<PAGE> 1
Filed Pursuant to Rule 424(b)(4)
Registration No. 333-94639
PROSPECTUS
5,000,000 SHARES
[IMAGEX.COM LOGO]
COMMON STOCK
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Of the 5,000,000 shares of common stock offered in this prospectus,
ImageX.com, Inc. is selling 4,000,000 shares and shareholders of ImageX.com are
selling 1,000,000 shares. ImageX.com will not receive any of the proceeds from
the sale of shares by the selling shareholders.
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Our common stock is quoted on the Nasdaq National Market under the symbol
"IMGX." On February 10, 2000, the last reported sale price for the common stock
on the Nasdaq National Market was $24.00 per share. See "Price Range of Common
Stock."
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<TABLE>
<CAPTION>
PER SHARE TOTAL
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<S> <C> <C>
Public offering price....................................... $23.00 $115,000,000
Underwriting discounts and commissions...................... $ 1.20 $ 6,000,000
Proceeds, before expenses, to ImageX.com.................... $21.80 $ 87,200,000
Proceeds, before expenses, to the selling shareholders...... $21.80 $ 21,800,000
</TABLE>
We and the selling shareholders have granted the underwriters a 30-day
option to purchase a maximum of 695,595 and 54,405 additional shares,
respectively, to cover over-allotments. Delivery of the shares will be made on
or about February 16, 2000.
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PLEASE SEE "RISK FACTORS" BEGINNING ON PAGE 6 TO READ ABOUT CERTAIN RISKS
THAT YOU SHOULD CONSIDER BEFORE BUYING SHARES OF OUR COMMON STOCK.
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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.
CHASE H&Q
BANC OF AMERICA SECURITIES LLC
PRUDENTIAL VOLPE TECHNOLOGY
A UNIT OF PRUDENTIAL SECURITIES
SG COWEN
THE DATE OF THIS PROSPECTUS IS FEBRUARY 11, 2000
<PAGE> 2
INSIDE FRONT LEFT
IMAGEX.COM: A LEADING BUSINESS-TO-BUSINESS INTERNET MARKET MAKER FOR PRINTED
BUSINESS MATERIALS.
ImageX.com has launched an online print market, connecting businesses,
individuals, and printing professionals to a suite of printing resources. The
result? One stop print buying that provides quality and service.
[GRAPHIC - SCREEN SHOT]
CORPORATE ONLINE PRINTING CENTER
The Corporate Online Printing Center is a catalog of printed materials for
medium and larger sized companies, saving time, streamlining processes and
helping them control their brands more effectively.
[GRAPHIC - SCREEN SHOT]
SMALL BUSINESS PRINTING CENTER
The Small Business Printing Center provides quick and easy access to a range of
personalized printed materials through the Internet at competitive prices.
[GRAPHIC - SCREEN SHOT]
PRINTBID.COM
ONLINE BIDDING FOR BUYERS AND PRINTERS
PrintBid.com is an online bidding service for custom print jobs that links over
2,800 print buyers with over 4,000 printers.
[GRAPHIC - SCREEN SHOT]
PAPERDEALS.COM
Online Paper Auctions
PaperDeals.com is a live e-auction site for commercial fine paper stocks,
offering a forum, to quickly and efficiently source and sell inventories.
<PAGE> 3
TABLE OF CONTENTS
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PAGE
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Prospectus Summary.......................................... 3
Risk Factors................................................ 6
Use of Proceeds............................................. 21
Price Range of Common Stock................................. 21
Dividend Policy............................................. 21
Capitalization.............................................. 22
Dilution.................................................... 23
Selected Financial Data..................................... 24
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 26
Business.................................................... 35
Management.................................................. 52
Certain Transactions........................................ 63
Principal and Selling Shareholders.......................... 66
Description of Capital Stock................................ 69
Shares Eligible for Future Sale............................. 72
Underwriting................................................ 74
Legal Matters............................................... 77
Experts..................................................... 77
Where You Can Find More Information......................... 78
Index to Financial Statements............................... F-1
</TABLE>
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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 the
European Union and have applied for the same mark in Canada and Japan. We have
also registered the trademarks "Your online printing resource" and "We didn't
invent printing. We reinvented it." This prospectus also contains product names,
trade names and trademarks that belong to other organizations.
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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. Except where we state otherwise, we present information in this
prospectus assuming no exercise of the underwriters' over-allotment option.
IMAGEX.COM, INC.
ImageX.com is a leading business-to-business Internet market maker for
printed business materials. We offer an end-to-end solution that streamlines the
procurement process for business printing customers, their employees and other
end users of printed products, printing manufacturers and raw material suppliers
to the printing industry. We provide e-commerce solutions that improve the way
businesses acquire marketing communications materials, ranging from business
cards to high-end printed materials. ImageX.com's nationwide Web-based services
include the Corporate Online Printing Center, the Small Business Printing
Center, PrintBid.com, an online bidding system for over 2,800 print buyers and
more than 4,000 printers, and PaperDeals.com, an online auction site for
commercial paper stock with approximately 280 registered paper mills and
printers.
Industry observers predict the next phase in the Internet revolution will
be business-to-business electronic commerce. Forrester Research estimates 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. Sales in the
U.S. printing industry totaled $292 billion in 1998 of which $58 billion was
derived from commercial printing operations including sales of printed business
materials for corporate and small office/home office print buyers, according to
data provided by CAP Ventures. This large industry is extremely fragmented, with
over 30,000 local and regional printers operating nationwide in 1998. We believe
most printing is purchased from local and regional printers, and that few of
these printers deliver automated service over the Internet.
ImageX.com provides an Internet-based end-to-end solution to produce
printed business materials for corporate and small office/home office customers.
The Corporate Online Printing Center allows medium to large size businesses to
access their own customized, secure Web site that contains a digital catalog of
their custom-printed business materials -- from marketing brochures to
stationery and business cards. Each business can modify, proof, procure and
manage its printed business materials from any Windows-based, Internet-enabled
personal computer. Our Small Business Printing Center provides quick and easy
access via the Internet to a wide range of personalized printed business
materials based on standard templates at competitive prices. PrintBid.com is an
online bidding service for customized print jobs that links over 2,800 print
buyers with more than 4,000 printers. PaperDeals.com is an online auction site
for paper stock, offering a forum to link buyers with sellers. To date, we have
derived substantially all our revenues from our Corporate Online Printing Center
and from customers obtained through acquisitions.
Our objective is to be the leading business-to-business Internet market
maker for printed business materials. The following are the key components of
our strategy:
- Exploit our first mover advantage as the leading end-to-end printing
solution;
- Acquire enabling technology and broaden our service offerings;
- Expand our direct sales force;
- Grow our customer base through acquisitions;
- Increase revenues from existing customers;
- Build brand name awareness; and
- Maintain product and technology leadership.
Our customer and revenue base has been grown rapidly since we introduced
the ImageX.com solution in October 1997. Our customers include Automated Data
Processing (ADP), Bell Atlantic Mobile, CB Richard Ellis, CIBC World Markets,
Donaldson, Lufkin & Jenrette, Merck & Co., New Energy Ventures,
PricewaterhouseCoopers, United Behavioral Health and Waddell & Reed. We have
approximately 280 employees and offices in 15 metropolitan markets across the
United States. We also have 52 patent applications pending on our proprietary
technology.
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THE OFFERING
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<S> <C>
Common stock offered by ImageX.com......... 4,000,000 shares
Common stock offered by the selling
shareholders............................. 1,000,000 shares
Common stock to be outstanding after this
offering................................. 21,381,639 shares
Use of proceeds by ImageX.com.............. For working capital, capital expenditures
and acquisitions of businesses. See "Use of
Proceeds."
Nasdaq National Market symbol.............. IMGX
</TABLE>
The amount of common stock that will be outstanding after this offering is
based on shares outstanding on December 31, 1999. It excludes:
- 1,625,751 shares of common stock issuable upon exercise of options
outstanding as of December 31, 1999, of which 352,585 shares were
exercisable under our stock option plans at a weighted average exercise
price of $5.57 per share, and 682,668 shares available for issuance under
our stock option plans pursuant to options that have not yet been
granted;
- 1,343,731 shares issuable upon exercise of warrants outstanding as of
December 31, 1999, all of which are currently exercisable at a weighted
average exercise price of $4.26 per share; and
- 250,000 shares available for future issuance under our employee stock
purchase plan.
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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
actual statement of operations data for the year ended December 31, 1999
includes the results of operations of Fine Arts Graphics since April 13, 1999
and Image Press since September 21, 1999. The pro forma statement of operations
data give effect to the acquisitions of Fine Arts Graphics and Image Press as if
each had occurred at the beginning of the period presented. See Unaudited Pro
Forma Condensed Consolidated Financial Statements.
<TABLE>
<CAPTION>
ACTUAL PRO FORMA
------------------------------ ------------
YEAR ENDED
DECEMBER 31, YEAR-ENDED
------------------------------ DECEMBER 31,
1997 1998 1999 1999
------- ------- -------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA (IN THOUSANDS):
Revenues.................................................... $ 87 $ 968 $ 11,499 $ 19,346
Cost of sales............................................... 100 998 8,541 14,133
------- ------- -------- --------
Gross profit (loss)......................................... (13) (30) 2,958 5,213
------- ------- -------- --------
Operating expenses:
Sales and marketing....................................... 1,018 2,207 6,765 7,226
Product development....................................... 1,316 2,750 3,770 3,770
General and administrative................................ 1,285 3,549 11,002 12,800
Amortization of unearned compensation..................... 380 2,284 2,284
Amortization of goodwill and other intangibles............ 213 310
------- ------- -------- --------
Total operating expenses................................ 3,619 8,886 24,034 26,390
Loss from operations........................................ (3,632) (8,916) (21,076) (21,177)
------- ------- -------- --------
Net loss.................................................... $(3,570) $(8,964) $(20,835) $(21,021)
======= ======= ======== ========
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1999
-----------------------
ACTUAL AS ADJUSTED
-------- -----------
(UNAUDITED)
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA (IN THOUSANDS):
Cash and cash equivalents................................... $ 18,257 $104,727
Working capital............................................. 18,053 104,523
Total assets................................................ 35,668 122,138
Accumulated deficit......................................... (33,832) (33,832)
Total shareholders' equity.................................. 30,774 117,244
</TABLE>
The preceding consolidated balance sheet data summarizes:
- actual consolidated balance sheet data at December 31, 1999; and
- unaudited consolidated balance sheet data, as adjusted to reflect the
sale of 4,000,000 shares of common stock by ImageX.com in this offering
at the public offering price of $23.00 per share less underwriting
discounts and commissions and estimated offering expenses we expect to
pay in connection with this offering. See "Use of Proceeds" and
"Capitalization."
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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 A LIMITED OPERATING HISTORY AND ARE SUBJECT TO THE RISKS OF NEW
ENTERPRISES.
We began operations in 1996 and commercially introduced our
Internet-enabled printing services in October 1997. We have had limited revenues
to date, and our customers have been doing business with us for only a short
time. Our limited operating history and the uncertain and emerging nature of the
market in which we compete make it difficult to assess our prospects or predict
our future operating results. 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."
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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 our gross
margins. As of December 31, 1999, we had an accumulated deficit of $33.8
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 may 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 upgrade acquired customers 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.
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Based on all these factors, we believe that our quarterly revenues,
expenses and operating results will be difficult to predict. Moreover, because
of our short operating history and our acquisitions of Fine Arts Graphics in
April 1999, Image Press in September 1999 and PrintBid.com in December 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."
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."
A substantial majority of our revenue is derived from customers that we
have obtained through acquisitions of print providers. A substantial majority of
such revenue is currently generated through traditional offline orders rather
than through our online procurement system. To the extent we complete additional
acquisitions of print providers, the percentage of our revenue generated by
traditional offline procurement will likely increase, offset by any customers
and revenue that we convert to our online procurement system. In order for our
business to be successful, we must increase the percentage of our revenue from
online ordering while increasing our revenue in absolute terms. There can be no
assurance that we will be able to convert acquired customers fast enough to
accomplish this.
WE MAY NOT BE ABLE TO GROW SUCCESSFULLY THROUGH ACQUISITIONS.
To expand our business and our customer base, we intend to pursue
acquisitions of other commercial printers and print brokers as well as companies
with complementary technologies or who offer complementary products or services
to businesses through the Internet.
To date, we have acquired Fine Arts Graphics, a commercial printer, in
April 1999, Image Press, a commercial print broker, in September 1999, and
PrintBid.com, an Internet-based provider of commercial printing services, in
December 1999. Although, we are in discussions with acquisition candidates from
time to time, we have no 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, any future acquisition
candidates.
To the extent we complete acquisitions using cash rather than stock, we may
need to raise additional capital in order to continue operations after we expend
our existing capital resources.
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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 and companies with complementary technologies or product
and service offerings;
- effectively compete with numerous other potential acquirers, particularly
a number of large companies that are aggressively seeking to consolidate
segments of the printing industry, and other e-commerce companies seeking
such technologies or service offerings;
- 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 forces 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;
- successfully dispose of or find alternative uses for excess facilities
and manufacturing capacity; and
- maximize the usefulness of acquired technologies in our business.
We cannot predict whether pursuing 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 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.
THERE ARE RISKS ASSOCIATED WITH OUR NEW BUSINESSES.
In December 1999, we acquired PrintBid.com, an online bidding service for
individual print jobs, and its affiliate PaperDeals.com, an online auction site
for commercial paper stock. The success of PrintBid.com and PaperDeals.com will
depend in large part on our ability to build a critical mass of print and paper
buyers and suppliers. To attract and maintain print suppliers, we must build a
critical mass of print buyers. However, print buyers must perceive value in our
procurement solution and this, in part, depends on the breadth of our print
supplier base. If we are unable to increase the number of print suppliers and
draw more print buyers to the PrintBid.com and PaperDeals.com sites, we will not
be able to benefit from any network effect, where the value to each participant
in those marketplaces increases with the addition of each new participant. As a
result, the value of those sites and the success of our
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overall business could be harmed. Our failure to create and maintain this
network effect would negatively affect our business, revenues, financial
condition and results of operations.
PrintBid.com is currently operating free-of-charge to print buyers and
printers. With the introduction of its enhanced version, PrintBid.com has
advised printers participating in the system that a transaction fee will be
charged for bids submitted and contracts won. Once we start charging a
transaction fee for PrintBid.com's services, it is possible that the number of
printers participating in the system will decrease or will not increase to the
extent necessary to build the critical mass of print buyers necessary for our
PrintBid.com business to succeed.
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, including additional
personnel in new geographic markets into which we might expand. Competition for
qualified personnel in these areas is intense. Although we are an Internet-based
business-to-business intermediary, face-to-face contact is a key component of
our sales process. As a result, geographic expansion of our sales force is
important to our ability to acquire new customers. 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 and pursue our growth strategy. We believe that the
net proceeds of this offering, together with our existing cash and cash
equivalents, will be sufficient to meet our anticipated cash needs for working
capital and capital expenditures for at least the next 12 months. However, our
future capital requirements will depend on many factors that are difficult to
predict, including the size, timing and structure of any acquisitions that we
complete, our rate of revenue growth, our operating losses, the cost of
obtaining new customers and technical capabilities, and the cost of upgrading
and maintaining our network infrastructure and other systems. As a result, we
cannot predict with certainty the timing or amount of our future capital needs.
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
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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 COULD 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.
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 acquired businesses 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 in existing and new
markets. 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 marketplace for printing solutions. 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, particularly as we expand into new geographic markets through direct
sales, acquisitions and/or strategic alliances. 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."
INCREASES IN PAPER PRICES AND SHORTAGES IN PAPER SUPPLY COULD ADVERSELY AFFECT
OUR GROSS MARGINS AND OPERATING RESULTS.
The cost of paper is a principal factor in the pricing we receive from our
network of commercial printing vendors and our own pricing through our two
production facilities. We are generally able to pass increases in the cost of
paper on 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
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customers, or if our customers reduce their order volume, our profit margins and
cash flows could be adversely affected.
In recent years, increases or decreases in demand for paper have led to
corresponding pricing changes. In periods of high demand, certain paper grades
have been in short supply, including grades we and our commercial printing
vendors use. Any loss of the sources for paper supply or any disruption in our
suppliers' businesses or their failure to meet our product needs on a timely
basis could cause, at a minimum, temporary shortages in needed materials, which
could have a material adverse effect on our operating results, sales, profit
margins and cash flows.
WE MAY BE EXPOSED TO ENVIRONMENTAL LIABILITIES AND MAY FACE INCREASED COSTS OF
COMPLIANCE
WITH ENVIRONMENTAL LAWS AND REGULATIONS.
The printing business generates substantial quantities of inks, solvents
and other waste products requiring disposal. The printing facilities that we
operate are subject to federal and state environmental laws and regulations
concerning emissions into the air, discharges into waterways and the generation,
handling and disposal of waste materials. We believe our facilities are in
substantial compliance with these laws and regulations at this time. However,
changes to these laws and regulations could increase the cost of our doing
business or otherwise have a material adverse effect on our business, financial
condition and operating results. In addition, although we maintain commercial
property insurance at all our facilities, this insurance may not be adequate to
cover any claims against us for environmental liabilities.
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. 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."
12
<PAGE> 15
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;
- 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 TRADITIONAL PRINTING COMPANIES
OR OTHER
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
13
<PAGE> 16
often able to obtain favorable pricing for their customers by soliciting bids
from a variety of printers. Like local and regional printers, printing services
brokers often have long-standing customer relationships and extensive local
direct sales forces.
We also face direct competition from other companies that market integrated
Internet-based business printing services similar to ours. Potential developers
of competing electronic commerce services may include:
- consumer printing services providers, including Internet-based providers;
- office services providers;
- equipment manufacturers; and
- financial printers and publishers.
Many of our current and potential future competitors have substantially
greater financial, marketing and other resources than we do. As a result, they
may be able to market their products, services and branding more aggressively
than we are able to, and may be able to significantly undercut our pricing for
extended periods of time. They may also be able to respond more quickly and
effectively to emerging new technologies and to changes in customer requirements
and preferences. See "Business -- Competition."
WE DERIVE A SUBSTANTIAL PORTION OF 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
largest customer, CB Richard Ellis, accounted for 13% of our revenues for the
year ended December 31, 1999. In addition, our combined top 10 customers
accounted for 45% of our revenues for the year ended December 31, 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 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.
14
<PAGE> 17
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 Corporate 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 we need will be made available to us on
reasonable terms, if at all. We also cannot predict whether the technologies 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
15
<PAGE> 18
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.
We are in the process of moving our information and communications systems
to an offsite location. If we fail to manage this move effectively, it could
interrupt service to our customers, which could tarnish our reputation and
decrease usage of our services.
POTENTIAL IMPOSITION OF GOVERNMENTAL REGULATION ON ELECTRONIC COMMERCE AND LEGAL
UNCERTAINTIES COULD LIMIT OUR GROWTH.
The adoption of new laws or the adaptation of existing laws to the Internet
may decrease the growth in the use of the Internet, which could in turn decrease
the demand for our services, increase our cost of doing business or otherwise
have a material adverse effect on our business, financial condition and
operating results. Few laws or regulations currently directly apply to access to
commerce on the Internet. Federal, state, local and foreign governments are
considering a number of legislative and regulatory proposals relating to
Internet commerce. As a result, a number of laws or regulations may be adopted
regarding Internet user privacy, taxation, pricing, quality of products and
services, and intellectual property ownership. How existing laws will be applied
to the Internet in areas such as property ownership, copyright, trademark, trade
secret, obscenity and defamation is uncertain. 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 52 U.S. patents pending, but we cannot be certain
that any patent will ultimately be issued. We have registered the trademark
"ImageX" in the United States and the European Union and have applied for the
same mark in Canada and Japan. We have also registered the trademarks "Your
online printing resource" and "We didn't invent printing. We reinvented it." 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
16
<PAGE> 19
in our favor, could result in substantial costs and diversion of resources. If a
claim is asserted that we infringed the intellectual property of a third party,
we may be required to seek licenses to such third-party technology. We cannot be
sure that licenses to third-party technology will be available to us at a
reasonable cost, if at all. If we were unable to obtain such a license on
reasonable terms, we could be forced to cease using the third-party technology.
See "Business -- Intellectual Property."
FAILURE TO MAINTAIN AND EXPAND OUR VENDOR NETWORK ACROSS A BROAD GEOGRAPHIC
TERRITORY MAY HINDER FULFILLMENT OF ORDERS.
We rely to a large extent on independent vendors to fulfill orders placed
through our Corporate Online Printing Center. Our future success will depend in
part on our ability to maintain and expand our vendor network at levels
commensurate with our order volume. If we are unable to maintain a vendor
network of sufficient capacity, our ability to fulfill orders in a timely and
cost-effective manner may be hindered, which could result in decreased adoption
and use of our print procurement solutions and revenues.
A large 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 arrangements with 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 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 STOCK PRICE MAY BE VOLATILE, AND YOU MAY NOT BE ABLE TO RESELL YOUR SHARES
AT OR ABOVE THE OFFERING PRICE.
We cannot predict whether the market price of our common stock following
this offering will remain at or above the offering price in this offering. As a
result, if you decide to purchase our shares, you may not be able to resell your
shares at or above the 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;
17
<PAGE> 20
- 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.
Although we currently expect to use the net proceeds we receive from this
offering for working capital, capital expenditures and acquisitions of
additional businesses, our board of directors has not approved any specific
plans for a significant portion of the net proceeds. 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 the net proceeds we receive
from this offering will be invested in short-term, interest-bearing,
investment-grade securities for an indefinite period of time.
AFTER THIS OFFERING WE WILL CONTINUE TO BE EFFECTIVELY CONTROLLED BY EXISTING
SHAREHOLDERS WHOSE INTERESTS MAY CONFLICT WITH YOURS.
Following the closing of this offering, our officers and directors and
holders of at least 10% of our outstanding shares together will beneficially own
approximately 38.5% of the outstanding shares of our common stock. As a result,
these shareholders will effectively be able to:
- elect, or defeat the election of, our directors;
- amend, or prevent amendment of, our articles of incorporation;
- effect or prevent a merger, sale of assets or other corporate
transaction; and
- control the outcome of any 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 and Selling Shareholders" for further
information on the share ownership of our officers, directors and affiliates.
18
<PAGE> 21
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.
Sales of a substantial number of shares of our common stock in the public
market following this offering could adversely affect the market price of our
common stock. After this offering, 21,381,639 shares of our common stock will be
outstanding. All of the shares sold in this offering and the 3,450,000 shares
sold in our initial public offering will be freely tradeable unless held by
affiliates of ImageX.com. An aggregate of 12,971,639 shares of common stock
outstanding after this offering will be restricted as a result of securities
laws or lock-up agreements signed by the holder. Of these restricted shares,
44,915 are eligible for immediate sale in the public market. The remaining
12,926,724 restricted shares will be available for sale in the public market as
follows:
<TABLE>
<CAPTION>
NUMBER OF
DATE OF AVAILABILITY FOR SALE SHARES
----------------------------- ---------
<S> <C>
February 22, 2000 (the expiration date of 180-day lock-up
agreements entered into in connection with our initial
public offering, unless released earlier by Prudential
Securities Incorporated in its sole discretion)........... 3,084,518
In April 2000, upon the expiration of various one-year
holding periods........................................... 1,610,775
May 11, 2000 (the expiration date of 90-day lock-up
agreements entered into in connection with this offering,
unless released earlier by Chase Securities Inc. in its
sole discretion).......................................... 7,676,817
Thereafter upon expiration of various one year holding
periods................................................... 554,619
</TABLE>
We have filed a registration statement to register up to 4,500,000 shares
of common stock reserved for issuance under our 1996 stock incentive
compensation plan and employee stock purchase plan. Of that number of shares,
14,365 shares have been issued upon the exercise of options and 225,145 shares
are subject to options that were exercisable as of December 31, 1999. We intend
to file, after the effective date of this offering, a registration statement on
Form S-8 to register up to 282,837 shares of common stock reserved for issuance
under the PrintBid.com, Inc. stock incentive plan. The registration statement
will become effective automatically upon filing. Shares issued under the
PrintBid stock incentive plan, after the filing of the registration statement on
Form S-8, may be sold in the open market, subject, in the case of certain
holders, to the above-referenced 90-day lock-up agreements and vesting
restrictions imposed by us. Of the shares reserved under the PrintBid stock
incentive plan, 127,440 shares are subject to options that were exercisable as
of December 31, 1999.
We also have 1,343,731 shares of common stock issuable upon exercise of
warrants, of which 1,276,286 may be exercised on a net basis (meaning the
exercise price may be satisfied by deducting shares otherwise issuable that are
equal in value to the exercise price). To the extent such warrants are exercised
on a net basis, the shares issued upon such exercise would be available for sale
in the public market, subject to expiration of the 180-day lock-up agreements
referred to above; with respect to 165,933 shares, to the expiration of various
one year holding periods in April 2000; and, with respect to 1,009,541 shares,
to the 90-day lock-up agreements referred to above.
19
<PAGE> 22
Prudential Securities Incorporated 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 expiring February 22, 2000 entered into in
connection with our initial public offering. Chase Securities Inc. 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 expiring May 11, 2000 entered
into in connection with this offering. See "Shares Eligible for Future Sale" and
"Underwriting."
20
<PAGE> 23
USE OF PROCEEDS
We estimate that our net proceeds from the sale of the 4,000,000 shares of
common stock we are offering will be approximately $86.5 million ($101.6 million
if the underwriters over-allotment option is exercised in full), at the public
offering price of $23.00 per share and after deducting estimated underwriting
discounts and commissions and estimated offering expenses. We will not receive
any proceeds from any shares sold by the selling shareholders.
The principal purposes of this offering are to obtain additional capital
and to enhance our ability to acquire other businesses, products or
technologies. We intend to use the proceeds for working capital, capital
expenditures and other general corporate purposes. We may also use a portion of
the net proceeds from this offering to acquire or invest in businesses,
technologies or products that are complementary to our business. We currently
have no commitments or agreements with respect to any acquisitions.
The amounts that we actually require 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 timing and terms
of any acquisitions we may complete. 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.
PRICE RANGE OF COMMON STOCK
Our common stock has been quoted on the Nasdaq National Market under the
symbol "IMGX" since August 26, 1999, the date of our initial public offering.
Prior to that time, there was no public market for our stock. The following
table sets forth, for the periods indicated, the high and low sales prices per
share of our common stock as reported on the Nasdaq National Market.
<TABLE>
<CAPTION>
HIGH LOW
------- --------
<S> <C> <C>
1999 FISCAL YEAR
Third Quarter (since August 26, 1999)..................... $23.00 $10.25
Fourth Quarter............................................ $45.00 $ 7.75
2000 FISCAL YEAR
First Quarter (through February 10, 2000)................. $42.125 $23.75
</TABLE>
On February 10, 2000, the last reported sale price of our common stock on
the Nasdaq National Market was $24.00 per share. As of December 31, 1999, there
were approximately 239 shareholders of record.
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.
21
<PAGE> 24
CAPITALIZATION
The following table sets forth at December 31, 1999:
- the actual capitalization of ImageX.com; and
- the capitalization of ImageX.com, as adjusted to reflect the sale by us
of 4,000,000 shares of common stock in this offering at the public
offering price of $23.00 per share less 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>
DECEMBER 31, 1999
---------------------------------
ACTUAL AS ADJUSTED
---------- -------------
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<S> <C> <C>
Shareholders' equity:
Common stock, $0.01 par value per share; 70,000,000
shares authorized; 17,381,639 shares issued and
outstanding, actual; 21,381,639 shares issued and
outstanding, as adjusted;............................. $ 174 $ 214
Additional paid-in capital............................... 67,118 153,548
Unearned compensation.................................... (2,518) (2,518)
Notes receivable from shareholders....................... (168) (168)
Accumulated deficit...................................... (33,832) (33,832)
-------- --------
Total shareholders' equity....................... 30,774 117,244
-------- --------
Total capitalization............................. $ 30,774 $117,244
======== ========
</TABLE>
The outstanding share information set forth above excludes:
- 1,625,751 shares of common stock issuable upon exercise of options
outstanding as of December 31, 1999, of which 352,585 shares are
exercisable, under our stock option plans at a weighted average exercise
price of $5.57 per share, and 682,668 shares available for future
issuance under our stock option plans pursuant to options that had not
yet been granted;
- 1,343,731 shares issuable upon exercise of warrants outstanding as of
December 31, 1999, all of which are currently exercisable at a weighted
average exercise price of $4.26 per share; and
- 250,000 shares available for future issuance under our employee stock
purchase plan.
22
<PAGE> 25
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 December 31, 1999
was $28.6 million, or $1.65 per share of common stock. After giving effect to
the sale of 4,000,000 shares of common stock offered by us in this offering at
the public offering price of $23.00 per share (less 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
December 31, 1999 would be $115.1 million, or $5.38 per share. This represents
an immediate increase in the adjusted pro forma net tangible book value of $3.73
per share to existing shareholders and an immediate and substantial dilution of
$17.62 per share to new investors. The following table illustrates this per
share dilution:
<TABLE>
<S> <C> <C>
Public offering price per share............................. $ 23.00
Pro forma net tangible book value per share at December
31, 1999............................................... $1.65
Increase per share attributable to new investors.......... 3.73
-----
Pro forma net tangible book value per share after this
offering.................................................. 5.38
--------
Dilution per share to new investors......................... $ 17.62
========
</TABLE>
The following table shows on a pro forma basis at December 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 before deducting the underwriting discounts and commissions and
estimated offering expenses payable by us:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
-------------------- ---------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing shareholders............. 17,381,639 81% $ 64,012,602 41% $ 3.68
New investors..................... 4,000,000 19% 92,000,000 59% $23.00
---------- --- ------------ ---
Total................... 21,381,639 100% $156,012,602 100%
========== === ============ ===
</TABLE>
At December 31, 1999, we had outstanding options and warrants to purchase
shares of common stock as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES
SUBJECT TO WEIGHTED AVERAGE
OPTIONS/WARRANTS EXERCISE PRICE
---------------- ----------------
<S> <C> <C>
Stock option plans................................... 1,625,751 $5.57
Warrants............................................. 1,343,731 4.26
---------
Total...................................... 2,969,482 $4.98
---------
</TABLE>
Additionally, as of December 31, 1999, there were 682,668 shares available
for future grant under our stock option plan and 250,000 shares available for
issuance pursuant to our employee stock purchase plan. To the extent option
holders exercise outstanding options, or any options we grant in the future,
there will be further dilution to new investors.
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<PAGE> 26
SELECTED FINANCIAL DATA
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, Fine Arts Graphics, Image Press and PrintBid.com included elsewhere
in this prospectus. The PrintBid.com acquisition was accounted for under the
pooling-of-interest method and all consolidated financial statements of
ImageX.com have been restated to include the results and balances of
PrintBid.com for all periods presented. Historical results are not necessarily
indicative of future results. The balance sheet data as of December 31, 1997,
1998 and 1999 and the statement of operations data for the four years ended
December 31, 1999 are derived from the financial statements of ImageX.com
included elsewhere in this prospectus and have been audited by
PricewaterhouseCoopers LLP, independent accountants. The unaudited pro forma
statement of operations data for the year ended December 31, 1999 gives effect
to the acquisitions of Fine Arts Graphics on April 13, 1999 and Image Press on
September 21, 1999 as if those acquisitions had occurred at the beginning of the
period. This pro forma condensed financial information has been prepared from,
and you should read it together with, the historical unaudited pro forma
condensed consolidated financial statement included elsewhere in this
prospectus. 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 and Image Press on the date assumed, nor is it necessarily indicative
of our future operating results.
24
<PAGE> 27
<TABLE>
<CAPTION>
ACTUAL PRO FORMA
---------------------------------------------- ------------
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
---------------------------------------------- ------------
1996 1997 1998(2) 1999(3) 1999
-------- -------- -------- ---------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA (IN THOUSANDS, EXCEPT SHARE
AND PER SHARE DATA):
Revenues................................................ $ 79 $ 87 $ 968 $ 11,499 $ 19,346
Cost of sales........................................... 99 100 998 8,541 14,133
-------- -------- -------- ---------- ----------
Gross profit (loss)..................................... (20) (13) (30) 2,958 5,213
-------- -------- -------- ---------- ----------
Operating expenses:
Sales and marketing................................... -- 1,018 2,207 6,765 7,226
Product development................................... 300 1,316 2,750 3,770 3,770
General and administrative............................ 146 1,285 3,549 11,002 12,800
Amortization of unearned compensation................. -- -- 380 2,284 2,284
Amortization of goodwill and other intangibles........ -- -- -- 213 310
-------- -------- -------- ---------- ----------
Total operating expenses........................ 446 3,619 8,886 24,034 26,390
-------- -------- -------- ---------- ----------
Loss from operations.................................... (466) (3,632) (8,916) (21,076) (21,177)
Other income (expense), net............................. 3 62 (48) 241 184
-------- -------- -------- ---------- ----------
Net loss before income taxes............................ (463) (3,570) (8,964) (20,835) (20,993)
State income tax provision.............................. -- -- -- -- (28)
-------- -------- -------- ---------- ----------
Net loss................................................ (463) (3,570) (8,964) (20,835) (21,021)
Preferred stock accretion............................... -- -- (221) (84) (84)
-------- -------- -------- ---------- ----------
Net loss used in calculating net loss per share......... $ (463) $ (3,570) $ (9,185) $ (20,919) $ (21,105)
======== ======== ======== ========== ==========
Basic and diluted net loss per share(1)................. $ (13.60) $ (14.14) $ (12.25) $ (3.07) $ (3.13)
======== ======== ======== ========== ==========
Shares used in computation of basic and diluted net loss
per share(1).......................................... 34,042 252,425 749,987 6,805,098 6,753,493
======== ======== ======== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
ACTUAL
-----------------------------
DECEMBER 31,
-----------------------------
1997 1998(2) 1999(3)
------- -------- --------
<S> <C> <C> <C>
BALANCE SHEET DATA (IN THOUSANDS):
Cash and cash equivalents................................... $ 186 $ 967 $ 18,257
Working capital (deficit)................................... (616) (293) 18,053
Total assets................................................ 938 2,469 35,668
Long-term obligations, net of current portion............... 300 454 --
Mandatorily redeemable convertible preferred stock.......... 3,459 -- --
Accumulated deficit......................................... (4,033) (12,997) (33,832)
Total shareholders' equity (deficit)........................ (3,642) (10,887) 30,774
</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.
(2) During December 1999, ImageX.com acquired PrintBid.com. The acquisition was
accounted for under the pooling-of-interest method and all consolidated
financial statements of ImageX.com have been restated to include the
results and balances of PrintBid.com for all periods presented.
(3) The 1999 results include the operations of Fine Art Graphics and Image
Press, which ImageX.com acquired in April 1999 and September 1999
respectively. See Note 13 to ImageX.com's financial statements.
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<PAGE> 28
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 e-commerce company in
the U.S. commercial printing industry. We derive substantially all our revenues
from the sale of printed business materials in both the marketing/promotional
and general office categories. Such products include business cards, stationary,
letterhead and other general office products, as well as color marketing
brochures, sell sheets and similar products.
Our e-procurement solution includes four services:
- Corporate Online Printing Center, a customized, secure Web site for
larger corporate customers containing an online catalog of their
repeat-ordered printed business materials;
- Small Business Printing Center, a small office/home office service
through which customers order personalized printed materials from a
non-custom site with online templates;
- PrintBid.com, an online bidding service in which print customers can
obtain bids from numerous participating vendors based on a specific set
of job criteria; and
- PaperDeals.com, an online auction service for commercial paper stock
aimed at raw materials suppliers and print manufacturers.
For orders we receive through our Corporate Online Printing Center, we
charge customers for the printed products they order in accordance with
customer-specific pricing arrangements negotiated with each account. Orders are
fulfilled through our network of approximately 40 vendors and two company-owned
facilities and shipped directly to customers under the ImageX.com brand. To
date, we have derived substantially all of our revenues from our Corporate
Online Printing Center and from customers we obtained through acquisitions.
Orders placed through our Small Business Printing Center are fulfilled by a
private label supplier and shipped under the ImageX.com brand. We receive a
percentage of the purchase price paid by customers for each order placed through
the Small Business Printing Center. As of December 31, 1999, the Small Business
Printing Center had not generated significant revenues.
For our PrintBid.com bidding service, we intend to charge a transaction fee
for each print provider who bids on a job, although to date PrintBid.com has
been offered free of charge in order to generate traffic and use of the service.
For PaperDeals.com commercial paper auctions
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<PAGE> 29
we charge a transaction fee to the auction originator. As of December 31, 1999,
PrintBid.com and PaperDeals.com had not generated any revenues.
As an element of our sales and marketing strategy we enter into strategic
alliances with various parties. In certain of these arrangements we have agreed
to share revenue or pay transaction fees on revenue derived from the
relationship, and in one case to pay a fixed monthly fee regardless of revenue
generated. These relationships have not generated any material revenues to date.
In our Corporate Online Printing Center and Small Business Printing Center
and through our wholly owned subsidiaries, Image Press and Fine Arts Graphics,
we recognize product revenues when the order is shipped to the customer and we
have fulfilled all of our contractual obligations. We expect to recognize
revenue from our PrintBid.com and PaperDeals.com services when the service is
performed and we bill the customer.
In the commercial printing industry, prices tend to move in correlation
with paper prices. We generally have been able to pass fluctuations in paper
pricing through to our customers, although this cannot be assured in the future.
We also offer volume discounts to customers, which we expect will continue.
Our customers include a wide variety of businesses, from Fortune 500
companies to small office operations. A substantial portion of our revenue has
been derived from customers that have come to ImageX.com by means of our
acquisitions of Fine Art Graphics, a commercial printer, in April 1999 and Image
Press, a print broker, in September 1999. Our goal in such acquisitions is to
convert acquired customers to our online print procurement system. Although we
generally expect that a majority of the historical revenue of acquired companies
will migrate to our online procurement system, such conversions require
significant time and effort, and we expect that customers who elect to convert
to online procurement will continue to order printing from us through
traditional means while they transition to e-procurement. In addition, there
will be customers that continue to use traditional procurement practices.
Currently, a substantial majority of our revenue is generated from acquired
customers ordering through traditional offline means. Although we may support
such traditional procurement after an acquisition, we intend to encourage our
acquired customers to order online over the long-term. To the extent we complete
additional acquisitions of print providers, the percentage of our revenue
generated by traditional offline procurement will likely increase, offset by any
customers and revenue that we convert to online procurement. Depending on the
number, size and frequency of acquisitions we may complete, revenue generated
through traditional means could continue to account for a significant percentage
of our total revenue.
For products sold through our Corporate Online Printing Center that are
produced by our network of vendors, gross profit is calculated as the selling
price of a specific product less the price our vendor charges us. For products
sold through our Corporate Online Printing Center that we produce in our own
facilities, gross profit is calculated as the selling price of the product
(including freight), less manufacturing costs, freight costs and certain
allocated overhead. For revenue generated through our Small Business Printing
Center, our cost of goods sold are not material. We expect that cost of goods
sold on revenue we may generate through the PrintBid.com and PaperDeals.com will
be minimal.
Our business incurs operating expenses in three broad expense categories:
sales and marketing, product development and general and administrative. We
expect our expenses in each of these categories to rise as our revenue grows. As
is typical of early-stage technology
27
<PAGE> 30
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
in both existing and new geographic markets, 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 printing businesses that have strong customer
relationships and e-commerce companies with complimentary technologies or
services, and seeking 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 in both existing and
new geographic markets and enter into strategic alliances;
- promote awareness of our brand name;
- hire additional programmers to further our product development efforts;
- execute and 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 to
the extent we are successful in growing our business. As a result of these
increased expenditures and other related factors, we expect to continue to incur
losses during the foreseeable future.
ACQUISITIONS
ImageX.com commercially launched its services in 1997 and had minimal
revenues in fiscal 1997 and 1998. We acquired Fine Arts Graphics, a commercial
printer focused exclusively on general office printing, which includes primarily
business cards, stationery and letterhead, in April 1999. Fine Arts Graphics'
historical revenue for fiscal 1998 was $10.5 million. In September 1999 we
acquired Image Press, a print broker, which had historical revenue for fiscal
1998 of $6.6 million. In December 1999, we acquired PrintBid.com, a provider of
online auction services in the commercial print procurement and paper markets.
PrintBid.com, which operates two businesses, PrintBid.com and
PaperDeals.com, had an accumulated deficit of approximately $2.2 million as of
September 30, 1999. We expect that the operations of PrintBid.com and
PaperDeals.com will accelerate our losses for the foreseeable future.
We incurred goodwill of approximately $1.4 million and $914,000 in the
acquisitions of Fine Arts Graphics and Image Press, respectively, whereas the
acquisition of PrintBid.com was accounted for as a pooling of interests. We
expect that we will incur additional goodwill in the future to the extent we
complete other acquisitions, which may have a negative effect on our
28
<PAGE> 31
results of operations in future periods. To the extent we acquire additional
e-commerce companies or other businesses that are losing money, our operating
results will likely be adversely affected.
RESULTS OF OPERATIONS
The following table sets forth certain statement of operations data as a
percentage of total revenues for the periods indicated. Historical periods have
been restated to reflect our acquisition of PrintBid.com in December 1999, which
was accounted for using the pooling-of-interest method. Pro forma consolidated
data give effect to the acquisitions of Fine Arts Graphics and Image Press as if
each had occurred at the beginning of the period presented.
<TABLE>
<CAPTION>
ACTUAL PRO FORMA
-------------------------------- -------------
YEAR ENDED DECEMBER 31, YEAR ENDED
-------------------------------- DECEMBER 31
1996 1997 1998 1999 1999
---- ------ ------ ---- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues............................................... 100% 100% 100% 100% 100%
Cost of sales.......................................... 126 115 103 74 73
---- ------ ------ ---- ----
Gross margin........................................... (26) (15) (3) 26 27
---- ------ ------ ---- ----
Operating expenses:
Sales and marketing.................................. -- 1,167 228 59 37
Product development.................................. 382 1,509 284 33 19
General and administrative........................... 186 1,474 367 96 66
Amortization of unearned compensation................ -- -- 39 20 12
Amortization of goodwill and other intangibles....... -- -- -- 2 2
---- ------ ------ ---- ----
Total operating expenses...................... 568 4,150 918 210 136
---- ------ ------ ---- ----
Loss from operations................................... (594) (4,165) (921) (184) (109)
Other income (expense), net............................ 4 71 (5) 2 1
---- ------ ------ ---- ----
Net loss............................................... (590)% (4,094)% (926)% (182)% (108)%
==== ====== ====== ==== ====
</TABLE>
We have incurred significant net losses since our inception. As of December
31, 1999, we had accumulated a deficit of $33.8 million. Our limited operating
history and the uncertain and emerging nature of our market make it difficult to
assess our prospects or predict our future results of operations. 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 a 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."
YEARS ENDED DECEMBER 31, 1999 AND 1998
Revenues
Revenues were $968,000 and $11.5 million for the years ended December 31,
1998 and 1999, respectively, representing an increase of $10.5 million, or
1,088%, over the prior year. This increase was primarily due to the acquisition
of Fine Arts Graphics and Image Press customers in 1999 and to an increased
number of customers using our online system, from approximately 80 customers at
December 31, 1998 to approximately 200 customers at
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<PAGE> 32
December 31, 1999. The increase in the number of customers contributes to both
increased product and service revenues.
Gross Profit
Gross profits/(loss) were ($30,000) and $3.0 million for the years ended
December 31, 1998 and 1999, respectively, representing an increase of $3.0
million in 1999 over the prior year. The increase in gross profit was primarily
due to our expanded customer base and consequent increased sales volumes,
increased product pricing to our customers, and decreased costs due to
renegotiated supplier pricing with several of our key commercial print vendors.
Sales and Marketing Expenses
Sales and marketing expenses consist primarily of salaries and related
benefits for sales and marketing personnel, advertising expenses, marketing
expenses, and travel expenses. Sales and marketing expenses were $2.2 million
and $6.8 million for the years ended December 31, 1998 and 1999, respectively,
representing an increase of $4.6 million, or 208%, over the prior year. The
increase in sales and marketing expenses resulted primarily from hiring new
sales representatives and marketing personnel, travel expenses, and marketing
expenses, including public relations, company Web site maintenance,
telemarketing expenses, and printed marketing materials. We expect that sales
and marketing expenses will continue to grow as we pursue an aggressive growth
strategy and hire additional sales and marketing personnel.
Product Development Expenses
Product development expenses consist primarily of salaries and benefits for
developers, product managers, and quality assurance personnel. Product
development expenses were $2.8 million and $3.8 million for the years ended
December 31, 1998 and 1999, respectively, representing an increase of $1.0
million or 37%, over the prior year. The increase in product development
expenses was due to an increase in amortization resulting from the
capitalization of certain software development costs relating to our Corporate
Online Printing Center, increased salary and benefit related expenses from
hiring new personnel and the inclusion of product development expenses
associated with PrintBid.com. We believe that continued investment in product
development is critical to attaining our goals and the dollar amount of product
development expenses will increase in future periods, although they may decline
as a percent of total revenues.
General and Administrative Expenses
General and administrative expenses consist primarily of salaries and
benefits for executive, finance, administrative and information technology
personnel as well as outside professional services and facilities related
expenses. General and administrative expenses were $3.5 million and $11.0
million for the years ended December 31, 1998 and 1999, respectively,
representing an increase of $7.5 million, or 210%, over the prior year. The
increase in general and administrative expenses was primarily due to our hiring
additional executive, finance, administrative and information technology
personnel as well as outside contractors to support the growth of our business.
In addition, we have had higher expenses resulting from depreciation, software
maintenance expenses, and professional fees. Increases in general and
administrative expenses were also a result of the inclusion of PrintBid.com's
expenses. We believe that our general and administrative expenses will continue
to increase as a result of the continued expansion of our administrative staff
and the expenses associated with becoming a
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<PAGE> 33
public company, including, but not limited to, annual and other public-reporting
costs, directors' and officers' liability insurance, investor-relations programs
and professional services fees.
Amortization
The amortization of unearned compensation was $380,000 and $2.3 million for
the years ended December 31, 1998 and 1999, respectively, representing an
increase of $1.9 million, or 501%, over the prior year. 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. The 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.
The amortization of goodwill and other intangibles is $0 and $213,000 for
the years ended December 31, 1998 and 1999, respectively, representing an
increase of $213,000, or 100%, over the prior year. The goodwill and other
intangibles arose as a result of the acquisition of Fine Arts Graphics and Image
Press.
Other Income (Expense), Net
Other income and expense consist primarily of interest income and interest
expense. The net other income/expense were an expense of $48,000 and income of
$241,000 for the years ended December 31, 1998 and 1999, respectively,
representing an increase of $289,000, over the prior year. The expense for the
year ended December 31, 1998 was interest on debt outstanding. With the proceeds
of our public offering in August 1999, all existing debt was paid off and the
remaining proceeds were invested which resulted in a net interest income for the
year ended December 31, 1999.
Income Taxes
No provision for federal income taxes has been recorded to date because we
incurred net operating losses from inception through December 31, 1999. As of
December 31, 1999, we had approximately $31.2 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.
Net Loss
The net loss was $9.0 million and $20.8 million for the years ended
December 31, 1998 and 1999, respectively, representing an increase of $11.8
million, or 132%, over the prior year. The $11.8 million increase in net loss
for the year ended December 31, 1999 was as a result of increased spending in
all categories -- sales and marketing, product development, general and
administrative, and amortization, as we have completed three acquisitions and
had significant growth overall during the year ended December 31, 1999.
31
<PAGE> 34
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 117% to $2.2 million from
$1.0 million for 1997. This increase resulted from a $487,000 increase in salary
expense, a $229,000 increase in promotional marketing expenditures and a
$171,000 increase in advertising expenditures. In addition, we did not commence
commercial marketing efforts until the last quarter of 1997.
Product Development Expenses
Product development expenses for 1998 increased 109% to $2.8 million from
$1.3 million for 1997. The increase resulted primarily from the addition of
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 176% to $3.5 million
from $1.3 million for 1997. The increase resulted primarily from a $531,000
increase in salary expense, a $283,000 increase in contract labor, a $213,000
increase in professional fees and a $147,000 increase in recruiting expense.
Other Income (Expense), Net
Interest expense, net for 1998 decreased to expense of $48,000 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 $9.0 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. Net loss also increased as a
result of the inclusion of PrintBid.com's operating expenses in 1998. As a
percentage of sales, net loss decreased to 926% for the year ended December 31,
1998 from 4,103% 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.
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<PAGE> 35
LIQUIDITY AND CAPITAL RESOURCES
Prior to our initial public offering, we financed our operations primarily
through sales of equity securities and, to a lesser degree, through the use of
long-term debt. As of December 31, 1999, we had raised approximately $36.7
million, net of offering costs, from private placements of preferred stock and
approximately $4.1 million from borrowings under convertible notes and bank
credit facilities. As of December 31, 1999, these borrowings under convertible
notes and bank credit facilities were fully paid off. In August 1999, we
completed our initial public offering and issued 3,450,000 shares of common
stock at an initial public offering price of $7.00 per share. We received
approximately $21.0 million in cash proceeds, net of underwriting discounts,
commissions and other offering costs.
As of December 31, 1999, we had cash and cash equivalents of $18.3 million,
representing an increase of $17.3 million from cash and cash equivalents held as
of December 31, 1998. Our working capital at December 31, 1999 was $18.1
million, compared to a working capital deficit of ($293,000) at December 31,
1998.
Net cash used in operating activities was $17.3 million and $7.4 million
for the years ended December 31, 1999 and 1998, respectively. The operating cash
outflows were primarily attributable to 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, inventories and prepaid expenses were
partially offset by increases in current liabilities, including trade payables.
Net cash used in investing activities was $11.6 million and $895,000 for
the years ended December 31, 1999 and 1998, respectively, and consisted of
capital expenditures, including equipment and the acquisitions of Fine Arts
Graphics and Image Press.
Net cash provided by financing activities was $46.1 million for the year
ended December 31, 1999 and consisted primarily of $21.3 million in net proceeds
from the issuance of common stock and $24.7 million in net proceeds from the
issuance of convertible preferred stock. Net cash provided by financing
activities was $9.1 million for the year ended December 31, 1998 primarily from
the issuance of convertible preferred stock and borrowings pursuant to
convertible notes and bank credit facilities.
We anticipate a substantial increase in our capital expenditures and lease
commitments consistent with anticipated growth in operations, infrastructure and
personnel, including growth associated with product and service offerings,
geographic expansion and integration of any new acquired businesses. We expect
to substantially increase our operating expenses, which will consume a material
amount of our cash resources; however, we believe that our existing cash and
cash equivalents, together with the net proceeds from this offering, will be
sufficient to meet our anticipated cash needs for working capital and capital
expenditures for at least the next 12 months. However, our future capital
requirements will depend on many factors that are difficult to predict,
including the size, timing and structure of any acquisitions that we complete,
our rate of revenue growth, our operating losses, the cost of obtaining new
customers and technical capabilities, and the cost of upgrading and maintaining
our network infrastructure and other systems. We expect that we will need to
raise additional capital in the future to fund our operations and to pursue our
growth strategy. 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 existing shareholders.
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<PAGE> 36
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 December 31,
1999, we had capitalized computer software costs of $1,078,000 and had recorded
the related amortization expense of $758,000 for the year ended December 31,
1999.
AMORTIZATION OF UNEARNED COMPENSATION, GOODWILL AND OTHER INTANGIBLES
Amortization consists of the amortization of unearned compensation,
goodwill and other intangible assets. The amortization of unearned compensation
is a result of recording the difference between the fair value of our common
stock at the date of grant and the exercise or purchase price of such
securities, as applicable. The unearned compensation is amortized over the
remaining vesting period of the applicable stock or options. The amortization of
goodwill and other intangible assets is a result of the acquisitions of Fine
Arts Graphics and Image Press. The amortization of goodwill is over a 10-year
period and the amortization periods of other intangible assets range from 3 to 8
years.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded
to accept only two-digit entries in the date code field. In order to distinguish
21st century dates from 20th century dates, the date code field needed to be
expanded to 4 digits. As a result, many companies' software and computer systems
were upgraded or replaced in order to comply with these Year 2000 requirements.
The use of software and computer systems that are not Year 2000 compliant could
have resulted in system failures or miscalculations resulting in disruptions of
operations, including among other things, a temporary inability to process
transactions, send invoices, or engage in normal business activities.
To date, we have not suffered any disruptions in our computer systems or
software when the expanded date code field was first used on January 1, 2000. In
addition, to date, we have not been made aware that any third-party systems we
rely on, the manufacturing systems of our vendors or the systems our customers
use to order our services have suffered disruptions in their systems.
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BUSINESS
IMAGEX.COM, INC.
ImageX.com is a leading business-to-business Internet market maker for
printed business materials. We offer an end-to-end solution that streamlines the
procurement process for business printing customers, their employees and other
end users of printed products, printing manufacturers and raw material suppliers
to the printing industry. We provide e-commerce solutions that improve the way
businesses acquire marketing communications materials, ranging from business
cards to high-end printed materials. ImageX.com's nationwide Web-based services
include the Corporate Online Printing Center, the Small Business Printing
Center, PrintBid.com, an online bidding system for over 2,800 print buyers and
more than 4,000 printers, and PaperDeals.com, an online auction site for
commercial paper stock with approximately 280 registered paper mills and
printers.
The Corporate Online Printing Center allows medium to large size businesses
to access their own customized, secure Web site that contains a digital catalog
of their custom-printed business materials -- from marketing brochures to
stationery and business cards. 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. To date, we have derived substantially all our
revenues from our Corporate Online Printing Center and from customers obtained
through acquisitions.
Our Small Business Printing Center provides quick and easy access via the
Internet to a wide range of personalized printed business materials based on
standard templates at competitive prices. PrintBid.com is an online bidding
service for customized print jobs that links over 2,800 print buyers with more
than 4,000 printers. PaperDeals.com is an online auction site for paper stock,
offering a forum to link buyers with sellers.
Our customer and revenue base has grown rapidly since we introduced the
ImageX.com solution in October 1997. Our customers include Automated Data
Processing (ADP), Bell Atlantic Mobile, CB Richard Ellis, CIBC World Markets,
Donaldson, Lufkin & Jenrette, Merck & Co., New Energy Ventures,
PricewaterhouseCoopers, United Behavioral Health and Waddell & Reed. We have
approximately 280 employees and offices in 15 metropolitan markets across the
country. We also have 52 patent applications pending on our proprietary
technology.
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. Internet electronic
commerce also 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;
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- 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.
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. printing
industry totaled $292 billion in 1998. Of that amount, $58 billion was derived
from the commercial print industry, including sales of printed business
materials for corporate and small office/home office print buyers. This large
industry is fragmented, with over 30,000 local and regional commercial printers
operating nationwide in 1998. We believe most printing is purchased from local
and regional printers, and that few of these printers deliver automated service
over the Internet.
[GRAPHIC]
[Graphic: Two pie charts representing (1) breakdown of U.S. Publishing and
Printing between (a) publishing and specialty ($186.3 billion) and (b) printing
($105.5 billion and (2) breakdown of the U.S. printing market between (a) forms,
printers and other ($47.3 billion) and (b) commercial ($58.2 billion). Cap below
graphic: ImageX.com 9 month revenues ending September 30, 1999 were $6,646,000
which represents an immaterial percentage of the commercial printing industry.
Over 30,000 printers compete in this industry.]
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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.
[GRAPHIC]
[Graphic: -- traditional print production process flow chart. Subheadings for
elements within graphics: Customer Process/Manufacturing Process; Need for a
Printed Product, Order Placement, Contact with Printer, Initiate Job Ticket,
Typesetting, Send to Customer, Customer Reviews Proof, Customer Makes
Corrections, Printer Typesets Corrections, Corrected Proof Sent Back to
Customer, Customer Re-Proofs Corrections, This part of the process is repeated
until a corrected proof is approved by customer, Customer Approves Proof,
Imaging, Job to Press, Printed Product Delivered.]
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 the 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. At the same time, we
believe that both customers and suppliers benefit from a more efficient and
streamlined process by which they can purchase and sell printed materials as
well as some of the raw materials needed for their printing operations.
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THE IMAGEX.COM SOLUTION
ImageX.com provides an Internet-based end-to-end solution to produce
printed business materials for corporate and small office/home office customers.
Our solution consists of the Corporate Online Printing Center, the Small
Business Printing Center, PrintBid.com and PaperDeals.com.
The following chart illustrates the printing process using the Corporate
Online Printing Center system.
[GRAPHIC]
[Graphic: ImageX.com print production process flow chart. Subheadings for
elements within graphics: Customer Process/Manufacturing Process; Need for
Variety of Printed Materials, Customer Logs In, Customer Modifies Proofs &
Releases Order Online, Printer Receives Press-Ready Digital Files and Electronic
Job Ticket, Press-Ready Digital Files Sent Directly to Plate, Job to a Variety
of Presses, A Variety of Printed Products Delivered.]
The Corporate Online Printing Center gives businesses access to a
customized, secure Web site that contains a digital catalog of all their
custom-printed business materials from marketing brochures to stationery and
business cards and offers the following key features:
Expediency Shortens the time required for customers to order
printed business materials and allows customers to
access, modify, proof and order their printed
business materials from their desktops, eliminating
the need to send markups and proofs to and from the
printer.
Accuracy Enables our customers to directly access their
corporate information online through a color
consistent and dimensionally accurate screen
rendering. Customers can order their products from
their own digital online catalog that includes
employee data, company graphics and logos, delivery
information, reporting requirements and prototypes
of the customer's printed business materials. We
believe this system reduces errors associated with
data reentry, typesetting and the use of outdated
document versions.
Single Sourcing Eliminates the need for customers to engage several
different printers to supply their printing needs.
Individual printers are typically constrained to a
limited range of products that can be supported by
their equipment. Through our network of
approximately 40 commercial printing vendors and
two owned facilities, we are able to provide a wide
range of printed business materials.
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Security and Control Enables customers to monitor print orders through a
password protected, secure Web site. Authorized
customer employees can individually access a wide
variety of printed business materials within the
centralized parameters and rules established by the
customer organization. This brings a uniform look
to a customer's printed business materials and
helps to maintain consistency of the customer's
corporate identity.
Scalability Scales to a large number of new employees and new
products, meaning it has the ability to handle
increasing order volume without compromising system
integrity and performance.
Streamlined Manufacturing Eliminates the typesetting process and certain
pre-press manufacturing steps by providing our
commercial printing vendors with print-ready files
that are routed directly to their printing systems.
Our Small Business Printing Center provides quick and easy access via the
Internet to a wide range of personalized printed business materials based on
standard templates at competitive prices for small and home-based businesses.
Customers can streamline the purchase of high-quality, custom-printed materials,
including business cards, labels, letterhead, envelopes and more. Customers can
work through a complete layout and design process for their materials, including
choosing desired formats, color and paper while having immediate proofing and
ordering capability.
Through PrintBid.com we enable our customers seeking individual, one-time
print jobs to achieve the best pricing conditioned to the customer's
specifications. By matching the specifications of print jobs against a
nationwide database of printers and their specific combinations of equipment,
PrintBid.com enables customers to find the ideal suppliers for their work.
PaperDeals.com connects printers and paper suppliers worldwide through a
live e-auction marketplace. This site allows print suppliers to auction
different categories and grades of paper to print buyers and also allows print
buyers to post a paper requirement for suppliers to post bids.
BUSINESS STRATEGY
Our objective is to be the leading business-to-business Internet market
maker for printed business materials. The following are the key components of
our strategy:
Exploit First Mover
Advantage
as the Leading End-To-End
Printing Solution We believe that as the first company providing an
integrated Internet solution for procurement of
printed business materials, we have the opportunity
to establish ourselves as the leading commercial
printing brand on the Internet.
Acquire Enabling Technology
and Broaden Our Service
Offerings Acquiring complementary Internet-based commerce
capabilities and entering into strategic alliances
with other e-procurement companies with
complementary product offerings or attractive
customer bases will allow us to broaden our service
offerings for existing and new customers and
increase the functionality and power of our Web
site to deliver business products and services to
customers.
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Expand Our Direct Sales
Force We intend to expand our direct sales force to
rapidly increase our customer base in both new and
existing markets and to expand the use of our
services by our customers. We intend to further
extend the geographic presence of our sales force
to acquire customers in new markets.
Grow Customer Base Through
Acquisitions We intend to actively pursue acquisitions of print
brokers and commercial printers with strong
customer relationships and seek to convert the
acquired customers to our Corporate Online Printing
Center. By acquiring existing customer
relationships, we gain immediate revenue and the
opportunity to leverage those relationships to
convert those customers to our online procurement
system.
Increase Revenues From
Existing Customers We believe that substantial opportunity exists for
us to grow by selling additional products and
services to our existing customers. We also believe
that broadening our product and service offerings
through acquisitions and alliances to encompass a
wider range of printing and related procurement
requirements will allow us to increase our customer
and revenue base and become the single-source
provider of printed materials to our customers.
Build Brand Name Awareness 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.
Maintain Product and
Technology Leadership We intend to continue our leadership position by
pursuing technology initiatives designed to enhance
our product and service offerings. We consistently
research and reassess customer needs and
preferences when developing new products and
technologies to achieve customer satisfaction.
PRODUCTS AND SERVICES
Our end-to-end Web-based solutions incorporate several services that
address specific customer needs and inefficiencies in the print industry supply
chain. These services can be implemented individually or on an integrated basis,
streamlining and reducing cost of the procurement, manufacture and fulfillment
processes.
The Corporate Online Printing Center
Through our Corporate Online Printing Center, we create customized Web
sites for corporate clients. These sites enable the customer's employees to
access, modify, proof, procure and manage their printed materials online from
any Windows-based, Internet-enabled personal computer. Through the Corporate
Online Printing Center, customers can purchase business cards, stationery,
envelopes and general office materials, as well as color marketing materials.
We build these sites in approximately four hours, using proprietary
automated tools. These sites provide a secure environment for storing the
underlying graphic files and employee data that are needed to procure printed
materials on a repeat basis. In addition, they incorporate customer-defined
procurement and authorization rules, as well as standardization procedures.
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Our Corporate Online Printing Center simplifies procurement, eliminates
certain pre-press steps, and reduces opportunities for errors, resulting in
rapid delivery of consistent, high-quality printed business materials.
Specifically, our Corporate Online Printing Center offers our customers the
following key benefits:
24-Hour, 7-Day Access Allows customers to modify and order their printed
business materials in minutes, at any time, on any
day, without any degradation of services;
Brand Control Standardization procedures embedded in the site
setup ensure consistency of printed business
materials and a uniform look throughout their
worldwide organization;
Online Editing and Proofing Color-consistent and dimensionally accurate screen
rendering eliminates the traditional process of
manual markups for proofing;
Online Database of Company
Information Ensures all company and delivery information and
reporting are current for employee-specific data,
promotional marketing materials, office stationery
and business cards;
Online Tracking and
Reporting Provides online order status reports. Order history
reports can be configured online;
Central Order Management Enables customers to queue their orders and release
them in batches to take advantage of volume
pricing; and
Scalability The customized sites can be scaled to incorporate
any number of new employees and new products.
The Small Business Printing Center
Small business customers can also take advantage of the benefits of our
services through a new feature targeted specifically at the small office/home
office market. This recently launched feature allows small business customers to
order simple, templated personalized stationery, business cards and other items
from a common, rather than a customized, Web site. Our goal is to generate a
customer base and revenue through alliances and other marketing strategies. In
January 2000, we established an alliance with InfoSpace.com, Inc. that in part
is designed to increase traffic on our Small Business Printing Center.
PrintBid.com
On December 9, 1999, we acquired PrintBid.com, an Internet-based bidding
service to help commercial print customers identify a short list of
manufacturers for their print jobs based on a defined set of job specifications
and obtain quotes from targeted vendors. PrintBid.com connects printing buyers
and suppliers and is intended to create an online "community" for commercial
printing. We are currently developing additional services to allow these buyers
and suppliers to source print materials and information.
PaperDeals.com
In August 1999, PrintBid.com launched the PaperDeals.com Web site, which is
a live, Internet-based auction marketplace for the paper industry.
PaperDeals.com is designed to provide PrintBid.com's audience of commercial
printers with access to paper mills, merchants, distributors, converters,
brokers, import/exporters, publishing companies and major corporations.
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CUSTOMERS AND MARKETS
Our target customers for the Corporate Online Printing Center are medium-
to large-sized businesses with more than 100 employees in major markets
nationwide. At September 30, 1999, we had obtained over 156 target customers
through our direct sales efforts and through conversion of acquired customers to
our Corporate Online Printing Center. During the quarter ended December 31,
1999, we added 39 customers who have agreed to implement our online procurement
system, including two of the top five Fortune 500 companies. All such customers
are in the process of having their Web sites implemented. In addition to online
customers, we also have customers acquired through acquisitions who order
printed business materials from us through traditional means. Our goal is to
convert as many such customers as possible to our online system. In addition,
customers who are in the process of establishing Corporate Online Printer Center
sites often continue to purchase through traditional means during this
transition period. Fine Arts Graphics and Image Press, which we acquired in
April and September 1999, respectively, sold printed business materials to over
an aggregate of 760 customers in 1998. The following is an alphabetical list of
the top 10 customers for ImageX.com, based on revenues during the year ended
December 31, 1999:
<TABLE>
<S> <C>
Automatic Data Processing (ADP) Merck & Co.
Bell Atlantic Mobile New Energy Ventures
CB Richard Ellis PricewaterhouseCoopers
CIBC World Markets United Behavioral Health
Donaldson, Lufkin & Jenrette Waddell & Reed
</TABLE>
SALES AND MARKETING
Organization
We sell our Corporate Online Printing Center through our direct sales
force. As of December 31, 1999, our sales and marketing team consisted of 35
employees. We had a Director of Sales in Bellevue, Washington and 22 sales
representatives covering 15 sales regions throughout the United States. We
intend to expand our direct sales force into additional major markets across the
country in order to expand our customer base.
Promotion
We market the Corporate Online Printing Center 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:
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.
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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.
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 Corporate 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 Corporate 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 Corporate Online Printing Center. For typical customers, the sales
cycle takes between two weeks to four months, but for large customers the sales
cycle may require more than one year.
Strategic Alliances
We are actively pursuing strategic relationships with other
business-to-business e-procurement providers in order to attract additional
customers to our Web site, strengthen our brand, expand the range of products
and services available to our customers and generate additional sources of
revenue. We have established strategic relationships with Internet-based
businesses in four general categories:
- Electronic procurement solution providers, such as Ariba.com, Commerce
One and Concur Technologies;
- Internet service businesses, such as InfoSpace.com;
- Businesses that offer products and services related to ours or targeted
at a similar customer base, such as Corporate Express, eCompanyStore.com
and ePromos.com; and
- Businesses that provide products and services to end users who operate
within the graphic arts and printing industry, such as Getty Images,
Inc.'s EyeWire and OnDemand, Inc.
Ideal candidates for strategic relationships are companies with a national
sales capacity, market leadership position and extensive contact with the
purchasing and marketing managers of their customers.
E-Procurement Strategic relationships with leading e-procurement
portals enable us to introduce our services to
major global buying organizations that utilize the
e-commerce solutions those portals provide. We have
arrangements with Ariba.com, Commerce One and
Concur Technologies pursuant to which those
businesses have agreed to offer and integrate the
Corporate Online Printing Center through their
e-procurement systems.
Ariba.com's software and services automate and
integrate the internal and external commerce
processes of buyers, suppliers,
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Internet market makers and value-added service
providers. Commerce One provides electronic
commerce solutions that dynamically link buying and
supplying organizations into real-time trading
communities. Concur Technologies' Concur
Procurement(TM) System is a buy-side Intranet-based
application that automates the entire
administrative procurement process throughout the
enterprise.
Internet Service Businesses Strategic relationships with Internet service
businesses allow us to introduce and make available
our products and services to a broader audience of
Internet users. We recently entered into an
agreement with InfoSpace.com whereby ImageX.com
will appear throughout the InfoSpace.com Web site
and its affiliate network sites, allowing users to
either directly link to or be introduced to
ImageX.com's product and service offerings.
InfoSpace.com is an Internet information
infrastructure company that, according to its
published reports, provides Internet functionality
to over 2,100 Web sites reaching 86% of Internet
users.
Related Products and
Services We are co-marketing and co-selling our products and
services with Internet-based businesses that offer
complementary products to the similar target
audience as ImageX.com. These alliances provide us
access to additional customers and enable us to
expand the range of products and services we can
provide to our customers. We have relationships
with Corporate Express, eCompanyStore.com and
ePromos.com, pursuant to which those companies'
customers can procure printed business materials
from ImageX.com.
Corporate Express is a provider of office supplies
to Fortune 1000 companies, both online and via
traditional procurement processes.
eCompanyStore.com is a provider of logo merchandise
for mid- to large-size businesses that develops
custom Web sites which allow its customers to offer
corporate identity merchandise via the Internet to
employees. ePromos.com is a Internet-based
promotional products store specializing in custom
imprinted promotional items for small businesses,
such as hats, mugs and shirts.
Graphic Arts Industry We partner with firms that offer complementary
Internet-based services to their end users in areas
such as marketing, advertising and creative
services. We have arrangements with Getty Images,
Inc's subsidiary, EyeWire, and OnDemand, Inc.,
pursuant to which we have agreed to co-market each
others' services and products.
EyeWire is a provider of visual and audio content,
online software tools, design resources, and
information for graphic designers and others
creating professional-looking graphics through its
Web site and catalog. OnDemand, Inc. is a channel
management and communication portal that delivers
critical vendor information.
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These strategic relationships are new and as yet unproven. We cannot be
certain that these strategic relationships will result in significant revenue.
Some of these relationships involve revenue sharing or transaction fees on the
part of ImageX.com and the InfoSpace.com agreement involves a fixed arrival fee
regardless of revenue.
Pricing
We provide each customer with a pricing proposal for each item on their
Corporate 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.
Our Small Business Printing Center is an outsourced service for which we
receive transaction fees based on a percent of revenue generated from each
order. PrintBid.com is currently operating free of charge to print buyers and
printers. With the introduction of its enhanced version, PrintBid.com has
advised printers participating in the system that a transaction fee will be
charged for bids submitted and contracts won. In both public auctions and
private auctions conducted through PaperDeals.com, the seller pays a fee
whenever an auction lot is successfully sold. This fee is calculated on a
sliding scale based on the total lot value.
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 quarterly.
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. Our technical support and our customer service
desks are staffed during normal business hours. Inquiries come to us through our
Web site, via e-mail and telephone. As of December 31, 1999, we had 83 employees
engaged in customer service and operations.
ACQUISITIONS
We are pursuing a two-pronged acquisition strategy of targeting
print-related companies and Internet-related companies with complementary
technologies or service offerings. The primary goals of this two-pronged
strategy are to increase our customer and revenue base, broaden our product and
service offerings, increase the functionality and power of our online
procurement system and further our overall objective of being the leading
Internet-based marketplace for commercial printing.
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Print-Related Businesses
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 the first element of our acquisition strategy, acquiring print
brokers, printers, direct mail houses, fulfillment houses and service bureaus,
offers the following strategic advantages:
- enables us to more quickly acquire desirable customers in existing and
new markets 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 geographic markets; and
- provides us with valuable expertise in integrating our technology with
other printers' systems and equipment.
Internet Technology and Electronic Commerce Business Procurement Companies
The second element of our acquisition strategy is to acquire Internet-based
companies with technologies that are complementary to ours or who offer related
products or services to businesses through the Internet. We believe these
acquisitions will offer us the following strategic advantages:
- expand the range of products and services available to our customers
through our Web site;
- build the ImageX.com brand in the Internet-based business procurement
marketplace;
- broaden our customer base and increase sales from existing customers; and
- augment our core technology.
We believe that acquiring Internet companies with complementary
technologies and service offerings for business procurement is critical to
achieving our goal of being the leading Internet-based marketplace for
commercial printing.
Recent Acquisitions
PrintBid.com. On December 9, 1999, we acquired PrintBid.com, an
Internet-based bidding service to help commercial print customers identify a
short list of ideal manufacturers for their print jobs based on a defined set of
job specifications and obtain quotes from targeted vendors. PrintBid.com
connects printing buyers and suppliers and is intended to create an online
"community" for commercial printing. We are currently developing additional
services to allow these buyers and suppliers to source print material and
information.
In August 1999, PrintBid.com launched the PaperDeals.com Web site.
PaperDeals.com is a live, global e-auction marketplace for the paper industry.
PaperDeals.com is designed to provide PrintBid.com's audience of commercial
printers with access to paper mills, merchants, distributors, converters,
brokers, import/exporters, publishing companies and major corporations.
Image Press. On September 21, 1999, we acquired Image Press, a print sales
organization with approximately $6.6 million in 1998 revenues focused primarily
on marketing materials. Image Press sales representatives serve as brokers
between customers and its supplier network, providing assistance with bidding,
buying and service order processing.
Fine Arts Graphics. On April 13, 1999, we acquired Fine Arts Graphics, a
commercial printer with approximately $10.5 million in 1998 revenues focused
primarily on the general
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office category. The business has two facilities, one in New Jersey and the
other in Oregon. Sales offices are co-located with manufacturing facilities.
TECHNOLOGY
The technology behind the ImageX.com solutions 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. ImageX.com's solutions address four specific, yet broad
application areas in the commercial printing marketplace: Corporate print
procurement, small office/home office print ordering, print project bidding, and
paper purchasing.
The ImageX.com corporate print procurement solution combines both the print
manufacturing process and the customer procurement process into one coherent
system, and drives the entire ordering and manufacturing process. The solution
was designed as a scalable manufacturing system to process thousands of printing
orders daily.
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:
Corporate Online Printing
Center We build a Corporate 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 pre-press representatives build these
Corporate Online Printing Centers using proprietary
tools developed especially for this task. Each
Corporate 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 Corporate Online
Printing Center handles all customer interaction
with ImageX.com's system. The Corporate 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) ILIAD is the heart of the ImageX.com corporate
print procurement solution. When a customer
initiates an order, the ILIAD engine establishes
the boundaries within which the customer can modify
the item. This allows the Corporate 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.
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<PAGE> 50
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.
LOGO
[GRAPHIC -- Depiction of the ImageX.com system. The order and composition Engine
(ILIAD) appears at the middle of the graphic, surrounded by the Online Printing
Center, the Digital Library, the Specialists and the Manufacturing System. These
components are grouped in a circle and labeled as the "ImageX.com core
Technology." Outside the circle are icons showing the relationship between the
ImageX.com technology, the Internet, Goods Delivered, Business Card Printers,
Stationery Printers and Brochure Prints.]
The ImageX.com corporate print procurement 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 system
utilizes Microsoft's Internet Information Server and application server
technology provided by Microsoft's Transaction Server and Message Queue
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<PAGE> 51
Server. Finally, Adobe PDF technology is utilized for online proofing of
materials prior to ordering. Every component of the ImageX.com corporate print
procurement solution architecture was chosen with scalability as the primary
consideration. By using scalable technologies from Oracle, Microsoft and Adobe,
the ImageX.com solution 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.
PrintBid.com's first-generation technology, which is presently visible on
the PrintBid.com Web site, was developed largely through contracts with outside
software development firms and represents a fraction of the company's software
technology. The current PaperDeals.com Web site is a first-generation site,
developed largely by outside software contractors, and utilizes Moai
Technology's LiveExchange 2.0 eAuction software for part of its functionality.
We have an ongoing development effort to upgrade the features and functionality
of both PrintBid.com and PaperDeals.com.
OPERATIONS
The operations strategies for the Corporate Online Printing Center and the
Small Business Printing Center are directly tied to the business model for those
services. The Corporate Online Printing Center leverages a network of
approximately 40 commercial printing vendors and two facilities that we own. Our
network of commercial printing vendors includes printers located across the
Unites States, 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 Corporate Online Printing Center offers improved
corporate utilization within our vendor network, direct cost and overhead cost
reduction and improved vendor management.
In contrast, the Small Business Printing Center is completely outsourced.
The Web site, customer service, and manufacturing are all performed by a
third-party provider. The third-party sets up templates for every new class of
product on the site and integrates, manufactures and fulfills orders either
through their own manufacturing facility or through a subcontractor.
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 quarterly 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 December 31, 1999, we had 42 employees
engaged in product development. Product development expenses were $3.8 million
for the year ended December 31, 1999, $2.8 million in 1998 and $1.3 million in
1997. We expect to continue making 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."
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<PAGE> 52
INTELLECTUAL PROPERTY
We rely on intellectual property laws in the United States and other
jurisdictions to protect our proprietary rights. We have filed trademark
applications for the ImageX.com name in the U.S., Canada and other key foreign
countries. We currently have fifty-two U.S. patents pending. We do not yet have
any issued patents. We own copyrights in the computer software and online
materials that we have developed, and we currently hold limited licenses to use
software in which third parties own copyrights, including software for database
management and electronic pre-press. 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, and with other Internet-based print
providers. 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 also face direct competition from other Internet-based companies that
offer business printing services, as well as from others who may develop such
services in the future. Potential developers of competing electronic commerce
services may include consumer printing services providers, office service
providers, equipment manufacturers and financial printers and publishers.
Many of our current and potential future competitors have substantially
greater financial, marketing and other resources than we have. As a result, they
may be able to market their products, services and branding more aggressively
than we are able to, and they 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 traditional printing companies or other businesses offering
Internet-based printing services, our business will fail."
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EMPLOYEES
As of December 31, 1999, we had 280 employees. We also employ a limited
number of independent contractors and temporary employees on a periodic basis.
None of our employees are represented by a labor union, and we consider our
labor relations to be good.
We believe our success depends to a significant extent on our ability to
attract, motivate and retain highly skilled management and employees. To this
end, we focus on incentive programs such as employee stock options, competitive
compensation and benefits for our employees.
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. Additionally, we
have signed a term lease for 44,044 square feet of office space in Kirkland,
Washington, which expires on December 31, 2004. The space consists of three
suites and we plan to move into the first of the suites in February 2000.
Through the acquisition of Fine Arts Graphics, we have added an
approximately 40,000-square-foot production facility and administrative office
in Tualatin, Oregon, and an approximately 15,000-square-foot production facility
and administrative office in Union, New Jersey. We have added an approximately
4,811-square-foot administrative office in San Leandro, California through our
acquisition of Image Press and an approximately 9,495-square-foot administrative
office in Portland, Oregon through our acquisition of PrintBid.com.
LEGAL PROCEEDINGS
We are not a party to any material litigation as of the date of this
prospectus.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of ImageX.com as of December 31, 1999
are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Richard P. Begert(1)............ 43 President, Chief Executive Officer and Director
Robin L. Krueger................ 49 Vice President, Chief Financial Officer, Treasurer and
Assistant Secretary
F. Joseph Verschueren........... 48 Chairman of the Board
Eric J. Bean.................... 41 Vice President, Products and Technology
Cory E. Klatt................... 31 Vice President and Chief Technology Officer
Dana F. Manciagli............... 39 Vice President, Sales and Marketing
John R. Higgins................. 34 Vice President, Finance and Acquisitions and Assistant
Secretary
Mariam J. Naini................. 36 Vice President, General Counsel and Secretary
John E. Ardell, III............. 59 Director
Garrett P. Gruener(2)........... 45 Director
Elwood D. Howse, Jr.(1)(2)...... 60 Director
Wayne M. Perry.................. 50 Director
Richard R. Sonstelie(1)(3)...... 54 Director
Bernee D. L. Strom(3)........... 52 Director
</TABLE>
- -------------------------
(1) Member of the Acquisition Committee.
(2) Member of the Audit Committee.
(3) 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 and Vice
President, Treasurer and Assistant Secretary since December 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 the Board of
Parallel Communications until July 1999. Mr. Verschueren received his B.A. in
English and a B.A. in philosophy from Gonzaga University.
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<PAGE> 55
Eric J. Bean has been Vice President, 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 Pacific University, and his B.S. in mathematics from Pacific Lutheran
University.
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 December 1999, as Assistant Secretary from
August 1997 to July 1998, as Treasurer from July 1998 to December 1999, as Chief
Technology Officer since August 1997 and as Vice President since December 1999.
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, 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, Finance and Acquisitions, of
ImageX.com since May 1999 and Assistant Secretary since December 1999. 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.
Mariam J. Naini has been Vice President, General Counsel, of ImageX.com
since November 1999 and Secretary since December 1999. From April 1999 to
October 1999, Ms. Naini was an Associate General Counsel at Amazon.com, Inc.
From April 1998 to March 1999, she was Of Counsel with Irell & Manella LLP's Los
Angeles, California office. From July 1994 to March 1998, Ms. Naini was a senior
associate with Morgan, Lewis & Bockius LLP's Washington, D.C. office, and from
December 1988 to June 1994, she was with Howrey & Simon LLP's Washington D.C.
office. Ms. Naini received her B.A. degree with honors, in three years, from
Wellesley College and her Juris Doctorate degree from Georgetown University Law
Center.
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.
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<PAGE> 56
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 also serves as a director of
CyberGold, Inc., a membership-based Internet incentives and promotions company,
Be Inc., an operating system provider for digital media application and Internet
appliances, and Ask Jeeves, Inc., a provider of natural language question
answering services on the Internet for companies and consumers. 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.
Wayne M. Perry has been a director of ImageX.com since December 1999. Mr.
Perry has served as Vice Chairman of NEXTLINK Communications, Inc., a
telecommunications company, since June 1997. From July 1997 to March 1999, Mr.
Perry was Chief Executive Officer of NEXTLINK. From September 1994 to July 1997,
Mr. Perry was also Vice Chairman of AT&T Wireless Services, Inc., a
telecommunications company, following the merger with McCaw Cellular
Communications, Inc. From June 1989 to September 1994, he served as Vice
Chairman of the Board of McCaw Cellular, and from December 1985 to June 1989,
served as President. From 1976 to 1985, Mr. Perry served as Executive Vice
President and General Counsel of McCaw Cellular. From 1990 to 1994, Mr. Perry
was Vice Chairman of the Board of LIN Broadcasting Corporation. He also served
as Chairman of the Board of Directors of the Cellular Telecommunications
Industry Association, the nationwide wireless industry association, for the
1993/94 term.
Richard R. Sonstelie has been a director of ImageX.com since June 1998. Mr.
Sonstelie served as Chairman of the Board of Puget Sound Energy, Inc., a power
company, from February 1997 to January 2000 and as a director from 1987 to
January 2000. His other 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 of InfoSpace.com Ventures since January 2000. Ms.
Strom served as President and Chief Operating Officer of InfoSpace.com, Inc., an
Internet information infra structure company, from November 1998 to December
1999 and as a director of InfoSpace.com 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, eLetter, an
Internet-based direct mail company, and iGP, an Internet portal
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<PAGE> 57
for grandparents, 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
plans 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.
The acquisition committee currently consists of Messrs. Begert, Howse and
Sonstelie. The acquisition committee reviews and approves the terms of
acquisitions that ImageX.com proposes to complete. However, the authority of the
acquisition committee to approve the terms of acquisitions is limited to
acquisitions in which the aggregate consideration is less than $10 million.
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 terms are
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 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. In December 1999, we
granted to Mr. Perry a nonqualified stock option to purchase 12,500 shares of
common stock at an exercise price of $25.9375 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.
Nonemployee Directors Stock Option Program
Our board of directors has adopted our 1999 Nonemployee Directors Stock
Option Program. Under the program, our nonemployee directors are entitled to
receive stock options. All options granted under the program expire 10 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.
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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 our initial public offering in August
1999. 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 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.
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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 years
ended December 31, 1999 and 1998 by our Chief Executive Officer and each of our
four most highly compensated executive officers other than the Chief Executive
Officer whose compensation exceeded $100,000 in fiscal 1999.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SECURITIES
-------------------- UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS(#)
--------------------------- ---- -------- -------- ------------
<S> <C> <C> <C> <C>
Richard P. Begert.............................. 1999 $225,000 -- 49,999
Chief Executive Officer and President 1998 28,125(1) -- --
F. Joseph Verschueren.......................... 1999 187,270 -- --
Chairman of the Board(2) 1998 154,211 -- --
Eric J. Bean................................... 1999 157,904 $ 50,000 37,500
Vice President, Products and 1998 68,750(3) -- 75,000
Technology
Dana F. Manciagli.............................. 1999 160,181 100,000 49,999
Vice President, Sales and Marketing 1998 96,633(4) -- 62,500
John R. Higgins................................ 1999 91,667 65,000 25,000
Vice President, Finance and Acquisitions 1998 44,256(5) 50,000
</TABLE>
- -------------------------
(1) Mr. Begert joined ImageX.com in November 1998. Represents salary earned as
of December 31, 1998 and is based on an annualized salary of $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, was due in
November 1999 and has been paid 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. As of
December 31, 1999, the repurchase right had lapsed with respect to 130,000
of the shares. The repurchase right with respect to the remaining shares
lapses ratably over the next 37 months. As of December 31, 1999, the value
of Mr. Begert's aggregate restricted stock holdings was $20.7 million, based
on the last reported sale price of our common stock on the Nasdaq National
Market on December 31, 1999 of $41.875 per share.
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(2) Prior to November 1998, Mr. Verschueren served as President and Chief
Executive Officer.
(3) Mr. Bean joined ImageX.com in July 1998. Represents salary earned as of
December 31, 1998.
(4) Ms. Manciagli joined ImageX.com in May 1998. Represents salary earned as of
December 31, 1998.
(5) Mr. Higgins joined ImageX.com in June 1998. Represents salary earned as of
December 31, 1998.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information regarding stock options we
granted to the officers listed in the Summary Compensation Table during the
fiscal year ended December 31, 1999.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------- POTENTIAL REALIZABLE
PERCENT OF VALUE AT ASSUMED
TOTAL ANNUAL RATES OF
NUMBER OF OPTIONS STOCK PRICE
SECURITIES GRANTED TO EXERCISE APPRECIATION
UNDERLYING EMPLOYEES IN PRICE FOR OPTION TERM(4)
OPTIONS FISCAL PER EXPIRATION ---------------------
NAME GRANTED(1) YEAR(2) SHARE(3) DATE 5% 10%
---- ---------- ------------ -------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Richard P. Begert................ 49,999 4.20% $ 6.00 4/21/09 $188,996 $476,990
F. Joseph Verschueren............ -- -- -- -- -- --
Eric J. Bean..................... 37,500 3.15 6.00 4/21/09 141,750 357,750
Dana F. Manciagli................ 49,999 4.20 6.00 4/21/09 188,996 476,990
John R. Higgins.................. 25,000 2.10 6.00 4/21/09 94,500 238,500
</TABLE>
- -------------------------
(1) The options granted to the officers listed in the table vest according to
our customary vesting schedule for all employees as follows: (a) 24% of the
options vest and become exercisable one year from the date of grant and (b)
an additional 2% of the options vest and become exercisable each month
thereafter. The options granted to Ms. Manciagli and Messrs. Begert, Higgins
and Bean were granted on April 21, 1999. For a description of the options
see "Employee Benefit Plans."
(2) Based on a total of 1,189,796 options granted to employees during fiscal
year 1999.
(3) Options were granted at an exercise price equal to the fair market value of
our common stock at the time of grant, as determined by our board of
directors.
(4) The dollar amounts under these columns result from calculations at the 5%
and 10% rates required by Securities Exchange Commission regulations and are
not intended to forecast possible future appreciation, if any, of the common
stock price. The amount represents appreciation in the value of the common
stock from the fair market value of our common stock at the time of grant,
as determined in good faith by our board of directors. The information in
this table assumes all options are exercised at the end of each of their
10-year terms. Actual gains, if any, on stock option exercises depends on
the future performance of the common stock and overall stock market
conditions, as well as the option holders' continued employment through the
vesting period. The amounts shown in this table may not be achieved.
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<PAGE> 61
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
The following table sets forth information regarding unexercised stock
options held by the officers listed in the Summary Compensation Table during the
fiscal year ended December 31, 1999. None of the officers exercised any options
during this period.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISABLE
UNDERLYING UNEXERCISED IN-THE-MONEY
SHARES OPTIONS AT FISCAL OPTIONS AT FISCAL
ACQUIRED YEAR-END YEAR-END(2)
ON VALUE --------------------------- ---------------------------
NAME EXERCISE REALIZED(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- -------- -------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Richard P. Begert............... -- -- -- 49,999 -- $1,793,964
F. Joseph Verschueren........... -- -- -- -- -- --
Eric J. Bean.................... 2,000 $ 13,400 23,500 87,000 $977,130 3,415,110
Dana F. Manciagli............... 21,250 230,063 2,500 88,749 103,950 3,405,189
John R. Higgins................. -- -- 15,000 60,000 618,300 2,335,200
</TABLE>
- -------------------------
(1) "Value Realized" represents the fair value of the underlying securities on
the date of exercise minus the exercise price of the options. Ms. Manciagli
exercised a portion of her options and Mr. Bean exercised all of his options
prior to our initial public offering. Prior to our initial public offering,
the fair value of our common stock was determined in good faith by our board
of directors. Since our initial public offering, the fair value of our
common stock is assumed to equal to the last reported closing price of our
common stock on the Nasdaq National Market.
(2) Amounts are based on the December 31, 1999 closing price of our common stock
of $41.875 per share as reported on the Nasdaq National Market.
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 placement at a level
of $15,000,000 or greater, an additional option to purchase 49,999 shares of
common stock. In April 1999, we granted Mr. Begert this option to purchase
49,999 shares of common stock at an exercise price of $6.00 per share after we
completed our private placement of Series E Preferred Stock.
EMPLOYEE BENEFIT PLANS
Amended and Restated 1996 Stock Incentive Compensation Plan
In December 1996, our board of directors and shareholders adopted our 1996
stock incentive compensation plan. In April 1999, our board of directors
approved, and in August 1999 our shareholders approved, an increase in the
number of shares of common stock reserved under the plan, as well as certain
other amendments. The purpose of the 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
permits the issuance of incentive stock options, nonqualified stock options and
stock awards. Our board has reserved a total of 2,800,000 shares of common stock
under the plan, of which
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<PAGE> 62
682,668 shares remain available for grant as of December 31, 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 our
board of directors. As of December 31, 1999, 173,295 shares had been issued upon
the exercise of stock options granted under the plan, 650,000 shares had been
issued pursuant to restricted stock awards and 1,336,037 shares were subject to
outstanding options.
Our committee or an officer designated by our board serves 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, options 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 selects individuals to receive
options under the plan and specifies the terms and conditions of each option
granted, including 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 plan will expire 10 years from the grant date.
Stock Awards. The plan administrator is authorized under the plan to award
shares of common stock subject to terms and restrictions established by the plan
administrator in its sole discretion. These terms and restrictions may include
the manner in which shares subject to stock awards must be held during the
periods they are subject to restrictions and the circumstances under shares of
restricted stock will be forfeited upon 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 award will automatically accelerate and
become 100% vested and exercisable immediately before the corporate transaction,
unless (1) the option is assumed, continued or replaced with a comparable award
by the successor corporation or the parent of the successor corporation or (2)
acceleration will render unavailable "pooling of interest" accounting for a
transaction that otherwise qualifies for this accounting treatment. Any option
that is assumed, continued or replaced with a comparable award in the corporate
transaction will accelerate if the holder's employment or services are
terminated by the successor corporation without cause or by the holder
voluntarily with good reason within two years of the corporate transaction.
PrintBid.com Stock Option Plan
On December 9, 1999, we acquired 100% of PrintBid.com, Inc. and assumed all
stock options outstanding under the PrintBid.com, Inc. stock incentive plan.
Assumed options were converted into options to purchase a total of 289,714
shares of our common stock on substantially the same terms and conditions under
which the options were initially granted by PrintBid.com, Inc. The per-share
exercise price and the total number of shares subject to each option were
adjusted to reflect the terms of the merger.
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<PAGE> 63
The incentive plan permits the issuance of stock options and other stock
awards, but only options were granted under the plan. No additional options will
be granted under the incentive plan, and the plan will remain in existence only
until all assumed options are exercised by optionees or expire without being
exercised. Our compensation committee serves as the current plan administrator
of the incentive plan.
Optionees under the incentive plan all have letter agreements from
PrintBid.com, Inc. that describe the terms and conditions of their options,
including the vesting schedule, the term of the option and the exercise price,
which, for incentive stock options, must have been at least equal to the fair
market value of the common stock on the grant date. We have supplemented
optionees' letter agreements with notices about the new per share exercise price
of the options and the total number of shares now subject to the options as a
result of the acquisition.
The plan administrator will make proportional adjustments to the number of
shares issuable under the incentive plan and to outstanding options in the event
of stock splits or other similar capital adjustments.
If a merger, consolidation or sale of ImageX.com occurs, the board will
determine its effect on outstanding options. Alternatives permitted by the
incentive plan include converting outstanding options into options to purchase
common stock of a successor company and terminating all outstanding options that
are not exercised prior to the corporate transaction.
1999 Employee Stock Purchase Plan
In April 1999, our board of directors adopted our 1999 employee stock
purchase plan, which was approved by our shareholders in August 1999. The stock
purchase plan became effective on August 26, 1999, the effective date of our
initial public offering. The plan's purpose is to encourage employees to remain
in our employ or the employ of our subsidiaries and to acquire a stock ownership
interest in ImageX.com. 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 for a future
offering period). 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 1,200 shares of common stock in any single purchase period.
Our compensation committee serves as the plan administrator of the plan.
Except for the first offering period, the stock purchase plan has two-year
offering periods. Each two-year offering period has four consecutive six-month
purchase periods. The first offering period began on August 26, 1999 and will
end on July 31, 2001. The first purchase period began on August 26, 1999 and
will end on January 31, 2000. Subsequent purchase periods will begin on each
February 1 and August 1 and end on the next July 31 and January 31. 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, which was $7.00 per share, and 85% of the
fair market value on the last day of the applicable purchase period. The stock
purchase plan
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<PAGE> 64
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 holders of 5% or more of the common stock of ImageX.com or its
subsidiaries. In addition, for future offering periods, the plan administrator
may require that employees work a minimum of up to five months per year and have
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.
250,000 shares of common stock are authorized for issuance under the plan,
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) 100,000 shares, (2)
0.5% 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 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 will 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. 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.
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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<PAGE> 65
CERTAIN TRANSACTIONS
From January 1, 1997 through December 31, 1999, in a series of private
transactions, we sold securities as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
PURCHASE EXERCISE
SECURITY DATE OF ISSUANCE SHARES PRICE PRICE
-------- ------------------- --------- -------- --------
<S> <C> <C> <C> <C>
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 5,952,391 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 C SERIES D SERIES E COMMON SERIES C SERIES D
-------- -------- -------- --------- ------- -------- --------
<S> <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)......... 473,334 101,294 952,381 92,300 13,334 10,060
Entities affiliated with Alta Partners(3)............... 1,428,572
Vanguard V, L.P......................................... 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)................................. 36,667 65,476 7,150
Richard R. Sonstelie(7)................................. 12,575 8,334 1,258
</TABLE>
- -------------------------
(1) Includes shares purchased by Acorn Ventures IX, LLC and Internet Ventures,
LLC. Acorn Ventures, Inc. is a member of Acorn Ventures IX, 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. Mr. Gruener is also
a member of Alta Embarcadero Partners II, LLC.
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<PAGE> 66
(4) Includes shares and warrants purchased by Waterhouse National Bank, 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.
(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 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 IX, 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 IX, 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, was due in November 1999 and
has been paid 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. As of December 31, 1999, the
repurchase right had lapsed with respect to 130,000 of the shares. The
repurchase right with respect to the remaining shares lapses ratably over the
next 37 months.
In January 1998, we entered into a consulting agreement with Acorn Ventures
IX, 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
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<PAGE> 67
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.
During 1998 and the period from January 1, 1999 to July 23, 1999, we paid
approximately $521,000 and $460,000, respectively, to Parallel Communications,
our advertising agency during those periods, for services rendered in connection
with our marketing efforts. Mr. Verschueren, a director of ImageX.com served as
a director and owned one-third of the outstanding shares of capital stock of
Parallel Communications until he sold his interest in Parallel on July 23, 1999.
Mr. Klatt, an executive officer of ImageX.com, owned one-third of the
outstanding shares of capital stock of Parallel Communications until he sold his
interest in Parallel on July 23, 1999. 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.
On January 5, 2000, we entered into a strategic relationship with
InfoSpace.com, an Internet information infrastructure company, whereby
ImageX.com will appear throughout the InfoSpace.com Web site and its affiliate
network sites, allowing users to either directly move to or be introduced to
ImageX.com's product and service offerings. Under the agreement entered into
between ImageX.com and InfoSpace.com, ImageX.com has agreed to pay InfoSpace.com
$100,000 per month for 12 months for this alliance. In addition, ImageX.com and
InfoSpace.com have agreed to share advertising revenues received by
InfoSpace.com for banner advertisements on the companies' co-branded Web pages.
Bernee D.L. Strom, a director of ImageX.com, currently serves as a director of
InfoSpace.com, Inc., and is President of InfoSpace.com Ventures. From November
1998 to December 1999, Ms. Strom also served as President and Chief Operating
Officer of InfoSpace.com. Acorn Ventures, Inc. and its affiliated entities
beneficially own approximately 16% of our outstanding common stock. Rufus Lumry,
a director of InfoSpace.com, is a principal of Acorn Ventures, Inc. Naveen Jain,
President and Chief Executive Officer, director and holder of approximately 33%
of the stock of InfoSpace.com, is a principal of Internet Ventures, LLC which
beneficially owns approximately 8.4% of our outstanding stock.
We have entered into indemnification agreements with each of our executive
officers and directors. See "Management -- Director and Officer Indemnification
and Liability."
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<PAGE> 68
PRINCIPAL AND SELLING SHAREHOLDERS
The following table summarizes certain information regarding the beneficial
ownership of our common stock as of December 31, 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;
- our top four most highly compensated executive officers (other than the
Chief Executive Officer) whose compensation exceeded $100,000 in 1999;
- all our directors and executive officers as a group; and
- the selling shareholders.
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>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO SHARES BEING OWNED AFTER
OFFERING(1) SOLD BY OFFERING(1)(2)
------------------- SELLING --------------------
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER PERCENT SHAREHOLDERS NUMBER PERCENT
------------------------------------ --------- ------- ------------ --------- -------
<S> <C> <C> <C> <C> <C>
Entities affiliated with Acorn
Ventures, Inc.(3).................... 3,080,830 16.8 300,000(4) 2,780,830 12.5
1309 114th Avenue S.E., Suite 200
Bellevue, WA 98004
Entities affiliated with Technology
Partners(5).......................... 2,503,832 14.4 375,575(6) 2,128,257 10.0
1550 Tiburon Boulevard, Suite A
Belvedere, CA 94920
Entities affiliated with Alta
Partners(7).......................... 1,428,572 8.2 142,857(8) 1,285,715 6.0
One Embarcadero Center, Suite 4050
San Francisco, CA 94111
Vanguard V, L.P........................ 889,442 5.1 -- 889,442 4.1
525 University Avenue, Suite 600
Palo Alto, CA 94301
Richard P. Begert...................... 500,000 2.9 -- 500,000 2.3
F. Joseph Verschueren.................. 580,150 3.3 -- 580,150 2.7
Eric J. Bean(9)........................ 40,833 * -- 40,833 *
Dana F. Manciagli(10).................. 154,937 * -- 154,937 *
John R. Higgins(11).................... 17,000 * -- 17,000 *
John E. Ardell, III(12)................ 2,503,832 14.4 -- 2,128,257(13) 10.0
</TABLE>
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<PAGE> 69
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO SHARES BEING OWNED AFTER
OFFERING(1) SOLD BY OFFERING(1)(2)
------------------- SELLING --------------------
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER PERCENT SHAREHOLDERS NUMBER PERCENT
------------------------------------ --------- ------- ------------ --------- -------
<S> <C> <C> <C> <C> <C>
Garrett P. Gruener(14)................. 1,428,572 8.2 -- 1,285,715(15) 6.0
Elwood D. Howse, Jr.(16)............... 334,293 1.9 10,000 324,293 1.5
Wayne M. Perry......................... 42,500 * -- 42,500 *
Richard R. Sonstelie(17)............... 39,667 * -- 39,667 *
Bernee D. L. Strom(18)................. 17,500 * -- 17,500 *
Ron Weiner(19)......................... 382,891 2.2 100,000 282,891 1.3
All directors and executive officers as
a group (14 persons)(20)............. 6,117,284 35.0 10,000(21) 5,588,852(22) 26.0
Other selling shareholders (15 persons,
each owning less than 1% of the
shares outstanding)(23).............. 332,669 1.9 71,568 261,101 1.2
</TABLE>
- -------------------------
* Less than 1%.
(1) This information is based on 17,381,639 shares outstanding on December 31,
1999 and 21,381,639 shares outstanding after this offering.
(2) Assumes no exercise of the underwriters' over-allotment option.
(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 IX, 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 IX, LLC and Internet Ventures,
LLC.
(4) Represents shares to be sold in this offering by Acorn Ventures IX, LLC.
(5) Represents 2,503,832 outstanding shares held by Technology Partners Fund V,
L.P. and Technology Partners Fund VI, L.P.
(6) Represents 232,718 shares to be sold in this offering by Technology
Partners Fund V, L.P. and 142,857 shares to be sold in this offering by
Technology Partners Fund VI, L.P.
(7) 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.
(8) Represents 141,548 shares to be sold in this offering by Alta California
Partners II, L.P. and 1,309 shares to be sold in this offering by Alta
Embarcadero Partners II, LLC.
(9) Includes 12,575 outstanding shares and 1,258 shares issuable pursuant to
warrants currently exercisable held by Waterhouse National Bank, F/B/O Eric
J. Bean IRA. Also includes 25,000 shares issuable pursuant to options
exercisable with 60 days of December 31, 1999.
(10) Includes 122,399 outstanding shares and 6,288 shares issuable pursuant to
warrants currently exercisable held by Galaxy Investment Partners, of which
Ms. Mancigli is co-general partner. Also includes 5,000 shares issuable
pursuant to options exercisable within 60 days of December 31, 1999.
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<PAGE> 70
(11) Represents 17,000 shares issuable pursuant to options exercisable with 60
days of December 31, 1999.
(12) Represents outstanding shares 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.
(13) Assumes the sale in this offering of 375,575 shares held by entities
affiliated with Technology Partners, which shares are beneficially owned by
Mr. Ardell.
(14) 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. Mr. Gruener is also a member of Alta
Embarcadero Partners II, LLC. Mr. Gruener disclaims beneficial ownership of
these shares except to the extent of his pecuniary interest in these shares
arising from his interest in Alta California Management Partners II, L.P.
(15) Assumes the sale in this offering of 142,857 shares held by entities
affiliated with Alta Partners, which shares are beneficially owned by Mr.
Gruener.
(16) 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.
(17) Includes 20,909 outstanding shares and 1,258 shares issuable pursuant to
warrants currently exercisable held jointly by Mr. Sonstelie and his
spouse.
(18) Includes 5,000 shares held by the Strom Family Trust, of which Ms. Strom is
trustee. Also includes 12,500 shares issuable pursuant to options currently
exercisable.
(19) Includes 80,246 shares issuable pursuant to options exercisable within 60
days of December 31, 1999. Mr. Weiner is President of PrintBid.com, Inc., a
wholly owned subsidiary of ImageX.com.
(20) Includes 87,953 shares issuable pursuant to options and warrants
exercisable within 60 days of December 31, 1999.
(21) Represents shares to be sold in this offering that are held by Elwood D.
Howse, Jr.
(22) In addition to the shares to be sold in this offering by our directors and
executive officers, also assumes the sale in this offering of 375,575
shares held by entities affiliated with Technology Partners, which are
beneficially owned by John E. Ardell, III, 142,857 shares held by entities
affiliated with Alta Partners, which shares are beneficially owned by Mr.
Gruener.
(23) Includes 33,225 shares issuable pursuant to options and warrants
exercisable within 60 days of December 31, 1999. These shareholders have
granted an option to the underwriters to purchase up to an aggregate of
54,405 shares to cover over-allotments, if any.
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<PAGE> 71
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 December 31, 1999, there were 17,381,639 shares of common stock
outstanding held of record by 238 shareholders. Following this offering, there
will be 21,381,639 shares of common stock outstanding (assuming no exercise of
outstanding options after December 31, 1999). 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
No shares of preferred stock are outstanding as of the date of this
prospectus. Pursuant to our articles of incorporation, the board of directors
has 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 of
directors 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 December 31, 1999, there were outstanding warrants to purchase
1,343,731 shares of common stock exercisable as follows:
- 1,034,400 shares at a weighted average price of $4.26 per share, expiring
on January 8, 2005;
- 54,452 shares at an exercise price of $3.98 per share, expiring on
October 1, 2005;
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<PAGE> 72
- 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;
- 67,446 shares at an exercise price of $4.36 per share, expiring between
May 2008 and October 2009; and
- 21,500 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 11,280,693 shares of our common stock and warrants to purchase
1,187,477 shares of our common stock, these holders are entitled to certain
registration rights. 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 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
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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, 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
Our stock is quoted on the Nasdaq National Market under the symbol "IMGX."
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SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of our common stock in the public market after
this offering, or the possibility of such sales occurring, could adversely
affect prevailing market prices for our common stock or our future ability to
raise capital through an offering of equity securities.
After this offering, we will have outstanding an aggregate of 21,381,639
shares of common stock. All of the shares sold in this offering will be, and all
of the 3,450,000 shares sold in our initial public offering are, freely tradable
in the public market without restriction under the Securities Act, unless such
shares will be or are held by our "affiliates," as that term is defined in Rule
144 under the Securities Act. An aggregate of 12,971,639 shares of common stock
outstanding upon completion of this offering will be restricted shares as a
result of securities laws or lock-up agreements signed by the holder. Shares
that are restricted as a result of securities laws may be sold in the public
market only if they are registered or if they qualify for an exemption from
registration, such as Rule 144 under the Securities Act, which is summarized
below. Of these restricted shares, 44,915 are eligible for immediate sale in the
public market.
All our executive officers and directors, the selling shareholders and
certain other shareholders, who collectively beneficially own an aggregate of
approximately 7,956,125 restricted shares, have agreed not to offer, sell,
contract to sell, grant any option to purchase or otherwise dispose of any such
shares until 90 days after this offering. Chase Securities Inc. 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 have also entered into
an agreement with Chase Securities Inc. that we will not offer, sell or
otherwise dispose of common stock until 90 days after the date of this
prospectus with various exceptions explained in the Underwriting Agreement
relating to this offering.
Taking into account the lock-up agreements and the provisions of Rules 144,
144(k) and 701, the number of restricted shares that will be available for sale
in the public market will be as follows:
<TABLE>
<CAPTION>
NUMBER OF
DATE OF AVAILABILITY FOR SALE SHARES
----------------------------- ---------
<S> <C>
February 22, 2000 (the expiration of 180-day lock-up
agreements entered into in connection with our initial
public offering, unless released earlier by Prudential
Securities in its sole discretion)........................ 3,084,518
In April 2000, upon the expiration of various one-year
holding periods........................................... 1,610,775
May 11, 2000 (the expiration of 90-day lock-up agreements
entered into in connection this offering, unless released
earlier by Chase Securities Inc. in its sole
discretion)............................................... 7,676,817
Thereafter upon expiration of various one year holding
periods................................................... 554,619
</TABLE>
In general, under Rule 144 as currently in effect, 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 213,823 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
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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 prior to our initial public offering 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 without having to comply with the holding period, public
information, volume limitation or notice provisions of Rule 144. Substantially
all shares issued prior to our initial public offering pursuant to Rule 701 are
subject to the 180-day lock-up agreements referred to above and will only become
eligible for sale at the earlier of the expiration of those lock-up agreements
or upon obtaining the prior written consent of Prudential Securities
Incorporated.
We have filed a registration statement on Form S-8 to register up to
4,500,000 shares of common stock reserved for issuance under our 1996 stock
incentive compensation plan and employee stock purchase plan. Shares issued
under the foregoing plans 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. Of
that number of shares, 14,365 shares have been issued upon the exercise of
options and 225,145 shares are subject to options that were exercisable as of
December 31, 1999. As of December 31, 1999, no shares had been issued pursuant
to our employee stock purchase plan.
We intend to file, after the effective date of this offering, a
registration statement on Form S-8 to register up to 282,837 shares of common
stock reserved for issuance under the PrintBid.com, Inc. stock incentive plan.
The registration statement will become effective automatically upon filing.
Shares issued under the PrintBid stock incentive plan, after the filing of the
registration statement on Form S-8, may be sold in the open market, subject, in
the case of certain holders, to the above-referenced 90-day lock-up agreements
and vesting restrictions imposed by us. Of the shares reserved under the
PrintBid stock incentive plan, 127,440 shares are subject to options that were
exercisable as of December 31, 1999.
We have 1,343,731 shares of common stock issuable upon exercise of
warrants, of which 1,276,286 may be exercised on a net basis (meaning the
exercise price may be satisfied by deducting shares otherwise issuable that are
equal in value to the exercise price). To the extent such warrants are exercised
on a net basis, the shares issued upon such exercise would be available for sale
in the public market, subject to expiration of the 180-day lock-up agreements
referred to above; with respect to 165,933 shares, to the expiration of various
one year holding periods in April 2000; and, with respect to 1,009,541 shares,
to the 90-day lock-up agreements referred to above.
In addition, after completion of this offering the holders of 10,280,693
shares of outstanding common stock and 1,187,477 warrants to purchase common
stock have, under certain circumstances, rights to require us to register their
shares for future sale.
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UNDERWRITING
Subject to the terms and conditions of the underwriting agreement, the
underwriters named below have severally agreed to purchase from ImageX.com and
the selling shareholders the following respective number of shares of common
stock:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ----------
<S> <C>
Chase Securities Inc........................................ 2,000,000
Banc of America Securities LLC.............................. 1,000,000
Prudential Securities Incorporated.......................... 1,000,000
SG Cowen Securities Corporation............................. 1,000,000
----------
Total............................................. 5,000,000
==========
</TABLE>
The underwriting agreement provides that the obligations of the
underwriters are subject to certain conditions precedent, including the absence
of any material adverse change in our business and the receipt of certain
certificates, opinions and letters from us, our counsel and the independent
auditors. The underwriters are committed to purchase all of the shares of common
stock offered by us and the selling shareholders if they purchase any shares.
The following table shows the per share and total underwriting discounts
and commissions we and the selling shareholders will pay to the underwriters.
Such amounts are shown assuming both no exercise and full exercise of the
underwriters' over-allotment option to purchase additional shares.
UNDERWRITING DISCOUNTS AND COMMISSIONS
<TABLE>
<CAPTION>
WITHOUT WITH
OVER-ALLOTMENT OVER-ALLOTMENT
EXERCISE EXERCISE
-------------- --------------
<S> <C> <C>
Per Share.......................................... $ 1.20 $ 1.20
Total.............................................. $6,000,000 $6,900,000
</TABLE>
We estimate that the total expenses of this offering, excluding
underwriting discounts and commissions, will be approximately $729,790.
The underwriters propose 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 that price less a concession not in excess
of $.68 per share. The underwriters may allow and such dealers may reallow a
concession not in excess of $.10 per share to certain other dealers. After this
offering of the shares, the offering price and other selling terms may be
changed by the underwriters.
Pursuant to the underwriting agreement, we and the selling shareholders
have granted to the underwriters an option, exercisable for 30 days from the
date of this prospectus, to purchase up to 695,595 and 54,405 additional shares
of common stock, respectively, 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.
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The offering of the shares is made for delivery when, as and if accepted by
the underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.
We, together with the selling shareholders, have agreed to indemnify the
underwriters against certain liabilities, including liabilities under the
Securities Act, and to contribute to payments the underwriters may be required
to make in respect of these liabilities.
From the date of this prospectus until 90 days after such date, we and
certain of our shareholders, including our officers, directors and selling
shareholders, have agreed not to, without the prior written consent of Chase
Securities Inc. on behalf of the underwriters, offer, sell or otherwise dispose
of any shares of our capital stock, options or warrants to acquire shares of our
capital stock or securities exchangeable for or convertible into shares of
capital stock, subject to certain exceptions.
Prior to the closing of our initial public offering, substantially all of
our shareholders, including our officers and directors, agreed not to, without
the prior written consent of Prudential Securities Incorporated on behalf of the
underwriters of the initial public offering, offer, sell or otherwise dispose of
any shares of capital stock, options or warrants to acquire shares of capital
stock or securities exchangeable for or convertible into shares of capital stock
owned by them for a period of 180 days following our initial public offering.
This period will terminate on February 22, 2000. We also agreed that we would
not, without the prior written consent of Prudential Securities Incorporated,
offer, sell or otherwise dispose of any shares of capital stock, options or
warrants to acquire shares of capital stock or securities exchangeable for or
convertible into shares of capital stock until February 22, 2000, subject to
certain exceptions.
Certain persons participating in this offering may over-allot or effect
transactions which stabilize, maintain or otherwise affect the market price of
the common stock at levels above those which might otherwise prevail in the open
market, including by entering stabilizing bids, effecting syndicate covering
transactions or imposing penalty bids. A stabilizing bid means the placing of
any bid or effecting of any purchase, for the purpose of pegging, fixing or
maintaining the price of the common stock. A syndicate covering transaction
means the placing of any bid on behalf of the underwriting syndicate or the
effecting of any purchase to reduce a short position created in connection with
the offering. A penalty bid means an arrangement that permits the underwriters
to reclaim a selling concession from a syndicate member in connection with the
offering when shares of common stock sold by the syndicate member are purchased
in syndicate covering transactions. Such transactions may be effected on the
Nasdaq National Market, in the over-the-counter market, or otherwise. Such
stabilizing, if commenced, may be discontinued at any time.
In connection with this offering, certain underwriters and selling group
members (if any) who are qualified market makers on the Nasdaq National Market
may engage in passive market making transactions in our common stock on the
Nasdaq National Market in accordance with Rule 103 of Regulation M under the
Securities Exchange Act of 1934, as amended. In general, a passive market maker
must display its bid at a price not in excess of the highest independent bid of
such security; if all independent bids are lowered below the passive market
maker's bid, however, such bid must then be lowered when certain purchase limits
are exceeded.
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Each of Chase Securities Inc., Banc of America Securities LLC, Prudential
Securities Incorporated and SG Cowen Securities Corporation has provided
financial advisory services to ImageX.com in the past and has received
compensation at market rates for these services.
Chase Securities Inc. and persons associated with Chase Securities Inc.
beneficially own 66,072 shares of our common stock. Additionally, Access
Technology Partners, L.P. and Access Technology Partners Brokers Fund, L.P.,
funds of outside investors that are managed by a subsidiary of Hambrecht & Quist
California, own 285,715 shares and 5,357 shares of our common stock,
respectively.
In April 1999, affiliates of Prudential Securities Incorporated 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. Prior to the
closing of the initial public offering, these shares were restricted from sale,
transfer, pledge, assignment or hypothecation for a period of one year from
August 26, 1999 in accordance with NASD Conduct Rules.
In April 1999, we issued a warrant to SG Cowen Securities Corporation to
purchase up to 48,165 shares of our common stock as part of its compensation as
placement agent in our Series E Preferred Stock private placement financing.
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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. As of the date of this
prospectus, an investment partnership associated with Wilson Sonsini Goodrich &
Rosati owns an aggregate of 2,381 shares of our common stock.
EXPERTS
The financial statements of ImageX.com, Inc. as of December 31, 1998 and
1999 and for each of the three years in the period ended December 31, 1999,
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.
The financial statements of Image Press, Inc. as of December 31, 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.
The financial statements of PrintBid.com, Inc. as of December 31, 1998 and
for 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.
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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.
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<PAGE> 81
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
IMAGEX.COM, INC.
Report of PricewaterhouseCoopers LLP, independent
accountants............................................ F-3
Consolidated Balance Sheets as of December 31, 1998 and
1999................................................... F-4
Consolidated Statements of Operations for the years ended
December 31, 1997, 1998 and 1999....................... F-5
Consolidated Statements of Shareholders' Equity (Deficit)
for the years ended December 31, 1997, 1998 and 1999... F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1998 and 1999....................... F-7
Notes to Consolidated Financial Statements................ F-8
FINE ARTS ENGRAVERS COMPANY, INC. (D.B.A. FINE ARTS
GRAPHICS)
Report of PricewaterhouseCoopers LLP, independent
accountants............................................ F-29
Balance Sheets as of December 31, 1997 and 1998 and March
31, 1999 (unaudited)................................... F-30
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-31
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-32
Statements of Cash Flows for the years ended December 31,
1997 and 1998 and for the three-month periods ended
March 31, 1998 and 1999 (unaudited).................... F-33
Notes to Financial Statements............................. F-34
IMAGE PRESS, INC.
Report of PricewaterhouseCoopers LLP, independent
accountants............................................ F-40
Balance Sheets as of December 31, 1998 and June 30, 1999
(unaudited)............................................ F-41
Statements of Operations for the years ended December 31,
1997 and 1998 and for the six-month periods ended June
30, 1998 and 1999 (unaudited).......................... F-42
Statements of Changes in Shareholders' Equity (Deficit)
for the years ended December 31, 1997 and 1998 and for
the six-month period ended June 30, 1999 (unaudited)... F-43
Statements of Cash Flows for the years ended December 31,
1997 and 1998 and for the six-month periods ended June
30, 1998 and 1999 (unaudited).......................... F-44
Notes to Financial Statements............................. F-45
PRINTBID.COM, INC.
Report of PricewaterhouseCoopers LLP, independent
accountants............................................ F-49
Balance Sheet as of December 31, 1998 and September 30,
1999 (unaudited)....................................... F-50
Statement of Operations for the year ended December 31,
1998 and for the nine-month periods ended September 30,
1998 and 1999(unaudited)............................... F-51
Statement of Shareholders' Equity (Deficit) for the year
ended December 31, 1998 and for the nine-month period
ended September 30, 1999 (unaudited)................... F-52
</TABLE>
F-1
<PAGE> 82
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Statement of Cash Flows for the year ended December 31,
1998 and for the nine-month periods ended September 30,
1998 and 1999 (unaudited).............................. F-53
Notes to Financial Statements............................. F-54
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL
STATEMENT
Unaudited Pro Forma Condensed Consolidated Statement of
Operations for the year ended December 31, 1999........ F-63
</TABLE>
F-2
<PAGE> 83
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
ImageX.com, Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, shareholders' equity (deficit)
and of cash flows present fairly, in all material respects, the financial
position of ImageX.com, Inc. (the "Company") at December 31, 1998 and 1999, and
the results of its operations and its cash flows for each of the three years in
the period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States. 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 auditing standards generally
accepted in the United States 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.
As described in Note 1, the loss per share amounts for 1997 and 1998 have
been revised.
PRICEWATERHOUSECOOPERS LLP
Seattle, Washington
February 1, 2000
F-3
<PAGE> 84
IMAGEX.COM, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1999
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 967 $ 18,257
Accounts receivable (net of allowance for doubtful
accounts of $15 and $126 at December 31, 1998 and 1999,
respectively)........................................... 234 3,427
Inventories............................................... 653
Prepaid expenses.......................................... 58 610
------- --------
Total current assets............................... 1,259 22,947
Restricted cash............................................. 25 1,625
Property and equipment, net................................. 1,140 6,613
Goodwill, net............................................... 2,132
Other assets................................................ 45 2,351
------- --------
Total assets....................................... $ 2,469 $ 35,668
======= ========
LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of notes payable.......................... $ 453 $
Line of credit payable.................................... 96
Accounts payable.......................................... 762 3,500
Accrued liabilities....................................... 241 1,394
------- --------
Total current liabilities.......................... 1,552 4,894
Notes payable, net of current portion....................... 454
------- --------
Total liabilities.................................. 2,006 4,894
------- --------
Commitments
Series B mandatorily redeemable convertible preferred stock,
$0.01 par value; 3,500,000 shares authorized, issued and
outstanding at December 31, 1998; aggregate liquidation
preference of $3,500...................................... 3,459
Series C mandatorily redeemable convertible preferred stock,
$0.01 par value; 4,040,000 shares authorized, 4,000,000
issued and outstanding at December 31, 1998; aggregate
liquidation preference of $6,000.......................... 5,109
Series D mandatorily redeemable convertible preferred stock,
$0.01 par value; 1,925,000 shares authorized, 1,385,493
issued and outstanding at December 31, 1998, respectively;
aggregate liquidation preference of $2,771................ 2,635
Value ascribed to mandatorily redeemable convertible
preferred stock warrants.................................. 147
-------
Total mandatorily redeemable convertible preferred
stock............................................. 11,350
-------
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 at
December 31, 1998; aggregate liquidation preference of
$1,500................................................. 15
Common stock, $0.01 par value; 70,000,000 shares
authorized; 2,081,974 and 17,381,639 shares issued and
outstanding at December 31, 1998 and 1999,
respectively............................................ 21 174
Additional paid-in capital................................ 4,263 67,118
Unearned compensation..................................... (1,961) (2,518)
Notes receivable from shareholders (including $20 from a
director)............................................... (228) (168)
Accumulated deficit....................................... (12,997) (33,832)
------- --------
Total shareholders' equity (deficit)............... (10,887) 30,774
------- --------
Total liabilities, mandatorily redeemable convertible
preferred stock and shareholders' equity (deficit)........ $ 2,469 $ 35,668
======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 85
IMAGEX.COM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------------------------
1997 1998 1999
------- ------- --------
<S> <C> <C> <C>
Revenues................................................. $ 87 $ 968 $ 11,499
Cost of sales............................................ 100 998 8,541
------- ------- --------
Gross profit (loss)................................. (13) (30) 2,958
------- ------- --------
Operating expenses:
General and administrative............................. 1,285 3,549 11,002
Sales and marketing.................................... 1,018 2,207 6,765
Product development.................................... 1,316 2,750 3,770
Amortization of unearned compensation, goodwill and
other intangibles................................... 380 2,497
------- ------- --------
Total operating expenses....................... 3,619 8,886 24,034
------- ------- --------
Loss from operations........................... (3,632) (8,916) (21,076)
Other income:
Interest income (expense), net......................... 62 (48) 241
------- ------- --------
Net loss....................................... $(3,570) $(8,964) $(20,835)
======= ======= ========
Basic and diluted net loss per share -- revised. See Note
1...................................................... $(14.14) $(12.25) $ (3.07)
======= ======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 86
IMAGEX.COM, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PREFERRED NOTES
SERIES A COMMON STOCK ADDITIONAL RECEIVABLE
------------------- ------------------- PAID-IN UNEARNED FROM
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION SHAREHOLDERS
---------- ------ ---------- ------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1996........ 1,500,000 $ 15 1,050,000 $ 11 $ 363
Issuance of common stock for notes
receivable........................ 150,000 1 29 $ (30)
Collection of notes receivable..... 2
Net loss...........................
---------- ---- ---------- ---- ------- ------- ---------
Balances, December 31, 1997........ 1,500,000 15 1,200,000 12 392 (28)
Value ascribed to common stock
warrants issued in conjunction
with sale of Series C Preferred
Stock............................. 1,038
Issuance of common stock for notes
receivable........................ 500,000 5 195 (200)
Repurchase of common stock......... (100,000) (1) (1)
Issuance of stock options to
consultants....................... 169
Issuance of common stock upon
exercise of stock options......... 8,520 2
Issuance of common stock to
Printbid shareholders............. 473,454 5 319 $ (6)
Issuance of common stock warrants
related to Series A convertible
debt.............................. 35 --
Unearned compensation.............. 2,335 (2,335)
Amortization of unearned
compensation...................... 380
Accretion of mandatorily redeemable
convertible preferred stock....... (221)
Net loss...........................
---------- ---- ---------- ---- ------- ------- ---------
Balances, December 31, 1998........ 1,500,000 15 2,081,974 21 4,263 (1,961) (228)
Redemption of common stock......... (42,000) (1) (7) 8
Purchase of treasury stock......... (38,212) (1) (1)
Issuance of stock options to
consultants....................... 155
Issuance of common stock upon
exercise of stock options......... 164,775 2 62 (15)
Issuance of common stock for Fine
Arts.............................. 93,750 1 374
Warrants issued in conjunction with
Series E bridge financing......... 115
Warrants issued in conjunction with
issuance of Series E preferred
stock............................. 130
Issuance of common stock warrants
in exchange for consulting
services.......................... 33
Issuance of common stock warrants
related to Series A convertible
debt.............................. 517
Unearned compensation related to
issuance of options to
consultant........................ 339
Accretion of mandatorily redeemable
preferred stock................... (84)
Net proceeds from initial public
offering (net of offering costs of
$3,119)........................... 3,450,000 35 20,996
Collection of notes receivable..... 67
Issuance of common stock for Image
Press............................. 16,394 1 299
Transfer value ascribed to
preferred stock warrants.......... 147
Conversion of preferred stock to
common stock upon initial public
offering.......................... (1,500,000) (15) 11,351,132 113 35,799
Issuance of common stock upon
exercise of warrants.............. 170,290 2 217
Unearned compensation.............. 2,841 (2,841)
Amortization of unearned
compensation...................... 2,284
Issuance of common stock to
PrintBid shareholders............. 133,536 1 1,070
Compensation related to advisors
subject to repurchase............. 295
Write-off of unamortized discount
on convertible debt............... (442)
Net loss...........................
---------- ---- ---------- ---- ------- ------- ---------
Balances, December 31, 1999........ -- $ -- 17,381,639 $174 $67,118 $(2,518) $ (168)
========== ==== ========== ==== ======= ======= =========
<CAPTION>
ACCUMULATED
DEFICIT TOTAL
----------- --------
<S> <C> <C>
Balances, December 31, 1996........ $ (463) $ (74)
Issuance of common stock for notes
receivable........................
Collection of notes receivable..... 2
Net loss........................... (3,570) (3,570)
-------- --------
Balances, December 31, 1997........ (4,033) (3,642)
Value ascribed to common stock
warrants issued in conjunction
with sale of Series C Preferred
Stock............................. 1,038
Issuance of common stock for notes
receivable........................
Repurchase of common stock......... (2)
Issuance of stock options to
consultants....................... 169
Issuance of common stock upon
exercise of stock options......... 2
Issuance of common stock to
Printbid shareholders............. 318
Issuance of common stock warrants
related to Series A convertible
debt.............................. 35
Unearned compensation..............
Amortization of unearned
compensation...................... 380
Accretion of mandatorily redeemable
convertible preferred stock....... (221)
Net loss........................... (8,964) (8,964)
-------- --------
Balances, December 31, 1998........ (12,997) (10,887)
Redemption of common stock.........
Purchase of treasury stock......... (2)
Issuance of stock options to
consultants....................... 155
Issuance of common stock upon
exercise of stock options......... 49
Issuance of common stock for Fine
Arts.............................. 375
Warrants issued in conjunction with
Series E bridge financing......... 115
Warrants issued in conjunction with
issuance of Series E preferred
stock............................. 130
Issuance of common stock warrants
in exchange for consulting
services.......................... 33
Issuance of common stock warrants
related to Series A convertible
debt.............................. 517
Unearned compensation related to
issuance of options to
consultant........................ 339
Accretion of mandatorily redeemable
preferred stock................... (84)
Net proceeds from initial public
offering (net of offering costs of
$3,119)........................... 21,031
Collection of notes receivable..... 67
Issuance of common stock for Image
Press............................. 300
Transfer value ascribed to
preferred stock warrants.......... 147
Conversion of preferred stock to
common stock upon initial public
offering.......................... 35,897
Issuance of common stock upon
exercise of warrants.............. 219
Unearned compensation..............
Amortization of unearned
compensation...................... 2,284
Issuance of common stock to
PrintBid shareholders............. 1,071
Compensation related to advisors
subject to repurchase............. 295
Write-off of unamortized discount
on convertible debt............... (442)
Net loss........................... (20,835) (20,835)
-------- --------
Balances, December 31, 1999........ $(33,832) $ 30,774
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 87
IMAGEX.COM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------------------
1997 1998 1999
------- ------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(3,570) $(8,964) $(20,835)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 121 423 1,947
Amortization of unearned compensation................... 380 2,284
Interest expense for warrants issued in connection with
bridge financing....................................... 30 115
Issuance of stock options to consultant................. 169 155
Amortization of discount on convertible debentures...... 2
Write-off of unamortized discount on convertible debt... (442)
Non-cash compensation expense........................... 61 1,151
Services exchanged for common stock warrants............ 33
Services exchanged for common stock..................... 252
Provision for doubtful accounts......................... 15 111
Changes in operating assets and liabilities, net of
effects of purchase of Fine Arts and Image Press:
Accounts receivable..................................... (19) (231) (2,340)
Inventories............................................. (624)
Prepaid expenses........................................ (33) (528)
Other assets............................................ (39) (6) (558)
Accounts payable and accrued liabilities................ 459 480 2,226
------- ------- --------
Net cash used in operating activities................... (3,048) (7,422) (17,305)
------- ------- --------
Cash flows from investing activities:
Purchases of property and equipment..................... (797) (870) (2,476)
Deposits of restricted cash............................. (25) (1,600)
Purchase of Fine Arts including acquisition costs of
$185................................................... (4,542)
Purchase of Image Press including acquisition costs of
$136................................................... (2,956)
Purchases of investments of available for sale
securities............................................. (975)
Proceeds from sale of investments of available for sale
securities............................................. 975
------- ------- --------
Net cash used in investing activities................... (797) (895) (11,574)
------- ------- --------
Cash flows from financing activities:
Proceeds from issuance of notes payable................. 600 601 2,932
Principal payments on notes payable..................... (24) (285) (2,071)
Proceeds from borrowings on line of credit.............. 96
Repayment on line of credit............................. (796)
Proceeds from issuance of Series C Preferred stock (net
of offering costs of $89).............................. 5,935
Proceeds from issuance of Series D Preferred stock (net
of offering costs of $29 and $8 for the years ended
December 31, 1998 and 1999, respectively).............. 2,743 795
Proceeds from issuance of Series E Preferred stock (net
of offering costs of $1,055)........................... 23,945
Repurchase of common stock.............................. (2) (2)
Proceeds from issuance of common stock.................. 10 268
Proceeds from issuance of common stock related to public
offering (net of offering costs of $3,119)............. 21,031
Proceeds from repayment on notes receivable from
shareholders........................................... 2 67
------- ------- --------
Net cash provided by financing activities............... 578 9,098 46,169
------- ------- --------
Net increase (decrease) in cash and cash equivalents.... (3,267) 781 17,290
Cash and cash equivalents at beginning of period........ 3,453 186 967
------- ------- --------
Cash and cash equivalents at end of period.............. $ 186 $ 967 $ 18,257
======= ======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE> 88
IMAGEX.COM, INC.
NOTES TO CONSOLIDATED 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 Corporate 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 Corporate 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. With the acquisition of
PrintBid.com, Inc. the Company has expanded its services to include an on-line
bidding system for print buyers and an online auction site for commercial paper.
As described in Note 13 on December 9, 1999, the Company merged with
PrintBid.com, Inc. in a transaction accounted for as a pooling of interests.
These consolidated financial statements give retroactive effect to the merger of
the Company with PrintBid.com, Inc.
Prior to 1998, the Company operated as a development-stage enterprise.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its subsidiaries after elimination of all significant
intercompany accounts and transactions.
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 certificates of deposit which collateralize
letters of credit as required by the Company's office lease agreements.
INVENTORIES
Inventories consists of raw materials, work-in-process and finished goods,
which are stated at the lower of cost or market. Cost is determined using a
method which approximates the first-in, first-out method. Work-in-process
includes direct labor, materials and allocated overhead.
F-8
<PAGE> 89
IMAGEX.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is provided on
the straight-line method for financial statement purposes. Estimated useful
lives of the assets are as follows:
<TABLE>
<CAPTION>
ASSET YEARS
----- ----------------
<S> <C>
Computer software...................................... 3
Computer hardware...................................... 3 - 5
Vehicles............................................... 5
Office furniture and equipment......................... 5 - 10
Machinery and equipment................................ 7 - 12
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.
COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE
Costs of computer software developed or obtained for internal use are
capitalized while in the application development stage and are expensed while in
the preliminary stage and the post-implementation stage. During 1999, the
Company capitalized approximately $1,078,000 and recognized the related
amortization expense of approximately $758,000. These costs are included in
property and equipment in the accompanying consolidated balance sheet.
GOODWILL
Goodwill represents the excess of the cost of purchased subsidiaries over
the estimated fair value of the net assets acquired as of the date of
acquisition and is being amortized using the straight line method over 10 years.
During 1999, the Company recognized the related amortization expense of
approximately $145,000.
OTHER ASSETS
Other assets consist primarily of a customer list, which is being amortized
using the straight-line method over 3 years and an assembled and trained
workforce, which is being amortized using the straight-line method over 8 years.
During 1999, the Company recognized the related amortization expense of
approximately $50,000 for the customer list and $18,000 for the assembled and
trained workforce.
F-9
<PAGE> 90
IMAGEX.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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,
goodwill 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 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.
STOCK-BASED COMPENSATION
The Company follows SFAS No. 123, "Accounting for Stock-Based Compensation"
which establishes financial accounting and reporting standards for stock-based
employee compensation plans and for the issuance of equity instruments to
acquire goods and services from nonemployees.
The Company has elected to apply the disclosure only provision of SFAS No.
123 for employee stock-based compensation plans. Accordingly, the Company
accounts for stock-based compensation to employees using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations. Compensation expense
for stock options is measured as the excess, if any, of the fair value of the
Company's common stock at the date of grant over the exercise price. The Company
records the fair value of equity instruments issued to nonemployees in
accordance with the provisions of SFAS No. 123.
REVENUE RECOGNITION
The Company has derived substantially all of its revenues from the
Corporate Online Printing Center and from customers they obtained through
acquisition. The Company's range of products include business cards, stationery,
letterhead, and other general office products, as well as color marketing
brochures, sell sheets and similar products. In our Corporate Online Printing
Center and Small Business Printing Center and through our wholly owned
subsidiaries, Image Press and Fine Arts Graphics, the Company recognizes product
revenues when the order is shipped to the customer and when the Company has
fulfilled all of its contractual obligations.
For orders received through the Corporate Online Printing Center service,
the Company charges customers for the printed products they order in accordance
with customer-specific pricing arrangements negotiated with each account. Orders
are fulfilled through a network of vendors and company-owned facilities and
shipped directly to the customers under the ImageX.com brand. Revenues are
recognized on a gross basis when the products are shipped.
F-10
<PAGE> 91
IMAGEX.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For orders received through the Small Business Printing Center service, the
Company utilized a private label supplier and the products are shipped under the
ImageX.com brand. The Company receives a transaction fee based upon a percentage
of the purchase price which is recognized when the products are shipped to the
end customer.
For PrintBid.com bidding services, the Company intends to charge a
transaction fee to each print provider who bids on a job. For PrintBid.com's
commercial paper auctions, the Company intends to charge a transaction fee to
the auction originator. Transaction fees will be recognized in the period the
bid occurs and the Company and its subsidiaries have fulfilled all of its
contractual obligations to the customer.
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, 1997, 1998 and 1999 were approximately $5,300,
$192,000, and $1,249,000, respectively.
COMPREHENSIVE INCOME
The Company has adopted the provisions of Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130") effective
January 1, 1998. SFAS No. 130 requires the disclosure of comprehensive income
and its components in a full-set of general purpose financial statements.
Comprehensive income is the change in equity from transactions and other events
and circumstances other than those resulting from investments by owners and
distributors to owners. SFAS No. 130 had no impact on the Company and,
accordingly, a separate statement of comprehensive income has not been
presented.
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 is computed using the
weighted-average number of common shares outstanding, including the pro forma
effects of the automatic conversion of the Company's mandatorily redeemable
convertible preferred stock into shares
F-11
<PAGE> 92
IMAGEX.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
of the Company's common stock effective upon the closing of the Company's
initial public offering as if such conversion occurred on the date the shares
were originally issued.
The historical basic and diluted net loss per share for 1997 and 1998 have
been revised to exclude the effect of stock subject to repurchase from the
weighted average shares of common stock outstanding. The basic and diluted net
loss per share for 1999 have been computed to exclude such effects.
The amount labelled as previously reported for 1998 and 1999 includes the
effect of the acquisition of PrintBid.com which was accounted for as a pooling
of interests. There was no pooling effect for 1997 as PrintBid.com did not exist
at that time.
A reconciliation of shares used in the calculation of basic and diluted and
pro forma basic and diluted net loss per share follows (in thousands, except
share and per share data):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------------------------
1997 1998 1999
---------- -------- -----------
<S> <C> <C> <C>
Net loss................................................ $ (3,570) $ (8,964) $ (20,835)
Accretion of mandatorily redeemable convertible
preferred stock....................................... -- (221) (84)
---------- -------- -----------
Net loss for common stock............................... $ (3,570) (9,185) (20,919)
==========
Effect of pro forma conversion of securities:
Accretion of mandatorily redeemable convertible
preferred stock.................................... 221 84
-------- -----------
$ (8,964) $ (20,835)
======== ===========
Weighted average shares of common stock outstanding
(shares used in computing basic and diluted net loss
per share)
as previously reported................................ 1,137,260 749,987 6,805,098
========== ======== ===========
as revised............................................ 252,425 749,987 6,805,098
========== ======== ===========
Basic and diluted net loss per share
as previously reported................................ $ (3.14) $ (12.25) $ (3.07)
========== ======== ===========
as revised............................................ $ (14.14) $ (12.25) $ (3.07)
========== ======== ===========
Shares used in computing basic and diluted net loss per
share................................................. 6,805,098
Weighted average effect of pro forma securities
Preferred stock adjustment
Series A, B, C, D, E............................... 5,332,394
-----------
Share used in computing pro forma basic and diluted net
loss per share........................................ 12,137,492
===========
Pro forma basic and diluted net loss per share.......... $ (1.72)
===========
</TABLE>
Dilutive securities include options, warrants, preferred stock as if
converted and restricted stock subject to repurchase. Potentially dilutive
securities totaling 3,530,390, 8,192,063 and
F-12
<PAGE> 93
IMAGEX.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3,603,796 for the years ended December 31, 1997, 1998 and 1999, respectively,
were excluded from historical basic and diluted loss per share because of their
antidilutive effect.
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. For the
year ended December 31, 1998, no single customer accounted for a significant
amount of the Company's revenues and there were no significant accounts
receivable from a single customer. For the year ended December 31, 1999, one
customer accounted for 13% of revenues. 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.
CONVERTIBLE DEBT WITH WARRANTS
Convertible debt with detachable warrants is shown in the financial
statements net of the unamortized debt discount. Upon debt issuance, a discount
is recorded equivalent to the fair value of the warrants. The fair value of the
warrants is determined using the Black Scholes pricing model. The debt discount
is amortized using the effective interest method.
F-13
<PAGE> 94
IMAGEX.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEGMENT INFORMATION
The Company has adopted Statement of Financial Accounting Standards No. 131
("SFAS No. 131") "Disclosures about Segments of an Enterprise and Related
Information," which is effective for fiscal years beginning after December 31,
1997. SFAS No. 131 supersedes SFAS No. 14, "Financial Reporting for Segments of
a Business Enterprise", replacing the "industry segment" approach with the
"management" approach. The management approach designates the internal
organization that is used by management for making operating decisions and
assessing performance as the source of the Company's reportable segments. SFAS
No. 131 also requires disclosures about products and services, geographic areas
and major customers. The Company operates in one segment.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS No. 133"), "Accounting for
Derivative Instruments and Hedging Activities", which establishes accounting and
reporting standards for derivative instruments and hedging activities. SFAS No.
133, which will be effective for the Company for fiscal years and quarters
beginning after June 15, 2000, requires that an entity recognize all derivatives
as either assets or liabilities in the statement of financial position and
measure those instruments at fair value. The Company is assessing the
requirements of SFAS No. 133 and the effects, if any, on the Company's financial
position, results of operations and cash flows.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition", which
provides guidance on the recognition, presentation and disclosure of revenue in
financial statements filed with the SEC. SAB 101 outlines the basic criteria
that must be met to recognize revenue and provides guidance for disclosures
related to revenue recognition policies. Management believes that the impact of
SAB 101 will have no material effect on the financial position or results of
operations of the Company.
2. INVENTORIES
Inventories consisted of the following at December 31, 1999 (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1999
------------
<S> <C>
Paper stock and supplies.................................... $225
Work-in-process............................................. 176
Finished goods.............................................. 252
----
$653
====
</TABLE>
F-14
<PAGE> 95
IMAGEX.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following at December 31, 1998 and
1999 (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1998 1999
------ -------
<S> <C> <C>
Computer hardware........................................... $ 794 $ 3,683
Office furniture and equipment.............................. 300 733
Computer software........................................... 560 2,413
Leasehold improvements...................................... 32 185
Production machinery and equipment.......................... -- 2,076
------ -------
1,686 9,090
Less accumulated depreciation............................... (546) (2,477)
------ -------
Property and equipment, net............................... $1,140 $ 6,613
====== =======
</TABLE>
Depreciation expense for the years ended December 31, 1997, 1998 and 1999
was $121,314, $424,221 and $1,742,538, respectively.
4. ACCRUED LIABILITIES
Accrued liabilities consisted of the following at December 31, 1998 and
1999 (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1998 1999
---- ------
<S> <C> <C>
Accrued payroll and related benefits........................ $ 93 $ 713
Taxes payable............................................... 29 216
Accrued professional services and other..................... 119 465
---- ------
$241 $1,394
==== ======
</TABLE>
F-15
<PAGE> 96
IMAGEX.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. NOTES PAYABLE AND LINE OF CREDIT:
Notes payable consisted of the following at December 31, 1998 (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1998
------------
<S> <C>
Note payable to bank, interest at prime (7.75% at December
31, 1998) plus 2%, monthly principal payments of $25 due
December 1999, and collateralized by substantially all of
the Company's assets...................................... $ 274
Note payable to bank, interest at prime (7.75% at December
31, 1998) plus 2%, due in 36 equal monthly principal
payments, due January 2002, and collateralized by
substantially all of the Company's assets................. 450
Uncollateralized note payable to business advisor, no
interest, due on March 1, 1999............................ 41
Convertible subordinated notes payable to investor, interest
at 8%, interest and principal due in a single payment two
years after issuance...................................... 142
-----
907
Less: current portion....................................... (453)
-----
$ 454
=====
</TABLE>
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 matured on September 18 1999. The
outstanding balance as of December 31, 1998 and 1999 was $96,440 and $0,
respectively. The line of credit was collateralized by substantially all of the
Company's assets. The line of credit was cancelled during 1999.
The convertible note agreements contain a conversion option, which entitles
the holder to convert the unpaid principal and interest into capital stock of
the same issue and at the same price as the first equity financing issue of $2
million or more. The option to convert expires on the maturity date of the note.
The Company may not redeem the notes prior to maturity. The convertible notes
are subordinate to the repayment rights of all other debtors, except other
subordinated note holders. The convertible note agreement converted to equity
securities upon the acquisition of PrintBid.
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 substantially all 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 the Company to maintain certain
financial ratios and net worth amounts. The Company used the proceeds from the
initial public offering to pay off the line of credit and term loan.
F-16
<PAGE> 97
IMAGEX.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
On April 30, 1999, Fine Arts entered into a revolving note with a bank for
$500,000 that is collateralized by substantially all of the assets of Fine Arts.
The note accrues interest at LIBOR plus 2.25% for drawn amounts and matures on
April 28, 2000. The note includes various restrictive covenants, which among
other things, require the Company to maintain certain financial ratios and net
worth amounts. The Company used the proceeds from the initial public offering to
pay off the line of credit and term loan.
6. FEDERAL INCOME TAXES:
At December 31, 1999, the Company had accumulated net operating loss
carryforwards for tax purposes of approximately $31,241,000, which will expire
beginning in 2011 through 2019. 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,
--------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Federal income tax benefit at statutory rate............... (34)% (34)% (34)%
Change in valuation allowance.............................. 34% 34% 32%
Amortization of deferred compensation...................... -- -- 2%
--- --- ---
-- -- --
=== === ===
</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 purposes. Significant components of
the Company's deferred tax assets and liabilities are approximately as follows
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
------- --------
<S> <C> <C>
Deferred income tax assets:
Tax loss carryforwards................................... $ 4,030 $ 10,622
Accrued compensation and benefits........................ 82 152
Provision for doubtful accounts.......................... 5 77
Depreciation............................................. 123 177
Other.................................................... 15 14
------- --------
4,255 11,042
Deferred income tax liabilities:
Valuation allowance...................................... (4,255) (11,042)
------- --------
Net deferred tax assets.................................. $ -- $ --
======= ========
</TABLE>
A full valuation allowance has been recorded at December 31, 1998 and 1999
based on management's determination that the recognition criteria for
realization of the net deferred tax assets has not been met.
F-17
<PAGE> 98
IMAGEX.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. 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 1997, 1998 and 1999, the Company paid Parallel approximately
$152,000, $521,000 and $957,000 respectively, for services performed on behalf
of the Company.
As of December 31, 1998, the Company had a payable to Parallel of $21,088.
As of December 31, 1999, the Company had no payables to Parallel.
In August 1999, Parallel was sold to an unrelated party.
In August 1999, PrintBid issued Series A convertible notes totaling $50,000
with 12,500 detachable warrants to a shareholder in exchange for online
advertising. PrintBid also issued Series A convertible notes totaling $48,000
with 12,000 detachable warrants to two shareholders during May and August 1999
in exchange for cash. These notes, totaling $146,000 plus accrued interest, are
due two years after issuance, unless converted to stock in accordance with the
Series A subordinated convertible note agreement. The convertible notes
converted to equity securities upon the acquisition of PrintBid.
8. 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 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 1997, 1998 or 1999.
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 was approved by
the Company's shareholders in August 1999.
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
F-18
<PAGE> 99
IMAGEX.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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. The increase was approved
by the Company's shareholders in August 1999. 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, $378,507 and $2,284,000 has been recorded for
stock options granted during the years ended December 31, 1997, 1998 and 1999,
respectively, 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.
Option activity for the years ended December 31, 1997, 1998 and 1999 is as
follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
SHARES EXERCISE 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............................................ 1,189,796 7.51
Exercised.......................................... (164,775) 0.39
Canceled........................................... (49,625) 1.41
---------
Options outstanding, December 31, 1999............. 1,625,751 5.57
Options exercisable at December 31, 1999........... 352,585
---------
Stock awards and options available for grant at
December 31, 1999................................ 682,668
</TABLE>
F-19
<PAGE> 100
IMAGEX.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes information about options outstanding at
December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ---------------------------------------------------------------- --------------------------
WEIGHTED AVERAGE
REMAINING WEIGHTED WEIGHTED
RANGE OF NUMBER CONTRACTUAL LIFE AVERAGE NUMBER AVERAGE
EXERCISE PRICES OF SHARES (IN YEARS) EXERCISE PRICE OF SHARES EXERCISE PRICE
--------------- --------- ---------------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C>
$ 0.040 - $ 0.040 196,027 9.57 $ 0.04 90,623 $ 0.04
$ 0.200 - $ 0.300 390,835 7.84 $ 0.28 159,670 $ 0.28
$ 0.400 - $ 0.400 20,220 8.84 $ 0.40 5,180 $ 0.40
$ 0.650 - $ 0.660 93,687 7.47 $ 0.65 36,817 $ 0.65
$ 1.200 - $ 1.200 74,628 7.55 $ 1.20 32,733 $ 1.20
$ 2.400 - $ 3.600 30,750 8.74 $ 3.21 2,062 $ 3.60
$ 4.200 - $ 6.000 303,623 9.30 $ 5.85 12,500 $ 6.00
$ 7.000 - $10.190 322,870 9.59 $ 7.96 500 $10.00
$12.000 - $17.000 58,000 9.70 $14.18 0 $ 0.00
$25.940 - $25.940 135,111 9.96 $25.94 12,500 $25.94
- ----------------- --------- -------
$ 0.040 - $25.940 1,625,751 8.91 $ 5.57 352,585 $ 1.49
================= ========= =======
</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>
1998 1999
--------------- ---------------
<S> <C> <C>
Risk free interest rate...................... 4.60% to 5.65% 5.58%
Expected lives............................... 5 to 10 years 5 to 10 years
Expected dividends........................... $0 $0
Volatility................................... -- 88%
</TABLE>
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,
--------------
1998 1999
----- -----
<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..................................................... $2.04 $7.30
===== =====
Weighted average fair value of options granted with exercise
price equal to the fair value of the stock on the date of
grant..................................................... $ -- $7.08
===== =====
Weighted average exercise price of options granted with
exercise price less than the fair value of the stock on
the date of grant......................................... $0.42 $0.24
===== =====
Weighted average exercise price of options granted with
exercise price equal to the fair value of the stock on the
date of grant............................................. $ -- $9.86
===== =====
</TABLE>
F-20
<PAGE> 101
IMAGEX.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table presents net loss and per share amounts as if the
Company accounted for compensation expense related to stock options under the
fair value method prescribed by SFAS No. 123 (in thousands, except per share
data):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------
1998 1999
------- --------
<S> <C> <C>
Net loss -- as reported..................................... $(8,964) $(20,835)
======= ========
Net loss -- pro forma....................................... $(9,031) $(22,046)
======= ========
Loss per share -- as reported............................... $(12.25) $ (3.07)
======= ========
Loss per share -- pro forma................................. $(12.34) $ (3.25)
======= ========
</TABLE>
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period.
9. 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. During January 1999, the Company issued an
additional 401,257 shares of Series D preferred stock for $802,514. During April
1999, the Company issued 11,904,761 shares of Series E preferred stock for
$25,000,000. 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. 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 either (a) sale of the Company's common stock in a public
offering in which the offering price of the common stock is not less than $10.00
per share and the gross proceeds are at least $15,000,000, as described in the
Company's Restated Articles of Incorporation or (b) upon the election by a
majority of the holders of Preferred Stock to convert their shares of Preferred
Stock into common stock. 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 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.
F-21
<PAGE> 102
IMAGEX.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At December 31, 1999, the following warrants to purchase mandatorily
redeemable convertible preferred stock were outstanding:
<TABLE>
<CAPTION>
PRICE PER SHARE,
SUBJECT TO
NUMBER OF SHARES ADJUSTMENT EXPIRATION DATE
---------------- ---------------- ---------------
<S> <C> <C> <C>
Series D Preferred Stock............. 108,904 $2.00 October 1, 2005
Series E Preferred Stock............. 85,535 $2.10 April 8, 2004
</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.
All warrants were exercised during 1999.
In connection with the 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. During 1999, 29,346 warrants were exercised.
In connection with the issuance of Series E preferred stock, the Company
issued warrants to its investors to purchase 85,535 shares of Series E preferred
stock. These warrants are exercisable at $2.10. The warrants were ascribed a
value of $129,645.
10. 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.
F-22
<PAGE> 103
IMAGEX.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 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 8),
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 8). At December 31, 1999,
the notes receivable from shareholders totaled $168,000 and are included in
shareholders' equity (deficit) on the accompanying balance sheet.
In June of 1998, upon formation of PrintBid, the Founders of PrintBid
received 302,650 of ImageX.com's shares in exchange for certain technology and
know-how. Of the shares issued, 151,325 were subject to repurchase for up to
three years. These shares have been recorded at fair value at the date of
issuance and the amount associated with the shares subject to repurchase has
been deferred and is being amortized over the restriction period.
In June of 1998, 75,662 of ImageX.com's restricted shares were issued to
outside advisors of PrintBid. The Company may repurchase these shares at par
value (.01) if the advisory relationship is terminated during the restriction
period. Compensation costs associated with these shares based on the fair value
at the date of grant, are being recognized as expense over the restriction
period.
F-23
<PAGE> 104
IMAGEX.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 became
effective on August 18, 1999. 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.
During 1996, the Company issued 150,000 shares of common stock of $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.
On August 26, 1999, the Company issued 3,000,000 shares of its common stock
at an initial public offering price of $7.00 per share. An additional 450,000
shares were issued upon the exercise of the underwriters' overallotment option.
The net proceeds to the Company from the offering, net of offering costs of
approximately $3.1 million were approximately $21.0 million. Concurrent with the
initial public offering, each outstanding share of the Company's convertible
preferred stock was automatically converted into common stock.
In December 1999, the Board of Directors authorized management of the
Company to file a Registration Statement with the Securities and Exchange
Commission covering the proposed sale of additional shares of its common stock
to the public.
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 anti-dilution
protection and proportional adjustments in the event of stock splits and similar
events.
F-24
<PAGE> 105
IMAGEX.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
WARRANTS
At December 31, 1999, the following warrants to purchase common stock were
outstanding:
<TABLE>
<CAPTION>
PRICE PER SHARE,
SUBJECT TO
NUMBER OF SHARES ADJUSTMENT EXPIRATION DATE
- ---------------- ---------------- ---------------------------
<C> <C> <S>
744,400 $3.00 January 8, 2005
290,000 $7.50 January 8, 2005
21,500 $6.00 April 21, 2004
48,165 $4.20 April 21, 2004
75,000 $4.00 April 13, 2006
67,446 $4.36 May 3, 2008-October 9, 2009
---------
1,246,511
</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 entered into an agreement with the Company
to perform certain management services for the Company.
11. COMMITMENTS:
OPERATING LEASE
The Company leases its facilities under noncancelable operating leases
which expire between February 28, 2001 and December 31, 2004. The Company pays
taxes, insurance, normal maintenance and certain other operating expenses. At
December 31, 1999 the approximate future rental payments due under these leases
for the remainder of the lease terms were as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
2000........................................................ $ 3,266
2001........................................................ 3,229
2002........................................................ 2,711
2003........................................................ 1,381
2004........................................................ 1,235
-------
$11,822
=======
</TABLE>
Total rent expense incurred under operating leases for the years ended
December 31, 1997, 1998 and 1999 was approximately $158,000, $333,000 and
$793,000, respectively.
F-25
<PAGE> 106
IMAGEX.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. CASH FLOW INFORMATION:
Disclosure of cash flow information is summarized below for the years ended
December 31, 1997, 1998 and 1999 (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------------------
1997 1998 1999
---- ---------- -------
<S> <C> <C> <C>
Cash paid during the year for interest...................... $12 $ 59 $ 160
Non-cash financing activities:
Unearned compensation..................................... 2,335 2,841
Issuance of common stock for note receivable.............. 30 200
Value ascribed to common stock warrants issued in
conjunction with sale of Series C Preferred Stock...... 1,038
Value ascribed to Series C Preferred Stock warrants issued
in connection with bridge financing.................... 30
Value ascribed to Series D Preferred Stock warrants issued
in conjunction with sale of Series D Preferred Stock... 117
Value ascribed to Series E Preferred Stock warrants issued
in conjunction with sale of Series E Preferred Stock... 130
Accretion on Series C Preferred Stock..................... 213 64
Accretion on Series D Preferred Stock..................... 9 8
Accretion on Series E Preferred Stock 12
Acquisition of Fine Arts (see Note 13):
Fair value of assets acquired.......................... 4,985
Issuance of common stock............................... 375
Assumption of liabilities.............................. 1,156
Assumption of acquisition costs........................ 185
Acquisition of Image Press (see Note 13):
Fair value of assets acquired.......................... 3,120
Issuance of common stock............................... 300
Assumption of liabilities.............................. 565
Conversion of Series A, B, C, D and E
Preferred Stock to common stock in connection with the
initial public offering............................... 35,897
Issuance of common stock warrant related to convertible
debt................................................... 35
Convertible debt issued in exchange for services to be
performed.............................................. 25
Issuance of common stock.................................. 7
Reclassification of preferred stock warrants from
temporary equity....................................... 147
Conversion of debt to equity securities................... 1,069
</TABLE>
13. ACQUISITIONS:
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 was
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 was allocated to
the net assets acquired, based upon their respective fair market values. The
excess of the purchase price over the fair market value of the assets acquired
of $1,356,000 has been allocated to goodwill and will be amortized over 10 years
using the straight line method.
F-26
<PAGE> 107
IMAGEX.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In connection with the acquisition, liabilities were assumed as follows (in
thousands):
<TABLE>
<S> <C>
Fair value of assets acquired............................... $ 4,985
Cash paid................................................... (4,625)
Common stock issued......................................... (375)
Goodwill.................................................... 1,356
Acquisition costs assumed................................... (185)
-------
Liabilities assumed......................................... $ 1,156
=======
</TABLE>
On September 21, 1999, the Company acquired all of the common stock of
Image Press, Inc. ("Image Press"), a privately owned California corporation.
Image Press is a broker of printed paper products. The acquisition will be
accounted for using the purchase method. The aggregate purchase price of
$3,120,000 consists of $300,000 of common stock for 16,394 shares issued to the
seller and $2,820,000 of cash payment. The aggregate purchase price was
allocated to the net assets acquired, based upon their respective fair market
values. The excess of the purchase price over the fair market value of the
assets acquired of $914,000 has been allocated to goodwill and will be amortized
over 10 years using the straight line method.
On December 9, 1999, the Company merged with PrintBid.com, Inc.
("PrintBid"), a privately owned Oregon corporation. PrintBid is an
Internet-based provider of commercial printing services. The acquisition was
accounted for using the pooling-of-interest method. The Company issued 568,778
shares of common stock to the shareholders of PrintBid in conjunction with this
transaction.
The following presents the separate results, in each of the periods
presented since the inception of PrintBid in 1998, of the Company and PrintBid
(in thousands):
<TABLE>
<CAPTION>
THE COMPANY PRINTBID TOTAL
----------- -------- --------
<S> <C> <C> <C>
For the year ended December 31, 1998
Revenues.......................................... $ 968 $ -- $ 968
======== ======= ========
Net loss.......................................... $ (8,600) $ (364) $ (8,964)
======== ======= ========
For the year ended December 31, 1999
Revenues.......................................... $ 11,493 $ 6 $ 11,499
======== ======= ========
Net loss.......................................... $(17,503) $(3,332) $(20,835)
======== ======= ========
</TABLE>
The following summarizes the unaudited pro forma results of operations, on
a combined basis, as if the Company's acquisition of Fine Arts and Image Press
occurred as of the beginning of each of the periods presented, after including
the impact of certain adjustments such as amortization of goodwill (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1999
----------------- -----------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Revenues.................................... $17,983 $ 19,346
======= ========
Pro forma net loss.......................... $(8,919) $(21,021)
======= ========
Pro forma basic and diluted net loss per
share..................................... $ (9.24) $ (3.13)
======= ========
</TABLE>
F-27
<PAGE> 108
IMAGEX.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
14. SUBSEQUENT EVENT
COMMITMENTS
On January 5, 2000, the Company entered into a strategic alliance with an
internet company whereby the Company is committed to paying $100,000 per month
for a period of one year from the date of signing for promotional links and
shared advertising revenues.
F-28
<PAGE> 109
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 each
of the two years in the period ended December 31, 1998 in conformity with
accounting principles generally accepted in the United States. 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
auditing standards generally accepted in the United States, 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-29
<PAGE> 110
FINE ARTS ENGRAVERS COMPANY, INC.
(D.B.A. FINE ARTS GRAPHICS)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- MARCH 31,
1997 1998 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 these financial statements.
F-30
<PAGE> 111
FINE ARTS ENGRAVERS COMPANY, INC.
(D.B.A. FINE ARTS GRAPHICS)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED 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 these financial statements.
F-31
<PAGE> 112
FINE ARTS ENGRAVERS COMPANY, INC.
(D.B.A. FINE ARTS GRAPHICS)
STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
---------------- PAID-IN ACCUMULATED SHAREHOLDER'S
SHARES AMOUNT CAPITAL DEFICIT EQUITY (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 these financial statements.
F-32
<PAGE> 113
FINE ARTS ENGRAVERS COMPANY, INC.
(D.B.A. FINE ARTS GRAPHICS)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR YEARS ENDED THREE MONTHS ENDED
DECEMBER 31, 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 these financial statements.
F-33
<PAGE> 114
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>
F-34
<PAGE> 115
FINE ARTS ENGRAVERS COMPANY, INC.
(D.B.A. FINE ARTS GRAPHICS)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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.
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-35
<PAGE> 116
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
F-36
<PAGE> 117
FINE ARTS ENGRAVERS COMPANY, INC.
(D.B.A. FINE ARTS GRAPHICS)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 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>
F-37
<PAGE> 118
FINE ARTS ENGRAVERS COMPANY, INC.
(D.B.A. FINE ARTS GRAPHICS)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 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 EQUIPMENT
BUILDING 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.
F-38
<PAGE> 119
FINE ARTS ENGRAVERS COMPANY, INC.
(D.B.A. FINE ARTS GRAPHICS)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 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-39
<PAGE> 120
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 shareholders' equity and of cash flows present fairly,
in all material respects, the financial position of Image Press, Inc. (the
"Company") at December 31, 1998, and the results of its operations and its cash
flows for each of the two years in the period ended December 31, 1998 in
conformity with accounting principles generally accepted in the United States.
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
auditing standards generally accepted in the United States, 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
San Francisco, California
November 1, 1999
F-40
<PAGE> 121
IMAGE PRESS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 652 $ 76,889
Accounts receivable -- trade.............................. 820,313 1,055,887
Other receivables......................................... 3,829 1,397
Inventories............................................... 66,770 37,781
Prepaid expenses.......................................... 21,965 25,718
---------- ----------
Total current assets.............................. 913,529 1,197,672
Property and equipment, net................................. 83,783 80,426
Other assets................................................ 86,500 3,500
---------- ----------
Total assets...................................... $1,083,812 $1,281,598
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term bank borrowings................................ $ 110,000
Notes payable to shareholders............................. $ 202,094 61,086
Trade accounts payable.................................... 228,315 368,548
Accrued liabilities....................................... 210,385 213,167
---------- ----------
Total current liabilities......................... 640,794 752,801
---------- ----------
Commitments
Shareholders' equity:
Common stock, no par value, 2,500 shares authorized,
200 shares issued and outstanding...................... 20,000 20,000
Retained earnings......................................... 423,018 508,797
---------- ----------
Total shareholders' equity........................ 443,018 528,797
---------- ----------
Total liabilities and shareholders' equity........ $1,083,812 $1,281,598
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-41
<PAGE> 122
IMAGE PRESS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, SIX-MONTHS ENDED JUNE 30,
------------------------ --------------------------
1997 1998 1998 1999
---------- ---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues............................. $4,878,778 $6,555,393 $3,104,145 $3,806,609
Cost of sales........................ 3,621,172 4,323,649 1,999,172 2,686,850
---------- ---------- ---------- ----------
Gross profit....................... 1,257,606 2,231,744 1,104,973 1,119,759
---------- ---------- ---------- ----------
Operating expenses:
General and administrative......... 586,227 771,745 345,115 387,207
Selling and marketing.............. 695,471 897,645 464,625 455,847
---------- ---------- ---------- ----------
1,281,698 1,669,390 809,740 843,054
---------- ---------- ---------- ----------
Income (loss) from operations........ (24,092) 562,354 295,233 276,705
---------- ---------- ---------- ----------
Other income (expense):
Interest expense................... (38,243) (25,118) (13,507) (9,355)
Other income (expense), net........ 8,068 8,362 4,958 1,958
---------- ---------- ---------- ----------
(30,175) (16,756) (8,549) (7,397)
---------- ---------- ---------- ----------
Net income (loss).................... $ (54,267) $ 545,598 $ 286,684 $ 269,308
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-42
<PAGE> 123
IMAGE PRESS, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK SHAREHOLDERS'
----------------- RETAINED EQUITY
SHARES AMOUNT EARNINGS (DEFICIT)
------ ------- --------- -------------
<S> <C> <C> <C> <C>
Balance, December 31, 1996................. 200 $20,000 $ (18,313) $ 1,687
Net loss................................. (54,267) (54,267)
--- ------- --------- ---------
Balance, December 31, 1997................. 200 20,000 (72,580) (52,580)
Net income............................... 545,598 545,598
Distributions............................ (50,000) (50,000)
--- ------- --------- ---------
Balance, December 31, 1998................. 200 20,000 423,018 443,018
Net income (unaudited)................... 269,308 269,308
Distributions (unaudited)................ (183,529) (183,529)
--- ------- --------- ---------
Balance, June 30, 1999 (unaudited)......... 200 $20,000 $ 508,797 $ 528,797
=== ======= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-43
<PAGE> 124
IMAGE PRESS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED SIX-MONTHS ENDED
DECEMBER 31, JUNE 30,
--------------------- ----------------------
1997 1998 1998 1999
-------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flow from operating activities:
Net income (loss)..................... $(54,267) $ 545,598 $ 286,684 $ 269,308
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Depreciation....................... 26,289 42,248 21,443 8,295
(Increase) decrease in:
Accounts receivable -- trade..... 368,373 (586,344) (506,693) (235,574)
Other receivables................ 3,096 (3,829) 2,432
Inventories...................... 13,485 (45,305) (32,514) 28,989
Prepaid expenses................. (185) (4,153) (10,098) (3,753)
Increase (decrease) in:
Trade accounts payable........... (63,425) 36,664 142,567 140,233
Accrued liabilities.............. (32,497) (12,475) 114,746 2,782
-------- --------- --------- ---------
Net cash provided by (used in)
operating activities....... 260,869 (27,596) 16,135 212,712
-------- --------- --------- ---------
Cash flows from investing activities:
Purchase of property and equipment.... (38,615) (45,593) (3,000) (4,938)
Purchase of investments............... (72,000)
-------- --------- --------- ---------
Net cash used in investing
activities................. (38,615) (117,593) (3,000) (4,938)
-------- --------- --------- ---------
Cash flows from financing activities:
Net proceeds from (repayments of)
short-term borrowings.............. (18,853) 110,000
Repayment of notes payable to
shareholders....................... (72,927) (102,696) (55,323) (141,008)
Distributions to shareholders......... (50,000) (100,529)
-------- --------- --------- ---------
Net cash used in financing
activities......................... (91,780) (152,696) (55,323) (131,537)
-------- --------- --------- ---------
Net increase (decrease) in cash....... 130,474 (297,885) (42,188) 76,237
Cash at beginning of period............. 168,063 298,537 298,537 652
-------- --------- --------- ---------
Cash at end of period................... $298,537 $ 652 $ 256,349 $ 76,889
======== ========= ========= =========
Supplemental disclosures of cash flow
information:
Cash paid during the year for:
Interest.............................. $ 38,243 $ 25,118 $ 13,507 $ 9,355
======== ========= ========= =========
Noncash investing and financing
activities:
Distribution of other assets to
shareholders....................... $ 83,000
=========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-44
<PAGE> 125
IMAGE PRESS, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Image Press, Inc. (the Company) is a California corporation formed in
August 1986. The Company is a broker of printed paper products. Customers are
located in the Western United States, primarily in California.
On September 21, 1999, 100% of the Company's common stock was sold to
ImageX.com, Inc. (see Note 8).
The unaudited interim financial statements as of June 30, 1999 and for the
six-month periods ended June 30, 1998 and 1999 have been prepared in accordance
with generally accepted accounting principles for interim financial information.
Accordingly, they do not include all 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 six-month period ended June 30, 1999 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1999.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and highly liquid temporary
investments with original maturity dates of three months or less. There were no
cash equivalents at December 31, 1998 and June 30, 1999 (unaudited).
Inventories
Inventories include all third-party-direct costs incurred relating to
undelivered products.
Property and Equipment
Property and equipment are stated at cost and are depreciated using a
diminishing balance 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>
Vehicles................................................... 5 years
Furniture and fixtures..................................... 7 years
Computer equipment......................................... 5 years
Office equipment........................................... 5 years
</TABLE>
F-45
<PAGE> 126
IMAGE PRESS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Revenue Recognition
The Company recognizes revenue upon shipment of product.
Advertising
Advertising and promotion costs are expensed as incurred and totaled
approximately $1,535 and $1,541 for the years ended December 31, 1997 and 1998,
respectively.
Income Taxes
At January 1, 1996, the Company, with the consent of its shareholders, has
elected to be taxed under the provisions of Subchapter S of the Internal Revenue
Code and generally does not pay Federal and State corporation 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.
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
The Company reviews the credit histories of potential customers prior to
extending credit and maintains allowances for potential credit losses. No
allowances were recorded at December 31, 1998 and June 30, 1999 (unaudited)
based on management's assessment of credit losses. Sales to the largest customer
were 16% and 11% for the years ended December 31, 1997 and 1998, respectively.
Of the accounts receivable balance, this customer represented 10% of the balance
at December 31, 1998.
F-46
<PAGE> 127
IMAGE PRESS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999
------------ -----------
(UNAUDITED)
<S> <C> <C>
Vehicles............................................. $ 72,424 $ 72,424
Furniture and fixtures............................... 59,189 61,555
Computer equipment................................... 186,620 189,192
Office equipment..................................... 46,657 46,657
--------- ---------
364,890 369,828
Less accumulated depreciation........................ (281,107) (289,402)
--------- ---------
$ 83,783 $ 80,426
========= =========
</TABLE>
As of December 31, 1998, approximately $198,186 of fully depreciated
property and equipment remained in service. Depreciation expense was $26,289,
$42,248, $21,443 and $8,295 for the years ended December 31, 1997 and 1998 and
the six-month periods ended June 30, 1998 and 1999 (unaudited), respectively.
3. OTHER ASSETS
Included in other assets at December 31, 1998 is an investment in a
nonmarketable equity security of $72,000 and a club membership of $11,000. These
assets are carried at cost. No income or loss has been recognized to date on
these assets. These assets were distributed to the shareholders during the
six-month period ended June 30, 1999 (unaudited) (Note 8).
4. SHORT TERM BANK BORROWINGS
On May 27, 1997, the Company entered into a $250,000 bank line of credit
with Union Bank of California. As of December 31, 1998, $250,000 was available
to be drawn under the line of credit. The line, which is guaranteed by the
Company's shareholders, accrues interest at 1.5% above the bank's reference rate
(10% at December 31, 1998) and is collateralized by accounts receivable,
inventories and equipment. The line of credit expires on November 30, 1999.
5. NOTES PAYABLE TO SHAREHOLDERS
Notes payable to shareholders are uncollateralized, bearing interest at 10%
per annum with interest payable quarterly. These notes were repaid in full
following the six-month period ended June 30, 1999 (unaudited) (Note 8).
Interest expense on the notes was $37,146, $24,526, $13,263 and $7,628 for the
years ended December 31, 1997 and 1998 and the six-month periods ended June 30,
1998 and 1999 (unaudited), respectively.
F-47
<PAGE> 128
IMAGE PRESS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. LEASE OBLIGATIONS
The Company leases its premises under an operating lease. In addition to
the base rents, the Company is also responsible for property taxes and related
insurance expenses. The facility lease is noncancelable and expires in July
2001. Total lease expense under this agreement was $58,625, $71,881, $37,514 and
$37,036 for the years ended December 31, 1997 and 1998, and the six-month
periods ended June 30, 1998 and 1999 (unaudited), respectively.
The Company is also obligated under terms of noncancelable operating leases
for equipment, expiring in January 2001. Total lease expense under these leases
was $2,200 for the years ended December 31, 1997 and 1998, respectively.
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>
PREMISES LEASE EQUIPMENT LEASES
-------------- ----------------
<S> <C> <C>
1999........................................... $ 73,860 $2,200
2000........................................... 73,860 2,200
2001........................................... 43,085 183
-------- ------
$190,805 $4,583
======== ======
</TABLE>
7. EMPLOYEE BENEFIT PLAN
Effective January 1, 1993, 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 25% of
their annual compensation or $30,000 under the Plan. Employer contributions are
made to the Plan at the discretion of the Company's Board of Directors up to a
maximum of 15% of each employee's eligible salary. Contributions made by the
Company totaled $41,500 and $46,037 for the years ended December 31, 1997 and
1998, respectively. 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 September 1999 (unaudited) following the sale of the Company (Note 8),
the Plan was terminated without further liability to the Company. No employer
contributions were made in 1999 and the plan funds may be transferred into the
ImageX.com plan beginning January 1, 2000, at the discretion of each member of
the Plan.
8. SALE OF THE COMPANY (UNAUDITED)
On September 21, 1999, the shareholders sold 100% of the Company's common
stock to ImageX.com, Inc. Prior to the sale, the Company distributed cash
totaling $77,611 to the shareholders. In addition, the notes payable to
shareholders were repaid in full.
F-48
<PAGE> 129
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Shareholders of
ImageX.com, Inc.
In our opinion, the accompanying balance sheet and the related statements
of operations, shareholders' equity (deficit) and cash flows present fairly, in
all material respects, the financial position of PrintBid.com, Inc. (a company
in the development stage) (the "Company"), at December 31, 1998 and the results
of its operations and its cash flows for the period from inception (June 10,
1998) to December 31, 1998 in conformity with accounting principles generally
accepted in the United States. 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 audit. We conducted our audit of these
statements in accordance with auditing standards generally accepted in the
United States 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
audit provides a reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
PORTLAND, OREGON
December 30, 1999
F-49
<PAGE> 130
PRINTBID.COM, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents................................. $ 84,038 $ 171,521
Prepaid expenses.......................................... 57,678 90,524
-------- -----------
Total current assets.............................. 141,716 262,045
Property and equipment, net............................... 8,124 100,231
-------- -----------
$149,840 $ 362,276
======== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities
Accounts payable.......................................... $ 15,994 $ 131,408
Accrued liabilities....................................... 17,433
-------- -----------
Total current liabilities......................... 15,994 148,841
Other liabilities
Accrued interest.......................................... 1,200 24,607
Subordinated Convertible Notes, net of discount of $32,777
and $480,279 (unaudited), respectively................. 142,223 509,484
-------- -----------
Total liabilities................................. 159,417 682,932
-------- -----------
Commitments
Shareholders' equity (deficit)
Preferred stock, $.01 par value: 5,000,000 shares
authorized: no shares issued and outstanding...........
Common stock, $.01 par value: 10,000,000 shares
authorized: 2,065,000 and 1,898,334 (unaudited) shares
issued and outstanding, respectively................... 20,650 18,983
Additional paid-in capital................................ 338,934 3,823,267
Unearned compensation..................................... (5,133) (1,917,521)
Deficit accumulated during the development stage.......... (364,028) (2,245,385)
-------- -----------
Total shareholders' equity (deficit).............. (9,577) (320,656)
-------- -----------
Total liabilities and shareholders' equity
(deficit)...................................... $149,840 $ 362,276
======== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-50
<PAGE> 131
PRINTBID.COM, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
INCEPTION INCEPTION NINE MONTH
(JUNE 10, (JUNE 10, PERIOD
1998) TO 1998) TO ENDED
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30, CUMULATIVE
1998 1998 1999 AMOUNTS(1)
------------ ------------- ------------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Operating Expenses
General and administrative........ $ 136,362 $ 74,918 $ 811,255 $ 947,617
Sales and marketing............... 24,549 21,834 188,892 213,441
Product development............... 198,735 196,140 204,957 403,692
Amortization of unearned
compensation................... 1,467 917 595,837 597,304
--------- --------- ----------- -----------
Loss from operations........... (361,113) (293,809) (1,800,941) (2,162,054)
--------- --------- ----------- -----------
Other income (expense)
Other income...................... 1,998 1,998
Interest income................... 89 89
Interest expense.................. (3,004) (82,414) (85,418)
--------- --------- ----------- -----------
Total other income (expense)... (2,915) (80,416) (83,331)
--------- --------- ----------- -----------
Net loss............................ $(364,028) $(293,809) $(1,881,357) $(2,245,385)
========= ========= =========== ===========
</TABLE>
- -------------------------
(1) From June 10, 1998 (date of inception) through September 30, 1999.
The accompanying notes are an integral part of these financial statements.
F-51
<PAGE> 132
PRINTBID.COM, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
COMMON STOCK ADDITIONAL DURING THE
------------------- PAID-IN UNEARNED DEVELOPMENT
SHARES AMOUNT CAPITAL COMPENSATION STAGE TOTAL
--------- ------- ---------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Issuance of common stock to
founder......................... 660,000 $ 6,600 $ 6,600
Unearned compensation related to
issuance of common stock to
founder......................... 660,000 6,600 $ (6,600)
Amortization of unearned
compensation.................... 1,467 1,467
Issuance of common stock, subject
to repurchase, to advisors...... 330,000 3,300 $ 52,553 55,853
Issuance of common stock in
exchange for services........... 415,000 4,150 251,800 255,950
Issuance of common stock warrants
related to Series A convertible
debt............................ 34,581 34,581
Net loss.......................... $ (364,028) (364,028)
--------- ------- ---------- ----------- ----------- -----------
Balances at December 31, 1998..... 2,065,000 20,650 338,934 (5,133) (364,028) (9,577)
Repurchase of common stock
(unaudited)..................... (166,666) (1,667) (1,667)
Compensation expense related to
issuance of common stock options
to consultants (unaudited)...... 338,820 338,820
Issuance of common stock warrants
in exchange for services
(unaudited)..................... 32,854 32,854
Issuance of common stock warrants
related to Series A convertible
notes (unaudited)............... 516,746 516,746
Unearned compensation related to
issuance of common stock options
to employees (unaudited)........ 2,508,225 (2,508,225)
Amortization of unearned
compensation (unaudited)........ 595,837 595,837
Compensation related to common
stock, subject to repurchase,
issued to advisors
(unaudited)..................... 87,688 87,688
Net loss (unaudited).............. (1,881,357) (1,881,357)
--------- ------- ---------- ----------- ----------- -----------
Balances at September 30, 1999
(unaudited)..................... 1,898,334 $18,983 $3,823,267 $(1,917,521) $(2,245,385) $ (320,656)
========= ======= ========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-52
<PAGE> 133
PRINTBID.COM, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
INCEPTION INCEPTION
(JUNE 10, (JUNE 10, NINE MONTH
1998) TO 1998) TO PERIOD ENDED
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30, CUMULATIVE
1998 1998 1999 AMOUNTS(1)
------------ ------------- ------------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities
Net loss.................................. $(364,028) $(293,809) $(1,881,357) $(2,245,385)
Adjustments to reconcile net loss to net
cash used in operating activities
Depreciation and amortization......... 3,244 3,244
Amortization of discount on
convertible notes.................. 1,804 59,007 60,811
Non-cash compensation expense......... 60,620 33,532 1,022,345 1,082,965
Services exchanged for stock.......... 251,800 249,713 251,800
Services exchanged for convertible
notes.............................. 117,000 117,000
Services exchanged for common stock
warrants........................... 32,854 32,854
Change in operating assets and
liabilities........................ --
Prepaid expenses................... (32,678) (32,846) (65,524)
Accounts payable................... 15,994 6,602 115,414 131,408
Accrued liabilities................ 17,433 17,433
Accrued interest................... 1,200 23,407 24,607
--------- --------- ----------- -----------
Net cash used in operating
activities....................... (65,288) (3,962) (523,499) (588,787)
--------- --------- ----------- -----------
Cash flows from investing activities
Purchase of property and equipment........ (8,124) (95,351) (103,475)
--------- --------- ----------- -----------
Cash flows from financing activities
Proceeds from issuance of common stock.... 7,450 7,450 7,450
Proceeds from issuance of subordinated
convertible notes....................... 150,000 708,000 858,000
Repurchase of common stock................ (1,667) (1,667)
--------- --------- ----------- -----------
Net cash provided by financing
activities....................... 157,450 7,450 706,333 863,783
--------- --------- ----------- -----------
Net increase in cash and cash equivalents... 84,038 3,488 87,483 171,521
Cash and cash equivalents at beginning of
period.................................... 84,038 84,038
--------- --------- ----------- -----------
Cash and cash equivalents at end of
period.................................... $ 84,038 $ 3,488 $ 171,521 $ 255,559
========= ========= =========== ===========
Supplemental disclosures of cash flow
information:
Issuance of common stock warrants issued
in conjunction with convertible notes... $ 34,581 $ 516,746 $ 551,327
========= =========== ===========
Convertible notes issued in exchange for
services to be performed................ $ 25,000 $ 25,000
========= ===========
Deferred compensation..................... $ 6,600 $ 6,600 $ 2,508,225 $ 2,514,825
========= ========= =========== ===========
Issuance of common stock.................. $ 6,600 $ 6,600 $ 6,600
========= ========= ===========
Issuance of common stock warrants for
services to be performed................ $ 32,584 $ 32,584
=========== ===========
</TABLE>
- -------------------------
(1) From June 30, 1998 (date of inception) through September 30, 1999.
The accompanying notes are an integral part of these financial statements.
F-53
<PAGE> 134
PRINTBID.COM, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
PrintBid.com, Inc. (the Company) was incorporated in the State of Oregon on
June 10, 1998. The Company is developing an Internet-based site for the
business-to-business market in which businesses seeking printing services are
matched to printing service providers. In addition, the Company is developing an
auction site on the Internet for sales of paper and other printing supplies. The
business users will pay fees for such services and products. Through September
30, 1999, the Company has been in the development stage and is engaged primarily
in site development, recruiting personnel and raising capital.
The unaudited interim financial statements as of September 30, 1999 and for
the period from inception (June 10, 1998) to September 30, 1998 and the
nine-month period ended September 30, 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 nine-month period ended September 30, 1999 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1999.
On December 9, 1999, the Company merged with ImageX.com, Inc. (See note 8).
CASH AND CASH EQUIVALENTS
The Company generally considers all highly liquid debt instruments
purchased with original or remaining maturities of three months or less at the
date of purchase to be cash equivalents.
Cash and cash equivalents are invested in deposits with a major bank. The
Company has not experienced any losses on its deposit of cash and cash
equivalents. Management believes that the bank is financially sound and minimal
credit risk exists.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are depreciated using the
straight-line method over the estimated useful lives of the assets (see table
below). Gains and losses from the disposal of property and equipment are
reflected in the statement of operations in the year of disposition.
Expenditures for additions and improvements are capitalized and expenditures for
maintenance and repairs are charged to expense as incurred.
Estimated useful lives:
<TABLE>
<CAPTION>
ASSET CLASS SERVICE LIVES
----------- -------------
<S> <C>
Computers and telecommunications equipment.................. 5 years
Furniture and fixtures...................................... 7 years
Purchased software.......................................... 3 years
</TABLE>
F-54
<PAGE> 135
PRINTBID.COM, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
CONVERTIBLE DEBT WITH WARRANTS
Convertible debt with detachable warrants is shown in the financial
statements net of the unamortized debt discount. Upon debt issuance, a discount
is recorded equivalent to the fair value of the warrants. The fair value of the
warrants is determined using the Black Scholes pricing model. The debt discount
is amortized using the effective interest method.
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation related to employees
using the intrinsic value method prescribed in Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees. Compensation cost for
stock options, if any, is measured as the excess of the fair value of the
Company's stock at the date of grant over the amount an employee must pay to
acquire the stock and is recorded as compensation over the requisite vesting
periods. Restricted stock is recorded as compensation cost over the requisite
vesting periods based on the fair value on the date of grant. Fair value has
been estimated based on a number of factors, including, among other things,
appraisals by an outside valuation firm, equity transactions, and proposed
equity transactions with unrelated third parties.
Statement of Financial Accounting Standards (SFAS) No. 123 "Accounting for
Stock-Based Compensation" established accounting and disclosure requirements
using a fair-value-based method of accounting for stock-based compensation
plans. The Company has adopted the disclosure requirements of SFAS No. 123 with
respect to employee stock compensation. With respect to stock-based compensation
to non-employees, the Company has adopted the accounting and disclosure
requirements of SFAS No. 123. Stock issued for services is recorded at the fair
value of the services rendered or fair value of the stock at the date of grant
at whichever value is more readily determinable. Restricted stock is recorded as
compensation cost over the requisite vesting periods based on the estimated fair
value of the stock at each date the restriction lapses. Fair value for stock and
restricted stock issued to non-employees has been estimated based on a number of
factors, including, among other things, appraisals by an outside valuation firm,
equity transactions and proposed equity transactions with unrelated third
parties. The fair value of stock options issued to non-employees is determined
using the Black Scholes method and recorded as compensation over the requisite
vesting periods. For purposes of determining fair value of non-employee options,
the Company assumed no dividends, a risk-free interest rate of 5.20%, volatility
of 61.4%, and an expected life equivalent to the term of the options.
PRODUCT DEVELOPMENT COSTS
Product development costs, including expenses incurred by the Company to
develop and enhance the Company's Internet site, are charged to expense as
incurred.
ADVERTISING
The Company expenses advertising costs at the first time the advertising
take place. Advertising costs for the period from inception (June 10, 1998) to
December 31, 1998, and the nine months ended September 30, 1999 (unaudited) were
$16,340 and $104,091, respectively.
F-55
<PAGE> 136
PRINTBID.COM, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
INCOME TAXES
The Company provides for deferred income taxes under the liability method.
Under this method, deferred tax assets and liabilities are determined based on
the difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to affect taxable income. A valuation allowance is
recorded when it is more likely than not that the net deferred tax asset will
not be recovered.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's short-term financial instruments, including cash and cash
equivalents, and accounts payable are carried at cost. The Company's short-term
financial instruments approximate fair value due to their relatively short
maturities. The carrying value of the Company's long-term financial instruments
(convertible debt) approximate fair value as the interest rates approximate
current market rates of similar debt.
USE OF 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 the
disclosure of contingent assets and liabilities at the date of the financial
statements, and that affect 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 January 1, 1999, the Company adopted this
statement. As of September, 30, 1999, the Company had not capitalized any
internal costs (unaudited).
F-56
<PAGE> 137
PRINTBID.COM, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
(UNAUDITED)
<S> <C> <C>
Computer and telecommunication equipment............ $8,124 $ 42,475
Furniture and fixtures.............................. 46,000
Purchased software.................................. 15,000
------ --------
Total..................................... 8,124 103,475
Less: Accumulated depreciation...................... -- (3,244)
------ --------
$8,124 $100,231
====== ========
</TABLE>
3. OPERATING LEASE COMMITMENTS
At December 31, 1998, and September 30, 1999 (unaudited), the Company had
no lease commitments exceeding a term of one year.
4. INCOME TAXES
At September 30, 1999, the Company had accumulated net operating loss
carryforwards for tax purposes of approximately $1,380,000 (unaudited), which
will expire through 2019. Utilization of net operating loss carryforwards may be
subject to certain limitations under Section 382 of the Internal Revenue Code.
The Company also has Research & Experimentation credit carryforwards of
approximately $6,500 (audited) and $13,200 (unaudited) at December 31, 1998 and
September 30, 1999, respectively, which will expire beginning in 2018 through
2019.
Federal rate reconciliation:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
(UNAUDITED)
<S> <C> <C>
Federal income tax benefit at statutory rate................ (34)% (34)%
Change in valuation allowance............................... 34 34
--- ---
0% 0%
=== ===
</TABLE>
F-57
<PAGE> 138
PRINTBID.COM, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities are approximately as follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
(UNAUDITED)
<S> <C> <C>
Deferred income tax assets:
Tax loss carryforwards.................................... $ 469,000
R&E Credit carryforwards.................................. $ 7,000 13,000
Amortization.............................................. 123,000 99,000
Deferred compensation..................................... 1,000 203,000
--------- ---------
131,000 784,000
Deferred income tax liabilities:
Depreciation.............................................. (5,000)
--------- ---------
131,000 779,000
Valuation allowance....................................... (131,000) (779,000)
--------- ---------
Net deferred tax assets................................... $ $
========= =========
</TABLE>
5. CONVERTIBLE NOTES AND WARRANTS
SERIES A SUBORDINATED CONVERTIBLE NOTES
In October 1998, the Board of Directors authorized the Company to issue up
to $1,000,000 in convertible debt (Series A). During 1998, the Company received
proceeds from various investors under these convertible debt agreements totaling
$150,000. In addition, the Company issued convertible debt totaling $25,000 in
exchange for services to be provided at a later date.
Under the same terms as the convertible debt issued in 1998, the Company
received an additional $708,000 in cash and $117,000 in services in exchange for
convertible debt during the first nine months of 1999 (unaudited).
The convertible notes accrue interest at 8% annually with interest and
principal due in a single payment two years after issuance. As of December 31,
1998, notes and accrued interest maturing in the year 2000 totaled approximately
$176,000. As of September 30, 1999, notes and accrued interest maturing in the
years 2000 and 2001 totaled approximately $186,000 and $839,000, respectively
(unaudited).
The convertible note agreements contain a conversion option, which entitles
the holder to convert the unpaid principal and interest into capital stock of
the same issue and at the same price as the first equity financing issue of $2
million or more. The option to convert expires on the maturity date of the note.
The Company may not redeem the notes prior to maturity. The convertible notes
are subordinate to the repayment rights of all other debtors, except other
subordinated note holders.
F-58
<PAGE> 139
PRINTBID.COM, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
WARRANTS
Each of the above convertible debt agreements were issued with warrants at
the ratio of $4 of debt per warrant totaling 43,750 warrants in 1998 (audited)
and 206,250 in the first nine months of 1999 (unaudited). These warrants are
exercisable at a variable rate equaling the lesser of $1 per share or the share
price of the first round of financing of $2 million dollars or more. The
warrants may be exercised any time after the $2 million financing is obtained
and expire ten years after the date of grant.
SERIES B SUBORDINATED CONVERTIBLE NOTES (UNAUDITED)
On August 27, 1999, the Board of Directors authorized the Company to issue
an additional $500,000 of convertible notes under the same terms as the Series A
convertible notes discussed above. As of September 30, 1999, the Company had
issued no Series B notes.
6. SHAREHOLDERS EQUITY (DEFICIT)
PREFERRED STOCK
Preferred stock may be issued in one or more series, each with such
designations, preferences, rights, qualifications, limitations and restrictions
as the Board of Directors of the Company may determine at the time of issuance.
Upon incorporation of the Company, the Company authorized issuance of 5,000,000
shares of preferred stock. As of December 31, 1998, no preferred stock had been
issued.
COMMON STOCK
Upon incorporation, the Company authorized 10,000,000 shares of common
stock. The Company reserved 250,000 and 125,000 shares of common stock for
issuance of warrants relating to the Series A and Series B convertible debt,
respectively.
COMMON STOCK ISSUED TO FOUNDER
In June of 1998, upon formation of the Company, the Founder received
1,320,000 shares in exchange for certain technology and know-how. Of the shares
issued, 660,000 were subject to repurchase for up to three years. These shares
have been recorded at fair value at the date of issuance and the amount
associated with the shares subject to repurchase has been deferred and is being
amortized over the restriction period. 513,300 and 348,300 (unaudited) shares
remain restricted at December 31, 1998 and September 30, 1999, respectively.
COMMON STOCK ISSUED TO ADVISORS
In June of 1998, 330,000 restricted shares were issued to outside advisors
to the Company. The Company may repurchase these shares at par value (.01) if
the advisory relationship is terminated during the restriction period.
Compensation costs associated with these shares, based on the fair value at the
date of grant, are being recognized as expense over the restriction period.
$52,553 and $87,688 was recognized from the date of inception to
F-59
<PAGE> 140
PRINTBID.COM, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998 and for the nine months ended September 30, 1999,
respectively. 265,833 and 42,501 (unaudited) shares remain restricted at
December 31, 1998 and September 30, 1999, respectively.
COMMON STOCK WARRANTS (UNAUDITED)
In addition to the warrants issued in conjunction with the convertible debt
discussed in Note 5, the Company issued 36,667 common stock warrants to a
related party on June 25, 1999 in exchange for services. These warrants have the
same terms as those issued in conjunction with the Series A convertible debt
discussed above, except that the warrants expire after three years.
STOCK OPTION PLAN (UNAUDITED)
In July 1999, the Company adopted the Stock Incentive Plan (the Plan). The
Plan provides for the granting of stock options to employees, officers,
directors and consultants of the Company. Options granted under the Plan may be
either incentive stock options or nonqualified stock options. Incentive stock
options (ISO) may be granted only to Company employees. Nonqualified stock
options (NSO) may be granted to Company employees, officers, directors and
consultants. Unless otherwise terminated in accordance with the provisions of
the Plan, the Plan will terminate when all shares available for issuance under
the Plan have been issued and all restrictions on such shares have lapsed or
upon termination by the Board of Directors. The Company has reserved 2,400,000
shares of common stock for issuance under the Plan.
For each option granted, the Board of Directors shall determine the number
of shares, the option price, the period of the option, the time or times at
which the option may be exercised and whether the option is an ISO or NSO, at
the date of grant. The first options were granted in July 1999 with vesting
periods up to 3 years, at exercise prices from $.01 to $.15. As of September 30,
1999, options totaling 1,203,650 shares had been granted and approximately
250,000 options had vested.
7. RELATED PARTY TRANSACTIONS
The Company purchased management consulting services from a consulting firm
owned by a significant shareholder of the Company. These consulting services for
the period from inception (June 10, 1998) to December 31, 1998 totaled $15,000.
The Company also purchased computer equipment from a shareholder of the Company
totaling $2,893.
In June 1999, as discussed in note 6, the Company issued 36,667 warrants to
a significant shareholder in exchange for consulting services.
In August 1999, the Company issued Series A convertible notes totaling
$50,000 with 12,500 detachable warrants to a shareholder in exchange for online
advertising. The Company also issued Series A convertible notes totaling $48,000
with 12,000 detachable warrants to two shareholders during May and August 1999
in exchange for cash. These notes, totaling $146,000
F-60
<PAGE> 141
PRINTBID.COM, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
plus accrued interest, are due two years after issuance, unless converted to
stock in accordance with the Series A subordinated convertible note agreement.
8. SUBSEQUENT EVENTS
On December 9, 1999, the Company merged with ImageX.com, Inc. (ImageX). The
merger will be accounted for as a pooling of interests. Each share of the
Company's common stock issued and outstanding prior to the merger was converted
to a defined number of shares of ImageX stock as calculated per the merger
agreement. Immediately prior to the closing of the merger the convertible notes
were converted to a defined number of shares of the Company's common stock and
subsequently exchanged for ImageX stock on the same basis as other shares of
common stock. Each outstanding option or warrant to purchase shares of the
Company's common stock was assumed by ImageX to constitute an option or warrant
to purchase ImageX common stock with the same terms as were applicable to the
original option or warrant.
F-61
<PAGE> 142
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENT
The unaudited pro forma condensed consolidated statement of operations is
based on individual historical results of operations of ImageX.com, Fine Arts
Graphics and Image Press for the year ended December 31, 1999, after giving
effect to the acquisitions of Fine Arts Graphics and Image Press as if those
acquisitions had occurred at the beginning of the period.
The unaudited pro forma condensed consolidated financial statement should
be read in conjunction with the historical financial statements and notes
thereto of ImageX.com, Fine Arts Graphics, Image Press and PrintBid. The pro
forma condensed consolidated financial statement is presented for illustrative
purposes only and is not necessarily indicative of results of operations that
would have actually occurred had the acquisitions of Fine Arts Graphics and
Image Press been effected on the dates assumed.
F-62
<PAGE> 143
IMAGEX.COM, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999
--------------------------------------------------------------------
FINE ARTS
ENGRAVERS IMAGE PRO FORMA
COMPANY, INC. PRESS, INC. ADJUSTMENTS
ACTUAL (3.5 MONTHS) (8.5 MONTHS) (NOTE 1) PRO FORMA
---------- ------------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Revenues........................... $ 11,499 $2,525 $5,359 $ (37) $ 19,346
Cost of sales...................... 8,541 1,814 3,709 69 14,133
---------- ------ ------ ----- ----------
Gross profit (loss).............. 2,958 711 1,650 (106) 5,213
---------- ------ ------ ----- ----------
Operating expenses:
General and administrative....... 11,002 615 968 215 12,800
Selling and marketing............ 6,765 134 327 7,226
Product development.............. 3,770 3,770
Amortization of unearned
compensation.................. 2,284 2,284
Amortization of goodwill and
other intangibles............. 213 97 310
---------- ------ ------ ----- ----------
Total operating expenses...... 24,034 749 1,295 312 26,390
---------- ------ ------ ----- ----------
Income (loss) from
operations.................. (21,076) (38) 355 (418) (21,177)
Other expense, net................. 241 (47) (10) 184
---------- ------ ------ ----- ----------
Net (loss) income before
taxes....................... (20,835) (85) 345 (418) (20,993)
State income tax expense...... (28) (28)
---------- ------ ------ ----- ----------
Net (loss) income............. (20,835) $ (85) $ 317 $(418) (21,021)
====== ====== =====
Preferred stock accretion.......... (84) (84)
---------- ----------
Net loss used in calculating
loss per share.............. $ (20,919) $ (21,105)
========== ==========
Basic and diluted net loss per
share............................ $ (3.07) $ (3.13)
========== ==========
Weighted-average shares
outstanding...................... 6,805,098 6,753,493
========== ==========
</TABLE>
- -------------------------
Note 1 -- The pro forma statements of operations give effect to the following
pro forma adjustments necessary to reflect the acquisition of Fine
Arts and Image Press as if each occurred at the beginning of the
period:
(a) The amortization of goodwill 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-63
<PAGE> 144
INSIDE BACK COVER
[GRAPHICS -- Logo: ImageX.com -- Your Online Printing Solution. Logos of
Automatic Data Processing, Merck, VeriFone, Cobalt, Amazon.com, Nielsen Media
Research, Merrill Gardens, CB Richard Ellis, CIBC World Markets, Point
Information Network, Shopnow.com, Candle, New Energy Ventures, Concur
Technologies, Visio, Getty images, Donaldson, Lufkin & Jenrette, World Vision.]
The above companies are selected members of ImageX.com's top 50 customers based
on revenues of $6,646,000 up through September 30, 1999. Their percentages of
such revenues are as follows: CB Richard Ellis 11.4%, New Energy Ventures 7%,
Automatic Data Processing, 3.7%, CIBC World Markets 3.3%, Merck 2.7%, Visio
1.8%, Donaldson, Lufkin & Jenrette 1.6%, Merrill Gardens 0.9%, VeriFone 0.9%,
World Vision 0.9%, Amazon.com 0.9%, Concur/Portable Software 0.8%, Shopnow.com
0.7%, Candle 0.7%, Cobalt 0.6%, Nielsen Media Research 0.6%, Getty
Images/Photodisc 0.5%, Point Info Network 0.5%.
BACK COVER
5,000,000 Shares
[Graphic: Laptop computer with ImageX.com logo]
Common Stock
Prospectus
Chase H&Q
Banc of America Securities LLC
Prudential Volpe Technology
SG Cowen Securities Corporation
February 11, 2000
You should rely only on information contained in this prospectus. We have not
authorized anyone to provide you with information different from that contained
in this prospectus. We are offering to sell, and seeking offers to buy, shares
of common stock only in jurisdictions where offers and sales are permitted.
This information contained in this prospectus is accurate only as of the date
of this prospectus, regardless of the time of delivery of this prospectus or of
any sale of our common stock.
No action is being taken in any jurisdiction outside the United States to
permit a public offering of the common stock or possession or distribution of
this prospectus in any such jurisdiction. Persons who come into possession of
this prospectus in jurisdiction outside the United States are required to
inform themselves about and to observe any restriction as to this offering and
the distribution of this prospectus applicable to that jurisdiction.
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