<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 20, 1999
REGISTRATION NO. 333-78271
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
IMAGEX.COM, INC.
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<S> <C> <C>
WASHINGTON 2752 91-1727170
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification
Incorporation or Organization) Number)
</TABLE>
10800 N.E. 8TH STREET, SUITE 200
BELLEVUE, WASHINGTON 98004
(425) 452-0011
(Address, Including Zip Code, and Telephone Number, Including
Area Code, of Registrant's Principal Executive Offices)
------------------------
RICHARD P. BEGERT
PRESIDENT AND CHIEF EXECUTIVE OFFICER
IMAGEX.COM, INC.
10800 N.E. 8TH STREET, SUITE 200
BELLEVUE, WASHINGTON 98004
(425) 452-0011
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent for Service)
------------------------
COPIES TO:
DAVID C. CLARKE BARRY E. TAYLOR
ALAN C. SMITH PATRICK J. SCHULTHEIS
Perkins Coie LLP RAMSEY HANNA
1201 Third Avenue, 40th Floor Wilson Sonsini Goodrich & Rosati, P.C.
Seattle, Washington 98101-3099 650 Page Mill Road
(206) 583-8888 Palo Alto, California 94304-1050
(650) 493-9300
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
- ------------------------------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
- ------------------------------------
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
- ------------------------------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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- --------------------------------------------------------------------------------
<PAGE>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY CHANGE. WE MAY NOT
SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SEC IS
EFFECTIVE AND THIS PROSPECTUS IS DELIVERED IN FINAL FORM. THIS PRELIMINARY
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES, AND IT IS NOT SOLICITING AN
OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.
<PAGE>
SUBJECT TO COMPLETION, DATED JULY 20, 1999
4,000,000 SHARES
[LOGO]
COMMON STOCK
--------------
ImageX.com, Inc. is offering 4,000,000 shares of its common stock. This is
our initial public offering, and no public market currently exists for our
shares. We anticipate that the initial public offering price will be between
$12.00 and $14.00 per share.
-------------------
We intend to list our common stock on the Nasdaq National Market under the
symbol "IMGX."
-------------------
PLEASE SEE "RISK FACTORS" BEGINNING ON PAGE 7 TO READ ABOUT CERTAIN RISKS
THAT YOU SHOULD CONSIDER BEFORE BUYING SHARES OF OUR COMMON STOCK.
-----------------
PRICE $ PER SHARE
-----------------
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<CAPTION>
PER SHARE TOTAL
------------ ------------
<S> <C> <C>
Public offering price............................................................... $ $
Underwriting discounts and commissions.............................................. $ $
Proceeds, before expenses, to ImageX.com............................................ $ $
</TABLE>
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES COMMISSIONS HAVE
NOT APPROVED OR DISAPPROVED OF THESE SECURITIES, OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
We have granted the underwriters a 30-day option to purchase a maximum of
600,000 additional shares to cover over-allotments of shares. Delivery of the
shares will be made on or about , 1999.
-------------------
VOLPE BROWN WHELAN & COMPANY
PRUDENTIAL SECURITIES
E*TRADE SECURITIES INC.
The date of this prospectus is , 1999
<PAGE>
- --------------------------------------------------------------------------------
INSIDE FRONT LEFT
IMAGEX.COM: INTERNET-BASED BUSINESS-TO-BUSINESS INTERMEDIARY IN THE
COMMERCIAL PRINTING INDUSTRY
[GRAPHIC - PHOTO MONTAGE OF CUSTOMERS' SAMPLE PRINTED PRODUCTS]
LABELS WITHIN MONTAGE:
Marketing Materials Office Stationery Business Cards
SUB-TEXT BELOW MONTAGE:
All items shown were produced by ImageX.com for our customers
BOTTOM RIGHT-HAND CORNER:
ImageX.com logo
<PAGE>
INSIDE FRONT GATEFOLD
BUSINESSES CLICK ON IMAGEX.COM FOR THEIR PRINTING NEEDS.
Productivity, control and convenience. ImageX.com has transformed the way
businesses order and manage their printing.
1. CUSTOMER LOGS IN TO CUSTOM WEB SITE.
[GRAPHIC - SCREEN SHOT]
The customer's secure Online Printing Center has a digital catalog of the
customer's graphic materials and a database of names, addresses and more.
2. CUSTOMER MODIFIES AND PROOFS PRINT ORDER.
[GRAPHIC - SCREEN SHOT]
With custom pre-set rules, businesses can now let remote offices place their
own orders, while controlling which areas on a printed piece can and cannot be
modified. Customers can modify and proof orders online.
3. CUSTOMER APPROVES AND RELEASES PRINT ORDER.
[GRAPHIC - SCREEN SHOT]
Secure order authorization provides the power to manage and release orders
online.
4. CUSTOMER'S PRINT ORDER IS FULFILLED.
[GRAPHIC - SCREEN SHOT]
ImageX.com prints and distributes sell sheets, brochures, letterhead, business
cards and more nationwide. Print specifications are locked-in for consistent
quality.
5. ONLINE REPORTS AVAILABLE ANYTIME.
[GRAPHIC - SCREEN SHOT]
Each customer's online reports provide instant order history. Orders in
production are also tracked and displayed.
<PAGE>
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS OR TO
WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THIS PROSPECTUS MAY ONLY BE USED WHERE IT IS
LEGAL TO SELL THESE SECURITIES. THE INFORMATION IN THIS PROSPECTUS MAY ONLY BE
ACCURATE ON THE DATE OF THIS PROSPECTUS.
TABLE OF CONTENTS
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PAGE
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<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 7
Use of Proceeds................................ 19
Dividend Policy................................ 20
Capitalization................................. 21
Dilution....................................... 22
Selected Financial Data for ImageX.com......... 24
Selected Financial Data for Fine Arts
Graphics..................................... 26
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 27
<CAPTION>
PAGE
-----
<S> <C>
Business....................................... 39
Management..................................... 57
Certain Transactions........................... 65
Principal Shareholders......................... 68
Description of Capital Stock................... 70
Shares Eligible for Future Sale................ 73
Underwriting................................... 75
Legal Matters.................................. 78
Experts........................................ 78
Where You Can Find More Information............ 78
Index to Financial Statements.................. F-1
</TABLE>
-------------------
Our executive offices are located at 10800 N.E. 8th Street, Suite 200,
Bellevue, Washington 98004, and our telephone number is (425) 452-0011. Our Web
site is located at http://www.imagex.com. Any information that is included on or
linked to our Web site is not a part of this prospectus.
We have registered the trademark "ImageX" in the United States and have
applied for the same mark in Japan and the European Union. This prospectus also
contains product names, trade names and trademarks that belong to other
organizations.
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS INFORMATION THAT WE PRESENT MORE FULLY ELSEWHERE IN
THIS PROSPECTUS. YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY, INCLUDING
"RISK FACTORS" AND THE FINANCIAL STATEMENTS, BEFORE MAKING AN INVESTMENT
DECISION.
IMAGEX.COM, INC.
OUR BUSINESS
ImageX.com is an Internet-based business-to-business intermediary in the
U.S. commercial printing industry. We believe we offer the first integrated
electronic commerce solution that automates the traditional commercial printing
process. With the ImageX.com solution, businesses access a customized, secure
Web site, called the "Online Printing Center," that contains a digital catalog
of all of their custom-printed business materials--from marketing brochures to
stationery and business cards. Through its Online Printing Center, each business
can modify, proof, procure and manage its printed business materials from any
Windows-based, Internet-enabled personal computer. We reduce the time associated
with ordering printed business materials to a few minutes and typically deliver
ordered materials to our customers within 6 to 10 days. We believe we also
reduce the possibility of errors in the printing process. Through a combination
of our network of approximately 30 commercial printing vendors (22 of which are
in Washington state) and two facilities that we own, we deliver high-quality
printed business materials nationwide.
OUR MARKET
Industry observers predict the next phase in the Internet revolution will be
business-to-business electronic commerce. Forrester Research estimates that
businesses bought and sold $43 billion in goods over the Internet in 1998, as
opposed to $8 billion bought by consumers. In addition, they predict that
business-to-business electronic commerce will grow to $1.3 trillion by 2003, or
more than 90% of the total projected electronic commerce market.
Based on data provided by CAP Ventures, sales in the U.S. commercial
printing industry totaled $55 billion in 1997. This large industry is
fragmented, with over 30,000 local and regional commercial printers operating
nationwide in 1998. In 1998, our revenues were $968,000 and our net loss was
$8,601,000. We believe the commercial printing industry presents an attractive
market opportunity for an Internet-based customized solution.
OUR SOLUTION
We enable customers to rapidly and efficiently modify, proof, procure and
manage a wide variety of high-quality, custom-printed business materials through
their Online Printing Centers. Our solution offers the following key features:
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<S> <C>
EFFICIENCY We shorten the time required for customers to order printed
business materials and allow customers to modify, proof and
order their printed business materials from their desktops,
eliminating the need to send markups and proofs to and from
the printer.
CONTROL AND SCALABILITY From the password-protected Online Printing Center, authorized
customer employees can individually modify, proof, procure and
manage a wide variety of printed business materials within the
centralized parameters and preset rules established by the
customer. In addition, the ImageX.com system is scalable,
meaning it has the ability to handle increasing order volume
without compromising system integrity and performance.
ACCURACY The ImageX.com system allows users to enter, proof, update and
maintain their information online. We believe the ImageX.com
system reduces errors associated with data reentry,
typesetting and the use of outdated document versions.
</TABLE>
3
<PAGE>
<TABLE>
<S> <C>
SINGLE-SOURCING We provide a wide range of printed business materials through
our network of approximately 30 commercial printing vendors
and two facilities that we own.
STREAMLINED We provide our commercial printing vendors with print-ready
MANUFACTURING files that are routed directly to their printing systems. Our
system eliminates typesetting and certain pre-press
manufacturing steps. As a result, we believe our system
reduces the opportunity for errors to occur in the
manufacturing process.
</TABLE>
We derive our revenue primarily from the sale of printed business materials.
We price our products competitively, but we do not strive to be the lowest-price
provider. In addition to the price for each printed item, we also typically
receive revenue from customers for construction of their Online Printing Center,
setup of each printed item and monthly site maintenance. For the typical
customer, these additional fees total less than $5,000.
OUR BUSINESS STRATEGY
Our objective is to be the leading Internet-based provider of printed
business materials. The following are the key components of our strategy:
- rapidly add new customers through direct sales, acquisitions and strategic
alliances;
- increase revenues from existing customers;
- build brand name awareness and exploit first-mover advantage; and
- maintain product and technology leadership.
Our customer and revenue base has grown rapidly since we introduced the
ImageX.com solution in October 1997. As a result of our sales and marketing
efforts and our recent acquisition of Fine Arts Graphics, an Oregon- and New
Jersey-based commercial printer, we have customers such as Amazon.com, Bell
Atlantic Mobile, CB Richard Ellis, CIBC Oppenheimer, Concur Technologies,
Donaldson, Lufkin & Jenrette, Merck & Co. and Visio. These customers accounted
for 27% of our 1998 pro forma revenues.
RISK FACTORS
An investment in our common stock involves a high degree of risk. We have
never been profitable, and we anticipate that we will continue to incur net
losses in future periods. In addition, we face a number of risks, including
unpredictabilty of operating results, the need to successfully acquire new
customers through direct sales and business acquisitions, the need to expand our
sales and customer support infrastructure, the need to raise additional capital,
the need to effectively manage our growth and the need to establish market
acceptance of our products. You should carefully consider these risks and
uncertainties as well as those other risks and uncertainties described in "Risk
Factors" beginning on page 7 of this prospectus before deciding whether to
invest in shares of our common stock.
THE OFFERING
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<S> <C>
Common stock offered......................... 4,000,000 shares
Common stock that will be outstanding after
this offering.............................. 17,102,831 shares
Use of proceeds.............................. For working capital, acquisitions of
businesses, repayment of debt and general
corporate purposes. See "Use of Proceeds."
Proposed Nasdaq National Market symbol....... IMGX
</TABLE>
The amount of common stock that will be outstanding after this offering is
based on shares outstanding on June 30, 1999. It excludes
- 951,253 shares of common stock issuable upon exercise of options
outstanding as of June 30, 1999, of which 181,201 shares were exercisable,
under our stock option plan at a weighted average exercise price of $2.78
per share, and 1,140,797 shares available for issuance under our stock
option plan pursuant to options that have not yet been granted;
- 1,460,476 shares issuable upon exercise of warrants outstanding as of June
30, 1999, all of which are currently exercisable at a weighted average
exercise price of $4.12 per share; and
- 250,000 shares available for future issuance under our employee stock
purchase plan.
4
<PAGE>
SUMMARY FINANCIAL DATA
The following table summarizes certain financial data for our business. When
you read this summary financial data, it is important that you also read the
historical financial statements and related notes included in this prospectus,
as well as the section of this prospectus entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operations." The pro forma
statement of operations data give effect to the acquisition of Fine Arts
Graphics as if it had occurred at the beginning of each of the periods
presented. See Unaudited Pro Forma Condensed Financial Statements.
<TABLE>
<CAPTION>
ACTUAL
----------------------------------------------------- PRO FORMA
THREE MONTHS ----------------------------
YEAR ENDED ENDED THREE MONTHS
DECEMBER 31, MARCH 31, YEAR ENDED ENDED
------------------------------- -------------------- DECEMBER 31, MARCH 31,
1996 1997 1998 1998 1999 1998 1999
--------- --------- --------- --------- --------- ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA (IN
THOUSANDS):
Revenues................................. $ 79 $ 87 $ 968 $ 110 $ 485 $ 11,428 $ 2,706
Cost of sales............................ 99 100 998 127 375 8,276 2,007
--------- --------- --------- --------- --------- ------------- -------------
Gross profit (loss)...................... (20) (13) (30) (17) 110 3,152 699
Operating expenses:
Sales and marketing.................... -- 1,018 2,182 614 596 2,711 714
Product development.................... 300 1,316 2,551 660 395 2,551 395
General and administrative............. 146 1,285 3,413 555 1,045 5,857 1,618
Amortization of unearned
compensation......................... -- -- 379 25 398 379 398
Amortization of goodwill............... -- -- -- -- -- 138 35
--------- --------- --------- --------- --------- ------------- -------------
Total operating expenses............. 446 3,619 8,525 1,854 2,434 11,636 3,160
Loss from operations..................... (466) (3,632) (8,555) (1,871) (2,324) (8,484) (2,461)
--------- --------- --------- --------- --------- ------------- -------------
Net loss................................. $ (463) $ (3,570) $ (8,601) $ (1,872) $ (2,340) $ (8,791) $ (2,531)
--------- --------- --------- --------- --------- ------------- -------------
--------- --------- --------- --------- --------- ------------- -------------
</TABLE>
<TABLE>
<CAPTION>
AT MARCH 31, 1999
-----------------------------------
PRO FORMA
AS
ACTUAL PRO FORMA ADJUSTED
--------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
BALANCE SHEET DATA (IN THOUSANDS):
Cash and cash equivalents.......................................... $ 124 $ 19,301 $ 66,461
Working capital (deficit).......................................... (1,905) 19,590 66,750
Total assets....................................................... 2,046 27,423 74,583
Total debt......................................................... 1,864 666 666
Mandatorily redeemable convertible preferred stock................. 12,217 -- --
Accumulated deficit................................................ (14,974) (14,974) (14,974)
Convertible preferred stock........................................ 15 -- --
Total shareholders' equity (deficit)............................... (12,820) 24,792 71,952
</TABLE>
The preceding balance sheet data summarizes
- actual balance sheet data at March 31, 1999;
- pro forma balance sheet data, after giving effect to (1) the conversion of
all shares of convertible preferred stock outstanding at March 31, 1999
into 5,398,741 shares of common stock, (2) the issuance and conversion
into 5,952,390 shares of common stock of convertible preferred stock we
issued on April 8 and 15, 1999 as if these shares had been issued on March
31, 1999 and (3) the acquisition of Fine Arts Graphics on April 13, 1999
and the issuance of 93,750 shares of common stock in connection therewith
as if the acquisition had occurred on March 31, 1999; and
5
<PAGE>
- pro forma balance sheet data, as adjusted to reflect the sale of 4,000,000
shares of common stock in this offering, assuming an initial public
offering price of $13.00 per share less estimated underwriting discounts
and commissions and estimated offering expenses we expect to pay in
connection with this offering. See "Use of Proceeds" and "Capitalization."
-------------------
Except where we state otherwise, we present information in this prospectus
(1) assuming the conversion on a 1-for-2 basis of all shares of our Series A,
Series B, Series C and Series E convertible preferred stock and the conversion
on a 1-for-1.988 basis of all shares of our Series D convertible preferred stock
into an aggregate of 11,351,131 shares of common stock upon the closing of this
offering, (2) assuming the conversion on a 1-for-2 basis of all outstanding
warrants to purchase shares of our Series C and Series E preferred stock and the
conversion on a 1-for-1.988 basis of all outstanding warrants to purchase shares
of our Series D preferred stock into warrants to purchase shares of common
stock, (3) assuming no exercise of the underwriters' over-allotment option and
(4) giving effect to a 1-for-2 reverse stock split of our common stock to be
completed before the closing of this offering. All references in this prospectus
(other than in the Financial Statements and Notes) to preferred stock and
warrants to purchase preferred stock represent the number of shares of common
stock issuable upon conversion of such preferred stock, after giving effect to
the 1-for-2 reverse stock split referred to in the preceding sentence. All
references to purchase prices for preferred stock and exercise prices for
preferred stock warrants have been similarly adjusted.
6
<PAGE>
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE RISKS AND UNCERTAINTIES DESCRIBED BELOW
BEFORE MAKING AN INVESTMENT DECISION. THEY ARE NOT THE ONLY ONES WE FACE.
ADDITIONAL RISKS AND UNCERTAINTIES THAT WE ARE NOT AWARE OF OR THAT WE CURRENTLY
DEEM IMMATERIAL ALSO MAY IMPAIR OUR BUSINESS.
IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS, FINANCIAL
CONDITION AND OPERATING RESULTS COULD BE MATERIALLY ADVERSELY AFFECTED, THE
TRADING PRICE OF OUR COMMON STOCK COULD DECLINE, AND YOU MIGHT LOSE ALL OR PART
OF YOUR INVESTMENT.
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES, SUCH AS STATEMENTS OF OUR PLANS, OBJECTIVES, EXPECTATIONS AND
INTENTIONS. WE USE WORDS SUCH AS "ANTICIPATE," "BELIEVE," "EXPECT," "FUTURE" AND
"INTEND" AND SIMILAR EXPRESSIONS TO IDENTIFY FORWARD-LOOKING STATEMENTS. OUR
ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE
FORWARD-LOOKING STATEMENTS FOR MANY REASONS, INCLUDING THE FACTORS DESCRIBED
BELOW AND ELSEWHERE IN THIS PROSPECTUS. YOU SHOULD NOT PLACE UNDUE RELIANCE ON
THESE FORWARD-LOOKING STATEMENTS, WHICH APPLY ONLY AS OF THE DATE OF THIS
PROSPECTUS.
WE HAVE AN EXTREMELY 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. We have had limited revenues to date, and our
customers have been doing business with us for only a short time. Our extremely
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. Therefore, you should not consider our recent revenue growth
as an indication of our future rate of revenue growth, if any. Our prospects are
subject to the risks and uncertainties frequently encountered in the
establishment of a new business enterprise, particularly in the new and rapidly
evolving markets for Internet products and services. To be successful, we must,
among other things,
- obtain substantial numbers of new customers rapidly and efficiently
through direct sales efforts, acquisitions of printers and print brokers
and strategic alliances;
- significantly expand our sales and marketing organization;
- convert customers of businesses we may acquire to the ImageX.com online
system;
- retain our existing customers and increase sales to these customers;
- significantly increase our gross margins;
- manage our growth effectively, assuming we succeed in expanding our
business;
- raise additional capital;
- anticipate and respond to competitive developments;
- enhance our product and service offerings;
- develop and upgrade our internal control systems; and
- identify, attract, retain and motivate qualified personnel.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
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 costs and improve
7
<PAGE>
our gross margins. As of March 31, 1999, we had an accumulated deficit of $15.0
million. Although we have experienced revenue growth in recent periods, our
revenues may not continue at their current level or increase in the future. We
expect to continue to incur operating losses for the foreseeable future.
Moreover, we currently expect to increase our operating expenses significantly
in connection with
- expanding our sales and marketing organization;
- continuing to develop our services and technology;
- hiring additional personnel;
- upgrading our information and internal control systems; and
- pursuing acquisitions as part of our growth strategy.
If we are unable to rapidly 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. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
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. We compete in the general commercial printing sector,
which is characterized by individual orders from customers for specific printing
projects rather than long-term contracts. Continued engagement for successive
jobs depends on the customers' satisfaction with the services provided. As a
result, we cannot predict the number, size and profitability of printing jobs in
a given period. Our operating results will fall below market analysts'
expectations in some future quarters, which could lead to a significant decline
in the market price of our stock. In addition to the risk factors described
elsewhere, quarterly fluctuations may also result from
- our ability to obtain new customers and cause acquired customers to
upgrade to the ImageX.com online system;
- changes in our operating expenses and capital expenditure requirements;
- our ability to retain our existing customers and increase sales to them;
- the timing of announcement and completion of any acquisitions we pursue;
- changes in the mix of printing services we sell;
- the timing of customer orders;
- increased competition; and
- 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 acquisition of Fine Arts Graphics in April 1999,
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. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
8
<PAGE>
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 system, which can require significant time and resources.
Consequently, we must incur substantial expenses in acquiring new customers and
converting them to the ImageX.com online system. The period between initial
contact and the purchase of our products through our online system is often long
and subject to delays associated with the lengthy approval and competitive
evaluation processes that typically accompany a customer's decision to change
its outsourcing relationships. For typical customers, the sales cycle takes
between two to twelve weeks, but for large customers, the sales cycle may
require more than one year. See "Business--Sales and Marketing."
WE MAY NOT BE ABLE TO GROW SUCCESSFULLY THROUGH BUSINESS ACQUISITIONS.
In April 1999, we acquired the assets of Fine Arts Graphics, a commercial
printer. To expand our business and our customer base, we intend to pursue
acquisitions of other commercial printers and print brokers. Our goal is to
rapidly acquire customers by acquiring printing services providers with strong
customer relationships and to convert their key customers to the ImageX.com
online printing system. We may continue to operate the printing facilities of
some of the printing businesses that we acquire, and sell the production
operations of others.
We are currently in discussions with several acquisition candidates, but we
have not entered into any definitive acquisition agreements at this time. We may
not be able to successfully negotiate definitive agreements with, or to
successfully complete and integrate any acquisitions of, these or any other
acquisition candidates.
Because we only recently completed our first acquisition, we cannot assure
you that our strategy of achieving customer and revenue growth through
acquisitions of businesses will be successful. To be successful we must be able
to
- identify printing businesses with strong customers and sound economics and
operations;
- effectively compete with numerous other potential acquirers, particularly
a number of large companies that are aggressively seeking to consolidate
segments of the printing industry;
- succeed in converting key acquired customers to the ImageX.com system, to
increase their purchases of print products and services and to minimize
customer attrition;
- motivate, train and retain the sales force and other key personnel of
acquired businesses;
- maintain or improve the profit margins and cash flow of acquired
businesses;
- integrate the operations, procedures and technologies of acquired
businesses with our own systems and infrastructure;
- minimize disruptions to our operations and distractions to our management;
- maintain consistent product standards and policies, and adequate internal
controls; and
- successfully dispose of or find alternative uses for excess facilities and
manufacturing capacity.
We cannot predict whether pursuing business acquisitions will allow us to
grow rapidly enough to recover the large investments we have made, and must
continue to make, in our technology and systems. Our business model depends on
rapid growth of revenues to achieve profitability. The
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integration of acquired businesses is often difficult, time consuming and
expensive. If acquiring businesses proves too costly or time-consuming, or if we
are unable to successfully retain the customers or personnel of acquired
businesses, our growth rate may not be sufficient to achieve profitability in
the foreseeable future, if ever. In addition, the amortization of goodwill and
other intangible assets, or other charges resulting from the cost of business
acquisitions, could adversely affect our operating results.
WE MAY NOT BE ABLE TO SUCCESSFULLY EXPAND OUR SALES AND CUSTOMER SUPPORT
INFRASTRUCTURE, WHICH COULD LIMIT OUR GROWTH.
To date, we have sold our products primarily through our direct sales force
and have supported our customers with our customer support personnel. Our
ability to expand our business will depend in part on recruiting and training
additional direct sales and customer support personnel. Competition for
qualified personnel in these areas is intense. We may not be able to
successfully expand our direct sales force, which would limit our ability to
expand our customer base. We may be unable to hire highly trained customer
support personnel, which would make it difficult for us to meet customer
demands. In addition, we plan to rely on our sales and marketing and customer
support personnel to retain the customers of printers and print brokers that we
may acquire in the future, and convert these customers to our online printing
system. As a result, any difficulties we may have in expanding our sales and
marketing or customer support organizations will have a negative impact on our
ability to successfully capitalize on any acquisitions we may complete. See
"Business--Sales and Marketing."
WE WILL NEED TO RAISE ADDITIONAL CAPITAL IN THE FUTURE, WHICH CAN CAUSE
DILUTION.
We expect that we will need to raise additional capital in the future in
order to fund our operations. Our future capital requirements will depend on
many factors that are difficult to predict, including acquisitions of
businesses, assets and technologies, our rate of revenue growth, our operating
cash flow, 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 the timing or amount of our future
capital needs. 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 or prevent us from pursuing our growth strategy.
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.
FAILURE TO ADDRESS STRAIN ON OUR RESOURCES CAUSED BY RAPID GROWTH WOULD MAKE IT
DIFFICULT TO MANAGE OUR BUSINESS.
Our business has grown rapidly in the last year and must continue to do so
for us to become profitable. Our recent rapid growth has placed and, if
sustained, will continue to place, a significant strain on our management and
operations. Accordingly, our future operating results will depend on the ability
of our officers and other key employees to continue to implement and improve our
operational, customer service and internal control systems, and to effectively
expand, train and manage our employee base. Furthermore, our subsidiary, Fine
Arts Graphics, has significant weaknesses in its cost accounting system that
limit management's ability to determine gross margin on a per job basis,
although the system does allow management to determine gross margin on an
aggregate basis.
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We are in the process of implementing new financial and reporting enterprise
application systems on a company-wide basis to support our anticipated growth
and integrate the operations of Fine Arts Graphics with those of ImageX.com. We
cannot be sure that these systems will be adequate for our immediate needs. In
addition, we may encounter problems, delays or additional costs in implementing
these systems. We cannot be certain that we will be able to manage any future
expansion. If we fail to effectively plan and manage future growth in our
business, we could face a loss of business and customers, and a deterioration of
our financial outlook.
WE MAY NOT BE ABLE TO ESTABLISH OUR BRAND NAME, WHICH COULD LIMIT OUR ABILITY TO
COMPETE EFFECTIVELY.
We have not yet developed a strong brand name on a national basis. We
believe that establishing and maintaining a strong brand name is a critical
aspect of attracting and expanding our customer base. Strong branding is also
critical to maintaining and building on the competitive advantage of being the
first company to provide businesses with an integrated, Internet-based
commercial printing solution. The importance of brand name recognition will
increase with competition. We will need to devote substantial financial and
management resources to promoting and enhancing our brand. There is a risk that
the costs associated with our brand promotion strategy may exceed the benefits
we may receive from those efforts. If we select the wrong channels to promote
the ImageX.com brand, fail to develop and target an effective customer message
or otherwise fail to successfully promote and maintain our brand name, we will
not be able to realize the benefits of strong brand recognition. Any failure to
develop a strong brand will prevent us from exploiting our first-mover advantage
in our market and will leave us more susceptible to competition from other
Internet-based printing services providers. See "Business--Business Strategy."
PROSPECTIVE INVESTORS SHOULD NOT RELY ON STATEMENTS MADE IN RECENT PRESS
ARTICLES.
Recently, several articles have appeared in the press concerning ImageX.com
and its business. Certain of these articles contained information provided by or
attributed to management that either is not contained in this prospectus or is
inconsistent with information contained in this prospectus. Neither ImageX.com
nor any of the Underwriters have confirmed, endorsed or adopted any statements
made in such articles for utilization by or distribution to prospective
investors in the offering. To the extent such statements are inconsistent with
information contained in this prospectus, or relate to information not contained
in this prospectus, ImageX.com and the Underwriters disclaim such statements.
Accordingly, prospective investors should not rely on such statements, or any
other information not contained in this prospectus, in making an investment
decision.
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
approximately 30 commercial printing vendors and our own pricing through our two
production facilities. We are generally able to pass increases in the cost of
paper to customers, while decreases in paper costs generally result in lower
prices to customers. In the last three years, paper prices have fluctuated
dramatically. 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.
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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 of our facilities, this insurance may not be adequate to cover
any claims against us for environmental liabilities.
TECHNOLOGY DEVELOPMENTS COULD REDUCE THE DEMAND FOR OUR PRODUCTS AND SERVICES.
In recent years, the market for printed business materials has experienced
significant changes due to advances in computer and communication technologies.
Certain products that were once commercially printed are now generated on
computers through word processing or desktop publishing software. In addition,
some information is now disseminated in a digital or electronic format rather
than in a paper format. These trends could continue in the future, resulting in
decreased demand for our products and services.
IF WE CANNOT RETAIN OUR KEY MANAGEMENT PERSONNEL AND HIRE ADDITIONAL QUALIFIED
MANAGEMENT AND TECHNICAL PERSONNEL, WE WILL NOT BE ABLE TO SUCCESSFULLY MANAGE
OUR OPERATIONS AND PURSUE OUR STRATEGIC OBJECTIVES.
Our future success depends on the continued services of certain key
management personnel, particularly our President and Chief Executive Officer,
Richard P. Begert and our Chief Technology Officer, Cory E. Klatt. We also must
identify, attract and retain additional qualified management and technical
personnel to manage and support our business. Competition for top management and
technical personnel is intense, and we may not be able to recruit and retain the
personnel we need. Many of our existing management personnel have been employed
at ImageX.com for less than a year, including our President and Chief Executive
Officer, who joined us in November 1998. Our future success depends to a
significant extent on the ability of our executive officers and other members of
our management team to operate effectively, both individually and as a group. We
cannot be certain that we will be able to satisfactorily allocate
responsibilities and that the new members of our executive team will succeed in
their roles. The loss of any one of our key management personnel, particularly
Mr. Begert, or the inability to attract, retain and integrate additional
qualified personnel would make it difficult for us to successfully manage our
operations and pursue our strategic objectives. See "Management."
IF BUSINESSES DO NOT ACCEPT THE INTERNET AS A MEANS OF PROCURING PRINTED
BUSINESS MATERIALS, OUR BUSINESS WILL FAIL.
For us to succeed, the Internet must continue to be adopted as an important
means of buying and selling products and services. In particular, Internet
electronic commerce must evolve beyond its current role as a consumer retail
channel and become a leading business-to-business purchasing tool. Because
online procurement of business products and services is still in its nascent
stage, it is difficult to estimate the size of this market and its growth rate,
if any. To date, many businesses have been deterred from using the Internet for
procurement for a number of reasons, including
- security concerns;
- unavailability of cost-effective, high-speed Internet access;
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- inconsistent quality of service;
- potentially inadequate development of the global Internet infrastructure;
and
- the difficulty of integrating existing business software applications with
online purchasing systems.
Even if the Internet is widely adopted for business procurement, it may not
achieve broad market acceptance for printing services procurement. Companies
that have already invested substantial resources in traditional methods of
printed business materials procurement may be reluctant to adopt new
Internet-based ordering systems.
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.com system,
or in achieving significant market share before competitors offer products,
applications or services with features similar or superior to our current or
proposed offerings.
IF WE ARE UNABLE TO COMPETE SUCCESSFULLY AGAINST PRINTING COMPANIES OR FUTURE
BUSINESSES OFFERING INTERNET-BASED PRINTING SERVICES, OUR BUSINESS WILL FAIL.
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 30,000 local and regional commercial printers
operating nationwide in 1998. 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 may in the future also face direct competition from other companies that
may develop and market integrated Internet-based business printing services
similar to ours. Potential developers of competing electronic commerce services
may include
- consumer printing services providers, including Internet-based providers;
- office services providers; and
- equipment manufacturers.
Many of our current and potential future competitors have substantially
greater financial, marketing and other resources than we do. As a result, they
may be able to market their products, services and branding more aggressively
than we are able to, and may be able to significantly undercut our pricing for
extended periods of time. They may also be able to respond more quickly and
effectively to emerging new technologies and to changes in customer requirements
and preferences. See "Business--Competition."
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WE DERIVE SUBSTANTIALLY ALL OUR REVENUES FROM A SMALL NUMBER OF CUSTOMERS, ANY
OF WHICH COULD REDUCE THEIR PURCHASES AT ANY TIME.
A small number of our customers account for a substantial percentage of our
revenues. We have not entered into long-term agreements with any of our
customers. Any of our significant customers could stop purchasing printing
services from us, or significantly reduce their purchases, at any time. Our two
largest customers following our recent acquisition of Fine Arts Graphics, CB
Richard Ellis and PricewaterhouseCoopers, accounted for 18% and 13%,
respectively, of our pro forma revenues in 1998 and 17% and 13%, respectively,
of our pro forma revenues in the first quarter of 1999. In addition, our
combined top 10 customers accounted for 49% of our pro forma revenues in 1998
and 50% of our pro forma revenues in the first quarter of 1999. See
"Business--Customers and Markets."
IF WE CANNOT CONTINUOUSLY ENHANCE OUR TECHNOLOGY AND SERVICES IN RESPONSE TO
RAPID CHANGES IN CUSTOMER NEEDS, COMPETITIVE OFFERINGS, INDUSTRY STANDARDS AND
TECHNOLOGY, OUR BUSINESS WILL FAIL.
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. We
must be able to continuously adapt to changing conditions, including evolving
customer needs, new competitive service offerings, emerging industry standards
and rapidly changing technology. Both the business printing services market and
the general Internet commerce sector are subject to rapidly changing technology
and standards, changes in customer requirements and frequent new product
introductions and enhancements. We may be unable to develop and market, on a
timely basis, if at all, service enhancements or new services that respond to
changing market conditions or that will be accepted by buyers of printed
business materials. Any failure by us to anticipate or to respond quickly to
changing market conditions, or any significant delays in service development or
introduction, could cause customers to delay or decide against purchasing our
services.
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 printing 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. Few of our systems
have redundant backup systems capable of mitigating the effect of service
disruptions. Any Internet or communications systems failure or interruption
could result in disruption of our service or loss or compromise of customer
orders and data. Such failures, especially if they are prolonged or repeated,
would make our services less attractive to customers and tarnish our reputation.
As the volume of data traffic on our Web site, 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.
In addition, significant components of the technologies employed in our
software and systems, including our Online Printing Center, are licensed from
third parties. We may be required to license additional software and
technologies from others as we expand and enhance our services. We cannot ensure
that the third-party technologies that we need will be made available to us on
reasonable terms,
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if at all. We also cannot predict whether the technologies that we license from
others will prove to have defects and errors that could disrupt our business.
Third-party technologies could also be subject to claims of infringement of
proprietary rights of others, which could force us to discontinue using these
technologies and force an interruption or reduction in the scope of our services
until alternative technologies are identified and implemented.
POSSIBLE ELECTRONIC COMMERCE SECURITY BREACHES, SYSTEMS FAILURES OR DAMAGE TO
OUR FACILITIES COULD HARM OUR BUSINESS.
We rely on encryption and authentication technology to effect secure
transmission of confidential information, such as payment instruction sets. 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.
All our databases, servers and other information and communications systems
are located at our headquarters in Bellevue, Washington. Although we have
limited backup systems, significant damage to or destruction of our main
facilities could interrupt service to our customers for several days. Our
property and business interruption insurance has relatively low coverage limits
and may not be adequate to compensate us for all losses that may occur.
We are contemplating moving our information and communications systems to an
offsite location. If we undertake this move and fail to manage it effectively,
it could interrupt service to our customers, which could tarnish our reputation
and decrease usage of our services.
WE MAY NOT BE ABLE TO PROVIDE SERVICES IF THE SYSTEMS THAT WE RELY ON ARE NOT
YEAR 2000 COMPLIANT.
We are in the process of assessing and remediating any year 2000 issues
associated with our computer systems and software and other property and
equipment. Despite our testing and remediation, our systems and those of third
parties, including the manufacturing systems of our vendors or the systems our
customers use to order our services, may contain certain year 2000 errors or
faults. Known or unknown errors and defects that affect the operation of our
software and systems and those of third parties could result in delay or loss of
revenues, interruption of services, damage to our reputation and litigation, any
of which could harm our business. Our efforts to address this issue are
described in more detail in "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Year 2000 Compliance."
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
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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. The recent growth of Internet commerce has been attributed by some to
the lack of sales and value-added taxes on interstate sales of goods and
services over the Internet. Numerous state and local authorities have expressed
a desire to impose such taxes on sales to consumers and businesses in their
jurisdictions. The Internet Tax Freedom Act of 1998 prevents imposition of such
taxes through October 2001. If the federal moratorium on state and local taxes
on Internet sales is not renewed, or if it is terminated before its expiration,
sales of goods and services over the Internet could be subject to multiple
overlapping tax schemes, which could substantially hinder the growth of
Internet-based commerce, including sales of our products and services.
POSSIBLE INFRINGEMENT OF INTELLECTUAL PROPERTY RIGHTS COULD HARM OUR BUSINESS.
Legal standards relating to the protection of intellectual property rights
in Internet-related industries are uncertain and still evolving. As a result,
the future viability or value of our intellectual property rights, as well as
those of other companies in the Internet industry, is unknown. We currently have
no issued patents. We have one U.S. patent pending, but we cannot be certain
that any patent will ultimately be issued. We have registered the trademark
"ImageX" in the United States and have applied for the same mark in Japan and
the European Union. We have additional trademark applications pending.
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.
See "Business--Intellectual Property."
GEOGRAPHIC CONCENTRATION OF VENDORS AND LACK OF LONG-TERM AGREEMENTS WITH
VENDORS MAY HINDER FULFILLMENT OF ORDERS.
A larger number of our current print vendors are located in Washington
state. This geographic concentration may make it more difficult for us to
deliver customer orders in a timely and cost-effective manner. A disruption of
transportation systems (air or ground) may create difficulty in fulfilling our
orders in a timely manner or increase our costs in meeting delivery commitments.
Any disruption in our ability to timely deliver orders to customers could
materially undermine our customer relationships and our business. Because a
large percentage of our vendors are located in Washington state, we may incur
increased shipping charges associated with delivery of print orders to customers
in a given time frame. To the extent that we are not able to pass such charges
on to customers, our gross margins and operating results could be adversely
affected.
Our contracts with our vendors are not long term and may be cancelled by
either party on relatively short notice, so we have no contractual assurance
that these vendors will fulfill orders in a timely way, or that they will not
decide to cease doing business with us. Although we believe that
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alternative vendors are readily available to replace any vendor who terminates
its relationship with us, or that is not performing up to our standards, adding
new vendors requires time and effort. If we were to encounter excessive vendor
turnover, it could undermine our business by diverting personnel and other
resources to increased vendor management needs.
Our vendors are generally smaller, privately-held firms who are not widely
known outside their industry. They have limited production capacity and
financial resources. Our vendors compete with other printers who are not
vendors, as well as with each other. The vendors do not share customer lists
with each other and may compete for the same customers while they are acting as
vendors for ImageX.com.
OUR STOCK PRICE MAY BE VOLATILE, AND YOU MAY NOT BE ABLE TO RESELL YOUR SHARES
AT OR ABOVE THE INITIAL PUBLIC OFFERING PRICE.
Prior to this offering, there has been no public market for our common
stock. The initial public offering price of our common stock will be determined
through negotiations between ImageX.com and the representatives of the
underwriters. We cannot predict whether the market price of our common stock
following this offering will remain at or above its initial offering price. We
also cannot be certain whether an active trading market in the common stock will
evolve following this offering and how liquid that market will be. As a result,
if you decide to purchase our shares, you may not be able to resell your shares
at or above the initial public offering price.
The market price for our shares of common stock is likely to be very
volatile due to a number of factors, including
- actual or anticipated variations in quarterly operating results;
- the gain or loss of significant customers;
- the timing of any acquisitions we may complete;
- changes in revenue and earning estimates by analysts;
- announcements of technological innovations or new products by us or our
competitors;
- general conditions in the Internet commerce and printing industries; and
- other events or factors that negatively affect the stock market.
In addition, the stock market in general has experienced extreme price and
volume fluctuations that have been unrelated to the operating performance of
particular companies. This is particularly characteristic of many companies in
the technology and emerging growth sectors. These broad market fluctuations
could materially adversely affect the market price of our common stock.
In the past, companies that have experienced volatility in the market price
of their stock have been subject to securities class-action litigation. If we
were the subject of securities class-action litigation, it could be costly and
divert our management's attention and resources.
WE HAVE NO SPECIFIC PLAN FOR ANY SIGNIFICANT PORTION OF THE NET PROCEEDS AND OUR
INVESTMENT OF THE NET PROCEEDS MAY NOT YIELD A FAVORABLE RETURN.
We currently have no specific plans for any significant portion of the net
proceeds of this offering. As a consequence, our management will have the
discretion to allocate the net proceeds to uses the shareholders may not deem
desirable. We may not be able to invest these proceeds to yield a significant
return. Substantially all of the net proceeds of this offering will be invested
in short-term, interest-bearing, investment-grade securities for an indefinite
period of time.
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AFTER THIS OFFERING WE WILL CONTINUE TO BE CONTROLLED BY EXISTING SHAREHOLDERS
WHOSE INTERESTS MAY CONFLICT WITH YOURS.
Following the closing of this offering, our officers and directors and our
affiliated entities together will beneficially own approximately 64% of the
outstanding shares of our common stock. As a result, these shareholders will be
able to control all matters requiring shareholder approval and, thereby, our
management and affairs. Matters that typically require shareholder approval
include
- election of directors;
- amendments to articles of incorporation;
- mergers, acquisitions or asset sales; and
- other significant corporate transactions.
This concentration of ownership may delay, deter or prevent actions that
would result in a change of control, which in turn could reduce the market price
of our common stock. See "Principal Shareholders" for further information on the
share ownership of our officers, directors and affiliates.
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.com, even if doing so might be beneficial to our shareholders. See
"Description of Capital Stock."
FUTURE SALES OF OUR COMMON STOCK MAY DEPRESS OUR STOCK PRICE.
After this offering, we will have outstanding 17,102,831 shares of common
stock. Sales of a substantial number of shares of common stock in the public
market following this offering could materially adversely affect the market
price for our common stock. All the shares sold in this offering will be freely
tradable. Pursuant to certain lock-up agreements, all the executive officers,
directors and shareholders of ImageX.com, who collectively hold an aggregate of
13,082,256 restricted shares, have agreed not to offer, sell, contract to sell,
grant any option to purchase or otherwise dispose of any such shares for a
period of 180 days from the date of this prospectus. On the expiration date of
the lock-up agreements, 6,909,284 restricted shares will be eligible for
immediate sale (of which 5,461,834 shares will be subject to certain volume,
manner of sale and other limitations under Rule 144 under the Securities Act).
The remaining 6,172,972 restricted shares will be eligible for sale pursuant to
Rule 144 on the expiration of various one-year holding periods over the six
months following the expiration of the lock-up period. Volpe Brown Whelan &
Company LLC may, in its sole discretion and at any time without prior notice,
release all or any portion of the common stock subject to lock-up agreements.
Shortly after the closing of this offering, we intend to file a registration
statement to register for resale 4,542,050 shares of common stock issuable under
our stock option and employee stock purchase plans. Of that number of shares,
181,201 shares are subject to options that were exercisable as of June 30, 1999.
See "Shares Eligible for Future Sale" and "Underwriting."
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USE OF PROCEEDS
We expect to receive approximately $47.1 million in net proceeds from the
sale of the 4,000,000 shares of common stock in this offering, assuming an
initial public offering price of $13.00 per share, after deducting estimated
underwriting discounts and commissions and estimated offering expenses we expect
to pay in connection with this offering (approximately $54.4 million if the
underwriters' over-allotment option is exercised in full).
Our board of directors has not considered or approved a specific plan for
the use of proceeds from this offering. However, we expect to use the proceeds
of this offering for repayment of outstanding balances on our credit facilities,
capital expenditures, working capital and acquisitions of businesses. In
particular, we plan to use approximately $2.5 million for repayment of debt as
indicated below, and the balance for a combination of capital expenditures
primarily for information technology infrastructure, working capital primarily
to fund continuing operating losses, and acquisitions of other businesses. Among
these uses, we expect a substantial majority of the proceeds will be used for
working capital and acquisitions, with the allocation of proceeds between these
two uses being dependent primarily on the working capital requirements of our
business over time and the timing and terms of any acquisitions we may pursue.
We plan to expand into new geographic markets in the near to medium term and to
hire additional personnel associated with that expansion. As a result, we expect
to incur additional costs across all expense categories, as well as possible
additional capital expenditures and/or acquisition costs, as we pursue such
expansion. Currently, we use working capital primarily to fund our continuing
operating losses, particularly our main expense categories of product
development, sales and marketing and general and administrative, all of which we
expect will rise over the next year. We are currently in discussions with
several acquisition candidates, but we have not entered into any definitive
agreements at this time. Because of the nature of our industry and the
expectations of our potential acquisition targets, we expect to use cash as the
primary currency for future acquisitions. As a result of our acquisition
strategy, we may use a substantial portion of the net proceeds of this offering
for acquisitions.
As stated above, we plan to use a portion of the net proceeds to repay
outstanding balances on our credit facilities. As of June 30, 1999, we had the
following outstanding balances on our credit facilities:
<TABLE>
<CAPTION>
AMOUNT
FACILITY OUTSTANDING INTEREST RATE AS OF JUNE 30, 1999
- ------------------------------------------------- ------------ -------------------------------------------------
<S> <C> <C>
Silicon Valley Bank:
Term loans..................................... $ 444,646 Prime + 2% = 9.75%
Working capital line........................... $ -- Prime + 1% = 8.75%
Bank of America:
Term loan...................................... $1,500,000 Prime + 1% = 8.75%
Working capital line........................... $ 500,000 Prime + 0.5% = 8.25%; plus 0.25% fee on the
undrawn amount
------------
Total........................................ $2,444,646
------------
------------
</TABLE>
The amounts that we actually expend for working capital will vary
significantly depending on a number of factors, including future revenue growth,
if any, the amount of cash we generate from operations and the extent to which
we use proceeds of this offering for acquisitions. As a result, we will retain
broad discretion in allocating the net proceeds of this offering. Pending the
uses described above, we will invest the net proceeds in short-term,
interest-bearing, investment-grade securities. See "Risk Factors--We have no
specific plan for any significant portion of the net proceeds and our investment
of the net proceeds may not yield a favorable return."
19
<PAGE>
DIVIDEND POLICY
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 any cash dividends
in the foreseeable future. In addition, the terms of our current credit
facilities prohibit us from paying any dividends without our lenders' consent.
20
<PAGE>
CAPITALIZATION
The following table sets forth at March 31, 1999:
- the actual capitalization of ImageX.com;
- the pro forma capitalization of ImageX.com, after giving effect to (1) the
conversion of all shares of convertible preferred stock outstanding at
March 31, 1999 into 5,398,741 shares of common stock, (2) the issuance and
conversion into 5,952,390 shares of common stock of convertible preferred
stock we issued on April 8 and 15, 1999, as if these shares had been
issued on March 31, 1999, and (3) the acquisition of Fine Arts Graphics on
April 13, 1999 and the issuance of 93,750 shares in connection therewith,
as if the acquisition had occurred on March 31, 1999; and
- the pro forma capitalization of ImageX.com, as adjusted to reflect the
sale of 4,000,000 shares of common stock in this offering, assuming an
initial public offering price of $13.00 per share less estimated
underwriting discounts and commissions and estimated offering expenses we
expect to pay in this offering.
This information should be read in conjunction with our financial statements
and related notes appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1999
-----------------------------------
PRO FORMA
AS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) ACTUAL PRO FORMA ADJUSTED
--------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
<CAPTION>
Long-term obligations, net of current portion.............. $ 268 $ 268 $ 268
<S> <C> <C> <C>
--------- ----------- -----------
Mandatorily redeemable convertible preferred stock, $0.01
par value per share; 9,465,000 shares authorized;
9,286,750 shares issued and outstanding, actual; no
shares issued and outstanding, pro forma and pro forma as
adjusted................................................. 12,217 -- --
--------- ----------- -----------
Shareholders' equity (deficit):
Preferred stock, 30,000,000 shares authorized:
Series A convertible preferred stock, $0.01 par value
per share; 1,500,000 shares authorized, issued and
outstanding, actual; no shares issued and
outstanding, pro forma or pro forma as adjusted...... 15 -- --
Common stock, $0.01 par value per share; 70,000,000
shares authorized; 1,587,545 shares issued and
outstanding, actual; 13,032,426 shares issued and
outstanding, pro forma; 17,032,426 shares issued and
outstanding, pro forma as adjusted..................... 16 130 170
Additional paid-in capital............................... 3,984 41,497 88,617
Unearned compensation.................................... (1,641) (1,641) (1,641)
Notes receivable from shareholders....................... (220) (220) (220)
Accumulated deficit...................................... (14,974) (14,974) (14,974)
--------- ----------- -----------
Total shareholders' equity (deficit)................. (12,820) 24,792 71,952
--------- ----------- -----------
Total capitalization............................... $ (335) $ 25,060 $ 72,220
--------- ----------- -----------
--------- ----------- -----------
</TABLE>
The outstanding share information set forth above excludes:
- 685,178 shares of common stock issuable upon exercise of options
outstanding as of March 31, 1999, of which 174,673 shares are exercisable,
under our stock option plan at a weighted average exercise price of $0.56
per share, and 1,477,277 shares available for future issuance under our
stock option plan pursuant to options that had not yet been granted;
- 1,435,476 shares issuable upon exercise of warrants outstanding as of
March 31, 1999, all of which are currently exercisable at a weighted
average exercise price of $4.12 per share; and
- 250,000 shares available for future issuance under our employee stock
purchase plan.
In April, we granted (1) options to purchase 25,000 shares of common stock at an
exercise price of $4.20 per share and options to purchase 284,275 shares of
common stock at an exercise price of $6.00 per share and (2) warrants to
purchase 25,000 shares of common stock at an exercise price of $6.00 per share.
In May 1999, we granted options to purchase 25,000 shares of common stock at an
exercise price of $10.00 per share. After June 1, 1999 and prior to the date of
this prospectus, we granted options to purchase 171,950 shares of common stock
at an exercise price of $12.00 per share.
21
<PAGE>
DILUTION
If you invest in our common stock, your interest will be diluted to the
extent of the difference between the public offering price per share and the
adjusted pro forma net tangible book value per share after this offering. We
calculate pro forma net tangible book value per share by dividing the pro forma
net tangible book value (total assets less intangible assets and total
liabilities) by the number of outstanding shares of common stock.
The pro forma net tangible book value of ImageX.com at March 31, 1999 was
$23.4 million, or $1.80 per share of common stock, after giving effect to the
acquisition of Fine Arts Graphics on April 13, 1999 and the issuance of 93,750
shares of common stock in connection therewith, as if the acquisition had
occurred on March 31, 1999, and the issuance of 11,904,761 shares of convertible
preferred stock on April 8 and 15, 1999, as if these shares had been issued on
March 31, 1999. After giving effect to the sale of 4,000,000 shares of common
stock in this offering at an assumed initial public offering price of $13.00 per
share (less estimated underwriting discounts and commissions and estimated
offering expenses we expect to pay in connection with this offering), the
adjusted pro forma net tangible book value of ImageX.com at March 31, 1999 would
be $70.6 million, or $4.14 per share. This represents an immediate increase in
the adjusted pro forma net tangible book value of $2.34 per share to existing
shareholders and an immediate and substantial dilution of $8.86 per share to new
investors. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share...................... $ 13.00
Pro forma net tangible book value per share at March 31, 1999...... $ 1.80
Increase per share attributable to new investors................... 2.34
---------
Pro forma net tangible book value per share after this offering...... 4.14
---------
Dilution per share to new investors.................................. $ 8.86
---------
---------
</TABLE>
The following table shows on a pro forma basis at March 31, 1999 the number
of shares of common stock purchased from us, the total consideration paid to us
and the average price per share paid by existing shareholders and by new
investors, after giving effect to the acquisition of Fine Arts Graphics on April
13, 1999 and the issuance of 93,750 shares of common stock in connection
therewith as if the acquisition had occurred on March 31, 1999, and the issuance
and conversion into 5,952,390 shares of common stock of convertible preferred
stock we issued on April 8 and 15, 1999, as if these shares had been issued on
March 31, 1999:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------------- -------------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders.................... 13,032,426 77% $ 38,454,200 43% $ 2.95
New investors............................ 4,000,000 23% 52,000,000 57% $ 13.00
------------ --- ------------- ---
Total................................ 17,032,426 100% $ 90,454,200 100%
------------ --- ------------- ---
------------ --- ------------- ---
</TABLE>
At March 31, 1999, we had outstanding options and warrants to purchase
shares of common stock as follows, after giving effect to the issuance in
connection with our acquisition of Fine Arts Graphics on April 13, 1999 of
warrants to purchase 75,000 shares of common stock at an exercise price of $4.00
per share, as if the acquisition had occurred on March 31, 1999, and the
issuance in connection with our convertible preferred stock financing on April 8
and 15, 1999 of warrants to purchase 90,933 shares
22
<PAGE>
of common stock at an exercise price of $4.20 per share, as if these warrants
had been issued on March 31, 1999:
<TABLE>
<CAPTION>
NUMBER OF SHARES
SUBJECT TO WEIGHTED AVERAGE
OPTIONS/WARRANTS EXERCISE PRICE
----------------- -----------------
<S> <C> <C>
Stock option plan.................................................. 685,178 $ 0.56
Warrants........................................................... 1,435,476 $ 4.12
-----------------
Total.............................................................. 2,120,654 $ 2.97
-----------------
-----------------
</TABLE>
Additionally, as of March 31, 1999, there were 1,477,277 options available
for future grant under our 1996 option plan. Also in April 1999, our board of
directors approved our employee stock purchase plan and reserved 250,000 shares
of common stock for issuance under that plan. In April 1999, we granted (1)
options to purchase 25,000 shares of common stock at an exercise price of $4.20
per share and options to purchase 284,275 shares of common stock at an exercise
price of $6.00 per share and (2) warrants to purchase 25,000 shares of common
stock at an exercise price of $6.00 per share. In May 1999, we granted options
to purchase 25,000 shares of common stock at an exercise price of $10.00 per
share. After June 1, 1999 and prior to the date of this prospectus, we granted
options to purchase 171,950 shares of common stock at an exercise price of
$12.00 per share. To the extent the option holders exercise these outstanding
options, or any options we grant in the future, there will be further dilution
to new investors.
23
<PAGE>
SELECTED FINANCIAL DATA FOR IMAGEX.COM
You should read the selected financial data below in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the historical financial statements and related notes of
ImageX.com and Fine Arts Graphics included elsewhere in this prospectus.
Historical results are not necessarily indicative of future results. The balance
sheet data as of December 31, 1997 and 1998 and the statement of operations data
for the three years ended December 31, 1998 are derived from the financial
statements of ImageX.com included elsewhere in this prospectus and have been
audited by PricewaterhouseCoopers LLP, independent accountants. The balance
sheet data as of December 31, 1996 are derived from the financial statements of
ImageX.com not included in this prospectus and have been audited by
PricewaterhouseCoopers LLP. The balance sheet data as of March 31, 1999 and the
statement of operations data for the three months ended March 31, 1998 and 1999
have been derived from the unaudited financial statements of ImageX.com and have
been prepared on a basis consistent with the audited financial statements of
ImageX.com and the related notes and include all adjustments (consisting of
normal recurring adjustments) which we consider necessary for a fair
presentation of the information. The unaudited pro forma statement of operations
data for the year ended December 31, 1998 and the three months ended March 31,
1999 give effect to the acquisition of Fine Arts Graphics on April 13, 1999 as
if the acquisition had occurred at the beginning of each period. The unaudited
pro forma balance sheet data as of March 31, 1999 give effect to the conversion
of all shares of convertible preferred stock outstanding as of March 31, 1999,
the issuance and conversion of shares of convertible preferred stock on April 8
and 15, 1999, as if these shares had been issued on March 31, 1999, and the
acquisition of Fine Arts Graphics, as if it had occurred on March 31, 1999.
Although ImageX.com was incorporated in 1995, we had no operations during that
year. This pro forma condensed financial information has been prepared from, and
you should read it together with, the historical financial statements and
related notes of ImageX.com and Fine Arts Graphics. We have provided this pro
forma condensed financial information for illustrative purposes only. The
information does not necessarily represent what our actual results of operations
would have been had we acquired Fine Arts Graphics on the date assumed, nor is
it necessarily indicative of our future operating results.
<TABLE>
<CAPTION>
ACTUAL PRO FORMA
----------------------------------------------------- ------------------------
THREE
YEAR ENDED THREE MONTHS ENDED MONTHS
DECEMBER 31, MARCH 31, YEAR ENDED ENDED
------------------------------- -------------------- DECEMBER 31, MARCH 31,
1996 1997 1998 1998 1999 1998 1999
--------- --------- --------- --------- --------- ------------ ---------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA (IN THOUSANDS,
EXCEPT SHARE AND PER SHARE DATA):
Revenues..................................... $ 79 $ 87 $ 968 $ 110 $ 485 $ 11,428 $ 2,706
Cost of sales................................ 99 100 998 127 375 8,276 2,007
--------- --------- --------- --------- --------- ------------ ---------
Gross profit (loss).......................... (20) (13) (30) (17) 110 3,152 699
Operating expenses:
Sales and marketing........................ -- 1,018 2,182 614 596 2,711 714
Product development........................ 300 1,316 2,551 660 395 2,551 395
General and administrative................. 146 1,285 3,413 555 1,045 5,857 1,618
Amortization of unearned compensation...... -- -- 379 25 398 379 398
Amortization of goodwill................... -- -- -- -- -- 138 35
--------- --------- --------- --------- --------- ------------ ---------
Total operating expenses................. 446 3,619 8,525 1,854 2,434 11,636 3,160
Loss from operations......................... (466) (3,632) (8,555) (1,871) (2,324) (8,484) (2,461 )
Other income (expense), net.................. 3 62 (46) (1) (16) (292) (75 )
--------- --------- --------- --------- --------- ------------ ---------
Net loss before income taxes................. (463) (3,570) (8,601) (1,872) (2,340) (8,776) (2,536 )
State income tax provision (benefit)......... -- -- -- -- -- 15 (5 )
--------- --------- --------- --------- --------- ------------ ---------
Net loss..................................... (463) (3,570) (8,601) (1,872) (2,340) (8,791) (2,531 )
Preferred stock accretion.................... -- -- (221) (31) (73) (221) (73 )
--------- --------- --------- --------- --------- ------------ ---------
Net loss used in calculating net loss per
share...................................... $ (463) $ (3,570) $ (8,822) $ (1,903) $ (2,413) $ (9,012) $ (2,604 )
--------- --------- --------- --------- --------- ------------ ---------
--------- --------- --------- --------- --------- ------------ ---------
Basic and diluted net loss per share(1)...... $ (3.99) $ (3.14) $ (7.27) $ (1.59) $ (1.53) $ (6.89) $ (1.55 )
--------- --------- --------- --------- --------- ------------ ---------
--------- --------- --------- --------- --------- ------------ ---------
Shares used in computation of basic and
diluted net loss per share(1).............. 115,948 1,137,260 1,213,591 1,200,000 1,580,633 1,307,341 1,674,383
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
ACTUAL
------------------------------------------------
PRO FORMA
DECEMBER 31, MARCH 31, ------------
---------------------------- ------------------ MARCH 31,
1996 1997 1998 1998 1999 1999
-------- -------- -------- -------- -------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (IN THOUSANDS):
Cash and cash equivalents......................... $ 3,453 $ 186 $ 883 $ 1,032 $ 124 $ 19,301
Working capital (deficit)......................... 3,367 (616) (418) 241 (1,905) 19,590
Total assets...................................... 3,471 938 2,319 2,101 2,046 27,423
Long-term obligations, net of current portion..... -- 300 313 300 268 268
Mandatorily redeemable convertible preferred
stock........................................... 3,459 3,459 11,350 5,888 12,217 --
Accumulated deficit............................... (463) (4,033) (12,634) (5,905) (14,974) (14,974)
Convertible preferred stock....................... 15 15 15 15 15 --
Total shareholders' equity (deficit).............. (74) (3,642) (10,878) (4,941) (12,820) 24,792
</TABLE>
- ------------
(1) See Note 1 to ImageX.com Financial Statements for an explanation of the
method used in computing basic and diluted net loss per share.
25
<PAGE>
SELECTED FINANCIAL DATA FOR FINE ARTS GRAPHICS
You should read the selected financial data below in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," the financial statements of Fine Arts Graphics and the related
notes thereto that we have included elsewhere in this prospectus. Historical
results are not necessarily indicative of future results. The balance sheet data
as of December 31, 1997 and 1998 and the statement of operations data for the
years then ended are derived from the financial statements of Fine Arts Graphics
included elsewhere in this prospectus, and have been audited by
PricewaterhouseCoopers LLP, independent accountants. The balance sheet data as
of March 31, 1998 and 1999 and the statement of operations data for the three
months ended March 31, 1998 and 1999 have been derived from the unaudited
financial statements of Fine Arts Graphics and have been prepared on a basis
consistent with the audited financial statements of Fine Arts Graphics and the
notes thereto and include all adjustments (consisting of normal recurring
adjustments) which we consider necessary for a fair presentation of the
information.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
---------------- --------------
1997 1998 1998 1999
------- ------- ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA (IN THOUSANDS):
Revenues................................................................... $ 9,187 $10,460 $2,328 $2,221
Cost of sales.............................................................. 5,978 7,127 1,603 1,586
------- ------- ------ ------
Gross profit............................................................. 3,209 3,333 725 635
------- ------- ------ ------
Operating expenses:
General and administrative............................................... 2,064 2,363 558 550
Selling and marketing.................................................... 654 528 141 118
------- ------- ------ ------
Total operating expenses................................................. 2,718 2,891 699 668
------- ------- ------ ------
Income (loss) from operations............................................ 491 442 26 (33)
Interest expense........................................................... 267 265 66 57
Other income (expense)..................................................... (31) 19 (1) (2)
------- ------- ------ ------
Income (loss) before income tax provision (benefit)........................ 193 196 (41) (92)
Income tax provision (benefit)............................................. -- 15 (3) (5)
------- ------- ------ ------
Net income (loss)........................................................ $ 193 $ 181 $ (38) $ (87)
------- ------- ------ ------
------- ------- ------ ------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
---------------- --------------
1997 1998 1998 1999
------- ------- ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA (IN THOUSANDS):
Cash....................................................................... $ 90 $ 19 $ 26 $ 41
Working capital............................................................ 168 185 100 62
Total assets............................................................... 3,737 3,364 3,190 3,255
Long-term obligations, net of current portion.............................. 1,244 1,110 1,229 1,071
Accumulated deficit........................................................ (453) (349) (505) (435)
Total shareholder's deficit................................................ (114) (9) (165) (96)
</TABLE>
26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
WHEN YOU READ THIS SECTION OF THIS PROSPECTUS, IT IS IMPORTANT THAT YOU ALSO
READ THE FINANCIAL STATEMENTS AND RELATED NOTES INCLUDED ELSEWHERE IN THIS
PROSPECTUS. THIS SECTION OF THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS
THAT INVOLVE RISKS AND UNCERTAINTIES, SUCH AS STATEMENTS OF OUR PLANS,
OBJECTIVES, EXPECTATIONS AND INTENTIONS. WE USE WORDS SUCH AS "ANTICIPATE,"
"BELIEVE," "EXPECT," "FUTURE" AND "INTEND" AND SIMILAR EXPRESSIONS TO IDENTIFY
FORWARD-LOOKING STATEMENTS. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS FOR MANY REASONS,
INCLUDING THE FACTORS DESCRIBED BELOW AND IN "RISK FACTORS." YOU SHOULD NOT
PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH APPLY ONLY AS OF
THE DATE OF THIS PROSPECTUS.
OVERVIEW
ImageX.com is an Internet-based business-to-business intermediary in the
U.S. commercial printing industry. Prior to the launch of our pilot system in
December 1996, we engaged primarily in product development and derived
substantially all our revenues from contracts for software development. For the
first nine months of 1997, customers using our pilot system accounted for
substantially all our revenues. On October 1, 1997, we launched the commercial
version of the ImageX.com system for business cards. By June 30, 1999, we had
- grown to 124 business customers (excluding customers we added through the
acquisition of Fine Arts Graphics);
- expanded our sales regions beyond Seattle to include Los Angeles, San
Francisco, New York City, Chicago and Portland;
- acquired Fine Arts Graphics, an Oregon- and New Jersey-based commercial
printer with over 600 customers in 1998;
- expanded our product offerings to include a broad range of marketing
promotional materials and general office materials; and
- grown to 90 employees (excluding 109 employees from the acquisition of
Fine Arts Graphics).
On April 13, 1999, we acquired the assets of Fine Arts Graphics, a
commercial printer focused exclusively on the general office category. The
aggregate purchase price of the acquisition was $5.0 million, including $4.625
million in cash and $375,000 in common stock. In connection with the
acquisition, we also entered into a two-year employment agreement with the
President of Fine Arts Graphics, Nicholas J. Stanley, pursuant to which we
agreed to provide Mr. Stanley with, among other things, a warrant to purchase
75,000 shares of common stock at $4.00 per share. See "Management-- Employment
Agreements."
We accounted for the acquisition under the purchase method of accounting.
For 1998 and the first quarter ended March 31, 1999, we have included Fine Arts
Graphics' results of operations and the fair market value of the assets acquired
and liabilities assumed in our Pro Forma Condensed Financial Statements, giving
effect to the acquisition as if it had occurred at the beginning of each period
presented. We expect to record goodwill of approximately $1.4 million as a
result of this acquisition. We amortize goodwill on a straight-line basis over a
period of 10 years.
We are currently in discussions with several acquisition candidates, but we
have not entered into any definitive acquisition agreements at this time. See
"Risk Factors--We may not be able to grow successfully through business
acquisitions" and "Business--Acquisitions."
As a result of our acquisition of Fine Arts Graphics, we expect that, for
the near term, a substantial portion of our revenues will be derived from orders
received through traditional means
27
<PAGE>
rather than through our online system. Our goal is to convert Fine Arts
Graphics' key customers to our online system, which we currently anticipate will
reduce manufacturing costs. In addition, we will be subject to various risks
associated with our manufacturing operations, including raw materials pricing
and higher fixed costs. We expect to incur significant costs in integrating the
operations of Fine Arts Graphics, including the implementation of management
information and internal control systems and other infrastructure. We may elect
to sell some or all of our current or future manufacturing operations, including
those of Fine Arts Graphics.
REVENUES
We derive substantially all our revenues from the sale of printed products
in both the marketing promotional and general office categories. Our revenues,
which consist of product and service revenues, totaled $968,000 in 1998, $87,000
in 1997 and $79,000 in 1996. After giving effect to the acquisition of Fine Arts
Graphics, our pro forma consolidated revenues were $2.7 million for the quarter
ended March 31, 1999 and $11.4 million for fiscal 1998.
We generally recognize product revenues when we ship an order or, in the
case of products such as masters (products printed ahead of time for later
addition of customer-specific data), when we bill the customer. We also generate
revenues from services related to the setup and management of each customer's
customized Online Printing Center. We charge for constructing the Online
Printing Center, creating and revising the printed materials in the customer's
online catalog and monthly maintenance.
Although service revenues constitute only a small portion of overall
revenues, they allow us to recoup costs associated with managing a customer's
Online Printing Center and raise the customer's attention to the value of the
work we perform.
GROSS PROFIT
For products that are produced by our commercial printing vendor network,
gross profit is calculated as the selling price of a specific product less the
price our vendor charges us. 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 and certain allocated overhead.
OPERATING EXPENSES
Our business incurs operating expenses in three broad expense categories:
sales and marketing, product development and general and administrative. As is
typical of early-stage technology companies, most of our historical expenditures
have been in the product development and general and administrative categories,
as we have focused on building the ImageX.com online printing system and an
infrastructure suitable for future growth. In the future, we intend to focus on
acquiring new customers, converting customers of businesses we may acquire to
our online system and increasing our revenue base. As a result, we expect that
sales and marketing expenses and the general and administrative expenses
associated with our manufacturing operations will account for a relatively
larger percentage of our operating expenses. We expect our infrastructure and
development costs will decline over time as a percentage of sales.
Our future success will depend on our ability to expand our customer base,
improve the lifetime gross profit we earn from our customers and lower our costs
of customer acquisition. We intend to focus on these three objectives to recoup
our infrastructure and technology investments and achieve profitability.
We are pursuing an aggressive growth strategy that includes building our
direct sales force, acquiring businesses within the printing industry that have
strong customer relationships, and seeking
28
<PAGE>
alliance partners to co-market our services. In connection with this growth
strategy, we anticipate incurring substantial additional operating expenses in
the immediate future as we
- expand our sales force and marketing organization;
- promote awareness of our brand name;
- hire additional programmers to further our product development efforts;
- integrate any additional acquisitions; and
- expand the infrastructure needed to support the growth of our business.
We also anticipate incurring additional general and administrative costs related
to being a public company, including directors' and officers' liability
insurance, investor relation programs and professional service fees. As a result
of these increased expenditures and other related factors, we expect to continue
to incur losses during the foreseeable future.
AMORTIZATION OF UNEARNED COMPENSATION
In connection with the grant of certain stock and stock options to employees
from inception through the first quarter of 1999, we recorded total unearned
compensation of approximately $2.4 million as of March 31, 1999. This total
unearned compensation amount represents the difference between the fair value of
our common stock for accounting purposes at the date of grant and the exercise
or purchase price of such securities, as applicable. As of March 31, 1999, $1.6
million unamortized portion of this total unearned compensation amount is
reflected as a reduction of shareholders' equity, and will be amortized over the
remaining vesting period of the applicable stock or options. The unearned
compensation is being amortized in accordance with Financial Accounting
Standards Board Interpretation No. 28 over the vesting period of the individual
options, generally four years. In 1998, we recorded expense of $379,000 and, in
the first quarter of 1999, we recorded expense of $398,000 for amortization of
unearned compensation. We expect to recognize amortization expense related to
unearned compensation of approximately $1.1 million in 1999, $543,000 in 2000,
$265,000 in 2001 and $83,000 in 2002.
NET LOSS
Net loss is calculated as gross profit (loss) less operating expenses and is
a function of revenues, cost of sales and other expenses--namely, sales and
marketing, product development and general and administrative expenses. We have
incurred significant net losses since our inception. As of March 31, 1999, we
had accumulated a deficit of $15.0 million.
Our extremely 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 results of operations. Therefore, you should not
consider our recent revenue growth as an indication of our future rate of
revenue growth, if any. 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. See "Risk
Factors--We have an extremely limited operating history and are subject to the
risks of new enterprises" and "--Our quarterly results are difficult to predict
and are likely to fluctuate, which may have an impact on our stock price."
29
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following table presents our unaudited quarterly results of operations
for the five-quarter period ended March 31, 1999, as well as such data expressed
as a percentage of our total revenues for the periods indicated. We have
prepared this unaudited information on the same basis as our audited financial
statements. This table includes all adjustments (consisting only of normal
recurring adjustments) required to fairly present the information for the
quarters presented, assuming you read it in conjunction with our financial
statements and the related notes included elsewhere in this prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31,
1998 1998 1998 1998 1999
--------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA (IN THOUSANDS):
Revenues.......................................... $ 110 $ 190 $ 314 $ 354 $ 485
Cost of sales..................................... 127 217 313 340 375
--------- -------- --------- -------- ---------
Gross profit (loss)............................... (17) (27) 1 14 110
Operating expenses:
Sales and marketing............................. 614 673 454 441 596
Product development............................. 660 666 558 667 395
General and administrative...................... 555 682 996 1,180 1,045
Amortization of unearned compensation........... 25 25 84 245 398
--------- -------- --------- -------- ---------
Total operating expenses...................... 1,854 2,046 2,092 2,533 2,434
Loss from operations.............................. (1,871) (2,073) (2,091) (2,519) (2,324)
Interest income (expense), net.................... (1) (1) (37) (7) (16)
--------- -------- --------- -------- ---------
Net loss.......................................... $(1,872) $ (2,074) $ (2,128) $ (2,526) $(2,340)
--------- -------- --------- -------- ---------
--------- -------- --------- -------- ---------
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31,
1998 1998 1998 1998 1999
--------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C>
AS A PERCENTAGE OF TOTAL REVENUES:
Revenues.......................................... 100% 100% 100% 100% 100%
Cost of sales..................................... 115 114 100 96 77
--------- -------- --------- -------- ---------
Gross margin...................................... (15) (14) -- 4 23
Operating expenses:
Sales and marketing............................. 558 354 145 125 123
Product development............................. 600 351 177 189 82
General and administrative...................... 505 359 317 333 215
Amortization of unearned compensation........... 23 13 27 69 82
--------- -------- --------- -------- ---------
Total operating expenses...................... 1,686 1,077 666 716 502
Loss from operations.............................. (1,701) (1,091) (666) (712) (479)
Interest income (expense), net.................... (1) (1) (12) (2) (3)
--------- -------- --------- -------- ---------
Net loss.......................................... (1,702)% (1,092)% (678)% (714)% (482)%
--------- -------- --------- -------- ---------
--------- -------- --------- -------- ---------
</TABLE>
REVENUES. Revenues grew in each quarter of 1998 and the first quarter of
1999 as demand for
our products and services increased. Revenues increased 37% to $485,000 for the
quarter ended March 31, 1999 from $354,000 for the quarter ended December 31,
1998. This increase resulted from a $131,000 increase in product sales. The 65%
increase in revenues to $314,000 for the quarter ended
30
<PAGE>
September 30, 1998 from $190,000 for the quarter ended June 30, 1998 was due to
a $118,000 increase in product sales and a $6,000 increase in service revenues.
GROSS PROFIT. Gross profit increased 686% to $110,000 for the quarter ended
March 31, 1999 from $14,000 for the quarter ended December 31, 1998. Gross
profit as a percentage of total revenues, or gross margin, increased to 23% for
the quarter ended March 31, 1999 from 4% for the quarter ended December 31,
1998. This improvement was substantially due to better vendor pricing as well
increased pricing to our customers.
SALES AND MARKETING EXPENSES. Sales and marketing expenses are comprised
primarily of our promotional expenditures to support our products and services,
and selling expenses associated with our direct sales force, including salaries,
benefits, travel and entertainment expenses. Sales and marketing expenses
increased 35% to $596,000 for the quarter ended March 31, 1999 from $441,000 for
the quarter ended December 31, 1998. The increase resulted from greater
expenditures in several areas, the largest of which were a $44,000 increase in
spending on our marketing collateral materials, a $20,000 increase in spending
on supplies, a $17,000 increase in telemarketing and a $10,000 increase in
recruiting fees. The 33% decrease to $454,000 for the quarter ended September
30, 1998 from $673,000 for the quarter ended June 30, 1998 was due to our
efforts to preserve our limited available cash at that time.
PRODUCT DEVELOPMENT EXPENSES. Product development expenses are comprised
primarily of the salary and benefits of our team of software developers. These
software developers are responsible for designing, writing and implementing the
software that underlies our online printing system. Product development expenses
as a percentage of total revenues have been generally declining over the five
quarters ended March 31, 1999. The 41% decrease to $395,000 for the quarter
ended March 31, 1999 from $667,000 for the quarter ended December 31, 1998 was
due to the capitalization of certain development costs as a result of a change
in accounting standards which took effect on January 1, 1999. The 20% increase
to $667,000 for the quarter ended December 31, 1998 from $558,000 for the
quarter ended September 30, 1998 was due in large part to a $100,000 increase in
salary expense. The 16% decrease to $558,000 for the quarter ended September 30,
1998 from $666,000 for the quarter ended June 30, 1998 was mainly due to a
$38,000 decrease in recruiting costs, a $50,000 decrease in contract labor costs
and a $21,000 decrease in salary expense.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
are comprised primarily of expenses for maintaining our business, such as
administrative and executive salaries and benefits, rent, professional fees,
business taxes, bad debt expense, recruiting, travel and other administrative
expenses. General and administrative expenses decreased by 11% to $1.0 million
for the quarter ended March 31, 1999 from $1.2 million for the quarter ended
December 31, 1998 and increased by 18% to $1.2 million from $996,000 for the
quarter ended September 30, 1998. This increase and subsequent decrease were the
result of fluctuating professional fees, recruiting costs and a settlement with
a former employee. The 46% increase to $996,000 for the quarter ended September
30, 1998 from $682,000 for the quarter ended June 30, 1998 was due to a $134,000
increase in contract labor costs, a $91,000 increase in recruiting expenses, a
$58,000 increase in salary expense and a $30,000 increase in travel expenses.
General and administrative expenses also increased 23% to $682,000 for the
quarter ended June 30, 1998 from $555,000 for the quarter ended March 31, 1998
due to a $74,000 increase in salary expense resulting primarily from the
addition of management personnel, a $12,000 increase in recruiting expense and a
$33,000 increase in spending for contract labor.
NET LOSS. Net loss of $2.3 million for the quarter ended March 31, 1999
decreased slightly compared to net loss of $2.5 million for the quarter ended
December 31, 1998. This decrease resulted from an improvement in gross margins
to 23% from 4%. The decrease also resulted from a $272,000 decrease in product
development costs and a $135,000 decrease in general and administrative
expenses. Net loss increased to $2.5 million for the quarter ended December 31,
1998 from $2.1 million
31
<PAGE>
for the quarter ended September 30, 1998. The increase resulted primarily from a
$109,000 increase in product development expenses, a $204,000 increase in
general and administrative expenses and a $161,000 increase in amortization of
unearned compensation. Net loss increased to $2.1 million for the quarter ended
June 30, 1998 from $1.9 million for the quarter ended March 31, 1998 due to
increased spending in all expense categories.
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. In addition, the results of any quarter do not indicate
results to be expected for a full fiscal year. Because of our short operating
history, 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. Also, our operating results will fall
below market analysts' expectations in some future quarters, which could lead to
a significant decline in the market price of our stock.
RESULTS OF OPERATIONS
The following table sets forth certain statement of operations data as a
percentage of total revenues for the periods indicated. Pro forma consolidated
data give effect to the acquisition of Fine Arts Graphics as if it had occurred
at the beginning of each period presented.
<TABLE>
<CAPTION>
ACTUAL
---------------------------------------- PRO FORMA
THREE MONTHS -----------------------------
YEAR ENDED DECEMBER ENDED THREE MONTHS
31, MARCH 31, YEAR ENDED ENDED
---------------------- -------------- DECEMBER 31, MARCH 31,
1996 1997 1998 1998 1999 1998 1999
---- ------ ---- ------ ---- ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues.......................................... 100 % 100% 100 % 100% 100 % 100% 100%
Cost of sales..................................... 126 115 103 115 77 72 74
---- ------ ---- ------ ---- -------- --------
Gross margin...................................... (26 ) (15) (3 ) (15) 23 28 26
Operating expenses:
Sales and marketing............................. -- 1,167 225 558 123 24 26
Product development............................. 382 1,509 264 600 82 23 15
General and administrative...................... 186 1,474 353 505 215 51 60
Amortization of unearned compensation........... -- -- 39 23 82 3 15
Amortization of goodwill........................ -- -- -- -- -- 1 1
---- ------ ---- ------ ---- -------- --------
Total operating expenses...................... 568 4,150 881 1,686 502 102 117
Loss from operations.............................. (594) (4,165) (884) (1,701) (479) (74) (91)
Other income (expense), net....................... 4 71 (5 ) (1) (3 ) (3) (3)
---- ------ ---- ------ ---- -------- --------
Net loss.......................................... (590)% (4,094)% (889)% (1,702)% (482)% (77)% (94)%
---- ------ ---- ------ ---- -------- --------
---- ------ ---- ------ ---- -------- --------
</TABLE>
ACTUAL RESULTS OF OPERATIONS
QUARTERS ENDED MARCH 31, 1999 AND MARCH 31, 1998 (UNAUDITED)
REVENUES. Revenues for the quarter ended March 31, 1999 increased 341% to
$485,000 from $110,000 for the same quarter in 1998. Product revenues increased
340% to $459,000 from $104,000 for the same quarter in 1998, while service
revenues increased 333% to $26,000 from $6,000 for the same quarter in 1998. The
increase in revenues resulted primarily from the increase in our customer base
to 108 customers at March 31, 1999 from 43 at March 31, 1998. The increase in
revenues was also attributable to:
- launching our marketing promotional materials capability;
- increasing sales to existing customers;
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<PAGE>
- expanding the range of services for which we charge a fee;
- realigning the customer service process to allow sales representatives to
focus on developing new accounts; and
- introducing new lead generation techniques, including direct mail and
telemarketing.
GROSS PROFIT. Gross profit for the quarter ended March 31, 1999 increased
to $110,000 from a loss of $17,000 for the same quarter in 1998. Gross margin
for the quarter ended March 31, 1999 increased to 23% from negative gross margin
of 15% for the same quarter in 1998. This increase in gross margin was
attributable primarily to increased product pricing to our customers, as well as
decreased costs due to renegotiated supplier pricing with several of our key
commercial print vendors. We were able to renegotiate better supplier pricing
due to increased orders and the ability of our system to reduce our vendors'
manufacturing costs. The high quality of the digital raw materials we supply to
vendors enables them to produce the printed materials with very little handling,
thereby creating increased plant utilization with very little incremental labor.
SALES AND MARKETING EXPENSES. Sales and marketing expenses for the quarter
ended March 31, 1999 decreased 3% to $596,000 from $614,000 for the same quarter
in 1998. This decrease was a result of our efforts to preserve our limited
available cash. However, we intend to increase the expenditures to introduce our
services to our targeted customers and to create a name brand within the
electronic commerce and printing industries. We expect that sales and marketing
expenses will grow significantly as we pursue an aggressive growth strategy and
hire additional sales and marketing personnel.
PRODUCT DEVELOPMENT EXPENSES. Product development expenses for the quarter
ended March 31, 1999 decreased 40% to $395,000 from $660,000 for the same
quarter in 1998. This decrease was primarily a result of our adoption of
capitalization accounting for software obtained or developed for internal use
beginning January 1, 1999, offset in part by increased product development
headcount from 24 people at March 31, 1998 to 28 people at March 31, 1999. We
believe that continued investment in product development is critical to
attaining our goals.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
for the quarter ended March 31, 1999 increased 88% to $1.0 million from $555,000
for the same quarter in 1998. The increase was primarily a result of an increase
of $210,000 in salary expense and a $50,000 increase in contract labor expenses
to support the growth of our business. We expect these expenses to grow as
additional personnel are hired and additional expenses are incurred to support
the growth of our business.
OTHER INCOME (EXPENSE), NET. Interest expense, net reflects both interest
income from investing our available cash in money market funds and certificates
of deposit and interest expense on our debt, principally under our bank credit
facilities. Interest expense, net for the quarter ended March 31, 1999 increased
to $16,000 from $1,000 for the same quarter in 1998, as a result of additional
borrowings under our credit facilities.
INCOME TAXES. No provision for federal and state income taxes has been
recorded to date because we incurred net operating losses from inception through
March 31, 1999. As of March 31, 1999, we had approximately $13.7 million of net
operating loss carryforwards for federal income tax purposes, expiring in 2011
through 2019. These losses are available to offset future taxable income. Given
our limited operating history, losses incurred to date and the difficulty in
accurately forecasting our future results, we do not believe that the
realization of the related deferred income tax assets meets the criteria
required by generally accepted accounting principles and, accordingly, no
deferred tax asset has been recorded.
33
<PAGE>
NET LOSS. Net loss increased to $2.3 million for the quarter ended March
31, 1999 from $1.9 million for the quarter ended March 31, 1998. This increase
resulted primarily from a $373,000 increase in amortization of deferred
compensation.
YEARS ENDED DECEMBER 31, 1998 AND 1997
REVENUES. Revenues for 1998 increased 1,013% to $968,000 from $87,000 in
1997. Product revenues for 1998 increased 1,117% to $913,000 from $75,000 for
1997, while our service revenues increased 358% to $55,000 from $12,000 for
1997. The increase in revenues was due to the commercial launch of the
ImageX.com system in October 1997, the addition of new customers and launching
the sale of marketing promotional materials in 1998.
GROSS PROFIT. We experienced a negative gross profit of $30,000 in 1998
compared to $13,000 in 1997. Negative gross margin for 1998 was 3% compared to
15% for 1997. The improvement was a result of higher pricing to our customers
and lower vendor costs.
SALES AND MARKETING EXPENSES. Sales and marketing expenses for 1998
increased 115% to $2.2 million from $1.0 million for 1997. This increase
resulted from a $487,000 increase in salary expense, a $250,000 increase in
promotional marketing expenditures and a $170,000 increase in advertising
expenditures. In addition, we did not commence commercial marketing efforts
until the last quarter of 1997. Finally, we hired two new sales representatives
in 1998.
PRODUCT DEVELOPMENT EXPENSES. Product development expenses for 1998
increased 94% to $2.6 million from $1.3 million for 1997. The increase resulted
primarily from the addition of six software developers to our team and our
investment in equipment to maintain and upgrade our proprietary software and
infrastructure systems.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
for 1998 increased 166% to $3.4 million from $1.3 million for 1997. The increase
resulted primarily from a $695,000 increase in salary expense, a $277,000
increase in contract labor, a $243,000 increase in professional fees and a
$144,000 increase in recruiting expense.
OTHER INCOME (EXPENSE), NET. Interest expense, net for 1998 decreased to
$46,000 from income of $62,000 for 1997 as a result of establishing and using a
working capital line and other bank credit facilities.
NET LOSS. Net loss increased substantially to $8.6 million for the year
ended December 31, 1998 from $3.6 million for the year ended December 31, 1997
as a result of increased sales and marketing, product development and general
and administrative expenses. These increased expenses resulted from the
commercial launch of the ImageX.com system in October 1997. As a percentage of
sales, net loss decreased to 889% for the year ended December 31, 1998 from
4,094% for the year ended December 31, 1997. The decrease in net loss as a
percentage of sales was primarily due to an $881,000 increase in our revenue
base.
INCEPTION THROUGH DECEMBER 31, 1995 AND YEAR ENDED DECEMBER 31, 1996
From inception to December 31, 1995, we had no operations. We generated
$79,000 in revenues in 1996, primarily as a result of contracts for software
development. Our total operating expenses were $446,000, consisting primarily of
product development expenses related to the development of our proprietary
software and infrastructure systems. Given the early stage of our business, we
do not believe the results of operations for this period are comparable to those
for 1997.
34
<PAGE>
PRO FORMA CONSOLIDATED RESULTS OF OPERATIONS
QUARTERS ENDED MARCH 31, 1999 AND MARCH 31, 1998
REVENUES. Revenues on a pro forma basis, which include the operating
results of Fine Arts Graphics, increased approximately 11% to $2.7 million for
the quarter ended March 31, 1999 from $2.4 million for the same quarter in 1998.
The increase in revenues is due to the 341% growth of the ImageX.com business
from the first quarter of 1998 to the first quarter of 1999. Fine Arts Graphics'
revenues decreased slightly due to the departure of one sales representative and
the disruption associated with the prospective acquisition by ImageX.com in the
first quarter of 1999.
GROSS PROFIT. Gross profit for the quarter ended March 31, 1999 increased
4% to $699,000 from $671,000 for the same quarter in 1998. Gross margin for the
quarter ended March 31, 1999 decreased to 26% from 28% for the same quarter in
1998 due to reduced gross profit earned by Fine Arts Graphics resulting
significantly from increased commissions charged by a significant independent
sales agent.
SALES AND MARKETING EXPENSES. Sales and marketing expenses for the quarter
ended March 31, 1999 decreased 5% to $714,000 from $755,000 for the same quarter
in 1998. Expenses were slightly lower due to lower salary and benefits expense
at Fine Arts Graphics and lower promotional marketing expenses at ImageX.com due
to efforts to preserve limited available cash.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
for the quarter ended March 31, 1999 increased 42% to $1.6 million from $1.1
million for the same quarter in 1998 due to the addition of six employees needed
to support and grow the ImageX.com business. Fine Arts Graphics' general and
administrative expenses for the quarter ended March 31, 1999 remained relatively
stable for this period.
OTHER INCOME (EXPENSE), NET. Other income (expense), net for the quarter
ended March 31, 1999 increased to expense of $75,000 from expense of $68,000 for
the same quarter in 1998, largely due to increased borrowings under our credit
facilities.
NET LOSS. Net loss increased to $2.3 million for the quarter ended March
31, 1999 from $1.9 million for the quarter ended December 31, 1998. This
increase was due primarily to the $500,000 increase in general and
administrative expenses.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have financed our operations primarily through sales
of equity securities and, to a lesser degree, through the use of long-term debt.
As of March 31, 1999, we had raised approximately $12.8 million, net of offering
costs, from private placements of preferred stock, and approximately $1.9
million from net borrowings under convertible notes and bank credit facilities.
As of March 31, 1999, we had cash and cash equivalents of $124,000. In April
1999, we raised an additional $23.9 million, net of offering costs, through the
sale of a new series of preferred stock. We also completed the acquisition of
Fine Arts Graphics, using $4.6 million in cash (including $2.0 million in new
bank financing).
Our operating activities resulted in net cash outflows of $14,000 in 1996,
$3.0 million in 1997, $7.4 million in 1998 and $2.1 million for the quarter
ended March 31, 1999. The operating cash outflows in these periods resulted from
significant expenditures on product development, sales and marketing and general
and administrative expenses, all of which led to operating losses. The cash
outflows resulting from operating losses and increases in accounts receivable
were partially offset by increases in current liabilities, including trade
payables.
35
<PAGE>
Investing activities used cash of $18,000 in 1996, $797,000 in 1997,
$887,000 in 1998 and $428,000 for the quarter ended March 31, 1999, primarily
for capital expenditures, including property and equipment.
Our financing activities provided cash of $3.5 million in 1996, $578,000 in
1997, $8.9 million in 1998 and $1.8 million for the quarter ended March 31,
1999, primarily from the issuance of preferred stock and borrowings pursuant to
convertible notes and our bank credit facilities.
As of March 31, 1999, we had several credit facilities outstanding with
Silicon Valley Bank consisting of:
- a 24-month term loan bearing interest at the bank's prime rate plus 2%,
which was 9.75% as of March 31, 1999. This facility was established for
general corporate purposes. As of March 31, 1999, we had an outstanding
balance of $156,000 under this term loan, which we are currently paying in
equal monthly installments through December 1999.
- a 36-month term loan bearing interest at the bank's prime rate plus 2%,
which was 9.75% as of March 31, 1999. The purpose of this facility was to
finance the purchase of new equipment. As of March 31, 1999, we had an
outstanding balance of $414,000 under this term loan, which we are
currently paying in equal monthly installments through January 2002.
- a working capital revolving line of credit that is secured by our accounts
receivable. This facility allows us to borrow up to the lesser of 75% of
our eligible accounts receivable or $300,000. As of March 31, 1999, we had
borrowed $96,000 under this facility. This facility expires on September
18, 1999 and bears interest at the bank's prime rate plus 1%, which was
8.75% as of March 31, 1999.
The agreements under which these credit facilities were established contain
certain financial covenants, including provisions requiring us to maintain
specified financial ratios.
On April 30, 1999, our Fine Arts Graphics subsidiary entered into a credit
agreement with Bank of America for a five-year, $1.5 million term loan for the
purpose of funding its purchase by ImageX.com. This facility bears interest at
the bank's prime lending rate plus up to 1%. On April 30, 1999, the interest
rate was 8.75%. This facility is a revolving term loan that only requires
monthly interest payments for the first two years of its term and thereafter
requires monthly interest and principal repayments over a 36-month period. The
credit agreement also includes a $1.0 million working capital line, which bears
interest at the bank's prime lending rate plus 0.5% for drawn amounts and a
commitment fee of 0.25% on any unused portion of the line. This facility expires
on April 29, 2000. We have $2.0 million outstanding under these facilities. Both
credit facilities are secured by all the assets of Fine Arts Graphics, including
accounts receivable, inventory, equipment and intangibles. We have
unconditionally guaranteed both of these facilities and have pledged all of the
stock of Fine Arts Graphics as collateral for the guarantee. Under the
guarantee, we must maintain minimum total shareholders' equity of $5.0 million.
The credit agreement also prohibits Fine Arts Graphics from paying any dividends
or making any intercompany loans to us. This prohibition will terminate upon
repayment of the outstanding balance on these facilities, which we expect to
repay from the net proceeds of this offering.
We currently expect to substantially increase our operating expenses in
connection with our aggressive growth strategy. These additional operating
expenses will consume a material amount of our cash resources, including a
portion of the net proceeds of this offering. We believe that the net proceeds
of this offering, together with our existing cash and cash equivalents and
available bank credit, will be sufficient to meet our anticipated cash needs for
working capital, acquisitions and capital expenditures for at least the next 12
months. However, our cash needs could exceed our expectations, and we may choose
to seek additional equity capital before that time. We expect that we will need
to raise additional capital in the future to fund our operations. We have no
commitments for additional
36
<PAGE>
financing, and we may experience difficulty in obtaining additional funding on
favorable terms, if at all. Any future funding may dilute the ownership of our
existing shareholders. See "Risk Factors--We will need to raise additional
capital in the future, which can cause dilution."
We do not own any equity securities of third parties and, accordingly, a
decline in the general condition of the stock market would not have a material
effect on our balance sheet. However, a decline in the general condition of the
stock market could limit our own ability to raise capital through the sale of
equity securities. See "Risk Factors--We will need to raise additional capital
in the future, which can cause dilution."
We have no exchange rate exposure, and we do not employ derivatives in
managing our balance sheet. We believe that the market risk arising from
holdings of our financial instruments is not material.
YEAR 2000 COMPLIANCE
Many existing computer systems are not capable of distinguishing
twenty-first century dates from twentieth century dates. As a result, computer
systems and software used by many companies and organizations in a wide variety
of industries will produce erroneous results or fail when they attempt to
process data dependent on dates on or after January 1, 2000 unless they have
been modified or upgraded to process date information correctly. Significant
uncertainty exists concerning the scope and magnitude of problems associated
with the century change. We recognize the need to ensure that our operations
will not be adversely affected by year 2000 software failures.
We have completed our initial assessment of the potential impact of the
impending century change on ImageX.com's and Fine Arts Graphics' computer
systems and software. Based on our current assessment, we believe that all our
systems and software are or will be fully year 2000 compliant--that is, they are
or will be capable of adequately distinguishing twenty-first century dates from
twentieth century dates--by the third quarter of 1999. Nevertheless, we cannot
be certain that coding errors will not be discovered in the future. Also, we
cannot be certain that the third-party systems we rely on, the manufacturing
systems of our vendors or the systems our customers use to order our services
will not be affected by the year 2000 date change.
Although we have not been a party to any litigation or arbitration
proceeding involving our services related to year 2000 compliance issues, we may
in the future be required to defend our products or services in such
proceedings, or to negotiate resolutions of claims based on year 2000 issues. We
may incur substantial costs of defending and resolving year 2000-related
disputes, regardless of the merits of such disputes, and we may face liability
for year 2000-related damages, including consequential damages. Sales of our
products may decrease as potential customers reduce their printing budgets due
to increased expenditures on their own year 2000 compliance efforts.
We have reviewed our internal management information and other critical
business systems to identify any year 2000 problems. We also have communicated
with the external vendors that supply us with business-critical systems,
supplies or products (including our third-party print vendors) to determine
their year 2000 readiness. In the course of these investigations, we have not
encountered any material year 2000 problems with these third-party products or
services.
We have done no assessment of our building systems (such as security, heat
and electricity) at our headquarters location in Bellevue, Washington. We do not
have sufficient information to determine what impacts the century change may
have on the building systems at this time.
To date, we have not incurred any material costs directly associated with
our year 2000 compliance efforts, except for compensation expense associated
with our salaried employees who have devoted some of their time to our year 2000
assessment and remediation efforts. As discussed above, we do not expect the
total cost of year 2000 problems to be material to our business, financial
condition and
37
<PAGE>
operating results. During the months prior to the century change, however, we
will continue to evaluate new versions of our services, information systems, and
any new infrastructure systems that we acquire to determine whether they are
year 2000 compliant. Despite our current assessment, we may not identify and
correct all significant year 2000 problems on a timely basis. Year 2000
compliance efforts may involve significant time and expense, and unremediated
problems could materially adversely affect our business, financial condition and
operating results. We believe that our most likely worst-case scenario is that
our customers may encounter substantial year 2000 compliance problems with their
information systems, which could prevent them from placing online orders for our
products, or that year 2000 compliance problems could arise in our vendor
network, which could prevent our vendors from receiving or processing product
orders. These scenarios could result in a material loss of revenues and damage
to our reputation. We currently have no contingency plans to address the risks
associated with unremediated year 2000 problems.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARD
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, "Accounting for the Cost of Computer Software
Developed or Obtained for Internal Use." SOP 98-1 is effective for financial
statements for years beginning after December 15, 1998. SOP 98-1 provides
guidance on accounting for computer software developed or obtained for internal
use, including a requirement to capitalize specified costs and amortize such
costs. We adopted this statement effective January 1, 1999. As of March 31,
1999, we had capitalized computer software costs of $338,000 and had recorded
the related amortization expense of $22,000 for the quarter ended March 31,
1999.
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BUSINESS
IMAGEX.COM, INC.
ImageX.com is an Internet-based business-to-business intermediary in the
U.S. commercial printing industry. We believe we offer the first integrated
electronic commerce solution that automates the traditional commercial printing
process. With the ImageX.com solution, businesses access a customized, secure
Web site, called the "Online Printing Center," that contains a digital catalog
of all of their custom-printed business materials--from marketing brochures to
stationery and business cards. Through its Online Printing Center, each business
can modify, proof, procure and manage its printed business materials from any
Windows-based, Internet-enabled personal computer. We reduce the time associated
with ordering printed business materials to a few minutes and typically deliver
ordered materials to our customers within 6 to 10 days. We believe we also
reduce the possibility of errors in the printing process. Through a combination
of our network of approximately 30 commercial printing vendors (22 of which are
in Washington state) and two facilities that we own, we deliver high-quality
printed business materials nationwide.
Our customer and revenue base has grown rapidly since we introduced the
ImageX.com solution in October 1997. As a result of our sales and marketing
efforts and our recent acquisition of Fine Arts Graphics, we have customers such
as Amazon.com, Bell Atlantic Mobile, CB Richard Ellis, CIBC Oppenheimer, Concur
Technologies, Donaldson, Lufkin & Jenrette, Merck & Co. and Visio. These
customers accounted for 27% of our 1998 pro forma revenues.
INDUSTRY BACKGROUND
THE GROWTH OF BUSINESS-TO-BUSINESS ELECTRONIC COMMERCE
Industry observers predict the next phase in the Internet revolution will be
business-to-business electronic commerce. Forrester Research estimates that
businesses bought and sold $43 billion in goods over the Internet in 1998, as
opposed to $8 billion bought by consumers. In addition, they predict that
business-to-business electronic commerce will grow to $1.3 trillion by 2003, or
more than 90% of the total projected electronic commerce market.
In recent years, businesses have used electronic data interchange (EDI),
technology that links businesses directly to their suppliers, to procure
materials more efficiently than they could using paper-based transactions.
However, electronic data interchange is typically capital-intensive and
difficult to implement. Like electronic data interchange, transactions over the
Internet are more efficient than paper-based transactions. However, Internet
electronic commerce offers businesses additional advantages, including
- the ability to reach a global audience of other businesses and provide
broader product and services selection and unparalleled convenience;
- the ability to complete transactions with minimal infrastructure, reduced
costs and greater economies of scale;
- the opportunity for anyone within an organization to access suppliers from
any Internet-enabled personal computer; and
- the technology to customize customer interfaces, creating greater
convenience and ease of use.
As a result, industry observers expect that an increasing portion of commerce
between businesses will be transacted over the Internet.
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Although many companies in the business-to-business space have commenced
offering products and services over the Internet, they typically still offer
only standard, rather than customized, products. We believe a larger opportunity
exists for companies that can offer solutions to businesses for the procurement
of customized products over the Internet.
THE PRINTING INDUSTRY
Printed business materials, which include promotional marketing materials
and general office products, are employed throughout business organizations
today. Based on data provided by CAP Ventures, sales in the U.S. commercial
printing industry totaled $55 billion in 1997. This large industry is
fragmented, with over 30,000 local and regional commercial printers operating
nationwide in 1998.
[LOGO]
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As the following chart illustrates, the typical process for ordering printed
business materials involves a series of interactions with the printer. The
individual placing the order must first gather the information relevant to the
order and send it to the printer. The printer then uses this information to
generate a preliminary proof, which is sent to the customer for approval. The
customer then informs the printer of any changes to the proof, which are made by
the printer. Only then do the pre-press and manufacturing processes begin.
[LOGO]
We believe that customers seek a more efficient process for ordering and
managing printed business materials. We also believe they desire a streamlined
ordering process, the capability to customize and differentiate their printed
business materials and minimization of their administrative cost of procurement.
Customers also wish to limit the number of vendors they must deal with in order
to satisfy their printed business materials requirements. We believe that these
customer needs can be addressed with an automated, integrated, Internet-based
print procurement solution.
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THE IMAGEX.COM SOLUTION
The following chart illustrates the printing process using the ImageX.com
system.
[LOGO]
The ImageX.com solution gives businesses access to a customized, secure Web
site, called the "Online Printing Center," that contains a digital catalog of
all their custom-printed business materials-- from marketing brochures to
stationery and business cards. Through its Online Printing Center, each business
can modify, proof, procure and manage their printed business materials from any
Windows-based, Internet-enabled personal computer. Through a combination of our
network of approximately 30 commercial printing vendors (22 of which are in
Washington state) and two facilities that we own, we deliver high-quality
printed business materials nationwide, typically within 6 to 10 days after the
customer places an order. Our solution offers the following key features:
<TABLE>
<S> <C>
EFFICIENCY We shorten the time required for customers to
order printed business materials and allow
customers to modify, proof and order their printed
business materials from their desktops,
eliminating the need to send markups and proofs to
and from the printer. Customers can more
efficiently manage their printed business
materials needs by implementing a just-in-time
ordering process to reduce the costs associated
with wasted inventory or queueing their orders and
releasing them in batches to take advantage of
volume pricing.
CONTROL AND SCALABILITY For each customer, we build a unique Online
Printing Center which contains a permanent digital
catalog that includes employee data, company
graphics and logos, delivery information,
reporting requirements and prototypes of the
customer's printed business materials. From the
password-protected Online Printing Center,
authorized customer employees can individually
modify, proof, procure and manage a wide variety
of printed business materials within the
centralized parameters and rules established by
the customer organization, helping to ensure
consistency and bring a uniform look to the
materials used throughout all parts of their
worldwide organization. Through online status
reports located on
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
the Online Printing Center, customers maintain
visibility into the timing of delivery. The Online
Printing Center is scalable to any number of new
employees and new products, meaning it has the
ability to handle increasing order volume without
compromising system integrity and performance.
ACCURACY The ImageX.com system allows users to enter,
proof, update and maintain their information
online. We believe the ImageX.com system reduces
errors associated with data reentry, typesetting
and the use of outdated document versions.
Customers can organize and order their products
from their own online catalog, in which the images
of the customer's products, their descriptions and
their appropriate usage are stored. In addition,
for business cards, stationery and labels, the
system captures and secures all necessary data on
each individual employee, such as name, position,
title and contact information. Customers can order
their materials directly from the online catalog
and proof them online with a color-consistent and
dimensionally accurate screen rendering.
SINGLE-SOURCING Our solution allows customers to deal with a
single vendor, because our network of
approximately 30 commercial printing vendors and
two facilities that we own enable us to provide a
wide range of printed business materials.
Individual printers are typically constrained to a
limited range of products that can be supported by
their equipment. Our single-source solution
eliminates the need for customers to engage
several different printers to supply their
printing needs.
STREAMLINED MANUFACTURING We provide our commercial printing vendors with
print-ready PostScript files that are routed
directly to their printing systems. Created by
Adobe Systems, PostScript is the standard page
description language for high quality digital
printing. Our system eliminates the typesetting
process and certain pre-press manufacturing steps.
As a result, we believe our system reduces the
opportunity for errors to occur in the
manufacturing process.
</TABLE>
BUSINESS STRATEGY
Our objective is to be the leading Internet-based provider of printed
business materials. The following are the key components of our strategy:
<TABLE>
<S> <C>
RAPIDLY ADD NEW CUSTOMERS We seek to rapidly increase our customer base
THROUGH DIRECT SALES, through the most cost-effective means and to
</TABLE>
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<TABLE>
<S> <C>
ACQUISITIONS AND STRATEGIC develop long-term relationships with new
ALLIANCES customers. First, we are increasing our sales
force to develop new customer relationships and
expand the use of our services by our existing
customers. In addition, we intend to actively
pursue acquisitions of printers and print brokers
with strong customer relationships and to convert
their customers to the ImageX.com system. Finally,
we are actively seeking to co-market our services
with partners that target customers similar to
those we target.
INCREASE REVENUES FROM EXISTING Our strategy is to become the single-source
CUSTOMERS provider of printed business materials to all our
customers. We believe that substantial opportunity
exists for us to grow by selling additional
products and services to our existing customers.
We accomplish this by selling additional products
and services through our existing sales
relationships and by developing new sales
relationships within the customer's organization.
BUILD BRAND NAME AWARENESS AND We promote ImageX.com as the leading electronic
EXPLOIT FIRST-MOVER ADVANTAGE commerce solution for procuring printed business
materials, primarily using public relations, print
advertising, online demonstrations and direct
contact with targeted decision-makers. We believe
that promoting our brand name and reputation as
the leading electronic commerce provider in our
industry will build awareness among our potential
customers, attract new customers, and increase
loyalty and usage of our services by our existing
customers. We believe that, as the first company
providing an integrated Internet solution for
procuring printed business materials, we have the
opportunity to establish ourselves as the leading
commercial printing brand on the Internet.
MAINTAIN PRODUCT AND TECHNOLOGY We believe that the ImageX.com solution is the
LEADERSHIP first integrated print procurement system to
effectively automate the customer procurement
process and the print manufacturing process across
a broad variety of manufacturing technologies and
equipment. To continue our leadership position, we
are currently pursuing technology initiatives
designed to enhance our product and service
offerings. We intend to enhance our product and
service offerings by continuing to research and
reassess customer needs and preferences.
</TABLE>
IMAGEX.COM PRODUCTS AND SERVICES
Our end-to-end solution delivers high-quality printed business materials.
For each customer, we build a custom Online Printing Center, which requires
approximately four hours using automated proprietary tools. The Online Printing
Center
- contains all the information, including underlying graphic files and
employee data, that the customer needs to procure its printed business
materials;
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- is protected by security measures;
- incorporates standardization procedures so that all orders are consistent
with the approved corporate image, regardless of who inputs the data for
an order; and
- incorporates procurement and authorization rules defined by the customer.
Once the Online Printing Center is built, the customer's employees can
modify, proof, procure and manage their printed business materials online from
any Windows-based, Internet-enabled personal computer. The ImageX.com solution
simplifies and shortens the ordering process and eliminates the typesetting
process and certain pre-press manufacturing steps. As a result, we believe our
solution reduces opportunities for error and also makes the printing process
more efficient and accurate, resulting in rapid delivery of consistent,
high-quality printed business materials.
Through our online system, we offer our customers the following key
benefits:
<TABLE>
<S> <C>
24-HOUR, 7-DAY ORDERING SYSTEM Customers can modify and order their printed
business materials in minutes, at any time, on any
day, from any Internet-enabled personal computer.
Orders are then delivered within six to ten days.
Multiple users can use the site simultaneously
without any degradation of service.
BRAND CONTROL Customers can preset certain rules to bring
consistency to their printed business materials
and a uniform look throughout their worldwide
organization. Logo treatments are protected across
all printed products within the customer's digital
catalog.
ONLINE CATALOG OF PRINTED Customers can organize and order a broad range of
BUSINESS MATERIALS printed materials through a customized online
catalog that displays an image of the product, its
description and its appropriate usage. The online
catalog avoids the need to re-enter all data in a
given order, even data that is unchanged from a
prior order. As a result, we believe the online
catalog reduces the opportunity for error.
ONLINE EDITING AND PROOFING Customers proof their order materials online with
a color-consistent and dimensionally accurate
screen rendering. The traditional process relies
on manual mark-ups for proofing.
ONLINE DATABASE OF COMPANY Our system captures and secures customer-specific
INFORMATION data, including company graphics and logos,
delivery information and reporting requirements,
as well as employee-specific data, such as name,
position, title and contact information. We
believe this database minimizes errors and delays
associated with relocations, area code changes,
office moves and other changes. Customers can make
global changes to their online information or edit
individual items. This data is then automatically
</TABLE>
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<TABLE>
<S> <C>
incorporated into the text of promotional
marketing materials, office stationery and
business cards.
ONLINE TRACKING AND MANAGEMENT Customers can maintain visibility into the timing
of delivery through online status reports. Order
history reports can be configured online.
CENTRAL MANAGEMENT OF ORDERS Rather than different departments of an
organization independently ordering and printing,
customers can queue their orders and release them
in batches to take advantage of volume pricing.
CUSTOMER SERVICE Our customer base is supported by sales
representatives and customer service professionals
who each have dedicated customer accounts.
Customers receive timely and high-quality personal
assistance as needed.
SCALABILITY The Online Printing Center is scalable to
incorporate any number of new employees and new
products. Customers can add new customer and
employee data and products, while still
maintaining worldwide ordering access with
centralized control.
ENHANCED PRODUCTIVITY Customers can enhance productivity by reducing the
labor associated with ordering, proofing and
managing the procurement process.
</TABLE>
Our existing customers can also request unique "one-off" print orders that
we can process more efficiently off-line. For these off-line orders, we source
and manage the off-line print process for our customer.
CUSTOMERS AND MARKETS
Our target customers are medium- to large-sized businesses. To date, we have
obtained over 124 customers through our direct sales efforts. In addition, Fine
Arts Graphics, which we acquired in April 1999, sold printed business materials
to over 600 customers in 1998. The following is an alphabetical list of the top
10 customers for ImageX.com and the top 10 customers for Fine Arts Graphics,
based on revenues during the quarter ended March 31, 1999:
<TABLE>
<CAPTION>
IMAGEX.COM FINE ARTS GRAPHICS
- -------------------------------- --------------------------------------
<S> <C>
Amazon.com Automatic Data Processing (ADP)
Cobalt CB Richard Ellis
Concur Technologies Champion Mortgage
New Energy Ventures Chevrolet Kelleher Enterprises
Parallel Communications Donaldson, Lufkin & Jenrette
Photo Disc Merck & Co.
Point Info Network PricewaterhouseCoopers
Verifone Silicon Graphics (SGI)
Visio Waddell & Reed
Worldvision Enterprises Weichert, Realtors
</TABLE>
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The following are case studies of two customers which have adopted the
ImageX.com solution-- Amazon.com, our ninth largest customer which contributed
$13,000 in revenues, or approximately 3% of our total revenues, for the quarter
ended March 31, 1999, and VeriFone, our third largest customer which contributed
$40,000 in revenues, or approximately 8% of our total revenues, for the quarter
ended March 31, 1999:
[LOGO]
[LOGO]
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SALES AND MARKETING
ORGANIZATION
We sell our products and services through our direct sales force. As of June
30, 1999, our sales and marketing team consisted of 23 employees, including 5
employees we acquired through the acquisition of Fine Arts Graphics. We have a
Director of Sales in Seattle and 12 sales representatives covering Seattle, Los
Angeles, San Francisco, New York City, Chicago and Portland.
PROMOTION
We market the ImageX.com solution to both the purchasing and marketing
departments of our customers. Our solution allows purchasing departments to
quickly process their orders for general office materials, such as business
cards, stationery and labels, and marketing departments to more efficiently
provide promotional marketing materials, such as sell sheets to their sales
organizations, channel partners and customers.
Our sales force uses three primary tools to generate leads and ultimately
gain new customers rapidly and efficiently:
<TABLE>
<S> <C>
TELEMARKETING Telemarketing has been our most effective tool for targeted lead
generation since we began telemarketing efforts in September
1998. Telemarketing has allowed us to efficiently find the
appropriate contact within an organization. From targeted
marketing lists, telemarketers qualify leads by using creative
scripts and online demonstrations. The qualified sales leads,
some with prescheduled meetings, are then passed on to our direct
sales force.
ONLINE DEMONSTRATIONS Online demonstrations are used to showcase our products. Links at
complementary Web sites direct customers to our Web site.
PRINT MEDIA/PUBLIC RELATIONS Print media/public relations build awareness of our solution in
major markets and draw target customers to our Web site.
ImageX.com uses advertising and public relations agencies to
integrate all marketing programs and ensure efficient and
effective spending.
</TABLE>
SELLING PROCESS
When we receive a qualified sales lead, an ImageX.com sales representative
makes contact with the potential customer and arranges a phone or live sales
presentation and demonstration of the Online Printing Center. The sales
representative assesses the potential customer's needs and returns with a sales
proposal, which includes a customized presentation of the benefits for that
potential customer, their Online Printing Center build fee, per-item setup
charges, monthly site maintenance fee and printed product quotes. Once this
sales proposal is accepted, we begin to build the customer's customized Online
Printing Center. For typical customers, the sales cycle takes between two and
twelve weeks, but for large customers the sales cycle may require more than one
year.
STRATEGIC MARKETING ALLIANCES
We are actively seeking to co-market our products and services with third
parties that target customers similar to those we target. Ideal candidates are
companies with a national sales capacity, market leadership position and
extensive contact with the purchasing and marketing managers of their customers.
We also intend to partner with firms that offer complementary Internet-based
services to their end users in areas such as marketing, advertising, office
supply and procurement services.
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In October 1998, ImageX.com and Concur Technologies, an online office
products retailer, announced an alliance that will allow businesses to procure
printing services via Concur's CompanyStore online procurement system. Through
the alliance, companies using CompanyStore can give their employees the ability
to manage and acquire their printing through ImageX.com.
Silicon Valley Bank offers a business-to-business, full-service Web site
called E-source. From this Web site, clients can access services such as
accounting and human resources consulting, as well as procure their printed
business materials. In January 1999, we entered into an alliance agreement with
Silicon Valley Bank under which the bank will feature us as the E-source print
provider for medium-and large-sized clients.
Corporate Express is a leading provider of office supplies to Fortune 1000
companies, both online and via traditional procurement processes. In April 1999,
we entered into a co-marketing arrangement whereby Corporate Express's office
products sales organization will offer the ImageX.com solution to its customers.
Ariba.com provides a business-to-business electronic commerce system that
connects buyers and sellers of business goods and services. In May 1999, we
entered into a memorandum of understanding with Ariba under which Ariba will
offer the ImageX.com solution to its users.
These strategic relationships are new and as yet unproven. We cannot be
certain that these strategic relationships will result in significant customer
leads.
PRICING
We provide each customer with a pricing proposal for each item on their
Online Printing Center. As customers add new products, we agree on appropriate
pricing. In preparing a pricing proposal, we also consider:
- the complexity of the printed product;
- the expected production volume;
- external market factors; and
- internal margin requirements.
Diverse pricing exists in the printing industry. For example, quotes for 500
business cards can range from $8.00 to $90.00 and quotes for 10,000 marketing
brochures can range from $1,000 to $9,000 depending on the customer's desired
specifications. Although we bid competitively for most of our work, we do offer
standard pricing for some stationery and business card products.
CUSTOMER SERVICE
We are committed to providing a high level of service and support to our
customers. Because our Internet services are available to users 24 hours a day,
our network support services are likewise continuously available. We value
frequent communication and feedback from our customers to continually improve
our services and products. To facilitate this communication, we have established
a customer advisory board with which our sales representatives meet monthly. By
offering customers a compelling and personalized service, we seek to strengthen
customer relationships, to encourage repeat visits and purchases, and to extend
customer retention. We generally staff our customer service desk weekdays from 6
a.m. to 6 p.m., Pacific time, consistent with the ordering patterns of our
customers. Inquiries come to us through our Web site and via e-mail and
telephone. As of June 30, 1999, we had 27 employees engaged in customer service
and operations.
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ACQUISITIONS
Along with direct sales, acquisitions are an important part of our growth
strategy because they offer an efficient way to access high-quality customers.
We believe our acquisition strategy offers the following strategic advantages:
- enables us to more quickly acquire desirable customers and avoid a lengthy
direct sales cycle;
- allows us to acquire an established and knowledgeable sales force;
- builds the ImageX.com brand by introducing our solution to a broader
audience of customers and a wider range of markets; and
- provides us with valuable expertise in integrating our technology with
other printers' systems and equipment.
The commercial printing industry is characterized by a significant number of
small- to medium-sized, regionally oriented, privately held businesses. We
target a range of potential businesses, including print brokers, printers,
direct mail houses, fulfillment houses and service bureaus. We consider several
factors in evaluating an acquisition target, including
- the quality of the target's customer base, including size, geographic
location, expected propensity to convert to the ImageX.com system and the
strength of existing customer relationships;
- the fit of the target's product and services capabilities with those of
ImageX.com;
- the depth of the target's management (including its sales force); and
- the target's financial performance.
We are currently in discussions with several acquisition candidates, but we have
not entered into any definitive acquisition agreements at this time. See "Risk
Factors--We may not be able to grow successfully through business acquisition."
FINE ARTS GRAPHICS
On April 13, 1999, we acquired the assets of Fine Arts Graphics, a
commercial printer with approximately $10 million in 1998 revenues focused
primarily on the general office category. The business has two facilities, one
in New Jersey and the other in Oregon. Sales offices are co-located with
manufacturing facilities.
In 1998, Fine Arts Graphics sold printed materials to over 600 customers,
with its top 46 customers accounting for 81% of its $10.4 million in 1998
revenues. We intend to use our direct sales force to convert Fine Arts Graphics'
key customers to the ImageX.com online system. Since the acquisition, we have
contacted customers accounting for approximately 63% of Fine Arts Graphics' 1998
revenues. As of July 6, 1999, customers accounting for approximately 80% of the
revenues generated by such contacted customers (50% of Fine Arts Graphics' total
1998 revenues) had agreed to convert to our online system. Because we only
recently constructed Online Printing Centers for some of these customers and are
in the process of constructing online printing centers for others, we have not
yet realized significant online revenues from these conversions.
TECHNOLOGY
The technology behind the ImageX.com solution is based on an integrated view
of the entire print procurement and manufacturing process. Other systems seek to
automate either the printer's manufacturing process or the customer's ordering
process. The ImageX.com solution combines both processes into one coherent
system, and drives the entire ordering and manufacturing process. We designed
our scalable manufacturing system to process thousands of printing orders daily.
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ImageX.com hosts substantially all elements of the system for all customers
and print vendors. Customers use standard Internet browsers to access the
system. We install and configure a small amount of software onsite for key
vendor partners.
SYSTEMS ARCHITECTURE
The ImageX.com system is composed of three main elements:
<TABLE>
<S> <C>
ONLINE PRINTING CENTER We build an Online Printing Center for each
customer that contains the customer's print
products and the business and procurement rules
required by that customer. ImageX.com customer
service and prepress representatives build these
Online Printing Centers using proprietary tools
developed especially for this task. Each Online
Printing Center has all the requisite features
of a business-to-business electronic commerce
site, including high levels of security, ease of
navigation, extensive customization, order
management, order tracking and administrative
controls. The Online Printing Center handles all
customer interaction with ImageX.com's system.
The Online Printing Center accepts the
customer's order, gathers the required
information, creates and renders a proof of the
document on screen and submits the order into
the manufacturing queuing system.
IMAGING LOGIC INFORMATION DATABASE ILIAD is the heart of the ImageX.com solution.
(ILIAD) When a customer initiates an order, the ILIAD
engine establishes the boundaries within which
the customer can modify the item. This allows
the Online Printing Center to guide the
customer's interaction so that elements are
modified properly and in the right combinations,
based on the customer-prescribed business rules
maintained within ILIAD. This composition engine
is a robust and central technology developed by
ImageX.com expressly for this purpose.
MANUFACTURING SYSTEMS The ImageX.com manufacturing systems prepare the
digital information file for a particular
printer and printing process, deliver the file
electronically using the industry standard
PostScript file format and establish the
information flow between the printer and
ImageX.com for monitoring and quality control.
</TABLE>
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[LOGO]
The ImageX.com solution runs on a distributed Oracle database that holds and
manages all ordering rules, content information and process data. The Oracle
database was chosen because it provides the industry's leading scalable solution
for enterprise data management. The ImageX.com technology utilizes Microsoft's
Internet Information Server and application server technology provided by
Microsoft's Transaction Server and Message Queue Server. Finally, Adobe PDF
technology is utilized for online proofing of materials prior to ordering. Every
component of the ImageX.com architecture was chosen with scalability as the
primary consideration. By using scalable technologies from Oracle, Microsoft and
Adobe, the ImageX.com system is able to leverage innovations and capabilities
from those vendors on an incremental basis, without impacting other elements of
the system or its fundamental architecture.
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OPERATIONS
Our operations strategy leverages a network of approximately 30 commercial
printing vendors (22 of which are located in Washington state) and two
facilities that we own. Our network of commercial printing vendors includes
printers in Washington, Oregon, California, New Jersey, Illinois, Indiana and
Minnesota, all of whom can ship nationwide. A substantial majority of our
vendors are small, regional operators. With this network of vendors and the
facilities that we own, we are able to deliver printed business materials
nationwide. We believe that the ImageX.com solution allows us to achieve the
following product delivery efficiencies:
<TABLE>
<S> <C>
IMPROVED CAPACITY UTILIZATION As an aggregator of print material demand, we
improve the capacity utilization of acquired and
aligned businesses. With nationally aggregated
orders, we hope to improve the cash flow of
acquired and aligned businesses.
DIRECT COST AND OVERHEAD COST By providing commercial printing vendors with
REDUCTION print- ready PostScript files that are routed
directly to their printing systems, our system
eliminates typesetting and certain pre-press
manufacturing steps. As a result, we believe our
system reduces the opportunity for errors to occur
in the manufacturing process. In addition, we
estimate that, by automating significant portions
of a printer's customer service and prepress
operations, the ImageX.com solution reduces a
typical printer's staffing requirements. As a
result, our solution lowers print production costs
and correspondingly increases cash flow.
VENDOR MANAGEMENT With access to our network of approximately 30
commercial printing vendors, as well as to our two
facilities that we own, we can allocate print
orders to the most efficient suppliers. Our access
to multiple print sources allows us to negotiate
more favorable terms from individual commercial
printing vendors. Our relationships with our
commercial printing vendors are nonexclusive. All
orders are completed on a purchase order basis,
and ImageX.com has no contractual guarantees of
performance. Vendors not meeting quality or cost
objectives can be replaced.
</TABLE>
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
meet changing conditions, including evolving customer needs, new competitive
service offerings, emerging industry standards and rapidly changing technology.
We maintain a customer advisory board that meets monthly to provide feedback on
product and service enhancements. 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 June 30, 1999, we had 30 employees
engaged in product development. Product development expenses were $2.6 million
in 1998, $1.3 million in 1997 and $300,000 in 1996. We expect to continue making
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substantial expenditures on product development in the future. See "Risk
Factors--If we cannot continuously enhance our technology and services in
response to rapid changes in customer needs, competitive offerings, industry
standards and technology, our business will fail."
INTELLECTUAL PROPERTY
We rely on intellectual property laws in the United States and other
jurisdictions to protect our proprietary rights. We currently have one U.S.
patent pending. We do not have any issued patents. We own copyrights in the
computer software and online materials that we have developed, and currently
hold limited licenses to use software in which third parties own copyrights,
including software for database management and electronic prepress. We have
registered the trademark "ImageX" in the United States and have applied for the
same mark in Japan and the European Union. We also have applied for U.S. federal
registration of the following marks: "Online Printing Center," "Your online
printing resource," "We didn't invent printing. We reinvented it," and "Your
online printing solution." For a discussion of risks related to our intellectual
property, refer to "Risk Factors--Possible infringement of intellectual property
rights could harm our business."
COMPETITION
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 30,000 local and regional commercial printers
operating nationwide in 1998. These printers 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 printer. 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 resources.
We may in the future also face direct competition from other companies that
may develop and market integrated Internet-based business printing services
similar to ours. Potential developers of competing electronic commerce services
may include:
<TABLE>
<S> <C>
CONSUMER PRINTING SERVICES A number of companies have recently started
PROVIDERS offering Internet-enabled printing services to
consumers and to the small office/home office
market. Among the services these companies offer
are online design and ordering of personalized
stationery, business cards and other office
staples. We believe that none of these consumer-
oriented providers is currently targeting our core
market of medium- to large-sized businesses.
However, these companies could enhance and expand
their service to include features and services
that make them competitive with the ImageX.com
system.
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
OFFICE SERVICES PROVIDERS Several large national and regional business
services providers currently offer integrated
document management services. These providers
typically offer onsite document management
services and equipment, and outsourced document
production services. Some providers have recently
commenced employing Web-based technologies for
document and order management and tracking. These
companies could potentially seek to capitalize on
their extensive customer base and document
production expertise by developing online business
materials design and ordering services.
EQUIPMENT MANUFACTURERS Leading office and computer equipment
manufacturers have recently devoted substantial
resources to developing high-end office printing
and reproduction equipment capable of producing
high-quality printed materials. As the cost and
complexity of high-end office printing technology
continues to fall, office equipment vendors could
displace a significant portion of the market for
outsourced business printing. Equipment
manufacturers could pose a particular competitive
threat to ImageX.com if they enhance their
hardware line by combining it with powerful
document design and management software with
features similar to the ImageX.com system.
</TABLE>
Many of our current and potential future competitors have substantially
greater financial, marketing and other resources than we do. As a result, they
may be able to market their products, services and branding more aggressively
than we are able to, and may be able to significantly undercut our pricing for
extended periods of time. They may also be able to respond more quickly and
effectively to emerging new technologies and to changes in customer requirements
and preferences. See "Risk Factors--If we are unable to compete successfully
against printing companies or future businesses offering Internet based printing
services, our business will fail."
EMPLOYEES
As of June 30, 1999, we had 198 full-time employees and one part-time
employee, including 109 employees we acquired through the acquisition of Fine
Arts Graphics. Of these employees, we have 23 in sales and marketing, 30 in
product development, 45 in customer service and operations, 71 in manufacturing
and 30 in general and administrative services. 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.
FACILITIES
We are headquartered in Bellevue, Washington, where we lease approximately
18,000 square feet pursuant to a term lease that expires on March 31, 2002.
These facilities are used for executive office space, including sales and
marketing, finance and administration, and customer support. Through the
acquisition of Fine Arts Graphics, we have added an approximately
40,000-square-foot production
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facility and administrative office in Tualatin, Oregon, and an approximately
15,000-square-foot production facility and administrative office in Union, New
Jersey. All our databases, servers and other information and communications
systems are located at our headquarters in Bellevue, Washington. Although we
have limited backup systems, significant damage to or destruction of our main
facilities could interrupt service to our customers for several days.
LEGAL PROCEEDINGS
We are not a party to any material litigation.
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<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of ImageX.com as of July 5, 1999 are as
follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------------------- --- --------------------------------------------------
<S> <C> <C>
Richard P. Begert............................ 42 President, Chief Executive Officer and Director
Robin L. Krueger............................. 48 Chief Financial Officer
F. Joseph Verschueren........................ 48 Chairman of the Board
Eric J. Bean................................. 40 Vice President of Products and Technology
Cory E. Klatt................................ 30 Chief Technology Officer, Secretary and Treasurer
Dana F. Manciagli............................ 39 Vice President of Sales and Marketing
John R. Higgins.............................. 33 Vice President of Finance and Acquisitions
Nicholas J. Stanley.......................... 34 President and Chief Executive Officer of Fine Arts
Graphics
John E. Ardell, III.......................... 59 Director
Garrett P. Gruener(1)........................ 44 Director
Elwood D. Howse, Jr.(1)...................... 59 Director
Richard R. Sonstelie(2)...................... 54 Director
Bernee D. L. Strom(2)........................ 52 Director
</TABLE>
- ---------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
Richard P. Begert has been President, Chief Executive Officer and director
of ImageX.com 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 positions at McCaw Cellular. Mr. Begert received his
B.A. in business administration from the University of Washington.
Robin L. Krueger has been Chief Financial Officer since July 1999. From 1994
to July 1999, Ms. Krueger was Vice President of Finance and Treasurer of Alaska
Airlines, Inc., a commercial airline. From 1987 to 1994, Ms. Krueger served as
Alaska Airlines' Assistant Vice President and Treasurer and from 1984 to 1987 as
Assistant Treasurer. Ms. Krueger received her B.B.A. from the University of
Washington and her M.B.A. from The George Washington University.
F. Joseph Verschueren, a co-founder of ImageX.com, has been a director of
ImageX.com 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 Board of Parallel
Communications since 1992. Mr. Verschueren received his B.A. in English and
philosophy from Gonzaga University.
Eric J. Bean has been Vice President of Products and Technology of
ImageX.com since July 1998. From June 1991 to July 1998, Mr. Bean held several
positions, including Director of Product Management and Business Line Manager,
with Adobe Systems Inc., a software company (and Aldus Corporation, which was
acquired by Adobe Systems in 1994). Mr. Bean received his M.B.A. from the
University of Washington, his master's degree in software engineering from
Seattle University, and his B.S. in mathematics from Pacific Lutheran
University.
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<PAGE>
Cory E. Klatt, a co-founder of ImageX.com, served as a director of
ImageX.com from August 1995 to December 1996, as Secretary from September 1996
to August 1997 and from July 1998 to present, as Assistant Secretary from August
1997 to July 1998, as Treasurer since July 1998 and as Chief Technology Officer
since August 1997. From 1995 to 1996, Mr. Klatt was Chief Technology Officer of
Parallel Communications. From 1992 to 1995, Mr. Klatt was a general partner of
Practical Applications, Inc., a software development company.
Dana F. Manciagli has been Vice President of Sales and Marketing of
ImageX.com since May 1998. From August 1996 to May 1998, Ms. Manciagli was Vice
President of Worldwide Marketing of the Kodak Professional Division of Eastman
Kodak Company, a photographic equipment and supply company. From June 1991 to
July 1996, she was Director of Marketing for Europe and Asia of Sea-Land
Service, Inc., a subsidiary of CSX Corporation, a transportation company, in
Hong Kong. Ms. Manciagli received her B.A. in political science from the
University of California, Santa Barbara and her master's degree in international
management from the American Graduate School of International Management.
John R. Higgins has been Vice President of Finance and Acquisitions of
ImageX.com since May 1999. In addition, he served as Director of Business
Development and Acquisitions from June 1998 to May 1999. From November 1996 to
January 1998, Mr. Higgins was Business Manager of the International Group of
Simpson Investment Company and Simpson Paper Company, a forest products
manufacturer. From June 1994 to November 1996, he served as a Senior Business
Analyst in Simpson Paper Company's Commercial Printing Business Unit. Mr.
Higgins received his B.S. in chemistry from the United States Military Academy
at West Point and his M.B.A. with distinction from Harvard University.
Nicholas J. Stanley has served as President of Fine Arts Graphics, which we
acquired in April 1999, since 1991 and as Chief Executive Officer since 1994.
Mr. Stanley has served as President of Stanley Investment & Management, an
investment company, since 1994, as a principal of the Titan Group, a real estate
investment firm, since 1990 and as a director of MotivePower Industries, Inc., a
manufacturer of products for rail and other power-related industries, since
1994. He also serves as Honorary Consul to the Kingdom of Thailand. Mr. Stanley
received his B.S. in business administration from Georgetown University.
John E. Ardell, III has been a director of ImageX.com since December 1996.
Mr. Ardell has been a general partner of Technology Partners, a venture capital
firm, since January 1994. From June 1996 to November 1998, Mr. Ardell served as
Chairman of the Board and Chief Executive Officer of Crystal Dynamics, a video
game developer. He is also a director of several private companies. Mr. Ardell
received his B.S. in engineering from the United States Naval Academy.
Garrett P. Gruener has been a director of ImageX.com since April 1999. Mr.
Gruener has been a general partner of Alta Partners, L.P., a venture capital
firm, since 1996 and of certain funds affiliated with Burr, Egan, Deleage & Co.,
a venture capital firm, since 1992. Mr. Gruener received his B.A. in political
science from the University of California, San Diego and his M.A. in political
science from the University of California, Berkeley.
Elwood D. Howse, Jr. has been a director of ImageX.com 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 OrthoLogic Corporation, a manufacturer of
orthopedic products, since September 1987 and of Applied Microsystems
Corporation, a manufacturer of microprocessors, since February 1992. He also
serves as a director of several private companies and charitable institutions.
Mr. Howse received his B.S. in engineering and his M.B.A. from Stanford
University.
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<PAGE>
Richard R. Sonstelie has been a director of ImageX.com since June 1998. Mr.
Sonstelie has served as Chairman of the Board of Puget Sound Energy, Inc., a
power company, since February 1997 and as a director since 1987. 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 B.S. from the United States Military Academy at West Point, his
M.S. in nuclear engineering from Massachusetts Institute of Technology and his
M.B.A. from Harvard University.
Bernee D. L. Strom has been a director of ImageX.com since May 1999. Ms.
Strom has served as President and Chief Operating Officer of InfoSpace.com,
Inc., a content services aggregator and integrator, since November 1998 and as a
director since December 1998. Ms. Strom has served as President and Chief
Executive Officer of the Strom Group, a venture investment and business advisory
firm specializing in high technology, since 1990. 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, Krug International Corporation, a consumer products
manufacturer, MilleCom, an Internet-based communications company, Walker
Digital, an intellectual property studio, and Quantum Development, a software
and services company. Ms. Strom received her B.S. in mathematics and history,
her M.A. and her Ph.D. in mathematics and mathematics education from New York
University and her M.B.A. from the University of California, Los Angeles.
COMMITTEES OF THE BOARD OF DIRECTORS
The compensation committee currently consists of Mr. Sonstelie and Ms.
Strom. The compensation committee establishes and reviews the compensation and
benefits of our executive officers, considers incentive compensation plans for
our employees and carries out duties assigned to the committee under our option
plan and our employee stock purchase plan.
The audit committee currently consists of Messrs. Gruener and Howse. The
audit committee makes recommendations to our board of directors regarding the
selection and retention of independent auditors, reviews the scope and results
of the audit with the independent auditor and management, and reviews and
evaluates our audit and control functions.
CLASSIFIED BOARD OF DIRECTORS
As of the first annual meeting of shareholders after the completion of this
offering, our board of directors will be divided into three classes of
directors. Directors in the first class will be elected for a one-year term,
those in the second class will be elected for a two-year term and those in the
third class will be elected for a three-year term. At each subsequent annual
meeting, shareholders will elect replacements for the directors whose term is
then expiring, and the directors so elected will serve for three-year terms.
DIRECTOR COMPENSATION
We reimburse our directors for all reasonable expenses incurred in
connection with their attendance at board and committee meetings. In December
1998, we granted to both Mr. Howse and Mr. Sonstelie a nonqualified stock option
to purchase 12,500 shares of common stock at an exercise price of $1.20 per
share. In April 1999, we granted to Ms. Strom a nonqualified stock option to
purchase 12,500 shares of common stock at an exercise price of $6.00 per share.
Other than stock options issued pursuant to the 1999 Nonemployee Directors Stock
Option Program described below, we do not currently pay compensation to our
directors.
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<PAGE>
NONEMPLOYEE DIRECTORS STOCK OPTION PROGRAM
Our board of directors has adopted our 1999 Nonemployee Directors Stock
Option Program, subject to shareholder approval. Under the program, our
nonemployee directors are entitled to receive stock options. 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.
The program provides for the grant of an option to purchase 12,500 shares of
common stock to each of our nonemployee directors upon their initial election or
appointment to the board following this offering. Thereafter, beginning with the
annual meeting of shareholders in 2000, we will grant each nonemployee director
who continues to serve on the board an additional option to purchase 5,000
shares of common stock upon such reelection or reappointment. All options
granted under the program fully vest on the grant date.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Our compensation committee currently consists of Mr. Sonstelie and Ms.
Strom. No member of the compensation committee serves as a member of the board
of directors or compensation committee of any entity that has one or more
executive officers serving as members of our board of directors or compensation
committee. Mr. Sonstelie and his spouse have purchased ImageX.com securities as
follows:
- 12,575 shares of our Series D Preferred Stock on October 1, 1998 at $3.98
per share;
- 8,334 shares of our Series E Preferred Stock on April 8, 1999 at $4.20 per
share; and
- 1,258 warrants to purchase shares of our Series D Preferred Stock on
October 1, 1998 at an exercise price of $3.98 per share.
See "Certain Transactions."
DIRECTOR AND OFFICER INDEMNIFICATION AND LIABILITY
Our articles of incorporation limit the liability of directors to the
fullest extent permitted by the Washington Business Corporation Act as it
currently exists or as it may be amended in the future. Consequently, subject to
the Washington Business Corporation Act, no director will be personally liable
to ImageX.com or its shareholders for monetary damages resulting from his or her
conduct as a director of ImageX.com, except liability for
- acts or omissions involving intentional misconduct or knowing violations
of law;
- unlawful distributions; or
- transactions from which the director personally receives a benefit in
money, property or services to which the director is not legally entitled.
Our articles of incorporation also provide that we will indemnify any
individual made a party to a proceeding because that individual is or was a
director of ImageX.com and that we 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. Any repeal of or
modification to our articles of incorporation may not adversely affect any right
of a director of ImageX.com who is or was a director at the time of that repeal
or modification.
Our bylaws provide that we will indemnify our directors and officers and may
indemnify our employees and agents to the full extent permitted by law. In
addition, we have entered into separate indemnification agreements with our
directors and executive officers that could require us, among other
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<PAGE>
things, to indemnify them against certain liabilities that arise because of
their status or service as directors or executive officers and to advance their
expenses incurred as a result of any proceeding against them as to which they
could be indemnified. We also maintain a liability insurance policy, pursuant to
which our directors and officers may be indemnified against liability they may
incur as a result of their service as directors and officers of ImageX.com.
To the extent the provisions of the articles of incorporation, bylaws and
indemnification agreements provide for indemnification of directors for
liabilities arising under the Securities Act, those provisions are, in the
opinion of the Securities and Exchange Commission, against public policy as
expressed in the Securities Act and are therefore unenforceable.
EXECUTIVE COMPENSATION
The following table provides information concerning the compensation
received for services rendered to ImageX.com in all capacities for the year
ended December 31, 1998 by our Chief Executive Officer and the other two
executive officers of ImageX.com whose compensation exceeded $100,000 in fiscal
1998. None of our executive officers whose compensation exceeded $100,000 in
fiscal 1998 received stock options in 1998 or held stock options as of December
31, 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL
COMPENSATION
-------------
NAME AND PRINCIPAL POSITION SALARY
- ------------------------------------------------------------------------------- -------------
<S> <C>
Richard P. Begert
Chief Executive Officer and President(1)..................................... $ 28,125
F. Joseph Verschueren
Chairman of the Board(2)..................................................... 154,211
Cory E. Klatt
Chief Technology Officer, Secretary and Treasurer............................ 111,648
</TABLE>
- ---------
(1) Mr. Begert joined ImageX.com in November 1998. His current annual base
salary is $225,000. 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 our board of directors. He paid the purchase price for the shares by
issuing a promissory note to us. The promissory note accrues interest at the
rate of 7% per year. Principal and interest under the promissory note are
due and payable as follows: (a) 24% of the principal, plus interest accrued
thereon, is due in November 1999 and (b) 2% of the principal is due each
month thereafter until the promissory note is paid in full. Pursuant to the
stock vesting and pledge agreement, Mr. Begert granted ImageX.com a right to
repurchase a portion of these shares if his employment terminates. The
repurchase right lapses after 12 months with respect to 120,000 of the
shares. The repurchase right with respect to the remaining shares lapses
ratably over the next 38 months.
(2) Prior to November 1998, Mr. Verschueren served as President and Chief
Executive Officer.
EMPLOYMENT AGREEMENTS
Pursuant to an offer letter dated November 12, 1998, we agreed to provide
Mr. Begert with an annual base salary of $225,000; participation in our bonus
program (at up to 100% of Mr. Begert's base salary); insurance and participation
in other employee benefit plans; eligibility for an additional bonus for the
achievement of profitability goals; a restricted stock award of 500,000 shares
of common stock at $0.40 per share, issued on November 16, 1998, which is
subject to our repurchase option, which lapses incrementally over a period of
approximately four years; and upon completion of a private
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<PAGE>
placement at a level of $15,000,000 or greater, an additional option to purchase
50,000 shares of common stock. In April 1999, we granted Mr. Begert this option
to purchase 50,000 shares of common stock after we completed our private
placement of Series E Preferred Stock.
Pursuant to an offer letter dated April 23, 1998, we agreed to provide Ms.
Manciagli with an annual base salary of $150,000; a guaranteed bonus of $50,000
on May 12, 1999, the first anniversary of her employment with ImageX.com; an
additional bonus of $50,000 and an option to purchase 12,500 shares of common
stock if we met certain sales goals and marketing objectives; an option to
purchase 62,500 shares of common stock, which vests incrementally over a period
of four years; a relocation reimbursement for documented moving expenses up to
$24,000 and reimbursement for other related expenses; and medical benefits for
her and her family based on our benefit plans. In April 1999, we granted Ms.
Manciagli the aforementioned option to purchase 12,500 shares of common stock
after she had achieved the requisite sales goals and marketing objectives.
Pursuant to an offer letter dated June 22, 1998, we agreed to provide Mr.
Bean with an annual base salary of $150,000; a guaranteed bonus of $50,000 on
July 15, 1999, the first anniversary of his employment with ImageX.com; an
option to purchase 75,000 shares of common stock, which vests incrementally over
a period of four years; a relocation reimbursement for documented moving
expenses up to $16,000 and reimbursement for other related expenses; and medical
benefits for him and his family based on our benefit plans.
Pursuant to an employment agreement dated April 13, 1999, we agreed to
provide Mr. Stanley with an annual base salary of $125,000; an annual bonus, if
any, as determined by our board of directors; the right to participate in fringe
benefit programs generally available to our senior executives; a warrant to
purchase 75,000 shares of common stock at $4.00 per share; and an option to
purchase 25,000 shares of common stock, which vests incrementally over a period
of four years.
Pursuant to an offer letter dated June 9, 1999, we agreed to provide Ms.
Krueger with an annual base salary of $150,000; a guaranteed bonus of $75,000 on
July 5, 2000, the first anniversary of her employment with ImageX.com;
eligibility for an additional bonus for the achievement of profitability goals;
an option to purchase 150,000 shares of common stock, which vests incrementally
over a period of four years; participation in all existing company benefits; and
reimbursement of all reasonable expenses incurred during the conduct of
ImageX.com business.
EMPLOYEE BENEFIT PLANS
AMENDED AND RESTATED 1996 STOCK INCENTIVE COMPENSATION PLAN
In September 1996, our board of directors and shareholders adopted our
Amended and Restated 1996 Stock Incentive Compensation Plan. In April 1999, our
board of directors approved, subject to shareholder approval, an increase in the
number of shares of common stock reserved under the plan, as well as certain
other amendments. The purpose of the option plan is to enhance long-term
shareholder value by offering opportunities to selected persons to participate
in our growth and success, and to encourage them to remain in our service or in
the service of our subsidiaries and to acquire and maintain ownership in
ImageX.com. The plan provides for awards, which may include incentive stock
options, nonqualified stock options and stock awards. The board has reserved a
total of 2,800,000 shares of common stock under the plan, of which 1,140,797
remain available for grant as of June 30, 1999, plus an automatic annual
increase, to be added on the first day of each fiscal year beginning on January
1, 2001, equal to the least of (1) 1,000,000 shares, (2) 5% of the average
number of common shares outstanding as used to calculate fully diluted earnings
per share as reported in ImageX.com's annual financial statements for the
preceding year and (3) a lesser amount determined by the board of directors. As
of June 30, 1999, 99,950 shares had been issued upon the exercise of stock
options granted under the plan (of which 319,000 had been cancelled or forfeited
without being exercised),
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650,000 shares had been issued pursuant to restricted stock awards and 951,253
shares were subject to outstanding options.
The board of directors or a committee appointed by the board will serve as
the plan administrator of the option plan. Unless the plan administrator permits
otherwise, no awards granted under the plan may be assigned or transferred by
the holder other than by will or by the applicable laws of descent and
distribution, and, during the holder's lifetime, these awards generally may be
exercised only by the holder. The board may suspend or terminate the plan at any
time. Unless sooner terminated by the board, the option plan will terminate on
April 21, 2009.
STOCK OPTION GRANTS. The plan administrator has the authority to select
individuals to receive options under the option plan and to specify the terms
and conditions of each option granted, the exercise price (which, for incentive
stock options, must be at least equal to the fair market value of the common
stock on the grant date and, for nonqualified stock options, must be not less
than 85% of the fair market value of the common stock on the grant date), the
vesting provisions and the option term. Unless otherwise provided by the plan
administrator, options granted under the option plan will expire ten years from
the grant date.
STOCK AWARDS. The plan administrator is authorized under the plan to award
shares of common stock on terms and conditions and subject to restrictions
established by the plan administrator in its sole discretion. The terms,
conditions and restrictions that the plan administrator will have the power to
determine will include the manner in which shares subject to stock awards are
held during the periods they are subject to restrictions and the circumstances
under which forfeiture of restricted stock will occur by reason of termination
of the holder's services. Holders of restricted stock are shareholders of
ImageX.com and have, subject to certain restrictions, all the rights of
shareholders with respect to those shares.
CORPORATE TRANSACTIONS. Unless individual letter agreements provide
otherwise, in the event of certain corporate transactions, such as a merger or
sale of ImageX.com, each outstanding option will automatically accelerate and
become 100% vested and exercisable immediately before the corporate transaction,
unless the option is assumed, continued or replaced with a comparable award by
the successor corporation or the parent of the successor corporation. If option
vesting is accelerated, any forfeiture provisions applicable to stock awards
will lapse. 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 and with good reason within two years.
1999 EMPLOYEE STOCK PURCHASE PLAN
In April 1999, our board of directors adopted our 1999 Employee Stock
Purchase Plan, subject to shareholder approval. We will implement our stock
purchase plan upon the effectiveness of this offering to encourage employees to
remain in our employ or the employ of our subsidiaries. We intend for the plan
to qualify under Section 423 of the Internal Revenue Code.
Our stock purchase plan permits our eligible employees and eligible
employees of our subsidiaries to purchase common stock through payroll
deductions of up to 15% of their salary or wage compensation (or higher
percentage established by the plan administrator from time to time). Under our
stock purchase plan, no employee may purchase common stock with a fair market
value of more than $25,000 in any calendar year, or purchase more than 500
shares of common stock in any single purchase period.
We will implement the stock purchase plan with two-year offering periods.
Each two-year offering period has four consecutive six-month purchase periods.
The first offering period will commence on the effectiveness of this offering
and end on August 31, 2001. The first purchase period under the first
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offering period will commence on the effectiveness of this offering and end on
February 29, 2000. Subsequent purchase periods will begin on each March 1 and
September 1 and end on the next August 31 and February 28 (or February 29 in the
case of leap years). Subject to certain limitations, the plan administrator may
establish a different term and different commencing and ending dates for future
offerings.
The price of the common stock purchased under the stock purchase plan will
be the lesser of 85% of the fair market value on the first day of the applicable
offering period and 85% of the fair market value on the last day of the
applicable purchase period, except that the purchase price for the first
offering period will be equal to the lesser of 100% of the initial public
offering price of the common stock and 85% of the fair market value on the last
day of the applicable purchase period. The stock purchase plan terminates ten
years after the date of adoption by our board of directors, but the board may
terminate it at any earlier time. We have not yet issued any shares of common
stock under the stock purchase plan.
Employees generally will be eligible to participate in the stock purchase
plan if they are customarily employed by ImageX.com for 20 hours or more per
week and are not (and would not become as a result of purchasing shares under
the plan) holders of 5% or more of our common stock or of our subsidiaries. In
addition, for eligibility, the plan administrator may require that the employee
works a minimum of up to five months per year and has been an employee for some
minimum period of time not to exceed two years. Options granted under the stock
purchase plan are not transferable and are only exercisable during the
optionee's lifetime.
We authorized the issuance under the stock purchase plan of a total of
250,000 shares of common stock, plus automatic annual increases, to be added on
the first day of our fiscal year beginning on January 1, 2001, equal to the
least of (1) 100,000 shares, (2) 0.5% of the average common shares outstanding
as used to calculate fully diluted earnings per share as reported in
ImageX.com's annual financial statements for the preceding year and (3) a lesser
amount as determined by our board of directors.
In the event of a merger or consolidation resulting in a change of control
or acquisition by another corporation of all or substantially all our assets,
each outstanding option to purchase shares under the stock purchase plan shall
be assumed or an equivalent option substituted by the successor corporation. If
the successor corporation refuses to assume or substitute for the option, the
offering period during which a participant may purchase stock will be shortened
to a specified date before such proposed transaction. Similarly, in the event of
a proposed liquidation or dissolution of ImageX.com, the offering period during
which a participant may purchase stock will be shortened to a specified date
before the date of the proposed liquidation or dissolution.
The stock purchase plan will expire ten years after the date of its adoption
by our board of directors, but the board of directors may suspend or terminate
the stock purchase plan at any time.
401(k) PLAN
We maintain a 401(k) plan that covers all our employees who satisfy certain
eligibility requirements relating to minimum age, length of service and hours
worked. We may make an annual contribution for the benefit of eligible employees
in an amount determined by our board of directors. We have not made any such
contribution to date and have no current plans to do so. Eligible employees may
make pretax elective contributions of up to 15% of their compensation, subject
to maximum limits on contributions prescribed by law.
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CERTAIN TRANSACTIONS
From January 1, 1996 through June 30, 1999, in a series of private
transactions, we sold securities as follows:
<TABLE>
<CAPTION>
PURCHASE WEIGHTED AVERAGE
SECURITY DATE OF ISSUANCE SHARES PRICE EXERCISE PRICE
- ------------------------------------------------ --------------------- ---------- ----------- -----------------
<S> <C> <C> <C> <C>
Series B Preferred Stock........................ 12/20/96 1,750,000 $ 2.00 --
Series C Preferred Stock........................ 1/9/98 and 5/14/98 2,000,006 $ 3.00 --
Series D Preferred Stock........................ 10/1/98 and 1/11/99 898,735 $ 3.98 --
Series E Preferred Stock........................ 4/8/99 and 4/15/99 5,952,390 $ 4.20 --
Common Stock Warrants........................... 1/9/98 500,000 $ .02 $ 3.00
1/9/98 290,000 $ .02 $ 7.50
5/14/98 390,000 $ .02 $ 3.00
4/13/99 75,000 $ .02 $ 4.00
4/21/99 48,165 $ .02 $ 4.20
Series C Warrants............................... 8/24/98 13,334 $ .02 $ 3.00
8/28/98 6,667 $ .02 $ 3.00
Series D Warrants............................... 10/1/98 69,542 $ .02 $ 3.98
Series E Warrants............................... 4/8/99 42,768 $ .02 $ 4.20
</TABLE>
We sold these securities pursuant to preferred stock purchase agreements on
similar terms (except for terms relating to date and price), under which we made
representations, warranties and covenants, and provided the purchasers with
registration rights, information rights, and rights of first refusal, among
other provisions. Listed below for holders of 5% or more of our common stock and
our directors, officers and entities affiliated with our directors and our
officers are the securities they purchased in the above financings.
<TABLE>
<CAPTION>
SHARES OF PREFERRED STOCK PURCHASED WARRANTS PURCHASED
------------------------------------------------ -------------------------------------
INVESTOR SERIES B SERIES C SERIES D SERIES E COMMON SERIES C SERIES D
- ---------------------------------------- ----------- ----------- ----------- --------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Entities affiliated with Acorn Ventures,
Inc.(1)............................... 691,668 1,464,287 924,875
Entities affiliated with Technology
Partners(2)........................... 875,000 473,334 101,294 952,381 92,300 13,334 10,060
Entities affiliated with Alta California
Management Partners II, L.P.(3)....... 1,428,572
Vanguard V, L.P......................... 500,000 273,334 51,111 53,300 6,667 5,030
Eric J. Bean(4)......................... 12,575 1,258
Dana F. Manciagli(5).................... 62,875 59,524 6,288
Elwood D. Howse, Jr.(6)................. 62,500 36,667 65,476 7,150
Richard R. Sonstelie(7)................. 12,575 8,334 1,258
</TABLE>
- ------------
(1) Includes shares purchased by Acorn Ventures IV, LLC and Internet Ventures,
LLC. Acorn Ventures, Inc. is a member of Acorn Ventures IV, LLC and Internet
Ventures, LLC.
(2) Includes shares purchased by Technology Partners Fund V, L.P. and Technology
Partners Fund VI, L.P. Mr. Ardell, a director of ImageX.com, is a general
partner of TPW Management V, L.P., which is the general partner of
Technology Partners Fund V, L.P. and a managing member of TP Management VI,
LLC, which is the general partner of Technology Partners Fund VI, L.P.
(3) Includes shares purchased by Alta California Partners II, L.P. and Alta
Embarcadero Partners II, LLC. Mr. Gruener, a director of ImageX.com, is a
general partner of Alta California Management Partners II, L.P., which is
the general partner of Alta California Partners II, L.P. and the managing
member of Alta Embarcadero Partners II, LLC.
(4) Includes shares and warrants purchased by Donaldson, Lufkin & Jenrette, of
which Mr. Bean, an executive officer of ImageX.com, is the beneficial owner.
(5) Includes shares and warrants purchased by Galaxy Investment Partners. Ms.
Manciagli, an executive officer of ImageX.com, is a general partner of
Galaxy Investment Partners.
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(6) Includes shares and warrants purchased by Howse Family Partnership. Mr.
Howse, a director of ImageX.com, is a general partner of Howse Family
Partnership.
(7) Includes shares and warrants purchased jointly by Mr. Sonstelie and his
spouse.
In December 1996, we issued 187,500 shares of Series A Preferred Stock to
each of Messrs. Verschueren and Klatt in connection with a reclassification of
their issued and outstanding shares of common stock into Series A Preferred
Stock.
In December 1996, ImageX.com issued promissory notes to Technology Partners
Fund V, L.P. in the amount of $100,000 and to Vanguard V, L.P. in the amount of
$50,000. The notes accrued interest at the rate of 8% per annum. Technology
Partners Fund V, L.P. and Vanguard V, L.P. paid a portion of the purchase price
for their shares of Series B Preferred Stock by canceling the convertible
promissory notes.
In December 1996, we entered into stock vesting agreements with F. Joseph
Verschueren, Cory E. Klatt and Elwood D. Howse, Jr., pursuant to which we issued
an aggregate of 750,000 shares of our common stock in exchange for an aggregate
of $300,000. Pursuant to the stock vesting agreements, each of Messrs.
Verschueren, Klatt and Howse granted ImageX.com a right to repurchase a portion
of his shares if his employment or consulting services terminate. The repurchase
rights lapse ratably over the 36-month period ending in December 1999. The
number of shares issued to each of Messrs. Verschueren, Klatt and Howse, and the
percentage of shares subject to the repurchase option, is as follows:
<TABLE>
<CAPTION>
PERCENT SUBJECT
NAME SHARES ISSUED TO REPURCHASE
- ------------------------------------------------------------------------- ------------- -----------------
<S> <C> <C>
F. Joseph Verschueren.................................................... 400,000 100%
Cory E. Klatt............................................................ 300,000 100%
Elwood D. Howse, Jr...................................................... 50,000 50%
</TABLE>
In August 1997, we entered into a stock subscription and repurchase
agreement with Elwood D. Howse, Jr., pursuant to which we issued 100,000 shares
of common stock to Mr. Howse at a purchase price of $.20 per share. Mr. Howse
paid the purchase price for the shares by issuing a $20,000 promissory note to
ImageX.com. Interest on the promissory note is due and payable monthly at the
rate of 7% per year. The principal amount of the promissory note is due in full
in April 2000. Pursuant to the stock subscription and repurchase agreement, Mr.
Howse granted ImageX.com a right to repurchase a portion of his shares if his
consulting services terminate. The repurchase right lapses ratably over the
36-month term beginning May 1, 1997 and ending April 30, 2000.
In May 1998, in connection with its purchase of Series C Preferred Stock,
Acorn Ventures IV, LLC issued a promissory note to ImageX.com in the amount of
$490,000.50. No interest was payable on the unpaid principal amount of the note.
In October 1998, Acorn Ventures IV, LLC satisfied its obligation under the note
with a cash payment of the principal amount.
In August 1998, we issued convertible promissory notes to Technology
Partners Fund V, L.P. in the amount of $400,000 and to Vanguard V, L.P. in the
amount of $200,000. The notes accrued interest at the rate of 7% per annum.
Technology Partners Fund V, L.P. and Vanguard V, L.P. paid the purchase price
for their shares of Series D Preferred Stock by canceling the convertible
promissory notes.
In November 1998, Richard P. Begert, our President, Chief Executive Officer
and a director, purchased 500,000 shares of common stock at $0.40 per share. Mr.
Begert paid the purchase price for the shares by issuing a promissory note to
us. The promissory note accrues interest at the rate of 7% per year. Principal
and interest under the promissory note are due and payable as follows: (a) 24%
of the principal, plus interest accrued thereon, is due in November 1999 and (b)
2% of the principal is due each month thereafter until the promissory note is
paid in full. Pursuant to the stock vesting and pledge agreement, Mr. Begert
granted ImageX.com a right to repurchase a portion of these shares if
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<PAGE>
his employment terminates. The repurchase right lapses after 12 months with
respect to 120,000 of the shares. The repurchase right with respect to the
remaining shares lapses ratably over the next 38 months.
In January 1998, we entered into a consulting agreement with Acorn Ventures
IV, LLC, pursuant to which we were required to pay reasonable out-of-pocket
expenses incurred by Acorn Ventures in connection with its services as a
consultant. In connection with the consulting agreement, Acorn Ventures received
a warrant to purchase 790,000 shares of common stock. Other than the
reimbursement of out-of-pocket expenses, there was no other cash compensation
under the consulting agreement. In addition, we entered into agreements to
indemnify Acorn Ventures against expenses (including attorneys' fees),
judgments, fines and settlement amounts incurred by Acorn Ventures as a party or
participant arising out of Acorn Ventures' services as a consultant. On April 7,
1999, Acorn Ventures and ImageX.com mutually agreed to terminate the consulting
agreement and accelerate the unvested portion of the warrant.
We have extended offer letters to Richard P. Begert, Robin L. Krueger, Dana
F. Manciagli and Eric J. Bean and have entered into an employment agreement with
Nicholas J. Stanley. See "Management--Employment Agreements."
During 1998, we paid approximately $521,000 to Parallel Communications, our
advertising agency, for services rendered in connection with our marketing
efforts. Mr. Verschueren, a director of ImageX.com, serves as a director and
owns one-third of the outstanding shares of capital stock of Parallel
Communications. Mr. Klatt, an executive officer of ImageX.com, owns one-third of
the outstanding shares of capital stock of Parallel Communications. During 1996,
ImageX.com had a payable to Parallel Communications in the amount of $86,627 for
various services performed and expenses incurred on behalf of ImageX.com, which
amount was disputed by ImageX.com and, as a consequence, was written off in
1996.
We intend to enter into indemnification agreements with each of our
executive officers and directors. See "Management--Director and Officer
Indemnification and Liability."
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<PAGE>
PRINCIPAL SHAREHOLDERS
The following table summarizes certain information regarding the beneficial
ownership of our common stock as of June 30, 1999 for
- each person or group that we know owns more than 5% of the common stock;
- each of our directors;
- our chief executive officer;
- each officer whose compensation exceeded $100,000 in 1998; and
- all our directors and executive officers as a group.
Beneficial ownership is determined in accordance with rules of the
Securities and Exchange Commission 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 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. Except as otherwise
indicated, we believe the beneficial owners of the common stock listed below,
based on information furnished by them, have sole voting and investment power
with respect to the shares listed opposite their names. Unless otherwise
indicated, the following officers, directors and shareholders can be reached at
the principal offices of ImageX.com.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
OUTSTANDING
NUMBER OF SHARES ----------------------------
BENEFICIALLY BEFORE AFTER
NAME AND ADDRESS OWNED OFFERING(1) OFFERING(2)
- --------------------------------------------------------------------- ----------------- ------------- -------------
<S> <C> <C> <C>
Entities affiliated with Acorn Ventures, Inc.(3) .................... 3,080,830 23.5% 18.0%
1309 114th Avenue S.E., Suite 200
Bellevue, WA 98004
Entities affiliated with Technology Partners(4) ..................... 2,517,703 19.2 14.7
1550 Tiburon Boulevard, Suite A
Belvedere, CA 94920
Entities affiliated with Alta California Management 1,428,572 10.9 8.4
Partners II, L.P.(5) ..............................................
One Embarcadero Center, Suite 4050
Palo Alto, CA 94301
Vanguard V, L.P.(6) ................................................. 889,442 6.8 5.2
525 University Avenue, Suite 600
Palo Alto, CA 94301
OKGBD & Co., as nominee for SunAmerica Investments, Inc.(7) ......... 772,118 5.9 4.5
1 SunAmerica Center
Century City, CA 90067
Richard P. Begert.................................................... 500,000 3.8 2.9
Cory E. Klatt........................................................ 487,500 3.7 2.9
F. Joseph Verschueren................................................ 587,500 4.5 3.4
John E. Ardell, III(8)............................................... 2,517,703 19.2 14.7
Garrett P. Gruener(9)................................................ 1,428,572 10.9 8.4
Elwood D. Howse, Jr.(10)............................................. 334,293 2.5 2.0
Richard R. Sonstelie(11)............................................. 34,667 * *
Bernee D. L. Strom(12)............................................... 12,500 * *
All directors and executive officers as a group (12 persons)(13)..... 6,211,505 47.4 36.3
</TABLE>
- ---------
* Less than 1%.
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<PAGE>
(1) Based on shares outstanding as of June 30, 1999.
(2) Assumes that all outstanding options and warrants to purchase common stock
are not exercised.
(3) Includes 35,715 outstanding shares held by Acorn Ventures, Inc. Also
includes 658,334 outstanding shares and 918,375 shares issuable pursuant to
warrants currently exercisable held by Acorn Ventures IV, LLC. Also
includes 1,461,906 outstanding shares and 6,500 shares issuable pursuant to
warrants currently exercisable held by Internet Ventures, LLC. Acorn
Ventures, Inc. is a member of Acorn Ventures IV, LLC and Internet Ventures,
LLC.
(4) Represents 2,401,009 outstanding shares and 115,694 shares issuable
pursuant to warrants currently exercisable held by Technology Partners Fund
V, L.P. and Technology Partners Fund VI, L.P.
(5) Represents 1,415,483 outstanding shares held by Alta California Partners
II, L.P. and 13,089 outstanding shares held by Alta Embarcadero Partners
II, LLC.
(6) Includes 64,997 shares of common stock issuable pursuant to warrants
currently exercisable.
(7) Includes 37,725 shares of common stock issuable pursuant to warrants
currently exercisable.
(8) Includes 2,401,009 outstanding shares and 115,694 shares issuable pursuant
to warrants currently exercisable held by Technology Partners Fund V, L.P.
and Technology Partners Fund VI, L.P. Mr. Ardell is a general partner of
TPW Management V, L.P., which is the general partner of Technology Partners
Fund V, L.P., and a managing member of TP Management VI, LLC, which is the
general partner of Technology Partners Fund VI, L.P. Mr. Ardell disclaims
beneficial ownership of these shares except to the extent of his pecuniary
interest in these shares arising from his interest in Technology Partners.
(9) Represents outstanding shares held by Alta California Partners II, L.P. and
Alta Embarcadero Partners II, LLC. Mr. Gruener is a general partner of Alta
California Management Partners II, L.P., which is the general partner of
Alta California Partners II, L.P. and the managing 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, L.P.
(10) Includes 327,143 outstanding shares and 7,150 shares issuable pursuant to
warrants currently exercisable held by Howse Family Partnership. Mr. Howse
is a general partner of Howse Family Partnership.
(11) Includes 20,909 outstanding shares and 1,258 shares issuable pursuant to
warrants currently exercisable held jointly by Mr. Sonstelie and his
spouse.
(12) Represents shares issuable pursuant to options currently exercisable.
(13) Includes 220,396 shares issuable pursuant to options and warrants
exercisable within 60 days of June 30, 1999.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
We are authorized to issue up to 70,000,000 shares of common stock, $0.01
par value per share, and 30,000,000 shares of preferred stock, $0.01 par value
per share. The following summary of certain provisions of the common stock and
preferred stock is not complete and is qualified in its entirety by reference to
our articles of incorporation, which are included as an exhibit to the
registration statement of which this prospectus is a part.
COMMON STOCK
As of June 30, 1999, assuming conversion of all outstanding shares of
preferred stock, there were 13,102,831 shares of common stock outstanding held
of record by 86 shareholders. Following this offering, there will be 17,102,831
shares of common stock outstanding (assuming no exercise of the underwriters'
over-allotment option and no exercise of outstanding options). The holders of
common stock are entitled to one vote per share on all matters to be voted on by
the shareholders. Subject to the prior rights of holders of any outstanding
shares of preferred stock, the holders of common stock are entitled to receive
ratably such dividends, if any, as may be declared by the board of directors out
of funds legally available for the payment of dividends. See "Dividend Policy."
In the event of a liquidation, dissolution or winding up of ImageX.com, the
holders of common stock are entitled to share pro rata all assets remaining
after payment of liabilities and prior liquidation preferences of any
outstanding shares of preferred stock. Holders of common stock have no
preemptive rights or rights to convert their common stock into any other
securities. There are no redemption or sinking fund provisions applicable to the
common stock. All outstanding shares of common stock are fully paid and
nonassessable, and the shares of common stock to be issued following this
offering will be fully paid and nonassessable.
PREFERRED STOCK
Upon the closing of this offering, all outstanding shares of preferred stock
will be converted into 11,351,131 shares of common stock. Thereafter, pursuant
to our articles of incorporation, the board of directors will have the
authority, without further action by the shareholders, to issue up to 30,000,000
shares of preferred stock in one or more series. The board also has the
authority to fix the designations, powers, preferences, privileges and relative,
participating, optional or special rights and the qualifications, limitations or
restrictions of any preferred stock issues, including dividend rights,
conversion rights, voting rights, terms of redemption and liquidation
preferences, any or all of which may be greater than the rights of the common
stock. The board of directors, without shareholder approval, can issue preferred
stock with voting, conversion or other rights that could adversely affect the
voting power and other rights of the holders of common stock. Preferred stock
could thus be issued quickly with terms that could delay or prevent a change in
control of ImageX.com or make removal of management more difficult.
Additionally, the issuance of preferred stock may decrease the market price of
the common stock and may adversely affect the voting and other rights of the
holders of common stock. We have no plans to issue any preferred stock.
WARRANTS
As of June 30, 1999, there were outstanding warrants to purchase 1,460,476
shares of common stock exercisable as follows:
- 1,180,000 shares at a weighted average exercise price of $4.11 per share,
expiring on January 8, 2005;
- 13,334 shares at an exercise price of $3.00 per share, expiring on August
24, 2005;
- 6,667 shares at an exercise price of $3.00 per share, expiring on August
28, 2005;
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<PAGE>
- 69,542 shares at an exercise price of $3.98 per share, expiring on October
1, 2005;
- 75,000 shares at an exercise price of $4.00 per share, expiring on April
13, 2006;
- 42,768 shares at an exercise price of $4.20 per share, expiring on April
8, 2004;
- 48,165 shares at an exercise price of $4.20 per share, expiring on April
21, 2004; and
- 25,000 shares at an exercise price of $6.00 per share, expiring on April
20, 2004.
REGISTRATION RIGHTS
Pursuant to an investor rights agreement dated April 8, 1999 between us and
holders of 10,601,131 shares of our common stock and warrants to purchase
132,311 shares of our common stock, these holders will be entitled to certain
registration rights beginning 180 days following the effective date of this
prospectus. Under the investor rights agreement, the holders, by written request
of at least 40% of these shares then outstanding, may demand that we file a
registration statement under the Securities Act covering all or a portion of the
holders' shares, provided that the registration statement has a proposed
aggregate offering price, net of underwriting discounts and commissions, of at
least $10 million.
In addition, if any holder who is a party to the investor rights agreement
requests that we file a registration statement on Form S-3 and there is a
reasonably anticipated aggregate offering price exceeding $1 million, we are
required to use our best efforts to cause these shares to be registered. The
holders who are parties to that investor rights agreement may not demand more
than two Form S-3 registrations in any 12-month period.
Further, if we propose to register any of our securities under the
Securities Act, either for our own account or for the account of other security
holders (other than registrations relating solely to employee benefit plans or
acquisitions), holders who are parties to the investor rights agreement are
entitled to notice of the registration and to include their shares in the
registration at our expense. This registration right is subject to certain
conditions and limitations, among them the right of the underwriters of an
offering to limit the number of shares held by parties to the investor rights
agreement included in the registration (but not below 25% of the total number of
shares to be included therein).
ANTITAKEOVER EFFECTS OF CERTAIN PROVISIONS OF ARTICLES OF INCORPORATION, BYLAWS
AND WASHINGTON LAW
As noted above, our board of directors, without shareholder approval, has
the authority under our articles of incorporation to issue preferred stock with
rights superior to the rights of the holders of common stock. As a result,
preferred stock could be issued quickly and easily, could adversely affect the
rights of holders of common stock and could be issued with terms calculated to
delay or prevent a change in control of ImageX.com or make removal of members of
the board of directors or management more difficult.
ELECTION AND REMOVAL OF DIRECTORS. Effective as of the first annual meeting
of shareholders following this offering, our articles of incorporation provide
for the division of our board of directors into three classes, as nearly as
equal in number as possible, with the directors in each class serving for a
three-year term, and one class being elected each year by our shareholders.
Directors may be removed only for cause. Because this system of electing and
removing directors generally makes it more difficult for shareholders to replace
a majority of the board of directors, it may tend to discourage a third party
from making a tender offer or otherwise attempting to gain control of ImageX.com
and may maintain the incumbency of the board of directors.
APPROVAL FOR CERTAIN BUSINESS COMBINATIONS. Our articles of incorporation
require that certain business combinations (including a merger, share exchange
and the sale, lease, exchange, mortgage,
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<PAGE>
pledge, transfer or other disposition or encumbrance of a substantial part of
our assets other than in the usual and regular course of business) be approved
by the holders of not less than two-thirds of the outstanding shares, unless
such business combination has been approved by a majority of the board of
directors, in which case the affirmative vote required shall be a majority of
the outstanding shares.
SHAREHOLDER MEETINGS. Under our articles of incorporation and bylaws, our
shareholders may call a special meeting only upon the request of holders of at
least 25% of the outstanding shares. Additionally, the chairman of the board,
the chief executive officer, the president or the board of directors may call
special meetings of shareholders.
REQUIREMENTS FOR ADVANCE NOTIFICATION OF SHAREHOLDER NOMINATIONS AND
PROPOSALS. Our bylaws establish advance notice procedures with respect to
shareholder proposals and the nomination of candidates for election of
directors, other than nominations made by or at the direction of the board of
directors or a committee thereof.
WASHINGTON LAW. Washington law imposes restrictions on certain transactions
between a corporation and certain significant shareholders. Chapter 23B.19 of
the Washington Business Corporation Act prohibits a "target corporation," with
certain exceptions, from engaging in certain significant business transactions
with an "acquiring person," which is defined as a person or group of persons
that beneficially owns 10% or more of the voting securities of the target
corporation, for a period of five years after becoming an acquiring person,
unless the transaction or acquisition of shares is approved by a majority of the
members of the target corporation's board of directors prior to the time of
acquisition. Such prohibited transactions include, among other things,
- a merger or consolidation with, disposition of assets to, or issuance or
redemption of stock to or from, the acquiring person;
- termination of 5% or more of the employees of the target corporation as a
result of the acquiring person's acquisition of 10% or more of the shares;
or
- allowing the acquiring person to receive any disproportionate benefit as a
shareholder.
After the five-year period, a "significant business transaction" may occur,
as long as it complies with certain "fair price" provisions of the statute. This
provision may have the effect of delaying, deterring or preventing a change in
control of ImageX.com.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is ChaseMellon
Shareholder Services, L.L.C.
NASDAQ NATIONAL MARKET LISTING
We have been approved for quotation on the Nasdaq National Market under the
symbol "IMGX," subject to notice of official issuance.
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for the common
stock. We cannot provide any assurances that a significant public market for the
common stock will develop or be sustained after this offering. Future sales of
substantial amounts of common stock in the public market, or the possibility of
such sales occurring, could adversely affect prevailing market prices for the
common stock or our future ability to raise capital through an offering of
equity securities.
After this offering, we will have 17,102,831 outstanding shares of common
stock. Of these shares, the 4,000,000 shares that we expect to sell in this
offering (4,600,000 shares if the underwriters' over-allotment option is
exercised in full) will be freely tradable in the public market without
restriction under the Securities Act, unless these shares are held by our
"affiliates," as that term is defined in Rule 144 under the Securities Act.
The remaining 13,102,831 shares of common stock that will be outstanding
after this offering will be restricted shares. We issued and sold the restricted
shares in private transactions in reliance on exemptions from registration under
the Securities Act. Restricted shares may be sold in the public market only if
they are registered or if they qualify for an exemption from registration under
Rule 144 or Rule 701 under the Securities Act, as summarized below.
Pursuant to certain lock-up agreements, all the executive officers,
directors and shareholders of ImageX.com, who collectively hold an aggregate of
13,082,256 restricted shares, have agreed not to offer, sell, contract to sell,
grant any option to purchase or otherwise dispose of any such shares for a
period of 180 days from the date of this prospectus. Volpe Brown Whelan &
Company, LLC may, in its sole discretion and at any time without prior notice,
release all or any portion of the common stock subject to these lock-up
agreements. We also have entered into an agreement with the underwriters that we
will not offer, sell or otherwise dispose of common stock for a period of 180
days from the date of this prospectus. On the date of the expiration of the
lock-up agreements, 6,909,284 restricted shares will be eligible for immediate
sale (of which 5,461,834 shares will be subject to certain volume, manner of
sale and other limitations under Rule 144). The remaining 6,172,972 restricted
shares will be eligible for sale pursuant to Rule 144 on the expiration of
various one-year holding periods over the six months following the expiration of
the lock-up period.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person (or persons whose shares are aggregated)
who has beneficially owned restricted shares for at least one year (including
the holding period of any prior owner except an affiliate) would be entitled to
sell within any three-month period a number of shares that does not exceed the
greater of (1) 1% of the number of shares of common stock then outstanding
(which will equal approximately 171,028 shares immediately after this offering)
and (2) the average weekly trading volume of the common stock during the four
calendar weeks preceding the filing of a Form 144 with respect to such sale.
Sales under Rule 144 are also subject to certain manner of sale provisions and
notice requirements and to the availability of current public information about
ImageX.com. Under Rule 144(k), a person who is not deemed to have been an
affiliate of ImageX.com at any time during the three months preceding a sale,
and who has beneficially owned the shares proposed to be sold for at least two
years (including the holding period of any prior owner except an affiliate), is
entitled to sell these shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144.
Rule 701 permits resales of shares in reliance upon Rule 144 but without
compliance with certain restrictions, including the holding period requirement,
of Rule 144. Any employee, officer or director of or consultant to ImageX.com
who purchased his or her shares pursuant to a written compensatory plan or
contract may be entitled to rely on the resale provisions of Rule 701. Rule 701
permits affiliates to sell their Rule 701 shares under Rule 144 without
complying with the holding period requirements of Rule 144. Rule 701 further
provides that nonaffiliates may sell such shares in reliance on Rule 144
73
<PAGE>
without having to comply with the holding period, public information, volume
limitation or notice provisions of Rule 144. All holders of Rule 701 shares are
required to wait until 90 days after the date of this prospectus before selling
their shares. However, all shares issued pursuant to Rule 701 are subject to
180-day lock-up agreements and will only become eligible for sale at the earlier
of the expiration of the lock-up agreements or upon obtaining the prior written
consent of Volpe Brown Whelan & Company, LLC on behalf of the underwriters.
We intend to file, after the effective date of this offering, a registration
statement on Form S-8 to register approximately 4,542,050 shares of common stock
reserved for issuance under our option plan and, employee stock purchase plan.
The registration statement will become effective automatically upon filing.
Shares issued under the foregoing plans, after the filing of a registration
statement on Form S-8, may be sold in the open market, subject, in the case of
certain holders, to the Rule 144 limitations applicable to affiliates, the
above-referenced lock-up agreements and vesting restrictions imposed by us.
In addition, 180 days after the effective date of this offering, the holders
of 10,601,131 shares of outstanding common stock and 132,311 warrants to
purchase common stock will, under certain circumstances, have rights to require
us to register their shares for future sale.
74
<PAGE>
UNDERWRITING
Under the terms and conditions contained in an underwriting agreement among
the underwriters and ImageX.com, each of the underwriters, for whom Volpe Brown
Whelan & Company, LLC, Prudential Securities Incorporated and E*TRADE Securities
Inc. are acting as representatives, has severally agreed to purchase from us the
number of shares of common stock set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ------------------------------------------------------------------------------------- ----------
<S> <C>
Volpe Brown Whelan & Company, LLC....................................................
Prudential Securities Incorporated...................................................
E*TRADE Securities Inc...............................................................
----------
Total............................................................................ 4,000,000
----------
----------
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase shares of common stock are subject to approval of
certain legal matters by their counsel and to certain other conditions. Under
the terms and conditions of the underwriting agreement, all the underwriters are
obligated to take and pay for all such shares of common stock if any are taken.
The following table shows the per share and total underwriting discounts and
commissions to be paid to the underwriters by ImageX.com. Such amounts are shown
assuming both no exercise and full exercise of the underwriters' option to
purchase 600,000 additional shares.
<TABLE>
<CAPTION>
FULL
NO EXERCISE EXERCISE
----------- ------------
<S> <C> <C>
Per Share....................................................... $ $
Total....................................................... $ $
</TABLE>
ImageX.com estimates that the total expenses of the offering, excluding
underwriting discounts and commissions will be $1.2 million.
The underwriters propose initially to offer the shares of common stock
directly to the public at the public offering price set forth on the cover page
of this prospectus and to certain dealers at such price, less a concession not
in excess of $ per share. The underwriters may allow, and such dealers may
reallow, concessions not in excess of $ per share of the common stock to
certain other dealers. After the initial public offering of the common stock,
the offering price of the common stock and other selling terms may be changed by
the underwriters. The underwriters expect to deliver the shares against payment
in Seattle, Washington on , 1999. The underwriters do not intend to
confirm sales to any accounts over which they exercise discretionary authority.
Pursuant to the underwriting agreement, we have granted to the underwriters
an option, exercisable for 30 days from the date of this prospectus, to purchase
up to 600,000 additional shares of common stock on the same terms and conditions
as set forth on the cover page of this prospectus. The underwriters may exercise
this option solely to cover over-allotments. To the extent such option is
exercised, each underwriter will have a commitment, subject to certain
conditions, to purchase a number of additional shares of common stock
proportionate to such underwriter's initial commitment pursuant to the
underwriting agreement.
75
<PAGE>
A prospectus in electronic format is being made available on an Internet Web
site maintained by E*TRADE Securities, Inc. Internet purchases of the common
stock offered by this prospectus will be available only to registered customers
of E*TRADE Securities, Inc. who possess sufficient net worth and investment
experience. All eligible accounts may submit an indication of interest to
E*TRADE Securities, Inc. to purchase shares. If demand exceeds availability,
E*TRADE Securities, Inc. will randomly allocate shares to applicants in 100
share lots in a round-robin fashion.
The underwriters have reserved for sale, at the initial public offering
price, 300,000 shares of common stock for certain of our employees, friends and
family who have expressed an interest in purchasing shares of common stock in
this offering. Such persons are expected to purchase, in the aggregate, not more
than 7.5% of the common stock offered in this offering. The number of shares
available for sale to the general public in this offering will be reduced to the
extent such persons purchase such reserved shares. Any reserved shares not
purchased will be offered by the underwriters on the same basis as other shares
offered hereby. The reserved shares will be sold at the same price as the shares
offered to the general public, and the same selling concession will be payable
to the underwriters with respect to these shares.
From the date of this prospectus until 180 days after such date, we and all
our shareholders, officers and directors have agreed not to, directly or
indirectly, sell, offer, contract to sell, transfer the economic risk of
ownership in, make any short sale, pledge or otherwise dispose of any shares of
common stock or any securities convertible into or exchangeable or exercisable
for or any other rights to purchase or acquire common stock without the prior
consent of Volpe Brown Whelan & Company, LLC. However, Volpe Brown Whelan &
Company, LLC may, in its sole discretion and at any time without notice, release
all or any portion of the securities subject to lock-up agreements.
We have agreed to indemnify the underwriters against certain liabilities,
losses and expenses, including liabilities under the Securities Act or to
contribute to payments that the underwriters may be required to make in respect
thereof.
Prior to this offering, there has been no public market for our common
stock. The initial public offering price for the shares of common stock in this
offering will be determined by agreement between us and the underwriters. Among
the factors to be considered in making such determination will be the history
of, and the prospects for, the industry in which we compete, an assessment of
our management, our present operations, our historical results of operations and
the trend of our revenues and earnings, our prospects for future earnings, the
general condition of the securities markets at the time of this offering and the
price of similar securities of generally comparable companies. An active trading
market may not develop for our common stock, and our common stock may not trade
in the public markets at or above the initial public offering price.
In order to facilitate this offering, certain persons participating in this
offering may engage in transactions that stabilize, maintain or otherwise affect
the price of the common stock during and after this offering. Specifically, the
underwriters may over-allot or otherwise create a short position in the common
stock for their own account by selling more shares of common stock than we have
sold to them. The underwriters may elect to cover any such short position by
purchasing shares of common stock in the open market or by exercising their
over-allotment option. In addition, the underwriters may stabilize or maintain
the price of the common stock by bidding for or purchasing shares of common
stock in the open market and may impose penalty bids. Penalty bids involve
reclaiming a portion of the selling concessions allowed to syndicate members or
other broker-dealers participating in the offering in the event that the
managing underwriters repurchase shares sold by or for the account of such
syndicate members or broker-dealers in the open market to stabilize the price of
the common stock. For instance, in the event that the representatives determine
to repurchase a certain number of the shares sold in this offering in the open
market, the representatives may choose to reduce the aggregate total selling
concessions payable to each syndicate member by the amount of the selling
76
<PAGE>
concessions attributable to the portion of the repurchased shares sold by the
syndicate member. These transactions may stabilize or maintain the market price
at a level above that which might otherwise prevail in the open market. The
imposition of a penalty bid may also affect the price of the common stock to the
extent that it discourages resales thereof. To reduce likelihood of penalty
bids, syndicate members and broker-dealers may be less likely to sell shares to
investors who have a history of quickly selling their allocated shares. No
representation is made as to the magnitude or effect of any such stabilization
or other transactions. Such transactions may be effected on the Nasdaq National
Market or otherwise and, if commenced, may be discontinued at any time.
In April 1999, affiliates of Volpe Brown Whelan & Company and Wilson Sonsini
Goodrich & Rosati, counsel to the underwriters in this offering, purchased
47,619 and 2,381 shares of Series E Preferred Stock, respectively, at $4.20 per
share as part of an equity financing on the same terms pursuant to which all
other participants in the financing purchased their shares. Purchase of these
shares may be deemed to be underwriting compensation. These shares will be
restricted from sale, transfer, pledge, assignment or hypothecation for a period
of one year from the effective date of the offering in accordance with NASD
Conduct Rules.
77
<PAGE>
LEGAL MATTERS
Certain legal matters will be passed on for ImageX.com by Perkins Coie LLP,
Seattle, Washington. Certain legal matters will be passed on for the
underwriters by Wilson Sonsini Goodrich & Rosati, Professional Corporation,
Kirkland, Washington and Palo Alto, California.
EXPERTS
The financial statements of ImageX.com, Inc. as of December 31, 1997 and
1998 and for each of the three years in the period ended December 31, 1998,
included in this Prospectus, have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
The financial statements of Fine Arts Engravers Company, Inc. (d.b.a. Fine
Arts Graphics) as of December 31, 1997 and 1998 and for each of the two years in
the period ended December 31, 1998, included in this prospectus, have been so
included in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1. This prospectus, which forms a part of the registration
statement, does not contain all the information included in the registration
statement. Certain information is omitted and you should refer to the
registration statement and its exhibits. With respect to references made in this
prospectus to any contract or other document of ImageX.com, such references are
not necessarily complete and you should refer to the exhibits attached to the
registration statement for copies of the actual contract or document. You may
review a copy of the registration statement, including exhibits filed therewith,
at the Commission's public reference facilities in Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional offices of
the Commission located at 7 World Trade Center, Suite 1300, New York, New York
10048, and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. You may also obtain copies of such materials from the Public
Reference Section of the Commission, Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. The Commission
maintains a Web site (http://www.sec.gov) that contains reports, proxy and
information statements and other information regarding registrants, such as
ImageX.com, that file electronically with the Commission.
This prospectus includes statistical data regarding the Internet sector and
the printing industry which were obtained from industry publications, including
reports generated by Forrester Research and CAP Ventures. These industry
publications generally indicate that they have obtained information from sources
believed to be reliable, but they do not guarantee the accuracy and completeness
of such information. While we believe these industry publications to be
reliable, we have not independently verified such data.
78
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
IMAGEX.COM, INC.
Report of PricewaterhouseCoopers LLP, independent accountants............................................ F-2
Balance Sheets as of December 31, 1997 and 1998 and March 31, 1999 (unaudited)........................... F-3
Statements of Operations for the years ended December 31, 1996, 1997 and 1998 and for the three-month
periods ended March 31, 1998 and 1999 (unaudited)...................................................... F-4
Statements of Shareholders' Equity (Deficit) for the years ended December 31, 1996, 1997 and 1998 and for
the three-month period ended March 31, 1999 (unaudited)................................................ F-5
Statements of Cash Flows for the years ended December 31, 1996, 1997 and 1998 and for the three-month
periods ended March 31, 1998 and 1999 (unaudited)...................................................... F-6
Notes to Financial Statements............................................................................ F-7
FINE ARTS ENGRAVERS COMPANY, INC. (D.B.A. FINE ARTS GRAPHICS)
Report of PricewaterhouseCoopers LLP, independent accountants............................................ F-24
Balance Sheets as of December 31, 1997 and 1998 and March 31, 1999 (unaudited)........................... F-25
Statements of Operations for the years ended December 31, 1997 and 1998 and for the three-month periods
ended March 31, 1998 and 1999 (unaudited).............................................................. F-26
Statements of Changes in Shareholders' Equity (Deficit) for the years ended December 31, 1997 and 1998
and for the three-month period ended March 31, 1999 (unaudited)........................................ F-27
Statements of Cash Flows for the two years ended December 31, 1997 and 1998 and for the three-month
periods ended March 31, 1998 and 1999 (unaudited)...................................................... F-28
Notes to Financial Statements............................................................................ F-29
UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS
Unaudited Pro Forma Condensed Balance Sheet as of March 31, 1999......................................... F-36
Unaudited Pro Forma Condensed Statements of Operations for the year ended December 31, 1998 and for the
three-month period ended March 31, 1999................................................................ F-37
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
ImageX.com, Inc.
In our opinion, the accompanying balance sheets and the related statements
of operations, shareholders' equity (deficit) and of cash flows present fairly,
in all material respects, the financial position of ImageX.com, Inc. at December
31, 1997 and 1998, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards 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 the opinion expressed above.
Seattle, Washington
March 5, 1999, except for paragraph 3
of Note 12, as to which the date is
April 13, 1999, paragraphs 17 and 18
of Note 1 and paragraph 8 of Note 12,
as to which the date is April 15,
1999, paragraph 2 of Note 7, paragraph
2 of Note 8, paragraphs 1 and 8 of
Note 9 and paragraph 9 of Note 12, as
to which the date is April 21, 1999,
paragraph 2 of Note 9, as to which the
date is June 16, 1999, paragraph 7 of
Note 12, as to which the date is April
30, 1999 and paragraph 10 of Note 12,
as to which the date is May 7, 1999
- --------------------------------------------------------------------------------
The foregoing report is in the form that will be signed upon completion of the
reverse stock split described in paragraph 7 of Note 9 to the financial
statements.
PricewaterhouseCoopers LLP
F-2
<PAGE>
IMAGEX.COM, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1998
------------ ------------
MARCH 31, PRO FORMA
1999 SHAREHOLDERS'
----------- EQUITY
-------------
(UNAUDITED)
(UNAUDITED)
(NOTE 1)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................................... $ 186,374 $ 882,723 $ 123,569
Accounts receivable (net of allowance for doubtful accounts of
$14,917 and $19,085 at December 31, 1998 and March 31, 1999,
respectively)................................................ 19,331 234,085 352,147
------------ ------------ -----------
Total current assets......................................... 205,705 1,116,808 475,716
Restricted cash.................................................. 24,849 24,849
Property and equipment, net...................................... 693,374 1,131,433 1,398,630
Other assets..................................................... 39,326 45,482 146,356
------------ ------------ -----------
Total assets................................................. $ 938,405 $ 2,318,572 $2,045,551
------------ ------------ -----------
------------ ------------ -----------
LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of notes payable............................... $ 300,000 $ 452,724 $1,499,622
Line of credit payable......................................... 96,440 96,440
Accounts payable............................................... 450,480 745,659 614,163
Accrued liabilities............................................ 70,969 240,011 170,799
------------ ------------ -----------
Total current liabilities.................................... 821,449 1,534,834 2,381,024
Notes payable, net of current portion............................ 300,000 312,500 267,568
------------ ------------ -----------
Total liabilities............................................ 1,121,449 1,847,334 2,648,592
------------ ------------ -----------
Commitments (Note 10)
Series B mandatorily redeemable convertible preferred stock,
$0.01 par value; 3,500,000 shares authorized, issued and
outstanding; aggregate liquidation preference of $3,500,000.... 3,458,648 3,458,648 3,458,648
Series C mandatorily redeemable convertible preferred stock,
$0.01 par value; 4,040,000 shares authorized, 4,000,000 issued
and outstanding; aggregate liquidation preference of
$6,000,000..................................................... 5,109,450 5,173,749
Series D mandatorily redeemable convertible preferred stock,
$0.01 par value; 1,925,000 shares authorized, 1,385,493 and
1,786,750 issued and outstanding at December 31, 1998 and March
31, 1999, respectively; aggregate liquidation preference of
$2,770,986 and $3,573,500, respectively........................ 2,634,593 3,437,706
Value ascribed to mandatorily redeemable convertible preferred
stock warrants................................................. 146,840 146,840
------------ ------------ -----------
Total mandatorily redeemable convertible preferred stock..... 3,458,648 11,349,531 12,216,943
------------ ------------ -----------
Shareholders' equity (deficit):
Preferred stock, 30,000,000 shares authorized:
Series A convertible preferred stock, $0.01 par value;
1,500,000 shares authorized, issued and outstanding;
aggregate liquidation preference of $1,500,000............. 15,000 15,000 15,000
Common stock, $0.01 par value; 70,000,000 shares authorized;
1,200,000, 1,608,520 and 1,587,545 shares issued and
outstanding at December 31, 1997 and 1998 and March 31, 1999,
respectively................................................. 12,000 16,085 15,875 $ 130,270
Additional paid-in capital..................................... 392,027 3,908,465 3,983,932 41,496,457
Unearned compensation.......................................... (1,956,256) (1,641,331 ) (1,641,331)
Notes receivable from shareholders (including $20,000 from a
director).................................................... (28,000) (228,000) (220,000 ) (220,000)
Accumulated deficit............................................ (4,032,719) (12,633,587) (14,973,460) (14,973,460)
------------ ------------ ----------- -------------
Total shareholders' equity (deficit)......................... (3,641,692) (10,878,293) (12,819,984) $ 24,791,936
------------ ------------ ----------- -------------
-------------
Total liabilities, mandatorily redeemable convertible
preferred stock and shareholders' equity (deficit)......... $ 938,405 $ 2,318,572 $2,045,551
------------ ------------ -----------
------------ ------------ -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
IMAGEX.COM, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------- ------------------------
1996 1997 1998 1998 1999
--------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues................................ $ 78,453 $ 87,202 $ 968,028 $ 110,130 $ 485,335
Cost of sales........................... 98,831 100,320 997,713 126,771 374,877
--------- ----------- ----------- ----------- -----------
Gross profit (loss)................. (20,378) (13,118) (29,685) (16,641) 110,458
--------- ----------- ----------- ----------- -----------
Operating expenses:
General and administrative............ 145,638 1,285,048 3,413,093 555,144 1,044,671
Sales and marketing................... 1,017,296 2,182,311 614,089 596,127
Product development................... 300,000 1,316,152 2,550,926 660,710 394,745
Amortization of unearned
compensation........................ 378,507 24,931 398,665
--------- ----------- ----------- ----------- -----------
Total operating expenses............ 445,638 3,618,496 8,524,837 1,854,874 2,434,208
--------- ----------- ----------- ----------- -----------
Loss from operations................ (466,016) (3,631,614) (8,554,522) (1,871,515) (2,323,750)
Other income:
Interest income (expense), net........ 3,027 61,884 (46,346) (880) (16,123)
--------- ----------- ----------- ----------- -----------
Net loss............................ $(462,989) $(3,569,730) $(8,600,868) $(1,872,395) $(2,339,873)
--------- ----------- ----------- ----------- -----------
--------- ----------- ----------- ----------- -----------
Basic and diluted net loss per share.... $ (3.99) $ (3.14) $ (7.27) $ (1.59) $ (1.53)
--------- ----------- ----------- ----------- -----------
--------- ----------- ----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
IMAGEX.COM, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
PREFERRED
SERIES A COMMON STOCK ADDITIONAL
------------------- ------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
---------- ------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C>
Balances, January 1, 1996................................... 1,000 $ 10 $ 1,990
Issuance of common stock for transfer of technology (see
Note 8)................................................... 49,000 490 299,510
Conversion of common stock to Series A Convertible Preferred
Stock..................................................... 1,500,000 $15,000 (50,000) (500) (14,500)
Issuance of common stock.................................... 1,050,000 10,500 (10,100)
Related party contribution (see Note 6)..................... 86,627
Net loss....................................................
---------- ------- ---------- ------- ----------
Balances, December 31, 1996................................. 1,500,000 15,000 1,050,000 10,500 363,527
Issuance of common stock for notes receivable............... 150,000 1,500 28,500
Collection of notes receivable..............................
Net loss....................................................
---------- ------- ---------- ------- ----------
Balances, December 31, 1997................................. 1,500,000 15,000 1,200,000 12,000 392,027
Value ascribed to common stock warrants issued in
conjunction with sale of Series C Preferred Stock......... 1,038,094
Issuance of common stock for notes receivable............... 500,000 5,000 195,000
Repurchase of common stock.................................. (100,000) (1,000) (1,000)
Issuance of stock options to consultant..................... 169,429
Issuance of common stock upon exercise of stock options..... 8,520 85 1,619
Unearned compensation....................................... 2,334,763
Amortization of unearned compensation.......................
Accretion of mandatorily redeemable convertible preferred
stock..................................................... (221,467)
Net loss....................................................
---------- ------- ---------- ------- ----------
Balances, December 31, 1998................................. 1,500,000 15,000 1,608,520 16,085 3,908,465
Redemption of common stock (unaudited)...................... (42,000) (420) (7,580)
Issuance of stock options to consultants (unaudited)........ 68,046
Issuance of common stock upon exercise of stock options
(unaudited)............................................... 21,025 210 4,007
Unearned compensation (unaudited)........................... 83,740
Amortization of unearned compensation (unaudited)...........
Accretion of mandatorily redeemable convertible preferred
stock (unaudited)......................................... (72,746)
Net loss (unaudited)........................................
---------- ------- ---------- ------- ----------
Balances, March 31, 1999 (unaudited)........................ 1,500,000 $15,000 1,587,545 $15,875 $3,983,932
---------- ------- ---------- ------- ----------
<CAPTION>
NOTES
RECEIVABLE
UNEARNED FROM ACCUMULATED
COMPENSATION SHAREHOLDERS DEFICIT TOTAL
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balances, January 1, 1996................................... $ 2,000
Issuance of common stock for transfer of technology (see
Note 8)................................................... 300,000
Conversion of common stock to Series A Convertible Preferred
Stock.....................................................
Issuance of common stock.................................... 400
Related party contribution (see Note 6)..................... 86,627
Net loss.................................................... $ (462,989) (462,989)
------------ ------------ ------------ ------------
Balances, December 31, 1996................................. (462,989) (73,962)
Issuance of common stock for notes receivable............... $ (30,000)
Collection of notes receivable.............................. 2,000 2,000
Net loss.................................................... (3,569,730) (3,569,730)
------------ ------------ ------------ ------------
Balances, December 31, 1997................................. (28,000) (4,032,719) (3,641,692)
Value ascribed to common stock warrants issued in
conjunction with sale of Series C Preferred Stock......... 1,038,094
Issuance of common stock for notes receivable............... (200,000)
Repurchase of common stock.................................. (2,000)
Issuance of stock options to consultant..................... 169,429
Issuance of common stock upon exercise of stock options..... 1,704
Unearned compensation....................................... $(2,334,763)
Amortization of unearned compensation....................... 378,507 378,507
Accretion of mandatorily redeemable convertible preferred
stock..................................................... (221,467)
Net loss.................................................... (8,600,868) (8,600,868)
------------ ------------ ------------ ------------
Balances, December 31, 1998................................. (1,956,256) (228,000) (12,633,587) (10,878,293)
Redemption of common stock (unaudited)...................... 8,000
Issuance of stock options to consultants (unaudited)........ 68,046
Issuance of common stock upon exercise of stock options
(unaudited)............................................... 4,217
Unearned compensation (unaudited)........................... (83,740)
Amortization of unearned compensation (unaudited)........... 398,665 398,665
Accretion of mandatorily redeemable convertible preferred
stock (unaudited)......................................... (72,746)
Net loss (unaudited)........................................ (2,339,873) (2,339,873)
------------ ------------ ------------ ------------
Balances, March 31, 1999 (unaudited)........................ $(1,641,331) $(220,000) $(14,973,460) $(12,819,984)
------------ ------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
IMAGEX.COM, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
YEAR ENDED DECEMBER 31, 31,
------------------------------------ ------------------------
1996 1997 1998 1998 1999
---------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss.............................. $ (462,989) $(3,569,730) $(8,600,868) $(1,872,395) $(2,339,873)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Depreciation and amortization..... 104 121,314 424,221 90,444 160,589
Amortization of unearned
compensation.................... 378,507 24,931 398,665
Interest expense for warrants
issued in connection with bridge
financing....................... 29,889
Issuance of stock options to
consultant...................... 169,429 68,046
Purchased in-process research and
development..................... 300,000
Provision for doubful accounts.... 14,917 4,168
Changes in operating assets and
liabilities:
Accounts receivable............. (19,331) (229,671) (43,120 ) (122,230 )
Other assets.................... (250) (39,326) (6,156) 21,124 (100,874 )
Accounts payable and accrued
liabilities................... 148,881 459,195 464,221 116,158 (200,708 )
---------- ----------- ----------- ----------- -----------
Net cash used in operating
activities.................. (14,254) (3,047,878) (7,355,511) (1,662,858 ) (2,132,217 )
---------- ----------- ----------- ----------- -----------
Cash flows from investing activities:
Purchases of property and equipment... (17,784) (796,758) (862,280) (385,017 ) (427,785 )
Deposits of restricted cash........... (24,849)
Purchases of investments of available
for sale securities................. (974,798)
Proceeds from sale of investments of
available for sale securities....... 974,798
---------- ----------- ----------- ----------- -----------
Net cash used in investing
activities.................. (17,784) (796,758) (887,129) (385,017 ) (427,785 )
---------- ----------- ----------- ----------- -----------
Cash flows from financing activities:
Proceeds from issuance of notes
payable............................. 174,000 600,000 450,000 1,197,486
Principal payments on notes payable... (24,000) (284,776) (83,274 ) (195,520 )
Proceeds from borrowings on line of
credit.............................. 96,440
Proceeds from issuance of Series B
Preferred stock (net of offering
costs of $74,352)................... 3,308,648
Proceeds from issuance of Series C
Preferred stock (net of offering
costs of $88,983 for the year ended
December 31, 1998 and $38,708 for
the three months ended March 31,
1998)............................... 5,934,618 2,977,092
Proceeds from issuance of Series D
Preferred stock (net of offering
costs of $29,365 for the year ended
December 31, 1998 and $7,849 for the
three months ended March 31,
1999)............................... 2,743,003 794,665
Repurchase of common stock............ (2,000)
Proceeds from issuance of common
stock............................... 400 1,704 4,217
Proceeds from repayment on notes
receivable from shareholders........ 2,000
---------- ----------- ----------- ----------- -----------
Net cash provided by financing
activities.................. 3,483,048 578,000 8,938,989 2,893,818 1,800,848
---------- ----------- ----------- ----------- -----------
Net increase (decrease) in
cash and cash equivalents... 3,451,010 (3,266,636) 696,349 845,943 (759,154 )
Cash and cash equivalents at
beginning of period......... 2,000 3,453,010 186,374 186,374 882,723
---------- ----------- ----------- ----------- -----------
Cash and cash equivalents at
end of period............... $3,453,010 $ 186,374 $ 882,723 $1,032,317 $ 123,569
---------- ----------- ----------- ----------- -----------
---------- ----------- ----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
IMAGEX.COM, INC.
NOTES TO FINANCIAL STATEMENTS
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
THE COMPANY
ImageX.com, Inc. (the "Company," formerly ImageX, Inc.) was incorporated on
August 21, 1995 and is headquartered in Bellevue, Washington. The Company is an
Internet-based business-to-business provider of printed business materials. The
Company's customers access an Online Printing Center that contains a digital
catalog of all of their custom-printed business materials--from marketing
brochures to stationery and business cards. From its Online Printing Center,
each customer can modify, proof, procure and manage its printed business
materials from any Internet-enabled personal computer. The Company markets its
printed business materials domestically. The Company operates in one segment.
Prior to 1998, the Company operated as a development-stage enterprise.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
RESTRICTED CASH
Restricted cash consists of a certificate of deposit which secures a letter
of credit as required by the Company's office lease agreement.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is provided on the
straight-line method for financial statement purposes and accelerated methods
for federal income tax purposes. Estimated useful lives of the assets are as
follows:
<TABLE>
<CAPTION>
ASSET YEARS
- -------------------------------------------------------------------------- ------------------
<S> <C>
Computer software......................................................... 3
Computer hardware......................................................... 5
Office furniture and equipment............................................ 7
Leasehold improvements.................................................... Life of lease
or useful lives,
whichever is
shorter, ranging
from 3 to 5
</TABLE>
Expenditures for additions and improvements are capitalized; expenditures
for maintenance and repairs are charged to expense 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.
VALUATION OF LONG-LIVED ASSETS
The Company periodically evaluates the carrying value of long-lived assets
to be held and used, including, but not limited to, property and equipment and
other assets, when events and circumstances warrant such a review. The carrying
value of a long-lived asset is considered impaired when the anticipated
undiscounted cash flow from such asset is separately identifiable and is less
than its carrying value. In that event, a loss is recognized based on the amount
by which the carrying value exceeds the
F-7
<PAGE>
IMAGEX.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
fair value of the long-lived asset. Fair value is determined primarily using the
anticipated cash flows discounted at a rate commensurate with the risk involved.
Loss on long-lived assets to be disposed of is determined in a similar manner,
except that fair values are reduced for the cost to dispose.
STOCK ISSUANCE COSTS
Proceeds from issuances of capital stock are presented net of specific
external costs directly attributable to the related offering.
REVENUE RECOGNITION
Revenue from sales of printed business materials is recognized upon
shipment. Revenue from sales of masters (products printed ahead of time for
later addition of customer-specific data) is recognized when invoiced.
PRODUCT DEVELOPMENT COSTS
Product development costs represent research and development expenditures,
which are charged to operations as incurred.
ADVERTISING
The Company expenses advertising costs as incurred. Advertising expenses for
the years ended December 31, 1996, 1997 and 1998 were approximately $0, $5,300
and $175,600, respectively, and $114,000 and $18,300, for the three months ended
March 31, 1998 and 1999, respectively (unaudited).
NET LOSS AND PRO FORMA NET LOSS PER SHARE
Statement of Financial Accounting Standards No. 128 (SFAS No. 128),
"EARNINGS PER SHARE," requires the presentation of basic and diluted earnings
(loss) per share for all periods presented.
In accordance with SFAS No. 128, basic net loss per share has been computed
using the weighted-average number of shares of common stock outstanding during
the period, except that pursuant to Securities and Exchange Commission Staff
Accounting Bulletin No. 98, if applicable, common shares issued in each of the
periods presented for nominal consideration have been included in the
calculation as if they were outstanding for all periods presented.
Pro forma basic and diluted net loss per share has been computed as
described above and also gives effect to the conversion of the convertible
instruments that will occur upon completion of the Company's qualified initial
public offering as described in Note 8. The Company has included the equivalent
number of common shares from the conversion of certain convertible preferred
stock in the calculation of pro forma EPS. The preferred stock is assumed
converted because its terms require conversion upon a qualified initial public
offering.
F-8
<PAGE>
IMAGEX.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
A reconciliation of shares used in the calculation of basic and diluted and
pro forma basic and diluted net loss per share follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
YEAR ENDED DECEMBER 31, (UNAUDITED)
------------------------------------------ -----------------------------
1996 1997 1998 1998 1999
----------- ------------- -------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Net loss.............................. $ (462,989) $ (3,569,730) $ (8,600,868) $ (1,872,395) $ (2,339,873)
Accretion of mandatorily redeemable
convertible preferred stock......... (221,467) (31,034) (72,746)
----------- ------------- -------------- ------------- --------------
Net loss for common stock............. (462,989) (3,569,730) (8,822,335) (1,903,429) (2,412,619)
Weighted average shares of common
stock outstanding (shares used in
computing basic and diluted net loss
per share).......................... 115,948 1,137,260 1,213,591 1,200,000 1,580,633
----------- ------------- -------------- ------------- --------------
----------- ------------- -------------- ------------- --------------
Basic and diluted net loss per
share............................. $ (3.99) $ (3.14) $ (7.27) $ (1.59) $ (1.53)
----------- ------------- -------------- ------------- --------------
----------- ------------- -------------- ------------- --------------
Shares used in computing basic and
diluted net loss per share........ 1,213,591 1,580,633
-------------- --------------
Adjustment to reflect the effect of
the assumed conversion of
convertible instruments:
Preferred stock -- Series A....... 750,000 750,000
Preferred stock -- Series B....... 1,750,000 1,750,000
Preferred stock -- Series C....... 2,000,006 2,000,006
Preferred stock -- Series D....... 696,903 898,735
-------------- --------------
5,196,909 5,398,741
-------------- --------------
Shares used in computing pro forma
basic and diluted net loss per
share............................. 6,410,500 6,979,374
-------------- --------------
-------------- --------------
Pro forma basic and diluted net loss
per share......................... $ (1.38) $ (0.35)
-------------- --------------
-------------- --------------
</TABLE>
Dilutive securities include options, warrants, preferred stock as if
converted and restricted stock subject to vesting. Potentially dilutive
securities totaling 0, 309,750 and 1,919,898 for the years ended December 31,
1996, 1997 and 1998, respectively, and 1,104,400 and 1,954,721 for the
three-month periods ended March 31, 1998 and 1999 respectively, were excluded
from historical basic and diluted loss per share because of their antidilutive
effect.
PRO FORMA SHAREHOLDERS' EQUITY
Upon completion of the Company's qualified initial public offering as
described in Note 8, all of the convertible preferred stock outstanding as of
the closing date, including 11,904,761 shares of
F-9
<PAGE>
IMAGEX.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
Series E Preferred Stock issued in April 1999 (see Note 12), will automatically
be converted into aggregate of 11,351,131 shares of common stock.
Unaudited pro forma shareholders' equity at March 31, 1999, as adjusted for
the conversion of the convertible preferred stock outstanding at March 31, 1999,
the issuance of Series E Preferred Stock in April 1999 and the issuance of
93,750 shares of common stock in connection with the acquisition of Fine Arts
Engravers Company, Inc. in April 1999 (see Note 12), is disclosed on the
accompanying balance sheet.
INCOME TAXES
The Company follows the liability method of accounting for income taxes
pursuant to Statement of Financial Accounting Standards No. 109 (SFAS No. 109),
"ACCOUNTING FOR INCOME TAXES." Under SFAS No. 109, deferred tax assets and
liabilities are determined based on differences between financial reporting and
tax bases of assets and liabilities and 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.
CONCENTRATIONS OF CREDIT RISK
The Company reviews the credit histories of potential customers prior to
extending credit and maintains allowances for potential credit losses. No single
customer accounted for a significant amount 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 period.
The carrying amount of notes payable and the line of credit approximate
their market value because they have interest rates that vary with market
interest rates.
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 that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NEW ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants
Accounting Standards Executive Committee issued Statement of Position 98-1,
"ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR
INTERNAL USE." This statement requires that once certain capitalization criteria
have been met, the direct costs of developing or obtaining computer software for
internal use be capitalized. The statement will be effective for fiscal years
beginning after December 15, 1998. Effective
F-10
<PAGE>
IMAGEX.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
January 1, 1999, the Company adopted this statement. As of March 31, 1999, the
Company had capitalized computer software costs of $338,296 and recognized the
related amortization expense of $22,477 for the three months ended March 31,
1999 (unaudited).
UNAUDITED INTERIM FINANCIAL STATEMENTS
The interim financial data as of March 31, 1999 and for the three months
ended March 31, 1999 and 1998 is unaudited; however, in the opinion of
management, the interim data includes all adjustments, consisting only of normal
recurring adjustments, necessary to present fairly the Company's financial
position as of March 31, 1999 and the results of its operations and cash flows
for the three months ended March 31, 1999 and 1998.
2. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following at December 31, 1997 and
1998, and at March 31, 1999:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- MARCH 31,
1997 1998 1999
--------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Computer hardware............................ $ 445,092 $ 784,401 $ 838,615
Office furniture and equipment............... 216,683 299,736 314,451
Computer software............................ 137,991 560,166 915,219
Leasehold improvements....................... 14,776 32,218 32,218
--------- ---------- -----------
814,542 1,676,521 2,100,503
Less accumulated depreciation................ (121,168) (545,088) (701,873)
--------- ---------- -----------
Property and equipment, net................ $ 693,374 $1,131,433 $ 1,398,630
--------- ---------- -----------
--------- ---------- -----------
</TABLE>
Depreciation expense for the year ended December 31, 1996, 1997 and 1998 was
$104, $121,314 and $424,221, respectively. Depreciation expense was $90,444 and
$138,112 for the three months ended March 31, 1998 and 1999, respectively
(unaudited).
3. ACCRUED LIABILITIES
Accrued liabilities consisted of the following at December 31, 1997 and
1998, and at March 31, 1999:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- MARCH 31,
1997 1998 1999
--------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Accrued payroll and related benefits......... $ 63,553 $ 93,082 $ 119,459
Taxes payable................................ 7,416 28,847 38,383
Accrued professional services................ 113,961
Other........................................ 4,121 12,957
--------- ---------- -----------
$ 70,969 $ 240,011 $ 170,799
--------- ---------- -----------
--------- ---------- -----------
</TABLE>
F-11
<PAGE>
IMAGEX.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. NOTES PAYABLE AND LINE OF CREDIT:
Notes payable consisted of the following at December 31, 1997 and 1998 and
at March 31, 1999:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ MARCH 31,
1997 1998 1999
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Note payable to bank, interest at prime
(7.75% at December 31, 1998) plus 2%,
monthly principal payments of $25,000 due
December 1999, and collateralized by
substantially all of the Company's
assets..................................... $600,000 $274,286 $ 156,190
Note payable to bank, interest at prime
(7.75% at December 31, 1998) plus 2%, due
in 36 equal montly principal payments, due
January 2002, and collateralized by
substantially all of the Company's
assets..................................... 450,000 413,514
Convertible subordinated promissory notes
payable to investors, interest at 7%, due
earlier of June 30, 1999 or the date of
closing of sale of Series E Preferred
Stock; subsequently converted to Series E
Preferred Stock in April 1999
(See Note 12).............................. 1,197,486
Uncollateralized note payable to business
advisor, no interest, due on March 1,
1999....................................... 40,938
-------- -------- -----------
600,000 765,224 1,767,190
Less: current portion........................ (300,000) (452,724) (1,499,622)
-------- -------- -----------
$300,000 $312,500 $ 267,568
-------- -------- -----------
-------- -------- -----------
</TABLE>
The agreements for notes payable to bank include various restrictive
covenants which, among other things, restrict the payment of dividends and
require the Company to maintain minimum working capital and net worth amounts.
At March 31, 1999, the Company was not in compliance with the minimum working
capital and net worth covenants of the note payable in the amount of $413,514.
However, the Company received a waiver for the violations. In April 1999, in
connection with the sale of Series E Preferred Stock (See Note 12), the Company
was no longer in violation of the above mentioned covenants.
Future minimum debt payments at December 31, 1998 were as follows:
<TABLE>
<S> <C>
1999.............................................................. $ 452,724
2000.............................................................. 150,000
2001.............................................................. 150,000
2002.............................................................. 12,500
---------
$ 765,224
---------
---------
</TABLE>
During 1996, the Company maintained a $25,000 line of credit. The
outstanding balance of $24,000 at December 31, 1996 was repaid in 1997 and the
line was closed in February 1997.
F-12
<PAGE>
IMAGEX.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. NOTES PAYABLE AND LINE OF CREDIT: (CONTINUED)
During 1998, the Company obtained a new line of credit in the amount of
$300,000 in conjunction with its note payable to a bank of $450,000. The line of
credit includes various restrictive covenants, effective from January 31, 1999,
which, among other things, require the Company to maintain minimum working
capital and net worth amounts. The line of credit accrues interest at prime
(7.75% at December 31, 1998) plus 1% and matures on September 18, 1999. The
outstanding balance as of December 31, 1998 was $96,440. The line of credit is
collateralized by substantially all of the Company's assets. At March 31, 1999,
the Company was not in compliance with the minimum working capital and net worth
covenants. However, the Company received a waiver for the violations. In April
1999, in connection with the sale of Series E Preferred Stock (See Note 12), the
Company was no longer in violation of the above mentioned covenants.
5. FEDERAL INCOME TAXES:
At December 31, 1998, the Company had accumulated net operating loss
carryforwards for tax purposes of approximately $11,900,000, which will expire
beginning in 2011 through 2018. 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 to the amount
based on the statutory Federal rate:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1996 1997 1998
----- ----- -----
<S> <C> <C> <C>
Federal income tax benefit at statutory rate.......................... (34)% (34)% (34)%
Change in valuation allowance......................................... 34% 34% 34%
-- -- --
-- -- --
-- -- --
-- -- --
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax
F-13
<PAGE>
IMAGEX.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. FEDERAL INCOME TAXES: (CONTINUED)
purposes. Significant components of the Company's deferred tax assets and
liabilities are approximately as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1997 1998
------------- -------------
<S> <C> <C>
Deferred income tax assets:
Tax loss carryforwards........................................ $ 1,290,300 $ 4,029,800
Accrued compensation & benefits............................... 18,300 80,600
Provision for doubtful accounts............................... 5,100
Contributed technology........................................ 34,000
Other......................................................... 8,400
------------- -------------
1,342,600 4,123,900
Deferred income tax liabilities:
Depreciation.................................................. (2,300) (100)
------------- -------------
1,340,300 4,123,800
Valuation allowance........................................... (1,340,300) (4,123,800)
------------- -------------
Net deferred tax assets....................................... $ -- $ --
------------- -------------
------------- -------------
</TABLE>
A full valuation allowance has been recorded at December 31, 1997 and 1998
based on management's determination that the recognition criteria for
realization of the net deferred tax assets has not been met.
6. RELATED PARTY TRANSACTIONS:
The original founders of the Company, one of whom is an officer and a
director of the Company, are the owners of 100% of the outstanding capital stock
of Parallel Communications, Inc. ("Parallel"), which serves as the Company's
advertising agency pursuant to an Advertising Agency Service Agreement, dated
August 26, 1997. In 1996, 1997 and 1998, the Company paid Parallel approximately
$0, $152,000 and $521,000, respectively, for services performed on behalf of the
Company. For the three months ended March 31, 1998 and 1999, the Company paid
approximately $192,900 and $95,000, respectively, for services performed on
behalf of the Company (unaudited).
As of December 31, 1997 and 1998, the Company had a payable to Parallel of
$85,397 and $21,088, respectively. As of March 31, 1999, the Company had a
payable to Parallel of $76,900 (unaudited).
During 1996, the Company had a payable to Parallel in the amount of $86,627
for various services performed and expenses incurred on behalf of the Company.
The payable was disputed by the Company and as a consequence was written off by
the Company in 1996. Because the shareholders of Parallel were the same as the
Company's shareholders, the $86,627 was recorded as a capital contribution by
the Company in 1996.
7. EMPLOYEE BENEFITS:
DEFINED CONTRIBUTION PLAN
The Company has a 401(k) Retirement Plan (the "Plan") which covers
substantially all eligible employees. The Plan is a defined contribution profit
sharing plan in which all eligible participants may
F-14
<PAGE>
IMAGEX.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. EMPLOYEE BENEFITS: (CONTINUED)
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 1996, 1997 or 1998.
STOCK OPTION PLAN
The Company has adopted 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, 1998, the Company had reserved a total of 1,550,000 shares of
common stock for issuance pursuant to the Plan. In April 1999, the Board of
Directors increased the total number of shares reserved under the Plan to
2,800,000 shares, plus an automatic annual increase, to be added on the first
day of each fiscal year beginning on January 1, 2001, equal to least of (1)
1,000,000 shares, (2) 5% of the 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 and (3) a lesser amount determined
by the Board of Directors. Options under the Plan will generally expire 10 years
from the date of grant. Under the Plan, the Plan administrator will fix the
conditions for the exercise of the options. Generally, options vest over four
years.
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"). The Company has chosen to account for
stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" and related interpretations. Accordingly, compensation cost for stock
awards and options is measured as the excess, if any, of the fair value of the
Company's stock at the date of the grant over the amount an employee must pay to
acquire the stock. The unearned compensation is being amortized in accordance
with Financial Accounting Standards Board Interpretation No. 28 over the vesting
period of the individual options.
Compensation expense of $0 and $378,507 has been recorded for stock options
granted during the years ended December 31, 1997 and 1998, respectively, and
$24,931 and $398,665, for the three months ended March 31, 1998 and 1999,
respectively (unaudited), because the exercise prices of the stock options
granted were less than the fair value of the related shares at the time of
grant. The fair value per share used to calculate unearned compensation 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.
F-15
<PAGE>
IMAGEX.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. EMPLOYEE BENEFITS: (CONTINUED)
Option activity for the years ended December 31, 1997 and 1998 is as
follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
----------- -----------
<S> <C> <C>
Options outstanding, January 1, 1997.................................. 0
Granted............................................................... 355,750 $ 0.20
Canceled.............................................................. (46,000) 0.20
----------- -----
Options outstanding, December 31, 1997................................ 309,750 0.20
Granted............................................................... 1,043,300 0.42
Exercised............................................................. (508,520) 0.40
Canceled.............................................................. (194,175) 0.24
----------- -----
Options outstanding, December 31, 1998................................ 650,355 0.38
Granted (unaudited)................................................... 72,928 2.04
Exercised (unaudited)................................................. (21,025) 0.20
Canceled (unaudited).................................................. (17,080) 0.29
----------- -----
Options outstanding, March 31, 1999 (unaudited)....................... 685,178 0.56
Options exercisable at December 31, 1998.............................. 166,365
-----------
Stock awards and options available for grant at December 31, 1998..... 241,125
-----------
</TABLE>
The following table summarizes information about options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
- -------------------------------------------
WEIGHTED AVERAGE OPTIONS EXERCISABLE
REMAINING --------------------
EXERCISE NUMBER OF CONTRACTUAL LIFE NUMBER OF EXERCISE
PRICES SHARES (IN YEARS) SHARES PRICES
- ---------- ---------- ------------------- --------- ---------
<S> <C> <C> <C> <C>
$0.20 181,805 9 94,365 $0.20
0.30 372,550 9 72,000 0.30
0.40 25,000 10 0.40
1.20 71,000 8 1.20
</TABLE>
Pro forma information regarding net loss as required by SFAS No. 123 has
been determined as if the Company had accounted for its employee stock options
under the minimum value method using the following weighted-average assumptions:
<TABLE>
<CAPTION>
1997 1998
------------------ ------------------
<S> <C> <C>
Risk free interest rate............................... 5.82% to 6.87% 4.60% to 5.65%
Expected lives........................................ 5 to 10 years 5 to 10 years
Expected dividends.................................... $0 $0
</TABLE>
The minimum value method was developed for use in estimating the fair value
of options granted by nonpublic entities and, accordingly, excludes
consideration of volatility. In addition, option valuation models require the
input of highly subjective assumptions. Because the Company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in
F-16
<PAGE>
IMAGEX.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. EMPLOYEE BENEFITS: (CONTINUED)
the subjective input assumptions can materially affect the fair value estimate,
in management's opinion, the minimum value method does not necessarily provide a
reliable single measure of the fair value of its stock options.
The weighted average fair values and weighted average exercise prices per
share at the date of grant for options granted were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
--------------------
1997 1998
--------- ---------
<S> <C> <C>
Weighted average fair value of options granted with exercise price less than
the fair value of the stock on the date of grant........................... $ 0.60 $ 2.04
--------- ---------
--------- ---------
Weighted average exercise price of options granted with exercise price less
than the fair value of the stock on the date of grant...................... $ 0.20 $ 0.42
--------- ---------
--------- ---------
</TABLE>
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:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1997 1998
------------- -------------
<S> <C> <C>
Net loss--as reported........................................... $ (3,569,730) $ (8,600,868)
Net loss--pro forma............................................. $ (3,573,514) $ (8,667,754)
Loss per share--as reported..................................... $ (3.14) $ (7.27)
Loss per share--pro forma....................................... $ (3.14) $ (7.32)
</TABLE>
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period.
8. MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK:
During 1996, the Company issued 3,500,000 shares of Series B Preferred
Stock, $0.01 par value. During 1998, the Company issued 4,000,000 shares of
Series C Preferred Stock, $0.01 par value and 1,385,493 shares of Series D
Preferred Stock, $0.01 par value. All holders of Preferred Stock are entitled to
vote on all matters on an "as if converted" basis. The holders of Preferred
Stock shall be entitled to receive dividends prior and in preference to any
declaration or payment of any dividend on the Series A Preferred Stock and
common stock of the Company.
Each share of Preferred Stock is convertible at the option of the holder or
automatically upon sale of the Company's common stock in a public offering in
which the offering price of the common stock is not less than $5 per share and
the gross proceeds are at least $15,000,000, as described in the Company's
Restated Articles of Incorporation. The conversion price is subject to weighted
average anti-dilution protection and proportional adjustments in the event of
stock splits and similar events. The Preferred Stock, other than Series A
Preferred Stock, is redeemable, at the option of the holders of more than 50% of
the outstanding shares thereof, beginning on or after April 2004. The redemption
price for each share of Preferred Stock shall be the original issue price plus
all accrued and unpaid dividends, adjusted for stock splits. Upon liquidation or
dissolution, holders of Preferred Stock will receive preference over holders of
Series A Preferred Stock and common stock. The redemption value
F-17
<PAGE>
IMAGEX.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK: (CONTINUED)
of the mandatorily redeemable convertible Preferred Stock is being accreted over
the period from issuance to the earliest redemption date using the effective
interest method.
At December 31, 1998, the following warrants to purchase mandatorily
redeemable convertible preferred stock were outstanding:
<TABLE>
<CAPTION>
PRICE PER
SHARE,
NUMBER OF SUBJECT TO
SHARES ADJUSTMENT EXPIRATION DATE
---------- ------------- ------------------
<S> <C> <C> <C>
Series C Preferred Stock 26,667 $ 1.50 August 24, 2005
13,333 $ 1.50 August 28, 2005
----------
40,000
Series D Preferred Stock 138,250 $ 2.00 October 1, 2005
</TABLE>
In August 1998, the Company issued warrants to two of its investors to
purchase 40,000 shares of Series C Preferred Stock in connection with bridge
financing arrangements. The Company executed convertible subordinated promissory
notes aggregating $600,000 which, with accrued interest, were converted into
302,993 shares of Series D Preferred Stock upon closing of the sale of Series D
Preferred Stock in October 1998. These warrants are exercisable at $1.50 per
share through August 28, 2005. The warrants were ascribed a value of $29,889.
In connection with issuance of Series D Preferred Stock, the Company issued
warrants to its investors to purchase 138,250 shares of Series D Preferred
Stock. These warrants are exercisable at $2.00 per share and are exercisable
through October 1, 2005. The warrants were ascribed a value of $116,951.
9. SHAREHOLDERS' EQUITY (DEFICIT):
COMMON STOCK
As of December 31, 1998, the Company was authorized to issue 22,500,000
shares of voting common stock, $0.01 par value. In April 1999, the Company's
Articles of Incorporation were amended to increase the number of authorized
shares of common stock to 50,000,000 shares. At its discretion, the Board of
Directors may declare dividends on shares of common stock. Upon liquidation,
holders of common stock will be paid only after the Preferred Stock preferences
have been satisfied.
In June 1999, the Company's Board of Directors approved an increase of the
number of authorized shares of common stock to 70,000,000 shares, subject to
shareholder approval.
The Company issued 1,000 shares of common stock to its four founding
shareholders (the "Founders") for $2,000 upon the formation of the Company on
August 21, 1995. Pursuant to an agreement dated May 1, 1996, the Founders, all
of whom are shareholders of Parallel (see Note 6), contributed technology to the
Company in exchange for 49,000 shares of common stock. Such technology was
purchased by the Founders from Parallel. The technology was valued at $300,000
and has been credited as a contribution to capital. The transferred technology
was considered to be in-process research and development; accordingly, the
$300,000 was charged to research and development expense in 1996. In December
1996, the Founders exchanged all of their 50,000 shares of common stock for
1,500,000 shares of Series A Preferred Stock.
In December 1996, the Company issued 1,050,000 shares of common stock to
certain Founders and a director of the Company for consideration of $400 and
services to be performed in the future. The
F-18
<PAGE>
IMAGEX.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. SHAREHOLDERS' EQUITY (DEFICIT): (CONTINUED)
shares are subject to repurchase by the Company for $0.02 per share over the
thirty-six month period following the issuance of the shares. Such shares
subject to repurchase will be reduced for each completed month of employment
with the Company by the Founders and the director. During 1998, the Company
repurchased 100,000 shares from one of the Founders of the Company in accordance
with an employment termination agreement.
Pursuant to the Company's stock incentive compensation plan (see Note 7),
the Company issued 150,000 shares of common stock (100,000 shares were to a
director of the Company) at a purchase price of $0.20 per share for an aggregate
purchase price of $30,000, which was satisfied by notes receivable totaling
$30,000. One note in the amount of $10,000 bears interest at 5.70% and is due in
February 2001. The other note in the amount of $20,000 bears interest at the
rate of 7.00% and is due in April 2000. The 150,000 shares are subject to
repurchase by the Company for $0.20 per share, as follows:
1. 50,000 shares will be subject to repurchase through February 2001, with
the number of shares being subject to repurchase reduced by 1,000 each
month following the original issuance of the shares.
2. 100,000 shares will be subject to repurchase through April 2000, with
the number of shares being subject to repurchase reduced by 2,778 shares
each month following the original issuance of the shares. During the
repurchase period, the individual who purchased the 100,000 shares is
required to perform management services for the Company.
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. The 650,000 shares have
been included in the stock options activity (see Note 7.) At December 31, 1998,
the notes receivable from shareholders totaled $228,000 and are included in
shareholders' equity (deficit) on the accompanying balance sheet.
On June 16, 1999, the Board of Directors approved a one-for-two reverse
stock split of the Company's common stock. The reverse stock split will become
effective at the time an Amended and Restated Certificate of Incorporation is
filed with the Secretary of State of Washington. All references in the financial
statements and all related notes thereto referring to shares, share prices, per
share amounts and other share information have been retroactively adjusted for
the reverse stock split.
SERIES A PREFERRED STOCK
As of December 31, 1998, the Company was authorized to issue 10,965,000
shares of preferred stock. In April 1999, the Articles of Incorporation were
amended to increase the number of authorized shares of preferred stock to
30,000,000 shares. The holders of Series A Preferred Stock shall be entitled to
receive dividends prior and in preference to any declaration or payment of any
dividend on the common stock of the Company. Each share of Series A Preferred
Stock is convertible at the option of the holder or automatically upon sale of
the Company's common stock in a public offering in which the offering price of
the common stock is not less than $5 per share and the gross proceeds are at
least $15,000,000, as described in the Company's Restated Articles of
Incorporation. The conversion price is subject to weighted average auto-dilution
protection and proportional adjustments in the event of stock splits and similar
events.
F-19
<PAGE>
IMAGEX.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
WARRANTS
At December 31, 1998, the following warrants to purchase common stock were
outstanding:
<TABLE>
<CAPTION>
PRICE PER
SHARE,
NUMBER OF SUBJECT TO
SHARES ADJUSTMENT EXPIRATION DATE
- ------------ ------------- ---------------------
<S> <C> <C>
890,000 $ 3.00 January 8, 2005
290,000 $ 7.50 January 8, 2005
- ------------
1,180,000
</TABLE>
During 1998 in connection with the sale of Series C Preferred Stock, the
Company sold warrants to purchase 1,180,000 shares of common stock for
consideration of $23,600 to investors. Of the warrants issued, 890,000 warrants
are exercisable at $3.00 per share. The remaining 290,000 warrants are
exercisable at $7.50 per share. The warrants are exercisable through January 8,
2005. A certain number of warrants are subject to repurchase by the Company, as
defined in the warrant agreements. The period in which the Company is entitled
to repurchase the warrants is January 1, 2001 through March 31, 2001. The
repurchase price is $0.02 per warrant. The warrants were ascribed a value of
$1,038,094. One of the investors has the entered into an agreement with the
Company to perform certain management services for the Company.
10. COMMITMENTS:
OPERATING LEASE
The Company leases its facilities under noncancelable operating leases which
expire between February 28, 2001 and February 28, 2002. The Company pays taxes,
insurance, normal maintenance and certain other operating expenses. At December
31, 1998 the approximate future rental payments due under these leases for the
remainder of the lease terms were as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- --------------------------------------------------
<S> <C>
1999.............................................. $ 344,000
2000.............................................. 350,000
2001.............................................. 304,000
2002.............................................. 74,000
----------
$1,072,000
----------
----------
</TABLE>
Total rent expense incurred under operating leases for the years ended
December 31, 1996, 1997 and 1998 was approximately $7,500, $158,000 and
$332,000, respectively. Total rent expense incurred under operating leases for
the three months ended March 31, 1998 and 1999 was $62,191 and $88,989,
respectively (unaudited).
F-20
<PAGE>
IMAGEX.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. SUPPLEMENTAL CASH FLOW INFORMATION:
Supplemental disclosure of cash flow information is summarized below for the
years ended December 31, 1996, 1997 and 1998, and for the three months ended
March 31, 1998 and 1999:
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED MARCH
DECEMBER 31, 31,
------------------------------- ------------------------
1996 1997 1998 1998 1999
--------- --------- --------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash paid during the year for
interest............................. $ 1,535 $ 12,233 $ 59,410 $ 15,703 $ 27,497
Non-cash financing activities:
Conversion of notes payable to Series
B Preferred stock.................. $ 150,000
Related party contribution (see Note
6)................................. $ 86,627
Unearned compensation................ $2,334,763 $ 133,853 $ 83,740
Issuance of common stock for note
receivable......................... $ 30,000 $ 200,000
Value ascribed to common stock
warrants issued in conjunction with
sale of Series C Preferred Stock... $1,038,094 $ 578,919
Value ascribed to Series C Preferred
Stock warrants issued in connection
with bridge financing.............. $ 29,889
Value ascribed to Series D Preferred
Stock warrants issued in
conjunction with sale of Series D
Preferred Stock.................... $ 116,951
Accretion on Series C Preferred
Stock.............................. $ 212,926 $ 31,034 $ 64,299
Accretion on Series D Preferred
Stock.............................. $ 8,541 $ 8,447
</TABLE>
12. SUBSEQUENT EVENTS:
REDEMPTION OF COMMON STOCK
During 1996, the Company issued 150,000 shares of common stock at $0.20 per
share in exchange for a note receivable of $30,000. During January 1999, the
Company redeemed 42,000 shares of common stock in exchange for cancellation of
the outstanding remaining principal amount of the note receivable.
SALE OF SERIES D PREFERRED STOCK
During January 1999, the Company issued an additional 401,257 shares of
Series D Preferred Stock for $802,514.
ACQUISITION
On April 13, 1999, the Company acquired substantially all of the assets of
Fine Arts Engravers Company, Inc. ("Fine Arts"), a privately owned Oregon
corporation. Fine Arts is in the printing business. The acquisition will be
accounted for using the purchase method. The aggregate purchase price of
$5,000,000 consists of $375,000 of common stock for 93,750 shares issued to the
seller and $4,625,000 of cash payment. The aggregate purchase will be allocated
to the net assets acquired, based
F-21
<PAGE>
IMAGEX.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
12. SUBSEQUENT EVENTS: (CONTINUED)
upon their respective fair market values. The excess of the purchase price over
the fair market value of the assets acquired of $1,386,060 has been allocated to
cost in excess of net assets acquired and will be amortized over 10 years.
In connection with the acquisition, liabilities were assumed as follows:
<TABLE>
<S> <C>
Fair value of assets acquired................................... $4,813,792
Cash paid....................................................... (4,625,000)
Common stock issued............................................. (375,000)
Cost in excess of net assets acquired........................... 1,386,060
----------
Liabilities assumed............................................. $1,199,852
----------
----------
</TABLE>
The following summarizes the unaudited pro forma results of operations, on a
combined basis, as if the Company's acquisition of Fine Arts occurred as of the
beginning of each of the periods presented, after including the impact of
certain adjustments such as amortization of cost in excess of net assets
acquired:
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS
DECEMBER 31, ENDED MARCH
1998 31, 1999
------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Revenues........................................................ $ 11,428,362 $ 2,706,220
Pro forma net loss.............................................. $ (8,791,465) $(2,530,575)
Pro forma basic and diluted net loss per share.................. $ (6.89) $ (1.55)
</TABLE>
The unaudited pro forma results are not necessarily indicative of the
results of operations which would actually have been reported had the
acquisition occurred prior to the beginning of the periods presented. In
addition, they are not intended to be indicative of future results.
On April 30, 1999, Fine Arts entered into a credit agreement with a bank for
a $1 million working capital line and a $1.5 million term loan that is
collateralized by all substantially of the assets of Fine Arts. The credit line
accrues interest at prime rate plus 0.5% for drawn amounts and a commitment fee
of 0.25% on any unused portion of the line and matures on April 29, 2000 with an
option to renew for subsequent 364 day-periods. The term loan accrues interest
at prime rate plus 0.25% to 1% based on the Debt to EBITDA ratio of the Company
on a consolidated basis. The credit agreement includes various restrictive
covenants, which among other things, require Fine Arts to maintain certain
financial ratios and net worth amounts.
SALE OF SERIES E PREFERRED STOCK
During April 1999, the Company issued 11,904,761 shares of Series E
Preferred Stock, $0.01 par value, for $25,000,000. The terms of the Series E
Preferred Stock are similar to the terms of previously issued preferred stock.
Of the 11,904,761 shares issued, 579,745 shares were issued as a result of the
conversion of the convertible subordinated promissory notes issued to investors
in January 1999 aggregating $1,197,486 plus accrued interest of $19,979. In
addition, in April 1999, the Company issued warrants to purchase 85,535 shares
of Series E Preferred Stock and 48,165 shares of common stock at exercise prices
of $2.10 per share and $4.20 per share respectively.
F-22
<PAGE>
IMAGEX.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
12. SUBSEQUENT EVENTS: (CONTINUED)
EMPLOYEE STOCK PURCHASE PLAN
In April 1999, the Board of Directors adopted, subject to shareholder
approval, the 1999 Employee Stock Purchase Plan ("Stock Purchase Plan") and
authorized for issuance under the Stock Purchase Plan a total of 250,000 shares
of common stock, plus automatic annual increases, to be added on the first day
of the Company's fiscal year beginning on January 1, 2001, equal to the least of
(1) 100,000 shares, (2) 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 and (3) a lesser amount as
determined by the Board of Directors. The Stock Purchase Plan will be
implemented upon the effectiveness of the Company's initial public offering of
its common stock ("IPO").
INITIAL PUBLIC OFFERING
In May 1999, the Board of Directors authorized the Company to file a
Registration Statement with the Securities and Exchange Commission to permit the
Company to proceed with an IPO.
F-23
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
ImageX.com, Inc.
In our opinion, the accompanying balance sheets and the related statements
of operations, changes in shareholder's equity (deficit) and of cash flows
present fairly, in all material respects, the financial position of Fine Arts
Engravers Company, Inc. (d.b.a. Fine Arts Graphics) (the Company) at December
31, 1997 and 1998, and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards, 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 the opinion expressed
above.
PricewaterhouseCoopers LLP
Portland, Oregon
April 16, 1999
F-24
<PAGE>
FINE ARTS ENGRAVERS COMPANY, INC.
(D.B.A. FINE ARTS GRAPHICS)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1998
------------ ------------ MARCH 31, 1999
--------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash............................................................... $ 89,891 $ 19,450 $ 40,548
Accounts receivable - trade, less allowance for doubtful accounts
of $25,531, $38,455 and $11,607 in 1997, 1998 and at March 31,
1999, respectively............................................... 1,893,528 1,533,384 1,406,280
Unbilled revenues and other receivables............................ 30,401 164,005 97,100
Inventories........................................................ 697,837 659,783 725,167
Prepaid expenses................................................... 62,050 71,927 71,862
------------ ------------ --------------
Total current assets............................................. 2,773,707 2,448,549 2,340,957
Property and equipment, net.......................................... 795,132 740,426 728,376
Other assets......................................................... 167,869 175,282 185,513
------------ ------------ --------------
$ 3,736,708 $ 3,364,257 $ 3,254,846
------------ ------------ --------------
------------ ------------ --------------
LIABILITIES AND SHAREHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Short-term bank borrowings......................................... $ 1,269,378 $ 1,015,293 $ 942,540
Indebtedness to related parties, current........................... 136,217 129,665 131,948
Current portion of deferred compensation........................... 4,039 4,523 5,066
Trade accounts payable............................................. 650,600 662,796 746,495
Accrued liabilities................................................ 545,658 451,101 453,357
------------ ------------ --------------
Total current liabilities........................................ 2,605,892 2,263,378 2,279,406
Indebtedness to related parties, noncurrent.......................... 1,198,826 1,069,161 1,035,306
Deferred compensation, net of current portion........................ 45,637 41,114 36,048
------------ ------------ --------------
Total liabilities................................................ 3,850,355 3,373,653 3,350,760
------------ ------------ --------------
Commitments
Shareholder's equity (deficit):
Common stock, $10 par value, 25,000 shares authorized, 3,933 shares
issued and outstanding........................................... 39,330 39,330 39,330
Additional paid-in capital......................................... 300,000 300,000 300,000
Accumulated deficit................................................ (452,977) (348,726) (435,244)
------------ ------------ --------------
Total shareholder's equity (deficit)............................... (113,647) (9,396) (95,914)
------------ ------------ --------------
$ 3,736,708 $ 3,364,257 $ 3,254,846
------------ ------------ --------------
------------ ------------ --------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-25
<PAGE>
FINE ARTS ENGRAVERS COMPANY, INC.
(D.B.A. FINE ARTS GRAPHICS)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTH PERIODS
YEAR ENDED DECEMBER ENDED
31, MARCH 31,
--------------------- --------------------
1997 1998 1998 1999
--------- ---------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues..................................... $9,187,145 $10,460,334 $2,328,478 $2,220,885
Cost of sales................................ 5,978,003 7,127,106 1,603,261 1,586,289
--------- ---------- --------- ---------
Gross profit............................. 3,209,142 3,333,228 725,217 634,596
--------- ---------- --------- ---------
Operating expenses:
General and administrative................. 2,064,183 2,363,046 558,129 549,773
Selling and marketing...................... 653,762 528,474 140,828 117,748
--------- ---------- --------- ---------
2,717,945 2,891,520 698,957 667,521
--------- ---------- --------- ---------
Income (loss) from operations............ 491,197 441,708 26,260 (32,925)
--------- ---------- --------- ---------
Other income (expense):
Interest expense........................... (266,723) (264,639) (65,736) (56,520)
Other income (expense)..................... (30,892) 18,917 (1,083) (2,073)
--------- ---------- --------- ---------
(297,615) (245,722) (66,819) (58,593)
--------- ---------- --------- ---------
Income (loss) before income taxes........ 193,582 195,986 (40,559) (91,518)
Income tax provision (benefit)............... 15,405 (3,000) (5,000)
--------- ---------- --------- ---------
Net income (loss)........................ $ 193,582 $ 180,581 $ (37,559) $ (86,518)
--------- ---------- --------- ---------
--------- ---------- --------- ---------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-26
<PAGE>
FINE ARTS ENGRAVERS COMPANY, INC.
(D.B.A. FINE ARTS GRAPHICS)
STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY (DEFICIT)
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK ADDITIONAL SHAREHOLDER'S
---------------------- PAID-IN ACCUMULATED EQUITY
SHARES AMOUNT CAPITAL DEFICIT (DEFICIT)
----------- --------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996........................... 3,933 $ 39,330 $ 300,000 $ (506,812) $ (167,482)
Net income........................................... 193,582 193,582
Distributions........................................ (139,747) (139,747)
----- --------- ---------- ------------ -------------
Balance, December 31, 1997........................... 3,933 39,330 300,000 (452,977) (113,647)
Net income........................................... 180,581 180,581
Distributions........................................ (76,330) (76,330)
----- --------- ---------- ------------ -------------
Balance, December 31, 1998........................... 3,933 39,330 300,000 (348,726) (9,396)
Net loss (unaudited)................................. (86,518) (86,518)
----- --------- ---------- ------------ -------------
Balance, March 31, 1999 (unaudited).................. 3,933 $ 39,330 $ 300,000 $ (435,244) $ (95,914)
----- --------- ---------- ------------ -------------
----- --------- ---------- ------------ -------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-27
<PAGE>
FINE ARTS ENGRAVERS COMPANY, INC.
(D.B.A. FINE ARTS GRAPHICS)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR YEARS ENDED DECEMBER THREE MONTH PERIODS
31, ENDED MARCH 31,
------------------------ ------------------------
1997 1998 1998 1999
----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).......................................... $ 193,582 $ 180,581 $ (37,559) $ (86,518)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization............................ 244,287 228,787 61,724 51,643
Loss from disposal of property and equipment............. 4,811 2,300
Unrealized gain on cash surrender value of life
insurance.............................................. (31,893) (33,690) (6,796) (6,778)
(Increase) decrease in:
Accounts receivable--trade............................. (446,010) 360,144 537,334 127,104
Unbilled revenues and other receivables................ (25,331) (133,604) (32,296) 66,905
Inventories............................................ (69,422) 38,054 (36,848) (65,384)
Prepaid expenses and other assets...................... (2,321) (8,582) 16,375 905
Increase (decrease) in:
Trade accounts payable................................. 144,319 12,196 62,202 83,699
Accrued liabilities.................................... 120,421 (94,557) (234,931) 2,256
Deferred compensation.................................. (19,549) (4,039) (4,039) (4,523)
----------- ----------- ----------- -----------
Net cash provided by operating activities................ 112,894 545,290 325,166 171,609
----------- ----------- ----------- -----------
Cash flows from investing activities:
Purchases of property and equipment........................ (165,750) (149,852) (48,256) (37,963)
Increase in cash surrender value of life insurance......... (32,781) (32,867) (8,204) (8,223)
----------- ----------- ----------- -----------
Net cash used in investing activities.................... (198,531) (182,719) (56,460) (46,186)
----------- ----------- ----------- -----------
Cash flows from financing activities:
Net proceeds from (repayments of) short-term borrowings.... 348,902 (254,085) (289,269) (72,753)
Proceeds from life insurance policy loans.................. 32,885 33,620
Repayment of indebtedness to related parties............... (114,991) (136,217) (29,444) (31,572)
Distributions to shareholder............................... (139,747) (76,330) (14,165)
----------- ----------- ----------- -----------
Net cash provided by (used in) financing activities...... 127,049 (433,012) (332,878) (104,325)
----------- ----------- ----------- -----------
Net increase (decrease) in cash.......................... 41,412 (70,441) (64,172) 21,098
Cash at beginning of period.................................. 48,479 89,891 89,891 19,450
----------- ----------- ----------- -----------
Cash at end of period........................................ $ 89,891 $ 19,450 $ 25,719 $ 40,548
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest................................................. $ 264,989 $ 273,276 $ 55,863 $ 45,889
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Income taxes............................................. $ 7,105 $ 5,109
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-28
<PAGE>
FINE ARTS ENGRAVERS COMPANY, INC.
(D.B.A. FINE ARTS GRAPHICS)
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF OPERATIONS
Fine Arts Engravers Company, Inc. (the "Company", d.b.a. Fine Arts Graphics)
is an Oregon corporation formed in 1963, which does business under the name of
Fine Arts Graphics. The Company manufactures and distributes fine quality
letterhead, envelopes, business cards, wine labels and other printed material
for customers in a broad range of industries throughout the United States. The
Company operates production facilities in Tualatin, Oregon (headquarters) and
Union, New Jersey.
On April 13, 1999, the Company's principal assets were sold to, and certain
of its liabilities were assumed by ImageX.com, Inc. (see Note 11).
The unaudited interim financial statements as of March 31, 1999 and for the
three month periods ended March 31, 1998 and 1999 have been prepared in
accordance with generally accepted accounting principles for interim financial
information. Accordingly, they do not include all of the information and
disclosures required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring adjustments) considered necessary for a fair presentation
have been included. Operating results for the three month period ended March 31,
1999 are not necessarily indicative of the results that may be expected for the
year ending December 31, 1999.
INVENTORIES
Inventories consist of raw materials, work-in-process and finished basics
(customer-owned inventory), 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
production overhead.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are depreciated using the
straight-line method over the estimated service lives. Minor repairs and
maintenance, which do not improve or extend the lives of assets, are expensed as
incurred. Major renewals are capitalized. When assets are retired or otherwise
disposed of, the cost and related accumulated depreciation are removed from the
accounts and any gain or loss is recognized in operations.
Estimated services lives are as follows:
<TABLE>
<CAPTION>
ASSET CLASS SERVICE LIVES
- -------------------------------------------------- -------------
<S> <C>
Machinery and equipment........................... 7-12 years
Furniture......................................... 10 years
Computers......................................... 3-5 years
</TABLE>
REVENUE RECOGNITION
Goods are shipped free on board (FOB) origin with revenue recognition taking
place based on product shipment from the Company's production facilities or the
Company's network of specialty product suppliers or product transfer to
customer-owned finished basic inventory.
F-29
<PAGE>
FINE ARTS ENGRAVERS COMPANY, INC.
(D.B.A. FINE ARTS GRAPHICS)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
Revenues are not recognized for Company-owned finished basics until imprint
orders are received, printed and shipped. Finished basics represent partially
manufactured products that require additional printing before they are shipped.
Revenues include freight billed to customers.
ADVERTISING
Advertising and promotion costs are expensed as incurred and totaled
approximately $59,000 for 1997 and $70,000 for 1998.
INCOME TAXES
The Company, with the consent of its shareholder, elected to be taxed under
the provisions of Subchapter S of the Internal Revenue Code and generally did
not pay Federal income taxes. In lieu of corporate income taxes, the
shareholders of an S corporation are taxed on their proportionate share of the
Company's taxable income. Therefore, the shareholder reports the taxable income
or loss. Accordingly, no provision or liability for Federal income taxes has
been included in these financial statements.
For state income tax purposes, the Company files as an S corporation in the
State of Oregon and a C corporation in the states of California and New Jersey.
Accordingly, state taxes are provided for income attributable to operations in
California and New Jersey.
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
CONCENTRATION OF CREDIT RISK
Sales to the largest three customers totaled 15%, 10% and 5%, respectively,
of sales in 1997 and 18%, 13% and 3%, respectively, of sales in 1998. Of the
accounts receivable balances, these same three customers represented 13%, 7% and
5%, respectively, of the balance at December 31, 1997 and 13%, 14% and 5%,
respectively, of the balance at December 31, 1998.
F-30
<PAGE>
FINE ARTS ENGRAVERS COMPANY, INC.
(D.B.A. FINE ARTS GRAPHICS)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. INVENTORIES:
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ MARCH 31,
1997 1998 1999
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Paper stock and supplies.......................... $285,965 $250,254 $234,631
Work-in-process................................... 144,514 90,200 138,996
Finished basics................................... 267,358 319,329 351,540
-------- -------- -----------
$697,837 $659,783 $725,167
-------- -------- -----------
-------- -------- -----------
</TABLE>
3. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ MARCH 31,
1997 1998 1999
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Production machinery and equipment................ $2,153,935 $2,345,651 $2,342,700
Computers, furniture and other equipment.......... 1,127,590 1,073,225 1,090,339
-------- -------- -----------
3,281,525 3,418,876 3,433,039
Less accumulated depreciation..................... 2,486,393 2,678,450 2,704,663
-------- -------- -----------
$795,132 $740,426 $ 728,376
-------- -------- -----------
-------- -------- -----------
</TABLE>
As of December 31, 1998, approximately $1,696,700 of fully depreciated
property and equipment remained in service.
4. CASH SURRENDER VALUE OF LIFE INSURANCE:
The Company purchased life insurance policies in connection with severance
agreements for two former key officers (see Note 8). The Company has elected to
report the cash surrender value of these policies net of any outstanding loans
against the policies. These net amounts are included in other assets on the
accompanying balance sheets. As of December 31, 1997 and 1998, the cash
surrender value of the policies was $848,654 and $915,211, respectively, which
was reported net of outstanding policy loans of $775,955 and $809,575,
respectively. The interest rate on these loans ranged from 6.75% to 6.84% at
December 31, 1998.
5. FINANCING AGREEMENTS:
SHORT-TERM BANK BORROWINGS
On July 17, 1998, the Company renewed a $1,400,000 bank line of credit with
Centennial Bank, which allows the Company to borrow against a specified
percentage of eligible accounts receivable plus a percentage of inventories. The
amount the Company may borrow against inventories and receivables may not exceed
$400,000 and $1,400,000, respectively. As of December 31, 1998, $1,326,239 was
available to be drawn under the line of credit. The line, which is guaranteed by
the Company's
F-31
<PAGE>
FINE ARTS ENGRAVERS COMPANY, INC.
(D.B.A. FINE ARTS GRAPHICS)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. FINANCING AGREEMENTS: (CONTINUED)
shareholder, accrues interest at 1% above the bank's reference rate (8.75% at
December 31, 1998) and is collateralized by accounts receivable and inventories.
Additionally, Centennial Bank has a first security interest in $300,000 of
machinery and equipment and a fourth security position behind the Marital Trust
and Maria Stanley notes (junior debt) on the remaining machinery and equipment.
The junior debt is subordinate to the bank line of credit and subject to
"inter-creditor" agreements. There are also certain financial covenants relating
to the various security agreements with which the Company was in compliance at
December 31, 1998. Management does not believe any of these covenants are
significantly restrictive.
INDEBTEDNESS TO RELATED PARTIES
MARITAL TRUST NOTE: On April 25, 1996, as a part of a refinance of existing
debt, the Company borrowed $1,187,477 from the Marital Trust Testamentary of
Edwin M. Stanley (Marital Trust). The Company's shareholder, Nicholas J.
Stanley, is one of four Marital Trustees. The note, which matures in April 2006,
bears a fixed annual interest rate of 7% and requires monthly payments of
$14,290, which includes principal and interest.
MARIA STANLEY NOTE: In conjunction with the refinance of the Marital Trust
notes referred to above, the balance of $263,116 on an existing note from Maria
Stanley (a related party) also matures in April 2006. The note, which was also
executed on April 25, 1996, bears an annual fixed interest rate of 7% and
requires monthly payments of $3,166, which includes principal and interest.
The following schedule represents the current and non-current portions of
the notes at December 31, 1998:
<TABLE>
<CAPTION>
CURRENT NON-CURRENT
DESCRIPTION PORTION PORTION TOTAL
- -------------------------------------------------- -------- ----------- ----------
<S> <C> <C> <C>
Marital Trust Note................................ $106,145 $ 875,227 $ 981,372
Maria Stanley Note................................ 23,520 193,934 217,454
-------- ----------- ----------
$129,665 $ 1,069,161 $1,198,826
-------- ----------- ----------
-------- ----------- ----------
</TABLE>
Maturities of indebtedness to related parties as of December 31, 1998 are as
follows:
<TABLE>
<S> <C>
1999.............................................. $ 129,665
2000.............................................. 139,039
2001.............................................. 149,090
2002.............................................. 159,868
2003.............................................. 171,424
Thereafter........................................ 449,740
----------
Total......................................... $1,198,826
----------
----------
</TABLE>
6. LEASE OBLIGATIONS:
The Company leases its Oregon facility (land and building) from SIAM Leasing
Company, which is owned by the Marital Trust, under an operating lease. In
addition to the base rents, the Company is
F-32
<PAGE>
FINE ARTS ENGRAVERS COMPANY, INC.
(D.B.A. FINE ARTS GRAPHICS)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. LEASE OBLIGATIONS: (CONTINUED)
also responsible for property taxes, utilities and related insurance expenses.
The facility lease is noncancelable and was renewed for a five-year term on July
1, 1996. The lease requires monthly payments of $24,300, and allows one option
of renewal effective July 1, 2001 for a five-year period using fair market
rentals at the date of renewal. Total lease expense under this agreement was
$291,600 in each of 1997 and 1998.
The Company leases its Union, New Jersey facility (land and building) from
Ideal Trade, which is a New Jersey partnership, under an operating lease. The
Company is responsible for property taxes and related insurance expenses. The
lease is noncancelable and was renewed for a five-year term on November 1, 1998.
Total lease expense under this agreement was $63,840 and $65,700 in 1997 and
1998, respectively.
The Company is also obligated under terms of noncancelable operating leases
for equipment, expiring through March 2002. Total lease expense under these
leases was $15,040 for 1998.
The following is a schedule of future minimum lease payments under leases
that have initial or remaining noncancelable lease terms in excess of one year
as of December 31, 1998.
<TABLE>
<CAPTION>
LAND AND
BUILDING EQUIPMENT
LEASES LEASES
---------- ---------
<S> <C> <C>
1999.............................................. $ 367,225 $14,360
2000.............................................. 370,975 6,880
2001.............................................. 228,925 6,880
2002.............................................. 86,625 1,719
2003.............................................. 73,750
---------- ---------
$1,127,500 $29,839
---------- ---------
---------- ---------
</TABLE>
7. EMPLOYEE BENEFIT PLAN:
Effective January 1, 1994, the Company established a 401(k) profit sharing
plan (the Plan) covering all eligible employees who meet certain age and service
requirements. Participants are allowed to defer the lesser of 20% of their
annual compensation or $10,000 to the Plan. Contributions are made to the Plan
at the discretion of the Company's Board of Directors. No matching contributions
were made in 1997 or 1998. The Plan includes professionally managed investment
funds that are invested at the discretion of individual Plan members, and a
professional third-party plan administrator. As a participant-driven plan, under
Internal Revenue Code Section 404(c), the Company is effectively relieved of
liability for losses that result from individual participant investment
decisions.
In addition, the Plan provides that the Company may make discretionary
profit sharing contributions. The Company did not make any discretionary
contributions in 1997 or 1998.
8. DEFERRED COMPENSATION PLANS:
In 1979 and 1980, the Company entered into deferred compensation
arrangements with two employees which provide for cash payments to be made after
their retirement. One employee retired in
F-33
<PAGE>
FINE ARTS ENGRAVERS COMPANY, INC.
(D.B.A. FINE ARTS GRAPHICS)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. DEFERRED COMPENSATION PLANS: (CONTINUED)
October 1982 and has received monthly payments of $1,861. This contract was
completed in October 1997. Another employee retired in December 1985 and began
receiving annual payments of $10,000 for 15 years in January 1991. The
liabilities under these arrangements have been recorded at their present value
using a 12% discount rate.
9. TRANSFER OF OWNERSHIP AND STOCK RESTRICTION:
On September 30, 1994, Nicholas J. Stanley completed the purchase of all
outstanding shares of the Company's stock from the estate of Edwin Stanley in a
transaction that did not involve the Company. All of the Company's stock is
subject to an Escrow Agreement and Stock Pledge and Security Agreement. The
shares will remain restricted as long as any amounts relating to the original
Marital Trust note of $1,187,477 (see Note 5) remain outstanding. Associated
with the Purchase Agreement, the Company and Mr. Stanley have agreed to certain
financial covenants relating to quarter-end net worth and working capital, and
quarterly and annual net profit and loss minimums. In addition to the financial
covenants, the Company is restricted from extending or modifying its bank debt
without the written consent of the Marital Trust. See Note 11 regarding the sale
of the Company's operations subsequent to December 31, 1998. The Company was in
compliance with these covenants at December 31, 1997, December 31, 1998 and
March 31, 1999 (unaudited).
10. SHAREHOLDER DISTRIBUTIONS:
As disclosed in Note 1, the Company has elected to be taxed under Subchapter
S of the Internal Revenue Code for federal and State of Oregon income tax
purposes, which results in the taxable income of the Company being taxed
directly to the shareholder. In order to fund the personal taxes of the
shareholder that result from this tax election at the corporate level, the
Company distributes to its shareholder, as dividends, an amount based on the
estimated tax costs of this flow-through income. During 1997 and 1998, these
Subchapter S shareholder dividends totaled $139,747 and $76,330, respectively.
11. SALE OF THE COMPANY:
On November 25, 1998, the Company and its shareholder entered into a letter
of intent that involves the sale of substantially all of the Company's assets to
and assumption of certain of its liabilities by ImageX.com, Inc. The sale closed
on April 13, 1999.
F-34
<PAGE>
UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS
On April 13, 1999, ImageX.com, Inc. (ImageX.com) acquired the assets of Fine
Arts Engravers Company, Inc. (Fine Arts Graphics) for approximately $5 million.
The unaudited pro forma condensed balance sheet is based on the individual
unaudited balance sheets of ImageX.com and Fine Arts Graphics appearing
elsewhere in this prospectus and has been prepared to reflect the acquisition by
ImageX.com of the assets of Fine Arts Graphics as of March 31, 1999. The
unaudited pro forma condensed statements of operations is based on individual
historical results of operations of ImageX.com and Fine Arts Graphics for the
year ended December 31, 1998 and for the three months ended March 31, 1999,
after giving effect to the acquisition of Fine Arts Graphics as if it had
occurred at the beginning of each of the periods presented.
The unaudited pro forma condensed financial statements should be read in
conjunction with the historical financial statements and notes thereto of
ImageX.com and Fine Arts Graphics. The pro forma condensed financial statements
are presented for illustrative purposes only and are not necessarily indicative
of results of operations that would have actually occurred had the acquisition
of Fine Arts Graphics been effected on the dates assumed.
F-35
<PAGE>
IMAGEX.COM, INC.
UNAUDITED PRO FORMA CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
AS OF MARCH 31, 1999
------------------------------------------------------------------------------------
FINE ARTS PRO FORMA PRO FORMA
ENGRAVERS ADJUSTMENTS ADJUSTMENTS
IMAGEX.COM, INC. COMPANY, INC. (NOTE 1) (NOTE 2) PRO FORMA
---------------- ------------- -------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................. $ 123,569 $ 40,548 $(4,665,548) $ 23,802,512 $ 19,301,081
Accounts receivable........................ 352,147 1,406,280 1,758,427
Unbilled revenues.......................... 97,100 97,100
Inventories................................ 725,167 725,167
Prepaid expenses........................... 71,862 71,862
---------------- ------------- -------------- --------------- --------------
Total current assets................... 475,716 2,340,957 (4,665,548) 23,802,512 21,953,637
Restricted cash.............................. 24,849 24,849
Property and equipment, net.................. 1,398,630 728,376 1,599,494 3,726,500
Cost in excess of net assets acquired........ 1,386,060 1,386,060
Other assets................................. 146,356 185,513 331,869
---------------- ------------- -------------- --------------- --------------
Total assets........................... $ 2,045,551 $3,254,846 $(1,679,994) $ 23,802,512 $ 27,422,915
---------------- ------------- -------------- --------------- --------------
---------------- ------------- -------------- --------------- --------------
LIABILITIES AND STOCKHOLDERS' (DEFICIT)
EQUITY
Current liabilities:
Current portion of notes payable........... $ 1,499,622 $ 942,540 $ (942,540) $ (1,197,486) $ 302,136
Related party indebtedness................. 131,948 (131,948)
Line of credit payable..................... 96,440 96,440
Current portion of deferred compensation... 5,066 (5,066)
Accounts payable........................... 614,163 746,495 1,360,658
Accrued liabilities........................ 170,799 453,357 (19,979) 604,177
---------------- ------------- -------------- --------------- --------------
Total current liabilities.............. 2,381,024 2,279,406 (1,079,554) (1,217,465) 2,363,411
Indebtedness to related parties, net of
current.................................... 267,568 1,035,306 (1,035,306) 267,568
Deferred compensation, net of current........ 36,048 (36,048)
---------------- ------------- -------------- --------------- --------------
Total liabilities...................... 2,648,592 3,350,760 (2,150,908) (1,217,465) 2,630,979
---------------- ------------- -------------- --------------- --------------
Commitments and contingencies
Mandatorily redeemable convertible preferred
stock...................................... 12,216,943 (12,216,943)
---------------- ---------------
Shareholders' (deficit) equity:
Series A convertible preferred stock....... 15,000 (15,000)
Common stock............................... 15,875 39,330 (38,393) 113,458 130,270
Additional paid-in capital................. 3,983,932 300,000 74,063 37,138,462 41,496,457
Unearned compensation...................... (1,641,331) (1,641,331)
Notes receivable from shareholders......... (220,000) (220,000)
Accumulated deficit........................ (14,973,460) (435,244) 435,244 (14,973,460)
---------------- ------------- -------------- --------------- --------------
Total shareholders' (deficit) equity... (12,819,984) (95,914) 470,914 37,236,920 24,791,936
---------------- ------------- -------------- --------------- --------------
Total liabilities and shareholders'
(deficit) equity..................... $ 2,045,551 $3,254,846 $(1,679,994) $ 23,802,512 $ 27,422,915
---------------- ------------- -------------- --------------- --------------
---------------- ------------- -------------- --------------- --------------
</TABLE>
Note 1-- The pro forma balance sheet has been prepared to reflect the
acquisition by ImageX.com of the assets of Fine Arts Graphics for an
aggregate purchase price of $5 million, consisting of $375,000 of common
stock and $4,625,000 of cash payment. Pro forma adjustments are made to
reflect:
(a) The issuance of 93,750 shares of common stock for $375,000
(b) The increase in the value of the property and equipment acquired
(c) The elimination of shareholder's equity accounts of Fine Arts
Graphics
(d) The elimination of liabilities of Fine Arts Graphics not assumed
(e) The cost in excess of net assets acquired
Note 2-- The pro forma balance sheet has been prepared to reflect (1) the
conversion of all shares of convertible preferred stock outstanding at
March 31, 1999 into 5,398,741 shares of common stock and (2) the
issuance and conversion into 5,952,390 shares of common stock of
convertible preferred stock issued on April 8 and 15, 1999 as if these
shares had been issued on March 31, 1999.
F-36
<PAGE>
IMAGEX.COM, INC.
UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
YEAR ENDED DECEMBER 31, 1998 1999
-------------------------------------------------------- -------------------------------
FINE ARTS PRO FORMA FINE ARTS
ENGRAVERS ADJUSTMENTS ENGRAVERS
IMAGEX.COM, INC. COMPANY, INC. (NOTE 2) PRO FORMA IMAGEX.COM, INC. COMPANY, INC.
---------------- ------------- ----------- ---------- ---------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Revenues......................... $ 968,028 $10,460,334 $11,428,362 $ 485,335 $ 2,220,885
Cost of Sales.................... 997,713 7,127,106 $ 151,559 8,276,378 374,877 1,586,289
---------------- ------------- ----------- ---------- ---------------- -------------
Gross profit................... (29,685) 3,333,228 (151,559) 3,151,984 110,458 634,596
Operating expenses:
General and administrative..... 3,413,093 2,363,046 81,013 5,857,152 1,044,671 549,773
Selling and marketing.......... 2,182,311 528,474 2,710,785 596,127 117,748
Research and development....... 2,550,926 2,550,926 394,745
Amortization of unearned
compensation................. 378,507 378,507 398,665
Amortization of cost in excess
of net assets acquired....... 138,606 138,606
---------------- ------------- ----------- ---------- ---------------- -------------
Total operating expenses..... 8,524,837 2,891,520 219,619 11,635,976 2,434,208 667,521
Loss from operations......... (8,554,522) 441,708 (371,178) (8,483,992) (2,323,750) (32,925)
---------------- ------------- ----------- ---------- ---------------- -------------
Other expense, net............... (46,346) (245,722) (292,068) (16,123) (58,593)
Net (loss) income before
taxes...................... (8,600,868) 195,986 (371,178) (8,776,060) (2,339,873) (91,518)
---------------- ------------- ----------- ---------- ---------------- -------------
State income tax expense
(benefit).................. 15,405 15,405 (5,000)
Net (loss) income............ $ (8,600,868) $ 180,581 $(371,178) $(8,791,465) $ (2,339,873) $ (86,518)
---------------- ------------- ----------- ---------- ---------------- -------------
---------------- ------------- ----------- ---------- ---------------- -------------
Preferred stock accretion........ (221,467) (221,467) (72,746)
Net loss used in calculating
loss per share............. $ (8,822,335) $ 180,581 $(371,178) $(9,012,932) $ (2,412,619) $ (86,518)
---------------- ------------- ----------- ---------- ---------------- -------------
---------------- ------------- ----------- ---------- ---------------- -------------
Basic and diluted net loss per
share.......................... $ (7.27) $ (6.89) $ (1.53)
---------------- ---------- ----------------
---------------- ---------- ----------------
<CAPTION>
PRO FORMA
ADJUSTMENTS
(NOTE 2) PRO FORMA
----------- ----------
<S> <C> <C>
Revenues......................... $2,706,220
Cost of Sales.................... $ 45,904 2,007,070
----------- ----------
Gross profit................... (45,904) 699,150
Operating expenses:
General and administrative..... 23,628 1,618,072
Selling and marketing.......... 713,875
Research and development....... 394,745
Amortization of unearned
compensation................. 398,665
Amortization of cost in excess
of net assets acquired....... 34,652 34,652
----------- ----------
Total operating expenses..... 58,280 3,160,009
Loss from operations......... (104,184) (2,460,859)
----------- ----------
Other expense, net............... (74,716)
Net (loss) income before
taxes...................... (104,184) (2,535,575)
----------- ----------
State income tax expense
(benefit).................. (5,000)
Net (loss) income............ $(104,184) $(2,530,575)
----------- ----------
----------- ----------
Preferred stock accretion........ (72,746)
Net loss used in calculating
loss per share............. $(104,184) $(2,603,321)
----------- ----------
----------- ----------
Basic and diluted net loss per
share.......................... $ (1.55)
----------
----------
</TABLE>
Note 2-- The pro forma statements of operations give effect to the following pro
forma adjustments necessary to reflect the acquisition described in Note
1 to the unaudited pro forma condensed balance sheet on the preceding
page:
(a) The amortization of cost in excess of net assets acquired over a
period of 10 years
(b) The additional depreciation expense recorded to cost of sales and
general and administrative expense for the increase in the value of the
property and equipment acquired
F-37
<PAGE>
INSIDE BACK COVER
IMAGEX.COM CUSTOMER SUCCESS STORIES
[GRAPHICS - Logos of Amazon.com, Verifone, Netlink, Photodisc, ShopNow.com,
Merrill Gardens, Candle, Cobalt, Parallel Communications, Aventail, fine.com,
Point Information Network, New Energy Ventures, Watchguard Technologies, Inc.,
World Vision, Visio and Concur Technologies]
The above companies are selected members of ImageX.com's top 20 customers based
on first quarter 1999 revenues ($485,000). Their percentages of such revenues
are as follows: Amazon.com 3%, Aventail 2%, Candle 2%, Cobalt 3%, Concur 3%,
Fire.com 1%, Merrill Gardens 2%, New Energy Ventures 10%, Nextlink 1%, Parallel
5%, Photodisc 4%, Point Information Network 4%, ShopNow.com 1%, Verifone 8%,
Visio 13%, Watch Guard 1%, World Vision 5%.
<PAGE>
Until , 1999 (25 days after the
commencement of this offering), all dealers
selling shares of our common stock, whether or
not participating in this offering, may be
required to deliver a prospectus. This delivery
requirement is in addition to the dealer's
obligation to deliver a prospectus when acting as
an underwriter and with respect to unsold
allotments or subscriptions.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than the
underwriting discount and commissions, payable by the registrant in connection
with the sale of the common stock being registered hereby. All amounts shown are
estimates, except the Securities and Exchange Commission registration fee, the
NASD filing fee and the Nasdaq National Market listing fee.
<TABLE>
<S> <C>
Securities and Exchange Commission registration
fee............................................... $ 17,125
NASD filing fee..................................... 5,500
Nasdaq National Market listing fee.................. 95,000
Blue Sky fees and expenses.......................... 10,000
Printing and engraving expenses..................... 150,000
Legal fees and expenses............................. 500,000
Accounting fees and expenses........................ 300,000
Directors' and officers' insurance.................. 100,000
Transfer Agent and Registrar fees................... 10,000
Miscellaneous expenses.............................. 12,375
-------------
Total............................................. $ 1,200,000
-------------
-------------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Sections 23B.08.500 through 23B.08.600 of the Washington Business
Corporation Act (the "WBCA") authorize a court to award, or a corporation's
board of directors to grant, indemnification to directors and officers on terms
sufficiently broad to permit indemnification under certain circumstances for
liabilities arising under the Securities Act of 1933, as amended (the
"Securities Act"). Section 10 of the registrant's Restated Bylaws (Exhibit 3.2
hereto) provides for indemnification of the registrant's directors, officers,
employees and agents to the maximum extent permitted by Washington law. The
directors and officers of the registrant also may be indemnified against
liability they may incur for serving in that capacity pursuant to a liability
insurance policy maintained by the registrant for such purpose.
Section 23B.08.320 of the WBCA authorizes a corporation to limit a
director's liability to the corporation or its shareholders for monetary damages
for acts or omissions as a director, except in certain circumstances involving
intentional misconduct, knowing violations of law or illegal corporate loans or
distributions, or any transaction from which the director personally receives a
benefit in money, property or services to which the director is not legally
entitled. Article VII of the registrant's Restated Articles of Incorporation
(Exhibit 3.1 hereto) contains provisions implementing, to the fullest extent
permitted by Washington law, such limitations on a director's liability to the
registrant and its shareholders.
The registrant has entered into certain indemnification agreements with its
officers and directors, the form of which is attached as Exhibit 10.26 to this
Registration Statement and incorporated herein by reference. The indemnification
agreements provide the registrant's officers and directors with indemnification
to the maximum extent permitted by the WBCA.
The Underwriting Agreement (Exhibit 1.1 hereto) provides for indemnification
by the Underwriters of the registrant and its executive officers and directors,
and by the registrant of the Underwriters, for certain liabilities, including
liabilities arising under the Securities Act, in connection
II-1
<PAGE>
with matters specifically provided in writing by the Underwriters for inclusion
in this Registration Statement.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Within the last three years, the registrant has issued and sold unregistered
securities as follows:
(1) On December 20, 1996, the registrant issued 375,000 shares of Series A
Preferred Stock to each of Philip J. Hooper, John T. Jerome, Cory E. Klatt
and F. Joseph Verschueren in connection with a reclassification of their
issued and outstanding shares of common stock into 15 shares of Series A
Preferred Stock.
(2) On December 20, 1996, the registrant issued 3,500,000 shares of Series B
Preferred Stock, which are convertible into 1,750,000 shares of common
stock, to nine investors, Technology Partners Fund V, L.P., Vanguard V,
L.P., Ironwood Capital, LLC, Howse Family Partnership, Steven Gillis,
Harold Kawaguchi, Thomas J. Cable, John D. Durbin and Scott Land. The
aggregate consideration received for such shares was $3,500,000.00 or $1.00
per share.
(3) On January 9, 1998, the registrant issued 2,000,001 shares of Series C
Preferred Stock, which are convertible into 1,000,003 shares of common
stock, to six investors, Acorn Ventures IV, LLC, Technology Partners Fund
V, L.P., Vanguard V, L.P., Michael Towers, Howse Family Partnership and
Harold Kawaguchi. The aggregate consideration received for such shares was
$3,000,001.50 or $1.50 per share. The registrant also issued warrants to
purchase 790,000 shares of common stock to Acorn Ventures IV, LLC. The
aggregate consideration received for such warrants was $15,800.00.
(4) On May 14, 1998, the registrant issued 1,999,999 shares of Series C
Preferred Stock, which are convertible into 1,000,003 shares of common
stock, to 12 investors, Acorn Ventures IV, LLC, Internet Ventures, LLC,
Technology Partners Fund V, L.P., Vanguard V, L.P., Nicholas B. Temple,
Eric S. Temple, Nicholas Brigham Temple, Jr., Tom A. Alberg, John
Meisenbach, Steven Gillis, Charles J. Katz, Jr. and James E. Webster. The
aggregate consideration received for such shares was $2,999,998.50 or $1.50
per share. The registrant also issued warrants to purchase 390,000 shares
of common stock to 15 investors, which includes, in addition to the
investors described in paragraph 2 above, Michael Towers, Howse Family
Partnership and Harold Kawaguchi. The aggregate consideration received for
such warrants was $7,800.
(5) On August 24, 1998, the registrant issued warrants to purchase 26,667
shares of Series C Preferred Stock, which are convertible into warrants to
purchase 13,334 shares of common stock, to Technology Partners Fund V, L.P.
The aggregate consideration received for such warrants was $267.
(6) On August 28, 1998, the registrant issued warrants to purchase 13,333
shares of Series C Preferred Stock, which are convertible into warrants to
purchase 6,667 shares of common stock, to Vanguard V, L.P. The aggregate
consideration received for such warrants was $133.
(7) On October 1, 1998, the registrant issued 1,385,493 shares of Series D
Preferred Stock, which are convertible into 692,747 shares of common stock,
to ten investors, SunAmerica, Inc., Technology Partners Fund V, L.P.,
Vanguard V, L.P., Donaldson, Lufkin & Jenrette, Galaxy Investment Partners,
Michael Towers, Steve Shindler and Mary Kay Kosnik, Rich and Cindy
Sonstelie, Western Investments Capital LLC and Carl Stork. The aggregate
consideration received for such shares was $2,770,986.00 or $2.00 per
share. The registrant also issued warrants to purchase 138,250 shares of
Series D Preferred Stock, which are convertible into warrants to purchase
69,125 shares of common stock, to the ten investors described above. The
aggregate consideration received for such warrants was $1,382.50.
II-2
<PAGE>
(8) On January 11, 1999, the registrant issued 401,257 shares of Series D
Preferred Stock, which are convertible into 200,629 shares of common stock,
to two investors, Eli Wilner and Barbara A. Brennan. The aggregate
consideration received for such shares was $802,514.
(9) On April 13, 1999, the registrant issued warrants to purchase 75,000 shares
of common stock to Nicholas J. Stanley. The aggregate consideration
received for such warrants was $1,500.
(10) On April 8, 1999, the registrant issued 8,641,666 shares of Series E
Preferred Stock, which are convertible into 4,320,840 shares of common
stock, to 28 investors, Internet Ventures, LLC, Nicholas Brigham Temple,
Jr., Eli Wilner, Barbara A. Brennan, Eric S. Temple, Galaxy Investment
Partners, Harold Kawaguchi, Ironwood Capital, LLC, Philip J. Hooper, John
Durbin, Michael and Pam Towers, Nicholas B. Temple, Rich and Cindy
Sonstelie, Rufus Lumry, SunAmerica Investments, Inc., Tom A. Alberg,
Thomas J. Cable, Western Investments Capital LLC, Howse Family
Partnership, Alta California Partners II, L.P., Alta Embarcadero Partners
II, LLC, Arthur W. Harrigan, WS Investment Company 99A, Stephen Scherba
Jr. and Elaine P. Scherba, Scott Drum, William C. Krueger, Brian and Jami
Holman and David Valle. The aggregate consideration received for such
shares was $18,147,498.60 or $2.10 per share. The registrant also issued
warrants to purchase 42,768 shares of common stock to two investors, Eli
Wilner and Barbara A. Brennan. The aggregate consideration received for
such warrants was $855.35.
(11) On April 15, 1999, the registrant issued 3,263,095 shares of Series E
Preferred Stock, which are convertible into 1,631,550 shares of common
stock, to 12 investors, Technology Partners Fund VI, L.P., Kellett
Partners LP, Clear Fir Partners, LP, Gary Sledge, Carl Stork, Nanda Nishit
Mehta and Nishit Kantilal Mehta, VBW Raptor Fund, LLC, Robert L. and
Leslie A Hobart JTWROS, Hambrecht & Quist California, Hambrecht & Quist
Employee Venture Fund, L.P. II, Access Technology Partners, L.P. and
Access Technology Partners Brokers Fund, L.P. The aggregate consideration
received for such shares was $6,852,499.50, or $2.10 per share.
(12) On April 21, 1999, the registrant issued warrants to purchase 48,165
shares of common stock to SG Cowen Securities Corporation for services
rendered in connection with the registrant's issuance of Series E
Preferred Stock.
(13) Within the last three years, the registrant granted stock options to
purchase 1,978,203 shares of common stock, with exercise prices ranging
from $0.20 to $12.00 per share and issued 650,000 shares of restricted
common stock to selected persons pursuant to the registrant's option plan.
Of the options, options for 319,000 shares have been canceled or forfeited
without being exercised, options for 99,950 shares have been exercised and
options for 951,253 shares remain outstanding.
Each share of preferred stock, other than shares of Series D Preferred
Stock, will convert on a 1-for-2 basis into common stock and each warrant to
purchase preferred stock, other than warrants to purchase Series D Preferred
Stock, will convert on a 1-for-2 basis into a warrant to purchase common stock.
Each share of Series D Preferred Stock will convert on a 1-for-1.988 basis into
common stock and each warrant to purchase Series D Preferred Stock will convert
on a 1-for-1.988 basis into a warrant to purchase common stock.
The sales and issuances of these securities were exempt from registration
under the Securities Act, pursuant to Section 4(2) of the Securities Act, on the
basis that the transactions did not involve a public offering, or pursuant to
Rule 701 under the Securities Act, on the basis that these options were offered
and sold either pursuant to a written compensatory benefit plan or pursuant to
written contracts relating to consideration, as provided by Rule 701.
II-3
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<S> <C>
1.1+ Form of Underwriting Agreement.
3.1+ Form of Amended and Restated Articles of Incorporation of the registrant, as further amended by Articles
of Amendment.
3.2+ Form of Amended and Restated Bylaws of the registrant.
5.1+ Opinion of Perkins Coie LLP as to the legality of the shares.
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.
10.2+ Stock Vesting Agreement, dated as of December 20, 1996, by and between the registrant and F. Joseph
Verschueren.
10.3+ Stock Vesting Agreement, dated as of December 20, 1996, by and between the registrant and Cory E. Klatt.
10.4+ Stock Vesting Agreement, dated as of December 20, 1996, by and between the registrant and Elwood D.
Howse, Jr.
10.5+ Stock Subscription and Repurchase Agreement, dated as of August 7, 1997, by and between the registrant
and Elwood D. Howse, Jr.
10.6+ Stock Vesting and Pledge Agreement, dated as of November 16, 1998, by and between the registrant and
Richard P. Begert.
10.7+ Offer of Employment, dated as of November 12, 1998, from the registrant to Richard P. Begert.
10.8+ Offer of Employment, dated as of April 23, 1998, from the registrant to Dana F. Manciagli.
10.9+ Offer of Employment, dated as of June 22, 1998, from the registrant to Eric J. Bean.
10.10+ Offer of Employment, dated as of June 9, 1999, from the registrant to Robin L. Krueger.
10.11+ Employment Agreement, dated as of April 13, 1999, by and between the registrant and Nicholas J. Stanley.
10.12+ Lease Agreement, dated as of January 31, 1997, by and between the registrant and Bellevue Associates,
L.P.
10.13+ Lease Agreement, dated as of May 15, 1998, by and between the registrant and Spieker Properties, L.P.
10.14+ Lease Agreement, dated as of October 19, 1998, by and between the registrant and Spieker Properties,
L.P.
10.15+ Lease Agreement, dated as of April 22, 1999, by and between the registrant and Spieker Properties, L.P.
10.16+ Lease Assignment and Assumption, dated as of April 13, 1999, by and between Keystone Acquisition
Corporation, a wholly owned subsidiary of the registrant, and Fine Arts Engravers Company, Inc.
10.17+ Lease Assignment and Assumption, dated as of April 13, 1999, by and between Keystone Acquisition
Corporation, a wholly owned subsidiary of the registrant, and Fine Arts Engravers Company, Inc.
10.18+ Loan and Security Agreement, dated as of February 26, 1997, by and between the registrant and Silicon
Valley Bank.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<S> <C>
10.19+ Loan and Security Agreement, dated as of September 24, 1998, by and between the registrant and Silicon
Valley Bank.
10.20+ Credit Agreement, dated as of April 30, 1999, by and between Keystone Acquisition Corporation, a wholly
owned subsidiary of the registrant, and Seafirst Bank.
10.21+ Guaranty Agreement, dated as of April 30, 1999, by and between the registrant and Seafirst Bank.
10.22+ Pledge Agreement, dated as of April 30, 1999, by and between the registrant and Seafirst Bank.
10.23+ Amended and Restated 1996 Stock Incentive Compensation Plan.
10.24+ 1999 Employee Stock Purchase Plan.
10.25+ 1999 Stock Option Grant Program for Nonemployee Directors.
10.26+ Form of Indemnification Agreement.
10.27+ Asset Purchase Agreement, dated as of February 23, 1999, by and among the registrant, Keystone
Acquisition Corp., Fine Arts Engravers Company, Inc. and Nicholas J. Stanley.
10.28+ Revolving Note, dated April 30, 1999, from Keystone Acquisition Corp., to Seafirst Bank.
10.29+ Converting Note, dated April 30, 1999, from Keystone Acquisition Corp., to Seafirst Bank.
21.1+ Subsidiaries of the registrant.
23.1 Consent of PricewaterhouseCoopers LLP, independent accountants.
23.2+ Consent of Perkins Coie LLP (contained in the opinion filed as Exhibit 5.1 hereto).
23.3+ Consent of CAP Ventures, Inc.
24.1+ Power of Attorney.
27.1+ Financial Data Schedule.
</TABLE>
- ---------
+ Previously filed.
(B) FINANCIAL STATEMENT SCHEDULES
All schedules are omitted because they are inapplicable or the requested
information is shown in the financial statements of the registrant or related
notes thereto.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described in Item 14, or otherwise, the
registrant has been advised that, in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
II-5
<PAGE>
The undersigned registrant hereby undertakes to provide to the Underwriters,
at the closing specified in the underwriting agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Amendment No. 3 to Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Bellevue, State of Washington, on the 19th day of July, 1999.
<TABLE>
<S> <C> <C>
IMAGEX.COM, INC.
BY: /S/ RICHARD P. BEGERT
-----------------------------------------
Richard P. Begert
PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 3 to Registration Statement has been signed by the following
persons in the capacities indicated below on the 19th day of July, 1999.
<TABLE>
<CAPTION>
NAME TITLE
- ------------------------------------------------------ ------------------------------------------------------
<C> <S>
/s/ RICHARD P. BEGERT
------------------------------------------- President and Chief Executive Officer (Principal
Richard P. Begert Executive Officer)
/s/ ROBIN L. KRUEGER
------------------------------------------- Chief Financial Officer (Principal Financial and
Robin L. Krueger Accounting Officer)
*F. JOSEPH VERSCHUEREN
------------------------------------------- Chairman of the Board
F. Joseph Verschueren
*JOHN E. ARDELL
------------------------------------------- Director
John E. Ardell
*GARRETT P. GRUENER
------------------------------------------- Director
Garrett P. Gruener
*ELWOOD D. HOWSE, JR.
------------------------------------------- Director
Elwood D. Howse, Jr.
*RICHARD R. SONSTELIE
------------------------------------------- Director
Richard R. Sonstelie
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
NAME TITLE
- ------------------------------------------------------ ------------------------------------------------------
<C> <S>
*BERNEE D. L. STROM
------------------------------------------- Director
Bernee D. L. Strom
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: /s/ JOHN R. HIGGINS
-------------------------
John R. Higgins
ATTORNEY-IN-FACT
</TABLE>
II-8
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
1.1+ Form of Underwriting Agreement.
3.1+ Form of Amended and Restated Articles of Incorporation of the registrant, as further amended by Articles
of Amendment.
3.2+ Form of Amended and Restated Bylaws of the registrant.
5.1+ Opinion of Perkins Coie LLP as to the legality of the shares.
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.
10.2+ Stock Vesting Agreement, dated as of December 20, 1996, by and between the registrant and F. Joseph
Verschueren.
10.3+ Stock Vesting Agreement, dated as of December 20, 1996, by and between the registrant and Cory E. Klatt.
10.4+ Stock Vesting Agreement, dated as of December 20, 1996, by and between the registrant and Elwood D.
Howse, Jr.
10.5+ Stock Subscription and Repurchase Agreement, dated as of August 7, 1997, by and between the registrant
and Elwood D. Howse, Jr.
10.6+ Stock Vesting and Pledge Agreement, dated as of November 16, 1998, by and between the registrant and
Richard P. Begert.
10.7+ Offer of Employment, dated as of November 12, 1998, from the registrant to Richard P. Begert.
10.8+ Offer of Employment, dated as of April 23, 1998, from the registrant to Dana F. Manciagli.
10.9+ Offer of Employment, dated as of June 22, 1998, from the registrant to Eric J. Bean.
10.10+ Offer of Employment, dated as of June 9, 1999, from the registrant to Robin L. Krueger.
10.11+ Employment Agreement, dated as of April 13, 1999, by and between the registrant and Nicholas J. Stanley.
10.12+ Lease Agreement, dated as of January 31, 1997, by and between the registrant and Bellevue Associates,
L.P.
10.13+ Lease Agreement, dated as of May 15, 1998, by and between the registrant and Spieker Properties, L.P.
10.14+ Lease Agreement, dated as of October 19, 1998, by and between the registrant and Spieker Properties,
L.P.
10.15+ Lease Agreement, dated as of April 22, 1999, by and between the registrant and Spieker Properties, L.P.
10.16+ 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 Fine Arts Graphics Company, Inc.
10.17+ Lease Assignment and Assumption, dated as of April 13, 1999, by and between Keystone Acquisition
Corporation, a wholly owned subsidiary of the registrant, and Fine Arts Graphics Company, Inc.
10.18+ Loan and Security Agreement, dated as of February 26, 1997, by and between the registrant and Silicon
Valley Bank.
10.19+ Loan and Security Agreement, dated as of September 24, 1998, by and between the registrant and Silicon
Valley Bank.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
10.20+ Credit Agreement, dated as of April 30, 1999, by and between Keystone Acquisitions Corporation, a wholly
owned subsidiary of the registrant, and Seafirst bank.
10.21+ Guaranty Agreement, dated as of April 30, 1999, by and between the registrant and Seafirst Bank.
10.22+ Pledge Agreement, dated as of April 30, 1999, by and between the registrant and Seafirst Bank.
10.23+ Amended and Restated 1996 Stock Incentive Compensation Plan.
10.24+ 1999 Employee Stock Purchase Plan.
10.25+ 1999 Stock Option Grant Program for Nonemployee Directors.
10.26+ Form of Indemnification Agreement.
10.27+ Asset Purchase Agreement, dated as of February 23, 1999, by and among the registrant, Keystone
Acquisition Corp., Fine Arts Engravers Company, Inc. and Nicholas J. Stanley.
10.28+ Revolving Note, dated April 30, 1999, from Keystone Acquisition Corp. to Seafirst Bank.
10.29+ Converting Note, dated April 30, 1999, from Keystone Acquisition Corp. to Seafirst Bank.
21.1+ Subsidiaries of the registrant.
23.1 Consent of PricewaterhouseCoopers LLP, independent accountants.
23.2+ Consent of Perkins Coie LLP (contained in the opinion filed as Exhibit 5.1 hereto).
23.3+ Consent of CAP Ventures, Inc.
24.1+ Power of Attorney.
27.1+ Financial Data Schedule.
</TABLE>
- ---------
+ Previously filed.
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1
(File No. 333-78271) of our report dated March 5, 1999, except for paragraph 3
of Note 12, as to which the date is April 13, 1999, paragraphs 17 and 18 of Note
1 and paragraph 8 of Note 12, as to which the date is April 15, 1999, paragraph
2 of Note 7, paragraph 2 of Note 8, paragraphs 1 and 8 of Note 9 and paragraph 9
of Note 12, as to which the date is April 21, 1999, paragraph 2 of Note 9, as to
which the date is June 16, 1999, paragraph 7 of Note 12, as to which the date is
April 30, 1999 and paragraph 10 of Note 12, as to which the date is May 7, 1999,
relating to the financial statements of ImageX.com, Inc. and of our report dated
April 16, 1999, relating to the financial statements of Fine Arts Engravers
Company, Inc., which appear in such Registration Statement. We also consent to
the reference to us under the headings "Experts," "Selected Financial Data for
ImageX.com" and "Selected Financial Data for Fine Arts Graphics" in such
Registration Statement.
Seattle, Washington
July 19, 1999
- --------------------------------------------------------------------------------
The foregoing report is in the form that will be signed upon completion of the
reverse stock-split described in paragraph 7 of Note 9 to the financial
statements.
PricewaterhouseCoopers LLP
