<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 13, 2000
REGISTRATION 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
IMAGEX.COM, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
WASHINGTON 2752 91-1727170
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
10800 N.E. 8TH STREET, SUITE 200
BELLEVUE, WASHINGTON 98004
(425) 452-0011
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
RICHARD P. BEGERT
PRESIDENT AND CHIEF EXECUTIVE OFFICER
IMAGEX.COM, INC.
10800 N.E. 8TH STREET, SUITE 200
BELLEVUE, WASHINGTON 98004
(425) 452-0011
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
ANDREW BOR
DAVID C. CLARKE
ANDREW B. MOORE
PERKINS COIE LLP
1201 THIRD AVENUE, 48TH FLOOR
SEATTLE, WASHINGTON 98101-3099
(206) 583-8888
BARRY E. TAYLOR
PATRICK J. SCHULTHEIS
GLENN J. LUINENBURG
WILSON SONSINI GOODRICH & ROSATI, P.C.
650 PAGE MILL ROAD
PALO ALTO, CALIFORNIA 94304-1050
(650) 493-9300
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
- ------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
- ------------
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
- ------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
- ------------
CALCULATION OF REGISTRATION FEE
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<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
PROPOSED
MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
OF SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------------------------------
Common Stock, $0.01 par value
per share................... 5,750,000 $31.91 $183,482,500.00 $48,440.00
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes 750,000 shares which the underwriters have the option to purchase
to cover over-allotments, if any.
(2) Determined in accordance with Rule 457(c) under the Securities Act of 1933,
as amended, based upon the average of the high and low sales prices of our
common stock reported on the Nasdaq National Market on January 12, 2000.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
The information in this prospectus is not complete and may be changed.
Underwriters may not confirm sales of these securities until the
registration statement filed with the Securities and Exchange Commission
is effective. This preliminary prospectus is not an offer to sell these
securities, and it is not soliciting an offer to buy these securities in
any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED JANUARY 13, 2000
5,000,000 SHARES
[IMAGEX.COM LOGO]
COMMON STOCK
-------------------------
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.
-------------------------
Our common stock is quoted on the Nasdaq National Market under the symbol
"IMGX." On January 12, 2000, the last reported sale price for the common stock
on the Nasdaq National Market was $29.75 per share. See "Price Range of Common
Stock."
-------------------------
PRICE $ PER SHARE
-------------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----------
<S> <C> <C>
Public offering price....................................... $ $
Underwriting discounts and commissions...................... $ $
Proceeds, before expenses, to ImageX.com.................... $ $
Proceeds, before expenses, to the selling shareholders...... $ $
</TABLE>
We and certain shareholders of ImageX.com have granted the underwriters a
30-day option to purchase a maximum of 750,000 additional shares to cover
over-allotments. Delivery of the shares will be made on or about
, 2000.
-------------------------
PLEASE SEE "RISK FACTORS" BEGINNING ON PAGE 6 TO READ ABOUT CERTAIN RISKS
THAT YOU SHOULD CONSIDER BEFORE BUYING SHARES OF OUR COMMON STOCK.
-------------------------
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 , 2000
<PAGE> 3
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> 4
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS OR TO
WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THIS PROSPECTUS MAY ONLY BE USED WHERE IT IS
LEGAL TO SELL THESE SECURITIES. THE INFORMATION IN THIS PROSPECTUS MAY ONLY BE
ACCURATE ON THE DATE OF THIS PROSPECTUS.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PROSPECTUS SUMMARY.................. 3
RISK FACTORS........................ 6
USE OF PROCEEDS..................... 20
PRICE RANGE OF COMMON STOCK......... 20
DIVIDEND POLICY..................... 20
CAPITALIZATION...................... 21
DILUTION............................ 22
SELECTED FINANCIAL DATA FOR
IMAGEX.COM........................ 23
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS..................... 25
</TABLE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
BUSINESS............................ 34
MANAGEMENT.......................... 53
CERTAIN TRANSACTIONS................ 64
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
POWER OF ATTORNEY................... II-7
</TABLE>
-------------------------
Our executive offices are located at 10800 N.E. 8th Street, Suite 200,
Bellevue, Washington 98004, and our telephone number is (425) 452-0011. Our Web
site is located at http://www.imagex.com. Any information that is included on or
linked to our Web site is not a part of this prospectus.
We have registered the trademark "ImageX" in the United States and 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.
2
<PAGE> 5
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, Visio and Waddell & Reed. We have approximately 280
employees and offices in 15 metropolitan markets across the United States. We
also have 52 patents pending on our proprietary technology.
3
<PAGE> 6
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................................. 21,382,278 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.
4
<PAGE> 7
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 nine months ended September 30, 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, Image Press and
PrintBid.com as if each had occurred at the beginning of each of the periods
presented. See Unaudited Pro Forma Condensed Consolidated Financial Statements.
<TABLE>
<CAPTION>
ACTUAL PRO FORMA
---------------------------------------------- ----------------------------
NINE MONTHS
YEAR ENDED ENDED NINE MONTHS
DECEMBER 31, SEPTEMBER 30, YEAR-ENDED ENDED
------------------------- ------------------ DECEMBER 31, SEPTEMBER 30,
1996 1997 1998 1998 1999 1998 1999
----- ------- ------- ------- -------- ------------ -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA (IN
THOUSANDS):
Revenues................................... $ 79 $ 87 $ 968 $ 614 $ 6,646 $17,983 $ 14,493
Cost of sales.............................. 99 100 998 657 4,986 12,600 10,578
----- ------- ------- ------- -------- ------- --------
Gross profit (loss)........................ (20) (13) (30) (43) 1,660 5,383 3,915
----- ------- ------- ------- -------- ------- --------
Operating expenses:
Sales and marketing...................... 1,018 2,182 1,741 3,778 3,633 4,427
Product development...................... 300 1,316 2,551 1,884 2,051 2,750 2,256
General and administrative............... 146 1,285 3,413 2,234 5,653 7,010 8,270
Amortization of unearned compensation.... 379 134 946 380 1,542
Amortization of goodwill................. 86 204 176
----- ------- ------- ------- -------- ------- --------
Total operating expenses............... 446 3,619 8,525 5,993 12,514 13,977 16,671
Loss from operations....................... (466) (3,632) (8,555) (6,036) (10,854) (8,594) (12,756)
----- ------- ------- ------- -------- ------- --------
Net loss................................... $(463) $(3,570) $(8,600) $(6,075) $(10,790) $(8,919) $(12,857)
===== ======= ======= ======= ======== ======= ========
</TABLE>
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1999
-----------------------
ACTUAL AS ADJUSTED
-------- -----------
(UNAUDITED)
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA (IN THOUSANDS):
Cash and cash equivalents................................... $ 27,256 $139,279
Working capital............................................. 28,045 140,068
Total assets................................................ 41,750 153,773
Accumulated deficit......................................... (23,423) (23,423)
Total shareholders' equity.................................. 37,537 149,560
</TABLE>
The preceding consolidated balance sheet data summarizes:
- actual unaudited consolidated balance sheet data at September 30, 1999;
- 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 an assumed offering price of $29.75 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."
-------------------------
5
<PAGE> 8
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."
6
<PAGE> 9
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 September 30, 1999, we had an accumulated deficit of $23.4
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.
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
7
<PAGE> 10
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.
8
<PAGE> 11
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 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.
9
<PAGE> 12
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 in the
future. If we issue securities with senior or superior rights and powers,
existing shareholders may be adversely affected.
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<PAGE> 13
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
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
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<PAGE> 14
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."
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.
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<PAGE> 15
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 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;
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<PAGE> 16
- 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 two
largest customers, CB Richard Ellis and PricewaterhouseCoopers, accounted for
17% and 12%, respectively, of our revenues for the nine months ended September
30, 1999. In addition, our combined top 10 customers accounted for 60% of our
revenues for the nine months ended September 30, 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.
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
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<PAGE> 17
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
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.
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<PAGE> 18
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 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."
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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;
- 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
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<PAGE> 20
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 40% 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.
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, 21,382,278 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 12,910,089 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
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<PAGE> 21
sale in the public market. The remaining 12,865,174 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 in its sole discretion)........................ 1,829,037
In April 2000, upon the expiration of various one-year
holding periods............................................. 2,067,568
May , 2000 (the expiration date of 90-day lock-up
agreements entered into in connection with this offering,
unless released earlier by Hambrecht & Quist LLC in its
sole discretion).......................................... 8,424,897
Thereafter upon expiration of various one year holding
periods................................................... 543,672
</TABLE>
W have filed registration statements to register up to 4,789,714 shares of
common stock reserved for issuance under our option plans and employee stock
purchase plan. Of that number of shares, 14,365 shares have been issued upon the
exercise of options and 352,585 shares are subject to options that were
exercisable as of December 31, 1999. We also have 1,187,477 shares of common
stock issuable upon exercise of warrants. To the extent such warrants are
exercised on a net basis (in which the exercise price is satisfied by deducting
shares otherwise issuable that are equal in value to the exercise price), 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 and, with respect to 935,214 shares, the 90-day lock-up agreements
referred to above.
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 entered into in connection with our initial public
offering. Hambrecht & Quist LLC may, in its sole discretion and at any time
without prior notice, release all or any portion of the common stock subject to
lock-up agreements entered into in connection with this offering. See "Shares
Eligible for Future Sale" and "Underwriting."
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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 $112 million, at an assumed
public offering price of $29.75 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 January 12, 2000).................. $42.125 $28.75
</TABLE>
On January 12, 2000, the last reported sale price of our common stock on
the Nasdaq National Market was $29.75 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.
20
<PAGE> 23
CAPITALIZATION
The following table sets forth at September 30, 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 an assumed public
offering price of $29.75 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>
SEPTEMBER 30, 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; 16,700,643 shares issued and outstanding,
actual; 20,700,643 shares issued and outstanding, as
adjusted;.................................................. $ 167 $ 207
Additional paid-in capital............................... 62,107 174,090
Unearned compensation.................................... (1,094) (1,094)
Notes receivable from shareholders....................... (220) (220)
Accumulated deficit...................................... (23,423) (23,423)
-------- --------
Total shareholders' equity....................... 37,537 149,560
-------- --------
Total capitalization............................. $ 37,537 $149,560
======== ========
</TABLE>
The outstanding share information set forth above excludes:
- 1,117,351 shares of common stock issuable upon exercise of options
outstanding as of September 30, 1999, of which 179,493 shares are
exercisable, under our stock option plan at a weighted average exercise
price of $3.63 per share, and 911,779 shares available for future
issuance under our stock option plan pursuant to options that had not yet
been granted;
- 1,391,979 shares issuable upon exercise of warrants outstanding as of
September 30, 1999, all of which are currently exercisable at a weighted
average exercise price of $4.16 per share; and
- 250,000 shares available for future issuance under our employee stock
purchase plan.
21
<PAGE> 24
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 September 30, 1999
was $35.3 million, or $2.11 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
an assumed public offering price of $29.75 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 September 30, 1999 would be $147.3 million, or $7.12 per share.
This represents an immediate increase in the adjusted pro forma net tangible
book value of $5.01 per share to existing shareholders and an immediate and
substantial dilution of $22.63 per share to new investors. The following table
illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed public offering price per share..................... $29.75
Pro forma net tangible book value per share at September 30,
1999........................................................ $2.11
Increase per share attributable to new investors.......... 5.01
-----
Pro forma net tangible book value per share after this
offering.................................................. 7.12
------
Dilution per share to new investors......................... $22.63
======
</TABLE>
The following table shows on a pro forma basis at September 30, 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:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
-------------------- ---------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing shareholders............. 16,700,643 81% $ 63,671,700 35% $ 3.81
New investors..................... 4,000,000 19% 119,000,000 65% $29.75
---------- --- ------------ ---
Total................... 20,700,643 100% $182,671,700 100%
========== === ============ ===
</TABLE>
At September 30, 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................................... 1,117,351 $3.63
Warrants............................................. 1,391,979 4.16
---------
Total...................................... 2,509,330 $3.92
---------
</TABLE>
Additionally, as of September 30, 1999, there were 911,779 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.
22
<PAGE> 25
SELECTED FINANCIAL DATA FOR IMAGEX.COM
You should read the selected financial data below in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the historical financial statements and related notes of
ImageX.com, Fine Arts Graphics, Image Press and PrintBid.com included elsewhere
in this prospectus. Historical results are not necessarily indicative of future
results. The balance sheet data as of December 31, 1997 and 1998 and the
statement of operations data for the three years ended December 31, 1998 are
derived from the financial statements of ImageX.com included elsewhere in this
prospectus and have been audited by PricewaterhouseCoopers LLP, independent
accountants. The balance sheet data as of December 31, 1996 are derived from the
financial statements of ImageX.com not included in this prospectus and have been
audited by PricewaterhouseCoopers LLP. The balance sheet data as of September
30, 1998 and 1999 and the statement of operations data for the nine months ended
September 30, 1998 and 1999 have been derived from the unaudited consolidated
financial statements of ImageX.com and its subsidiaries and have been prepared
on a basis consistent with the audited financial statements of ImageX.com and
the related notes and include all adjustments (consisting of normal recurring
adjustments) which we consider necessary for a fair presentation of the
information. The unaudited pro forma statement of operations data for the year
ended December 31, 1998 and the nine months ended September 30, 1999 give effect
to the acquisitions of Fine Arts Graphics on April 13, 1999, Image Press on
September 21, 1999 and PrintBid.com on December 9, 1999 as if those acquisitions
had occurred at the beginning of each period. Although ImageX.com was
incorporated in 1995, we had no operations during that year. This pro forma
condensed financial information has been prepared from, and you should read it
together with, the historical and unaudited pro forma condensed consolidated
financial statements and related notes of ImageX.com, Fine Arts Graphics, Image
Press and PrintBid.com. 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, Image Press and PrintBid.com on the date assumed, nor is it
necessarily indicative of our future operating results.
23
<PAGE> 26
<TABLE>
<CAPTION>
ACTUAL PRO FORMA
-------------------------------------------------------------- ----------------------------
YEAR ENDED NINE MONTHS ENDED YEAR NINE MONTHS
DECEMBER 31, SEPTEMBER 30, ENDED ENDED
------------------------------------ ----------------------- DECEMBER 31, SEPTEMBER 30,
1996 1997 1998 1998 1999(2) 1998 1999
-------- ------------ ---------- ---------- ---------- ------------ -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA (IN
THOUSANDS, EXCEPT SHARE AND PER
SHARE DATA):
Revenues.......................... $ 79 $ 87 $ 968 $ 614 $ 6,646 $ 17,983 $ 14,493
Cost of sales..................... 99 100 998 657 4,986 12,600 10,578
-------- ---------- ---------- ---------- ---------- ---------- ----------
Gross profit (loss)............... (20) (13) (30) (43) 1,660 5,383 3,915
-------- ---------- ---------- ---------- ---------- ---------- ----------
Operating expenses:
Sales and marketing............. -- 1,018 2,182 1,741 3,778 3,633 4,427
Product development............. 300 1,316 2,551 1,884 2,051 2,750 2,256
General and administrative...... 146 1,285 3,413 2,234 5,653 7,010 8,270
Amortization of unearned
compensation.................. -- -- 379 134 946 380 1,542
Amortization of goodwill........ -- -- -- -- 86 204 176
-------- ---------- ---------- ---------- ---------- ---------- ----------
Total operating
expenses................ 446 3,619 8,525 5,993 12,514 13,977 16,671
-------- ---------- ---------- ---------- ---------- ---------- ----------
Loss from operations.............. (466) (3,632) (8,555) (6,036) (10,854) (8,594) (12,756)
Other income (expense), net....... 3 62 (45) (39) 64 (310) (73)
-------- ---------- ---------- ---------- ---------- ---------- ----------
Net loss before income taxes...... (463) (3,570) (8,600) (6,075) (10,790) (8,904) (12,829)
State income tax provision........ -- -- -- -- -- (15) (28)
-------- ---------- ---------- ---------- ---------- ---------- ----------
Net loss.......................... (463) (3,570) (8,600) (6,075) (10,790) (8,919) (12,857)
Preferred stock accretion......... -- -- (221) (147) (84) (221) (84)
-------- ---------- ---------- ---------- ---------- ---------- ----------
Net loss used in calculating net
loss per share.................. $ (463) $ (3,570) $ (8,821) $ (6,222) $ (10,874) $ (9,140) $ (12,941)
======== ========== ========== ========== ========== ========== ==========
Basic and diluted net loss per
share(1)........................ $ (13.60) $ (14.14) $ (14.65) $ (10.90) $ (3.43) $ (9.24) $ (3.71)
======== ========== ========== ========== ========== ========== ==========
Shares used in computation of
basic and diluted net loss per
share(1)........................ 34,042 252,425 601,962 570,723 3,173,827 989,364 3,484,877
======== ========== ========== ========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
ACTUAL
-------------------------------------------------
DECEMBER 31, SEPTEMBER 30, PRO FORMA
--------------------------- ------------------- SEPTEMBER 30,
1996 1997 1998 1998 1999(2) 1999
------ ------- -------- -------- -------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (IN THOUSANDS):
Cash and cash equivalents................... $3,453 $ 186 $ 883 $ 99 $ 27,256 $ 27,427
Working capital (deficit)................... 3,367 (616) (418) (1,391) 28,045 28,158
Total assets................................ 3,471 938 2,319 1,458 41,750 42,112
Long-term obligations, net of current
portion................................... -- 300 312 233 -- 534
Mandatorily redeemable convertible preferred
stock..................................... 3,459 3,459 11,350 8,532 -- --
Accumulated deficit......................... (463) (4,033) (12,633) (10,108) (23,423) (25,668)
Total shareholders' equity (deficit)........ (74) (3,642) (10,878) (9,012) 37,537 37,216
</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) 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 12 to ImageX.com's financial statements.
24
<PAGE> 27
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, stationery,
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 September 30, 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 we
charge a transaction fee to the auction originator. As of September 30, 1999,
PrintBid.com and PaperDeals.com had not generated any revenues.
25
<PAGE> 28
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 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
26
<PAGE> 29
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
which, as of September 30, 1999, had not generated revenue.
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 $1.7 million and $655,000 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 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.
27
<PAGE> 30
RESULTS OF OPERATIONS
The following table sets forth certain statement of operations data as a
percentage of total revenues for the periods indicated. Pro forma consolidated
data give effect to the acquisitions of Fine Arts Graphics, Image Press and
PrintBid.com as if each had occurred at the beginning of each period presented.
<TABLE>
<CAPTION>
PRO FORMA
NINE MONTHS ----------------------------
NINE MONTHS
ACTUAL
------------------------- ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30, YEAR ENDED ENDED
------------------------- -------------- DECEMBER 31, SEPTEMBER 30,
1996 1997 1998 1998 1999 1998 1999
----- ------- ----- ----- ----- ------------ -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues.......................... 100% 100% 100% 100% 100% 100% 100%
Cost of sales..................... 126 115 103 107 75 70 73
---- ------ ---- ---- ---- --- ----
Gross margin...................... (26) (15) (3) (7) 25 30 27
---- ------ ---- ---- ---- --- ----
Operating expenses:
Sales and marketing............. -- 1,167 225 284 57 20 31
Product development............. 382 1,509 264 307 31 15 16
General and administrative...... 186 1,474 353 364 85 40 56
Amortization of unearned
compensation.................. -- -- 39 22 14 2 11
Amortization of goodwill........ -- -- -- -- 1 1 1
---- ------ ---- ---- ---- --- ----
Total operating
expenses............... 568 4,150 881 977 188 78 115
---- ------ ---- ---- ---- --- ----
Loss from operations.............. (594) (4,165) (884) (984) (163) (48) (88)
Other income (expense), net....... 4 71 (5) (6) 1 (2) (1)
---- ------ ---- ---- ---- --- ----
Net loss.......................... (590)% (4,094)% (889)% (990)% (162)% (50)% (89)%
==== ====== ==== ==== ==== === ====
</TABLE>
We have incurred significant net losses since our inception. As of
September 30, 1999, we had accumulated a deficit of $23.4 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."
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998 (UNAUDITED)
Revenues
Revenues were $614,000 and $6.6 million for the nine-month periods ended
September 30, 1998 and 1999, respectively, representing an increase of $6.0
million, or 982%, in 1999 over the same period in 1998. This increase was 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 78 customers at
September 30, 1998 to 156 customers at September 30, 1999. The increase in the
number of customers contributes to both increased product and service revenues.
28
<PAGE> 31
Gross Profit
Gross profits/(loss) were ($43,000) and $1.7 million for the nine-month
periods ended September 30, 1998 and 1999, respectively, representing an
increase of $1.7 million in 1999 over the same period in 1998. The increases in
gross profits and gross margins for the nine-month period ended September 30,
1999 as compared to the same period in 1998 were 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 $1.7 million
and $3.8 million for the nine months ended September 30, 1998 and 1999,
respectively, representing an increase of $2.1 million, or 117%, over the same
period in 1998. The increase in sales and marketing expenses for the comparable
nine-month periods ended September 30 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 $1.9 million and $2.1 million for the nine months
ended September 30, 1998 and 1999, respectively, representing an increase of
$167,000 or 9%, over the same period in 1998. The increase in product
development expenses for the comparable nine-month periods ended September 30
was due to an increase in amortization resulting from the capitalization of
certain software development costs relating to our Corporate Online Printing
Center and increased salary and benefit related expenses from hiring new
personnel. For the nine-month period ended September 30, 1999 we had a decrease
in contract labor of $206,000. 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 $2.2 million and $5.7 million
for the nine-month periods ended September 30, 1998 and 1999, respectively,
representing an increase of $3.5 million, or 157%, over the same period in 1998.
The increase in general and administrative expenses for the comparable
nine-month periods ended September 30 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. 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 public company,
including, but not limited
29
<PAGE> 32
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 $134,000 and $946,000 for the
nine-month periods ended September 30, 1998 and 1999, respectively, representing
an increase of $812,000, or 606%, over the same period in 1998. 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 $51,000 and $86,000
for the nine-month periods ended September 30, 1998 and 1999, respectively,
representing an increase of $35,000, or 69%, over the same period in 1998. The
amortization of goodwill and other intangibles are 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 $39,000 and income of
$64,000 for the nine-month period ended September 30, 1998 and 1999,
respectively, representing an increase of $103,000, over the same period in
1998. The expense for the nine month period ended September 30, 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 nine-month period ended
September 30, 1999.
Income Taxes
No provision for federal income taxes has been recorded to date because we
incurred net operating losses from inception through September 30, 1999. As of
September 30, 1999, we had approximately $21.3 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 $6.1 million and $10.8 million for the nine months ended
September 30, 1998 and 1999, respectively, representing an increase of $4.7
million, or 77%, over the same period in 1998. The $4.7 million increase in net
loss for the nine months ended September 1999 as compared to the same period in
1998 was as a result of increased spending in all categories -- sales and
marketing, product development, general and administrative, and amortization, as
we have completed two acquisitions and had significant growth overall during the
nine months ended September 30, 1999.
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YEARS ENDED DECEMBER 31, 1998 AND 1997
Revenues
Revenues for 1998 increased 1,013% to $968,000 from $87,000 in 1997.
Product revenues for 1998 increased 1,117% to $913,000 from $75,000 for 1997,
while our service revenues increased 358% to $55,000 from $12,000 for 1997. The
increase in revenues was due to the commercial launch of the ImageX.com system
in October 1997, the addition of new customers and launching the sale of
marketing promotional materials in 1998.
Gross Profit
We experienced a negative gross profit of $30,000 in 1998 compared to
$13,000 in 1997. Negative gross margin for 1998 was 3% compared to 15% for 1997.
The improvement was a result of higher pricing to our customers and lower vendor
costs.
Sales and Marketing Expenses
Sales and marketing expenses for 1998 increased 115% to $2.2 million from
$1.0 million for 1997. This increase resulted from a $487,000 increase in salary
expense, a $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 94% to $2.6 million from
$1.3 million for 1997. The increase resulted primarily from the addition of six
software developers to our team and our investment in equipment to maintain and
upgrade our proprietary software and infrastructure systems.
General and Administrative Expenses
General and administrative expenses for 1998 increased 166% to $3.4 million
from $1.3 million for 1997. The increase resulted primarily from a $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 $45,000 from income of $62,000
for 1997 as a result of establishing and using a working capital line and other
bank credit facilities.
Net Loss
Net loss increased substantially to $8.6 million for the year ended
December 31, 1998 from $3.6 million for the year ended December 31, 1997 as a
result of increased sales and marketing, product development and general and
administrative expenses. These increased expenses resulted from the commercial
launch of the ImageX.com system in October 1997. As a percentage of sales, net
loss decreased to 889% for the year ended December 31, 1998 from 4,094% for the
year ended December 31, 1997. The decrease in net loss as a percentage of sales
was primarily due to an $881,000 increase in our revenue base.
INCEPTION THROUGH DECEMBER 31, 1995 AND YEAR ENDED DECEMBER 31, 1996
From inception to December 31, 1995, we had no operations. We generated
$79,000 in revenues in 1996, primarily as a result of contracts for software
development. Our total
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operating expenses were $446,000, consisting primarily of product development
expenses related to the development of our proprietary software and
infrastructure systems. Given the early stage of our business, we do not believe
the results of operations for this period are comparable to those for 1997.
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 September 30, 1999, we had raised approximately $36.7
million, net of offering costs, from private placements of preferred stock and
approximately $2.7 million from net borrowings under convertible notes and bank
credit facilities. 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 September 30, 1999, we had cash and cash equivalents of $27.3
million, representing an increase of $26.4 million from cash and cash
equivalents held as of December 31, 1998. Our working capital at September 30,
1999 was $28.0 million, compared to a working capital deficit of ($418,000) at
December 31, 1998.
Net cash used in operating activities was $8.5 million and $5.5 million for
the nine-month periods ended September 30, 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 and prepaid expenses were
partially offset by increases in current liabilities, including trade payables.
Net cash used in investing activities was $10.3 million and $728,000 for
the nine-month periods ended September 30, 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 $45.2 million for the
nine-month period ended September 30, 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 $6.1 million for the nine-month period ended
September 30, 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 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
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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.
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 September 30,
1999, we had capitalized computer software costs of $822,000 and had recorded
the related amortization expense of $369,000 for the nine months ended September
30, 1999.
AMORTIZATION OF UNEARNED COMPENSATION
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 for accounting purposes 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 of other intangible assets range
from a 3 to 8 year period.
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, Visio and Waddell & Reed. We have approximately 280
employees and offices in 15 metropolitan markets across the country. We also
have 52 patents 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
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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;
- 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.
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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: 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: -- 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: 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
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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.
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
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provide PrintBid.com's audience of commercial printers with access to paper
mills, merchants, distributors, converters, brokers, import/exporters,
publishing companies and major corporations.
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 nine months
ended September 30, 1999:
<TABLE>
<S> <C>
Automatic Data Processing (ADP) Merck & Co.
Bell Atlantic Mobile New Energy Ventures
CB Richard Ellis PricewaterhouseCoopers
CIBC World Markets Visio
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
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creative scripts and online demonstrations. The
qualified sales leads, some with prescheduled
meetings, are then passed on to our direct sales
force.
Online Demonstrations Online demonstrations are used to showcase our
products. Links at complementary Web sites direct
customers to our Web site.
Print Media/Public
Relations Print media/public relations build awareness of our
solution in major markets and draw target customers
to our Web site. ImageX.com uses advertising and
public relations agencies to integrate all
marketing programs and ensure efficient and
effective spending.
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
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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, 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.
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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.
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.
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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.
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.
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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 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.
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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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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.
[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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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 $2.1 million
for the nine months ended September 30, 1999, $2.6 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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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."
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.
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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 on February 1, 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................... 30 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.
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
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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.
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
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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 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
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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.
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
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<PAGE> 59
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.
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.
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<PAGE> 60
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
and paid in November 1999 and (b) 2% of the principal is due each month
thereafter until the promissory note is paid in full. Pursuant to the stock
vesting and pledge agreement, Mr. Begert granted ImageX.com a right to
repurchase a portion of these shares if his employment terminates. 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 7/8 per share.
(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 and is based on an annualized salary of $150,000.
(4) Ms. Manciagli joined ImageX.com in May 1998. Represents salary earned as of
December 31, 1998 and is based on an annualized salary of $150,000.
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<PAGE> 61
(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 4.80% $ 6.00 4/21/09 $188,996 $476,990
F. Joseph Verschueren............ -- -- -- -- -- --
Eric J. Bean..................... 37,500 3.60 6.00 4/21/09 141,750 357,750
Dana F. Manciagli................ 49,999 4.80 6.00 4/21/09 188,996 476,990
John R. Higgins.................. 25,000 2.40 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 1,042,185 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> 62
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 682,668 shares remain available for grant as of
December 31, 1999, plus an automatic annual
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<PAGE> 63
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.
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
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<PAGE> 64
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 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.
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<PAGE> 65
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> 66
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 IV, LLC and Internet Ventures,
LLC. Acorn Ventures, Inc. is a member of Acorn Ventures IV, LLC and Internet
Ventures, LLC.
(2) Includes shares purchased by Technology Partners Fund V, L.P. and Technology
Partners Fund VI, L.P. Mr. Ardell, a director of ImageX.com, is a general
partner of TPW Management V, L.P., which is the general partner of
Technology Partners Fund V, L.P. and a managing member of TP Management VI,
LLC, which is the general partner of Technology Partners Fund VI, L.P.
(3) Includes shares purchased by Alta California Partners II, L.P. and Alta
Embarcadero Partners II, LLC. Mr. Gruener, a director of ImageX.com, is a
general partner of Alta California Management Partners II, L.P., which is
the general partner of Alta California Partners II, L.P. Mr. Gruener is also
a member of Alta Embarcadero Partners II, LLC.
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(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 IV, LLC issued a promissory note to ImageX.com in the amount of
$490,000.50. No interest was payable on the unpaid principal amount of the note.
In October 1998, Acorn Ventures IV, LLC satisfied its obligation under the note
with a cash payment of the principal amount.
In August 1998, we issued convertible promissory notes to Technology
Partners Fund V, L.P. in the amount of $400,000 and to Vanguard V, L.P. in the
amount of $200,000. The notes accrued interest at the rate of 7% per annum.
Technology Partners Fund V, L.P. and Vanguard V, L.P. paid the purchase price
for their shares of Series D Preferred Stock by canceling the convertible
promissory notes.
In November 1998, Richard P. Begert, our President, Chief Executive Officer
and a director, purchased 500,000 shares of common stock at $0.40 per share. Mr.
Begert paid the purchase price for the shares by issuing a promissory note to
us. The promissory note accrues interest at the rate of 7% per year. Principal
and interest under the promissory note are due and payable as follows: (a) 24%
of the principal, plus interest accrued thereon, is due and paid in November
1999 and (b) 2% of the principal is due each month thereafter until the
promissory note is paid in full. Pursuant to the stock vesting and pledge
agreement, Mr. Begert granted ImageX.com a right to repurchase a portion of
these shares if his employment terminates. 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
IV, LLC, pursuant to which we were required to pay reasonable out-of-pocket
expenses incurred by Acorn Ventures in connection with its services as a
consultant. In connection with the consulting agreement, Acorn Ventures received
a warrant to purchase 790,000 shares of common stock. Other than the
reimbursement of out-of-pocket expenses, there was no other cash compensation
under the consulting agreement. In addition, we entered into agreements to
indemnify Acorn Ventures against expenses (including attorneys' fees),
judgments, fines and settlement amounts incurred by Acorn Ventures as a party or
participant arising out of Acorn Ventures' services as a consultant. On April 7,
1999, Acorn Ventures and ImageX.com mutually
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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 Parrallel 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 Parrallel 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, LLS 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."
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
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<PAGE> 69
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 2,780,830 12.5
1309 114th Avenue S.E., Suite 200
Bellevue, WA 98004
Entities affiliated with Technology
Partners(4).......................... 2,503,832 14.4 400,000 2,103,832 9.8
1550 Tiburon Boulevard, Suite A
Belvedere, CA 94920
Entities affiliated with Alta
Partners(5).......................... 1,428,572 8.2 142,857 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 -- -- 2.3
F. Joseph Verschueren.................. 580,150 3.3 -- -- 2.7
Eric J. Bean(6)........................ 40,833 * 2,075 38,758 *
Dana F. Manciagli(7)................... 154,937 * 2,000 152,937 *
John R. Higgins(8)..................... 17,000 * -- -- *
John E. Ardell, III(9)................. 2,503,832 14.4 -- 2,103,832(10) 9.8
Garrett P. Gruener(11)................. 1,428,572 8.2 -- 1,285,715(12) 6.0
Elwood D. Howse, Jr.(13)............... 334,293 1.9 20,000 314,293 1.5
Wayne M. Perry......................... 42,500 -- -- 42,500 *
Richard R. Sonstelie(14)............... 39,667 * -- 39,667 *
Bernee D. L. Strom(15)................. 17,500 * -- 17,500 *
Other selling shareholders (each owning
less than 1% of the shares
outstanding)......................... 133,068 * 133,068 -- *
All directors and executive officers as
a group (14 persons)(16)............. 6,117,284 35.0 24,075(17) 5,550,352(18) 25.9
</TABLE>
- -------------------------
* Less than 1%.
(1) This information is based on 17,382,278 shares outstanding on December 31,
1999 and 21,382,278 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 IV, LLC. Also
includes 1,461,906 outstanding shares and 6,500
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<PAGE> 70
shares issuable pursuant to warrants currently exercisable held by Internet
Ventures, LLC. Acorn Ventures, Inc. is a member of Acorn Ventures IV, LLC
and Internet Ventures, LLC.
(4) Represents 2,503,832 outstanding shares held by Technology Partners Fund V,
L.P. and Technology Partners Fund VI, L.P.
(5) Represents 1,415,483 outstanding shares held by Alta California Partners
II, L.P. and 13,089 outstanding shares held by Alta Embarcadero Partners
II, LLC.
(6) Includes 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.
(7) 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.
(8) Represents 17,000 shares issuable pursuant to options exercisable with 60
days of December 31, 1999.
(9) 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.
(10) Assumes the sale in this offering of 400,000 shares held by entities
affiliated with Technology Partners, which shares are beneficially owned by
Mr. Ardell.
(11) 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.
(12) 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.
(13) 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.
(14) Includes 20,909 outstanding shares and 1,258 shares issuable pursuant to
warrants currently exercisable held jointly by Mr. Sonstelie and his
spouse.
(15) 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.
(16) Includes 87,953 shares issuable pursuant to options and warrants
exercisable within 60 days of December 31, 1999.
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<PAGE> 71
(17) Represents shares to be sold in this offering that are held by Eric J.
Bean, Dana F. Manciagli and Elwood D. Howse, Jr.
(18) 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 400,000
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.
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 17,382,278 shares of common stock
outstanding held of record by 238 shareholders. Following this offering, there
will be 21,382,278 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.
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<PAGE> 72
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;
- 75,000 shares at an exercise price of $4.00 per share, expiring on April
13, 2006;
- 42,768 shares at an exercise price of $4.20 per share, expiring on April
8, 2004;
- 48,165 shares at an exercise price of $4.20 per share, expiring on April
21, 2004; and
- 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
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<PAGE> 73
class serving for a three-year term, and one class being elected each year by
our shareholders. Directors may be removed only for cause. Because this system
of electing and removing directors generally makes it more difficult for
shareholders to replace a majority of the board of directors, it may tend to
discourage a third party from making a tender offer or otherwise attempting to
gain control of ImageX.com and may maintain the incumbency of the board of
directors.
Approval for Certain Business Combinations. Our articles of incorporation
require that certain business combinations (including a merger, share exchange
and the sale, lease, exchange, mortgage, 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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<PAGE> 74
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 21,382,278
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 12,910,089 shares of common stock
outstanding upon completion of this offering will be restricted shares.
Restricted shares 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, directors and the selling shareholders, who
collectively beneficially own an aggregate of approximately 8,424,897 restricted
shares, have agreed not to offer, sell, contract to sell, grant any option to
purchase or otherwise dispose of any such shares until 91 days after this
offering. Hambrecht & Quist LLC may, in its sole discretion and at any time
without prior notice, release all or any portion of the common stock subject to
these lock-up agreements. We have also entered into an agreement with Hambrecht
& Quist LLC that we will not offer, sell or otherwise dispose of common stock
until 91 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, the number of restricted shares
that will be available for sale in the public market under the provisions of
Rules 144, 144(k) and 701 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)........................ 1,829,037
In April 2000, upon the expiration of various one-year
holding periods............................................. 2,067,568
May , 2000 (the expiration of 90-day lock-up agreements
entered into in connection this offering, unless released
earlier by Hambrecht & Quist LLC in its sole
discretion)............................................... 8,424,897
Thereafter upon expiration of various one year holding
periods................................................... 543,672
</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 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.
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<PAGE> 75
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 registration statements on Form S-8 to register up to
4,789,714 shares of common stock reserved for issuance under our option plans
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 352,585 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 also have 1,187,477 shares of common stock issuable upon
exercise of warrants. To the extent such warrants are exercised on a net basis
(in which the exercise price is satisfied by deducting shares otherwise issuable
that are equal in value to the exercise price), 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 and, with respect to 935,214
shares, the 90-day lock-up agreements referred to above.
In addition, after completion of this offering the holders of 11,468,170
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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<PAGE> 76
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>
Hambrecht & Quist LLC.......................................
Banc of America Securities LLC..............................
Prudential Securities Incorporated..........................
SG Cowen Securities Corporation.............................
----------
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.......................................... $ $
Total.............................................. $ $
</TABLE>
We estimate that the total expenses of this offering, excluding
underwriting discounts and commissions, will be approximately $679,790.
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 $ per share. The underwriters may allow and such dealers may reallow a
concession not in excess of $ 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 750,000 additional shares of common
stock on the same terms and conditions as set forth on the cover page of this
prospectus. The underwriters may exercise this option solely to cover
over-allotments. To the extent such option is exercised, each underwriter will
have a commitment, subject to
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<PAGE> 77
certain conditions, to purchase a number of additional shares of common stock
proportionate to such underwriter's initial commitment pursuant to the
underwriting agreement.
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 Hambrecht
& Quist LLC 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.
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, except that we
may (i) issue shares upon the exercise of convertible securities, options and
warrants granted prior to the date of the initial public offering; (ii) grant
additional options under our stock option plans; (iii) issue shares under our
employee stock purchase plan; (iv) issue up to 4,000,000 shares of common stock,
under certain terms and conditions, in connection with strategic acquisitions or
alliances; and (v) issue warrants to purchase up to 200,000 shares of common
stock, under certain terms and conditions, to consultants to ImageX.com.
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
75
<PAGE> 78
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.
Each of Hambrecht & Quist LLC, 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.
Hambrecht & Quist LLC and persons associated with Hambrecht & Quist LLC
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.
76
<PAGE> 79
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, 1997 and
1998 and for each of the three years in the period ended December 31, 1998,
included in this prospectus, have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
The financial statements of Fine Arts Engravers Company, Inc. (d.b.a. Fine
Arts Graphics) as of December 31, 1997 and 1998 and for each of the two years in
the period ended December 31, 1998, included in this prospectus, have been so
included in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
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.
77
<PAGE> 80
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1. This prospectus, which forms a part of the registration
statement, does not contain all the information included in the registration
statement. Certain information is omitted and you should refer to the
registration statement and its exhibits. With respect to references made in this
prospectus to any contract or other document of ImageX.com, such references are
not necessarily complete and you should refer to the exhibits attached to the
registration statement for copies of the actual contract or document. You may
review a copy of the registration statement, including exhibits filed therewith,
at the Commission's public reference facilities in Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional offices of
the Commission located at 7 World Trade Center, Suite 1300, New York, New York
10048, and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. You may also obtain copies of such materials from the Public
Reference Section of the Commission, Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. The Commission
maintains a Web site (http://www.sec.gov) that contains reports, proxy and
information statements and other information regarding registrants, such as
ImageX.com, that file electronically with the Commission.
This prospectus includes statistical data regarding the Internet sector and
the printing industry which were obtained from industry publications, including
reports generated by Forrester Research and CAP Ventures. These industry
publications generally indicate that they have obtained information from sources
believed to be reliable, but they do not guarantee the accuracy and completeness
of such information. While we believe these industry publications to be
reliable, we have not independently verified such data.
78
<PAGE> 81
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
IMAGEX.COM, INC.
Report of PricewaterhouseCoopers LLP, independent
accountants................................................. F-3
Balance Sheets as of December 31, 1997 and 1998 and
September 30, 1999 (unaudited)......................... F-5
Statements of Operations for the years ended December 31,
1996, 1997 and 1998 and for the nine-month periods
ended September 30, 1998 and 1999 (unaudited).......... F-6
Statements of Shareholders' Equity (Deficit) for the years
ended December 31, 1996, 1997 and 1998 and for the
nine-month period ended September 30, 1999
(unaudited)............................................ F-7
Statements of Cash Flows for the years ended December 31,
1996, 1997 and 1998 and for the nine-month periods
ended September 30, 1998 and 1999 (unaudited).......... F-8
Notes to Financial Statements............................. F-9
IMAGEX.COM, INC.
Supplemental Consolidated Balance Sheets as of December
31, 1997 and 1998 and September 30, 1999 (unaudited)... F-28
Supplemental Consolidated Statements of Operations for the
years ended December 31, 1996, 1997 and 1998 and for
the nine-month periods ended September 30, 1998 and
1999 (unaudited)....................................... F-29
Supplemental Consolidated Statements of Shareholders'
Equity (Deficit) for the years ended December 31, 1996,
1997 and 1998 and for the nine-month period ended
September 30, 1999 (unaudited)......................... F-30
Supplemental Consolidated Statements of Cash Flows for the
years ended December 31, 1996, 1997 and 1998 and for
the nine-month periods ended September 30, 1998 and
1999 (unaudited)....................................... F-31
Notes to Supplemental Consolidated Financial Statements... F-32
FINE ARTS ENGRAVERS COMPANY, INC. (D.B.A. FINE ARTS
GRAPHICS)
Report of PricewaterhouseCoopers LLP, independent
accountants............................................ F-52
Balance Sheets as of December 31, 1997 and 1998 and March
31, 1999 (unaudited)................................... F-53
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-54
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-55
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-56
Notes to Financial Statements............................. F-57
IMAGE PRESS, INC.
Report of PricewaterhouseCoopers LLP, independent
accountants............................................ F-63
Balance Sheets as of December 31, 1998 and June 30, 1999
(unaudited)............................................ F-64
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-65
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-66
</TABLE>
F-1
<PAGE> 82
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
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-67
Notes to Financial Statements............................. F-68
PRINTBID.COM, INC.
Report of PricewaterhouseCoopers LLP, independent
accountants............................................ F-72
Balance Sheets as of December 31, 1998 and September 30,
1999 (unaudited)....................................... F-73
Statements of Operations for the year ended December 31,
1998 and for the nine-month periods ended September 30,
1998 and 1999(unaudited)............................... F-74
Statements of Changes in Shareholders' Equity (Deficit)
for the year ended December 31, 1998 and for the
nine-month period ended September 30, 1999
(unaudited)............................................ F-75
Statements of Cash Flows for the year ended December 31,
1998 and for the nine-month periods ended September 30,
1998 and 1999 (unaudited).............................. F-76
Notes to Financial Statements............................. F-77
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
Unaudited Pro Forma Condensed Consolidated Balance Sheet
as of September 30, 1999............................... F-86
Unaudited Pro Forma Condensed Consolidated Statements of
Operations for the year ended December 31, 1998 and for
the nine-month period ended September 30, 1999......... F-87
</TABLE>
F-2
<PAGE> 83
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
ImageX.com, Inc.
In our opinion, the accompanying balance sheets and the related statements
of operations, shareholders' equity (deficit) and of cash flows present fairly,
in all material respects, the financial position of ImageX.com, Inc. (the
"Company") at December 31, 1997 and 1998, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1998, in conformity with 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 in the accompanying
financial statements have been revised.
As described in Note 12, on December 9, 1999, the Company merged with
PrintBid.com, Inc. in a transaction accounted for as a pooling of interests. The
accompanying supplementary consolidated financial statements give retroactive
effect to the merger of the Company with PrintBid.com, Inc. Generally accepted
accounting principles proscribe giving effect to a consummated business
combination accounted for by the pooling of interests method in financial
statements that do not include the date of consummation. These financial
statements do not extend through the date of consummation; however, they will
become the historical financial statements of the Company after financial
statements covering the date of consummation of the business combination are
issued.
In our opinion, based upon our audits, the accompanying supplementary
consolidated balance sheets and the related supplementary consolidated
statements of operations, shareholders' equity (deficit) and of cash flows
present fairly, in all material respects, the financial position of the Company
and its subsidiaries at December 31, 1998, and the results of their operations
and their cash flows for each of the three 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
F-3
<PAGE> 84
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICEWATERHOUSECOOPERS LLP
Seattle, Washington
March 5, 1999, except for paragraph 3 of Note 12,
as to which the date is April 13, 1999,
paragraph 11 of Note 12, as to
which the date is April 15, 1999, paragraph 2 of
Note 7, paragraph 2 of Note 8, paragraphs 1 and 8
of Note 9, as to which the date is April 21, 1999,
paragraph 2 of Note 9, as to which the date is
June 16, 1999, paragraphs 9 and 10 of Note 12, as to
which the date is April 30, 1999, paragraph 12
of Note 12, as to which the date is August 9, 1999,
paragraph 13 of Note 12, as to which the date is
August 26, 1999, paragraph 14 of Note 12 as to which
the date is January 7, 2000, paragraph 15 of Note 12
as to which the date is November 4, 1999,
paragraph 16 of Note 12 as to which the date is
January 5, 2000. Note 13, as to which the
date is September 30, 1999, paragraph 7 of Note 9, as to
which the date is August 18, 1999, paragraph 5 of
Note 12, as to which the date is September 21, 1999,
except as to the pooling of interests with PrintBid.com, Inc.
which is as of December 9, 1999 and paragraph 15 of
Note 1 as to which the date is January 12, 2000
F-4
<PAGE> 85
IMAGEX.COM, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1997 1998 1999
------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 186 $ 883 $27,256
Accounts receivable (net of allowance for doubtful
accounts of $15 and $140 at December 31, 1998 and
September 30, 1999, respectively)....................... 19 234 3,319
Inventories............................................... 723
Prepaid expenses.......................................... 960
------- -------- -------
Total current assets............................... 205 1,117 32,258
Restricted cash............................................. 25 25
Property and equipment, net................................. 694 1,132 5,173
Goodwill, net............................................... 2,266
Other assets................................................ 39 45 2,028
------- -------- -------
Total assets....................................... $ 938 $ 2,319 $41,750
======= ======== =======
LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of notes payable.......................... $ 300 $ 453
Line of credit payable.................................... 96
Accounts payable.......................................... 450 746 $ 3,019
Accrued liabilities....................................... 71 240 1,194
------- -------- -------
Total current liabilities.......................... 821 1,535 4,213
Notes payable, net of current portion....................... 300 312
------- -------- -------
Total liabilities.................................. 1,121 1,847 4,213
------- -------- -------
Commitments
Series B mandatorily redeemable convertible preferred stock,
$0.01 par value; 3,500,000 shares authorized, issued and
outstanding; aggregate liquidation preference of $3,500... 3,459 3,459
Series C mandatorily redeemable convertible preferred stock,
$0.01 par value; 4,040,000 shares authorized, 4,000,000
issued and outstanding; aggregate liquidation preference
of $6,000................................................. 5,109
Series D mandatorily redeemable convertible preferred stock,
$0.01 par value; 1,925,000 shares authorized, 1,385,493
issued and outstanding, respectively; aggregate
liquidation preference of $2,771.......................... 2,635
Series E mandatorily redeemable convertible preferred stock,
$0.01 par value; 11,904,762 shares authorized
Value ascribed to mandatorily redeemable convertible
preferred stock warrants.................................. 147
------- --------
Total mandatorily redeemable convertible preferred
stock............................................ 3,459 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;
aggregate liquidation preference of $1,500.............. 15 15
Common stock, $0.01 par value; 70,000,000 shares
authorized; 1,200,000, 1,608,520 and 16,700,643 shares
issued and outstanding at December 31, 1997 and 1998 and
September 30, 1999, respectively........................ 12 16 167
Additional paid-in capital................................ 392 3,908 62,107
Unearned compensation..................................... (1,956) (1,094)
Notes receivable from shareholders (including $20 from a
director)............................................... (28) (228) (220)
Accumulated deficit....................................... (4,033) (12,633) (23,423)
------- -------- -------
Total shareholders' equity (deficit)............... (3,642) (10,878) 37,537
------- -------- -------
Total liabilities, mandatorily redeemable convertible
preferred stock and shareholders' equity (deficit)........ $ 938 $ 2,319 $41,750
======= ======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 86
IMAGEX.COM, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
--------------------------- -------------------------
1996 1997 1998 1998 1999
------- ------- ------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues............................... $ 79 $ 87 $ 968 $ 614 $ 6,646
Cost of sales.......................... 99 100 998 657 4,986
------- ------- ------- ------- --------
Gross profit (loss)............... (20) (13) (30) (43) 1,660
------- ------- ------- ------- --------
Operating expenses:
General and administrative........... 146 1,285 3,413 2,234 5,739
Sales and marketing.................. 1,018 2,182 1,741 3,778
Product development.................. 300 1,316 2,551 1,884 2,051
Amortization of unearned
compensation...................... 379 134 946
------- ------- ------- ------- --------
Total operating expenses..... 446 3,619 8,525 5,993 12,514
------- ------- ------- ------- --------
Loss from operations......... (466) (3,632) (8,555) (6,036) (10,854)
Other income:
Interest income (expense), net....... 3 62 (45) (39) 64
------- ------- ------- ------- --------
Net loss..................... $ (463) $(3,570) $(8,600) $(6,075) $(10,790)
======= ======= ======= ======= ========
Basic and diluted net loss per share --
revised -- See Note 1................ $(13.60) $(14.14) $(14.65) $(10.90) $ (3.43)
======= ======= ======= ======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 87
IMAGEX.COM, INC.
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, January 1, 1996.......... $ 1,000 $ -- $ 2 $ $
Issuance of common stock for
transfer of technology (see Note
9)................................ 49,000 1 299
Conversion of common stock to
Series A
Convertible Preferred Stock....... 1,500,000 15 (50,000) (1) (14)
Issuance of common stock........... 1,050,000 11 (11)
Related-party contribution (see
Note 6)........................... 87
Net loss...........................
---------- ---- ---------- ---- ------- ------- ---------
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
Unearned compensation.............. 2,335 (2,335)
Amortization of unearned
compensation...................... 379
Accretion of mandatorily redeemable
convertible preferred stock....... (222)
Net loss...........................
---------- ---- ---------- ---- ------- ------- ---------
Balances, December 31, 1998........ 1,500,000 15 1,608,520 16 3,908 (1,956) (228)
Redemption of common stock
(unaudited)....................... (42,000) (1) (7) 8
Issuance of stock options to
consultants (unaudited)........... 68
Issuance of common stock upon
exercise of stock options
(unaudited)....................... 154,350 1 60 (15)
Issuance of common stock for Fine
Arts (unaudited).................. 93,750 1 374
Warrants issued in conjunction with
Series E bridge financing
(unaudited)....................... 115
Warrants issued in conjunction with
issuance of Series E preferred
stock (unaudited)................. 130
Accretion of mandatorily redeemable
convertible preferred stock
(unaudited)....................... (84)
Net proceeds from initial public
offering (net of offering costs of
$3,119) (unaudited)............... 3,450,000 35 20,996
Collection of note receivable
(unaudited)....................... 15
Issuance of common stock for Image
Press (unaudited)................. 16,394 1 299
Reclassification of preferred stock
warrants from temporary equity
(unaudited)....................... 147
Conversion of preferred to common
stock upon initial public offering
(unaudited)....................... (1,500,000) (15) 11,351,132 113 35,799
Issuance of common stock upon
exercise of warrants
(unaudited)....................... 68,497 1 218
Unearned compensation
(unaudited)....................... 84 (84)
Amortization of unearned
compensation (unaudited).......... 946
Net loss (unaudited)...............
---------- ---- ---------- ---- ------- ------- ---------
Balances, September 30, 1999
(unaudited)....................... 16,700,643 $167 $62,107 $(1,094) $ (220)
========== ==== ========== ==== ======= ======= =========
<CAPTION>
ACCUMULATED
DEFICIT TOTAL
----------- --------
<S> <C> <C>
Balances, January 1, 1996.......... $ $ 2
Issuance of common stock for
transfer of technology (see Note
9)................................ 300
Conversion of common stock to
Series A
Convertible Preferred Stock.......
Issuance of common stock...........
Related-party contribution (see
Note 6)........................... 87
Net loss........................... (463) (463)
-------- --------
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
Unearned compensation..............
Amortization of unearned
compensation...................... 379
Accretion of mandatorily redeemable
convertible preferred stock....... (222)
Net loss........................... (8,600) (8,600)
-------- --------
Balances, December 31, 1998........ (12,633) (10,878)
Redemption of common stock
(unaudited).......................
Issuance of stock options to
consultants (unaudited)........... 68
Issuance of common stock upon
exercise of stock options
(unaudited)....................... 46
Issuance of common stock for Fine
Arts (unaudited).................. 375
Warrants issued in conjunction with
Series E bridge financing
(unaudited)....................... 115
Warrants issued in conjunction with
issuance of Series E preferred
stock (unaudited)................. 130
Accretion of mandatorily redeemable
convertible preferred stock
(unaudited)....................... (84)
Net proceeds from initial public
offering (net of offering costs of
$3,119) (unaudited)............... 21,031
Collection of note receivable
(unaudited)....................... 15
Issuance of common stock for Image
Press (unaudited)................. 300
Reclassification of preferred stock
warrants from temporary equity
(unaudited)....................... 147
Conversion of preferred to common
stock upon initial public offering
(unaudited)....................... 35,897
Issuance of common stock upon
exercise of warrants
(unaudited)....................... 219
Unearned compensation
(unaudited).......................
Amortization of unearned
compensation (unaudited).......... 946
Net loss (unaudited)............... (10,790) (10,790)
-------- --------
Balances, September 30, 1999
(unaudited)....................... $(23,423) $ 37,537
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE> 88
IMAGEX.COM, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
---------------------------- --------------------
1996 1997 1998 1998 1999
------ ------- ------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................... $ (463) $(3,570) $(8,600) $ (6,075) $(10,790)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 121 423 304 1,203
Amortization of unearned compensation................... 379 134 946
Interest expense for warrants issued in connection with
bridge financing...................................... 30 30 115
Issuance of stock options to consultant................. 169 169 68
Purchased in-process research and development........... 300
Provision for doubtful accounts......................... 15 10 140
Changes in operating assets and liabilities, net of
effects of purchase of Fine Arts and Image Press:
Accounts receivable..................................... (19) (230) (205) (779)
Inventories............................................. 69
Prepaid expenses........................................ (875)
Other assets............................................ (39) (6) 13 (145)
Accounts payable and accrued liabilities................ 149 459 464 146 1,522
------ ------- ------- -------- --------
Net cash used in operating activities................... (14) (3,048) (7,356) (5,474) (8,526)
------ ------- ------- -------- --------
Cash flows from investing activities:
Purchases of property and equipment..................... (18) (797) (862) (703) (2,769)
Deposits of restricted cash............................. (25) (25)
Purchase of Fine Arts including acquisition costs of
$185.................................................. (4,810)
Purchase of Image Press including acquisition costs of
$14................................................... (2,712)
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................... (18) (797) (887) (728) (10,291)
------ ------- ------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of notes payable................. 174 600 450 450 2,200
Principal payments on notes payable..................... (24) (285) (379) (2,265)
Proceeds from borrowings on line of credit.............. 96 (796)
Proceeds from issuance of Series B Preferred stock (net
of offering costs of $74)............................. 3,309
Proceeds from issuance of Series C Preferred stock (net
of offering costs of $89)............................. 5,935 5,445
Proceeds from issuance of Series D Preferred stock (net
of offering costs of $29 for the year ended December
31, 1998, and $29 and $7 for the nine months ended
September 30, 1998 and 1999, respectively)............ 2,743 600 795
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.................. 3 1 272
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 8
------ ------- ------- -------- --------
Net cash provided by financing activities............... 3,483 578 8,940 6,115 45,190
------ ------- ------- -------- --------
Net increase (decrease) in cash and cash equivalents.... 3,451 (3,267) 697 (87) 26,373
Cash and cash equivalents at beginning of period........ 2 3,453 186 186 883
------ ------- ------- -------- --------
Cash and cash equivalents at end of period.............. $3,453 $ 186 $ 883 $ 99 $ 27,256
====== ======= ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-8
<PAGE> 89
IMAGEX.COM, INC.
NOTES TO FINANCIAL STATEMENTS
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
THE COMPANY
ImageX.com, Inc. (the "Company," formerly ImageX, Inc.) was incorporated on
August 21, 1995 and is headquartered in Bellevue, Washington. The Company is an
Internet market maker for printed business materials. The Company's medium to
large size business customers access a Corporate Online Printing Center that
contains a digital catalog of all of their own 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 also markets printed business materials based on standard
templates through a small business printing center.
The Company markets its printed business materials domestically. The
Company operates in one segment.
Prior to 1998, the Company operated as a development-stage enterprise.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
RESTRICTED CASH
Restricted cash consists of a certificate of deposit which collateralizes a
letter of credit as required by the Company's office lease agreement.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is provided on
the straight-line method for financial statement purposes and accelerated
methods for federal income tax purposes. Estimated useful lives of the assets
are as follows:
<TABLE>
<CAPTION>
ASSET YEARS
----- ----------------
<S> <C>
Computer software...................................... 3
Computer hardware...................................... 5
Office furniture and equipment......................... 7
Leasehold improvements................................. Life of lease or
useful lives,
whichever is
shorter, ranging
from 3 to 5
</TABLE>
Expenditures for additions and improvements are capitalized; expenditures
for maintenance and repairs are charged to expense as incurred. When assets are
retired or otherwise disposed of, the cost of the assets and related accumulated
depreciation are eliminated from the accounts and any resulting gain or loss is
reflected in the results of operations.
F-9
<PAGE> 90
IMAGEX.COM, INC.
NOTES TO 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 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.
REVENUE RECOGNITION
The Company derives substantially all of its revenues from the sale of
printed business materials in both the marketing/promotional and general office
categories. Such 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 our network of approximately 40 vendors and the two
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.
For orders received through the Small Business Printing Center service, the
Company utilizes a private label supplier and the products are shipped under the
ImageX.com brand. The Company receives a percentage of the purchase price paid
by the customers. Revenues are recognized when the products are shipped.
PRODUCT DEVELOPMENT COSTS
Product development costs represent research and development expenditures,
which are charged to operations as incurred.
ADVERTISING
The Company expenses advertising costs as incurred. Advertising expenses
for the years ended December 31, 1996, 1997 and 1998 were approximately $0,
$5,300 and $175,600,
F-10
<PAGE> 91
IMAGEX.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
respectively, and approximately $175,600 and $331,700, for the nine months ended
September 30, 1998 and 1999, respectively (unaudited).
NET LOSS AND PRO FORMA NET LOSS PER SHARE
Statement of Financial Accounting Standards No. 128 (SFAS No. 128),
"Earnings Per Share," requires the presentation of basic and diluted earnings
(loss) per share for all periods presented.
In accordance with SFAS No. 128, basic net loss per share has been computed
using the weighted-average number of shares of common stock outstanding during
the period, except that pursuant to Securities and Exchange Commission Staff
Accounting Bulletin No. 98, if applicable, common shares issued in each of the
periods presented for nominal consideration have been included in the
calculation as if they were outstanding for all periods presented.
Pro forma basic and diluted net loss per share 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 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.
Both historical and pro forma basic and diluted net loss per share for all
periods presented have been revised to exclude the effect of stock subject to
repurchase from the weighted average shares of common stock outstanding. In
addition, the pro forma net loss for common stock for each pro forma period has
been revised to show the effect of pro forma conversion of securities as a
decrease in the historical net loss for common stock. These revisions had no
effect on the previously reported net losses or cash flows of the Company for
any period.
F-11
<PAGE> 92
IMAGEX.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
---------------------------------- ------------------------
1996 1997 1998 1998 1999
-------- ---------- ---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net loss............................. $ (463) $ (3,570) $ (8,600) $ (6,075) $ (10,790)
Accretion of mandatorily redeemable
convertible preferred stock.......... (221) (147) (84)
-------- ---------- ---------- ---------- -----------
Net loss for common stock............ $ (463) $ (3,570) (8,821) $ (6,222) (10,874)
======== ========== ==========
Effect of pro forma conversion of
securities:
Accretion of mandatorily redeemable
convertible preferred stock..... 221 84
---------- -----------
$ (8,600) $ (10,790)
========== ===========
Weighted average shares of common
stock outstanding (shares used in
computing basic and diluted net
loss per share)
as previously reported:............ 115,948 1,137,260 1,213,591 1,167,095 3,935,641
======== ========== ========== ========== ===========
as revised:........................ 34,042 252,425 601,962 570,723 3,173,827
======== ========== ========== ========== ===========
Basic and diluted net loss per share
as previously reported:............ $ (3.99) $ (3.14) $ (7.27) $ (5.33) $ (2.76)
======== ========== ========== ========== ===========
as revised:........................ $ (13.60) $ (14.14) $ (14.65) $ (10.90) $ (3.43)
======== ========== ========== ========== ===========
Shares used in computing basic and
diluted net loss per share
as previously reported:............ 1,213,591 3,935,641
========== ===========
as revised:........................ 601,962 3,173,827
========== ===========
Weighted average effect of pro forma
securities
Preferred stock adjustment
Series A, B, C, D, E
as previously reported:............ 5,196,909 7,227,939
========== ===========
as revised:........................ 4,281,968 7,190,303
========== ===========
Shares used in computing pro forma
basic and diluted net loss per
share...........................
as previously reported:............ 6,410,500 11,163,580
========== ===========
as revised:........................ 4,883,930 10,364,130
========== ===========
Pro forma basic and diluted net loss
per share
as previously reported:............ $ (1.38) $ (0.97)
========== ===========
as revised:........................ $ (1.76) $ (1.04)
========== ===========
</TABLE>
F-12
<PAGE> 93
IMAGEX.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Dilutive securities include options, warrants, preferred stock as if
converted and restricted stock subject to repurchase. Potentially dilutive
securities totaling 3,496,528, 3,580,390 and 7,990,774 for the years ended
December 31, 1996, 1997 and 1998, respectively, and 6,718,091 and 3,187,277 for
the nine-month periods ended September 30, 1998 and 1999 (unaudited),
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 nine month period ended September 30,
1999, two customers accounted for 17% and 12% of revenues, respectively. The
Company maintains its cash and cash equivalents in bank accounts in amounts,
which, at times, may exceed Federally insured limits. The Company has not
experienced any losses in such accounts.
FAIR VALUE OF FINANCIAL INSTRUMENTS
For certain financial instruments, including cash and cash equivalents,
accounts receivable, accounts payable and accrued liabilities, recorded amounts
approximate fair value due to the relatively short maturity period.
The carrying amount of notes payable and the line of credit approximate
their market value because they have interest rates that vary with market
interest rates.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NEW ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants
Accounting Standards Executive Committee issued Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." This statement requires that once
F-13
<PAGE> 94
IMAGEX.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 capitalized computer software costs of approximately $822,000
and recognized the related amortization expense of approximately $369,000 for
the nine months ended September 30, 1999 (unaudited).
UNAUDITED INTERIM FINANCIAL STATEMENTS
The interim financial statements as of September 30, 1999 and for the nine
months ended September 30, 1999 and 1998 is unaudited; however, in the opinion
of management, the interim financial statements includes all adjustments,
consisting only of normal recurring adjustments, necessary to present fairly the
Company's financial position as of September 30, 1999 and the results of its
operations and cash flows for the nine months ended September 30, 1999 and 1998.
2. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following at December 31, 1997 and
1998, and at September 30, 1999 (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------- SEPTEMBER 30,
1997 1998 1999
----- ------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Computer hardware....................................... $ 445 $ 785 $ 2,348
Office furniture and equipment.......................... 217 300 682
Computer software....................................... 138 560 1,834
Leasehold improvements.................................. 15 32 71
Production machinery and equipment...................... -- -- 1,876
----- ------ -------
815 1,677 6,811
Less accumulated depreciation........................... (121) (545) (1,638)
----- ------ -------
Property and equipment, net........................... $ 694 $1,132 $ 5,173
===== ====== =======
</TABLE>
Depreciation expense for the years ended December 31, 1996, 1997 and 1998
was $104, $121,314 and $424,221, respectively. Depreciation expense was $303,749
and $1,076,501 for the nine months ended September 30, 1998 and 1999,
respectively (unaudited).
F-14
<PAGE> 95
IMAGEX.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. ACCRUED LIABILITIES
Accrued liabilities consisted of the following at December 31, 1997 and
1998, and at September 30, 1999 (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------ SEPTEMBER 30,
1997 1998 1999
---- ---- -------------
(UNAUDITED)
<S> <C> <C> <C>
Accrued payroll and related benefits............... $64 $ 93 $ 763
Taxes payable...................................... 7 29 188
Accrued professional services...................... 114
Other.............................................. 4 243
--- ---- ------
$71 $240 $1,194
=== ==== ======
</TABLE>
4. NOTES PAYABLE AND LINE OF CREDIT:
Notes payable consisted of the following at December 31, 1997 and 1998 (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1997 1998
----- -----
<S> <C> <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...................................... $ 600 $ 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
----- -----
600 765
Less: current portion....................................... (300) (453)
----- -----
$ 300 $ 312
===== =====
</TABLE>
The agreements for notes payable to bank include various restrictive
covenants which, among other things, restrict the payment of dividends and
require the Company to maintain minimum working capital and net worth amounts.
Future minimum debt payments at December 31, 1998 were as follows (in
thousands):
<TABLE>
<S> <C>
1999........................................................ $453
2000........................................................ 150
2001........................................................ 150
2002........................................................ 12
----
$765
====
</TABLE>
During 1996, the Company maintained a $25,000 line of credit. The
outstanding balance of $24,000 at December 31, 1996 was repaid in 1997 and the
line was closed in February 1997.
F-15
<PAGE> 96
IMAGEX.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
During 1998, the Company obtained a new line of credit in the amount of
$300,000 in conjunction with its note payable to a bank of $450,000. The line of
credit includes various restrictive covenants, effective from January 31, 1999,
which, among other things, require the Company to maintain minimum working
capital and net worth amounts. The line of credit accrues interest at prime
(7.75% at December 31, 1998) plus 1% and matures on September 18, 1999. The
outstanding balance as of December 31, 1998 was $96,440. The line of credit is
collateralized by substantially all of the Company's assets.
5. FEDERAL INCOME TAXES:
At December 31, 1998, the Company had accumulated net operating loss
carryforwards for tax purposes of approximately $11,900,000, which will expire
beginning in 2011 through 2018. Utilization of net operating loss carryforwards
may be subject to certain limitations under Section 382 of the Internal Revenue
Code.
The following is a reconciliation of the income tax benefit to the amount
based on the statutory Federal rate:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
--------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Federal income tax benefit at statutory rate............... (34)% (34)% (34)%
Change in valuation allowance.............................. 34% 34% 34%
--- --- ---
-- -- --
=== === ===
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities are approximately as follows
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1998
------- -------
<S> <C> <C>
Deferred income tax assets:
Tax loss carryforwards.................................... $ 1,291 $ 4,030
Accrued compensation and benefits......................... 18 81
Provision for doubtful accounts........................... 5
Contributed technology.................................... 34
Other..................................................... 8
------- -------
1,343 4,124
Deferred income tax liabilities:
Depreciation.............................................. (3) --
------- -------
1,340 4,124
Valuation allowance....................................... (1,340) (4,124)
------- -------
Net deferred tax assets................................... $ -- $ --
======= =======
</TABLE>
F-16
<PAGE> 97
IMAGEX.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
A full valuation allowance has been recorded at December 31, 1997 and 1998
based on management's determination that the recognition criteria for
realization of the net deferred tax assets has not been met.
6. RELATED PARTY TRANSACTIONS:
The original founders of the Company, one of whom is an officer and a
director of the Company, are the owners of 100% of the outstanding capital stock
of Parallel Communications, Inc. ("Parallel"), which serves as the Company's
advertising agency pursuant to an Advertising Agency Service Agreement, dated
August 26, 1997. In 1996, 1997 and 1998, the Company paid Parallel approximately
$0, $152,000 and $521,000, respectively, for services performed on behalf of the
Company. For the nine months ended September 30, 1998 and 1999, the Company paid
approximately $473,600 and $957,300, respectively, for services performed on
behalf of the Company (unaudited).
As of December 31, 1997 and 1998, the Company had a payable to Parallel of
$85,397 and $21,088, respectively. As of September 30, 1999, the Company had no
payables to Parallel.
During 1996, the Company had a payable to Parallel in the amount of $86,627
for various services performed and expenses incurred on behalf of the Company.
The payable was disputed by the Company and as a consequence was written off by
the Company in 1996. Because the shareholders of Parallel were the same as the
Company's shareholders, the $86,627 was recorded as a capital contribution by
the Company in 1996.
7. EMPLOYEE BENEFITS:
DEFINED CONTRIBUTION PLAN
The Company has a 401(k) Retirement Plan (the "Plan") which covers
substantially all eligible employees. The Plan is a defined contribution profit
sharing plan in which all eligible participants may elect to have a percentage
of their compensation contributed to the Plan, subject to certain guidelines
issued by the Internal Revenue Service. The Company can contribute to the Plan
at the discretion of the Board of Directors. There were no contributions made by
the Company during 1996, 1997 or 1998.
STOCK OPTION PLAN
The Company has adopted a stock incentive compensation plan (the "Plan"),
which provides for the issuance of stock awards and nonqualified and incentive
stock options for officers, directors, employees, and consultants. As of
December 31, 1998, the Company had reserved a total of 1,550,000 shares of
common stock for issuance pursuant to the Plan. In April 1999, the Board of
Directors increased the total number of shares reserved under the Plan to
2,800,000 shares, plus an automatic annual increase, to be added on the first
day of each fiscal year beginning on January 1, 2001, equal to least of (1)
1,000,000 shares, (2) 5% of the average number of common shares outstanding as
used to calculate fully diluted earnings per share as reported in the Company's
financial statements for the preceding year and (3) a lesser amount determined
by the Board of Directors. 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.
F-17
<PAGE> 98
IMAGEX.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"). The Company has chosen to account for
stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" and related interpretations. Accordingly, compensation cost for stock
awards and options is measured as the excess, if any, of the fair value of the
Company's stock at the date of the grant over the amount an employee must pay to
acquire the stock. The unearned compensation is being amortized in accordance
with Financial Accounting Standards Board Interpretation No. 28 over the vesting
period of the individual options.
Compensation expense of $0 and $378,507 has been recorded for stock options
granted during the years ended December 31, 1997 and 1998, respectively, and
$133,926 and $945,916, for the nine months ended September 30, 1998 and 1999,
respectively (unaudited), because the exercise prices of the stock options
granted were less than the fair value of the related shares at the time of
grant. The fair value per share used to calculate unearned compensation was
determined by the Company's Board of Directors based on a number of factors,
including, among other things, appraisals by an outside valuation firm and by
reference to the preferred stock values reduced by a nominal discount factor.
Option activity for the years ended December 31, 1997 and 1998 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 (unaudited)................................ 660,371 6.28
Exercised (unaudited).............................. (154,350) 0.40
Canceled (unaudited)............................... (39,025) 1.15
---------
Options outstanding, September 30, 1999
(unaudited)...................................... 1,117,351 3.63
Options exercisable at December 31, 1998........... 166,365
---------
Stock awards and options available for grant at
December 31, 1998................................ 241,125
</TABLE>
F-18
<PAGE> 99
IMAGEX.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes information about options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ----------------------------------------------------- ----------------------------------
WEIGHTED AVERAGE
REMAINING
CONTRACTUAL LIFE
EXERCISE PRICES NUMBER OF SHARES (IN YEARS) NUMBER OF SHARES EXERCISE PRICES
- --------------- ---------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C>
$0.20 181,805 9 94,365 $0.20
0.30 372,550 9 72,000 0.30
0.40 25,000 10 0.40
1.20 71,000 8 1.20
</TABLE>
Pro forma information regarding net loss as required by SFAS No. 123 has
been determined as if the Company had accounted for its employee stock options
under the minimum value method using the following weighted-average assumptions:
<TABLE>
<CAPTION>
1997 1998
--------------- ---------------
<S> <C> <C>
Risk free interest rate...................... 5.82% to 6.87% 4.60% to 5.65%
Expected lives............................... 5 to 10 years 5 to 10 years
Expected dividends........................... $0 $0
</TABLE>
The minimum value method was developed for use in estimating the fair value
of options granted by nonpublic entities and, accordingly, excludes
consideration of volatility. In addition, option valuation models require the
input of highly subjective assumptions. Because the Company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the minimum value
method does not necessarily provide a reliable single measure of the fair value
of its stock options.
The weighted average fair values and weighted average exercise prices per
share at the date of grant for options granted were as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------
1997 1998
----- -----
<S> <C> <C>
Weighted average fair value of options granted with exercise
price less than the fair value of the stock on the date of
grant..................................................... $0.60 $2.04
===== =====
Weighted average exercise price of options granted with
exercise price less than the fair value of the stock on
the date of grant......................................... $0.20 $0.42
===== =====
</TABLE>
F-19
<PAGE> 100
IMAGEX.COM, INC.
NOTES TO 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,
------------------
1997 1998
------- -------
<S> <C> <C>
Net loss -- as reported..................................... $(3,570) $(8,600)
======= =======
Net loss -- pro forma....................................... $(3,574) $(8,667)
======= =======
Loss per share -- as reported............................... $(14.14) $(14.65)
======= =======
Loss per share -- pro forma................................. $(14.16) $(14.77)
======= =======
</TABLE>
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period.
8. MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK:
During 1996, the Company issued 3,500,000 shares of Series B Preferred
Stock, $0.01 par value. During 1998, the Company issued 4,000,000 shares of
Series C Preferred Stock, $0.01 par value and 1,385,493 shares of Series D
Preferred Stock, $0.01 par value. All holders of Preferred Stock are entitled to
vote on all matters on an "as if converted" basis. The holders of Preferred
Stock shall be entitled to receive dividends prior and in preference to any
declaration or payment of any dividend on the Series A Preferred Stock and
common stock of the Company.
Each share of Preferred Stock is convertible at the option of the holder or
automatically upon 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-20
<PAGE> 101
IMAGEX.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
At December 31, 1998, 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 C Preferred Stock............. 26,667 $1.50 August 24, 2005
13,333 $1.50 August 28, 2005
-------
40,000
Series D Preferred Stock............. 138,250 $2.00 October 1, 2005
</TABLE>
In August 1998, the Company issued warrants to two of its investors to
purchase 40,000 shares of Series C Preferred Stock in connection with bridge
financing arrangements. The Company executed convertible subordinated promissory
notes aggregating $600,000 which, with accrued interest, were converted into
302,993 shares of Series D Preferred Stock upon closing of the sale of Series D
Preferred Stock in October 1998. These warrants are exercisable at $1.50 per
share through August 28, 2005. The warrants were ascribed a value of $29,889.
In connection with issuance of Series D Preferred Stock, the Company issued
warrants to its investors to purchase 138,250 shares of Series D Preferred
Stock. These warrants are exercisable at $2.00 per share and are exercisable
through October 1, 2005. The warrants were ascribed a value of $116,951.
9. SHAREHOLDERS' EQUITY (DEFICIT):
COMMON STOCK
As of December 31, 1998, the Company was authorized to issue 22,500,000
shares of voting common stock, $0.01 par value. In April 1999, the Company's
Articles of Incorporation were amended to increase the number of authorized
shares of common stock to 50,000,000 shares. At its discretion, the Board of
Directors may declare dividends on shares of common stock. Upon liquidation,
holders of common stock will be paid only after the Preferred Stock preferences
have been satisfied.
In June 1999, the Company's Board of Directors approved an increase of the
number of authorized shares of common stock to 70,000,000 shares, subject to
shareholder approval.
The Company issued 1,000 shares of common stock to its four founding
shareholders (the "Founders") for $2,000 upon the formation of the Company on
August 21, 1995. Pursuant to an agreement dated May 1, 1996, the Founders, all
of whom are shareholders of Parallel (see Note 6), contributed technology to the
Company in exchange for 49,000 shares of common stock. Such technology was
purchased by the Founders from Parallel. The technology was valued at $300,000
and has been credited as a contribution to capital. The transferred technology
was considered to be in-process research and development; accordingly, the
$300,000 was charged to research and development expense in 1996. In December
1996, the Founders exchanged all of their 50,000 shares of common stock for
1,500,000 shares of Series A Preferred Stock.
In December 1996, the Company issued 1,050,000 shares of common stock to
certain Founders and a director of the Company for consideration of $400 and
services to be performed in the future. The shares are subject to repurchase by
the Company for $0.02 per share over the
F-21
<PAGE> 102
IMAGEX.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
thirty-six month period following the issuance of the shares. Such shares
subject to repurchase will be reduced for each completed month of employment
with the Company by the Founders and the director. During 1998, the Company
repurchased 100,000 shares from one of the Founders of the Company in accordance
with an employment termination agreement.
Pursuant to the Company's stock incentive compensation plan (see Note 7),
the Company issued 150,000 shares of common stock (100,000 shares were to a
director of the Company) at a purchase price of $0.20 per share for an aggregate
purchase price of $30,000, which was satisfied by notes receivable totaling
$30,000. One note in the amount of $10,000 bears interest at 5.70% and is due in
February 2001. The other note in the amount of $20,000 bears interest at the
rate of 7.00% and is due in April 2000. The 150,000 shares are subject to
repurchase by the Company for $0.20 per share, as follows:
1. 50,000 shares will be subject to repurchase through February 2001,
with the number of shares being subject to repurchase reduced by 1,000 each
month following the original issuance of the shares.
2. 100,000 shares will be subject to repurchase through April 2000,
with the number of shares being subject to repurchase reduced by 2,778
shares each month following the original issuance of the shares. During the
repurchase period, the individual who purchased the 100,000 shares is
required to perform management services for the Company.
In November 1998, the Company issued 500,000 shares of common stock to an
officer of the Company at a purchase price of $0.40 per share pursuant to a
promissory note in the amount of $200,000. The note bears interest at 7% and is
due in January 2003. These shares are subject to repurchase by the Company for
$0.40 per share through January 15, 2003, with the shares being subject to
repurchase reduced by 120,000 shares after November 15, 1999, and reduced by
10,000 shares each month following November 15, 1999. The 650,000 shares have
been included in the stock options activity (see Note 7). At December 31, 1998,
the notes receivable from shareholders totaled $228,000 and are included in
shareholders' equity (deficit) on the accompanying balance sheet.
On June 16, 1999, the Board of Directors approved a one-for-two reverse
stock split of the Company's common stock. The reverse stock split 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.
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.
F-22
<PAGE> 103
IMAGEX.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The conversion price is subject to weighted average anti-dilution
protection and proportional adjustments in the event of stock splits and similar
events.
WARRANTS
At December 31, 1998, 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>
890,000 $3.00 January 8, 2005
290,000 $7.50 January 8, 2005
---------
1,180,000
</TABLE>
During 1998 in connection with the sale of Series C Preferred Stock, the
Company sold warrants to purchase 1,180,000 shares of common stock for
consideration of $23,600 to investors. Of the warrants issued, 890,000 warrants
are exercisable at $3.00 per share. The remaining 290,000 warrants are
exercisable at $7.50 per share. The warrants are exercisable through January 8,
2005. A certain number of warrants are subject to repurchase by the Company, as
defined in the warrant agreements. The period in which the Company is entitled
to repurchase the warrants is January 1, 2001 through March 31, 2001. The
repurchase price is $0.02 per warrant. The warrants were ascribed a value of
$1,038,094. One of the investors has entered into an agreement with the Company
to perform certain management services for the Company.
10. COMMITMENTS:
OPERATING LEASE
The Company leases its facilities under noncancelable operating leases
which expire between February 28, 2001 and February 28, 2002. The Company pays
taxes, insurance, normal maintenance and certain other operating expenses. At
December 31, 1998 the approximate future rental payments due under these leases
for the remainder of the lease terms were as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
1999........................................................ $ 808
2000........................................................ 3,043
2001........................................................ 2,783
2002........................................................ 2,637
2003........................................................ 1,381
Thereafter.................................................. 1,234
-------
$11,886
=======
</TABLE>
Total rent expense incurred under operating leases for the years ended
December 31, 1996, 1997 and 1998 was approximately $7,500, $158,000 and
$332,000, respectively. Total rent expense incurred under operating leases for
the nine months ended September 30, 1998 and 1999 was approximately $237,000 and
$344,000, respectively (unaudited).
F-23
<PAGE> 104
IMAGEX.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. SUPPLEMENTAL CASH FLOW INFORMATION:
Supplemental disclosure of cash flow information is summarized below for
the years ended December 31, 1996, 1997 and 1998, and for the nine months ended
September 30, 1998 and 1999 (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
-------------------------- -------------------------
1996 1997 1998 1998 1999
---- ---------- ------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash paid during the year for interest... $ 2 $12 $ 59 $ 39 $ 159
Non-cash financing activities:
Conversion of notes payable to Series B
Preferred stock..................... $150
Related party contribution (see Note
6).................................. $ 87
Unearned compensation.................. $2,335 $ 539 $ 84
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 $ 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 $ 147 $ 64
Accretion on Series D Preferred
Stock............................... $ 9 $ 8
Accretion of Series E Preferred
Stock............................... $ 12
Acquisition of Fine Arts (see Note 12):
Fair value of assets acquired....... $ 4,664
Issuance of common stock............ $ 375
Assumption of liabilities........... $ 1,156
Assumption of acquisition costs..... $ 185
Acquisition of Image Press (see Note
12):
Fair value of assets acquired....... $ 2,997
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
Reclassification of preferred stock
warrants from temporary equity...... $ 147
</TABLE>
F-24
<PAGE> 105
IMAGEX.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
12. SUBSEQUENT EVENTS:
REDEMPTION OF COMMON STOCK
During 1996, the Company issued 150,000 shares of common stock at $0.20 per
share in exchange for a note receivable of $30,000. During January 1999, the
Company redeemed 42,000 shares of common stock in exchange for cancellation of
the outstanding remaining principal amount of the note receivable.
SALE OF SERIES D PREFERRED STOCK
During January 1999, the Company issued an additional 401,257 shares of
Series D Preferred Stock for $802,514.
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 will be
accounted for using the purchase method. The aggregate purchase price of
$5,000,000 consists of $375,000 of common stock for 93,750 shares issued to the
seller and $4,625,000 of cash payment. The aggregate purchase will be allocated
to the net assets acquired, based upon their respective fair market values. The
excess of the purchase price over the fair market value of the assets acquired
of $1,677,206 has been allocated to goodwill and will be amortized over 10 years
using the straight line method.
In connection with the acquisition, liabilities were assumed as follows (in
thousands):
<TABLE>
<S> <C>
Fair value of assets acquired............................... $ 4,664
Cash paid................................................... (4,625)
Common stock issued......................................... (375)
Goodwill.................................................... 1,677
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
$2,997,207 consists of $300,000 of common stock for 16,394 shares issued to the
seller and $2,697,207 of cash payment. The aggregate purchase price will be
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 $655,039 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 online
resource that provides print buyers with free access to a comprehensive database
of printers in the United States. The acquisition will be accounted for using
the pooling-of-interest method.
The following summarizes the unaudited pro forma results of operations, on
a combined basis, as if the Company's acquisition of Fine Arts, Image Press and
PrintBid occurred as of the
F-25
<PAGE> 106
IMAGEX.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
beginning of each of the periods presented, after including the impact of
certain adjustments such as amortization of goodwill (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1998 SEPTEMBER 30, 1999
----------------- ------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Revenues.................................... $17,983 $ 14,493
======= ========
Pro forma net loss.......................... $(8,919) $(12,857)
======= ========
Pro forma basic and diluted net loss per
share..................................... $ (9.24) $ (3.71)
======= ========
</TABLE>
The unaudited pro forma results are not necessarily indicative of the
results of operations which would actually have been reported had the
acquisition occurred prior to the beginning of the periods presented. In
addition, they are not intended to be indicative of future results.
On April 30, 1999, Fine Arts entered into a credit agreement with a bank
for a $1 million working capital line and a $1.5 million term loan that is
collateralized by 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 Fine Arts to maintain certain
financial ratios and net worth amounts.
On April 30, 1999, Fine Arts entered into a revolving note with a bank for
a $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 Fine Arts to maintain certain financial ratios
and net worth amounts.
SALE OF SERIES E PREFERRED STOCK
During April 1999, the Company issued 11,904,761 shares of Series E
Preferred Stock, $0.01 par value, for $25,000,000. The terms of the Series E
Preferred Stock are similar to the terms of previously issued preferred stock.
Of the 11,904,761 shares issued, 579,745 shares were issued as a result of the
conversion of the convertible subordinated promissory notes issued to investors
in January 1999 aggregating $1,197,486 plus accrued interest of $19,979. In
addition, in April 1999, the Company issued warrants to purchase 85,535 shares
of Series E Preferred Stock and 48,165 shares of common stock at exercise prices
of $2.10 per share and $4.20 per share respectively.
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
F-26
<PAGE> 107
IMAGEX.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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.
INITIAL PUBLIC OFFERING
On August 26, 1999, the Company issued 3,000,000 shares of its common stock
at an initial public offering 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.
SECONDARY PUBLIC OFFERING
In January 2000, 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.
COMMITMENTS
On November 4, 1999, the Company signed a term lease for office space in
Kirkland, Washington which expires on December 31, 2004. The future rental
payments due under this lease are approximately $1,038,000, $1,102,000,
$1,146,000, $1,190,000 and $1,235,000 for the fiscal years ended December 31,
2000, 2001, 2002, 2003 and thereafter, respectively.
On January 5, 2000, the Company entered into a strategic alliance agreement
with an Internet company whereby the Company is committed in paying $100,000 per
month for a duration of one year from the signing date for promotional links.
13. INVENTORIES (UNAUDITED):
Inventories consist 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 production overhead. Inventories
consist of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
1999
-------------
(UNAUDITED)
<S> <C>
Paper stock and supplies.................................. $316
Work-in-process........................................... 83
Finished goods............................................ 324
----
$723
====
</TABLE>
F-27
<PAGE> 108
IMAGEX.COM, INC.
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1997 1998 1999
------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 186 $ 967 $27,427
Accounts receivable (net of allowance for doubtful
accounts of $15 and $140 at December 31, 1998 and
September 30, 1999, respectively)....................... 19 234 3,319
Inventories............................................... 723
Prepaid expenses.......................................... 58 1,051
------- -------- -------
Total current assets............................... 205 1,259 32,520
Restricted cash............................................. 25 25
Property and equipment, net................................. 694 1,140 5,273
Goodwill, net............................................... 2,266
Other assets................................................ 39 45 2,028
------- -------- -------
Total assets....................................... $ 938 $ 2,469 $42,112
======= ======== =======
LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of notes payable.......................... $ 300 $ 453
Line of credit payable.................................... 96
Accounts payable.......................................... 450 762 $ 3,151
Accrued liabilities....................................... 71 241 1,211
------- -------- -------
Total current liabilities.......................... 821 1,552 4,362
Notes payable, net of current portion....................... 300 454 534
------- -------- -------
Total liabilities.................................. 1,121 2,006 4,896
------- -------- -------
Commitments
Series B mandatorily redeemable convertible preferred stock,
$0.01 par value; 3,500,000 shares authorized, issued and
outstanding; aggregate liquidation preference of $3,500... 3,459 3,459
Series C mandatorily redeemable convertible preferred stock,
$0.01 par value; 4,040,000 shares authorized, 4,000,000
issued and outstanding; aggregate liquidation preference
of $6,000................................................. 5,109
Series D mandatorily redeemable convertible preferred stock,
$0.01 par value; 1,925,000 shares authorized, 1,385,493
issued and outstanding, respectively; aggregate
liquidation preference of $2,771.......................... 2,635
Series E mandatorily redeemable convertible preferred stock,
$0.01 par value; 11,904,762 shares authorized
Value ascribed to mandatorily redeemable convertible
preferred stock warrants.................................. 147
------- --------
Total mandatorily redeemable convertible preferred
stock............................................ 3,459 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;
aggregate liquidation preference of $1,500............. 15 15
Common stock, $0.01 par value; 70,000,000 shares
authorized; 1,200,000, 2,081,974 and 17,135,885 shares
issued and outstanding at December 31, 1997 and 1998 and
September 30, 1999, respectively........................ 12 21 171
Additional paid-in capital................................ 392 4,263 65,945
Unearned compensation..................................... (1,961) (3,012)
Notes receivable from shareholders (including $20 from a
director)............................................... (28) (228) (220)
Accumulated deficit....................................... (4,033) (12,997) (25,668)
------- -------- -------
Total shareholders' equity (deficit)............... (3,642) (10,887) 37,216
------- -------- -------
Total liabilities, mandatorily redeemable convertible
preferred stock and shareholders' equity (deficit)........ $ 938 $ 2,469 $42,112
======= ======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-28
<PAGE> 109
IMAGEX.COM, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
--------------------------- -------------------------
1996 1997 1998 1998 1999
------- ------- ------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues............................... $ 79 $ 87 $ 968 $ 614 $ 6,646
Cost of sales.......................... 99 100 998 657 4,986
------- ------- ------- ------- --------
Gross profit (loss)............... (20) (13) (30) (43) 1,660
------- ------- ------- ------- --------
Operating expenses:
General and administrative........... 146 1,285 3,549 2,309 6,550
Sales and marketing.................. 1,018 2,207 1,763 3,967
Product development.................. 300 1,316 2,750 2,080 2,256
Amortization of unearned
compensation...................... 380 135 1,542
------- ------- ------- ------- --------
Total operating expenses..... 446 3,619 8,886 6,287 14,315
------- ------- ------- ------- --------
Loss from operations......... (466) (3,632) (8,916) (6,330) (12,655)
Other income:
Interest income (expense), net....... 3 62 (48) (39) (16)
------- ------- ------- ------- --------
Net loss..................... $ (463) $(3,570) $(8,964) $(6,369) $(12,671)
======= ======= ======= ======= ========
Basic and diluted net loss per share... $(13.60) $(14.14) $(12.25) $ (9.67) $ (3.67)
======= ======= ======= ======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-29
<PAGE> 110
IMAGEX.COM, INC.
SUPPLEMENTAL 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, January 1, 1996.......... $ 1,000 $ -- $ 2 $ $
Issuance of common stock for
transfer of technology (see Note
9)................................ 49,000 1 299
Conversion of common stock to
Series A Convertible Preferred
Stock............................. 1,500,000 15 (50,000) (1) (14)
Issuance of common stock........... 1,050,000 11 (11)
Related-party contribution (see
Note 6)........................... 87
Net loss...........................
---------- ---- ---------- ---- ------- ------- ---------
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
(unaudited)....................... (42,000) (1) (7) 8
Purchase of treasury stock
(unaudited)....................... (38,212) (1) (1)
Issuance of stock options to
consultants (unaudited)........... 155
Issuance of common stock upon
exercise of stock options
(unaudited)....................... 154,350 1 60 (15)
Issuance of common stock for Fine
Arts (unaudited).................. 93,750 1 374
Warrants issued in conjunction with
Series E bridge financing
(unaudited)....................... 115
Warrants issued in conjunction with
issuance of Series E preferred
stock (unaudited)................. 130
Issuance of common stock warrants
in exchange for consulting
services (unaudited).............. 33
Issuance of common stock warrants
related to Series A convertible
debt (unaudited).................. 517
Unearned compensation related to
issuance of options to consultant
(unaudited)....................... 339
Accretion of mandatorily redeemable
convertible preferred stock
(unaudited)....................... (84)
Net proceeds from initial public
offering (net of offering costs of
$3,119) (unaudited)............... 3,450,000 35 20,996
Collection of note receivable
(unaudited)....................... 15
Issuance of common stock for Image
Press (unaudited)................. 16,394 1 299
Transfer value ascribed to
preferred stock warrants
(unaudited)....................... 147
Conversion of preferred to common
stock upon initial public offering
(unaudited)....................... (1,500,000) (15) 11,351,132 113 35,799
Issuance of common stock upon
exercise of warrants
(unaudited)....................... 68,497 1 218
Unearned compensation
(unaudited)....................... 2,592 (2,592)
Amortization of unearned
compensation (unaudited).......... 1,541
Net loss (unaudited)...............
---------- ---- ---------- ---- ------- ------- ---------
Balances, September 30, 1999
(unaudited)....................... $ 17,135,885 $171 $65,945 $(3,012) $ (220)
========== ==== ========== ==== ======= ======= =========
<CAPTION>
ACCUMULATED
DEFICIT TOTAL
----------- --------
<S> <C> <C>
Balances, January 1, 1996.......... $ $ 2
Issuance of common stock for
transfer of technology (see Note
9)................................. 300
Conversion of common stock to
Series A Convertible Preferred
Stock.............................
Issuance of common stock...........
Related-party contribution (see
Note 6)........................... 87
Net loss........................... (463) (463)
-------- --------
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
(unaudited).......................
Purchase of treasury stock
(unaudited)....................... (2)
Issuance of stock options to
consultants (unaudited)........... 155
Issuance of common stock upon
exercise of stock options
(unaudited)....................... 46
Issuance of common stock for Fine
Arts (unaudited).................. 375
Warrants issued in conjunction with
Series E bridge financing
(unaudited)....................... 115
Warrants issued in conjunction with
issuance of Series E preferred
stock (unaudited)................. 130
Issuance of common stock warrants
in exchange for consulting
services (unaudited).............. 33
Issuance of common stock warrants
related to Series A convertible
debt (unaudited).................. 517
Unearned compensation related to
issuance of options to consultant
(unaudited)....................... 339
Accretion of mandatorily redeemable
convertible preferred stock
(unaudited)....................... (84)
Net proceeds from initial public
offering (net of offering costs of
$3,119) (unaudited)............... 21,031
Collection of note receivable
(unaudited)....................... 15
Issuance of common stock for Image
Press (unaudited)................. 300
Transfer value ascribed to
preferred stock warrants
(unaudited)....................... 147
Conversion of preferred to common
stock upon initial public offering
(unaudited)....................... 35,897
Issuance of common stock upon
exercise of warrants
(unaudited)....................... 219
Unearned compensation
(unaudited).......................
Amortization of unearned
compensation (unaudited).......... 1,541
Net loss (unaudited)............... (12,671) (12,671)
-------- --------
Balances, September 30, 1999
(unaudited)....................... $(25,668) $ 37,216
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-30
<PAGE> 111
IMAGEX.COM, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
---------------------------- --------------------
1996 1997 1998 1998 1999
------ ------- ------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................... $ (463) $(3,570) $(8,964) $ (6,369) $(12,671)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 121 423 304 1,206
Amortization of unearned compensation................... 379 134 946
Interest expense for warrants issued in connection with
bridge financing...................................... 30 30 115
Issuance of stock options to consultant................. 169 169 68
Amortization of discount on convertible debentures...... 2 59
Non-cash compensation expense........................... 61 34 1,022
Services exchanged for convertible debentures........... 117
Services exchanged for common stock warrants............ 33
Services exchanged for common stock..................... 252 250
Purchased in-process research and development........... 300
Provision for doubtful accounts......................... 15 10 140
Changes in operating assets and liabilities, net of
effects of purchase of Fine Arts and Image Press:
Accounts receivable..................................... (19) (230) (205) (779)
Inventories............................................. 69
Prepaid expenses........................................ (33) (908)
Other assets............................................ (39) (6) 13 (145)
Accounts payable and accrued liabilities................ 149 459 480 153 1,655
------ ------- ------- -------- --------
Net cash used in operating activities................... (14) (3,048) (7,422) (5,477) (9,073)
------ ------- ------- -------- --------
Cash flows from investing activities:
Purchases of property and equipment..................... (18) (797) (870) (703) (2,864)
Deposits of restricted cash............................. (25) (25)
Purchase of Fine Arts including acquisition costs of
$185.................................................. (4,810)
Purchase of Image Press including acquisition costs of
$14................................................... (2,712)
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................... (18) (797) (895) (728) (10,386)
------ ------- ------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of notes payable................. 174 600 601 450 2,931
Principal payments on notes payable..................... (24) (285) (379) (2,265)
Proceeds from borrowings on line of credit.............. 96
Repayment on line of credit............................. (796)
Proceeds from issuance of Series B Preferred stock (net
of offering costs of $74)............................. 3,309
Proceeds from issuance of Series C Preferred stock (net
of offering costs of $89)............................. 5,935 5,445
Proceeds from issuance of Series D Preferred stock (net
of offering costs of $29 for the year ended December
31, 1998, and $29 and $7 for the nine months ended
September 30, 1998 and 1999, respectively)............ 2,743 600 795
Proceeds from issuance of Series E Preferred stock (net
of offering costs of $1,055).......................... 23,945
Repurchase of common stock.............................. (2) (2) (2)
Proceeds from issuance of common stock.................. 10 8 272
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 8
------ ------- ------- -------- --------
Net cash provided by financing activities............... 3,483 578 9,098 6,122 45,919
------ ------- ------- -------- --------
Net increase (decrease) in cash and cash equivalents.... 3,451 (3,267) 781 (83) 26,460
Cash and cash equivalents at beginning of period........ 2 3,453 186 186 967
------ ------- ------- -------- --------
Cash and cash equivalents at end of period.............. $3,453 $ 186 $ 967 $ 103 $ 27,427
====== ======= ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-31
<PAGE> 112
IMAGEX.COM, INC.
NOTES TO SUPPLEMENTAL 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 12 on December 9, 1999, the Company merged with
PrintBid.com, Inc. in a transaction accounted for as a pooling of interests. The
supplementary consolidated financial statements give retroactive effect to the
merger of the Company with PrintBid.com, Inc. Generally accepted accounting
principles proscribe giving effect to a consummated business combination
accounted for by the pooling of interests method in financial statements that do
not include the date of consummation. These financial statements do not extend
through the date of consummation; however, they will become the historical
financial statements of the Company after financial statements covering the date
of consummation of the business combination are issued.
Prior to 1998, the Company operated as a development-stage enterprise.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
RESTRICTED CASH
Restricted cash consists of a certificate of deposit which collateralizes a
letter of credit as required by the Company's office lease agreement.
F-32
<PAGE> 113
IMAGEX.COM, INC.
NOTES TO SUPPLEMENTAL 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 and accelerated
methods for federal income tax purposes. Estimated useful lives of the assets
are as follows:
<TABLE>
<CAPTION>
ASSET YEARS
----- ----------------
<S> <C>
Computer software...................................... 3
Computer hardware...................................... 5
Office furniture and equipment......................... 7
Leasehold improvements................................. Life of lease or
useful lives,
whichever is
shorter, ranging
from 3 to 5
</TABLE>
Expenditures for additions and improvements are capitalized; expenditures
for maintenance and repairs are charged to expense as incurred. When assets are
retired or otherwise disposed of, the cost of the assets and related accumulated
depreciation are eliminated from the accounts and any resulting gain or loss is
reflected in the results of operations.
VALUATION OF LONG-LIVED ASSETS
The Company periodically evaluates the carrying value of long-lived assets
to be held and used, including, but not limited to, property and equipment and
other assets, when events and circumstances warrant such a review. The carrying
value of a long-lived asset is considered impaired when the anticipated
undiscounted cash flow from such asset is separately identifiable and is less
than its carrying value. In that event, a loss is recognized based on the amount
by which the carrying value exceeds the fair value of the long-lived asset. Fair
value is determined primarily using the anticipated cash flows discounted at a
rate commensurate with the risk involved. Loss on long-lived assets to be
disposed of is determined in a similar manner, except that fair values are
reduced for the cost to dispose.
STOCK ISSUANCE COSTS
Proceeds from issuances of capital stock are presented net of specific
external costs directly attributable to the related offering.
REVENUE RECOGNITION
The Company has derived substantially all of its revenues from the
Corporate Online Printing Center and from customers they obtained through
acquisition. Such 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
F-33
<PAGE> 114
IMAGEX.COM, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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. As of September 30, 1999, PrintBid.com
had not generated any revenues.
PRODUCT DEVELOPMENT COSTS
Product development costs represent research and development expenditures,
which are charged to operations as incurred.
ADVERTISING
The Company expenses advertising costs as incurred. Advertising expenses
for the years ended December 31, 1996, 1997 and 1998 were approximately $0,
$5,300 and $192,000, respectively, and approximately $175,600 and $435,800, for
the nine months ended September 30, 1998 and 1999, respectively (unaudited).
NET LOSS AND PRO FORMA NET LOSS PER SHARE
Statement of Financial Accounting Standards No. 128 (SFAS No. 128),
"Earnings Per Share," requires the presentation of basic and diluted earnings
(loss) per share for all periods presented.
In accordance with SFAS No. 128, basic net loss per share has been computed
using the weighted-average number of shares of common stock outstanding during
the period, except that pursuant to Securities and Exchange Commission Staff
Accounting Bulletin No. 98, if applicable, common shares issued in each of the
periods presented for nominal consideration have been included in the
calculation as if they were outstanding for all periods presented.
Pro forma basic and diluted net loss per share 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 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.
F-34
<PAGE> 115
IMAGEX.COM, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
---------------------------------- ------------------------
1996 1997 1998 1998 1999
-------- ---------- ---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net loss......................... $ (463) $ (3,570) $ (8,964) $ (6,369) $ (12,671)
Accretion of mandatorily
redeemable convertible
preferred stock................ (221) (147) (84)
-------- ---------- ---------- ---------- -----------
Net loss for common stock........ $ (463) $ (3,570) (9,185) $ (6,516) (12,755)
======== ========== ==========
Effect of pro forma conversion of
securities:
Accretion of mandatorily
redeemable convertible
preferred stock............. 221 84
---------- -----------
$ (8,964) $ (12,671)
========== ===========
Weighted average shares of common
stock outstanding (shares used
in computing basic and diluted
net loss per share)............ 34,042 252,425 749,987 673,894 3,478,089
======== ========== ========== ========== ===========
Basic and diluted net loss per
share.......................... $ (13.60) $ (14.14) $ (12.25) $ (9.67) $ (3.67)
======== ========== ========== ========== ===========
Shares used in computing basic
and diluted net loss per
share.......................... 749,987 3,478,089
Weighted average effect of pro
forma securities
Preferred stock adjustment
Series A, B, C, D, E........ 4,281,967 7,190,304
---------- -----------
Shares used in computing pro
forma basic and diluted net
loss per share.............. 5,031,954 10,668,393
========== ===========
Pro forma basic and diluted net
loss per share................. $ (1.78) $ (1.19)
========== ===========
</TABLE>
Dilutive securities include options, warrants, preferred stock as if
converted and restricted stock subject to repurchase. Potentially dilutive
securities totaling 3,496,528, 3,580,390 and 8,192,063 for the years ended
December 31, 1996, 1997 and 1998, respectively, and 6,928,264 and 3,655,066 for
the nine-month periods ended September 30, 1998 and 1999 (unaudited),
respectively, were excluded from historical basic and diluted loss per share
because of their antidilutive effect.
F-35
<PAGE> 116
IMAGEX.COM, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 nine month period ended September 30,
1999, two customers accounted for 17% and 12% of revenues, respectively. 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.
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
F-36
<PAGE> 117
IMAGEX.COM, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 capitalized computer software costs of approximately $822,000
and recognized the related amortization expense of approximately $369,000 for
the nine months ended September 30, 1999 (unaudited).
UNAUDITED INTERIM FINANCIAL STATEMENTS
The interim financial statements as of September 30, 1999 and for the nine
months ended September 30, 1999 and 1998 is unaudited; however, in the opinion
of management, the interim financial statements includes all adjustments,
consisting only of normal recurring adjustments, necessary to present fairly the
Company's financial position as of September 30, 1999 and the results of its
operations and cash flows for the nine months ended September 30, 1999 and 1998.
2. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following at December 31, 1997 and
1998, and at September 30, 1999 (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------- SEPTEMBER 30,
1997 1998 1999
----- ------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Computer hardware....................................... $ 445 $ 794 $ 2,391
Office furniture and equipment.......................... 217 300 728
Computer software....................................... 138 560 1,849
Leasehold improvements.................................. 15 32 71
Production machinery and equipment...................... -- -- 1,875
----- ------ -------
815 1,686 6,914
Less accumulated depreciation........................... (121) (546) (1,641)
----- ------ -------
Property and equipment, net........................... $ 694 $1,140 $ 5,273
===== ====== =======
</TABLE>
Depreciation expense for the years ended December 31, 1996, 1997 and 1998
was $104, $121,314 and $424,221, respectively. Depreciation expense was $303,749
and $1,079,745 for the nine months ended September 30, 1998 and 1999,
respectively (unaudited).
F-37
<PAGE> 118
IMAGEX.COM, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACCRUED LIABILITIES
Accrued liabilities consisted of the following at December 31, 1997 and
1998, and at September 30, 1999 (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------ SEPTEMBER 30,
1997 1998 1999
---- ---- -------------
(UNAUDITED)
<S> <C> <C> <C>
Accrued payroll and related benefits............... $64 $ 93 $ 780
Taxes payable...................................... 7 29 188
Accrued professional services...................... 114
Other.............................................. 5 243
--- ---- ------
$71 $241 $1,211
=== ==== ======
</TABLE>
4. NOTES PAYABLE AND LINE OF CREDIT:
Notes payable consisted of the following at December 31, 1997 and 1998 (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------- SEPTEMBER 30,
1997 1998 1999
----- ----- -------------
(UNAUDITED)
<S> <C> <C> <C>
Note payable to bank, interest at prime (7.75% at
December 31, 1998) plus 2%, monthly principal payments
of $25 due December 1999, and collateralized by
substantially all of the Company's assets............. $ 600 $ 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 $534
----- ----- ----
600 907 534
Less: current portion................................... (300) (453)
----- ----- ----
$ 300 $ 454 $534
===== ===== ====
</TABLE>
The agreements for notes payable to bank include various restrictive
covenants which, among other things, restrict the payment of dividends and
require the Company to maintain minimum working capital and net worth amounts.
F-38
<PAGE> 119
IMAGEX.COM, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Future minimum debt payments at December 31, 1998 were as follows (in
thousands):
<TABLE>
<S> <C>
1999........................................................ $453
2000........................................................ 291
2001........................................................ 150
2002........................................................ 13
----
$907
====
</TABLE>
During 1996, the Company maintained a $25,000 line of credit. The
outstanding balance of $24,000 at December 31, 1996 was repaid in 1997 and the
line was closed in February 1997.
During 1998, the Company obtained a new line of credit in the amount of
$300,000 in conjunction with its note payable to a bank of $450,000. The line of
credit includes various restrictive covenants, effective from January 31, 1999,
which, among other things, require the Company to maintain minimum working
capital and net worth amounts. The line of credit accrues interest at prime
(7.75% at December 31, 1998) plus 1% and matures on September 18, 1999. The
outstanding balance as of December 31, 1998 was $96,440. The line of credit is
collateralized by substantially all of the Company's assets.
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.
PrintBid 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.
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.
5. FEDERAL INCOME TAXES:
At December 31, 1998, the Company had accumulated net operating loss
carryforwards for tax purposes of approximately $13,280,000, which will expire
beginning in 2011 through 2018. Utilization of net operating loss carryforwards
may be subject to certain limitations under Section 382 of the Internal Revenue
Code.
The following is a reconciliation of the income tax benefit to the amount
based on the statutory Federal rate:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
--------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Federal income tax benefit at statutory rate............... (34)% (34)% (34)%
Change in valuation allowance.............................. 34% 34% 34%
--- --- ---
-- -- --
=== === ===
</TABLE>
F-39
<PAGE> 120
IMAGEX.COM, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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,
------------------
1997 1998
------- -------
<S> <C> <C>
Deferred income tax assets:
Tax loss carryforwards.................................... $ 1,291 $ 4,030
Accrued compensation and benefits......................... 18 82
Provision for doubtful accounts........................... 5
Contributed technology.................................... 34
Depreciation.............................................. 123
Other..................................................... 15
------- -------
1,343 4,255
Deferred income tax liabilities:
Depreciation.............................................. (3) --
------- -------
1,340 4,255
Valuation allowance....................................... (1,340) (4,255)
------- -------
Net deferred tax assets................................... $ -- $ --
======= =======
</TABLE>
A full valuation allowance has been recorded at December 31, 1997 and 1998
based on management's determination that the recognition criteria for
realization of the net deferred tax assets has not been met.
6. RELATED PARTY TRANSACTIONS:
The original founders of the Company, one of whom is an officer and a
director of the Company, are the owners of 100% of the outstanding capital stock
of Parallel Communications, Inc. ("Parallel"), which serves as the Company's
advertising agency pursuant to an Advertising Agency Service Agreement, dated
August 26, 1997. In 1996, 1997 and 1998, the Company paid Parallel approximately
$0, $152,000 and $521,000, respectively, for services performed on behalf of the
Company. For the nine months ended September 30, 1998 and 1999, the Company paid
approximately $473,600 and $957,300, respectively, for services performed on
behalf of the Company (unaudited).
As of December 31, 1997 and 1998, the Company had a payable to Parallel of
$85,397 and $21,088, respectively. As of September 30, 1999, the Company had no
payables to Parallel.
During 1996, the Company had a payable to Parallel in the amount of $86,627
for various services performed and expenses incurred on behalf of the Company.
The payable was disputed by the Company and as a consequence was written off by
the Company in 1996. Because the shareholders of Parallel were the same as the
Company's shareholders, the $86,627 was recorded as a capital contribution by
the Company in 1996.
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
F-40
<PAGE> 121
IMAGEX.COM, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
7. EMPLOYEE BENEFITS:
DEFINED CONTRIBUTION PLAN
The Company has a 401(k) Retirement Plan (the "Plan") which covers
substantially all eligible employees. The Plan is a defined contribution profit
sharing plan in which all eligible participants may elect to have a percentage
of their compensation contributed to the Plan, subject to certain guidelines
issued by the Internal Revenue Service. The Company can contribute to the Plan
at the discretion of the Board of Directors. There were no contributions made by
the Company during 1996, 1997 or 1998.
STOCK OPTION PLAN
The Company has adopted a stock incentive compensation plan (the "Plan"),
which provides for the issuance of stock awards and nonqualified and incentive
stock options for officers, directors, employees, and consultants. As of
December 31, 1998, the Company had reserved a total of 1,550,000 shares of
common stock for issuance pursuant to the Plan. In April 1999, the Board of
Directors increased the total number of shares reserved under the Plan to
2,800,000 shares, plus an automatic annual increase, to be added on the first
day of each fiscal year beginning on January 1, 2001, equal to least of (1)
1,000,000 shares, (2) 5% of the average number of common shares outstanding as
used to calculate fully diluted earnings per share as reported in the Company's
financial statements for the preceding year and (3) a lesser amount determined
by the Board of Directors. 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 and $378,507 has been recorded for stock options
granted during the years ended December 31, 1997 and 1998, respectively, and
$133,926 and $1,541,751, for the nine months ended September 30, 1998 and 1999,
respectively (unaudited), because the exercise prices of the stock options
granted were less than the fair value of the related shares at the time of
grant. The fair value per share used to calculate unearned compensation was
determined by the Company's Board of Directors based on a number of factors,
including, among other things, appraisals by an outside valuation firm and by
reference to the preferred stock values reduced by a nominal discount factor.
F-41
<PAGE> 122
IMAGEX.COM, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Option activity for the years ended December 31, 1997 and 1998 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 (unaudited)................................ 936,330 3.12
Exercised (unaudited).............................. (154,350) 0.40
Canceled (unaudited)............................... (39,025) 1.15
---------
Options outstanding, September 30, 1999
(unaudited)...................................... 1,393,310 2.96
Options exercisable at December 31, 1998........... 166,365
---------
Stock awards and options available for grant at
December 31, 1998................................ 241,125
</TABLE>
The following table summarizes information about options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ----------------------------------------------------- ----------------------------------
WEIGHTED AVERAGE
REMAINING
CONTRACTUAL LIFE
EXERCISE PRICES NUMBER OF SHARES (IN YEARS) NUMBER OF SHARES EXERCISE PRICES
- --------------- ---------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C>
$0.20 181,805 9 94,365 $0.20
0.30 372,550 9 72,000 0.30
0.40 25,000 10 0.40
1.20 71,000 8 1.20
</TABLE>
Pro forma information regarding net loss as required by SFAS No. 123 has
been determined as if the Company had accounted for its employee stock options
under the minimum value method using the following weighted-average assumptions:
<TABLE>
<CAPTION>
1997 1998
--------------- ---------------
<S> <C> <C>
Risk free interest rate...................... 5.82% to 6.87% 4.60% to 5.65%
Expected lives............................... 5 to 10 years 5 to 10 years
Expected dividends........................... $0 $0
</TABLE>
The minimum value method was developed for use in estimating the fair value
of options granted by nonpublic entities and, accordingly, excludes
consideration of volatility. In addition, option valuation models require the
input of highly subjective assumptions. Because the Company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can materially
affect
F-42
<PAGE> 123
IMAGEX.COM, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
the fair value estimate, in management's opinion, the minimum value method does
not necessarily provide a reliable single measure of the fair value of its stock
options.
The weighted average fair values and weighted average exercise prices per
share at the date of grant for options granted were as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------
1997 1998
----- -----
<S> <C> <C>
Weighted average fair value of options granted with exercise
price less than the fair value of the stock on the date of
grant..................................................... $0.60 $2.04
===== =====
Weighted average exercise price of options granted with
exercise price less than the fair value of the stock on
the date of grant......................................... $0.20 $0.42
===== =====
</TABLE>
The following table presents net loss and per share amounts as if the
Company accounted for compensation expense related to stock options under the
fair value method prescribed by SFAS No. 123 (in thousands, except per share
data):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------
1997 1998
------- -------
<S> <C> <C>
Net loss -- as reported..................................... $(3,570) $(8,964)
======= =======
Net loss -- pro forma....................................... $(3,574) $(9,031)
======= =======
Loss per share -- as reported............................... $(14.14) $(12.25)
======= =======
Loss per share -- pro forma................................. $(14.16) $(12.34)
======= =======
</TABLE>
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period.
8. MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK:
During 1996, the Company issued 3,500,000 shares of Series B Preferred
Stock, $0.01 par value. During 1998, the Company issued 4,000,000 shares of
Series C Preferred Stock, $0.01 par value and 1,385,493 shares of Series D
Preferred Stock, $0.01 par value. All holders of Preferred Stock are entitled to
vote on all matters on an "as if converted" basis. The holders of Preferred
Stock shall be entitled to receive dividends prior and in preference to any
declaration or payment of any dividend on the Series A Preferred Stock and
common stock of the Company.
Each share of Preferred Stock is convertible at the option of the holder or
automatically upon 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.
F-43
<PAGE> 124
IMAGEX.COM, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
At December 31, 1998, 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 C Preferred Stock............. 26,667 $1.50 August 24, 2005
13,333 $1.50 August 28, 2005
-------
40,000
Series D Preferred Stock............. 138,250 $2.00 October 1, 2005
</TABLE>
In August 1998, the Company issued warrants to two of its investors to
purchase 40,000 shares of Series C Preferred Stock in connection with bridge
financing arrangements. The Company executed convertible subordinated promissory
notes aggregating $600,000 which, with accrued interest, were converted into
302,993 shares of Series D Preferred Stock upon closing of the sale of Series D
Preferred Stock in October 1998. These warrants are exercisable at $1.50 per
share through August 28, 2005. The warrants were ascribed a value of $29,889.
In connection with issuance of Series D Preferred Stock, the Company issued
warrants to its investors to purchase 138,250 shares of Series D Preferred
Stock. These warrants are exercisable at $2.00 per share and are exercisable
through October 1, 2005. The warrants were ascribed a value of $116,951.
9. SHAREHOLDERS' EQUITY (DEFICIT):
COMMON STOCK
As of December 31, 1998, the Company was authorized to issue 22,500,000
shares of voting common stock, $0.01 par value. In April 1999, the Company's
Articles of Incorporation were amended to increase the number of authorized
shares of common stock to 50,000,000 shares. At its discretion, the Board of
Directors may declare dividends on shares of common stock. Upon liquidation,
holders of common stock will be paid only after the Preferred Stock preferences
have been satisfied.
In June 1999, the Company's Board of Directors approved an increase of the
number of authorized shares of common stock to 70,000,000 shares, subject to
shareholder approval.
The Company issued 1,000 shares of common stock to its four founding
shareholders (the "Founders") for $2,000 upon the formation of the Company on
August 21, 1995. Pursuant to an agreement dated May 1, 1996, the Founders, all
of whom are shareholders of Parallel (see Note 6), contributed technology to the
Company in exchange for 49,000 shares of common stock. Such technology was
purchased by the Founders from Parallel. The technology was valued at $300,000
and has been credited as a contribution to capital. The transferred technology
was considered to be in-process research and development; accordingly, the
F-44
<PAGE> 125
IMAGEX.COM, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
$300,000 was charged to research and development expense in 1996. In December
1996, the Founders exchanged all of their 50,000 shares of common stock for
1,500,000 shares of Series A Preferred Stock.
In December 1996, the Company issued 1,050,000 shares of common stock to
certain Founders and a director of the Company for consideration of $400 and
services to be performed in the future. The shares are subject to repurchase by
the Company for $0.02 per share over the thirty-six month period following the
issuance of the shares. Such shares subject to repurchase will be reduced for
each completed month of employment with the Company by the Founders and the
director. During 1998, the Company repurchased 100,000 shares from one of the
Founders of the Company in accordance with an employment termination agreement.
Pursuant to the Company's stock incentive compensation plan (see Note 7),
the Company issued 150,000 shares of common stock (100,000 shares were to a
director of the Company) at a purchase price of $0.20 per share for an aggregate
purchase price of $30,000, which was satisfied by notes receivable totaling
$30,000. One note in the amount of $10,000 bears interest at 5.70% and is due in
February 2001. The other note in the amount of $20,000 bears interest at the
rate of 7.00% and is due in April 2000. The 150,000 shares are subject to
repurchase by the Company for $0.20 per share, as follows:
1. 50,000 shares will be subject to repurchase through February 2001,
with the number of shares being subject to repurchase reduced by 1,000 each
month following the original issuance of the shares.
2. 100,000 shares will be subject to repurchase through April 2000,
with the number of shares being subject to repurchase reduced by 2,778
shares each month following the original issuance of the shares. During the
repurchase period, the individual who purchased the 100,000 shares is
required to perform management services for the Company.
In November 1998, the Company issued 500,000 shares of common stock to an
officer of the Company at a purchase price of $0.40 per share pursuant to a
promissory note in the amount of $200,000. The note bears interest at 7% and is
due in January 2003. These shares are subject to repurchase by the Company for
$0.40 per share through January 15, 2003, with the shares being subject to
repurchase reduced by 120,000 shares after November 15, 1999, and reduced by
10,000 shares each month following November 15, 1999. The 650,000 shares have
been included in the stock options activity (see Note 7). At December 31, 1998,
the notes receivable from shareholders totaled $228,000 and are included in
shareholders' equity (deficit) on the accompanying balance sheet.
In June of 1998, 330,000 restricted shares were issued to outside advisors
of PrintBid. PrintBid 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
(unaudited) was recognized from the date of inception to December 31, 1998 and
for the nine months ended September 30, 1999, respectively. 265,833 (audited)
and 42,501 (unaudited) shares remain restricted at December 31, 1998 and
September 30, 1999, respectively.
F-45
<PAGE> 126
IMAGEX.COM, INC.
NOTES TO SUPPLEMENTAL 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.
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.
WARRANTS
At December 31, 1998, 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>
890,000 $3.00 January 8, 2005
290,000 $7.50 January 8, 2005
---------
1,180,000
</TABLE>
During 1998 in connection with the sale of Series C Preferred Stock, the
Company sold warrants to purchase 1,180,000 shares of common stock for
consideration of $23,600 to investors. Of the warrants issued, 890,000 warrants
are exercisable at $3.00 per share. The remaining 290,000 warrants are
exercisable at $7.50 per share. The warrants are exercisable through January 8,
2005. A certain number of warrants are subject to repurchase by the Company, as
defined in the warrant agreements. The period in which the Company is entitled
to repurchase the warrants is January 1, 2001 through March 31, 2001. The
repurchase price is $0.02 per warrant. The warrants were ascribed a value of
$1,038,094. One of the investors has entered into an agreement with the Company
to perform certain management services for the Company.
In addition to the warrants issued in conjunction with the convertible debt
discussed in Note 4, PrintBid 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.
F-46
<PAGE> 127
IMAGEX.COM, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. COMMITMENTS:
OPERATING LEASE
The Company leases its facilities under noncancelable operating leases
which expire between February 28, 2001 and February 28, 2002. The Company pays
taxes, insurance, normal maintenance and certain other operating expenses. At
December 31, 1998 the approximate future rental payments due under these leases
for the remainder of the lease terms were as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
1999........................................................ $ 808
2000........................................................ 3,043
2001........................................................ 2,783
2002........................................................ 2,637
2003........................................................ 1,381
Thereafter.................................................. 1,234
-------
$11,886
=======
</TABLE>
Total rent expense incurred under operating leases for the years ended
December 31, 1996, 1997 and 1998 was approximately $7,500, $158,000 and
$333,000, respectively. Total rent expense incurred under operating leases for
the nine months ended September 30, 1998 and 1999 was approximately $237,000 and
$367,000, respectively (unaudited).
F-47
<PAGE> 128
IMAGEX.COM, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. SUPPLEMENTAL CASH FLOW INFORMATION:
Supplemental disclosure of cash flow information is summarized below for
the years ended December 31, 1996, 1997 and 1998, and for the nine months ended
September 30, 1998 and 1999 (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
-------------------------- -------------------------
1996 1997 1998 1998 1999
---- ---------- ------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash paid during the year for interest....... $ 2 $12 $ 59 $ 39 $ 159
Non-cash financing activities:
Conversion of notes payable to Series B
Preferred stock......................... $150
Related party contribution (see Note 6).... $ 87
Unearned compensation...................... $2,335 $ 539 $ 2,592
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 $ 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 $ 147 $ 64
Accretion on Series D Preferred Stock...... $ 9 $ 8
Accretion on Series E Preferred Stock...... 12
Acquisition of Fine Arts (see Note 12):
Fair value of assets acquired........... $ 4,664
Issuance of common stock................ $ 375
Assumption of liabilities............... $ 1,156
Assumption of acquisition costs......... $ 185
Acquisition of Image Press (see Note 12):
Fair value of assets acquired........... $ 2,997
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 $ 517
Convertible debt issued in exchange for
services to be performed................ $ 25
Issuance of common stock................... $ 7 $ 7
Issuance of common stock warrants for
services to be performed................ $ 33
Reclassification of preferred stock
warrants from temporary equity.......... $ 147
</TABLE>
F-48
<PAGE> 129
IMAGEX.COM, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. SUBSEQUENT EVENTS:
REDEMPTION OF COMMON STOCK
During 1996, the Company issued 150,000 shares of common stock at $0.20 per
share in exchange for a note receivable of $30,000. During January 1999, the
Company redeemed 42,000 shares of common stock in exchange for cancellation of
the outstanding remaining principal amount of the note receivable.
SALE OF SERIES D PREFERRED STOCK
During January 1999, the Company issued an additional 401,257 shares of
Series D Preferred Stock for $802,514.
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 will be
accounted for using the purchase method. The aggregate purchase price of
$5,000,000 consists of $375,000 of common stock for 93,750 shares issued to the
seller and $4,625,000 of cash payment. The aggregate purchase will be allocated
to the net assets acquired, based upon their respective fair market values. The
excess of the purchase price over the fair market value of the assets acquired
of $1,677,206 has been allocated to goodwill and will be amortized over 10 years
using the straight line method.
In connection with the acquisition, liabilities were assumed as follows (in
thousands):
<TABLE>
<S> <C>
Fair value of assets acquired............................... $ 4,664
Cash paid................................................... (4,625)
Common stock issued......................................... (375)
Goodwill.................................................... 1,677
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
$2,997,207 consists of $300,000 of common stock for 16,394 shares issued to the
seller and $2,697,207 of cash payment. The aggregate purchase price will be
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 $655,039 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 online
resource that provides print buyers with free access to a comprehensive database
of printers in the United States. The acquisition will be accounted for using
the pooling-of-interest method.
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
F-49
<PAGE> 130
IMAGEX.COM, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
beginning of each of the periods presented, after including the impact of
certain adjustments such as amortization of goodwill (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1998 SEPTEMBER 30, 1999
----------------- ------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Revenues.................................... $17,983 $ 14,493
======= ========
Pro forma net loss.......................... $(8,919) $(12,857)
======= ========
Pro forma basic and diluted net loss per
share..................................... $ (9.24) $ (3.71)
======= ========
</TABLE>
The unaudited pro forma results are not necessarily indicative of the
results of operations which would actually have been reported had the
acquisition occurred prior to the beginning of the periods presented. In
addition, they are not intended to be indicative of future results.
On April 30, 1999, Fine Arts entered into a credit agreement with a bank
for a $1 million working capital line and a $1.5 million term loan that is
collateralized by 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 Fine Arts to maintain certain
financial ratios and net worth amounts.
On April 30, 1999, Fine Arts entered into a revolving note with a bank for
a $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 Fine Arts to maintain certain financial ratios
and net worth amounts.
SALE OF SERIES E PREFERRED STOCK
During April 1999, the Company issued 11,904,761 shares of Series E
Preferred Stock, $0.01 par value, for $25,000,000. The terms of the Series E
Preferred Stock are similar to the terms of previously issued preferred stock.
Of the 11,904,761 shares issued, 579,745 shares were issued as a result of the
conversion of the convertible subordinated promissory notes issued to investors
in January 1999 aggregating $1,197,486 plus accrued interest of $19,979. In
addition, in April 1999, the Company issued warrants to purchase 85,535 shares
of Series E Preferred Stock and 48,165 shares of common stock at exercise prices
of $2.10 per share and $4.20 per share respectively.
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
F-50
<PAGE> 131
IMAGEX.COM, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
INITIAL PUBLIC OFFERING
On August 26, 1999, the Company issued 3,000,000 shares of its common stock
at an initial public offering at $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.
SECONDARY PUBLIC OFFERING
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.
COMMITMENTS
On November 4, 1999, the Company signed a term lease for office space in
Kirkland, Washington which expires on December 31, 2004. The future rental
payments under this Lease are approximately $1,038,000, $1,102,000, $1,146,000,
$1,190,000 and $1,235,000 for the fiscal years ended December 31, 2000, 2001,
2002, 2003 and thereafter, respectively.
On January 5, 2000, the Company entered into a strategic alliance agreement
with an internet company whereby the Company is committed in paying $100,000 per
month for a duration of our year from the signing date for promotional links.
13. INVENTORIES (UNAUDITED):
Inventories consist 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 production overhead. Inventories
consist of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
1999
-------------
(UNAUDITED)
<S> <C>
Paper stock and supplies.................................. $316
Work-in-process........................................... 83
Finished goods............................................ 324
----
$723
====
</TABLE>
F-51
<PAGE> 132
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-52
<PAGE> 133
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-53
<PAGE> 134
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-54
<PAGE> 135
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-55
<PAGE> 136
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-56
<PAGE> 137
FINE ARTS ENGRAVERS COMPANY, INC.
(D.B.A. FINE ARTS GRAPHICS)
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF OPERATIONS
Fine Arts Engravers Company, Inc. (the "Company," d.b.a. Fine Arts
Graphics) is an Oregon corporation formed in 1963, which does business under the
name of Fine Arts Graphics. The Company manufactures and distributes fine
quality letterhead, envelopes, business cards, wine labels and other printed
material for customers in a broad range of industries throughout the United
States. The Company operates production facilities in Tualatin, Oregon
(headquarters) and Union, New Jersey.
On April 13, 1999, the Company's principal assets were sold to, and certain
of its liabilities were assumed by ImageX.com, Inc. (see Note 11).
The unaudited interim financial statements as of March 31, 1999 and for the
three month periods ended March 31, 1998 and 1999 have been prepared in
accordance with generally accepted accounting principles for interim financial
information. Accordingly, they do not include all of the information and
disclosures required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring adjustments) considered necessary for a fair presentation
have been included. Operating results for the three month period ended March 31,
1999 are not necessarily indicative of the results that may be expected for the
year ending December 31, 1999.
INVENTORIES
Inventories consist of raw materials, work-in-process and finished basics
(customer-owned inventory), which are stated at the lower of cost or market.
Cost is determined using a method which approximates the first-in, first-out
method. Work-in-process includes direct labor, materials and allocated
production overhead.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are depreciated using the
straight-line method over the estimated service lives. Minor repairs and
maintenance, which do not improve or extend the lives of assets, are expensed as
incurred. Major renewals are capitalized. When assets are retired or otherwise
disposed of, the cost and related accumulated depreciation are removed from the
accounts and any gain or loss is recognized in operations.
Estimated services lives are as follows:
<TABLE>
<CAPTION>
ASSET CLASS SERVICE LIVES
----------- -------------
<S> <C>
Machinery and equipment.................................... 7 - 12 years
Furniture.................................................. 10 years
Computers.................................................. 3 - 5 years
</TABLE>
REVENUE RECOGNITION
Goods are shipped free on board (FOB) origin with revenue recognition
taking place based on product shipment from the Company's production facilities
or the Company's
F-57
<PAGE> 138
FINE ARTS ENGRAVERS COMPANY, INC.
(D.B.A. FINE ARTS GRAPHICS)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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-58
<PAGE> 139
FINE ARTS ENGRAVERS COMPANY, INC.
(D.B.A. FINE ARTS GRAPHICS)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. INVENTORIES:
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- MARCH 31,
1997 1998 1999
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Paper stock and supplies..................... $285,965 $250,254 $234,631
Work-in-process.............................. 144,514 90,200 138,996
Finished basics.............................. 267,358 319,329 351,540
-------- -------- --------
$697,837 $659,783 $725,167
======== ======== ========
</TABLE>
3. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ MARCH 31,
1997 1998 1999
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Production machinery and equipment........ $2,153,935 $2,345,651 $2,342,700
Computers, furniture and other
equipment................................. 1,127,590 1,073,225 1,090,339
---------- ---------- ----------
3,281,525 3,418,876 3,433,039
Less accumulated depreciation............. 2,486,393 2,678,450 2,704,663
---------- ---------- ----------
$ 795,132 $ 740,426 $ 728,376
========== ========== ==========
</TABLE>
As of December 31, 1998, approximately $1,696,700 of fully depreciated
property and equipment remained in service.
4. CASH SURRENDER VALUE OF LIFE INSURANCE:
The Company purchased life insurance policies in connection with severance
agreements for two former key officers (see Note 8). The Company has elected to
report the cash surrender value of these policies net of any outstanding loans
against the policies. These net amounts are included in other assets on the
accompanying balance sheets. As of December 31, 1997 and 1998, the cash
surrender value of the policies was $848,654 and $915,211, respectively, which
was reported net of outstanding policy loans of $775,955 and $809,575,
respectively. The interest rate on these loans ranged from 6.75% to 6.84% at
December 31, 1998.
5. FINANCING AGREEMENTS:
SHORT-TERM BANK BORROWINGS
On July 17, 1998, the Company renewed a $1,400,000 bank line of credit with
Centennial Bank, which allows the Company to borrow against a specified
percentage of eligible accounts receivable plus a percentage of inventories. The
amount the Company may borrow against inventories and receivables may not exceed
$400,000 and $1,400,000, respectively. As of December 31, 1998, $1,326,239 was
available to be drawn under the line of credit. The line, which is guaranteed by
the Company's shareholder, accrues interest at 1% above the bank's
F-59
<PAGE> 140
FINE ARTS ENGRAVERS COMPANY, INC.
(D.B.A. FINE ARTS GRAPHICS)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
reference rate (8.75% at December 31, 1998) and is collateralized by accounts
receivable and inventories. Additionally, Centennial Bank has a first security
interest in $300,000 of machinery and equipment and a fourth security position
behind the Marital Trust and Maria Stanley notes (junior debt) on the remaining
machinery and equipment. The junior debt is subordinate to the bank line of
credit and subject to "inter-creditor" agreements. There are also certain
financial covenants relating to the various security agreements with which the
Company was in compliance at December 31, 1998. Management does not believe any
of these covenants are significantly restrictive.
INDEBTEDNESS TO RELATED PARTIES
Marital Trust Note: On April 25, 1996, as a part of a refinance of existing
debt, the Company borrowed $1,187,477 from the Marital Trust Testamentary of
Edwin M. Stanley (Marital Trust). The Company's shareholder, Nicholas J.
Stanley, is one of four Marital Trustees. The note, which matures in April 2006,
bears a fixed annual interest rate of 7% and requires monthly payments of
$14,290, which includes principal and interest.
Maria Stanley Note: In conjunction with the refinance of the Marital Trust
notes referred to above, the balance of $263,116 on an existing note from Maria
Stanley (a related party) also matures in April 2006. The note, which was also
executed on April 25, 1996, bears an annual fixed interest rate of 7% and
requires monthly payments of $3,166, which includes principal and interest.
The following schedule represents the current and non-current portions of
the notes at December 31, 1998:
<TABLE>
<CAPTION>
CURRENT NON-CURRENT
DESCRIPTION PORTION PORTION TOTAL
----------- -------- ----------- ----------
<S> <C> <C> <C>
Marital Trust Note......................... $106,145 $ 875,227 $ 981,372
Maria Stanley Note......................... 23,520 193,934 217,454
-------- ---------- ----------
$129,665 $1,069,161 $1,198,826
======== ========== ==========
</TABLE>
Maturities of indebtedness to related parties as of December 31, 1998 are
as follows:
<TABLE>
<S> <C>
1999........................................................ $ 129,665
2000........................................................ 139,039
2001........................................................ 149,090
2002........................................................ 159,868
2003........................................................ 171,424
Thereafter.................................................. 449,740
----------
Total............................................. $1,198,826
==========
</TABLE>
6. LEASE OBLIGATIONS:
The Company leases its Oregon facility (land and building) from SIAM
Leasing Company, which is owned by the Marital Trust, under an operating lease.
In addition to the base rents, the Company is 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
F-60
<PAGE> 141
FINE ARTS ENGRAVERS COMPANY, INC.
(D.B.A. FINE ARTS GRAPHICS)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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.
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
F-61
<PAGE> 142
FINE ARTS ENGRAVERS COMPANY, INC.
(D.B.A. FINE ARTS GRAPHICS)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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-62
<PAGE> 143
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-63
<PAGE> 144
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-64
<PAGE> 145
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-65
<PAGE> 146
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-66
<PAGE> 147
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-67
<PAGE> 148
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-68
<PAGE> 149
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.
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>
F-69
<PAGE> 150
IMAGE PRESS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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.
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>
F-70
<PAGE> 151
IMAGE PRESS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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-71
<PAGE> 152
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-72
<PAGE> 153
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-73
<PAGE> 154
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-74
<PAGE> 155
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-75
<PAGE> 156
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-76
<PAGE> 157
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. The Company will
retain a portion of such fees and remit the remainder to the application service
provider. 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-77
<PAGE> 158
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-78
<PAGE> 159
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-79
<PAGE> 160
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-80
<PAGE> 161
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-81
<PAGE> 162
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 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.
F-82
<PAGE> 163
PRINTBID.COM, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 plus accrued interest, are
due two years after issuance, unless converted to stock in accordance with the
Series A subordinated convertible note agreement.
F-83
<PAGE> 164
PRINTBID.COM, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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-84
<PAGE> 165
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The unaudited pro forma condensed consolidated balance sheet has been
prepared to reflect the acquisition of Printbid.com, Inc. using the
pooling-of-interests method, at September 30, 1999. The unaudited pro forma
condensed consolidated statements of operations is based on individual
historical results of operations of ImageX.com, Fine Arts Graphics, Image Press
and PrintBid for the year ended December 31, 1998 and for the nine months ended
September 30, 1999, after giving effect to the acquisitions of Fine Arts
Graphics, Image Press and PrintBid as if those acquisitions had occurred at the
beginning of each of the periods presented.
The unaudited pro forma condensed consolidated financial statements 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 statements are presented for illustrative
purposes only and are not necessarily indicative of results of operations that
would have actually occurred had the acquisitions of Fine Arts Graphics, Image
Press and PrintBid been effected on the dates assumed.
F-85
<PAGE> 166
IMAGEX.COM, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1999
------------------------------------
PRO FORMA
ADJUSTMENTS
ACTUAL (NOTE 1) PRO FORMA
-------- ----------- ---------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................... $ 27,256 $ 171 $ 27,427
Accounts receivable............................... 3,319 3,319
Inventories....................................... 723 723
Prepaid expenses.................................. 960 91 1,051
-------- ------- --------
Total current assets...................... 32,258 262 32,520
Restricted cash..................................... 25 25
Property and equipment, net......................... 5,173 100 5,273
Goodwill, net....................................... 2,266 2,266
Other assets........................................ 2,028 2,028
-------- ------- --------
Total assets.............................. $ 41,750 $ 362 $ 42,112
======== ======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.................................. $ 3,019 $ 132 $ 3,151
Accrued liabilities............................... 1,194 17 1,211
-------- ------- --------
Total current liabilities................. 4,213 149 4,362
Notes payable, net of current....................... 534 534
-------- ------- --------
Total liabilities......................... 4,213 683 4,896
-------- ------- --------
Commitments
Shareholders' equity (deficit):
Common stock...................................... 167 4 171
Additional paid-in capital........................ 62,107 3,838 65,945
Unearned compensation............................. (1,094) (1,918) (3,012)
Notes receivable from shareholders................ (220) (220)
Accumulated deficit............................... (23,423) (2,245) (25,668)
-------- ------- --------
Total shareholders' equity (deficit)...... 37,537 (321) 37,216
-------- ------- --------
Total liabilities and shareholders' equity
(deficit).............................. $ 41,750 $ 362 $ 42,112
======== ======= ========
</TABLE>
- -------------------------
Note 1 -- The pro forma balance sheet has been prepared to reflect the
acquisition of PrintBid as if it occurred at the beginning of the
period using the pooling-of-interests method.
F-86
<PAGE> 167
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, 1998
-------------------------------------------------------------------------------
FINE ARTS PRO FORMA
IMAGEX.COM, ENGRAVERS IMAGE ADJUSTMENTS
INC. COMPANY, INC. PRESS, INC. PRINTBID (NOTE 1) PRO FORMA
----------- ------------- ----------- -------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenues....................... $ 968 $10,460 $6,555 $ $ $ 17,983
Cost of sales.................. 998 7,127 4,323 152 12,600
---------- ------- ------ ----- ----- ----------
Gross profit (loss).......... (30) 3,333 2,232 (152) 5,383
---------- ------- ------ ----- ----- ----------
Operating expenses:
General and administrative... 3,413 2,363 772 136 326 7,010
Selling and marketing........ 2,182 528 898 25 3,633
Product development.......... 2,551 199 2,750
Amortization of unearned
compensation............... 379 1 380
Amortization of goodwill..... 204 204
---------- ------- ------ ----- ----- ----------
Total operating expenses... 8,525 2,891 1,670 361 530 13,977
---------- ------- ------ ----- ----- ----------
Income (loss) from
operations............... (8,555) 442 562 (361) (682) (8,594)
Other expense, net............. (45) (246) (16) (3) (310)
---------- ------- ------ ----- ----- ----------
Net (loss) income before
taxes.................... (8,600) 196 546 (364) (682) (8,904)
State income tax expense... (15) (15)
---------- ------- ------ ----- ----- ----------
Net (loss) income.......... $ (8,600) $ 181 $ 546 $(364) $(682) (8,919)
======= ====== ===== =====
Preferred stock accretion...... (221) (221)
---------- =======
Net loss used in
calculating loss per
share.................... $ (8,821) $ (9,140)
========== ==========
Basic and diluted net loss per
share........................ $ (14.65) $ (9.24)
========== ==========
Weighted-average shares
outstanding.................. 601,962 989,364
========== ==========
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1999
---------------------------------------------------------------------------------
FINE ARTS
ENGRAVERS IMAGE PRO FORMA
COMPANY, INC. PRESS, INC. PRINTBID ADJUSTMENTS
ACTUAL (3.5 MONTHS) (8.5 MONTHS) (9 MONTHS) (NOTE 1) PRO FORMA
---------- ------------- ------------ ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenues....................... $ 6,646 $2,525 $5,359 $ $ (37) $ 14,493
Cost of sales.................. 4,986 1,814 3,709 69 10,578
---------- ------ ------ ------- ----- ----------
Gross profit (loss).......... 1,660 711 1,650 (106) 3,915
---------- ------ ------ ------- ----- ----------
Operating expenses:
General and administrative... 5,661 615 968 811 215 8,270
Selling and marketing........ 3,777 134 327 189 4,427
Product development.......... 2,051 205 2,256
Amortization of unearned
compensation............... 946 596 1,542
Amortization of goodwill..... 79 97 176
---------- ------ ------ ------- ----- ----------
Total operating expenses... 12,514 749 1,295 1,801 312 16,671
---------- ------ ------ ------- ----- ----------
Income (loss) from
operations............... (10,854) (38) 355 (1,801) (418) (12,756)
Other expense, net............. 64 (47) (10) (80) (73)
---------- ------ ------ ------- ----- ----------
Net (loss) income before
taxes.................... (10,790) (85) 345 (1,881) (418) (12,829)
State income tax expense... (28) (28)
---------- ------ ------ ------- ----- ----------
Net (loss) income.......... (10,790) $ (85) $ 317 $(1,881) $(418) $ (12,857)
====== ====== ======= =====
Preferred stock accretion...... (84) (84)
---------- ------ ----------
Net loss used in
calculating loss per
share.................... $ (10,874) $ (12,941)
========== ==========
Basic and diluted net loss per
share........................ $ (3.43) $ (3.71)
========== ==========
Weighted-average shares
outstanding.................. 3,173,827 3,484,877
========== ==========
</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, Image Press and PrintBid 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-87
<PAGE> 168
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
January __, 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.
<PAGE> 169
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than the
underwriting discount and commissions, payable by the registrant in connection
with the sale of the common stock being registered hereby. All amounts shown are
estimates, except the Securities and Exchange Commission registration fee, the
NASD filing fee and the Nasdaq National Market listing fee.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee......... $ 48,440
NASD filing fee............................................. 18,850
Nasdaq National Market listing fee.......................... 17,500
Blue Sky fees and expenses.................................. 10,000
Printing and engraving expenses............................. 200,000
Legal fees and expenses..................................... 250,000
Accounting fees and expenses................................ 150,000
Transfer Agent and Registrar fees........................... 25,000
Miscellaneous expenses...................................... 10,000
--------
Total............................................. $679,790
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Sections 23B.08.500 through 23B.08.600 of the Washington Business
Corporation Act (the "WBCA") authorize a court to award, or a corporation's
board of directors to grant, indemnification to directors and officers on terms
sufficiently broad to permit indemnification under certain circumstances for
liabilities arising under the Securities Act of 1933, as amended (the
"Securities Act"). Section 10 of the registrant's Restated Bylaws (Exhibit 3.2
hereto) provides for indemnification of the registrant's directors, officers,
employees and agents to the maximum extent permitted by Washington law. The
directors and officers of the registrant also may be indemnified against
liability they may incur for serving in that capacity pursuant to a liability
insurance policy maintained by the registrant for such purpose.
Section 23B.08.320 of the WBCA authorizes a corporation to limit a
director's liability to the corporation or its shareholders for monetary damages
for acts or omissions as a director, except in certain circumstances involving
intentional misconduct, knowing violations of law or illegal corporate loans or
distributions, or any transaction from which the director personally receives a
benefit in money, property or services to which the director is not legally
entitled. Article VII of the registrant's Restated Articles of Incorporation
(Exhibit 3.1 hereto) contains provisions implementing, to the fullest extent
permitted by Washington law, such limitations on a director's liability to the
registrant and its shareholders.
The registrant has entered into certain indemnification agreements with its
officers and directors, the form of which is attached as Exhibit 10.26 to this
Registration Statement and incorporated herein by reference. The indemnification
agreements provide the registrant's officers and directors with indemnification
to the maximum extent permitted by the WBCA.
The Underwriting Agreement (Exhibit 1.1 hereto) provides for
indemnification by the Underwriters of the registrant and its executive officers
and directors, and by the registrant of the Underwriters, for certain
liabilities, including liabilities arising under the Securities Act, in
II-1
<PAGE> 170
connection with matters specifically provided in writing by the Underwriters for
inclusion in this Registration Statement.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Within the last three years, the registrant has issued and sold
unregistered securities as follows:
(1) On January 9, 1998, the registrant issued 2,000,001 shares of
Series C Preferred Stock, which are convertible into 1,000,003 shares of
common stock, to six investors, Acorn Ventures IV, LLC, Technology Partners
Fund V, L.P., Vanguard V, L.P., Michael Towers, Howse Family Partnership
and Harold Kawaguchi. The aggregate consideration received for such shares
was $3,000,001.50 or $1.50 per share. The registrant also issued warrants
to purchase 500,000 shares of common stock at an exercise price of $3.00
per share and 290,000 shares of common stock at an exercise price of $7.50
per share to Acorn Ventures IV, LLC. The aggregate consideration received
for such warrants was $15,800.00.
(2) On May 14, 1998, the registrant issued 1,999,999 shares of Series
C Preferred Stock, which are convertible into 1,000,003 shares of common
stock, to 12 investors, Acorn Ventures IV, LLC, Internet Ventures, LLC,
Technology Partners Fund V, L.P., Vanguard V, L.P., Nicholas B. Temple,
Eric S. Temple, Nicholas Brigham Temple, Jr., Tom A. Alberg, John
Meisenbach, Steven Gillis, Charles J. Katz, Jr. and James E. Webster. The
aggregate consideration received for such shares was $2,999,998.50 or $1.50
per share. The registrant also issued warrants to purchase 390,000 shares
of common stock at an exercise price of $3.00 per share to 15 investors,
which includes, in addition to the investors described in paragraph 2
above, Michael Towers, Howse Family Partnership and Harold Kawaguchi. The
aggregate consideration received for such warrants was $7,800.
(3) On August 24, 1998, the registrant issued warrants to purchase
26,667 shares of Series C Preferred stock, which are convertible into
warrants to purchase 13,334 shares of common stock, at an exercise price of
$3.00 per share to Technology Partners Fund V, L.P. The aggregate
consideration received for such warrants was $267.
(4) On August 28, 1998, the registrant issued warrants to purchase
13,333 shares of Series C Preferred Stock, which are convertible into
warrants to purchase 6,667 shares of common stock, at an exercise price of
$3.00 per share to Vanguard V. L.P. The aggregate consideration received
for such warrants was $133.
(5) On October 1, 1998, the registrant issued 1,385,493 shares of
Series D Preferred Stock, which are convertible into 692,747 shares of
common stock, to ten investors, SunAmerica, Inc., Technology Partners Fund
V, L.P., Vanguard V, L.P., Donaldson, Lufkin & Jenrette, Galaxy Investment
Partners, Michael Towers, Steve Shindler and Mary Kay Kosnik, Rich and
Cindy Sonstelie, Western Investments Capital LLC and Carl Stork. The
aggregate consideration received for such shares was $2,770,986.00 or $2.00
per share. The registrant also issued warrants to purchase 138,250 shares
of Series D Preferred Stock, which are convertible into warrants to
purchase 69,125 shares of common stock, at an exercise price of $4.00 per
share to the ten investors described above. The aggregate consideration
received for such warrants was $1,382.50.
(6) On January 11, 1999, the registrant issued 401,257 shares of
Series D Preferred stock, which are convertible into 200,629 shares of
common stock, to two investors, Eli Wilner and Barbara A. Brennan. The
aggregate consideration received for such shares was $802,514.
II-2
<PAGE> 171
(7) On April 8, 1999, the registrant issued 8,641,666 shares of Series
E Preferred Stock, which are convertible into 4,320,840 shares of common
stock, to 28 investors, Internet Ventures, LLC, Nicholas Brigham Temple,
Jr., Eli Wilner, Barbara A. Brennan, Eric S. Temple, Galaxy Investment
Partners, Harold Kawaguchi, Ironwood Capital, LLC, Philip J. Hooper, John
Durbin, Michael and Pam Towers, Nicholas B. Temple, Rich and Cindy
Sonstelie, Rufus Lumry, SunAmerica Investments, Inc., Tom A. Alberg, Thomas
J. Cable, Western Investments Capital LLC, Howse Family Partnership, Alta
California Partners II, L.P., Alta Embarcadero Partners II, LLC, Arthur W.
Harrigan, WS Investment Company 99A, Steven Scherba Jr. and Elaine P.
Scherba, Scott Drum, William C. Krueger, Brian and Jami Holman and David
Valle. The aggregate consideration received for such shares was
$18,147,498.60 or $2.10 per share. The registrant also issued warrants to
purchase 42,768 shares of common stock at an exercise price of $4.20 per
share to two investors, Eli Wilner and Barbara A. Brennan. The aggregate
consideration received for such warrants was $855.35.
(8) On April 13, 1999, the registrant issued warrants to purchase
75,000 shares of common stock at an exercise price of $4.00 per share to
Nicholas J. Stanley. The aggregate consideration received for such warrants
was $100.
(9) On April 15, 1999, the registrant issued 3,263,095 shares of
Series E Preferred Stock, which are convertible into 1,631,550 shares of
common stock, to 12 investors, Technology Partners Fund VI, L.P., Kellett
Partners LP, Clear Fir Partners, LP, Gary Sledge, Carl Stork, Nanda Nishit
Mehta and Nishit Kantilal Mehta, VBW Raptor Fund, LLC, Robert L. and Leslie
A. Hobart JTWROS, Hambrecht & Quist California, Hambrecht & Quist Employee
Venture Fund, L.P. II, Access Technology Partners, L.P. and Access
Technology Partners Brokers Fund, L.P. The aggregate consideration received
for such shares was $6,852,499.50, or $2.10 per share.
(10) On April 21, 1999, the registrant issued warrants to purchase
48,165 shares of common stock at an exercise price of $4.20 per share to SG
Cowen Securities Corporation for services rendered in connection with the
registrant's issuance of Series E Preferred Stock.
(11) On April 21, 1999, the registrant issued warrants to purchase
25,000 shares of common stock at an exercise price of $6.00 per share to
Kindling I, L.L.C. in connection with a consulting agreement for
intellectual property consulting services.
(12) On October 1, 1999, the registrant issued an aggregate of 16,394
shares of common stock to Glen R. and Anne S. Douglas and Stanley F. and
Marina Lynne Poitras in connection with the registrant's acquisition of all
of the outstanding capital stock of Image Press, Inc. The shares
represented $300,000 of the $3,900,000 purchase price.
(13) On December 9, 1999 the registrant merged with Printbid.com, Inc.
pursuant to an agreement and plan of merger among the registrant,
Printbid.com and Orcas Acquisition Corp., a wholly owned subsidiary of the
registrant. The shareholders of Printbid.com were issued an aggregate of
approximately 568,778 shares of the registrant's common stock in exchange
for all of the outstanding capital stock of Printbid.com.
(14) From January 1, 1997 to August 25, 1999, the registrant granted
stock options to purchase 2,203,971 shares of common stock, with exercise
prices ranging from $0.20 to $12.00 and issued 650,000 shares of restricted
common stock to selected persons pursuant to the registrant's option plans.
Of those options, options for 279,000 shares have been
II-3
<PAGE> 172
canceled without being exercised, options for 158,930 shares have been
exercised and options for 1,116,041 shares remain outstanding.
The sales and issuances of these securities were exempt from registration
under the Securities Act, pursuant to Section 4(2) of the Securities Act, on the
basis that the transactions did not involve a public offering, or pursuant to
Rule 701 under the Securities Act, on the basis that these options were offered
and sold either pursuant to a written compensatory benefit plan or pursuant to
written contracts relating to consideration, as provided by Rule 701.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ------ -----------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1 Amended and Restated Articles of Incorporation of the
registrant, as further amended by Articles of Amendment.(1)
3.2 Amended and Restated Bylaws of the registrant.(1)
5.1 Opinion of Perkins Coie LLP as to the legality of the
shares.
10.1 Amended and Restated Investor Rights Agreement, dated as of
April 8, 1999, by and among the registrant and certain of
the registrant's shareholders named therein.(1)
10.2 Stock Vesting Agreement, dated as of December 20, 1996, by
and between the registrant and F. Joseph Verschueren.(1)
10.3 Stock Vesting Agreement, dated as of December 20, 1996, by
and between the registrant and Cory E. Klatt.(1)
10.4 Stock Vesting Agreement, dated as of December 20, 1996, by
and between the registrant and Elwood D. Howse, Jr.(1)
10.5 Stock Subscription and Repurchase Agreement, dated as of
August 7, 1997, by and between the registrant and Elwood D.
Howse, Jr.(1)
10.6 Stock Vesting and Pledge Agreement, dated as of November 16,
1998, by and between the registrant and Richard P.
Begert.(1)
10.7 Offer of Employment, dated as of November 12, 1998, from the
registrant to Richard P. Begert.(1)
10.8 Lease Agreement, dated as of January 31, 1997, by and
between the registrant and Bellevue Associates, L.P.(1)
10.9 Lease Agreement, dated as of May 15, 1998, by and between
the registrant and Spieker Properties, L.P.(1)
10.10 Lease Agreement, dated as of October 19, 1998, by and
between the registrant and Spieker Properties, L.P.(1)
10.11 Lease Agreement, dated as of April 22, 1999, by and between
the registrant and Spieker Properties, L.P.(1)
10.12 Lease Agreement, dated as of November 4, 1999, by and
between the Registrant and The Plaza at Yarrow Bay, LLC.
10.13 Lease Assignment and Assumption, dated as of April 13, 1999,
by and between the Keystone Acquisition Corporation, a
wholly owned subsidiary of the registrant, and Fine Arts
Graphics Company, Inc.(1)
10.14 Lease Assignment and Assumption, dated as of April 13, 1999,
by and between Keystone Acquisition Corporation, a wholly
owned subsidiary of the registrant, and Fine Arts Graphics
Company, Inc.(1)
10.15 Amended and Restated 1996 Stock Incentive Compensation
Plan.(1)
10.16 1999 Employee Stock Purchase Plan.(1)
</TABLE>
II-4
<PAGE> 173
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ------ -----------
<C> <S>
10.17 1999 Stock Option Grant Program for Nonemployee
Directors.(1)
10.18 Form of Indemnification Agreement.(1)
10.19 Asset Purchase and Sale Agreement, dated as of February 23,
1999, by and among the registrant, Keystone Acquisition
Corp., Fine Arts Engravers Company, Inc. and Nicholas J.
Stanley.(1)
10.20 Stock Purchase Agreement dated September 21, 1999, among
ImageX.com, Inc., Stanley F. and Marina Lynne Poitras,
individually and as Trustees of the Poitras Family Trust
dated November 22, 1993, Glen R. and Anne Douglas, as
community property.(2)
10.21 Agreement and Plan of Merger dated November 17, 1999 among
ImageX.com, Inc., Orcas Acquisition Corp. and PrintBid.com,
Inc.(3)
10.22 First Amendment to Agreement and Plan of Merger dated
November 30, 1999, among ImageX.com, Inc., Orcas Acquisition
Corp. and PrintBid.com, Inc.(3)
21.1 Subsidiaries of the registrant.
23.1 Consent of PricewaterhouseCoopers LLP, independent
accountants.
23.2 Consent of Perkins Coie LLP (contained in the opinion filed
as Exhibit 5.1 hereto).
23.3 Consent of CAP Ventures, Inc.
24.1 Power of Attorney (contained on signature page).
27.1 Financial Data Schedule.
</TABLE>
- -------------------------
* To be filed by amendment.
(1) Incorporated by Reference herein to the Registration Statement on Form S-1
and all amendments thereto filed with the Securities and Exchange Commission
on May 12, 1999. (File No. 333-78271).
(2) Incorporated by Reference herein to the Current Report on Form 8-K and all
amendments thereto filed with the Securities and Exchange Commission on
September 30, 1999. (File No. 000-26837).
(3) Incorporated by Reference herein to the Current Report on Form 8-K and all
amendments thereto filed with the Securities and Exchange Commission on
December 22, 1999. (File No. 000-26837).
(b) Financial Statement Schedules
All schedules are omitted because they are inapplicable or the requested
information is shown in the consolidated financial statements of the registrant
or related notes thereto.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described in Item 14, or otherwise, the
registrant has been advised that, in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court
II-5
<PAGE> 174
of appropriate jurisdiction the question of whether such indemnification by it
is against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
The undersigned registrant hereby undertakes to provide to the
Underwriters, at the closing specified in the underwriting agreement,
certificates in such denominations and registered in such names as required by
the Underwriters to permit prompt delivery to each purchaser of the shares
offered by the registrant.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-6
<PAGE> 175
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Bellevue,
State of Washington, on the 13th day of January, 2000.
IMAGEX.COM, INC.
By: /s/ RICHARD P. BEGERT
------------------------------------
Richard P. Begert
President and Chief Executive
Officer
POWER OF ATTORNEY
Each person whose individual signature appears below hereby authorizes and
appoints Richard P. Begert and Robin L. Krueger, and each of them, with full
power of substitution and resubstitution and full power to act without the
other, as his or her true and lawful attorney-in-fact and agent to act in his or
her name, place and stead and to execute in the name and on behalf of each
person, individually and in each capacity stated below, and to file, any and all
amendments to this Registration Statement, including any and all post-effective
amendments and amendments thereto and any registration statement relating to the
same offering as this Registration Statement that is to be effective upon filing
pursuant to Rule 462(b) under the Securities Act of 1933, as amended, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in fact and agents, and each of them, full power and authority to do
and perform each and every act and thing, ratifying and confirming all that said
attorneys-in-fact and agents or any of them or their or his substitute or
substitutes may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities indicated below on the 13th day of January, 2000.
<TABLE>
<C> <S>
/s/ RICHARD P. BEGERT President and Chief Executive Officer
- ----------------------------------------------------- (Principal Executive Officer)
Richard P. Begert
/s/ ROBIN L. KRUEGER Vice President, Chief Financial Officer,
- ----------------------------------------------------- Treasurer and Assistant Secretary
Robin L. Krueger (Principal Financial and Accounting
Officer)
/s/ F. JOSEPH VERSCHUEREN Chairman of the Board
- -----------------------------------------------------
F. Joseph Verschueren
/s/ JOHN E. ARDELL Director
- -----------------------------------------------------
John E. Ardell
</TABLE>
II-7
<PAGE> 176
<TABLE>
<C> <S>
/s/ GARRETT P. GRUENER Director
- -----------------------------------------------------
Garrett P. Gruener
/s/ ELWOOD D. HOWSE, JR. Director
- -----------------------------------------------------
Elwood D. Howse, Jr.
/s/ WAYNE M. PERRY Director
- -----------------------------------------------------
Wayne M. Perry
/s/ RICHARD R. SONSTELIE Director
- -----------------------------------------------------
Richard R. Sonstelie
/s/ BERNEE D. L. STROM Director
- -----------------------------------------------------
Bernee D. L. Strom
</TABLE>
II-8
<PAGE> 177
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
1.1* Form of Underwriting Agreement.
3.1 Amended and Restated Articles of Incorporation of the
registrant, as further amended by Articles of Amendment.(1)
3.2 Amended and Restated Bylaws of the registrant.(1)
5.1 Opinion of Perkins Coie LLP as to the legality of the
shares.
10.1 Amended and Restated Investor Rights Agreement, dated as of
April 8, 1999, by and among the registrant and certain of
the registrant's shareholders named therein.(1)
10.2 Stock Vesting Agreement, dated as of December 20, 1996, by
and between the registrant and F. Joseph Verschueren.(1)
10.3 Stock Vesting Agreement, dated as of December 20, 1996, by
and between the registrant and Cory E. Klatt.(1)
10.4 Stock Vesting Agreement, dated as of December 20, 1996, by
and between the registrant and Elwood D. Howse, Jr.(1)
10.5 Stock Subscription and Repurchase Agreement, dated as of
August 7, 1997, by and between the registrant and Elwood D.
Howse, Jr.(1)
10.6 Stock Vesting and Pledge Agreement, dated as of November 16,
1998, by and between the registrant and Richard P.
Begert.(1)
10.7 Offer of Employment, dated as of November 12, 1998, from the
registrant to Richard P. Begert.(1)
10.8 Lease Agreement, dated as of January 31, 1997, by and
between the registrant and Bellevue Associates, L.P.(1)
10.9 Lease Agreement, dated as of May 15, 1998, by and between
the registrant and Spieker Properties, L.P.(1)
10.10 Lease Agreement, dated as of October 19, 1998, by and
between the registrant and Spieker Properties, L.P.(1)
10.11 Lease Agreement, dated as of April 22, 1999, by and between
the registrant and Spieker Properties, L.P.(1)
10.12 Lease Agreement, dated as of November 4, 1999, by and
between the Registrant and The Plaza at Yarrow Bay, LLC.
10.13 Lease Assignment and Assumption, dated as of April 13, 1999,
by and between the Keystone Acquisition Corporation, a
wholly owned subsidiary of the registrant, and Fine Arts
Graphics Company, Inc.(1)
10.14 Lease Assignment and Assumption, dated as of April 13, 1999,
by and between Keystone Acquisition Corporation, a wholly
owned subsidiary of the registrant, and Fine Arts Graphics
Company, Inc.(1)
10.15 Amended and Restated 1996 Stock Incentive Compensation
Plan.(1)
10.16 1999 Employee Stock Purchase Plan.(1)
10.17 1999 Stock Option Grant Program for Nonemployee
Directors.(1)
10.18 Form of Indemnification Agreement.(1)
10.19 Asset Purchase and Sale Agreement, dated as of February 23,
1999, by and among the registrant, Keystone Acquisition
Corp., Fine Arts Engravers Company, Inc. and Nicholas J.
Stanley.(1)
10.20 Stock Purchase Agreement dated September 21, 1999, among
ImageX.com, Inc., Stanley F. and Marina Lynne Poitras,
individually and as Trustees of the Poitras Family Trust
dated November 22, 1993, Glen R. and Anne Douglas, as
community property.(2)
</TABLE>
<PAGE> 178
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
10.21 Agreement and Plan of Merger dated November 17, 1999 among
ImageX.com, Inc., Orcas Acquisition Corp. and PrintBid.com,
Inc.(3)
10.22 First Amendment to Agreement and Plan of Merger dated
November 30, 1999, among ImageX.com, Inc., Orcas Acquisition
Corp. and PrintBid.com, Inc.(3)
21.1 Subsidiaries of the registrant.
23.1 Consent of PricewaterhouseCoopers LLP, independent
accountants.
23.2 Consent of Perkins Coie LLP (contained in the opinion filed
as Exhibit 5.1 hereto).
23.3 Consent of CAP Ventures, Inc.
24.1 Power of Attorney (contained on signature page).
27.1 Financial Data Schedule.
</TABLE>
- -------------------------
* To be filed by amendment.
(1) Incorporated by Reference herein to the Registration Statement on Form S-1
and all amendments thereto filed with the Securities and Exchange Commission
on May 12, 1999. (File No. 333-78271).
(2) Incorporated by Reference herein to the Current Report on Form 8-K and all
amendments thereto filed with the Securities and Exchange Commission on
September 30, 1999. (File No. 000-26837).
(3) Incorporated by Reference herein to the Current Report on Form 8-K and all
amendments thereto filed with the Securities and Exchange Commission on
December 22, 1999. (File No. 000-26837).
<PAGE> 1
EXHIBIT 5.1
[PERKINS COIE LLP LETTERHEAD]
January 10, 2000
ImageX.com, Inc.
Suite 200
10800 NE 8th Avenue
Bellevue, WA 98004
Ladies and Gentlemen:
We have acted as counsel to you in connection with the proceedings for the
authorization and issuance by ImageX.com, Inc. (the "Company") of up to
4,000,000 shares of the Company's Common Stock, $.01 par value per share,
together with an additional 1,000,000 shares of Common Stock which certain
shareholders of the Company are selling (collectively, the "Shares") and the
preparation and filing of a registration statement on Form S-1 (the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"), which you are filing with the Securities and Exchange
Commission with respect to the Shares.
We have examined the Registration Statement and such documents and records
of the Company and other documents as we have deemed necessary for the purpose
of this opinion. Based upon the foregoing, we are of the opinion that upon the
happening of the following events:
(a) the filing and effectiveness of the Registration Statement and any
amendments thereto,
(b) due execution by the Company and registration by its registrar of the
Shares,
(c) the offering and sale of the Shares as contemplated by the
Registration Statement, and
(d) receipt by the Company of the consideration required for the Shares,
the Shares will be duly authorized, validly issued, fully paid and nonassessable
<PAGE> 2
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and any amendment thereto, including any and all
post-effective amendments and any registration statement relating to the same
offering that is to be effective upon filing pursuant to Rule 462(b) under the
Securities Act, and to the reference to our firm in the Prospectus of the
Registration Statement under the heading "Legal Matters". In giving such
consent, we do not thereby admit that we are in the category of persons whose
consent is required under Section 7 of the Securities Act.
Very truly yours,
/s/ Perkins Coie LLP
Perkins Coie LLP
<PAGE> 1
EXHIBIT 10.12
BASIC LEASE TERMS
<TABLE>
<S> <C>
a. DATE OF LEASE: November 4, 1999
b. TENANT: ImageX.Com, Inc.
Trade Name: ImageX.Com
Address(Leased Premises): 10210 NE Points Drive, Kirkland, WA, 98033
Address (For Notices): Prior to Commencement Date: 10800 NE 8th Street
Bellevue, WA 98004, Attn: CEO
After Commencement Date: 10210 NE Points
Drive, Kirkland, WA, 98033, Attn: CEO
c. LANDLORD: The Plaza at Yarrow Bay, LLC
Address (For Notices): c/o JSH Properties, Inc.
10220 NE Points Drive, Suite 203,
Kirkland, WA, 98033
ATTN: Property Manager
Facsimile: (425) 889-0606
d. TENANT'S USE OF PREMISES: General office
c. PREMISES AREA: A portion of Floors 2, 3, and 4 of Building III,
consisting of 44,091 rentable square feet.
</TABLE>
f. TERM OF LEASE: This Lease shall commence on January 1, 2000 for Suite
410, May 1, 2000 for Suite 310, and May 16, 2000 for Suite 200, or such
earlier or later date as is provided in Section II, and, regardless of
the actual Commencement Date, this Lease shall terminate on December 31,
2004 (the "Expiration Date").
<TABLE>
<S> <C>
g. BASE MONTHLY RENT: See Paragraph 3.1--Minimum Rent
h. PREPAID RENT: First month's rent
i. LETTER OF CREDIT: $1,600,000, decreasing to $1,200,000 in year 4 and
to $800,000 in year 5
j. BASE YEAR: N/A
k. BROKERS: Kidder, Mathews & Segner, Inc.
l. GUARANTORS: N/A
m. EXHIBITS: A-1 Legal Description of Building III
A-2 Legal Description of Park
B - Floor Plan of Premises
C - Building Rules & Regulations
D - Work Letter
D-1 _ Outline Specifications for Building Standard
Improvements
</TABLE>
- 1 -
<PAGE> 2
<TABLE>
<S> <C>
E - Letter of Credit Format
n. PARKING: See Paragraph 9.2
</TABLE>
- 2 -
<PAGE> 3
LEASE
THIS LEASE is made as of the 4th day of November, 1999, by and between
THE PLAZA AT YARROW BAY, LLC, a Washington limited liability company
("Landlord"), and IMAGEX.COM, INC., a Washington corporation ("Tenant").
For and in consideration of the mutual promises, covenants and
conditions set forth in this Lease, Landlord and Tenant agree as follows:
SECTION I - PREMISES
1.1 Premises. Landlord hereby leases to Tenant and Tenant hereby leases
from Landlord, those certain premises (the "Premises") having an agreed rentable
area of 44,091 square feet and an agreed usable area of 38,979 square feet. The
Premises are situated on the 2nd, 3rd, and 4th floors of a building, consisting
of Suites 200, 310, 410 respectively, located on the real property legally
described in Exhibit A-1 attached, and all improvements thereon, and all rights
appurtenant thereto (the "Building"). The Premises are more particularly shown
on the floor plan of the Building attached to this Lease as Exhibit B. The
Building is part of a multi-phase project located on the real property legally
described on Exhibit A-2 attached, and all improvements thereon, and all rights
appurtenant thereto, commonly known as The Plaza at Yarrow Bay (the "Park"). The
Building is commonly referred to as Building III of the Park.
1.2 Reserved to Landlord. Landlord reserves all air rights over the
Premises, the use of the exterior walls, the roof, and the right to install,
maintain, use, repair and replace pipes, ducts, conduits and wires leading
through the Premises in locations which will not materially interfere with
Tenant's use thereof to serve other parts of the Building and/or the Park.
1.3 Changes to Park. Landlord reserves the right at any time to make
alterations or additions to the Building and to build adjoining the same,
provided such alterations and additions do not have a material adverse effect on
Tenant's rights under this Lease or on Tenant's quiet enjoyment of the Premises.
Landlord also reserves the right from time to time to construct other buildings
or improvements in the Park, to make alterations thereof or additions thereto,
and to relocate the various buildings (other than the Building), parking and
other common areas comprising the Park.
SECTION II - TERM
2.1 Lease Term. This Lease shall commence on the earlier of the
following two dates (the "Commencement Date"): (a) the date Tenant occupies any
of the three suites constituting the Premises for a primary use other than
performing tenant improvement work, or (b) three (3) days after Landlord
notifies Tenant that Landlord has substantially completed the tenant
improvements in the first suite constituting the Premises to be completed in
accordance with Landlord's obligations under Section 7.1 below. As used herein,
"substantial completion" or "substantially completed" shall mean that the tenant
improvements have been completed according to the mutually approved plans and
specifications (subject to minor defects, deviations and incomplete
- 3 -
<PAGE> 4
items typically found on a punchlist and which will not interfere with Tenant's
ability to use the Premises for their intended purpose).
The "Target Commencement Date" for Suite 410 is January 1, 2000; the
Target Commencement Date for Suite 310 is May 1, 2000, and the Target
Commencement Date for Suite 200 is May 16, 2000, which dates are only an
estimate of the dates the various suites constituting the Premises will be
available for Tenant's occupancy.
Landlord shall have no liability to Tenant and this Lease shall
not be void or voidable if the Premises are not delivered to Tenant by the
Target Commencement Date. Notwithstanding the foregoing, if Landlord has not
substantially completed the tenant improvements in, and delivered possession of,
any of the three suites constituting a portion of the Premises to Tenant within
one hundred twenty (120) days from the Target Commencement Date for such suite,
then at Tenant's option, which must be exercised by written notice given to
Landlord within thirty (30) days after the expiration of said 120-day period,
this Lease shall terminate and the parties shall have the rights or liabilities
which arise at Lease termination as provided herein; provided, if Landlord is
unable to deliver possession of any of the three suites constituting a portion
of the Premises to Tenant within the 120-day period due to delays caused by
Tenant, or material shortages, labor strikes or other reasons beyond Landlord's
control, the 120-day period shall be extended by the number of days of delay
experienced by Landlord. This Lease shall terminate at 11:59 p.m. on December
31, 2004. Landlord shall confirm the Commencement Date for each of the three
suites constituting a portion of the Premises in writing to Tenant.
2.2 Early Entry. If Tenant is permitted entry to the Premises prior to
Commencement Date for the purpose of installing tenant improvements or fixtures
or any other purpose permitted by Landlord, such early entry will be at Tenant's
sole risk and subject to all the terms and provisions of this Lease as though
the Commencement Date had occurred, except for the payment of rent and
additional rent, which will commence on the Commencement Date. Tenant, its
agents and employees will not interfere with or delay Landlord's completion of
construction of any improvements to be made by Landlord. All rights of Tenant
under this Section 2.2 will be subject to the requirements of all applicable
building codes and zoning requirements, and must not interfere with Landlord
obtaining a certificate of occupancy for the Premises. Landlord has the right to
impose such additional conditions on Tenant's early entry as Landlord deems
appropriate in its sole discretion, and will further have the right to require
that Tenant execute an early entry agreement containing such conditions prior to
Tenant's early entry.
2.3 Acceptance of Premises. Landlord shall give Tenant written notice of
the completion of each phase of Landlord's obligations described in Sections 2.1
and 7.1 of this Lease. Within ten (10) business days after Landlord gives such
notice, Tenant shall inspect the work performed by Landlord pursuant to Section
7.1, and except as Tenant may otherwise notify Landlord in writing within such
period, Tenant shall be deemed to have accepted the Premises in their condition
at that time. If, as a result of such inspection, Tenant discovers minor
exceptions or variations from the plans and specifications for tenant
improvements of a nature commonly found on a "punch list" (as that term is used
in the construction industry), Tenant shall notify
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<PAGE> 5
Landlord of such exceptions within such ten (10) business day period. Landlord
shall correct or remedy the exceptions within a reasonable time. The existence
of such punch list items shall not postpone the Commencement Date or Tenant's
obligation to pay Rent or other charges.
2.4 Term. The term of this Lease shall commence on the Commencement Date
and continue through December 31, 2004, unless sooner terminated or extended as
provided in this Lease.
2.5 Option to Extend.
a. So long as Tenant is not then in default under this Lease
beyond applicable cure periods, and so long as Tenant has not been ten (10) or
more days late in payment of rent after written notice thereof more than a total
of three (3) times during the term of this Lease, Tenant shall have the right to
extend the Lease term for one (1) additional five (5) period(s) (each an
"Additional Term") on the terms and conditions stated in this paragraph. To
exercise its right to extend this Lease for an Additional Term, Tenant must
deliver to Landlord a written notice exercising its rights under this paragraph
at least two hundred seventy (270) days, but not more than three hundred sixty
(360) days, prior to the date the Lease term will expire. All the terms and
conditions of this Lease shall apply during each Additional Term except (i) the
minimum rent shall be an amount mutually agreed to by Landlord and Tenant or
determined by arbitration as set forth below, but in no event shall it be less
than that due from Tenant immediately prior to the commencement of the
Additional Term; (ii) unless otherwise agreed by Landlord in writing, there
shall be no further extension options; and (iii) [except as set forth in Section
2.5(e) below,] Landlord shall have no tenant improvement or lease commission
obligations with respect to the Premises. When the rental rate for the
Additional Term is determined, either by agreement of the parties or pursuant to
arbitration as provided below, Landlord and Tenant shall enter into a lease
extension agreement setting forth the new minimum rent for the Premises and such
other terms as may be applicable. If at the time Tenant delivers to Landlord its
written notice electing to extend this Lease term, or at any time between such
date and the commencement date of the Additional Term, Tenant defaults under
this Lease and fails to cure the default within the applicable cure period, if
any, Landlord shall have the option to declare Tenant's notice of exercise null
and void by written notice to Tenant, in which case the Lease term shall expire
on the expiration of the then current Lease term.
b. If Tenant exercises an extension right under this paragraph,
the minimum rent for the Additional Term shall be the then "fair market rent"
(defined below) for the Premises. For purposes of this Lease, the term "fair
market rent" shall mean the triple net rate per rentable square foot that
willing, non-equity, non-renewal tenants are paying for comparable space in the
building and in comparable buildings in the Kirkland-Bellevue areas for leases
having a five-(5) year term without including the value of any improvements paid
for by Tenant (but including any improvements made by Tenant at the commencement
of the initial Lease term). Landlord shall advise Tenant in writing of
Landlord's determination of fair market rent for the Premises not later than
thirty (30) days after Tenant exercises its extension right. Within thirty (30)
days after receiving Landlord's determination of fair market rent, Tenant shall
notify Landlord in writing whether or not Tenant accepts Landlord's
determination of fair market rent. If Tenant disagrees with Landlord's
determination of fair market rent, Tenant shall advise Landlord of Tenant's
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<PAGE> 6
determination of fair market rent in the notice required pursuant to the
preceding sentence. If Tenant fails to so notify Landlord prior to expiration of
its thirty (30) day period to respond to Landlord's notice, then Tenant shall be
deemed to have approved Landlord's determination, unless otherwise agreed in
writing by Landlord and Tenant. If Tenant does not accept Landlord's
determination of fair market rent, the parties shall promptly meet and attempt
to resolve their differences.
If the parties have not agreed on the fair market rent within
sixty (60) days after Tenant has exercised its renewal right, then unless
otherwise agreed in writing by the parties, the parties shall submit the matter
to arbitration in accordance with the terms of paragraph (c) below. The last day
of such period shall be referred in this Lease as the "Arbitration Commencement
Date."
c. The arbitration will be conducted by three MAI real estate
appraisers who have been active over the five (5) year period ending on the
Arbitration Commencement Date in the appraisal of office properties in the
Kirkland-Bellevue area. One appraiser will be selected by Tenant, one appraiser
will be selected by Landlord, and the third will be selected by the two
appraisers so chosen. If the two appraisers chosen by the parties cannot agree
on a third appraiser within ten (10) days after the date the second appraiser
has been appointed, the third appraiser will be appointed by the Seattle office
of the American Arbitration Association upon the application of either party.
Each party shall select its appraiser within ten (10) days after the Arbitration
Commencement Date. If either party fails to select its appraiser within such ten
(10) day period, and the other party duly selects its appraiser, then the
appraiser selected by the other party shall be the sole arbitrator for
determining fair market rent. With twenty (20) days after the selection of the
third appraiser (or if only one appraiser is to render the decision, within
twenty (20) days after the last day of the above-referenced ten (10) day
period), the appraiser(s) shall determine fair market rent. The decision of a
majority of the appraisers shall control. If a majority of the appraisers do not
agree within the stipulated time period, then each appraiser shall in writing
render his or her separate determination as to fair market rent within five (5)
days after the expiration of the twenty (20) day period. In such case, the three
determinations shall be averaged to determine the fair market rent; however, if
the lowest fair market rent or the highest fair market rent is ten percent (10%)
lower or higher, as applicable, than the middle fair market rent, then the low
fair market rent and/or the high fair market rent, as applicable, shall be
disregarded and the remaining fair market rent(s) will be averaged in order to
establish the fair market rent.
d. Both parties may submit any information to the arbitrators
for their consideration, with copies to the other party. The arbitrators shall
have the right to consult experts and competent authorities for factual
information or evidence pertaining to the determination of fair market rent. The
arbitrators shall have no power to modify the provisions of this Lease. The
determination of the arbitrators will be final and binding upon Landlord and
Tenant. The cost of the arbitration will be paid by Landlord if the fair market
rent is ninety percent (90%) or less than the fair market rent specified in the
notice given by Landlord to Tenant; by Tenant if the fair market rent is one
hundred ten percent (110%) or more than the fair market rent specified in the
notice given by Tenant to Landlord; and otherwise shall be shared equally by
Landlord and Tenant.
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<PAGE> 7
e. This option to extend is personal to Tenant and cannot be
transferred without Landlord's consent in accordance with this Lease, except
that a Transferee who satisfies the requirements of Sections 11.2 or 11.7 below
will also receive a transfer of this option to extend.
2.6 Right of First Offer. Tenant is granted a right of first offer to
all (but not less than all) of Suite 222 (currently lease by Novell), Suite 300
(currently leased by Inteliant) and Suite 400 (currently leased by Pivotal) in
Building III of the Park if such space becomes available for lease during the
initial term of the Lease, provided that Tenant is not then in default under
this Lease beyond any applicable cure period, and provided that Tenant is not
then subleasing and has not then assigned any interest in its space in the Park
except as permitted in Section 11.7. The right of first offer is granted subject
to the existing rights of the tenants of Suites 400 and 222 to exercise current
rights to extend lease terms which may apply to such suites. Landlord shall
provide Tenant with written notice promptly upon learning that all of any of the
three foregoing suites in Building III will be available for lease, and propose
a fair market rent and other lease terms and conditions ("Landlord's Notice").
If Tenant fails to provide written notice within five (5) days after receipt of
Landlord's Notice that it wishes to negotiate for the lease of any such space,
the right of first offer shall expire with respect to the suite in question. If
Tenant provides Landlord with a written reply within five days of receiving
Landlord's Notice that Tenant wishes to negotiate for the lease of the suite
coming available, then Landlord and Tenant shall promptly commence negotiations
for Tenant's lease of that suite. If Landlord and Tenant do not execute a
mutually acceptable lease for the suite, under which Tenant will actually occupy
the premises, within fourteen (14) days after Landlord's Notice to Tenant under
this paragraph, then the right of first offer shall expire, and Landlord may
lease such suite to other tenants.
SECTION III - RENT
3.1 Minimum Rent. Tenant shall pay to Landlord, c/o JSH Properties,
Inc., at 10220 N.E. Points Drive, Suite 203, Kirkland, Washington 98033, or to
such other entity or address as may be specified by Landlord from time to time,
without any set off or deduction whatsoever, as fixed minimum rent, in the
amounts specified below. Tenant shall commence paying rent on a particular suite
constituting a portion of the Premises on the earlier to occur of (a) the date
Tenant occupies the suite for a primary use other than performing tenant
improvement work, or (b) three (3) days after Landlord notifies Tenant that
Landlord substantially completed the tenant improvements in the suite. Fixed
minimum rent shall be payable in the triple net amounts specified below.
<TABLE>
<S> <C>
Commencement Date through 12/31/00 for $24.00 nnn per rentable square foot
all suites for which the rent (rsf)
obligation has commenced
1/1/01 - 12/31/01 $25.00 nnn per rsf
1/1/02 - 12/31/02 $26.00 nnn per rsf
1/1/03 - 12/31/03 $27.00 nnn per rsf
1/1/04 - 12/31/04 $28.00 nnn per rsf
</TABLE>
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<PAGE> 8
Monthly installments of fixed minimum rent are due on or before the
first day of each month of the Lease term. Rent for partial months shall be
prorated. The minimum rent is referred to herein as "rent," and it does not
include the additional rent payable by Tenant pursuant to this Section III. Upon
execution of this Lease, Tenant shall deposit with Landlord first month's rent.
Tenant shall receive a rent credit of $5,000 per month from the
Commencement Date until the earlier to occur of (a) the date which is four (4)
months after the Commencement Date, or (b) the date Tenant ceases business
operations in its space at 10800 NE 8th Street in Bellevue, Washington. The rent
credit is provided to reimburse Tenant for a portion of its additional cost in
continuing dual fiber optic service until it has vacated its current premises.
3.2 Additional Rent. In addition to rent, all other sums to be paid or
reimbursed by Tenant to Landlord, whether or not so designated, are "additional
rent" for the purposes of this Lease. If Tenant defaults in the performance of
any of its obligations hereunder, Landlord may, but shall not be obligated to,
perform such obligations, and the cost thereof to Landlord shall also be
additional rent. Unless otherwise specifically provided in this Lease, Tenant
shall pay Landlord all additional rent within ten (10) days after Landlord's
demand.
3.3 Tenant's Contributions.
3.3.1 On or before the Commencement Date, and no more than
ninety (90) days after the commencement of each calendar year thereafter,
Landlord will notify Tenant in writing of Landlord's estimate of Tenant's Share
of estimated "Operating Costs" and "Real Property Taxes" (such terms are defined
in Section 3.3.2 below) for the then current calendar year (or part thereof),
which amount Tenant shall pay in advance in twelve (12) equal monthly
installments, due and payable without set-off or deduction, on the first (1st)
day of each calendar month. As used herein, the term "Tenant's Share" is
determined by multiplying the cost to be shared by a fraction, the numerator of
which is the rentable area of the Premises from time to time and the denominator
of which is the rentable area of the Building (82,013 rentable square feet) for
expenses related to the Building, and the rentable area of the Park (274,406
rentable square feet) for expenses related to the Park. Upon full occupancy of
the Premises, Tenant's share of the Building shall be 53.7% and Tenant's share
of the Park shall be 16.05%, based on current configurations of the Building and
of the Park. Tenant's share of the Building and of the Park shall be adjusted as
and when the rentable area of the Building or of the Park changes. Within ninety
(90) days after the end of each year, Landlord will compute Tenant's Share for
such year (or portion thereof) based on actual costs and provide to Tenant an
itemized statement (a "Statement") of Tenant's Share for such year. If Tenant's
Share of amounts due for such year is greater than the amounts already paid by
Tenant pursuant to this Section 3.3, Tenant shall pay Landlord any deficiency
within ten (10) business days of receipt of written notice.
If the total amount paid for such year exceeds Tenant's Share,
then Landlord shall credit such excess to the payment of rent and additional
rent which may thereafter become due, provided, however, upon the expiration or
sooner termination of the Lease term, Landlord shall refund such excess to
Tenant, provided that Landlord may offset any sums owing to Tenant against sums
then owed by Tenant to Landlord. If at any time (but not more than once each
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<PAGE> 9
calendar year) Landlord obtains additional information regarding expenses,
Landlord may at its election adjust the amount of the monthly installments due
during the balance of the year to reflect such additional information, by giving
Tenant written notice thereof, which notice shall also state the amount of the
deficiency, if any, in the prior monthly payments for the calendar year. Tenant
shall pay any such deficiency within twenty (20) days of its receipt of the
notice and shall make the adjusted monthly payments for the remainder of the
calendar year. At any time within eighteen (18) months after a Statement for any
particular calendar year is provided to Tenant, upon twenty (20) days prior
written notice and during normal business hours at Landlord's office or at such
other place as Landlord shall reasonably designate, Tenant shall be entitled to
inspect and examine the books and records of Landlord related to the
determination of any sums payable by Tenant pursuant to this Section 3.3 which
are the subject of the applicable Statement.
If, after inspection and examination of such books and records,
Tenant disputes the amounts paid by Tenant pursuant to this Section 3.3, Tenant
by written notice to Landlord, may request an independent audit of such books
and records. The independent audit of Landlord's books and records shall be
conducted by a certified public accountant designated by Tenant and reasonably
acceptable to Landlord. The audit shall be limited to the determination of the
amount of any or all items payable by Tenant pursuant to this Section 3.3 for
the subject calendar year. If the audit discloses any amounts billed to and paid
by Tenant which are incorrect, the appropriate party shall pay to the other
party the deficiency or overpayment, as applicable, within thirty (30) days
after the results of the audit have been disclosed to both parties, unless
Landlord disputes the results of the audit within sixty (60) days of receipt of
the results of the audit, in which case, Landlord and Tenant shall agree upon a
national accounting firm to review and verify the Operating Costs, and provide
the results to Landlord and Tenant (the "Reconciliation Audit"). The
determination as set forth in the Reconciliation Audit shall be binding upon
Landlord and Tenant. If the Reconciliation Audit is performed, Landlord and
Tenant shall each pay one-half of the cost of the Reconciliation Audit. The
exercise by Tenant of its audit rights hereunder shall not relieve Tenant of its
obligations to pay prior to the request for and inspection and examination of
Landlord's books and records or permit Tenant the right to audit any other sums.
Additionally, Tenant agrees and acknowledges that various tenants' lease
provisions in the Building related to Operating Costs vary, and that the audit
right is set forth herein in the review of books and records shall be
confidential. With the exception of Tenant's auditors, Tenant shall not disclose
or discuss the audit or the results of the audit to any third parties, including
but not limited to any other tenants in the Building or the Park. All costs and
expenses of the audit shall be paid by Tenant unless the audit shows that
Landlord overstated Tenant's Share of the subject calendar year by more than
five percent (5%) of the actual amount payable by Tenant, in which case Landlord
shall pay all costs and expenses of the audit.
Notwithstanding any of the foregoing, Tenant shall not be
entitled to inspect or audit the books and records of Landlord more frequently
than once each calendar year.
3.3.2 For purposes of this Section 3.3, the following
definitions apply:
(i) "Operating Costs" shall mean all expenses paid or
incurred by Landlord or charged to Landlord for maintaining, operating,
repairing, replacing and administering the Building, the Park or both (including
common areas and facilities), and the
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<PAGE> 10
personal property used in conjunction therewith, together with a sum equal to
five percent (5%) of the cost thereof (exclusive of Real Property Taxes and
professional management fees) as an administrative fee, including, without
limitation, the costs of refuse collection, water, sewer, electricity, heat, air
conditioning, fuel, light, fire protection, and other utilities; services;
supplies; janitorial and cleaning services; window washing; snow, garbage and
refuse removal; security services and systems; resurfacing, repair, maintenance,
painting, lighting, cleaning, striping and securing parking facilities; elevator
operation, repair and maintenance; landscape maintenance; services of
independent contractors; compensation (including employment taxes and fringe
benefits) of all persons who perform duties in connection with the operation,
maintenance, repair, replacement and administration of the Park, the Building or
both, their equipment and common areas and facilities; insurance premiums for
all insurance carried with respect to the Building or the Park; licenses,
permits and inspection fees (but not Landlord's general business license and
related fees); subsidies and other payments required by public bodies, including
those for traffic signals and controls and for fire protection; professional
management fees (in amounts competitive with those charged by third party
property managers in connection with the management of comparable first class
office properties); legal and accounting expenses; and all other expenses or
charges whether or not hereinabove described which, in accordance with generally
accepted accounting and management practices, would be considered an expense of
maintaining, operating, repairing, replacing and administering the Building or
the Park, but excluding: (a) costs of any special services rendered to
individual tenants (including Tenant) for which a special charge is made; (b)
Real Property Taxes; (c) depreciation or amortization of costs required to be
capitalized in accordance with generally accepted accounting practices (except
Operating Costs shall include amortization over their useful life, on a straight
line basis, of capital improvements made subsequent to the date the last party
executes this Lease which are either designed with a reasonable probability of
improving the operating efficiency of the Building or the Park, as applicable,
or are required to be made to operate the Building or the Park in accordance
with applicable federal, state and local laws, regulations, ordinances and codes
enacted after the date of this Lease; (d) executive salaries (i.e., salaries of
all persons above Building management level); (e) salaries of Building
management and service personnel to the extent such personnel perform services
not solely in connection with the management, operation, repair or maintenance
of the Building or the Park, unless such salaries are prorated to reflect time
spent on operating and managing the Building or the Park, vis a vis time spent
on matters unrelated to operating and managing the Building or the Park; (f)
interest, charges and fees incurred on debt, payments and mortgages owed on the
Building or the Park; (g) advertising or promotional expenses with respect to
leasing space in or selling the Building or the Park; (h) brokerage, legal and
professional fees expended by Landlord in connection with negotiating and
entering into any leases and any related instruments with any tenant or other
occupant of any portion of the Building or the Project, and the enforcement of
any such instruments; (i) interest, penalties or damages incurred by Landlord
for late payment of taxes or assessments or under any agreement to which
Landlord is a party by reason of the breach or default of Landlord; (j) expenses
incurred in connection with relocating tenants in the Building or the Park; and
(k) structural and foundation repairs and roof replacements.
Operating Costs also shall not include any costs or expenses
incurred by Landlord in connection with the initial entitlement, construction or
development of the Building
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<PAGE> 11
pursuant to governmental agreements, rules, codes, rules or statutes, such as
the cost of child care facilities; traffic mitigation fees; water and sewage
connection, recycling, or housing replacement fees; infrastructure and
transportation fees; or art programs. Tenant acknowledges that Operating Costs
shall include Tenant's pro rata share of certain costs of maintaining,
operating, repairing, replacing and administering the common areas and
facilities in the Park.
(ii) "Real Property Taxes" shall mean all taxes on the
Building, and Landlord's share of any taxes applicable to the Park (including
common areas and facilities), and on personal property used in conjunction
therewith, including surcharges and all local governmental or quasi governmental
improvement and other assessments levied with respect to the Building or the
Park and all other property used directly in connection with the operation of
the Building or the Park; and any taxes levied or assessed in addition to or in
lieu of, in whole or in part, such real or personal property taxes, or any other
tax upon leasing of the Building or rents collected therefrom, other than any
federal or state income or franchise tax.
3.4 Late Charge; Interest. If Tenant fails to pay any amount due
hereunder within five (5) days of the due date, a late charge equal to five
percent (5%) of the unpaid amount shall be assessed and be immediately due and
payable. In addition, interest shall accrue on any payment which is more than
five (5) days past due at the rate of five percentage points (5%) per annum in
excess of the prime business lending rate publicly quoted from time to time in
the money rates column of the Wall Street Journal, calculated from the date the
payment was due to the date of payment. If the Wall Street Journal ceases to
quote a prime rate or similar rate, interest calculated under this Section 3.4
shall be based on the prime rate or similar rate of a United States national
bank having an office in Seattle, Washington, selected by Landlord. If the
foregoing rate exceeds the maximum rate permitted by applicable law, interest
shall accrue at the maximum rate so permitted by law, from the date due until
paid on any amount not paid when due. Landlord shall have the right to accept
rent and all other payments, whether full or partial, and negotiate checks and
payments thereof, without any waiver of rights, irrespective of any conditions
to the contrary sought to be imposed by Tenant.
SECTION IV - CONDUCT OF BUSINESS
4.1 Use of Premises. Tenant shall use the Premises only for general
office and related purposes, excluding medical or dental office, consistent with
the operation of a first class office building. Tenant shall not use or permit
the use of the Premises for any other business or purpose without Landlord's
prior written consent, which consent Landlord may grant or deny in its sole
discretion. Tenant shall promptly comply with the rules and regulations of the
Building and the Park, as set forth in Exhibit C attached, as the same may be
changed from time-to-time by Landlord in its reasonable business judgment upon
reasonable notice to Tenant. Tenant shall not permit any public or private
nuisance to occur on the Premises, or any other act or circumstance which
disturbs the quiet enjoyment of any occupant of the Building or the Park.
4.2 Appearance of Premises. Tenant shall maintain the Premises in a
clean, orderly and neat fashion to conform with the high standards of the
Building and the Park, permitting no odors to be emitted from the Premises and
neither commit waste nor permit any waste to be committed thereon. Tenant shall
not burn any trash in or about the Premises or permit any
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<PAGE> 12
accumulation of trash. Tenant shall store all trash, refuse and waste material
so as not to constitute a health or fire hazard or nuisance, in adequately
covered containers which are located within the Premises which are not visible
to the general public or in areas designated by Landlord.
4.3 Unlawful Use. Tenant shall not use or permit the Premises or any
part thereof to be used for any purpose in violation of any municipal, county,
state or federal law, ordinance or regulation, or for any purpose offensive to
the standards of the community of which the Building is a part, or in any manner
which is not in the best interests of the tenants of the Building or the Park.
Tenant shall promptly comply, at its sole cost and expense (except as otherwise
set forth in this Lease), with all laws, ordinances, and regulations now in
force or hereafter adopted and with the requirements of any board of fire
underwriters or similar body relating to or affecting the condition, use or
occupancy of the Premises.
Tenant shall not do or permit anything to be done in or about
the Premises, nor bring or keep anything therein which will increase the
existing rate of or affect any fire or other insurance upon the Building or any
of its contents, or cause a cancellation of any insurance policy covering the
Building or any part thereof or any of its contents. Tenant shall promptly upon
demand reimburse Landlord for any additional premium charged for any such policy
by reason of Tenant's failure to comply with the provisions of this Section.
4.4 Liens and Encumbrances. Tenant shall keep the Premises free and
clear of all liens and encumbrances arising or growing out of its use and
occupancy of the Premises. If any lien is filed against the Premises, the
Building or the Park as a result of the acts action or inaction of Tenant,
Tenant shall upon demand post a bond and cause such lien to be removed in
accordance with State law; provided that, at Tenant's option, or if required by
Landlord to expedite the necessary security, provide Landlord with cash or other
security acceptable to Landlord in an amount equal to one and one-half (1-1/2)
times the amount of the claimed lien as security for its prompt removal.
Landlord shall have the right to disburse such security to cause the removal of
the lien if a judgment is entered against Tenant in the lien proceeding, if such
lien causes difficulties for Landlord in connection with its financing of the
Building or if Tenant is otherwise in default under this Lease.
4.5 Hazardous Substances. Tenant shall not (either with or without
negligence) cause or permit the escape, disposal or release of any biologically
or chemically active or other hazardous substances or materials within the
Premises, the Building or the Park. Tenant shall not allow the storage or use of
such substances or materials in any manner not sanctioned by law or by the
highest standards prevailing in the industry for the storage and use of such
substances or materials, nor allow to be brought into the Project any such
materials or substances except to use in the ordinary course of Tenant's
business, and then only after written notice is given to Landlord of the
identity of such substances or materials.
Without limitation, hazardous substance and materials shall
include those described in the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended, 42 U.S.C. Section 9601 et
seq., any applicable state or local laws and the regulations adopted under these
acts, the Washington Model Toxics Control Act, RCW Chapter 70.105D,
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<PAGE> 13
and asbestos. If any lender or governmental agency should shall ever require
testing to ascertain whether or not there has been any release of hazardous
materials by Tenant or its employees, agents, contractors, invitees or licensees
anywhere in the Park, then the reasonable costs thereof shall be reimbursed by
Tenant to Landlord upon demand as additional rent if such requirement applies to
the Premises. In addition, Tenant shall execute affidavits, representations and
the like from time to time at Landlord's request concerning Tenant's best
knowledge and belief regarding the presence of hazardous substances or materials
on the Premises. In all events, Tenant shall indemnify Landlord in the manner
elsewhere provided in the Lease from any release of hazardous materials on the
Premises occurring while Tenant is in possession, or elsewhere if caused by
Tenant or persons acting under Tenant. The within covenants shall survive the
expiration or earlier termination of the Lease term. Tenant shall indemnify,
defend and hold harmless Landlord from any and all claims, damages, fines,
judgments, penalties, liabilities or losses (including, without limitation, a
decrease in the value of the Premises or Building, damages caused by loss or
restriction of rentable or usable space, or any damages caused by adverse impact
on marketing of the space and any and all sums paid for settlement of claims,
litigation expenses, attorneys' fees, consulting and expert fees) of whatever
kind or nature, known or unknown, contingent or otherwise, arising during or
after the Lease term and arising as a result of that contamination by Tenant.
This indemnification includes, without limitation, any and all costs incurred
because of any investigation of the site or any cleanup, removal or restoration
mandated by federal, state or local agency or political subdivision. Without
limiting the foregoing, if Tenant causes or permits the presence of any
hazardous substance on the Premises or the Building that results in
contamination, Tenant shall promptly, at its sole expense, take any and all
necessary actions to return the Premises or Building to the condition existing
prior to the presence of any such hazardous substance on the Premises or
Building. Tenant shall first obtain Landlord's approval for any such remedial
action.
To the actual knowledge of Landlord no Hazardous Materials are
present on the Premises or the Park in any manner or quantity that would violate
any applicable law or regulation. Landlord has made available to Tenant all
reports and environmental assessments of the Premises or the Park conducted at
the request of or otherwise available to Landlord and Landlord has complied with
all environmental disclosure obligations imposed upon Landlord by applicable law
with respect to this transaction.
4.6 Signs. Tenant shall not erect or place, or permit to be erected or
placed, or maintain any signs of any nature or kind whatsoever on the exterior
walls or windows of the Premises or elsewhere in the Park, except in compliance
with this paragraph. Tenant agrees to abide by all signing rules and
regulations, if any, promulgated by Landlord. Landlord agrees to provide Tenant
with the following signage identifying Tenant as an occupant of the Building in
size, color and style acceptable to Landlord:
a. One (1) Building standard sign on the plaza level lobby
directory.
b. One (1) Building standard sign at the main entry to the
Premises.
c. One (1) building exterior sign, at Tenant's expense, subject
to Landlord's and Tenant's mutual agreement on the location, size, design and
appearance of the sign. All
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Tenant's signage shall comply with all applicable governmental laws,
regulations, ordinances and codes.
SECTION V - UTILITIES AND OTHER CHARGES
5.1 Utilities and Services.
5.1.1 In accordance with Section 3.3 of this Lease, as
additional rent, Tenant shall pay Tenant's Share of all charges for heat, water,
light, gas, electricity, sewer, garbage, fire protection and any other utilities
and/or services used or consumed on or supplied to the Building and/or the Park,
including the Premises, and not separately metered or charged to Tenant or any
other tenant of the Building or the Park. Tenant shall be solely responsible for
and shall promptly pay when due all charges for telephone and all other charges
which are separately metered or charged to the Premises.
5.1.2 Landlord shall cause the public and common areas of the
Building and the Park, such as lobbies, elevators, stairs, corridors and
restrooms, to be maintained in reasonably good order and condition, except for
damage occasioned by any act or omission of Tenant or Tenant's officers,
contractors, agents, invitees, licensees or employees, the repair of which
latter damage shall be paid for by Tenant. Twenty-four (24) hours per day, seven
(7) days per week, Tenant shall have access to the Premises (subject to such
Building and Park security systems and procedures as may be in place from time
to time), and Tenant shall have available to it water and electrical service for
lighting and operation of 110-volt office machines. From 7:00 a.m. to 6:00 p.m.
on weekdays (i.e., Monday through Friday) and 8:00 a.m. to 1:00 p.m. on
Saturdays, excluding legal holidays and holiday weekends (collectively "Normal
Business Hours"), Landlord shall furnish the Premises with heat and air
conditioning services. If requested by Tenant, Landlord shall furnish such
services at times other than Normal Business Hours, and Tenant shall pay for the
cost of such after-hours services at rates established by Landlord from time to
time. Landlord's current hourly rates for after hours heating and air
conditioning services is $50.00 per hour.
Landlord will provide janitorial services customary for first
class buildings comparable to the Building in quality and location. If Tenant
requires excessive or specialized janitorial services, Tenant shall promptly pay
Landlord the additional costs and expenses incurred by Landlord in providing
such services.
The Building standard mechanical system is designed to
accommodate heating loads generated by lights and equipment using up to 2.5
watts per square foot. Before installing lights and equipment in the Premises
which in the aggregate exceed such amount, Tenant shall obtain the written
permission of Landlord. Landlord may refuse to grant such permission unless
Tenant agrees to pay the cost of installing supplementary air conditioning units
or electrical systems as necessitated by such equipment or lights. In addition,
Tenant shall pay to Landlord in advance, on the first day of each month during
the Lease term, the amount estimated by Landlord as the cost of furnishing
electricity for the operation of such equipment or lights and the amount
estimated by Landlord as the costs of operation and maintenance of supplementary
air
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conditioning units or electrical systems as necessitated by Tenant's use of such
equipment or lights. Landlord shall be entitled to install and operate at
Tenant's cost a monitoring/metering system in the Premises to measure the added
demands on electricity, heating, ventilation, and air conditioning systems
resulting from such equipment and lights and from Tenant's after-hours heating,
ventilation and air conditioning service requirements.
Tenant shall comply with Landlord's instructions, rules and
regulations for the use of drapes, blinds and thermostats in the Building.
Landlord shall not be liable for any loss, injury or damage to
person or property caused by or resulting from any variation, interruption, or
failure of such services due to any cause whatsoever, or from failure to make
any repairs or perform any maintenance unless such was caused by the gross
negligence or intentional misconduct of Landlord or Landlord's agents or
employees. No temporary interruption or failure of such services incident to the
making of repairs, alterations or improvements, or due to accident, strike or
conditions or other events beyond Landlord's reasonable control shall be deemed
an eviction of Tenant or to relieve Tenant from any of Tenant's obligations
hereunder or to give Tenant a right of action against Landlord for damages.
5.2 Licenses and Taxes. Tenant shall be liable for, and shall pay
throughout the term of this Lease, all license and excise fees and occupation
taxes covering the business conducted on the Premises and all personal property
taxes levied with respect to all personal property located at the Premises. If
any governmental authority levies a tax or license fee on rents payable under
this Lease or rents accruing from use of the Premises or a tax or license fee in
any form against Landlord or Tenant because of or measured by or based upon
income derived from the leasing or rental thereof (other than a net income tax
on Landlord's income), or a transaction privilege tax, such tax or license fee
shall be paid by Tenant, either directly if required by law, or by reimbursing
Landlord for the amount thereof upon demand.
SECTION VI - LETTER OF CREDIT
6.1 [Intentionally omitted.]
6.2 Letter of Credit. Within ten (10) days after mutual execution of
this Lease, Tenant shall cause to be delivered to Landlord an irrevocable,
unconditional, transferable standby Letter of Credit in the initial sum of
$1,600,000.00 naming Landlord as beneficiary, issued by a lender acceptable to
Landlord and otherwise substantially in the form of attached Exhibit E (the
"Letter of Credit"). At least thirty (30) days prior to the expiration of the
Letter of Credit, Tenant shall be obligated to deliver to Landlord a renewal
Letter of Credit satisfying the terms of this Section 6.2. If no such renewal
Letter of Credit is provided, it shall be a material default of this Lease, and
no cure period shall apply to such default. Tenant shall be required to maintain
the Letter of Credit for a period of six (6) months after termination of this
Lease. The Letter of Credit shall be governed by the rules of the International
Standby Practices of 1998 or such later revision as may be published by the
Institute of International Banking Law and Practice.
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Provided that Tenant is not then in default under this Lease,
the Letter of Credit may be reduced to the sum of $1,200,000 beginning on or
after January 1, 2003, and it may be further reduced to $800,000 beginning on or
after January 1, 2004. The Letter of Credit shall remain in place through the
Lease term. If Tenant breaches any covenant or condition of this Lease,
including but not limited to the payment of rent or additional rent, and fails
to cure such breach within any cure period provided in this Lease, Landlord may
draw on the Letter of Credit and apply any sums so drawn to reimburse itself for
any damages suffered as a result of Tenant's breach, regardless of whether
Landlord has previously taken any other action against Tenant. After drawing any
sums under the letter of credit, Landlord shall deposit such sums in an
interest-bearing account until the sums are paid out or retained by Landlord.
Any payment to Landlord from the Letter of Credit shall not be construed as a
payment of liquidated damages for any default.
SECTION VII - COMPLETION AND ALTERATIONS
7.1 Delivery of Premises. Landlord shall deliver the Premises to Tenant
in a condition in accordance with Exhibit D attached.
7.2 Alterations by Tenant. Tenant shall not make any alterations,
additions or improvements in or to the Premises without first submitting to
Landlord professionally-prepared plans and specifications for such work and
obtaining Landlord's prior written approval thereof. Landlord shall not
unreasonably withhold its approval to alterations proposed by Tenant which are
nonstructural and which do not affect any Building systems. Tenant covenants
that it will cause all such alterations, additions and improvements to be
performed at Tenant's sole cost and expense by Landlord or a contractor approved
by Landlord in advance (in the exercise of Landlord's reasonable business
judgment) and in a manner which: (a) is consistent with the Landlord-approved
plans and specifications and any conditions imposed by Landlord in connection
therewith; (b) is in conformity with commercial standards; (c) includes
acceptable insurance coverage for Landlord's benefit; (d) does not affect the
structural integrity of the Building; (e) does not unreasonably disrupt the
business or operations of adjoining tenants; and (f) does not invalidate or
otherwise affect the construction and systems warranties then in effect with
respect to the Park. With respect to any alterations, additions and improvements
made by Landlord for Tenant, Tenant shall pay Landlord a supervision fee in an
amount equal to five percent (5%) of the cost of design, permitting and
construction of the alterations, additions and improvements. Tenant shall secure
all governmental permits and approvals, as well as comply with all other
applicable governmental requirements and restrictions.
All alterations, additions and improvements (expressly including
all light fixtures, heating, ventilation and air conditioning units and floor
coverings), except trade fixtures and appliances and equipment not affixed to
the Premises, shall immediately become the property of Landlord without any
obligation on its part to pay therefor (other than the Allowance described in
Exhibit D). At the termination of the Lease, Tenant shall remove all cable and
conduit installed, unless otherwise directed by Landlord, but Tenant shall not
be required to remove any other improvements on the termination of this Lease
unless Landlord informs Tenant at the time of approving such improvements that
Tenant will be required to remove them at the termination of this Lease.
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SECTION VIII - MAINTENANCE OF PREMISES
8.1 Care of Premises. Tenant shall take good care of the Premises and
shall reimburse Landlord for all damage done to the Building, the Park or the
Premises not covered by insurance and occasioned by any act or omission of
Tenant or Tenant's officers, employees, contractors, agents, invitees, licensees
or employees, including, but not limited to, cracking or breaking of glass. If
Tenant fails to take good care of the Premises, subject to normal wear and tear,
Landlord, at its option after giving Tenant the notice required in this Lease
for nonmonetary defaults, may do so, and in such event upon receiving written
statements from Landlord, Tenant shall promptly pay the entire cost thereof as
additional rent. Landlord shall have the right to enter the Premises for such
purposes.
8.2 Repairs by Landlord; Maintenance and Repair Charges. Except for
repairs which are Tenant's responsibility under Section 8.1 above, all normal
repairs necessary to maintain the Premises and the Building in a reasonable
condition as a first class office building, as determined by Landlord in the
reasonable exercise of its discretion, shall be performed by Landlord and the
costs incurred by Landlord in so doing shall be reimbursed to Landlord as an
Operating Cost in accordance with Section 3.3 above. Except as provided in
Section XII below, there shall be no abatement of rent or additional rent and no
liability to Landlord under any circumstances by reason of any loss of or any
injury to property, lost profits, or for injury to or interference with Tenant's
business arising from the making of or Landlord's failure to make any repairs,
alterations or improvements or reduction of rent arising by reason of Landlord's
making of repairs, alterations or improvements. Landlord shall seek to make
repairs, alterations and improvements after written notice from Tenant in a
manner that will minimize material injury to property, lost profit, or injury to
or interference with Tenant's business. Landlord shall be responsible for
structural and foundation repairs and roof replacement, the cost of which shall
not be reimbursed to Landlord as an Operating Cost.
8.3 Surrender of Premises. At the expiration or sooner termination of
this Lease, Tenant shall return the Premises to Landlord in the same condition
in which received (or, if altered, then the Premises shall be returned in such
altered condition unless otherwise directed by Landlord under terms of Section
7.2), reasonable wear and tear excepted. Prior to such return, Tenant shall
remove its trade fixtures and appliances and equipment which have not been
attached to the Premises, and shall restore the Premises to the condition they
were in prior to the installation of said items. In no event shall Tenant remove
floor coverings; heating, ventilating and air conditioning equipment; lighting
equipment or fixtures; wall coverings; window coverings; or other operating
equipment. Tenant's obligation to perform this covenant shall survive the
expiration or termination of this Lease.
SECTION IX - COMMON AREAS
9.1 Control of Common Areas by Landlord. During the term of this Lease,
Tenant and its employees, customers and invitees, shall have the non-exclusive
right to use all entrances, lobbies and other public areas of the Building and
the Park (the "Common Areas"), in common with Landlord, other Building and Park
tenants and their respective employees, customers and invitees. Landlord at all
times shall have the exclusive control and management of the Common
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Areas and no diminution of the Common Areas shall be deemed a constructive or
actual eviction of Tenant or entitle Tenant to compensation or a reduction or
abatement of rent. Landlord shall have the right from time to time to establish,
modify and enforce reasonable rules and regulations regarding the use of the
Common Areas and the right to change the area, level, location and arrangement
of the Common Areas.
9.2 Parking. Ninety-seven (97) covered parking stalls in the Building
parking garage have been allocated to the Premises and forty (40) parking stalls
elsewhere in the Park have been allocated to the Premises. All of the stalls
allocated to the Premises are unreserved and available on a first come, first
served basis. Tenant shall cause its employees and invitees to comply with such
rules and regulations from time-to-time promulgated with respect to the parking
areas of the Building and the Park. Tenant shall pay for covered parking stalls
at the initial rate of forty dollars ($40) per stall per month. Thereafter,
Landlord may increase the cost of covered parking stalls to the fair market
rental value of such stalls. Landlord may charge the fair market rental value
for uncovered parking stalls, provided that (i) the initial charge for such
stalls shall not exceed twenty five dollars ($25) per stall, (ii) Landlord is
charging all tenants in the Park using uncovered parking stalls (unless Landlord
cannot under the terms of a lease existing as of the mutual execution of this
Lease), and (iii) any increase above the initial charge per parking shall be
limited to twenty five percent (25%) per year, cumulative, during the Lease
term. If Tenant exercises any option to renew this Lease, then the limitations
on parking charges which may be made by Landlord under this Lease shall not
apply during any renewal term, notwithstanding any language in Section 2.6 to
the contrary, and Tenant shall pay for covered and uncovered parking at the then
fair market rental rate during the renewal term.
SECTION X - INSURANCE AND INDEMNITY
10.1 Indemnification. Landlord shall not be liable for any injury to any
person, or for any loss of or damage to any property (including property of
Tenant) occurring in or about the Premises from any cause whatsoever, other than
the negligence or intentional misconduct of Landlord or its employees or agents.
Tenant shall indemnify, defend and save Landlord, its officers, agents,
employees and contractors, and other tenants and occupants of the Park, harmless
from all losses, damages, fines, penalties, liabilities and expenses (including
Landlord's personnel and overhead costs and attorneys' fees and other costs
incurred in connection with such claims, regardless of whether claims involve
litigation) resulting from any actual or alleged injury to any person or from
any actual or alleged loss of or damage to any property alleged to be
attributable to Tenant's operation or occupation of the Premises or caused by or
resulting from any act or omission of Tenant or any licensee, assignee, or
concessionaire, or of any officer, agent, employee, guest or invitee of any such
person in or about the Premises, including, but not limited to, the deposit or
release of hazardous or toxic materials or substances or Tenant's breach of its
obligations hereunder. Tenant agrees that the foregoing indemnity specifically
covers actions brought by its own employees. Notwithstanding any of the
foregoing, if losses, liabilities, damages, liens, costs and expenses so arising
are caused by the concurrent negligence of both Landlord and Tenant, their
employees, agents, invitees and licensees, Tenant shall indemnify Landlord only
to the extent of Tenant's own negligence or that of its officers, agents,
employees, guests or invitees.
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As between Landlord and Tenant, the foregoing indemnity is
specifically and expressly intended to constitute a waiver of Tenant's immunity
under Washington's Industrial Insurance Act, RCW Title 51, for the sole purpose
of and only to the extent necessary to provide Landlord with a full and complete
indemnity from claims made against Landlord by Tenant's employees. The
indemnification provided for in this Section with respect to acts or omissions
during the term of this Lease shall survive termination or expiration of this
Lease. Tenant shall promptly notify Landlord of casualties or accidents
occurring in or about the Premises. LANDLORD AND TENANT ACKNOWLEDGE THAT THE
INDEMNIFICATION PROVISIONS OF THIS SECTION 10.1 WERE SPECIFICALLY NEGOTIATED AND
AGREED UPON BY THEM.
10.2 Insurance. Tenant shall, at its own expense, maintain comprehensive
or commercial general liability insurance with broad form and stop gap
(employer's liability) endorsements in minimum limits of $2,000,000 per
occurrence for property damage or loss and minimum limits of $2,000,000 per
occurrence for personal injuries and death, to indemnify Landlord, Tenant and
any lender designated by Landlord ("Lender") against claims, demands, losses,
damages, liabilities and expenses. Landlord shall have the right to periodically
review the appropriateness of such limits in view of changing industry
conditions and court decisions and to require a reasonable increase in such
limits upon ninety (90) days prior written notice to Tenant. Landlord and Lender
shall be named as additional insureds and shall be furnished with a copy of such
policy or policies of insurance which shall bear an endorsement that the same
shall not be canceled nor materially reduced in coverage or limits without
thirty (30) days prior written notice to Landlord and Lender.
During the Lease term, Tenant shall also maintain at its own
expense insurance covering its furniture, fixtures, equipment and inventory and
all improvements which it makes to the Premises in an amount equal to the full
insurable value thereof, against fire and such other perils as are covered by an
all risk policy with plate glass endorsement, including all glass on the
Premises. All insurance required under this Lease shall (a) be issued by
insurance companies authorized to do business in the State of Washington and
having a financial rating of at least A, Class X status, as rated in the most
recent edition of Best's Insurance Reports, or with companies otherwise
acceptable to Landlord; (b) be issued as a primary policy, or under the blanket
policy, not contributing with and not in excess of coverage which Landlord may
carry; (c) in the case of the liability policy, contain a contractual liability
coverage endorsement covering Tenant's indemnification duty; and (d) have
deductibles approved by Landlord in its reasonable discretion. If Tenant fails
to maintain such insurance, Landlord may do so, and Tenant shall reimburse
Landlord for the full expense thereof upon demand.
During the term of this Lease, Landlord shall maintain special
extended coverage casualty insurance on the Building in the amount of the
replacement cost of the Building, and on such other terms as Landlord deems
appropriate. Landlord may also maintain other insurance coverage for the
Building or the Park, including commercial general liability insurance and loss
of rents insurance, in such amounts and on such terms as Landlord's lender may
require or as Landlord shall otherwise deem prudent in the exercise of its
business judgment.
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10.3 Increase in Insurance Premiums. Tenant shall not keep, use, sell or
offer for sale in or upon the Premises any article which is prohibited by
Landlord's insurance policy. Tenant shall pay immediately any increase in
Landlord's premiums for insurance during the term of this Lease which results
from Tenant's occupancy or use of the Premises. In determining whether increased
premiums are the result of Tenant's use of the Premises, a schedule, issued by
the organization establishing the insurance rate on the Premises showing the
various components of such rate, shall be conclusive evidence of the several
items and charges which make up the insurance rate on the Premises.
10.4 Waiver of Subrogation. Neither Landlord nor Tenant shall be liable
to the other party or to any insurance company (by way of subrogation or
otherwise) insuring the other party for any loss or damage to any building,
structure or tangible personal property of the other occurring in or about the
Premises, even though such loss or damage might have been occasioned by the
negligence of such party, its agents or employees, if such loss or damage is
covered by insurance benefiting the party suffering such loss or damage or was
required to be covered by insurance under terms of this Lease. Each party shall
cause each insurance policy obtained by it to contain the waiver of subrogation
clause.
SECTION XI - ASSIGNMENT AND SUBLETTING
11.1 Assignment or Sublease. Tenant shall not voluntarily, involuntarily
or by operation of law, assign, sell, pledge, transfer, mortgage or encumber
this Lease or any interest therein, or sublet the whole or any part of the
Premises (any of which events being a "Transfer" and any such assignee,
purchaser, mortgagee, pledgee or other transferee being a "Transferee" for
purposes of this Section XI) without first obtaining Landlord's written consent,
which shall not be unreasonably withheld if all of the following conditions
precedent are fully and completely satisfied, but which otherwise may be
withheld by Landlord in its sole discretion:
(a) The proposed Transferee is at least as creditworthy as
Tenant when Tenant entered into this Lease, and satisfies Landlord's then
current credit standards for tenants of the Building and the Park, and in
Landlord's opinion has the financial strength and stability to perform all
obligations under this Lease to be performed by Tenant as and when they fall
due.
(b) The proposed Transferee will use the Premises for a purpose
which in Landlord's reasonable opinion (i) is lawful, (ii) is consistent with
the permitted use of the Premises under this Lease, (iii) is consistent with the
general character of business carried on by tenants in similar office buildings,
(iv) does not conflict with any exclusive rights or covenants not to compete in
favor of any other tenant or proposed tenant in the Building and the Park, (v)
will not increase the likelihood of damage or destruction, (vi) will not
increase the rate of wear and tear to the Premises or common areas, (vii) will
not likely cause an increase in insurance premiums for insurance policies
applicable to the Building (unless the proposed Transferee agrees to pay such
additional cost), and (viii) will not require new tenant improvements
incompatible with then existing Building systems and components.
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(c) Tenant pays to Landlord all of Landlord's reasonable
attorneys' fees and costs incurred in connection with negotiation, review and
processing of the Transfer, plus a processing fee of $1,000.
(d) At the time of the proposed Transfer, Tenant is not in
default under or in breach of any term, provision or covenant of this Lease.
(e) In Landlord's business judgment: (i) the proposed Transferee
must have a business reputation and financial strength equal to or better than
the Tenant at the time of mutual execution of this Lease, and (ii) the proposed
transfer shall not create an undesirable mix of tenants at the Park.
(f) At least seventy-five percent (75%) for the rentable area of
the Building and the Park is leased to paying tenants.
(g) The Transfer will not otherwise have or cause a material
adverse impact on Landlord's interests in the Park, the Building or the
Premises.
Tenant shall demonstrate that each of the foregoing conditions is satisfied as a
condition to any permitted transfer. No Transfer shall relive Tenant of any
liability under this Lease. Consent to any Transfer shall not operate as a
waiver of the necessity of a consent to any subsequent Transfer, and the terms
of such consent shall be binding upon any Person holding by, under or through
Tenant.
11.2 Entity Ownership. The cumulative transfer (i.e. in one or more
sales or transfers, by operation of law or otherwise) of an aggregate of fifty
percent (50%) or more of the voting stock issued and outstanding on the date of
this Lease is executed by Landlord, including by creation or issuance of new
stock of a corporation which is (i) owned by Tenant, (ii) the corporate assignee
of Tenant, or (iii) any corporation which is a general partner in a general or
limited partnership or member of a limited liability company which is the tenant
or an assignee of the tenant of this Lease; or the cumulative transfer of an
aggregate of fifty percent (50%) or more of the ownership interest in a general
or limited partnership, limited liability company or other entity which is the
tenant or an assignee of the tenant, by which an aggregate of fifty percent
(50%) or more of such ownership interest is vested in a person or persons who
are not general partners, members or other owners (except as the result of
transfer by gift or inheritance), shall be deemed a Transfer of this Lease and
shall be subject to the provisions of Section 11.1. For the purpose of Section
11.1, any entity which has undergone any of the changes described in this
Section shall be deemed to be a Transferee. The term "voting stock" means the
stock regularly entitled to vote for election of directors of the corporation;
and any stock, however denominated, which is convertible into such voting stock,
shall be treated for purposes of the foregoing as if it were in fact converted.
This Section 11.2, however, shall not be applicable to any Tenant corporation
the outstanding voting stock of which is listed on a national securities
exchange and actively traded "over the counter."
11.3 Recapture by Landlord. If Tenant at any time desires to Transfer
this Lease, it shall give notice (a "Tenant Transfer Notice") to Landlord of its
desire to do so which notice shall
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state the rent at which it proposes so to Transfer and shall contain full and
complete financial and business information on its intended Transferee. In
addition to Landlord's rights under Section 11.1, Landlord may elect by notice
to Tenant (a "Landlord's Repossession Notice"), within forty-five (45) days of
receipt of the Tenant Transfer Notice, to terminate this Lease as to that
portion of the Premises subject to the Tenant Transfer Notice.
If Landlord exercises such right to terminate, Landlord shall be
entitled to recover possession of the portion of the Premises subject of the
Tenant Transfer Notice on the later of (i) the proposed date for possession by
such Transferee, as set out in the Tenant Transfer Notice, or (ii) forty-five
(45) days after the date of Landlord's Repossession Notice. All costs incurred
by Landlord in constructing improvements, such as doors or partitions,
separating the remaining Premises from the repossessed area of the Premises
shall be paid by Tenant within thirty (30) days of demand. If Landlord does not
exercise such right to terminate and otherwise approves the transfer, Tenant may
thereafter Transfer this Lease or a portion of the Premises subject thereof, but
at a rental not less than that offered to Landlord in the Tenant Transfer Notice
and not later than forty-five (45) days after delivery of the Tenant Transfer
Notice to Landlord, unless a further notice is given pursuant to this section,
provided (i) Landlord consents thereto pursuant to Section 11.1, (ii) Tenant
delivers to Landlord prior to the effective date of any such Transfer duplicate
originals of any instrument effecting such Transfer, in form and content
satisfactory to Landlord, and (iii) all amounts received by Tenant from the
Transferee in excess of the sum of (a) the Rent payable hereunder for the area
of the Premises so Transferred and (b) brokerage commissions, legal fees,
marketing costs and tenant improvement costs incurred by Tenant in connection
with the Transfer, shall belong to and shall immediately be paid to Landlord as
Additional Rent.
No action or inaction by Landlord in connection with its rights
under this Section 11.3 shall constitute or be deemed to constitute an approval
of a proposed Transfer for purposes of Section 11.1 except as specifically set
forth in a notice from Landlord to Tenant.
11.4 Assignee Obligation. Any Transferee other than a subtenant approved
by Landlord shall assume all obligations of Tenant and shall be jointly and
severally liable with Tenant for the payment of rent, additional rent and other
charges and performance of all of Tenant's obligations under this Lease. Tenant
shall provide Landlord with full and complete duplicate originals of all
instruments of assignment, sublease or assumption. It shall not be unreasonable
for Landlord to withhold consent to a proposed assignment or sublease because it
wishes to exercise its right to recapture all or part of the Premises under
Section 11.3 hereof, or because (a) the proposed transferee is any governmental
agency, federal, state, local or foreign government or incorporation, (b) the
transfer would cause the Landlord to violate another lease at the Park or
agreement to which Landlord is a party or would give a Building tenant the right
to cancel its lease, or (c) the proposed transferee occupies space in the
Building or the Park, is negotiating with Landlord to lease space in the
Building or the Park, or has negotiated with Landlord to lease space in the
Building or the Park during the six months immediately proceeding the
notification from Tenant.
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11.5 Additional Consideration. If Tenant assigns its interest under this
Lease, or sublets all or any portion of the Premises, Tenant shall pay to
Landlord (in addition to minimum rent and all other amounts payable by Tenant
under this Lease) as additional rent, within ten (10) days after receipt, all
rent, bonus rent, assignment fees and other consideration payable by the
assignee or subtenant in excess of (a) the rent otherwise payable by Tenant from
time to time under this Lease, and (b) legal fees and leasing commissions
incurred by Tenant due to the sublease or assignment, and out-of-pocket costs
incurred by Tenant to pay the costs of labor and materials paid to third parties
for renovations made to the premises to accommodate the assignee or subtenant.
11.6 Assignment by Landlord. If Landlord sells or otherwise transfers
the Building, or if Landlord assigns its interest under this Lease (other than
for security purposes) Landlord shall transfer the Letter of Credit to the
purchaser and shall cause the purchaser to assume this Lease, whereupon such
purchaser, transferee or assignee thereof shall be deemed to have assumed
Landlord's obligations hereunder from and after the transfer date, and Landlord
shall thereupon be relieved of all liabilities hereunder, but this Lease shall
otherwise remain in full force and effect.
11.7 Permitted Transfers. Anything contained herein to the contrary
notwithstanding, Landlord hereby consents to an assignment of this Lease, or a
subletting of all or part of the Premises, to (a) the parent of Tenant or to a
wholly-owned subsidiary of Tenant or of such parent, (b) any corporation or
other entity into which or with which Tenant may be merged or consolidated,
provided that the net worth of the resulting corporation or entity is at least
equal to the greater of (i) the net worth of Tenant on the date hereof, or (ii)
the net worth of Tenant immediately prior to such merger or consolidation, or
(c) any entity to which Tenant sells all or substantially all of its assets,
provided that such entity expressly assumes all of Tenant's obligations
hereunder and that the net worth of the purchaser is at least equal to the
greater of (i) the net worth of Tenant on the date hereof, or (ii) the net worth
of Tenant immediately prior to such purchase. Any assignee or subtenant
described in this Section is a "Permitted Transferee."
SECTION XII - DESTRUCTION OF PREMISES
12.1 Partial Destruction. If the Premises are rendered partially
untenantable by fire or other insured casualty, and if the damage is repairable
within sixty (60) days from the date of the occurrence (with the repair work and
preparations therefore to be done during regular working hours on regular work
days), Landlord shall repair the Premises with due diligence, to the extent of
the insurance proceeds available, and the minimum rent and additional rent shall
be abated in the proportion that the untenantable portion of the Premises bears
to the whole thereof for the period from the date of the casualty to the
completion of the repairs, unless the casualty results from Tenant's negligence
or its breach of the terms hereof.
If thirty percent (30%) or more of the rentable area of the
Building is destroyed or damaged, regardless of whether the Premises are
damaged, Landlord may terminate this Lease as of the date of such damage or
destruction by giving notice to Tenant within thirty (30) days thereafter of the
election so to do. If thirty percent (30%) or more of the rentable area of the
Premises is destroyed or damaged within the last twelve (12) months of the Lease
term, then
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Tenant may terminate this Lease by giving Landlord written notice of its intent
to do so within thirty (30) days after the casualty event.
12.2 Total Destruction. If the Premises are completely destroyed by fire
or other casualty, or if they are damaged by uninsured casualty, or by insured
casualty to such an extent that the damage cannot be repaired within sixty (60)
days of the occurrence, Landlord shall have the option to restore the Premises
or to terminate this Lease on sixty (60) days written notice, effective as of
any date not more than sixty (60) days after the occurrence. If this Section
becomes applicable, Landlord shall advise Tenant within thirty (30) days after
such casualty whether Landlord elects to restore the Premises or to terminate
this Lease. If Landlord elects to restore the Premises, it shall commence and
prosecute the restoration work with diligence. For the period from the date of
the casualty until completion of the repairs (or the date of termination of this
Lease, if Landlord elects not to restore the Premises), the minimum rent and
additional rent shall be abated in the same proportion that the untenantable
portion of the Premises bears to the whole thereof, unless the casualty results
from Tenant's negligence or its breach of the terms thereof. If the Premises are
totally damaged or destroyed, and the repairs to the Premises have not been
completed within nine (9) months after the damage or destruction (subject to
delays such as force majeure delays which are beyond Landlord's control), Tenant
shall have the right to terminate this Lease by written notice given to Landlord
within thirty (30) days after the end of the foregoing nine (9) month period,
provided Landlord does not complete the repairs prior to the date Tenant
delivers its termination notice to Landlord.
12.3 Limitation. Except as otherwise provided in this Lease, Landlord
shall not be liable to Tenant for destruction or damage to any of Tenant's
property including fixtures, equipment or other improvements, or for damages or
compensation for inconvenience, loss of business or disruption arising from
repairs or restoration of any portion of the Building or the Premises.
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SECTION XIII - EMINENT DOMAIN
13.1 Total Taking. If all of the Premises are taken by eminent domain,
this Lease shall terminate as of the date Tenant is required to vacate the
Premises and all rentals shall be paid to that date. The term "eminent domain"
shall include the taking or damaging of property by, through or under any
governmental or statutory authority, and any purchase or acquisition in lieu
thereof, whether the damaging or taking is by government or any other person.
13.2 Partial Taking. If a taking of any part of the Premises by eminent
domain renders the remainder thereof unusable for the business of Tenant, in the
reasonable judgment of Landlord, this Lease may, at the option of either party,
be terminated by written notice given to the other party not more than thirty
(30) days after Landlord receives notice (and provides Tenant written notice) of
the taking, and such termination shall be effective as of the date when Tenant
is required to vacate the portion of the Premises so taken. If this Lease is so
terminated, all rent shall be paid to the date of termination.
Whenever any portion of the Premises is taken by eminent domain
and this Lease is not terminated, Landlord shall at its expense proceed with all
reasonable dispatch to restore, to the extent of available proceeds and to the
extent it is reasonably prudent to do so, the remainder of the Premises to the
condition it was in immediately prior to such taking, and Tenant shall at its
expense proceed with all reasonable dispatch to restore its fixtures, furniture,
furnishings, floor covering and equipment to the same condition they were in
immediately prior to such taking. The minimum rent and additional rent payable
hereunder shall be reduced from the date Tenant is required to partially vacate
the Premises in the same proportion that the area taken bears to the total area
of the Premises prior to taking.
13.3 Damages. Landlord reserves all right to the entire damage award or
payment for any taking by eminent domain or a transfer in lieu thereof, and
Tenant waives all claim whatsoever against Landlord for damages for termination
of its leasehold interest in the Premises or for interference with its business
as a result of such taking. Tenant hereby grants and assigns to Landlord any
right Tenant may now have or hereafter acquire to such damages and agrees to
execute and deliver such further instruments of assignment as Landlord may from
time to time request; however, Tenant shall have the right to claim from the
condemning authority all compensation that may be recoverable by Tenant on
account of any loss incurred by Tenant in removing Tenant's furniture, trade
fixtures and equipment to the extent such damages are awarded separately in the
eminent domain proceeding and not as part of Landlord's damages.
SECTION XIV - DEFAULT OF TENANT
14.1 Defaults.
14.1.1 Time is of the essence of this Lease. Tenant shall be in default
under this Lease if: (i) Tenant violates or breaches or fails to keep or perform
any covenant, term or condition of this Lease; (ii) Tenant or any guarantor of
Tenant's obligations under this Lease (a "Guarantor") files or is the subject of
a petition in bankruptcy; (iii) a trustee or receiver is appointed for Tenant's
or any Guarantor's assets; (iv) Tenant or any Guarantor makes an
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assignment for the benefit of creditors; or (v) Tenant abandons the Premises
(for this purpose, abandonment shall mean that no Tenant employee is regularly
present in the Premises, and Tenant has no intention to reoccupy the Premises).
If the default under (i) above is the nonpayment of rent, additional rent or any
other sum payable by Tenant under this Lease, Tenant shall have five (5) days
after written notice to cure the default. If the default under (i) above is
something other than nonpayment of rent, additional rent or any other sum
payable by Tenant under this Lease, Tenant shall have twenty (20) days following
receipt of written notice from Landlord within which to cure any such default;
provided, if the nature of the default is such that the same cannot reasonably
be cured within such twenty (20) day period, the cure period shall be extended
for so long as may be reasonably necessary to cure the default so long as Tenant
commences the cure within the initial twenty (20) day period, thereafter
diligently prosecutes the cure to completion in good faith, and furnishes
Landlord with such assurances and indemnities as Landlord may reasonably require
to insure completion thereof and fully and completely protect Landlord from any
loss or liability resulting from any such default or any delay by Tenant in
curing the default. The foregoing notices and cure periods shall include but not
be in addition to any notices and cure periods otherwise required by RCW 59.12,
as now or hereafter amended, or any legislation in substitution thereof.
14.1.2 If a default is not cured within the applicable cure
period, if any, Landlord shall have the following rights and remedies, at its
option which shall not be exclusive, but shall be cumulative and in addition and
supplemental to any and all other rights and/or remedies that Landlord may have
at law or if equity: (1) to declare the term hereof ended and to reenter the
Premises and take possession thereof and remove all persons therefrom, and
Tenant shall have no further claim thereon or hereunder; (2) without declaring
this Lease terminated, to reenter the Premises and occupy the whole or any part
thereof for and on account of Tenant and to collect any unpaid rentals and other
charges, which have become payable, or which may thereafter become payable; or
(3) even though it may have reentered the Premises, to thereafter elect to
terminate this Lease and all of the rights of Tenant in or to the Premises. If
Landlord reenters the Premises under option (2) above, Landlord shall not be
deemed to have terminated this Lease or the liability of Tenant to pay any
rental or other charges thereafter accruing, or to have terminated Tenant's
liability for damages under any of the provisions hereof, by any such reentry or
by any action, in unlawful detainer or otherwise, to obtain possession of the
Premises, unless Landlord shall have notified Tenant in writing that it has so
elected to terminate this Lease, and Tenant further covenants that the service
by Landlord of any notice pursuant to the unlawful detainer statutes and the
surrender of possession pursuant to such notice shall not (unless Landlord
elects to the contrary at the time of or at any time subsequent to the serving
of such notices and such election is evidenced by written notice to Tenant) be
deemed to be a termination of this Lease. In the event of any entry or taking
possession of the Premises, Landlord shall have the right, but not the
obligation, to remove therefrom all or any part of the personal property located
therein and may place the same in storage at a public warehouse at the expense
and risk of Tenant.
14.1.3 If Landlord elects to terminate this Lease pursuant to
the provisions of options (1) or (3) in Section 14.1.2 above, Landlord may
recover from Tenant as damages the following: (i) the worth at the time of award
of any unpaid rental which had been earned at the time of such termination; plus
(ii) the worth at the time of award of the amount by which the
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unpaid rental which would have been earned after termination until the time of
award exceeds the amount of such rental loss Tenant proves could have been
reasonably avoided; plus (iii) the worth at the time of award of the amount by
which the unpaid rental for the balance of the term after the time of award
exceeds the amount of such rental loss that Tenant proves could be reasonably
avoided; plus (iv) any other amount necessary to compensate Landlord for all the
detriment proximately caused by Tenant's failure to perform its obligations
under this Lease, including, but not limited, any costs or expenses incurred by
Landlord in (1) retaking possession of the Premises, including reasonable
attorneys' fees therefor, (2) maintaining or preserving the Premises after such
default, (3) preparing the Premises for reletting to a new tenant, including
repairs or alterations to the Premises for such reletting, (4) leasing
commissions, and (5) any other costs necessary or appropriate to relet the
Premises; plus (v) at Landlord's election, such other amounts in addition to or
in lieu of the foregoing as may be permitted from time to time by the laws of
the State of Washington; plus (vi) the total value at the time of the award of
all of the concessions granted to Tenant at the time of signing this Lease,
prorated based on the remainder of the initial term of the Lease. As used in
items (i) and (ii) above, the "worth at the time of award" is computed by
allowing interest at the interest rate specified in Section 3.4 hereof.
As used in item (iii) above, the "worth at the time of award" is
computed by using a discount rate of six percent (6%).
14.1.4 For all purposes of this Section 14.1 only, the term
"rental" shall be deemed to be the minimum rent and all additional rent and
other sums required to be paid by Tenant pursuant to the terms of this Lease.
All such sums, other than the minimum rent, shall, for the purpose of
calculating any amount due under the provisions of subparagraph (iii) above, be
computed on the basis of the average monthly amount thereof accruing during the
immediately preceding twelve (12) month period, except that if it becomes
necessary to compute such rental before such a twelve (12) month period has
occurred then such rental shall be computed on the basis of the average monthly
amount hereof accruing during such shorter period.
14.2 Legal Expenses. If either party commences a legal proceeding to
enforce or obtain a declaration of its rights under this Lease, the prevailing
party shall be entitled to reimbursement from the non-prevailing party for the
prevailing party's reasonable costs and attorneys' fee, whether such costs and
attorneys' fees are incurred in such proceeding or on appeal.
14.3 Remedies Cumulative; Waiver. Landlord's remedies hereunder are
cumulative, and Landlord's exercise of any right or remedy due to a default or
breach by Tenant shall not be deemed a waiver of, or alter, affect or prejudice
any other right or remedy which Landlord may have under this Lease or by law.
Neither the acceptance of rent nor any other acts or omissions of Landlord at
any time or times after the happening of any event authorizing the cancellation
or forfeiture of this Lease shall operate as a waiver of any past or future
violation, breach or failure to keep or perform any covenant, agreement, term or
condition hereof or to deprive Landlord of its right to cancel or forfeit this
Lease, upon the written notice provided for herein, at any time that cause for
cancellation or forfeiture may exist, or be construed so as at any future time
to estop Landlord from promptly exercising any other option, right or remedy
that it may have under any term or provision of this Lease.
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SECTION XV - ACCESS BY LANDLORD; DEFAULT OF LANDLORD
15.1 Right of Entry. Landlord and its agents shall have the right to
enter the Premises at any time upon reasonable prior notice to Tenant, to
examine the same, to show them to prospective purchasers, lenders or tenants, to
make such alterations, repairs, improvements or additions as Landlord may deem
necessary or desirable; provided, in an emergency or perceived emergency or to
provide normal services (such as janitorial service) to the Premises, no advance
notice shall be required. If Tenant is not personally present to permit entry
and an entry is necessary in an emergency, Landlord may enter the same by master
key or may forcibly enter the same, without rendering Landlord liable therefor.
Nothing contained herein shall be construed to impose upon Landlord any duty of
repair except as specifically provided for herein. Tenant shall not change the
locks to the Premises without first advising Landlord thereof and providing
Landlord with evidence that the new lock is keyed to Landlord's master key
system for the Park.
15.2 Excavation. If Landlord authorizes an excavation upon land adjacent
to the Premises, Tenant shall permit the person doing the excavation to enter
the Premises for the purpose of doing such work as Landlord deems necessary to
preserve the walls of the Building from injury or damage and to support the same
by proper foundations, without any claim for damage or indemnification against
Landlord or diminution or abatement of rent.
15.3 Default of Landlord. If Landlord defaults in the performance of any
covenant required to be performed by Landlord, Tenant may serve upon Landlord a
written notice specifying the default. If Landlord does not remedy the default
within thirty (30) days following receipt thereof or, in the case of a default
which takes more than thirty (30) days to cure, if Landlord has not commenced to
remedy the same within thirty (30) days following receipt thereof, Tenant may,
after expiration of the notice period specified in Section 18.8 hereof, cure the
default on Landlord's behalf and the costs incurred by Tenant in so doing shall
be paid by Landlord to Tenant within thirty (30) days after Tenant's giving
Landlord written notice of the amounts so incurred, together with reasonable
supporting information or documentation.
SECTION XVI - SURRENDER OF PREMISES
16.1 Surrender of Possession. Tenant shall promptly yield and deliver to
Landlord possession of the Premises upon the expiration or earlier termination
of this Lease in the condition they were required to be maintained hereunder
(subject to the removals required or permitted hereunder). Landlord may place
and maintain a "For Rent" sign in conspicuous places on the Premises for sixty
(60) days prior to the expiration or earlier termination of this Lease.
16.2 Holding Over. Any holding over by Tenant after the expiration of
the term hereof with Landlord's consent shall be construed as a tenancy from
month to month on the terms and conditions set forth herein, except as otherwise
agreed by the parties, which tenancy may be terminated by either party upon
thirty (30) days written notice to the other party. Any holding over by Tenant
after the expiration of the term hereof without Landlord's consent shall be
deemed to be a tenancy at will, terminable at any time by Landlord at a rental
rate equal to two (2) times
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the rental rate in effect on the date of such expiration of the Lease term,
prorated on a daily basis, and otherwise on the terms, covenants and conditions
of this Lease to the extent applicable.
SECTION XVII - QUIET ENJOYMENT
17.1 Landlord's Covenant. Landlord represents and warrants to Tenant
that Landlord is the sole owner of the Building in fee simple, and that the only
deed of trust presently encumbering the Building is held by Teacher's Insurance
and Annuity Association of America ("Lender"). Tenant, upon fully complying with
and promptly performing all of the terms, covenants and conditions of this Lease
on its part to be performed, shall have and quietly enjoy the Premises for the
term set forth herein, if its performance of such terms, covenants and
conditions continues for such period, subject, however, to matters of record on
the date hereof and to those matters to which this Lease may be subsequently
subordinated.
SECTION XVIII - MISCELLANEOUS
18.1 Notices. Any notices required in accordance with any of the
provisions herein shall be in writing and personally delivered or mailed by
registered or certified mail, return receipt requested, to the Landlord c/o JSH
Properties, Inc., 10220 N.E. Points Drive, Suite 203, Kirkland, Washington
98033, Attention: Property Manager; to Tenant at the address set forth on page
1; or to such other address as a party shall from time to time advise the other
party by a written notice given in accordance with this Section 18.1. If Tenant
is a partnership or joint enterprise, any notice required or permitted hereunder
may be given by or to any one partner thereof with the same force and effect as
if given by or to all thereof. A notice shall be deemed received on the date of
personal delivery, or if mailed, on the second (2nd) business day after the
postmark affixed on the envelope by the United States Post Office.
18.2 Successors or Assigns. All of the terms, conditions, covenants and
agreements of this Lease shall extend to and be binding upon Landlord, Tenant
and, subject to the terms of Section XI hereof, their respective heirs,
administrators, executors, successors and permitted assigns, and upon any person
or persons coming into ownership or possession of any interest in the Premises
by operation of law or otherwise, and shall be construed as covenants running
with the land.
18.3 [Intentionally omitted.]
18.4 Tenant Defined. The word "Tenant" as used herein shall mean each
and every person, partnership or corporation who is mentioned as Tenant herein
or who executes this Lease as Tenant. If there shall be more than one Tenant,
they shall all be bound jointly and severally by the terms, covenants and
agreements herein.
18.5 Brokers' Commissions. Landlord will pay commissions to Kidder,
Mathews & Segner, Inc. ("Brokers") in accordance with separate agreements
between Landlord and Brokers. Tenant agrees to indemnify and hold Landlord
harmless from all liabilities and claims for brokerage commissions or finder's
fees growing out of agreements which Tenant has made with persons or entities
other than Brokers.
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18.6 Partial Invalidity. If any term, covenant or condition of this
Lease or the application thereof to any person or circumstance is, to any
extent, invalid or unenforceable, the remainder of this Lease, or the
application of such term, covenant or condition to persons or circumstances
other than those as to which it is held invalid or unenforceable, shall not be
affected thereby and each term, covenant or condition of this Lease shall be
valid and be enforced to the fullest extent permitted by law.
18.7 Recording. Neither Landlord or Tenant shall record this Lease or
any memorandum hereof.
18.8 Subordination; Notice to Lender; Attornment.
18.8.1 Unless otherwise designated by Landlord, this Lease shall
be subordinate to all existing or future mortgages and deeds of trust on the
Park, and to any extensions, renewals or replacements thereof; however, Tenant's
possession of the Premises pursuant to this Lease may not be disturbed by any
such mortgagee so long as Tenant is not in default under this Lease. Within five
(5) days after mutual execution of this Lease, and thereafter within twenty (20)
days of Landlord's request therefor, Tenant shall execute and deliver all
instruments or certificates which Landlord or Lender may deem necessary or
appropriate to reflect such subordination of this Lease, provided that Tenant
receives Lender's nondisturbance covenant. Landlord shall use reasonable
commercial efforts to negotiate and deliver to Tenant an executed subordination,
attornment and non-disturbance agreement acceptable to Lender, Landlord and
Tenant within thirty (30) days after mutual execution of the Lease. Within
twenty (20) days of Landlord's request therefor, Tenant shall promptly execute
and deliver to third parties designated by Landlord an estoppel certificate or
letter in the form requested by Landlord or its lender that correctly recites
the facts with respect to the existence, terms and status of this Lease. Tenant
agrees to attorn to Landlord's successor following any foreclosure sale or
transfer in lieu thereof.
18.8.2 Tenant shall, within ten (10) days of demand, execute,
acknowledge and deliver to Landlord or its designee a written statement
certifying: (i) the date the Lease term commenced or will commence and the date
it expires; (ii) the date Tenant entered into occupancy of and commenced
business operations in the Premises; (iii) the amount of Base Rent and the date
to which Rent has been paid; (iv) that this Lease is in full force and effect
and has not been assigned, modified, supplemented or amended in any way (or
specifying the date and terms of each agreement so affecting this Lease) and
that no part of the Premises has been sublet (or to the extent such is not the
case, a copy of any sublease); (v) that, to the extent such is the case, this
Lease represents the entire agreement between the parties as to the Premises;
(vi) that Landlord is not in default under this Lease (or is such is not the
case, the extent and nature of such default); (vii) that all required advanced
by Landlord to Tenant on account of tenant improvements have been made (or the
extent that such is not the case); (viii) on the date of such certification
there are no existing defenses or claims which Tenant has against the
enforcement of this Lease by Landlord (or if such is not the case, the extent
and nature of such defenses or claims); (ix) the amount of the Security Deposit
paid to Landlord; and (x) any other fact or representation that a mortgagee or
purchaser may reasonably request. It is intended that any such statement
delivered pursuant to this Section 18.8.2 shall be fully and completely binding
upon Tenant for all purposes
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of this Lease, may be relied upon by a prospective purchaser or mortgagee of
Landlord's interest, or any assignee of any mortgage upon Landlord's interest in
the Building or the Land. If Tenant shall fail to respond within ten (10) days
of receipt of a written request by Landlord therefor, Tenant shall be deemed to
have given a certificate as above provided without modification and shall be
conclusively deemed to have admitted the accuracy of any information supplied by
Landlord to a prospective purchaser or mortgagee, that this Lease is full force
and effect, that there are no uncured defaults in Landlord's performance, that
the Security Deposit is as stated in this Lease and that not more than one
month's Rent has been paid in advance.
18.8.3 Notwithstanding anything to the contrary in this Lease,
Landlord shall not be in default under any provision of this Lease unless
written notice specifying such default is given to Landlord and to any lender
who has been identified to Tenant in writing as a party to whom notice must be
sent. Any lender of Landlord entitled to notice pursuant to the preceding
sentence shall have the right to cure any default on behalf of Landlord within
the later of (a) thirty (30) days after receipt of such notice, or (b) thirty
(30) days after the expiration of any cure period provided to Landlord pursuant
to this Lease; provided, if such default cannot reasonably be cured within such
thirty (30) day period, Landlord's lender shall be entitled to such additional
time as may be reasonably necessary to cure the default, if within the thirty
(30) day period the lender commences and thereafter diligently pursues the
actions necessary for the lender to cure such default by Landlord (including, if
possession of the Premises is necessary to cure the default, commencing such
judicial or non-judicial proceedings as may be necessary for lender or a
receiver to take possession of the Premises). So long as a lender is diligently
taking the actions reasonably necessary for it to cure Landlord's default,
Tenant shall not exercise its remedies for Landlord's default under this Lease.
18.9 Financial Statements. Within ten (10) days after Landlord's request
therefor, Tenant shall deliver to Landlord such current financial statements
regarding Tenant as Landlord may reasonably request. Tenant shall certify the
accuracy of such statements. Landlord may make the financial statements
available to potential lenders or purchasers, but shall otherwise preserve their
confidentiality except in connection with legal proceedings between the parties
or as otherwise directed by court rule or order.
18.10 [Intentionally omitted.]
18.11 Liability of Landlord. Tenant shall look solely to Landlord's
interests in the Building (including without limitation the rents, issues and
profits from the Building) for the satisfaction of any judgment or decree
against Landlord based upon any default under this Lease, and no other property
or assets of the Landlord (or its partners) shall be subject to levy, execution
or other enforcement procedures for satisfaction of any such judgment or decree.
18.12 Force Majeure. Neither Tenant nor Landlord shall be deemed in
default hereof nor liable for damages arising from its failure to perform its
duties or obligations hereunder if such is due to causes beyond its reasonable
control, including, but not limited to, acts of God, acts of civil or military
authorities, fires, floods, windstorms, earthquakes, strikes or other labor
disturbances, civil commotion or war.
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18.13 Transportation Management Program; Recycling. Tenant shall
cooperate with Landlord in meeting the objectives and complying with the terms
and conditions of any transportation management plan applicable to the Building
or the Park. Landlord will provide Tenant with a copy of any such transportation
management plan now or hereafter in effect. In addition, Tenant will cooperate
with and participate in any and all recycling programs now or hereafter in place
with respect to the Building or the Park.
18.14 Cure Right of Landlord. All covenants and agreements to be kept or
performed under Tenant under any of the terms of this Lease shall be performed
by Tenant at Tenant's sole cost and expense and without any abatement of rent.
If Tenant shall fail to pay any sum of money, other than rent,
required to be paid by hereunder or shall fail to perform any other act on its
part to be performed hereunder, Landlord may, after giving any notice of default
required under this Lease, but shall not be obligated to, and without waiving
any default of Tenant or rights or remedies of Landlord or releasing Tenant from
any obligations of Tenant hereunder, make any such payment or perform any such
other act on Tenant's part to be made or performed as in this Lease provided.
All sums so paid by Landlord and all necessary incidental costs,
together with the interest thereon at the default rate as provided in Section
3.4 from the date of such payment by Landlord, shall be paid to Landlord
forthwith on demand, and Landlord shall have (in addition to any other right or
remedy of Landlord) the same rights and remedies in the event of nonpayment
thereof by Tenant as in the case of default by Tenant and the nonpayment of
rent.
18.15 Name of Building. Landlord may adapt or change the name or address
or identity of the Building or any part thereof or the Park (or any part
thereof) including roof signs, ground level and lobby signage and any other
Building or Park identification.
18.16 Tax on Rent. The Rent herein is exclusive of any sales, business
and occupation, gross receipts or other tax based on Rents, or tax on Tenant's
property or tax upon or measured by the number of employees of Tenant, or any
similar tax or charge. If any such tax or charge be hereinafter enacted, and
imposed upon Landlord, Tenant shall pay Landlord the amount thereof concurrently
with each monthly Rent payment. If it shall not be lawful for Tenant so to
reimburse Landlord, the monthly Rent payable to Landlord under this Lease shall
be revised to net Landlord the same net rental after imposition of any such tax
or charge upon Landlord as would have been payable to Landlord prior to the
imposition of such tax or charge. Tenant shall not be liable to reimburse
Landlord for any federal income tax or other income tax of a general nature
applicable to Landlord's income.
18.17 Light, Air and View. Landlord does not guarantee the continued
present status of light or air over any property adjoining or in the vicinity of
the Building or the Park. Any diminution or shutting off of light, air or view
by any structure which may be erected near or adjacent to the Building or the
Park shall in no way affect this Lease or impose any liability on Landlord.
-32-
<PAGE> 33
SECTION XIX - EXECUTION OF LEASE
19.1 Execution by Landlord and Tenant; Approval of Lender. Landlord
shall not be deemed to have made an offer to Tenant by furnishing Tenant with a
copy of this Lease with particulars inserted. No contractual or other rights
shall exist or be created between Landlord and Tenant until all parties hereto
have executed this Lease and until it has been approved in writing by Lender and
fully executed copies have been delivered to Landlord and Tenant. The Lease
shall be conclusively presumed to have Lender's written approval unless Landlord
gives Tenant written notice within 30 days after mutual execution of this Lease
of Lender's disapproval. Tenant agrees to make such changes herein as may be
requested by Lender so long as such do not increase amounts due from Tenant
hereunder or otherwise materially alter its rights hereunder.
SECTION XX - ENTIRE AGREEMENT - APPLICABLE LAW
20.1 Entire Agreement - Applicable Law. This Lease and the Exhibits
attached hereto, and by this reference incorporated herein, set forth the entire
agreement of Landlord and Tenant concerning the Premises, and there are no other
agreements or understanding, oral or written, between Landlord and Tenant
concerning the Premises. Any subsequent modification or amendment of this Lease
shall be binding upon Landlord and Tenant only if reduced to writing and signed
by them. This Lease shall be governed by, and construed in accordance with the
laws of the State of Washington.
DATED as of the day and year first written above.
LANDLORD:
THE PLAZA AT YARROW BAY, LLC,
a Washington limited liability
company
By: HAL Realty III, Inc.,
its manager
By:
-----------------------------
Its:
---------------------------
-33-
<PAGE> 34
TENANT:
ImageX.Com, Inc., a Washington
corporation
By: /s/ Richard P. Begert
---------------------------------
Its: President and CEO
---------------------------------
STATE OF WASHINGTON )
) ss.
COUNTY OF KING )
On this 9th day of November, 1999, before me, a Notary Public in and for the
State of Washington, duly commissioned and sworn, personally appeared
[Illegible], to me known to be the Vice President of HAL Realty III, Inc., the
manager of THE PLAZA AT YARROW BAY, LLC, the limited liability company named in
and which executed the foregoing instrument; and he acknowledged to me that he
signed the same as the free and voluntary act and deed of said partnership for
the uses and purposes therein mentioned.
I certify that I know or have satisfactory evidence that the person appearing
before me and making this acknowledgment is the person whose true signature
appears on this document.
WITNESS my hand and official seal the day and year in this certificate above
written.
/s/ Deidre Africa
---------------------------------
Signature
/s/ Deidre Africa
---------------------------------
Print Name
NOTARY PUBLIC in and for the State of
Washington, residing at Seattle.
My commission expires 1-19-2000.
-34-
<PAGE> 35
STATE OF WASHINGTON )
) ss.
COUNTY OF KING )
On this 5th day of November, 1999, before me, a Notary Public in and for
the State of Washington, duly commissioned and sworn, personally appeared
Richard Begert, to me known to be the President & CEO of ImageX.Com, Inc., a
Washington corporation, the corporation named in and which executed the
foregoing instrument; and he/she acknowledged to me that he/she signed the same
as the free and voluntary act and deed of said partnership for the uses and
purposes therein mentioned.
I certify that I know or have satisfactory evidence that the person appearing
before me and making this acknowledgment is the person whose true signature
appears on this document.
WITNESS my hand and official seal the day and year in this certificate above
written.
/s/ G. Faye Moniz
---------------------------------
Signature
/s/ G. Faye Moniz
---------------------------------
Print Name
NOTARY PUBLIC in and for the State of
Washington, residing at Bothell, WA.
My commission expires 2-9-02.
-35-
<PAGE> 36
INDEX
<TABLE>
<S> <C>
SECTION I - PREMISES.........................................................................3
1.1 Premises..............................................................................3
1.2 Reserved to Landlord..................................................................3
1.3 Changes to Park.......................................................................3
SECTION II - TERM............................................................................3
2.1 Lease Term............................................................................3
2.2 Early Entry...........................................................................4
2.3 Acceptance of Premises................................................................4
2.4 Term..................................................................................5
2.5 Option to Extend......................................................................5
2.6 Right of First Offer..................................................................7
SECTION III - RENT...........................................................................7
3.1 Minimum Rent..........................................................................7
3.2 Additional Rent.......................................................................8
3.3 Tenant's Contributions................................................................8
3.4 Late Charge; Interest................................................................11
SECTION IV - CONDUCT OF BUSINESS............................................................11
4.1 Use of Premises......................................................................11
4.2 Appearance of Premises...............................................................12
4.3 Unlawful Use.........................................................................12
4.4 Liens and Encumbrances...............................................................12
4.5 Hazardous Substances.................................................................12
4.6 Signs................................................................................14
SECTION V - UTILITIES AND OTHER CHARGES.....................................................14
5.1 Utilities and Services...............................................................14
5.2 Licenses and Taxes...................................................................15
SECTION VI - LETTER OF CREDIT...............................................................15
6.1 [Intentionally omitted.].............................................................16
6.2 Letter of Credit.....................................................................16
SECTION VII - COMPLETION AND ALTERATIONS....................................................16
7.1 Delivery of Premises.................................................................16
7.2 Alterations by Tenant................................................................16
SECTION VIII - MAINTENANCE OF PREMISES......................................................17
8.1 Care of Premises.....................................................................17
8.2 Repairs by Landlord; Maintenance and Repair Charges..................................17
8.3 Surrender of Premises................................................................18
SECTION IX - COMMON AREAS...................................................................18
9.1 Control of Common Areas by Landlord..................................................18
9.2 Parking..............................................................................18
SECTION X - INSURANCE AND INDEMNITY.........................................................19
10.1 Indemnification.....................................................................19
10.2 Insurance...........................................................................19
10.3 Increase in Insurance Premiums......................................................20
</TABLE>
-36-
<PAGE> 37
<TABLE>
<S> <C>
10.4 Waiver of Subrogation...............................................................20
SECTION XI - ASSIGNMENT AND SUBLETTING......................................................21
11.1 Assignment or Sublease..............................................................21
11.2 Entity Ownership....................................................................22
11.3 Recapture by Landlord...............................................................22
11.4 Assignee Obligation.................................................................23
11.5 Additional Consideration............................................................23
11.6 Assignment by Landlord..............................................................23
11.7 Permitted Transfers.................................................................24
SECTION XII - DESTRUCTION OF PREMISES.......................................................24
12.1 Partial Destruction.................................................................24
12.2 Total Destruction...................................................................24
12.3 Limitation..........................................................................25
SECTION XIII - EMINENT DOMAIN...............................................................26
13.1 Total Taking........................................................................26
13.2 Partial Taking......................................................................26
13.3 Damages.............................................................................26
SECTION XIV - DEFAULT OF TENANT.............................................................26
14.1 Defaults............................................................................26
14.2 Legal Expenses......................................................................28
14.3 Remedies Cumulative; Waiver.........................................................28
SECTION XV - ACCESS BY LANDLORD; DEFAULT OF LANDLORD........................................29
15.1 Right of Entry......................................................................29
15.2 Excavation..........................................................................29
15.3 Default of Landlord....................................................................29
SECTION XVI - SURRENDER OF PREMISES.........................................................29
16.1 Surrender of Possession.............................................................30
16.2 Holding Over........................................................................30
SECTION XVII - QUIET ENJOYMENT..............................................................30
17.1 Landlord's Covenant.................................................................30
SECTION XVIII - MISCELLANEOUS...............................................................30
18.1 Notices.............................................................................30
18.2 Successors or Assigns...............................................................31
18.3 [Intentionally omitted.]............................................................31
18.4 Tenant Defined......................................................................31
18.5 Brokers' Commissions................................................................31
18.6 Partial Invalidity..................................................................31
18.7 Recording...........................................................................31
18.8 Subordination; Notice to Lender; Attornment.........................................31
18.9 Financial Statements................................................................33
18.10 [Intentionally omitted.]...........................................................33
18.11 Liability of Landlord..............................................................33
18.12 Force Majeure......................................................................33
18.13 Transportation Management Program; Recycling.......................................33
18.14 Cure Right of Landlord.............................................................33
</TABLE>
-37-
<PAGE> 38
<TABLE>
<S> <C>
18.15 Name of Building...................................................................34
18.16 Tax on Rent........................................................................34
18.17 Light, Air and View................................................................34
SECTION XIX - EXECUTION OF LEASE............................................................34
19.1 Execution by Landlord and Tenant; Approval of Lender................................34
SECTION XX - ENTIRE AGREEMENT - APPLICABLE LAW..............................................34
20.1 Entire Agreement - Applicable Law...................................................34
</TABLE>
-38-
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
Image Press, Inc., a California corporation
Keystone Acquisition Corporation, a Washington corporation
PrintBid.com, Inc., an Oregon corporation
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1 of our
report dated March 5, 1999, except for paragraph 3 of Note 12, as to which the
date is April 13, 1999, paragraph 11 of Note 12, as to which the date is April
15, 1999, paragraph 2 of Note 7, paragraph 2 of Note 8, paragraphs 1 and 8 of
Note 9, as to which the date is April 21, 1999, paragraph 2 of Note 9, as to
which the date is June 16, 1999, paragraph 9 and 10 of Note 12, as to which the
date is April 30, 1999, paragraph 12 of Note 12, as to which the date is August
9, 1999, paragraph 13 of Note 12, as to which the date is August 9, 1999,
paragraph 13 of Note 12, as to which the date is August 26, 1999, paragraph 14
of Note 12 as to which the date is January 7, 2000, paragraph 15 of Note 12 as
to which the date is November 4, 1999, paragraph 16 of Note 12 as to which the
date is January 5, 2000, Note 13, as to which the date is September 30, 1999,
paragraph 7 of Note 9, as to which the date is August 18, 1999, paragraph 5 of
Note 12, as to which the date is September 21, 1999, except as to the pooling of
interests with PrintBid.com, Inc. which is as of December 9, 1999, and paragraph
15 of Note 1 as to which the date is January 12, 2000 relating to the
financial statements of ImageX.com, Inc., of our report dated April 16, 1999,
relating to the financial statements of Fine Arts Engravers Company, Inc., of
our report dated November 1, 1999, relating to the financial statements of Image
Press, Inc., and of our report dated December 31, 1999, relating to the
financial statements of PrintBid.com, Inc., which appear in such Registration
Statement. We also consent to the reference to us under the headings "Experts"
and "Selected Financial Date for ImageX.com" in such Registration Statement.
PricewaterhouseCoopers LLP
Seattle, Washington
January 13, 2000
<PAGE> 1
EXHIBIT 23.3
January 10, 2000
CONFIDENTIAL
VIA FACSIMILE
Ms. Cary Sherbourne
CAP Ventures, Inc.
195 PortSmith Ave
Greenland, NH 03840
RE: IMAGEX.COM, INC.
Dear Ms. Sherbourne:
ImageX.com, Inc. is planning a public offering of its common stock and
expects to file a registration statement with the Securities and Exchange
Commission during the week of January 10, 2000. ImageX.com's plans regarding
this public offering remain extremely confidential. Please help us to protect
the confidentiality of these plans by disclosing them on a need-to-know basis
only.
The purpose of this letter is to confirm your consent to the reference to
your firm in ImageX.com's Registration Statement on Form S-1 and the inclusion
therein of information derived from your firm's report entitled "U.S. Print on
Demand Market Forecast 1998-2003". Exhibit A to this letter identifies the
information that we have derived from your firm's report and included in
ImageX.com's registration statement.
Please confirm your consent to the foregoing by executing a copy of this
letter below, then fax a copy of this letter to the undersigned at
(425) 452-9266 on or before January 11, 2000. Please also return the original
letter by mail or overnight courier. Thank you very much for your assistance
with this matter.
Very truly yours,
/s/ ROBIN L. KRUEGER/mgn
------------------------
Robin L. Krueger
Chief Financial Officer
<PAGE> 2
January 10, 2000
Page 2
Agreed and accepted:
CAP Ventures, Inc.
By: /s/ CHARLES M. CORR
--------------------------
Name: Charles M. Corr
--------------------
Title: Director
-------------------
<PAGE> 3
January 10, 2000
Page 3
EXHIBIT A
1. Sales in the U.S. printing industry totaled $292 billion in 1998, of which
$58 billion was derived from commercial printing operations.
2. There were over 30,000 local and regional commercial printing operations in
the United States in 1998.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998 DEC-31-1999
<PERIOD-START> JAN-01-1997 JAN-01-1998 JAN-01-1999
<PERIOD-END> DEC-31-1997 DEC-31-1998 SEP-30-1999
<CASH> 186 883 27,256
<SECURITIES> 0 0 0
<RECEIVABLES> 19 249 3,459
<ALLOWANCES> 0 (15) (140)
<INVENTORY> 0 0 723
<CURRENT-ASSETS> 205 1,117 32,258
<PP&E> 815 1,677 6,811
<DEPRECIATION> (121) (545) (1,638)
<TOTAL-ASSETS> 938 2,319 41,750
<CURRENT-LIABILITIES> 821 1,535 4,213
<BONDS> 0 0 0
3,459 11,350 0
15 15 0
<COMMON> 12 16 167
<OTHER-SE> (3,669) (10,909) 37,370
<TOTAL-LIABILITY-AND-EQUITY> 938 2,319 41,750
<SALES> 87 968 6,646
<TOTAL-REVENUES> 87 968 6,646
<CGS> 100 998 4,986
<TOTAL-COSTS> 100 998 4,986
<OTHER-EXPENSES> 3,619 8,525 12,514
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> (62) 45 (64)
<INCOME-PRETAX> (3,570) (8,600) (10,790)
<INCOME-TAX> 0 0 0
<INCOME-CONTINUING> (3,570) (8,600) (10,790)
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> (3,570) (8,600) (10,790)
<EPS-BASIC> (14.14) (14.65) (3.43)
<EPS-DILUTED> (14.14) (14.65) (3.43)
</TABLE>
