to
cost-reduction initiatives begun in the first quarter of 2001, which
significantly reduced compensation expense by approximately $2.8 million,
travel, telephone and other employee related expenses by $1.5 million,
accounting and legal fees by $880,000 and contractor and consulting fees by
$778,000. Offsetting these cost reductions was a $1.5 million loss on disposal
of property and equipment, primarily internally developed software, incurred as
a result of closing the PrintBid.com marketplace in March 2001.
The decrease in general and administrative expenses in fiscal 2002
compared to fiscal 2001 was primarily due to cost-reduction initiatives
implemented during 2001 and the first quarter of 2002 which significantly
reduced compensation expense by approximately $1.6 million, rent and related
facilities costs by approximately $1.1 million, travel, telephone and other
employee related expenses by $200,000, contractor and consulting fees by
approximately $300,000 and accounting and legal fees by approximately $208,000.
In addition, depreciation and amortization expenses in fiscal 2002 were
approximately $2.1 million less than in fiscal 2001 and bad debt expense was
approximately $174,000 less than in fiscal 2001. The cost-reductions and
reductions in depreciation and amortization expenses were partially offset by a
lease termination fee of $667,000 related to restructuring our office lease in
Kirkland in March 2002 and an increase in insurance premiums of approximately
$226,000. Approximately $1.3 million in losses related to disposal of certain
equipment and abandoned copyrights, and were recognized in general and
administrative expenses in fiscal 2002. Management expects general and
administrative expenses to continue to decrease in fiscal 2003.
26
Sales and Marketing Expenses
(In thousands) For the Year Ended December 31,
-------------------------------
2000 2001 Change 2002 Change
---- ---- ------ ---- ------
Sales and marketing............ $ 19,228 $11,500 (40)% $ 7,798 (32)%
Percentage of revenues......... 46% 26% 22%
Sales and marketing expenses consist primarily of salaries and related
benefits for sales, marketing, customer service and technical support personnel,
advertising expenses, marketing expenses, travel expenses and amortization of
customer lists related to acquisitions. The decrease in sales and marketing
expenses in 2001 compared to 2000 was primarily due to a $3.0 million reduction
in compensation expense due to a reduction in staffing, a $3.7 million decrease
in advertising expenses and a $1.0 million decrease in travel, telephone and
other employee related expenses.
The decrease in sales and marketing expenses in 2002 compared to 2001 was
primarily due a $2.6 million reduction in compensation expense due to a
reduction in staffing, a $727,000 decrease in advertising expenses and a
$400,000 decrease in travel, telephone and other employee related expenses.
Product Development Expenses
(In thousands) For the Year Ended December 31,
-------------------------------
2000 2001 Change 2002 Change
---- ---- ------ ---- ------
Product development............ $ 8,314 $ 7,235 (13)% $ 3,625 (50)%
Percentage of revenues......... 20% 16% 10%
Product development expenses consist primarily of salaries and benefits
for developers, product managers, quality assurance personnel, payments to
outside contractors for programming services and depreciation of capitalized
software development projects. The decrease in product development expenses in
2001 and 2002 is primarily due to staff reductions implemented in 2001 and 2002
as part of our cost-reduction iniatives.
Amortization of Goodwill and Assembled Workforce
(In thousands) For the Year Ended December 31,
-------------------------------
2000 2001 Change 2002 Change
---- ---- ------ ---- ------
Amortization of goodwill and
assembled workforce......... $ 369 $ 973 164% $ -- (100)%
Percentage of revenues......... 1% 2% --
The amortization of goodwill and assembled workforce is a result of the
acquisitions of FA Graphics and Image Press in 1999 and Howard Press in 2000.
Through December 31, 2001, goodwill was amortized over 10 years and assembled
workforce was amortized over periods ranging from 3 to 7 years. Upon adoption of
Statement of Financial Accounting Standard ("SFAS") SFAS No. 142 "Goodwill and
Other Intangible Assets," in January 2002, we discontinued amortization of
goodwill and assembled workforce. See Note 2 to ImageX's consolidated financial
statements.
27
Impairment Charge
(In thousands) For the Year Ended December 31,
-------------------------------
2000 2001 Change 2002 Change
---- ---- ------ ---- ------
Impairment charge.............. $ -- $ -- -- $ 16,358 (100)%
Percentage of revenues......... -- -- 47%
In January 2002, we adopted SFAS No. 142 and SFAS No. 144 "Accounting for
the Impairment of Disposal of Long-Lived Assets." In accordance with these two
pronouncements, we recorded an impairment charge of approximately $6.1 million
in fiscal 2002 to write down goodwill in our wholly-owned subsidiaries, Howard
Press, Image Press and FA Graphics and we recorded an impairment charge of
approximately $10.3 million to write down fixed assets and intangible assets in
those entities as well as in our Kirkland headquarters. This impairment charge
consisted of the write down of fixed assets of approximately $7.4 million, a
write down of customer lists of approximately $2.3 million and the write down of
capitalized patent costs of approximately $630,000. See Note 2 to ImageX's
consolidated financial statements.
Interest Income, Net
(In thousands) For the Year Ended December 31,
-------------------------------
2000 2001 Change 2002 Change
---- ---- ------ ---- ------
Interest income, net........... $ 3,721 $ 850 (77)% $ 159 (81)%
Percentage of revenues......... 9% 2% 1%
The decrease in net interest income in fiscal 2001 compared to 2000 is due
primarily to the decrease in the cash and cash equivalents balance during the
year. The decrease in net interest income in fiscal 2002 compared to 2001 is due
primarily to the decrease in cash and cash equivalents balance during the year
offset by decreased interest expense due to less debt outstanding during the
year.
Net (Loss) Income From Discontinued Operations
(In thousands) For the Year Ended December 31,
-------------------------------
2000 2001 Change 2002 Change
---- ---- ------ ---- ------
Net (loss) income from
discontinued operations..... $ (6,379) $ (9,125) (43)% $ 4,308 147%
Percentage of revenues......... (15)% (21)% 12%
The net (loss) income from discontinued operations consists of the results
of operations of Extensis, which we purchased in June 2000 and sold in September
2002. In accordance with generally accepted accounting principles, Extensis'
prior period results of operations have been reclassified to net (loss) income
from discontinued operations. We recognized a gain on the sale of Extensis of
approximately $3.5 million which is included in net (loss) income from
discontinued operations in fiscal 2002. See note 3 to ImageX's consolidated
financial statements.
28
Cumulative Effect of Change in Accounting Principle
(In thousands) For the Year Ended December 31,
-------------------------------
2000 2001 Change 2002 Change
---- ---- ------ ---- ------
Cumulative effect of change in
accounting principle........ $ -- $ -- -- $ (30,195) --
Percentage of revenues......... -- -- (86)%
In accordance with the adoption of SFAS No. 142 in January 2002, we
engaged an independent valuation firm to assist us in assessing the fair value
of goodwill recorded on our books as of January 1, 2002. The valuation process
provided a fair value of goodwill using a discounted cash flow model that also
considered factors such as market capitalization and estimated 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, Extensis. This transitional impairment charge was approximately $30.2
million and the effect of adopting SFAS No. 142 is reported as a cumulative
effect of change in accounting principle for the year ended December 31, 2002.
The estimated fair value of the Printing segment's goodwill exceeded the book
value of this asset at January 1, 2002 and therefore, no transitional impairment
charge was recognized in the Printing segment upon adoption of SFAS No. 142.
Income Taxes
No provision for federal income taxes has been recorded to date because we
have incurred net operating losses from inception through December 31, 2002. As
of December 31, 2002, we had approximately $117.8 million of net operating loss
carryforwards for federal income tax purposes, expiring in 2010 through 2022.
Utilization of net operating loss carryforwards may be subject to certain
limitations under Section 382 of the Internal Revenue Code. Given our limited
operating history, losses incurred to date and the difficulty in accurately
forecasting our future results, we do not believe that the realization of the
related deferred income tax assets meets the criteria required by generally
accepted accounting principles and, accordingly, a full valuation allowance for
net deferred tax assets has been recorded.
Liquidity and Capital Resources
We have incurred significant net losses since our inception. As of
December 31, 2002 we have accumulated a deficit of $183.8 million. Our principal
source of liquidity is our cash and cash equivalents. As of December 31, 2002,
we had cash and cash equivalents of $12.4 million, representing a decrease of
$5.0 million from December 31, 2001. Our working capital at December 31, 2002
was $15.9 million, compared to $18.6 million in December 31, 2001.
On December 31, 2002, the Company's $5.0 million bank line of credit
expired and was not renewed. We do not have commitments for additional
financing.
29
Contractual commitments at December 31, 2002 consisted of the following:
(In thousands) 2003 2004 2005 2006 2007 Thereafter Total
- -------------- ---- ---- ---- ---- ---- ---------- -----
Capital lease obligation .... $ 54 $ 54 $ 54 $ 54 $ 45 $ -- $ 261
Operating lease obligations . 1,784 1,413 403 168 8 -- 3,776
Co-location agreement ....... 228 -- -- -- -- -- 228
------------------------------------------------------------------
Total contractual commitments
$2,066 $1,467 $ 457 $ 222 $ 53 $ -- $4,265
==================================================================
Net cash used in operating activities was $36.8 million, $17.4 million and
$10.3 million for the years ended December 31, 2000, 2001 and 2002,
respectively. The operating cash outflows were primarily attributable to
significant expenditures on general and administrative, sales and marketing and
product development expenses, all of which led to operating losses.
Net cash provided by investing activities was $8.5 million for the year
ended December 31, 2002 and primarily consisted of $9.1 million in cash proceeds
received from the sale of Extensis to Celartem and the release of $667,000 of
restricted cash as a result of renegotiating our office lease, offset by
approximately $1.4 million in purchases of property and equipment. Net cash used
in investing activities was $42.0 million and $2.4 million for the years ended
December 31, 2000 and 2001, respectively, and consisted primarily of cash used
to purchase Howard Press and Extensis in 2000 and purchases of equipment and
software in both 2000 and 2001.
Net cash used in financing activities was $4.9 million for the year ended
December 31, 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. Net
cash provided by financing activities for the year ended December 31, 2000 and
2001 was $103.7 million and $1.3 million, respectively. Net cash provided by
financing activities in 2000 primarily consisted of $101.4 million in net
proceeds from the issuance of common stock in our follow-on offering. Net cash
provided by financing activities in 2001 primarily consisted of inflows from
short-term borrowings of $5.0 million and the sale of common stock through
private placement of $4.9 million, offset by the repayment of $8.8 million in
debt.
We have never been profitable and it is anticipated that we will continue
to incur net losses in future periods. As of December 31, 2002, we had an
accumulated deficit of $183.8 million. To become profitable, we must
significantly increase revenues by obtaining new customers and generating
additional revenues from existing customers, control expenses and improve gross
margins. We have experienced revenue declines in recent periods and may continue
to incur operating losses for some time. Although we have experienced revenue
growth in the past, revenues may not continue at their current level, and may
decrease in the future. These matters raise substantial doubt about our ability
to continue as a going concern. The financial statements do not include any
adjustments to reflect the possible effects on the recoverability and
classification of assets and liabilities that may result from the outcome of
this uncertainty.
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. While we have incurred losses since inception
and we expect to incur losses this year at our current operating level, we
believe that our existing cash and cash equivalents will be sufficient to meet
our anticipated cash needs for working capital and capital expenditures through
December 31, 2003. 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. Any
difficulty in obtaining additional financial resources could force us to curtail
our operations, dispose of certain assets at less than book value or prevent us
from pursuing our growth strategy. In addition, any future funding may dilute
the ownership of our shareholders. There can be no assurance that we will be
able to successfully complete the steps necessary to continue as a going
concern. Our stock is currently trading at prices less than $1.00 per share. If
our stock continues to trade at this level, our stock could be delisted from the
NASDAQ SmallCap Market and our ability to obtain financing may suffer as a
result.
30
Impact of 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 was January 1, 2003 and the adoption of this
statement did not have a material impact on our results of operations, financial
position or cash flows.
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 was January 1, 2003 and
we are currently assessing what impact SFAS No. 146 will have on our results of
operations and financial position.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure - an amendment of SFAS No.
123." This statement amends SFAS No. 123, "Accounting for Stock-Based
Compensation," to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, this statement amends the disclosure requirements of
SFAS No. 123 to require prominent disclosure in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The
disclosure provisions of SFAS No. 148 are effective for fiscal years ending
after December 15, 2002 and have been incorporated into our consolidated
financial statements and accompanying notes. We have elected to apply the
disclosure only provisions of SFAS No. 123 at this time and do not have plans to
change our election for the year ending December 31, 2003.
In November 2002, the Emerging Issues Task Force reached a consensus on
Issue 00-21, addressing how to account for arrangements that involve the
delivery or performance of multiple products, services, and/or rights to use
assets. Revenue arrangements with multiple deliverables are divided into
separate units of accounting if the deliverables in the arrangement meet the
following criteria: (1) the delivered item has value to the customer on a
standalone basis; (2) there is objective and reliable evidence of the fair value
of undelivered items; and (3) delivery of any undelivered item is probable.
Arrangement consideration should be allocated among the separate units of
accounting based on their relative fair values, with the amount allocated to the
delivered item being limited to the amount that is not contingent on the
delivery of additional items or meeting other specified performance conditions.
The final consensus will be applicable to agreements entered into in fiscal
periods beginning after June 15, 2003 with early adoption permitted. The
provisions of this Consensus are not expected to have a significant effect on
our financial position or operating results.
In November 2002, FASB Interpretation ("FIN") No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" was issued. The interpretation provides
guidance on the guarantor's accounting and disclosure requirements for
guarantees,
31
including indirect guarantees of indebtedness of others. We have adopted the
disclosure requirements of the interpretation as of December 31, 2002. The
accounting guidelines are applicable to guarantees issued after December 31,
2002 and require that we record a liability for the fair value of such
guarantees in the balance sheet. Adoption of FIN No. 45 did not have a material
impact on our financial position, results of operations or cash flows.
Item 7A. 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 use 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 capital lease obligation of $212,000 has an imputed
interest rate of 8.5%. All of the potential changes noted above are based on
sensitivity analysis performed on our balances as of December 31, 2002.
32
Item 8. Financial Statements
Consolidated financial statements and financial statement schedule of
ImageX, Inc. are as follows
Page
----
Report of PricewaterhouseCoopers LLP, Independent Accountants............................................. 34
Consolidated Balance Sheets as of December 31, 2001 and 2002.............................................. 35
Consolidated Statements of Operations for the years ended December 31, 2000, 2001 and 2002................ 36
Consolidated Statements of Comprehensive Loss for the years ended December 31, 2000, 2001 and 2002........ 36
Consolidated Statements of Shareholders' Equity for the years ended December 31, 2000, 2001 and 2002...... 37
Consolidated Statements of Cash Flows for the years ended December 31, 2000, 2001 and 2002................ 38
Notes to Consolidated Financial Statements................................................................ 39
Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts for the years ended December 31, 2000, 2001 and 2002. 77
33
Report of Independent Accountants
To the Board of Directors and Shareholders of
ImageX, Inc.
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of ImageX, Inc. and its subsidiaries (the "Company") at December 31,
2001 and 2002, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 2002, in conformity with
accounting principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedule listed in the
accompanying index presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements. These financial statements and financial statement
schedule are the responsibility of the Company's management; our responsibility
is to express an opinion on these financial statements and financial statement
schedule based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As discussed in Note 2, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 142, Goodwill and Intangible Assets effective
January 1, 2002 and ceased amortizing goodwill. Accordingly, the consolidated
financial statements for periods prior to January 1, 2002 are not comparable to
consolidated financial statements presented on or subsequent to January 1, 2002.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations
that raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
PRICEWATERHOUSECOOPERS LLP
Seattle, Washington
March 31, 2003
34
IMAGEX, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
December 31, December 31,
2001 2002
---- ----
ASSETS
Current assets:
Cash and cash equivalents ................................................. $ 17,375 $ 12,366
Accounts receivable (net of allowance for doubtful accounts and returns of
$924 and $207, respectively) ........................................... 8,062 5,105
Inventories ............................................................... 2,935 2,048
Prepaid expenses .......................................................... 637 1,068
--------- ---------
Total current assets ................................................... 29,009 20,587
Restricted cash .............................................................. 1,600 933
Property and equipment, net .................................................. 16,493 2,669
Deposits and other ........................................................... 562 332
Other intangible assets, net ................................................. 8,313 600
Goodwill ..................................................................... 37,022 101
--------- ---------
Total assets ........................................................... $ 92,999 $ 25,222
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable .......................................................... $ 2,485 $ 1,602
Accrued liabilities ....................................................... 2,932 3,039
Short-term note payable ................................................... 5,000 --
Current portion of capital lease obligation ............................... -- 37
--------- ---------
Total current liabilities .............................................. 10,417 4,678
Long-term capital lease obligation ........................................... -- 175
--------- ---------
Total liabilities ...................................................... 10,417 4,853
--------- ---------
Commitments and contingencies (Note 13)
Shareholders' equity:
Preferred stock, $0.01 par value; 30,000 shares authorized; none issued and
outstanding ............................................................ -- --
Common stock, $0.01 par value; 70,000 shares authorized; 30,876 and 31,189
shares issued and outstanding, respectively ............................ 309 311
Additional paid-in capital ................................................ 203,598 203,817
Unearned compensation ..................................................... (84) (1)
Notes receivable from shareholders ........................................ (52) --
Accumulated deficit ....................................................... (121,189) (183,758)
--------- ---------
Total shareholders' equity ............................................. 82,582 20,369
--------- ---------
Total liabilities and shareholders' equity ................................... $ 92,999 $ 25,222
========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
35
IMAGEX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Year Ended December 31,
-----------------------
2000 2001 2002
-------- -------- --------
Revenues ............................................................... $ 41,861 $ 44,423 $ 34,888
Cost of revenues ....................................................... 32,690 34,682 26,698
-------- -------- --------
Gross profit ................................................... 9,171 9,741 8,190
-------- -------- --------
Operating expenses:
General and administrative .......................................... 26,057 21,660 17,250
Sales and marketing ................................................. 19,228 11,500 7,798
Product development ................................................. 8,314 7,235 3,625
Amortization of goodwill and assembled workforce .................... 369 973 --
Impairment charge ................................................... -- -- 16,358
-------- -------- --------
Total operating expenses .................................... 53,968 41,368 45,031
-------- -------- --------
Loss from operations ................................................... (44,797) (31,627) (36,841)
Interest income, net ................................................ 3,721 850 159
-------- -------- --------
Loss from continuing operations ........................................ (41,076) (30,777) (36,682)
(Loss) income from discontinued operations ............................. (6,379) (9,125) 842
Gain on sale of discontinued operations ................................ -- -- 3,466
-------- -------- --------
Net (loss) income from discontinued operations ......................... (6,379) (9,125) 4,308
-------- -------- --------
Net loss before cumulative effect of change in accounting principle .... (47,455) (39,902) (32,374)
Cumulative effect of change in accounting principle .................... -- -- (30,195)
-------- -------- --------
Net loss ............................................................... $(47,455) $(39,902) $(62,569)
======== ======== ========
Basic and diluted net loss per share:
Loss from continuing operations ..................................... $ (1.75) $ (1.07) $ (1.18)
Net (loss) income from discontinued operations ...................... (0.27) (0.32) 0.14
-------- -------- --------
Net loss before cumulative effect of change in accounting principle . (2.02) (1.39) (1.04)
Cumulative effect of change in accounting principle ................. -- -- (0.98)
-------- -------- --------
Basic and diluted net loss per share (Note 1) ....................... $ (2.02) $ (1.39) $ (2.02)
======== ======== ========
Weighted-average shares outstanding, basic and diluted ................. 23,534 28,783 30,983
======== ======== ========
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
Net loss ........................................................... $(47,455) $(39,902) $(62,569)
Other comprehensive income (loss):
Foreign currency translation ............................... (27) 27 --
-------- -------- --------
Comprehensive loss ................................................. $(47,482) $(39,875) $(62,569)
======== ======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
36
IMAGEX, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
Notes Accumulated
Common Stock Additional Receivable Other
------------ Paid-In Unearned From Comprehensive Accumulated
Shares Amount Capital Compensation Shareholders Income (loss) Deficit Total
------ ------ ------- ------------ ------------ ------------- ------- -----
Balances, December 31, 1999......... 17,381,639 $ 174 $ 67,118 $ (2,518) $ (168) $ -- $ (33,832) $ 30,774
Net proceeds from follow-on
offering (net of offering costs
of $6,588)........................ 4,695,595 47 101,351 101,398
Issuance of common stock upon
exercise of stock options......... 353,893 3 166 169
Issuance of common stock upon
exercise of warrants.............. 195,273 1 571 572
Issuance of common stock pursuant
to Employee Stock Purchase Plan... 154,159 2 885 887
Issuance of common stock and
options for acquisitions.......... 3,753,818 38 28,911 28,949
Issuance of common stock for
operating expenses................ 22,910 90 90
Amortization of unearned
compensation...................... 1,681 1,681
Collection of notes receivable
from shareholder................... 68 68
Foreign currency translation........ (27) (27)
Net loss............................ (47,455) (47,455)
----------------------------------------------------------------------------------------------
Balances, December 31, 2000......... 26,557,287 265 199,092 (837) (100) (27) (81,287) 117,106
Issuance of common stock upon
exercise of stock options......... 93,906 1 22 23
Issuance of common stock pursuant
to Employee Stock Purchase Plan... 189,056 2 449 451
Private placement of common stock... 4,273,504 43 4,807 4,850
Additional purchase price for
Extensis, Inc..................... (215,419) (2) (397) (399)
Return of common stock for
operating expense refund.......... (21,910) (85) (85)
Amortization of unearned
compensation...................... (290) 753 463
Collection of notes receivable
from shareholder.................. 48 48
Foreign currency translation........ 27 27
Net loss............................ (39,902) (39,902)
----------------------------------------------------------------------------------------------
Balances, December 31, 2001......... 30,876,424 309 203,598 (84) (52) -- (121,189) 82,582
Issuance of common stock upon
exercise of stock options......... 45,711 12 12
Issuance of common stock pursuant
to Employee Stock Purchase Plan... 68,857 1 40 41
Additional purchase price for
Howard Press....................... 193,390 1 82 83
Additional purchase price for
PrintBid.com...................... 4,884 -- -- --
Options modified for non-employees.. 85 85
Amortization of unearned
compensation...................... 83 83
Collection of notes receivable
from shareholder.................. 52 52
Net loss............................ (62,569) (62,569)
----------------------------------------------------------------------------------------------
Balances, December 31, 2002......... 31,189,266 $ 311 $203,817 $ (1) $ -- $ -- $(183,758) $ 20,369
==============================================================================================
The accompanying notes are an integral part of these
consolidated financial statements.
37
IMAGEX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Year Ended December 31,
-----------------------
2000 2001 2002
--------- --------- ---------
Cash flows from operating activities:
Net loss .......................................................... $ (47,455) $ (39,902) $ (62,569)
Adjustments to reconcile net loss to net cash used in operating
activities:
Cumulative effect of change in accounting principle ............ -- -- 30,195
Impairment charge .............................................. -- -- 16,358
Loss (income) from discontinued operations ..................... 6,379 9,125 (842)
Gain on sale of Extensis ....................................... -- -- (3,466)
Depreciation and amortization .................................. 6,191 9,179 6,741
Amortization of unearned compensation .......................... 1,681 463 83
Loss on disposal of fixed assets ............................... -- 1,464 1,318
Services exchanged for common stock, options and warrants ...... 90 (85) 85
Provision for doubtful accounts ................................ 318 141 (16)
Changes in operating assets and liabilities, net of effects of
acquisitions and disposals:
Accounts receivable ............................................ (2,967) 4,051 1,642
Inventories .................................................... 1,926 655 641
Prepaid expenses ............................................... (720) 609 (733)
Other intangible assets ........................................ -- (216) (488)
Accounts payable and accrued liabilities ....................... (1,114) (2,916) 774
--------- --------- ---------
Net cash used in continuing operating activities ............... (35,671) (17,432) (10,277)
--------- --------- ---------
--------- --------- ---------
Cash flows (used in) provided by discontinued operations .......... (2,686) (4,557) 1,687
--------- --------- ---------
Cash flows from investing activities:
Purchases of property and equipment ............................ (15,626) (3,190) (1,410)
Proceeds from sale of property and equipment ................... 20 -- 91
Proceeds from sale of Extensis ................................. -- -- 9,128
(Deposits) refund of restricted cash ........................... (787) 812 667
Acquisitions, net .............................................. (26,718) -- --
--------- --------- ---------
Net cash (used in) provided by investing activities ............ (43,111) (2,378) 8,476
--------- --------- ---------
Cash flows from financing activities:
Proceeds from notes payable .................................... 8,800 5,000 5,000
Principal payments on notes payable ............................ (8,236) (8,800) (10,000)
Proceeds from issuance of common stock ......................... 1,628 474 53
Proceeds from issuance of common stock related to public
offerings (net of offering costs of $6,558 for 2000) ... 101,398 -- --
Proceeds from the sale of common stock - private placement ..... -- 4,850 --
Cash adjustment to Extensis purchase price ..................... -- (277) --
Proceeds from repayment on notes receivable from shareholders .. 68 48 52
--------- --------- ---------
Net cash provided by (used in) financing activities ............ 103,658 1,295 (4,895)
--------- --------- ---------
Effect of exchange rate changes on cash ........................ (27) 27 --
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents ........... 22,163 (23,045) (5,009)
Cash and cash equivalents at beginning of period ............... 18,257 40,420 17,375
--------- --------- ---------
Cash and cash equivalents at end of period ..................... $ 40,420 $ 17,375 $ 12,366
========= ========= =========
Supplemental Cash Flow Information:
Fixed assets acquired under capital lease $ -- $ -- $ 212
Cash paid for interest 257 332 104
The accompanying notes are an integral part of these
consolidated financial statements.
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
THE COMPANY
ImageX, Inc. ("the Company") was incorporated on August 21, 1995 and is
headquartered in Kirkland, Washington. The Company provides traditional printing
services and Internet-based business-to-business e-procurement services for
printed business materials. The Company's printing products include marketing
and promotional materials, business cards and general office products.
As described in Note 3, 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. Previously, Extensis' operating results
comprised the Company's Software Segment. With the sale of Extensis, the Company
now only operates in one business segment, the Printing Segment and continues to
operate in only one geographic segment, the United States of America.
LIQUIDITY
The Company has never been profitable and it is anticipated that the
Company will continue to incur net losses in future periods. As of December 31,
2002, the Company had an accumulated deficit of $183.8 million. 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.
Although the Company has experienced revenue growth in the past, revenues may
not continue at their current level, and may decrease in the future. These
matters raise substantial doubt about the Company's ability to continue as a
going concern. The financial statements do not include any adjustments to
reflect the possible effects on the recoverability and classification of assets
and liabilities that may result from the outcome of this uncertainty.
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. While the Company has incurred losses since
its inception and is expected to incur losses this year at its current operating
level, 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 through December 31, 2003. 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. The Company has no
commitments for additional financing. 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. There can be no assurance that the Company will be able to
successfully complete the steps necessary to continue as a going concern. 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 and the Company's ability to obtain financing
may suffer as a result.
39
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries after elimination of all
significant intercompany accounts and transactions.
RECLASSIFICATION
Certain prior year amounts have been reclassified to conform to the
current year presentation.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with
maturity of three months or less at the date of purchase to be cash equivalents.
Cash and cash equivalents include money market accounts, commercial paper and
various deposit accounts.
RESTRICTED CASH
Restricted cash consists of a certificate of deposit that collateralizes a
letter of credit as required by the Company's office lease in Kirkland,
Washington. This letter of credit was reduced by $667,000 in January 2002 when
the Company renegotiated this lease. See Note 13.
INVENTORIES
Inventories consist of raw materials and supplies, work-in-process and
finished goods, which are stated at the lower of cost or market. Cost is
determined using a method which approximates the first-in, first-out method.
Work-in-process includes direct labor, materials and allocated overhead.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost less accumulated depreciation,
which includes the amortization of assets recorded under capital leases. Fixed
assets and assets purchased under capital leases are depreciated using the
straight-line method over the estimated life of the asset. Estimated useful
lives of assets are as follows:
Assets Years
------ -----
Computer hardware......................................................... 2 - 5
Computer software......................................................... 1 - 4
Production machinery and equipment........................................ 6
Office furniture and equipment............................................ 3 - 6
Leasehold improvements.................................................... Life of lease or useful life,
whichever is shorter, ranging
from 3 to 5
Expenditures for additions and improvements are capitalized; expenditures
for maintenance and repairs are expensed as incurred. When assets are retired or
otherwise disposed of, the cost of the assets and related accumulated
depreciation are eliminated from the accounts and any resulting gain or loss is
reflected in the results of operations as general and administrative expenses.
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets to Be Disposed
40
Of," the Company recorded an impairment charge of approximately $7.3 million to
reduce its fixed assets to their fair value in 2002. See Note 2.
COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE
Costs of computer software developed or obtained for internal use are
capitalized while in the application development stage and are expensed while in
the preliminary stage and the post-implementation stage. Capitalized internally
developed software is depreciated using the straight-line method over one to
four years. These capitalized costs are included in property and equipment in
the accompanying consolidated balance sheets. During 2001 and 2002, the Company
capitalized $1.6 million and $738,000, respectively, of internal use software.
In accordance with SFAS No. 144, all capitalized software was written off in
December 2002 and included in the impairment charge. See Note 2.
GOODWILL
Goodwill represents the excess of the cost of purchased subsidiaries over
the estimated fair values of the net assets acquired as of the date of
acquisition. Beginning in fiscal 2002 with the adoption of SFAS No. 142,
"Goodwill and Other Intangible Assets," goodwill is no longer amortized, but
instead is tested for impairment at least annually. Prior to fiscal 2002,
goodwill was amortized using the straight-line method over its estimated period
of benefit of 10 years. In accordance with SFAS No. 142, the Company recorded a
transitional impairment charge of approximately $30.2 million and an impairment
charge of approximately $6.1 million to reduce its goodwill to fair value in
2002. See Note 2.
OTHER INTANGIBLE ASSETS
Other intangible assets consist primarily of capitalized patent costs,
customer lists, assembled workforce and purchased technology resulting from
acquisitions in 1999 and 2000. These assets are being amortized using the
straight-line method over their estimated useful lives, which range from 3 to 6
years. In accordance with the adoption of SFAS No. 142 in January 2002, the
Company reclassified approximately $2.8 million of assembled workforce to
Goodwill on January 1, 2002. In accordance with SFAS No. 144, the Company wrote
off approximately $2.9 million of Other Intangible Assets in 2002 as an
impairment charge. See Notes 2 and 6.
STOCK-BASED COMPENSATION
The Company follows SFAS No. 123, "Accounting for Stock-Based
Compensation" which establishes financial accounting and reporting standards for
stock-based employee compensation plans and for the issuance of equity
instruments to acquire goods and services from non-employees.
The Company records as operating expense the fair value of equity
instruments issued to non-employees in accordance with the provisions of SFAS
No. 123 and Emerging Issues Task Force No. 96-18. The Company recognized
approximately $90,000 and $85,000 of operating expense in fiscal 2000 and 2002,
respectively, related to stock options granted to non-employees. The Company
reversed approximately $85,000 of operating expense in fiscal 2001 related to
non-employee stock options that were cancelled in fiscal 2001.
The Company has elected to apply the disclosure only provision of SFAS No.
123 for employee stock-based compensation plans. Accordingly, the Company
accounts for stock issued to employees using the intrinsic value method
prescribed in Accounting Principles Board Opinion ("APB") No. 25, "Accounting
for Stock Issued to Employees," and related interpretations. Compensation
expense for stock options is measured as the excess, if any, of the fair value
of the Company's common stock at the date of grant over the stock option's
exercise price.
41
The weighted average fair values and weighted average exercise prices per
share at the date of grant for options granted were as follows:
Year Ended December 31,
-----------------------
2000 2001 2002
---- ---- ----
Weighted average fair value of options granted with exercise price equal to
the fair market value of the stock on the date of grant .............. $8.12 $1.37 $0.46
===== ===== =====
Weighted average exercise price of options granted with exercise price
equal to the fair market value of the stock on the date of grant ..... $8.80 $1.45 $0.46
===== ===== =====
Pro Forma Net Income and Earnings Per Share
Pro forma information regarding net loss as required by SFAS No. 123 and
as amended by SFAS No. 148 has been determined as if the Company had accounted
for its employee stock options and employee stock purchase plans using the
Black-Scholes option-pricing model assuming no expected dividends and the
following weighted-average assumptions:
Employee Stock Option Plan Employee Stock Purchase Plan
-------------------------- ----------------------------
2000 2001 2002 2000 2001 2002
---- ---- ---- ---- ---- ----
Risk free interest rate..... 6.18% 4.88% 3.64% 5.84% 4.08% 3.28%
Expected lives.............. 6.5 years 6.56 years 6.24 years 6 months 6 months 6 months
Volatility.................. 134% 147% 258% 123% 142% 146%
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected stock price
volatility. Because the Company's stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
the opinion of management, the existing models do not necessarily provide a
reliable single measure of the fair value of the Company's options. The weighted
average estimated fair value of shares granted under the Employee Stock Purchase
Plan in fiscal years 2000, 2001 and 2002 was $4.92, $1.20 and $0.61 per share.
The following table presents net loss and per share amounts as if the
Company accounted for compensation expense related to stock options under the
fair value method prescribed by SFAS No. 123:
(In thousands, except per share data) Year Ended December 31,
-----------------------
2000 2001 2002
-------- -------- --------
Net loss:
Net loss attributable to common shareholders, as reported .................. $(47,455) $(39,902) $(62,569)
Add: Total stock-based employee compensation included in reported net loss,
net of related tax effects .............................................. 1,681 463 83
Deduct: Total stock-based employee compensation expense determined under the
fair value method, net of related tax effects ........................... (7,124) (3,738) (822)
-------- -------- --------
Pro forma net loss ......................................................... $(52,898) $(43,177) $(63,308)
======== ======== ========
Net loss per share:
Net loss per share-as reported ............................................. $ (2.02) $ (1.39) $ (2.02)
======== ======== ========
Net loss per share-pro forma ............................................... $ (2.25) $ (1.50) $ (2.04)
======== ======== ========
42
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period.
REVENUE RECOGNITION
The Company's printing products include business cards, general office
products, and marketing and promotional materials. ImageX and its wholly-owned
subsidiaries, Image Press ("Image Press"), FA Graphics, Inc. ("FA Graphics"),
and Howard Press, Inc. ("Howard Press") generally recognize printing revenues
when the order is shipped to the customer and when the Company has fulfilled all
of its contractual obligations. Service revenues generated from the creation of
Web sites for customers to use our ImageX Print System and ImageX Channel
Marketing 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
contractual period.
From July 2000 through September 15, 2002, the Company sold software
products through Extensis to distributors, resellers and customers. The revenues
for these sales were recognized when persuasive evidence of a contract existed,
software had been delivered, the fee was fixed or determinable and
collectibility was probable. Distributors and resellers generally had a
sixty-day right of return. A provision was recorded for estimated product
returns. The Company sold Extensis on September 15, 2002, and in accordance with
generally accepted accounting principles, prior period results of operations
have been reclassified to reflect Extensis' operating results as Discontinued
Operations. See Note 3.
PRODUCT DEVELOPMENT COSTS
Product development costs represent research and development expenditures,
which are charged to operating expenses as incurred.
ADVERTISING
The Company expenses advertising costs as incurred. Advertising expenses
for continuing operations for the years ended December 31, 2000, 2001 and 2002
were approximately $4.6 million, $864,000 and $137,000, respectively.
COMPREHENSIVE LOSS
Comprehensive loss includes all changes in equity that result from
transactions and other economic events during the period other than transactions
with stockholders. Comprehensive income (loss) for the Company for the years
ended December 31, 2000 and 2001 includes accumulated foreign currency
translation adjustments of $(27) and $27, respectively, resulting from the
translation of the balance sheet for a European office.
43
NET LOSS PER SHARE
In accordance with SFAS No. 128, basic and diluted net loss per share has
been computed using the weighted-average number of shares of common stock
outstanding during the period.
A reconciliation of shares used in the calculation of basic and diluted
net loss per share follows:
(In thousands, except per share data) Year Ended December 31,
-----------------------
2000 2001 2002
---- ---- ----
Loss from continuing operations ......................... $(41,076) $(30,777) $(36,682)
Net (loss) income from discontinued operations .......... (6,379) (9,125) 4,308
-------- -------- --------
Net loss before cumulative effect of change in accounting
principle ............................................ (47,455) (39,902) (32,374)
Cumulative effect of change in accounting principle ..... -- -- (30,195)
-------- -------- --------
Net loss ................................................ $(47,455) $(39,902) $(62,569)
======== ======== ========
Weighted average shares of common stock outstanding and
denominator for basic and diluted calculation ........ 23,534 28,783 30,983
======== ======== ========
Basic and diluted net loss per share:
Loss from continuing operations ...................... $ (1.75) $ (1.07) $ (1.18)
Net (loss) income from discontinued operations ....... (0.27) (0.32) 0.14
-------- -------- --------
Net loss before cumulative effect of change in
accounting principle .............................. (2.02) (1.39) (1.04)
Cumulative effect of change in accounting principle .. -- -- (0.98)
-------- -------- --------
Basic and diluted net loss per share .................... $ (2.02) $ (1.39) $ (2.02)
======== ======== ========
Basic loss per share excludes the effect of restricted stock subject to
repurchase from the weighted average shares of common stock outstanding. The
following table sets forth common stock equivalents that are not included in the
diluted net loss per share calculation above because to do so would be
antidilutive for the periods presented:
(In thousands)
Common Stock Equivalents: Year Ended December 31,
-----------------------
2000 2001 2002
---- ---- ----
Common stock warrants ...................... 1,159 1,929 1,929
Common shares subject to repurchase ........ 292 140 20
Employee stock options ..................... 3,112 4,438 3,750
----- ----- -----
Potentially dilutive shares ............. 4,563 6,507 5,699
===== ===== =====
INCOME TAXES
Deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities, and on tax
loss and credit carryforwards. They are measured using the enacted tax laws and
rates applicable to the periods in which the differences are expected to
reverse. The Company provides for a valuation allowance, if necessary, to reduce
deferred tax assets to their estimated realizable value.
44
CONCENTRATIONS OF CREDIT RISK
The Company reviews the credit histories of potential customers prior to
extending credit and maintains allowances for potential credit losses. For the
years ended December 31, 2000, 2001 and 2002, no single customer accounted for
more than 10% of the Company's revenues and there were no significant accounts
receivable from a single customer. The Company maintains its cash and cash
equivalents in bank accounts in amounts, which, at times, may exceed federally
insured limits. The Company has not experienced any losses in such accounts.
FAIR VALUE OF FINANCIAL INSTRUMENTS
For certain financial instruments, including cash and cash equivalents,
accounts receivable, accounts payable and accrued liabilities, recorded amounts
approximate fair value due to the relatively short maturity periods of these
instruments.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. These estimates and assumptions affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities
and the reported amounts of revenues and expenses. Actual results could differ
from those estimates.
RECENT ACCOUNTING PRONOUNCEMENTS
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 was January 1, 2003
and the adoption of this statement did not have a material impact on the
Company's results of operations, financial position or cash flows.
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 was 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.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure - an amendment of SFAS No.
123." This statement amends SFAS No. 123, "Accounting for Stock-Based
Compensation," to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, this statement amends the disclosure requirements of
SFAS No. 123 to require prominent disclosure in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The
disclosure provisions of SFAS No. 148 are effective for fiscal years ending
after December 15, 2002 and have been incorporated into these consolidated
financial statements and accompanying notes. The Company has elected to apply
the disclosure only provisions of SFAS No. 123 at this time and has no plans to
change our election for the year ending December 31, 2003.
In November 2002, the Emerging Issues Task Force reached a consensus on
Issue 00-21, addressing how to account for arrangements that involve the
delivery or performance of multiple products, services,
45
and/or rights to use assets. Revenue arrangements with multiple deliverables are
divided into separate units of accounting if the deliverables in the arrangement
meet the following criteria: (1) the delivered item has value to the customer on
a standalone basis; (2) there is objective and reliable evidence of the fair
value of undelivered items; and (3) delivery of any undelivered item is
probable. Arrangement consideration should be allocated among the separate units
of accounting based on their relative fair values, with the amount allocated to
the delivered item being limited to the amount that is not contingent on the
delivery of additional items or meeting other specified performance conditions.
The final consensus will be applicable to agreements entered into in fiscal
periods beginning after June 15, 2003 with early adoption permitted. The
provisions of this Consensus are not expected to have a significant effect on
the Company's financial position or operating results.
In November 2002, FASB Interpretation ("FIN") No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" was issued. The interpretation provides
guidance on the guarantor's accounting and disclosure requirements for
guarantees, including indirect guarantees of indebtedness of others. The Company
adopted the disclosure requirements of the interpretation as of December 31,
2002. The accounting guidelines are applicable to guarantees issued after
December 31, 2002 and require that we record a liability for the fair value of
such guarantees in the balance sheet. Adoption of FIN No. 45 did not have a
material impact on the Company's financial position, results of operations or
cash flows.
2. IMPAIRMENT OF GOODWILL AND LONG-LIVED ASSETS
In June 2001, the FASB issued 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 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 accordance with SFAS No. 141, approximately $2.8 million of net
assembled workforce was reclassified from other intangible assets to goodwill on
January 1, 2002.
In the assessment of the fair 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 provided an
estimated 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, Extensis. 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 year ended December
31, 2002. The estimated fair value of the Printing segment's goodwill exceeded
the book value of this asset at January 1, 2002 and therefore, no impairment
charge was recognized in the Printing segment upon adoption of SFAS No. 142.
However, in the third and fourth quarters of 2002, the reporting units in the
Company's Printing segment, continued to underachieve revenue forecasts. The
Company determined that this event was a triggering event and as such, goodwill
in the Printing segment was tested for impairment. As a result, the Company
recorded an impairment charge of approximately $6.1 million in fiscal 2002 to
write down substantially all of the goodwill in its wholly-owned subsidiaries,
Howard Press, Image Press and FA Graphics.
46
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 performs the 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 the Company 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 September 2002, the Company sold its wholly-owned subsidiary, Extensis,
(see Note 3) resulting in the disposal of related goodwill in the Software
segment. The changes in the carrying amount of goodwill for the year ended
December 31, 2002 are as follows:
(In thousands) Segment
---------------------
Printing Software Consolidated
-------- -------- ------------
Goodwill:
Balance as of December 31, 2001 .............. $ 4,099 $ 32,923 $ 37,022
Assembled workforce reclassified as goodwill 2,019 751 2,770
Purchase price earn out .................... 82 -- 82
Transitional impairment charge ............. -- (30,195) (30,195)
Impairment charge .......................... (6,099) -- (6,099)
Sale of Extensis ........................... -- (3,479) (3,479)
-------- -------- --------
Balance as of December 31, 2002 .............. $ 101 $ -- $ 101
======== ======== ========
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, 2000, is as follows:
(In thousands, except per share data) Year ended December 31,
-----------------------
2000 2001 2002
---------- ---------- ----------
Reported net loss ............................... $ (47,455) $ (39,902) $ (62,569)
Add back: Goodwill amortization ................. 119 545 --
Add back: Goodwill amortization from discontinued
operations ................................ 2,028 3,706 --
---------- ---------- ----------
Adjusted net loss ............................... $ (45,308) $ (35,651) $ (62,569)
========== ========== ==========
Reported basic and diluted net loss per share ... $ (2.02) $ (1.39) $ (2.02)
Add back: Goodwill amortization ................. 0.01 0.02 --
Add back: Goodwill amortization from discontinued
operations ................................ 0.09 0.13 --
---------- ---------- ----------
Adjusted basic and diluted net loss per share ... $ (1.92) $ (1.24) $ (2.02)
========== ========== ==========
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 APB No. 30,
"Reporting Results of Operations -Reporting the Effects of Disposal of a Segment
of a Business." SFAS No. 144
47
develops one accounting model for long-lived assets, such as fixed assets and
intangible 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 and fourth quarters of 2002, the reporting units in the
Company's Printing segment, continued to underachieve revenue forecasts. The
Company determined that this event was a triggering event and as such,
long-lived assets in the Printing segment were tested for impairment. The
Company engaged an independent valuation firm to provide an estimated fair value
of all long-lived 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
resulted in the Company recognizing an impairment charge of approximately $10.3
million in fiscal 2002 to write down fixed assets and intangible assets. This
impairment charge consisted of a write down of fixed assets of approximately
$7.4 million, a write down of customer lists of approximately $2.3 million and a
write down of capitalized patent costs of approximately $630,000.
Impairment Charge
Year Ended December 31, 2002:
(In thousands)
- --------------
Goodwill .................................................. $ 6,099
Fixed assets .............................................. 7,344
Customer lists ............................................ 2,285
Capitalized patent costs .................................. 630
-------
Total impairment charge ................................ $16,358
=======
3. 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 $9.1 million. In addition,
Celartem will pay the Company up to an additional $2.0 million over the next two
years, if Extensis meets certain revenue targets. These conditional payments
have not been accrued and will be recognized as additional gain if and when the
Company receives the payments.
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 consolidated statements of operations and balance sheets relating to
discontinued operations are as follows:
(In thousands)
Statement of operations data: Year Ended December 31,
-----------------------
2000 2001 2002
-------- -------- --------
Revenues ..................................... $ 8,870 $ 12,046 $ 8,894
(Loss) income from discontinued operations ... (6,379) (9,125) 842
Gain from sale of Extensis ................... -- -- 3,466
-------- -------- --------
Net (loss) income from discontinued operations $ (6,379) $ (9,125) $ 4,308
======== ======== ========
48
(In thousands)
December 31,
------------
Balance Sheet 2001 2002
---- ----
Current assets ................................ $ 2,073 $ --
Property and equipment, net ................... 939 --
Other assets .................................. 34,875 --
------- ----
Total assets ............................... $37,887 $ --
======= ====
Current liabilities ........................... $ 1,519 $ --
Shareholders' equity .......................... 36,368 --
------- ----
$37,887 $-
======= ====
4. INVENTORIES:
Inventories consisted of the following:
(In thousands) December 31,
------------
2001 2002
---- ----
Raw materials and supplies ................... $1,254 $ 790
Work-in-process .............................. 568 474
Finished goods ............................... 1,113 784
------ ------
$2,935 $2,048
====== ======
5. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following:
(In thousands) December 31,
------------
2001 2002
-------- --------
Computer hardware .......................................... $ 9,046 $ --
Computer software .......................................... 9,271 --
Production machinery and equipment ......................... 5,396 2,387
Leased production machinery ................................ -- 448
Office furniture and equipment ............................. 1,882 19
Leasehold improvements ..................................... 3,718 5
-------- --------
29,313 2,859
Less accumulated amortization of leased production machinery -- (19)
Less accumulated depreciation and amortization ............. (12,820) (171)
-------- --------
Property and equipment, net ................................ $ 16,493 $ 2,669
======== ========
Depreciation and amortization expense for continuing operations for the
years ended December 31, 2000, 2001 and 2002 was approximately $5.3 million,
$7.3 million and $5.9 million, respectively. Depreciation and amortization
expense for discontinued operations for the years ended December 31, 2000, 2001
and 2002 was approximately $316,000, $593,000 and $301,000. In accordance with
SFAS No. 144, the Company wrote off approximately $7.4 million of fixed assets
in 2002 as an impairment charge. See Note 2.
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
49
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 in fiscal
2001.
During 2002, the Company determined that certain property and equipment,
primarily leasehold improvements related to surrendered office space, furniture
and equipment would not provide future benefit to the Company. Accordingly,
approximately $1.1 million was written off as a loss on disposal of property and
equipment, and is included in general and administrative expenses in fiscal
2002.
6. OTHER INTANGIBLE ASSETS:
The carrying amount and accumulated amortization of the Company's
intangible assets other than goodwill as of December 31, 2001 and 2002 are as
follows:
(In thousands) December 31, 2001 December 31, 2002
----------------- -----------------
Carrying Accumulated Book Carrying Accumulated Book
Amount Amortization Value Amount Amortization Value
--------- ----------- --------- ---------- ----------- ---------
Customer list................. $ 5,200 $ 1,536 $ 3,664 $ 750 $ 150 $ 600
Assembled workforce........... 4,358 1,588 2,770 - - -
Technology.................... 2,060 1,047 1,013 - - -
Patents and other............. 1,421 555 866 - - -
--------- ----------- --------- ---------- ----------- ---------
$ 13,039 $ 4,726 $ 8,313 $ 750 $ 150 $ 600
========= =========== ========= ========== =========== =========
Amortization expense for continuing operations for the years ended
December 31, 2000, 2001 and 2002 was approximately $811,000, $1.3 million and
$794,000, respectively. Amortization expense for discontinued operations for the
years ended December 31, 2000, 2001 and 2002 was approximately $880,000, $1.8
million and $500,000, respectively. Amortization expense is expected to be
$120,000 per year for the next five years. The Customer list will be fully
amortized at December 31, 2007.
During 2002, the Company abandoned certain copyrights. Accordingly,
approximately $170,000 was written off as a loss on disposal of copyrights, and
is included in general and administrative expenses in fiscal 2002.
In accordance with SFAS 142, assembled workforce was reclassified to
goodwill on January 1, 2002. In accordance with SFAS No. 144, the Company
recorded an impairment charge to write down approximately $2.3 million of
customer lists and $630,000 of capitalized patent costs in fiscal 2002. See Note
2. All of the Company's capitalized technology assets were sold with Extensis in
September 2002. See Note 3.
7. ACCRUED LIABILITIES:
Accrued liabilities consisted of the following:
(In thousands) December 31,
------------
2001 2002
------ ------
Accrued payroll and related benefits ............. $1,644 $1,549
Sales and excise taxes payable ................... 174 253
Deferred revenues ................................ 440 117
Customer deposits ................................ 19 185
Other ............................................ 655 935
------ ------
$2,932 $3,039
====== ======
50
8. NOTES PAYABLE AND CAPITAL LEASE OBLIGATION:
Notes payable consisted of the following:
(In thousands) December 31,
------------
2001 2002
---- ----
Revolving credit line payable to bank.................. $ 5,000 $ --
On December 27, 2001, the Company entered into a loan agreement with a
bank for a $5.0 million variable rate revolving line of credit collateralized by
the Company's assets excluding the assets of Extensis and Image Press. This line
of credit expired on December 31, 2002.
Capital lease obligation consisted of the following:
(In thousands) December 31,
------------
2001 2002
-------- -----
Gross capital lease obligation ................... $ -- $ 268
Less imputed interest ............................ -- (56)
-------- -----
Present value of minimum lease payments .......... -- 212
Less current portion ............................. -- (37)
-------- -----
Long-term capital lease obligation ............... $ -- $ 175
======== =====
In November 2002, Howard Press entered into a lease agreement with a
leasing company to finance a portion of the purchase of production machinery.
Total principal financed was approximately $218,000 for a term of 60 months at
an imputed interest rate of approximately 8.5%. ImageX, Inc. provided a
guarantee for this lease.
Interest expense for continuing operations for the years ended December
31, 2000, 2001, and 2002 was approximately $237,000, $334,000 and $105,000,
respectively.
9. INCOME TAXES:
At December 31, 2002, the Company had net operating loss carryforwards of
approximately $117.8 million which will begin expiring in 2010 through 2022.
Utilization of net operating loss carryforwards may be subject to certain
limitations under Section 382 of the Internal Revenue Code. The following is a
reconciliation of the income tax benefit based on the statutory Federal rate:
Year Ended December 31,
-----------------------
2000 2001 2002
---- ---- ----
Federal income tax benefit at statutory rate............................. (34) % (34)% (34)%
Change in valuation allowance............................................ 24 24 15
Amortization of deferred compensation.................................... 3 5 -
Amortization of goodwill including impairments........................... 7 5 19
-------------------------------
-- % -- % -- %
===============================
51
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial accounting
purposes and the amounts used for income tax purposes. The Company has recorded
a valuation allowance against its net deferred tax assets due to the uncertainty
surrounding the ultimate realization of such assets. Management evaluates, on a
quarterly basis, the recoverability of the net deferred tax assets and the
amount of the valuation allowance. At such time as it is determined that it is
more likely than not that the net deferred tax assets are realizable, the
valuation allowance will be reduced. The effect of temporary differences and
carryforwards that give rise to deferred tax assets and liabilities are as
follows:
(In thousands) December 31,
------------
2000 2001 2002
-------- -------- --------
Deferred income tax assets:
Net operating loss carryforwards ..... $ 27,624 $ 34,487 $ 40,058
Credit carryforwards ................. 308 308 --
Accrued compensation and benefits .... 280 132 309
Stock-based compensation ............. 276 20 213
Provision for doubtful accounts ...... 211 314 70
Depreciation ......................... -- -- 4,741
Other ................................ 18 18 42
-------- -------- --------
Total ............................ 28,717 35,279 45,433
-------- -------- --------
Deferred income tax liabilities:
Depreciation ......................... (1,596) (1,382) (413)
-------- -------- --------
Total ............................ (1,596) (1,382) (413)
-------- -------- --------
Net deferred tax assets .............. 27,121 33,897 45,020
Valuation allowance .................. (27,121) (33,897) (45,020)
-------- -------- --------
$ -- $ -- $ --
======== ======== ========
10. RELATED PARTY TRANSACTIONS:
In November 1998, the Company issued 500,000 shares of common stock to an
officer of the Company in exchange for a promissory note in the amount of
$200,000. See Note 12.
11. EMPLOYEE BENEFITS:
Defined Contribution Plan
The Company has a 401(k) Retirement Plan which covers substantially all
eligible employees. This plan is a defined contribution profit sharing plan in
which all eligible participants may elect to have a percentage of their
compensation contributed to the plan, subject to certain guidelines issued by
the Internal Revenue Service. The Company can contribute to the plan at the
discretion of the Board of Directors. There were no contributions made by the
Company during 2000, 2001 or 2002.
Employee Stock Purchase Plan
The Company has an Employee Stock Purchase Plan (the "ESPP") for all
eligible employees. The ESPP permits eligible employees of the Company to
purchase common stock at not less than 85% of fair market value as defined in
the plan through payroll deductions of up to 15% of their compensation, provided
that no employee may purchase common stock with a fair market value exceeding
$25,000 in any calendar year or exceeding 15% of their gross compensation or
more than 1,200 shares during an offering period. At December 31, 2002,
1,311,882 shares of common stock were authorized under the ESPP. The ESPP
provides for an automatic annual increase in authorized shares on the first day
of the Company's fiscal year equal to the lesser of (i) 100,000 shares,
52
(ii) 0.5% of the average common shares outstanding as used to calculate fully
diluted earnings per share as reported in the Company's financial statements for
the preceding year or (iii) a lesser amount as determined by the Board of
Directors. During fiscal 2000, 154,159 shares were issued under the ESPP at an
average price of $5.75 per share. During fiscal 2001, 189,056 shares were issued
at an average price of $2.38 per share and during fiscal 2002, 68,857 shares
were issued at an average price of $0.59 per share.
Stock Option Plan
The Company has a stock incentive compensation plan (the "Plan"), which
provides for the issuance of stock awards and nonqualified and incentive stock
options for officers, directors, employees, and consultants. As of December 31,
2002, 7,115,885 shares of common stock were authorized under the Plan. The Plan
provides for an automatic annual increase on the first day of the Company's
fiscal year equal to (i) 5% of the adjusted average number of common shares
outstanding as used to calculate fully diluted earnings per share as reported in
the Company's financial statements for the preceding year or (ii) a lesser
amount determined by the Board of Directors. Options under the Plan generally
have been granted at fair market value on the date of grant, expire after ten
years and generally vest over a period of four years. During fiscal 2000, the
Company assumed the stock option plan and the outstanding options of an acquired
company. No additional options will be granted under the assumed plan.
For stock options granted with exercise prices less than fair market value
on the date of grant, the Company recognized amortization of unearned
compensation expense of approximately $1.7 million, $463,000 and $83,000 for the
years ended December 31, 2000, 2001 and 2002, respectively. The fair market
value per share used to calculate compensation expense prior to the Company's
initial public offering was determined by the Company's Board of Directors based
on a number of factors, including, among other things, appraisals by an outside
valuation firm and by reference to the preferred stock values reduced by a
nominal discount factor.
Option activity for the years ended December 31, 2000, 2001 and 2002 is as
follows:
Weighted Average
Shares Exercise Price
------ --------------
Options outstanding, December 31, 1999...................... 1,625,751 $ 5.57
Granted..................................................... 1,752,225 8.80
Options assumed in acquisition.............................. 764,876 9.97
Exercised................................................... (353,893) 0.48
Canceled.................................................... (677,021) 11.58
------------
Options outstanding, December 31, 2000...................... 3,111,938 7.75
Granted..................................................... 2,677,802 1.45
Exercised................................................... (93,906) 0.25
Canceled.................................................... (1,258,236) 6.32
------------
Options outstanding, December 31, 2001...................... 4,437,598 4.56
Granted..................................................... 2,403,329 0.46
Exercised................................................... (45,711) 0.84
Canceled.................................................... (3,045,073) 4.13
------------
Options outstanding, December 31, 2002...................... 3,750,143 2.33
============
Options exercisable at December 31, 2002.................... 1,187,628 $ 4.59
============
Stock awards and options available for grant at
December 31, 2002........................................ 2,995,227
53
The following table summarizes information about options outstanding at
December 31, 2002:
Options Outstanding Options Exercisable
- --------------------------------------------------------------------------- ----------------------------
Weighted Average
Remaining Weighted Weighted
Range of Number Contractual Life Average Number Average
Exercise Prices of Shares (in Years) Exercise Price of Shares Exercise Price
--------------- --------- ---------- -------------- --------- --------------
$ 0.19 - $ 0.20 312,000 9.64 $ 0.20 8,400 $ 0.20
0.21 - 0.21 599,200 9.88 0.21 - -
0.25 - 0.53 432,735 8.99 0.42 77,635 0.38
0.55 - 0.77 391,376 8.81 0.75 53,158 0.65
0.81 - 1.01 333,600 8.55 0.94 158,040 0.95
1.07 - 1.07 705,870 8.54 1.07 249,315 1.07
1.10 - 7.56 817,922 7.35 5.01 516,059 5.28
9.88 - 33.75 157,440 6.69 18.43 125,021 17.98
- --------------------------------------------------------------------------------------------------------------
$ 0.19 - $ 33.75 3,750,143 8.59 $ 2.33 1,187,628 $ 4.59
12. SHAREHOLDERS' EQUITY:
Restricted Common Stock
In November 1998, the Company issued 500,000 shares of common stock to an
officer of the Company at a purchase price of $0.40 per share pursuant to a
promissory note in the amount of $200,000. The note bears interest at 7% and is
due in January 2003. These shares are subject to repurchase by the Company for
$0.40 per share through January 15, 2003, with the shares being subject to
repurchase reduced by 120,000 shares after November 15, 1999, and reduced by
10,000 shares each month following November 15, 1999. At December 31, 2002, the
remaining balance of this note receivable was paid in full by the officer. At
December 31, 2002, 20,000 shares issued to the officer remain subject to
repurchase by the Company.
Common Stock
On February 11, 2000, the Company issued 4,695,595 shares of its common
stock at an offering price of $23.00 per share. This included 695,595 shares of
common stock issued upon exercise of the underwriters' over allotment option.
The net proceeds to the Company from the offering, net of offering costs of
approximately $6.6 million, were approximately $101.4 million.
On June 11, 2001, the Company sold an aggregate of 4,273,504 shares of its
common stock at $1.17 per share in a private placement. In addition, the Company
issued immediately exercisable, seven year warrants representing the right to
purchase an aggregate of 769,231 additional shares of its common stock for $1.17
per share. The sales and issuances of these securities were exempt from
registration under the Securities Act, pursuant to Section 4(2) of the
Securities Act or Regulation D promulgated thereunder, on the basis that the
transactions did not involve a public offering. No underwriters were used in the
financing.
Warrants
In connection with the sale of preferred stock during 1996, 1997, 1998 and
1999 and in connection with common stock sold in June 2001, the Company issued
warrants to purchase common stock. The fair
54
value of the warrants was recorded as a cost of the issuance of the preferred
stock as determined using the Black-Scholes pricing model. Warrants outstanding
and exercisable at December 31, 2002 were as follows:
Exercise
Price Per Share,
Subject to
Number of Shares Adjustment Expiration Date
- ---------------- ---------- ---------------
6,134.................. $ 1.34 None
42,768.................. 4.20 April 8, 2004
21,500.................. 6.00 April 21, 2004
48,165.................. 4.20 April 21, 2004
568,900.................. 3.00 January 8, 2005
290,000.................. 7.50 January 8, 2005
769,231.................. 1.17 January 8, 2005
55,694.................. 4.00 October 1, 2005
75,000.................. 4.00 April 13, 2006
51,301.................. 4.36 May 3, 2008-October 9, 2009
---------
1,928,693
=========
13. COMMITMENTS AND CONTINGENCIES:
Commitments
The Company leases its facilities and certain equipment under
noncancelable operating leases, which expire between April 2003 and December
2007. 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 drawdown 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 year ended
December 31, 2002.
At December 31, 2002, the approximate future rental payments due under the
Company's noncancelable operating leases for the remainder of the lease terms
were as follows:
(In thousands)
Year Ending December 31,
------------------------
2003.......................... $ 1,784
2004.......................... 1,413
2005.......................... 403
2006.......................... 168
2007.......................... 8
Thereafter ................... --
-------
$ 3,776
=======
Total rent expense from continuing operations incurred under operating
leases for continuing operations for the years ended December 31, 2000, 2001 and
2002 was approximately $2.6 million, $3.7 million and $3.1 million,
respectively.
55
At December 31, 2002, contractual commitments associated with the
Company's capital lease obligation including related interest of approximately
$49,000 (See Note 8) and the Company's offsite co-location area for its
telecommunications equipment are as follows:
(In thousands) 2003 2004 2005 2006 2007 Thereafter Total
---- ---- ---- ---- ---- ---------- -----
Capital lease obligation... $ 54 $ 54 $ 54 $ 54 $ 45 $ -- $ 261
Co-location agreement...... 228 -- -- -- -- -- 228
-------------------------------------------------------------------------------------
Total contractual commitments $ 282 $ 54 $ 54 $ 54 $ 45 $ -- $ 489
=====================================================================================
Contingencies
From time to time, the Company is 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 or operating results or cash flows.
14. ACQUISITIONS:
In September 1999, the Company acquired all of the common stock of Image
Press, a privately owned California corporation. In accordance with the terms of
the stock purchase agreement, in September 2000, the Company made a contingent
payment of $780,000 to the former owners of Image Press.
On June 21, 2000, the Company completed the acquisition of Extensis, an
Oregon corporation. Extensis develops and markets software products. The
acquisition was recorded using the purchase method of accounting. The Company
issued 3,541,195 shares of stock and approximately $14.6 million in cash and
$3.4 million in assumed liabilities, resulting in an aggregate purchase price of
approximately $45.4 million, including transaction costs of approximately $3.0
million. In 2001, 215,419 shares held in escrow were returned to the Company,
and the purchase price was reduced by approximately $399,000 as settlement of
Extensis' obligations incurred prior to the acquisition. Of this $399,000
reduction in purchase price, approximately $277,000 was for cash payments made
by the Company on behalf of Extensis' former owners and $122,000 was a non-cash
write down of goodwill. On September 15, 2002, Extensis was sold to Celartem.
See Note 3.
On June 27, 2000, the Company completed the acquisition of certain assets
and liabilities of Howard Press Limited Partnership ("Howard Press"), a Delaware
limited partnership. Howard Press is a full-service printing company. The
acquisition was recorded using the purchase method of accounting. The Company
issued 212,623 shares of stock, paid $12.8 million in cash and assumed $4.9
million in liabilities, resulting in an aggregate purchase price of
approximately $19.1 million, including transaction costs of approximately
$213,000. The sellers of Howard Press were entitled to 5% of online revenues,
that is, certain revenues earned on sales from existing customers of Howard
Press generated by ImageX using its online printing center, to be paid in stock
quarterly through August 2002. The Company paid the former owners of Howard
Press 193,390 shares of common stock in fiscal 2002 pursuant to this agreement.
In accordance with the provisions of APB No. 16, all identifiable assets
and liabilities were assigned a portion of the cost of the acquisitions based on
their respective fair values. The estimated values of identifiable intangibles
such as assembled workforce, customer relationships, web portal, existing
technology and in-process research and development were determined by
independent valuations. The excess of the purchase price over the fair market
value of the assets acquired was allocated to goodwill and was amortized over 10
years using the straight-line method until the adoption of SFAS No. 142 in
January 2002. Intangible
56
assets are amortized on a straight-line basis over their estimated useful lives,
ranging from 3 to 10 years. See Notes 2 and 6.
The allocation of purchase prices for the acquisitions were as follows:
(In thousands) December 31,
2000
-------
Identified intangibles ...................................... $10,320
In-process research and development ......................... 1,062
Goodwill .................................................... 42,002
Tangible assets acquired, net ............................... 11,958
-------
Total purchase price ................................ $65,342
=======
Among the assets purchased in the Extensis acquisition were two in-process
research and development software products valued at approximately $798,000 and
$264,000. Both of these products were between 85% and 90% completed at the date
of acquisition and had no alternative use if not completed successfully. Both
products were completed in fiscal 2000 and generated revenues beginning in the
fourth quarter of 2000. These products were valued using a discounted cash flow
analysis by an independent appraiser and the total value of approximately $1.1
million was expensed as in-process research and development in the second
quarter of 2000 and has been reclassified to discontinued operations.
The following summarizes the unaudited pro forma results of operations, on
a combined basis, as if the Company's acquisition of Extensis and Howard Press
occurred as of the beginning of the period presented. The pro forma information
gives effect to certain adjustments, including amortization of identified
intangibles and goodwill. The pro forma adjustments exclude the effect of the
nonrecurring charge of approximately $1.1 million for purchased in-process
research and development.
(In thousands, except per share data) Year Ended
December 31, 2000
-----------------
(Unaudited)
Revenues:
Revenues from continuing operations ........................ $ 55,064
Revenues from discontinued operations ...................... 16,758
--------
Total revenues .......................................... $ 71,822
========
Pro forma net loss:
Pro forma net loss from continuing operations .............. $(42,201)
Pro forma net loss from discontinued operations ............ (10,090)
--------
Total pro forma net loss ................................ $(52,291)
========
Pro forma basic and diluted net loss per share:
Pro forma basic and diluted net loss per share from
continuing operations ................................... $ (1.67)
Pro forma basic and diluted net loss per share from
discontinued operations ................................. (0.40)
--------
Total pro forma basic and diluted net loss per share .... $ (2.07)
========
This unaudited pro forma information is presented for illustrative
purposes only and is not necessarily indicative of the results of future
operations or results that would have been achieved if the Company had made
these acquisitions at the beginning of January 2000.
57
15. UNAUDITED QUARTERLY INFORMATION:
Presented below are summarized quarterly operating results for fiscal
years 2001 and 2002. Due to the sale of Extensis in September 2002, prior period
results have been reclassified to reflect Extensis' operating results and the
gain on sale as Discontinued Operations.
Quarter Ended
-------------
Mar. 31 Jun. 30 Sep. 30 Dec. 31
------- ------- ------- -------
2001
Revenues....................................................... $ 11,510 $ 12,627 $ 9,702 $ 10,584
Gross profit................................................... 2,068 3,177 1,919 2,577
Loss from continuing operations................................ (12,017) (6,997) (6,432) (5,331)
Net loss from discontinued operations.......................... (3,152) (2,932) (1,859) (1,182)
Net loss....................................................... (15,169) (9,929) (8,291) (6,513)
Basic and diluted net loss per share:
Loss from continuing operations................................ (0.46) (0.25) (0.21) (0.17)
Net loss from discontinued operations.......................... (0.12) (0.11) (0.06) (0.04)
Basic and diluted net loss per share........................... (0.58) (0.36) (0.27) (0.21)
2002
Revenues....................................................... $ 9,092 $ 8,771 $ 7,892 $ 9,133
Gross profit................................................... 1,805 2,146 1,946 2,293
Loss from continuing operations................................ (7,346) (4,438) (10,271) (14,627)
Net (loss) income from discontinued operations................. 116 407 3,796 (11)
Net loss before cumulative effect of change in accounting
principle................................................. (7,230) (4,031) (6,475) (14,638)
Cumulative effect of change in accounting principle............ (30,195) -- -- --
Net loss....................................................... (37,425) (4,031) (6,475) (14,638)
Basic and diluted net loss per share:
Loss from continuing operations................................ (0.24) (0.14) (0.33) (0.47)
Net (loss) income from discontinued operations................. 0.01 0.01 0.12 --
Net loss before cumulative effect of change in accounting
principle................................................... (0.23) (0.13) (0.21) (0.47)
Cumulative effect of change in accounting principle (0.98) -- -- --
Basic and diluted net loss per share........................... (1.21) (0.13) (0.21) (0.47)
16. SUBSEQUENT EVENT
On March 3, 2003, we signed a definitive merger agreement with Kinko's
Washington, Inc., a Washington corporation ("Kinko's Washington") and a
wholly-owned subsidiary of Kinko's Inc., a privately held Delaware corporation
("Kinko's"), the world's leading provider of document solutions and business
services. Under the terms of the agreement, Kinko's Washington will offer to
acquire for cash all the outstanding common shares of ImageX for $0.512 per
common share in a transaction valued at approximately $16.5 million. The
transaction is subject to customary conditions and is expected to be completed
in the second quarter of 2003. In connection with the tender offer and proposed
merger, Kinko's has filed with the SEC a tender offer statement on Schedule TO
(including an offer to purchase, letter of transmittal and related tender offer
documents) and ImageX has filed a solicitation/recommendation statement on
Schedule 14D-9. These documents contain important information and shareholders
of ImageX are advised to carefully read these documents.
58
Item 9. Change in and Disagreements with Accountants on Accounting and Financial
Disclosure
None.
Part III
Item 10. Directors and Executive Officers of the Registrant
Directors
The Board of Directors is divided into three classes, with the members of
each class serving for a staggered three-year term. At each annual meeting of
shareholders of the Company, a class of directors will be elected for a
three-year term to succeed the directors of the same class whose terms are then
expiring. The term of the Class I director expires upon the election and
qualification of a successor director at the annual meeting of shareholders to
be held in 2004. The term of the Class II directors expire upon the election and
qualification of successor directors at the annual meeting of shareholders to be
held in 2005. The term of the Class III directors expire upon the election and
qualification of a successor directors at the annual meeting of shareholders to
be held in 2003.
The Board of Directors currently consists of one Class I director (Garret
P. Gruener), three Class II directors (F. Joseph Verschueren, Elwood D. Howse,
Jr., and Bernee D. L. Strom), and two Class III directors (Richard P. Begert and
Richard R. Sonstelie). There are no family relationships among any of our
directors or executive officers. Information regarding each of the members of
the Board of Directors is set forth below.
Richard P. Begert (age 46) has been President, Chief Executive Officer and
a director of ImageX since November 1998. From 1993 to 1998, Mr. Begert was
Regional President of AT&T Wireless Services (and its predecessor, McCaw
Cellular Communications, Inc.), a telecommunications company. From 1986 to 1993,
Mr. Begert held various other senior positions at McCaw Cellular. Mr. Begert
received his BA in business administration from the University of Washington.
Garrett P. Gruener (age 48) has served as a director of ImageX since April
1999. He is a Founder and Managing Director of Alta Partners, a venture capital
partnership investing in information technologies and life science companies.
Prior to founding Alta Partners in 1996, Mr. Gruener was a Partner at Burr,
Egan, Deleage & Co., a venture capital firm, which he joined in 1992 and served
as Vice President from 1992 to 1997. Mr. Gruener was a consultant to various
corporations and start-up companies from 1988 to 1992. He founded Virtual
Microsystems, Inc. in 1982, a successful software company that merged with
another DEC-oriented software company in 1987. From 1978 to 1982, he worked for
Integrated Automation in a variety of capacities including Director of
Marketing. Mr. Gruener also serves as Chairman of the Board and Secretary of Ask
Jeeves, Inc. Mr. Gruener received his BS in political science from the
University of California, San Diego and his MA in political science from the
University of California, Berkeley.
Elwood D. Howse, Jr. (age 62) has been a director of ImageX since December
1996. Mr. Howse served as President of Cable & Howse Ventures, a Northwest
venture capital management firm, from 1981 to 1997 and as Managing Member since
1997. He has served as a director of BSquare Corporation (Nasdaq NM: BSQR) which
accelerates the development, deployment, and management of next generation smart
devices and applications, since December 2002 and of OrthoLogic Corporation, a
manufacturer and marketer of orthopaedic products, since September 1987 and of
Applied Microsystems Corporation, a manufacturer of microprocessors, which
provides high-level software development tools and solutions that expedite
complex
59
software projects, since February 1992. He also serves as a director of several
private companies and charitable institutions. Mr. Howse received his BS in
engineering and his MBA from Stanford University.
Richard R. Sonstelie (age 57) has been a director of ImageX since June
1998. Mr. Sonstelie served as Chairman of the Board of Puget Sound Energy, Inc.,
a power company, from February 1997 through March 2000 and as a director from
1987 to January 2000. His prior positions with Puget Sound Energy included Chief
Executive Officer from 1992 to 1998, Chief Operating Officer from 1991 to 1992,
Chief Financial Officer from 1987 to 1991 and Executive Vice President from 1985
to 1987. Mr. Sonstelie received his BS from the United States Military Academy
at West Point, his MS in nuclear engineering from Massachusetts Institute of
Technology and his MBA from Harvard University.
Bernee D. L. Strom (age 55) has been a director of ImageX since May 1999.
Ms. Strom has served as President and Chief Executive Officer of the Strom
Group, Inc., a venture investment and business advisory firm specializing in
high technology since 1990. Ms. Strom was Chief Executive Officer of
iCopyright.com, a provider of Internet content services from July 2000 until
January 2001. Prior to that, she was President and Chief Operating Officer of
InfoSpace.com, Inc. from November 1998 through December 1999 and President of
InfoSpace Ventures LLC from January 2000 though June 2000. From April 1995 to
June 1997, Ms. Strom served as President and Chief Executive Officer of USA
Digital Radio, LP, a partnership of Westinghouse Electric Corporation and
Gannett Co., Inc. that develops technology for AM and FM digital radio
broadcasting. Ms. Strom also serves as a director of the Polaroid Corporation, a
photographic equipment and supply company and Hughes Electric. Ms. Strom
received her BS in mathematics and history, her MA and her Ph.D. (ABD) in
mathematics and mathematics education from New York University and her MBA from
the Anderson School at the University of California, Los Angeles.
F. Joseph Verschueren (age 51) was a Co-Founder of ImageX, has been a
director of ImageX since its inception in 1995 and has served as Chairman of the
Board since August 1997. In addition, he served as President from September 1996
to November 1998 and Chief Executive Officer from August 1997 to November 1998.
Mr. Verschueren served as Chief Executive Officer of Parallel Communications
Inc., an advertising agency, from 1992 to 1996 and as Chairman of the Board of
Parallel Communications until July 1999. Mr. Verschueren received his BA in
English and a BA in philosophy from Gonzaga University.
Executive Officers
The remaining information required by this Item is set forth in Part I of
this report under the caption "Our Executive Officers."
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires ImageX's
officers, directors and persons who own more than 10% of a registered class of
ImageX's equity securities to file reports of ownership and changes in ownership
with the Securities and Exchange Commission. Officers, directors and
greater-than-10% shareholders are required by SEC regulation to furnish ImageX
with copies of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms it received, or
written representations from certain reporting persons that no forms were
required for those persons, ImageX, to the best of its knowledge, believes that
during fiscal year 2002 its officers, directors and greater-than-10% beneficial
owners complied with all applicable filing requirements of Section 16(a). ImageX
has concluded that no transactions gave rise to liability under Section 16(b) of
the Exchange Act for recapture of short-swing profits.
60
Item 11. Executive Compensation
The following table provides information concerning the compensation
received for services rendered to ImageX in all capacities for the three fiscal
years ended December 31, 2002 by our Chief Executive Officer and each of our
four most highly compensated executive officers other than our Chief Executive
Officer whose compensation exceeded $100,000 in fiscal year 2002.
Summary Compensation Table
Long-Term
Compensation
Annual Compensation Awards
------------------- ------
Securities
Underlying
Name and Principal Position Year Salary Bonus Options
- --------------------------- ---- ------ ----- -------
Richard P. Begert......................................... 2002 $252,083 $137,813 75,000
President, Chief Executive Officer and Director 2001 264,583 100,000 150,000
2000 254,167 150,000 100,000
Timothy G. Dowling (1).................................... 2002 192,000 133,265 210,000
Chief Operating Officer 2001 141,667(2) 80,000 200,000
Cory E. Klatt............................................. 2002 153,666 46,400 10,000
Chief Technology Officer 2001 159,583 35,000 100,000
2000 140,000 -- --
Gary L. Madson............................................ 2002 149,825 15,600 90,000
Vice President, Operations 2001 151,500 45,000 80,000
2000 47,211(3) -- 50,000
Mariam J. Naini........................................... 2002 148,865 4,883 110,000
Vice President, General Counsel and Secretary 2001 150,417 43,200 80,000
2000 136,250 54,000 55,000
- ----------
(1) Mr. Dowling resigned on December 31, 2002.
(2) Mr. Dowling joined ImageX in April 2001. This represents salary earned as
of December 31, 2001. Additionally, the Company paid relocation expenses
for Mr. Dowling of $77,083.33.
(3) Mr. Madson joined ImageX in September 2000. This represents salary earned
as of December 31, 2000.
61
Option Grants in Last Fiscal Year
The following table sets forth information regarding stock options we
granted to the officers listed in the Summary Compensation Table during the
fiscal year ended December 31, 2002.
Individual Grants
---------------------------------------------------------
Potential Realizable
Value at Assumed
Number of Percent of Annual Rates of
Securities Total Options Exercise Price Appreciation
Underlying Granted to Price for Option Term (3)
Options Employees in Per Exercise ----------------------
Name Granted (1) Fiscal Year Share (2) Date 5% 10%
---- ----------- ----------- --------- ---- -- ---
Richard P. Begert........ 75,000 3.1% $0.77 02/15/12 $36,000 $92,250
Timothy G. Dowling....... 10,000 8.7 0.77 02/15/12 66,800 180,300
200,000 0.53 05/15/12
Cory E. Klatt............ 10,000 0.4 0.77 02/15/12 4,800 12,300
Gary L. Madson........... 10,000 3.7 0.77 02/15/12 29,600 79,500
80,000 0.53 05/15/12
Mariam J. Naini.......... 10,000 4.6 0.77 02/15/12 35,800 96,300
100,000 0.53 05/15/12
- ----------
(1) The options granted to the officers listed in the table vest according to
our customary vesting schedule for all employees as follows: (a) 24% of
the options vest and become exercisable one year from the date of grant,
and (b) an additional 2% of the options vest and become exercisable each
month thereafter.
Unless individual letter agreements provide otherwise, in the event of
certain corporate transactions, such as a merger or sale of ImageX, each
outstanding award under our Amended and Restated 1996 Stock Incentive
Compensation Plan will automatically accelerate and become 100% vested and
exercisable immediately before the corporate transaction, unless (a) the
option is assumed, continued or replaced with a comparable award by the
successor corporation or the parent of the successor corporation or (b)
acceleration will render unavailable "pooling of interest" accounting for
a transaction that otherwise qualifies for this accounting treatment. Any
option that is assumed, continued or replaced with a comparable award in
the corporate transaction will accelerate if the holder's employment or
services are terminated by the successor corporation without cause or by
the holder voluntarily with good reason within two years of the corporate
transaction.
(2) Options were granted at an exercise price equal to the fair market value
of our common stock at the time of grant.
(3) The dollar amounts under these columns result from calculations at the 5%
and 10% rates required by Securities Exchange Commission regulations and
are not intended to forecast possible future appreciation, if any, of the
common stock price. The amounts represent hypothetical appreciation in the
value of the common stock from the fair market value of our common stock
at the time of grant. The information in this table assumes all options
are exercised at the end of each of their 10-year terms. Actual gains, if
any, on stock option exercises depends on the future performance of the
common stock and overall stock market conditions, as well as the option
holders' continued employment through the vesting period. The amounts
shown in this table may not be achieved.
62
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values
The following table sets forth information regarding stock option
exercises in 2002 and unexercised stock options held by the officers listed in
the Summary Compensation Table as of December 31, 2002.
Value of Unexercised
Number of Securities Underlying In-the-Money
Unexercised Options at Options at Fiscal
Shares Fiscal Year-End Year-End (2)
Acquired Value ------------------------------ ----------------------------
Name on Exercise Realized (1) Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------ ----------- ------------- ----------- -------------
Richard P. Begert.......... -- -- 162,999 212,000 $0 $0
Timothy G. Dowling......... -- -- 80,000 120,000 0 0
Cory E. Klatt.............. -- -- 52,667 82,333 0 0
Gary L. Madson............. -- -- 55,400 164,600 0 0
Mariam J. Naini............ -- -- 83,833 196,167 0 0
- ----------
(1) "Value Realized" represents the fair value of the underlying securities on
the date of exercise minus the exercise price of the options. The fair
value of our common stock is assumed to equal to the last reported closing
price of our common stock on the NASDAQ SmallCap Market on the date of
exercise.
(2) Amounts are based on the December 31, 2002 last reported closing price of
our common stock of $0.22 per share as reported on the NASDAQ SmallCap
Market.
Compensation of Directors
We reimburse our directors for all reasonable expenses incurred in
connection with their attendance at board and committee meetings. Under our 1999
Non-employee Directors Stock Option Program, each of our non-employee directors
is entitled to receive stock options as set forth below. The program provides
for the grant of an option to purchase 12,500 shares of common stock to each of
our non-employee directors upon their initial election or appointment to the
board, then annually, we grant each non-employee director who continues to serve
on the board an additional option to purchase 5,000 shares of common stock. All
options granted under the program fully vest on the grant date. All options
granted under the program expire ten years from the date of the option grant.
The exercise price for these options is the fair market value of our common
stock on the grant date. Directors do not receive any annual stipend or other
remuneration.
Employment Contracts
In November 2002, ImageX entered into an employment agreement with Ms.
Naini. The agreement entitles Ms. Naini to receive a lump sum severance payment
in an amount equal to 12 months salary, plus any bonus Ms. Naini would have
received based on the achievement of performance-based goals determined by the
Company (prorated for the length of service during the fiscal year in which Ms.
Naini is no longer employed by the Company), plus medical and dental premiums
for 12 months upon the occurrence of certain events, including: (a) termination
of Ms. Naini's employment without cause; (b) the liquidation or dissolution of
the Company; (c) a diminution of the Company's cash-on-hand below $5,000,000;
(d) the closing of the sale of all or substantially all of the Company's assets
or a majority of the Company's stock; (e) the Board of Directors' elimination of
the positions of the Chief Executive Officer and Chief Financial Officer; or (f)
Mr. Begert's separation of employment with the Company. The Company expects that
its obligation to make the foregoing severance payment will be triggered by the
transactions contemplated in the definitive merger agreement with Kinko's.
63
Report on Executive Compensation by the Compensation Committee
The Compensation Committee of the Board of Directors has furnished the
following report on executive compensation. The Compensation Committee, which is
composed of two non-employee independent directors, establishes and reviews the
compensation and benefits of the Chief Executive Officer and consults with the
Chief Executive Officer with respect to the compensation and benefits for other
officers of the Company. The Compensation Committee also considers incentive
compensation plans and carries out duties assigned to the committee under our
option plans and our employee stock purchase plan. The Compensation Committee
considers internal and external information in determining compensation.
Compensation Philosophy
Our compensation policies are based on the belief that the interests of
employees should be closely aligned with those of our shareholders. The
compensation policies are designed to achieve the following objectives:
o Offer compensation opportunities that attract highly qualified
employees, reward outstanding initiative and achievement, and retain
the leadership and skills necessary to build long-term shareholder
value.
o Maintain a market-competitive compensation structure in line with
corporate business objectives. The focus is weighted on incentive
programs and based on results as measured by both the annual and
long-term financial performance of ImageX and the increase in
shareholder value as measured principally by the trading price of
our common stock.
o Further our short and long-term strategic goals and values by
aligning compensation with business objectives and individual
performance.
Compensation Program
Our compensation program has three major integrated components: base
salary, annual incentive awards and long-term incentives.
Base Salary / Executive Officer Compensation. The Committee bases the
combination of base salary and incentive bonus paid to the Chief Executive
Officer on the approximate range of cash remuneration paid to executives
performing similar duties for companies of comparable size in the Pacific
Northwest. During fiscal year 2002, the Chief Executive Officer's base
compensation was $252,083. Additionally in 2002, he received a performance-based
bonus of $137,813 based on the success of meeting 2001 objectives in the
following areas: 40% financial performance, 20% funding objectives, 20% business
development objectives and 20% other corporate objectives. During fiscal year
2002, Mr. Begert's performance based bonus was based on the success of meeting
objectives in the following areas: 40% financial performance, 30% investor
relations objectives, 20% business development objectives and 10% team
development. Review of Mr. Begert's success in meeting objectives for the fiscal
year 2002 and payment of any performance-based bonus has not yet been completed.
During fiscal year 2002, Mr. Begert was granted a stock option to purchase
75,000 shares of ImageX common stock at an exercise price of $0.77, the fair
market value of our common stock on the date of the grant. Mr. Begert's base
salary, annual incentive award and long-term compensation for future years will
be determined by the Compensation Committee based upon the same factors employed
by the Committee for executive officers generally as described in the following
paragraph.
Base salaries for executive officers other than the Chief Executive
Officer are determined annually by the Chief Executive Officer and reviewed and
approved by the Compensation Committee. In determining salary
64
adjustments for executive officers, the Chief Executive Officer and the
Compensation Committee consider the individual officer's historical performance
against his or her job responsibilities and personal compensation packages
provided to executives performing similar duties for companies of comparable
size in the Pacific Northwest, the rate of inflation, salary adjustments to be
awarded to other executive officers of the Company and other subjective factors.
Annual Incentive Awards. Annual cash bonus awards are based on individual
employee goals and corporate objectives. For 2002, there was no formal bonus
program established for employees.
Long-Term Incentives. The Compensation Committee views stock options as an
important part of its long-term, performance-based compensation program. The
Compensation Committee believes that stock ownership is an excellent vehicle for
compensating its officers and employees. We provide long-term incentives through
our Amended and Restated 1996 Stock Incentive Compensation Plan and our 1999
Employee Stock Purchase Plan, the purpose of which is to create a direct link
between executive compensation and increases in shareholder value. Stock options
are granted at fair market value and vest in installments over 50 months. Thus,
the value of the shareholders' investment must appreciate before the optionee
receives any financial benefit. Additionally, the employee must remain in our
employ for the period required for the stock option to be exercisable, thus
providing an incentive to remain in our employ. When determining option awards
for an executive officer, the Compensation Committee considers the executive's
current contribution to Company performance, the anticipated contribution to
meeting our long-term strategic performance goals, and industry practices and
norms. Long-term incentives granted in prior years and existing levels of stock
ownership are also taken into consideration. Because the receipt of value by an
executive officer under a stock option is dependent upon an increase in the
price of our common stock, this portion of the executive's compensation is
directly aligned with an increase in shareholder value. The Compensation
Committee believes that such stock plans align the interests of the employees
with the long-term interests of the shareholders.
Under the Omnibus Budget Reconciliation Act of 1993, the federal income
tax deduction for certain types of compensation paid to the Chief Executive
Officer and four other most highly compensated executive officers of publicly
held companies is limited to $1.0 million per officer per fiscal year unless
such compensation meets certain requirements. The Committee is aware of this
limitation and believes no compensation paid by the Company during fiscal 2003
will exceed the $1.0 million limitation.
March 7, 2003
COMPENSATION COMMITTEE
Richard R. Sonstelie, Chairman
Bernee D. L. Strom
65
Performance Graph
Set forth below is a line graph comparing the cumulative return to the
shareholders of ImageX's common stock with the cumulative return of (a) the
NASDAQ U.S. Index and (b) the Inter@ctive Week Internet Index for the period
commencing August 26, 1999 (the date of ImageX's initial public offering)
through the end of fiscal year 2002.
Comparison of Cumulative Total Return among ImageX, Inc.,
The NASDAQ Stock Market (U.S.) Index
and The Inter@ctive Week Internet Index (1)
[PERFORMANCE CHART OMITTED]
- ----------
(1) The Company previously tracked total returns relative to the JP Morgan HQ
Internet 100 Index (the "JP Morgan Index"), which has since been
discontinued. The Company has selected the Inter@ctive Week Internet Index
(the "Inter@ctive Index") as a replacement. Because the JP Morgan Index
has been discontinued, the Company is unable to provide a comparison of
the total return of the JP Morgan Index relative to the Inter@ctive Index.
66
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table summarizes certain information regarding the
beneficial ownership of our common stock as of March 6, 2003 for
o our Chief Executive Officer;
o our top four most highly compensated executive officers (other than
our chief executive officer) whose compensation exceeded $100,000 in
2002;
o each of our directors;
o all our directors and executive officers as a group; and
o each person or group that we know owns more than 5% of our common
stock.
Beneficial ownership is determined in accordance with rules of the
Securities and Exchange Commission ("SEC") and includes shares over which the
indicated beneficial owner exercises voting and/or investment power. Shares of
common stock subject to options or warrants currently exercisable or exercisable
within 60 days of March 6, 2003 are deemed outstanding for computing the
percentage ownership of the person holding the options or warrants, but are not
deemed outstanding for computing the percentage ownership of any other person.
Unless otherwise indicated, any listed executive officers or director of ImageX
can be reached at the principal offices of ImageX.
Shares of ImageX, Inc.
Common Stock
------------
Amount and
Nature of Percent of
Beneficial Class
Name and Address of Beneficial Owners Ownership (1)
- ------------------------------------- --------- ---
Executive Officers and Directors
Richard P. Begert(2)......................................................... 715,199 2.3%
Timothy G. Dowling........................................................... 0 *
Cory Klatt (3) .............................................................. 534,378 1.7
Gary Madson (4) ............................................................. 78,200 *
Mariam J. Naini (5) ......................................................... 109,398 *
Garrett P. Gruener (6)....................................................... 5,334,903 17.1
Elwood D. Howse, Jr. (7)..................................................... 306,328 1.0
Richard R. Sonstelie (8)..................................................... 74,667 *
Bernee D. L. Strom (9)....................................................... 32,500 *
F. Joseph Verschueren (10) .................................................. 469,900 1.5
All directors and executive officers as a group (10 persons) (11)............ 7,655,473 24.5
Other Principal Shareholders
Entities affiliated with Acorn Ventures, Inc. (12)........................... 3,483,177 11.2
1309 114th Avenue SE, Suite 200
Bellevue, WA 98004
67
- ----------
* Less than 1%.
(1) Based on 31,211,967 outstanding shares as of March 6, 2003.
(2) Includes 207,999 shares issuable pursuant to options exercisable within 60
days of March 6, 2003 ("Vested Options").
(3) Includes 72,778 Vested Options.
(4) Includes 75,800 Vested Options.
(5) Includes 107,589 Vested Options.
(6) Includes 4,650,085 outstanding shares held by, and 607,707 shares issuable
pursuant to warrants exercisable within 60 days of March 6, 2003 ("Vested
Warrants") held by Alta California Partners II, LP and 54,433 outstanding
shares and 7,678 Vested Warrants held by Alta Embarcadero Partners II,
LLC. Mr. Gruener is a general partner of Alta California Management
Partners II, LP, which is the general partner of Alta California Partners
II, LP. Mr. Gruener is also a member of Alta Embarcadero Partners II, LLC.
Mr. Gruener disclaims beneficial ownership of these shares except to the
extent of his pecuniary interest in these shares arising from his interest
in Alta California Management Partners II, LP. Also includes 15,000 Vested
Options.
(7) Includes 15,000 Vested Options. Also includes 37,000 outstanding shares
held by Mr. Howse's spouse and 7,150 Vested Warrants held by Howse Family
Partnership. Mr. Howse is a general partner of Howse Family Partnership.
(8) Includes 15,000 Vested Options and 58,409 outstanding shares and 1,258
Vested Warrants held jointly by Mr. Sonstelie and his spouse.
(9) Includes 27,500 Vested Options.
(10) Includes 10,000 Vested Options.
(11) Includes 546,666 Vested Options and 623,793 Vested Warrants.
(12) Includes 936,410 outstanding shares and 870,946 Vested Warrants held by
Acorn Ventures IX, LLC. Also includes 1,461,906 outstanding shares and
6,500 Vested Warrants held by Internet Ventures, LLC. Acorn Ventures, Inc.
is a member of Acorn Ventures IX, LLC and Internet Ventures, LLC.
68
Equity Compensation Plan Information
The following table sets forth, as of December 31, 2002, information
concerning the Company's shareholder and non-shareholder approved equity
compensation plans related to the number of shares underlying outstanding
options and other rights to acquire Company stock, the weighted average exercise
price of those options and other rights and the number of shares remaining
available for issuance under such plans.
Number of shares
remaining available
for future issuance
under equity
compensation plans
(excluding shares to
Number of shares to be Weighted-Average be issued upon
issued upon exercise of exercise price of exercise of
outstanding options and outstanding options outstanding options
Plan Category other rights and other rights and other rights)
- ---------------------------------------- ------------------------- ---------------------- ------------------------
Equity compensation plans approved by
the Company's shareholders (1)........ 3,750,143 $ 2.33 3,895,126
Equity compensation plans not approved
by the Company's shareholders......... -- -- --
------------------------- ---------------------- ------------------------
Total.............................. 3,750,143 $ 2.33 3,895,126
- ----------
(1) During fiscal 1999 and 2000, the Company assumed the stock option plans
and the outstanding options of two companies it acquired. Options
outstanding at December 31, 2002 under these plans were 67,712 with a
weighted average exercise price of $4.52. No additional options will be
granted under the assumed plans.
69
Item 13. Certain Relationships and Related Transactions
ImageX has entered into indemnification agreements with each of its
executive officers and directors. Under these agreements, ImageX indemnifies any
individual made a party to a proceeding because that individual is or was a
director or executive officer of ImageX, and will advance or reimburse
reasonable expenses incurred by that individual in advance of the final
disposition of the proceeding, to the full extent permitted by applicable law.
In November 2002, ImageX entered into an employment agreement with Ms.
Naini. The agreement entitles Ms. Naini to receive a lump sum severance payment
in an amount equal to 12 months salary, plus any bonus Ms. Naini would have
received based on the achievement of performance-based goals determined by the
Company (prorated for the length of service during the fiscal year in which Ms.
Naini is no longer employed by the Company), plus medical and dental premiums
for 12 months upon the occurrence of certain events, including: (a) termination
of Ms. Naini's employment without cause; (b) the liquidation or dissolution of
the Company; (c) a diminution of the Company's cash-on-hand below $5,000,000;
(d) the closing of the sale of all or substantially all of the Company's assets
or a majority of the Company's stock; (e) the Board of Directors' elimination of
the positions of the Chief Executive Officer and Chief Financial Officer; or (f)
Mr. Begert's separation of employment with the Company. The Company expects that
its obligation to make the foregoing severance payment will be triggered by the
transactions contemplated in the definitive merger agreement with Kinko's.
In November 1998, Mr. Begert purchased 500,000 shares of common stock at
the then fair market price of $0.40 per share, as determined by the Board of
Directors. He paid the purchase price for the shares by issuing a promissory
note to ImageX. The promissory note accrued interest at the rate of 7% per year
and was paid in full at December 31, 2002. Pursuant to the stock vesting and
pledge agreement, Mr. Begert granted ImageX a right to repurchase a portion of
these shares if his employment terminates. As of December 31, 2002, the
repurchase right had lapsed with respect to 480,000 of the shares. The
repurchase right with respect to the remaining 20,000 shares lapsed on February
28, 2003. As of December 31, 2002, the value of Mr. Begert's aggregate
restricted stock holdings was $110,000, based on the last reported sale price of
our common stock on the NASDAQ SmallCap Market on December 31, 2002 of $0.22 per
share.
ImageX believes that the transactions described above were made on terms
as favorable to ImageX as it would have received from unaffiliated third
parties. Any future transactions between ImageX and its officers, directors and
greater than 5% shareholders and their affiliates will be approved by a majority
of the Board of Directors, including a majority of ImageX's disinterested,
non-employee directors.
Item 14. Controls and Procedures
Based on their evaluation as of a date within 90 days of the filing date
of this Annual Report on Form 10-K, 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.
70
Part IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Documents filed as part of this report are as follows:
1. Consolidated Financial Statements.
See Index to Consolidated Financial Statements included at Item 8 of
this report.
2. Financial Statement Schedule.
Schedule II Valuation and Qualifying Accounts
All other schedules have been omitted because the required
information is included in the consolidated financial statements or
the notes thereto, or is not applicable or required.
3. Exhibits
NUMBER DESCRIPTION
------ -----------
2.1 Stock Purchase Agreement by and among Extensis, Inc., ImageX, Inc.
and Celartem Technology USA, Inc. dated September 9, 2002. (1)
2.2 Agreement and Plan of Merger among Kinko's, Inc., Kinko's
Washington, Inc. and ImageX, Inc. dated as of March 3, 2003. (2)
3.1 Amended and Restated Articles of Incorporation of the registrant,
as further amended by Articles of Amendment. (3)
3.2 Amended and Restated Bylaws of the registrant. (3)
10.1 Amended and Restated Investor Rights Agreement, dated as of April
8, 1999, by and among the registrant and certain of the
registrant's shareholders named therein. (3)
10.2 Stock Vesting Agreement, dated as of December 20, 1996, by and
between the registrant and F. Joseph Verschueren. (3)
10.3 Stock Vesting Agreement, dated as of December 20, 1996, by and
between the registrant and Cory E. Klatt. (3)
10.4 Stock Vesting Agreement, dated as of December 20, 1996, by and
between the registrant and Elwood D. Howse, Jr. (3)
10.5 Stock Subscription and Repurchase Agreement, dated as of August 7,
1997, by and between the registrant and Elwood D. Howse, Jr. (3)
10.6 Stock Vesting and Pledge Agreement, dated as of November 16, 1998,
by and between the registrant and Richard P. Begert. (3)
10.7 Offer of Employment, dated as of November 12, 1998, from the
registrant to Richard P. Begert. (3)
10.8 Lease Agreement, dated as of January 31, 1997, by and between the
registrant and Bellevue Associates, L.P. (3)
10.9 Lease Agreement, dated as of May 15, 1998, by and between the
registrant and Spieker Properties, L.P. (3)
10.10 Lease Agreement, dated as of October 19, 1998, by and between the
registrant and Spieker Properties, L.P. (3)
10.11 Lease Agreement, dated as of April 22, 1999, by and between the
registrant and Spieker Properties, L.P. (3)
71
10.12 Lease Agreement, dated as of November 4, 1999, by and between the
Registrant and The Plaza at Yarrow Bay, LLC. (6)
10.13 Amendment to Lease Agreement dated as of January 28, 2002 by and
between the Registrant and The Plaza at Yarrow Bay, Inc. (10)
10.14 Lease Assignment and Assumption, dated as of April 13, 1999, by
and between the Keystone Acquisition Corporation, a wholly-owned
subsidiary of the registrant, and FA Graphics, Inc. Company, Inc.
(3)
10.15 Lease Assignment and Assumption, dated as of April 13, 1999, by
and between Keystone Acquisition Corporation, a wholly-owned
subsidiary of the registrant, and FA Graphics, Inc. Company, Inc.
(3)
10.16 Amended and Restated 1996 Stock Incentive Compensation Plan. (3)
10.17 1999 Employee Stock Purchase Plan. (3)
10.18 1999 Stock Option Grant Program for Non-employee Directors. (3)
10.19 Form of Indemnification Agreement. (3)
10.20 Asset Purchase and Sale Agreement, dated as of February 23, 1999,
by and among the registrant, Keystone Acquisition Corp., Fine Arts
Engravers Company, Inc. and Nicholas J. Stanley. (3)
10.21 Stock Purchase Agreement dated September 21, 1999, among
ImageX.com, Inc., Stanley F. and Marina Lynne Poitras,
individually and as Trustees of the Poitras Family Trust dated
November 22, 1993, Glen R. and Anne Douglas, as community
property. (4)
10.22 Agreement and Plan of Merger dated November 17, 1999 among
ImageX.com, Inc., Orcas Acquisition Corp. and PrintBid.com, Inc.
(5)
10.23 First Amendment to Agreement and Plan of Merger dated November 30,
1999, among ImageX.com, Inc., Orcas Acquisition Corp. and
PrintBid.com, Inc. (5)
10.24 Amended and Restated Agreement and Plan of Merger dated May 20,
2000 among ImageX.com, Inc., Columbia Acquisition Corp., and
Extensis, Inc., and Shareholder Representative. (7)
10.25 Asset Purchase Agreement dated June 15, 2000 among ImageX.com,
Inc., Meadowlands Acquisition Corp., Howard Press Limited
Partnership and the partners thereof, individually.(8)
10.26 Employment Agreement between Mariam J. Naini and ImageX, Inc.
dated November 15, 2002. (9)
21.1 Subsidiaries of the registrant.*
23.1 Consent of PricewaterhouseCoopers LLP, independent accountants. *
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. *
- ----------
* Filed herewith.
(1) Incorporated by Reference herein to the Current Report on Form 8-K and all
amendments thereto filed with the Securities and Exchange Commission on
September 12, 2002. (File No. 000-26837).
(2) Incorporated by Reference herein to the Current Report on Form 8-K and all
amendments thereto filed with the Securities and Exchange Commission on
March 4, 2003. (File No. 000-26837).
72
(3) Incorporated by Reference herein to the Registration Statement on Form S-1
and all amendments thereto filed with the Securities and Exchange
Commission on May 12, 1999. (File No. 333-78271).
(4) Incorporated by Reference herein to the Current Report on Form 8-K and all
amendments thereto filed with the Securities and Exchange Commission on
September 30, 1999. (File No. 000-26837).
(5) Incorporated by Reference herein to the Current Report on Form 8-K and all
amendments thereto filed with the Securities and Exchange Commission on
December 22, 1999. (File No. 000-26837).
(6) Incorporated by Reference herein to the Registration Statement on Form S-1
and all amendments thereto filed with the Securities and Exchange
Commission on January 13, 2000. (File No. 333-94639).
(7) Incorporated by Reference herein to the Current Report on Form 8-K and all
amendments thereto filed with the Securities and Exchange Commission on
July 5, 2000. (File No. 000-26837).
(8) Incorporated by Reference herein to the Current Report on Form 8-K and all
amendments thereto filed with the Securities and Exchange Commission on
July 12, 2000. (File No. 000-26837).
(9) Incorporated by Reference herein to Schedule 14D-9 filed with the
Securities and Exchange Commission on March 13, 2003. (File No.
005-56779).
(10) Incorporated by Reference herein to the Annual Report on Form 10-K filed
with the Securities and Exchange Commission on April 1, 2002. (File No.
000-26837).
(b) Reports on Form 8-K
The Company filed Form 8-K on February 13, 2003, announcing
its fourth quarter and annual 2002 results.
The Company filed Form 8-K on March 4, 2003, announcing that
the Company and Kinko's, Inc. have signed a definitive
agreement pursuant to which Kinko's will acquire the Company.
(c) Exhibits
See Item 15 (a) above.
(d) Financial Statements and Schedule
See Item 15 (a) above.
73
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf of the undersigned, thereunto duly authorized.
IMAGEX, INC.
By: /s/ Richard P. Begert
-------------------------------------
Richard P. Begert
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1934, this Report
has been signed by the following persons in the capacities indicated below on
the 4th day of April, 2003.
/s/ Richard P. Begert President and Chief Executive Officer
- ---------------------------- (Principal Executive Officer)
Richard P. Begert
/s/ Jose S. David Chief Financial Officer
- ---------------------------- (Principal Financial and Accounting Officer)
Jose S. David
/s/ F. Joseph Verschueren Chairman of the Board
- ----------------------------
F. Joseph Verschueren
/s/ Garrett P. Gruener Director
- ----------------------------
Garrett P. Gruener
/s/ Elwood D. Howse, Jr. Director
- ----------------------------
Elwood D. Howse, Jr.
/s/ Richard R. Sonstelie Director
- ----------------------------
Richard R. Sonstelie
/s/ Bernee D. L. Strom Director
- ----------------------------
Bernee D. L. Strom
74
Form of Sarbanes-Oxley Section 302(a) Certification
I, Richard P. Begert, certify that:
1. I have reviewed this annual report on Form 10-K of ImageX, Inc.;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual
report;
4. The registrant's other certifying officer 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 annual
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 annual report (the "Evaluation Date"); and
c) presented in this annual 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 officer 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 officer and I have indicated in this
annual 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: April 4, 2003
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.
75
Form of Sarbanes-Oxley Section 302(a) Certification
I, Jose S. David, certify that:
1. I have reviewed this annual report on Form 10-K of ImageX, Inc.;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual
report;
4. The registrant's other certifying officer 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 annual
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 annual report (the "Evaluation Date"); and
c) presented in this annual 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 officer 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 officer and I have indicated in this
annual 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: April 4, 2003
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.
76
IMAGEX, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Allowance for Doubtful Accounts and Returns
(In thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at Amounts Balances of
beginning of charged to Discontinued companies Amounts Balance at
Year Ended year income operations acquired written off end of year
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 2002.............. $ 924 $ (16) $ (517) $ -- $ 184 $ 207
December 31, 2001.............. 1,403 141 (439) -- 181 924
December 31, 2000.............. 126 318 36 1,059 136 1,403
INDEX TO EXHIBITS
NUMBER DESCRIPTION
------ -----------
2.1 Stock Purchase Agreement by and among Extensis, Inc., ImageX, Inc.
and Celartem Technology USA, Inc. dated September 9, 2002. (1)
2.2 Agreement and Plan of Merger among Kinko's, Inc., Kinko's
Washington, Inc. and ImageX, Inc. dated as of March 3, 2003. (2)
3.1 Amended and Restated Articles of Incorporation of the registrant,
as further amended by Articles of Amendment. (3)
3.2 Amended and Restated Bylaws of the registrant. (3)
10.1 Amended and Restated Investor Rights Agreement, dated as of April
8, 1999, by and among the registrant and certain of the
registrant's shareholders named therein. (3)
10.2 Stock Vesting Agreement, dated as of December 20, 1996, by and
between the registrant and F. Joseph Verschueren. (3)
10.3 Stock Vesting Agreement, dated as of December 20, 1996, by and
between the registrant and Cory E. Klatt. (3)
10.4 Stock Vesting Agreement, dated as of December 20, 1996, by and
between the registrant and Elwood D. Howse, Jr. (3)
10.5 Stock Subscription and Repurchase Agreement, dated as of August 7,
1997, by and between the registrant and Elwood D. Howse, Jr. (3)
10.6 Stock Vesting and Pledge Agreement, dated as of November 16, 1998,
by and between the registrant and Richard P. Begert. (3)
10.7 Offer of Employment, dated as of November 12, 1998, from the
registrant to Richard P. Begert. (3)
10.8 Lease Agreement, dated as of January 31, 1997, by and between the
registrant and Bellevue Associates, L.P. (3)
10.9 Lease Agreement, dated as of May 15, 1998, by and between the
registrant and Spieker Properties, L.P. (3)
10.10 Lease Agreement, dated as of October 19, 1998, by and between the
registrant and Spieker Properties, L.P. (3)
10.11 Lease Agreement, dated as of April 22, 1999, by and between the
registrant and Spieker Properties, L.P. (3)
10.12 Lease Agreement, dated as of November 4, 1999, by and between the
Registrant and The Plaza at Yarrow Bay, LLC. (6)
10.13 Amendment to Lease Agreement dated as of January 28, 2002 by and
between the Registrant and The Plaza at Yarrow Bay, Inc. (10)
10.14 Lease Assignment and Assumption, dated as of April 13, 1999, by and
between the Keystone Acquisition Corporation, a wholly-owned
subsidiary of the registrant, and FA Graphics, Inc. Company, Inc.
(3)
10.15 Lease Assignment and Assumption, dated as of April 13, 1999, by and
between Keystone Acquisition Corporation, a wholly-owned subsidiary
of the registrant, and FA Graphics, Inc. Company, Inc. (3)
10.16 Amended and Restated 1996 Stock Incentive Compensation Plan. (3)
10.17 1999 Employee Stock Purchase Plan. (3)
10.18 1999 Stock Option Grant Program for Non-employee Directors. (3)
10.19 Form of Indemnification Agreement. (3)
10.20 Asset Purchase and Sale Agreement, dated as of February 23, 1999,
by and among the registrant, Keystone Acquisition Corp., Fine Arts
Engravers Company, Inc. and Nicholas J. Stanley. (3)
10.21 Stock Purchase Agreement dated September 21, 1999, among
ImageX.com, Inc., Stanley F. and Marina Lynne Poitras, individually
and as Trustees of the Poitras Family Trust dated November 22,
1993, Glen R. and Anne Douglas, as community property. (4)
10.22 Agreement and Plan of Merger dated November 17, 1999 among
ImageX.com, Inc., Orcas Acquisition Corp. and PrintBid.com, Inc.
(5)
10.23 First Amendment to Agreement and Plan of Merger dated November 30,
1999, among ImageX.com, Inc., Orcas Acquisition Corp. and
PrintBid.com, Inc. (5)
10.24 Amended and Restated Agreement and Plan of Merger dated May 20,
2000 among ImageX.com, Inc., Columbia Acquisition Corp., and
Extensis, Inc., and Shareholder Representative. (7)
10.25 Asset Purchase Agreement dated June 15, 2000 among ImageX.com,
Inc., Meadowlands Acquisition Corp., Howard Press Limited
Partnership and the partners thereof, individually.(8)
10.26 Employment Agreement between Mariam J. Naini and ImageX, Inc. dated
November 15, 2002. (9)
21.1 Subsidiaries of the registrant.*
23.1 Consent of PricewaterhouseCoopers LLP, independent accountants. *
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. *
- ----------
* Filed herewith.
(1) Incorporated by Reference herein to the Current Report on Form 8-K and all
amendments thereto filed with the Securities and Exchange Commission on
September 12, 2002. (File No. 000-26837).
(2) Incorporated by Reference herein to the Current Report on Form 8-K and all
amendments thereto filed with the Securities and Exchange Commission on
March 4, 2003. (File No. 000-26837).
(3) Incorporated by Reference herein to the Registration Statement on Form S-1
and all amendments thereto filed with the Securities and Exchange
Commission on May 12, 1999. (File No. 333-78271).
(4) Incorporated by Reference herein to the Current Report on Form 8-K and all
amendments thereto filed with the Securities and Exchange Commission on
September 30, 1999. (File No. 000-26837).
(5) Incorporated by Reference herein to the Current Report on Form 8-K and all
amendments thereto filed with the Securities and Exchange Commission on
December 22, 1999. (File No. 000-26837).
(6) Incorporated by Reference herein to the Registration Statement on Form S-1
and all amendments thereto filed with the Securities and Exchange
Commission on January 13, 2000. (File No. 333-94639).
(7) Incorporated by Reference herein to the Current Report on Form 8-K and all
amendments thereto filed with the Securities and Exchange Commission on
July 5, 2000. (File No. 000-26837).
(8) Incorporated by Reference herein to the Current Report on Form 8-K and all
amendments thereto filed with the Securities and Exchange Commission on
July 12, 2000. (File No. 000-26837).
(9) Incorporated by Reference herein to Schedule 14D-9 filed with the
Securities and Exchange Commission on March 13, 2003. (File No.
005-56779).
(10) Incorporated by Reference herein to the Annual Report on Form 10-K filed
with the Securities and Exchange Commission on April 1, 2002. (File No.
000-26837).