<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: MARCH 30, 1996 Commission file No. 0-15338
-------------- -------
SEATTLE FILMWORKS, INC.
------------------------
(Exact name of registrant as specified in its charter.)
Washington 91-0964899
------------------------------- -------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1260 16th Avenue West, Seattle, WA 98119
---------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (206) 281-1390
--------------
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to the
filing requirements for the past 90 days.
Yes X No
----- -----
As of April 30, 1996, there were issued and outstanding 10,809,951
shares of common stock, par value $.01 per share.
Index to Exhibits at Page 14
Page 1 of 64
<PAGE>
SEATTLE FILMWORKS, INC.
INDEX
-----
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I -- FINANCIAL INFORMATION
Item 1 - Financial Statements 3-7
Balance Sheets as of March 30, 1996
and September 30, 1995 3-4
Statements of Income for the second quarter and six
months ended March 30, 1996 and March 25, 1995 5
Statements of Cash Flows for the six months ended
March 30, 1996 and March 25, 1995 6
Notes to Financial Statements 7
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-11
PART II -- OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of Security Holders 11-12
Item 6 - Exhibits and Reports on Form 8-K 12
SIGNATURES 13
INDEX TO EXHIBITS 14
EXHIBITS 15-64
</TABLE>
Page 2 of 64
<PAGE>
PART I -- FINANCIAL INFORMATION
-------------------------------
ITEM 1 - FINANCIAL STATEMENTS
SEATTLE FILMWORKS, INC.
BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
(UNAUDITED) (NOTE)
March 30, September 30,
ASSETS 1996 1995
=============================================================================
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 6,614 $ 8,560
Securities available for sale 500 1,345
Accounts receivable, net of
allowance for doubtful accounts 1,286 1,242
Inventories 6,992 4,626
Capitalized promotional expenditures 43 158
Prepaid expenses and other 546 164
Deferred income taxes 353 398
------- -------
TOTAL CURRENT ASSETS 16,334 16,493
FURNITURE, FIXTURES, AND EQUIPMENT,
at cost, less accumulated depreciation 4,329 3,200
CAPITALIZED CUSTOMER ACQUISITION EXPENDITURES 9,645 7,356
DEPOSITS AND OTHER ASSETS 245 68
NON-COMPETE AGREEMENTS,
net of accumulated amortization 939 1,127
------- -------
TOTAL ASSETS $31,492 $28,244
======= =======
</TABLE>
Note: The September 30, 1995 balance sheet has been derived from audited
financial statements.
See notes to financial statements.
Page 3 of 64
<PAGE>
SEATTLE FILMWORKS, INC.
BALANCE SHEETS (continued)
(in thousands, except share information)
<TABLE>
<CAPTION>
(UNAUDITED) (NOTE)
March 30, September 30,
LIABILITIES AND SHAREHOLDERS' EQUITY 1996 1995
================================================================================
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 6,470 $ 4,782
Accrued expenses 2,257 2,364
Income taxes payable 856
------- -------
TOTAL CURRENT LIABILITIES 8,727 8,002
DEFERRED INCOME TAXES 3,126 2,310
------- -------
TOTAL LIABILITIES 11,853 10,312
SHAREHOLDERS' EQUITY
Preferred Stock, $.01 par value
authorized 2,000,000 shares, none issued.
Common Stock, $.01 par value - authorized
67,500,000
shares, issued and outstanding 10,806,988 108 107
Additional paid-in capital 1,207 955
Retained earnings 18,324 16,870
------- -------
TOTAL SHAREHOLDERS' EQUITY 19,639 17,932
------- ------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $31,492 $28,244
======= =======
</TABLE>
Note: The September 30, 1995 balance sheet has been derived from audited
financial statements.
See notes to financial statements.
Page 4 of 64
<PAGE>
SEATTLE FILMWORKS, INC.
STATEMENTS OF INCOME (UNAUDITED)
(in thousands, except share information)
<TABLE>
<CAPTION>
Second Quarter Ended Six Months Ended
March 30, March 25, March 30, March 25,
1996 1995 1996 1995
================================================================================
<S> <C> <C> <C> <C>
Net revenues $17,821 $12,293 $34,510 $24,563
Cost of goods and services 10,510 8,141 20,907 15,821
------- ------- ------- -------
GROSS PROFIT 7,311 4,152 13,603 8,742
Operating expenses:
Customer acquisition costs 3,236 2,017 5,774 4,056
Other selling expenses 2,130 931 3,462 1,815
Research and development 274 94 521 211
General and administrative 1,012 661 1,780 1,281
------- ------- ------- -------
Total operating expenses 6,652 3,703 11,537 7,363
------- ------- ------- -------
INCOME FROM OPERATIONS 659 449 2,066 1,379
Other income (expense):
Interest expense (1) (1) (1) (2)
Interest income 112 57 254 117
Non operating income
(expense), net (1) (93) 3
------- ------- ------- -------
Total other income 111 55 160 118
------- ------- ------- -------
INCOME BEFORE INCOME TAXES 770 504 2,226 1,497
Provision for income taxes (267) (165) (772) (503)
------- ------- ------- -------
NET INCOME $ 503 $ 339 $ 1,454 $ 994
======= ======= ======= =======
EARNINGS PER SHARE $.04 $.03 $.12 $.09
==== ==== ==== ====
WEIGHTED AVERAGE SHARES AND
EQUIVALENTS OUTSTANDING 11,848,053 11,571,746 11,844,024 11,555,702
========== ========== ========== ==========
</TABLE>
See notes to financial statements.
Page 5 of 64
<PAGE>
SEATTLE FILMWORKS, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended
March 30, March 25,
1996 1995
================================================================================
<S> <C> <C>
OPERATING ACTIVITIES:
- ---------------------
Net income $ 1,454 $ 994
Charges to income not affecting cash:
Depreciation and amortization 1,111 791
Amortization of capitalized customer
acquisition expenditures 5,124 2,579
Deferred income taxes 861 101
Loss or (gain) on disposal of equipment 88 (5)
Net change in receivables, inventories,
payables and other (2,066) (2,066)
Capitalized promotional expenditures, net 115 253
Additions to capitalized customer acquisition
expenditures (7,413) (3,066)
------- -------
NET CASH USED IN OPERATING ACTIVITIES (726) (419)
INVESTING ACTIVITIES:
- ---------------------
Purchase of furniture, fixtures, and equipment (2,320) (521)
Purchase of securities available for sale (2,350) (11)
Sales of securities available for sale 3,195 1,190
Proceeds from sale of equipment 2 17
------- -------
NET CASH FROM (USED IN) INVESTING ACTIVITIES (1,473) 675
FINANCING ACTIVITY: Proceeds from issuance of 253 181
- ------------------- ------- -------
Common Stock
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,946) 437
Cash and cash equivalents at beginning of period 8,560 2,711
------- -------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 6,614 $ 3,148
======= =======
</TABLE>
See notes to financial statements.
Page 6 of 64
<PAGE>
SEATTLE FILMWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
NOTE A -- BASIS OF PRESENTATION
Seattle FilmWorks, Inc. (the "Company") principally markets 35mm
photographic film, photofinishing services and related photographic products on
a direct-to-consumer mail order basis under the brand name of Seattle
FilmWorks(R). The Company also markets 35mm photographic film, single-use
cameras and photographic supplies on a wholesale basis under the brand name of
OptiColor Film and Photo(TM).
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring adjustments and changes as discussed in Note D below) considered
necessary for fair presentation of interim results have been included. The
Company follows a policy of recording its interim periods and year-end on a 5
week, 4 week and 4 week basis for comparability of results and to be consistent
with its internal weekly reporting. Operating results for the second quarter and
six months ended March 30, 1996 are not necessarily indicative of the results
that may be expected for the fiscal year ending September 28, 1996. For further
information, refer to the "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and financial statements and footnotes
thereto included in the Company's Annual Report on Form 10-K for the year ended
September 30, 1995.
NOTE B -- STOCK SPLIT
On March 15, 1996 the Company effected a three-for-two stock split by
declaring a stock dividend of one share for every two shares outstanding. All
share information and the related capital accounts in the accompanying financial
statements have been retroactively adjusted for this stock split.
NOTE C -- RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the 1996
financial statements presentation.
NOTE D -- CHANGE IN ESTIMATES
Effective as of the beginning of the second quarter of fiscal 1996, the
Company changed from twelve months to six months the period over which it
amortizes certain capitalized customer acquisition expenditures. This change in
accounting estimate was made to more accurately match incremental revenues and
expenses, and resulted in $414,000 of incremental deferred customer acquisition
costs. The Company also recorded an additional $43,000 of amortization related
to a change in estimated life of the benefit of a non-compete agreement from ten
years to five years.
Page 7 of 64
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward-Looking Information
- ---------------------------
Statements in this report concerning future results, performance,
achievements, expectations or trends, if any, are forward-looking statements.
Actual results, performance, achievements, events or trends could differ
materially from those expressed or implied by such forward-looking statements as
a result of known and unknown risks, uncertainties and other factors including
those described below and those identified by the Company from time to time in
other filings with the Securities and Exchange Commission, press releases and
other communications.
General
- -------
Seattle FilmWorks, Inc. (the "Company") is one of the largest direct-to-
consumer providers of photofinishing services in the United States. The Company
offers its services and products primarily on a mail order basis under the brand
name Seattle FilmWorks(R).
The Company seeks to differentiate its photofinishing services by offering
its customers the options of receiving their photographs as conventional prints
and/or slides and as digital images delivered either on floppy diskettes under
the Pictures On Disk(TM) brand name or over the Internet using the Company's
PhotoMail(TM) service. To permit viewing of digital images on personal
computers, the Company provides various versions of software under the titles
PhotoWorks(TM) and PhotoWorks Plus(TM). The Company also furnishes a variety of
reprint and enlargement services. In addition, the Company provides services,
products and photofinishing supplies on a wholesale basis to a variety of
customers who offer these services and products to their customers at their own
retail locations under their own brand names. The Company has the ability to
process virtually all 35mm color negative films, including those manufactured
for the motion picture industry. To support its direct-to-consumer business, the
Company has developed comprehensive computerized marketing models and support
systems for designing, implementing and analyzing direct response marketing
programs.
Demand for the Company's photofinishing-related services and products is
highly seasonal with the highest volume of photofinishing activity occurring
during the summer months. This seasonality, when combined with the general
growth of the Company's photofinishing business, has produced substantially
greater photofinishing revenues during the last half of the fiscal year with a
peak occurring in the fourth fiscal quarter. Net income is affected by the
seasonality of the Company's revenues due to the fixed nature of a large portion
of the Company's operating expenses, seasonal variation in sales mix and by the
Company's practice of relatively higher expenditures on marketing programs prior
to the summer months.
Page 8 of 64
<PAGE>
Results of Operations
The following table presents information from the Company's statements of
income, expressed as a percentage of net revenues for the periods indicated.
<TABLE>
<CAPTION>
Second Quarter Ended Six Months Ended
March 30, March 25, March 30, March 25,
1996 1995 1996 1995
================================================================================
<S> <C> <C> <C> <C>
Net revenues 100.0% 100.0% 100.0% 100.0%
Cost of goods and services 59.0 66.2 60.6 64.4
----- ----- ----- -----
GROSS PROFIT 41.0 33.8 39.4 35.6
Operating expenses:
Customer acquisition costs 18.2 16.4 16.7 16.5
Other selling expenses 11.9 7.6 10.0 7.4
Research and development 1.5 0.7 1.5 0.9
General and administrative 5.7 5.4 5.2 5.2
----- ----- ----- -----
Total operating expenses 37.3 30.1 33.4 30.0
----- ----- ----- -----
INCOME FROM OPERATIONS 3.7 3.7 6.0 5.6
Total other income 0.6 0.4 0.4 0.5
----- ----- ----- -----
INCOME BEFORE INCOME TAXES 4.3 4.1 6.4 6.1
Provision for income taxes 1.5 1.3 2.2 2.1
----- ----- ----- -----
NET INCOME 2.8% 2.8% 4.2% 4.0%
===== ===== ===== =====
</TABLE>
The Company's net revenues for the second quarter of fiscal 1996 increased
45.0% to $17,821,000 compared to net revenues of $12,293,000 in the second
quarter of fiscal 1995. For the six months ended March 30, 1996, net revenues
increased 40.5% to $34,510,000 compared to $24,563,000 for the same period of
fiscal 1995. The increased revenues in fiscal 1996 are primarily due to
expanded customer acquisition activities and marketing to existing customers
during fiscal year 1995 and the first two quarters of fiscal 1996 which have
resulted in increased net revenues from photofinishing services and products.
The quarter ending March 30, 1996, marks the fourth consecutive quarter of
expanded customer acquisition efforts. Management also believes that its
Seattle FilmWorks(R) branded business has benefited from the Company's entry
into the home computer market with its PhotoWorks(TM) and Pictures On Disk(TM)
products, which were first introduced in January 1994.
Cost of goods and services consist of labor, postage and supplies related
to the Company's services and products. Gross profit in the second quarter of
fiscal 1996 increased to 41.0% of net revenue compared to 33.8% in the second
quarter of fiscal 1995. For the first six months of fiscal 1996, gross profit
increased to 39.4% compared to 35.6% for the same period of fiscal 1995. The
increases in fiscal 1996 periods were due primarily to a product mix containing
a higher percentage of the Company's Seattle FilmWorks(R) branded products,
which carry a higher gross profit margin than the Company's other lines of
business. Gross profit was also favorably impacted in the second quarter of
fiscal 1996 by the reversal of $227,000 of state tax reserves upon the
resolution of uncertainties related to a recent state tax examination.
Fluctuations in gross profit will occur in future periods due to the seasonal
nature of revenues, mix of product sales, intensity of promotional activities
and other factors.
Page 9 of 64
<PAGE>
Total operating expenses in the second quarter of fiscal 1996 increased to
37.3% of net revenue compared to 30.1% in the second quarter of fiscal 1995.
For the first six months of fiscal 1996 total operating expenses increased to
33.4% of net revenue compared to 30.0% for the same period of fiscal 1995. The
increase in total operating expenses for the quarter was due primarily to an
increase in customer acquisition and other selling activities. The Company's
principal technique for acquiring new customers is its Introductory Offer of two
rolls of 35 mm film for $2.00 or less. Customer acquisition costs are comprised
of the costs of generating a lead and the direct acquisition costs associated
with acquiring the customer. Costs of generating a lead include all
advertising, direct response media and other costs associated with developing
target customer lists. Direct acquisition costs include film and printed
material costs associated with mailings to new and existing customers. A
significant portion of the direct acquisition costs, including the cost of film
and printed materials, but excluding advertising costs, are initially
capitalized as assets on the Company's balance sheet. These deferred costs are
amortized over a period of up to three years, based on statistical analyses of
historical photofinishing volumes. Effective at the beginning of the second
quarter of fiscal 1996 the Company reduced from twelve months to six months the
amortization period for certain marketing activities to specific groups of
existing customers. This change in accounting estimate resulted in incremental
amortization of $414,000 of previously deferred customer acquisition costs..
The Company capitalized $4,417,000 and $2,996,000 of customer acquisition costs
in the first and second quarters of fiscal 1996, respectively, compared to
$1,688,000 and $1,378,000 for the first and second quarters of fiscal 1995,
respectively. Capitalized customer acquisition costs as of March 30, 1996,
increased to $9,645,000 compared to $7,356,000 as of September 30, 1995.
Management believes this increased investment in customer acquisition combined
with new service and product introductions are the primary reasons for the
increase in photofinishing related revenues. Each year the Company prepares
detailed plans for its various marketing activities, including the mix between
customer acquisition expenditures and other selling expenses. However, the
Company occasionally changes both the mix and total marketing expenditures
between periods to take advantage of marketing opportunities as they become
available. Future periods may reflect increased customer acquisition costs due
to the amortization of capitalized expenditures or the development and
initiation of additional marketing programs. For tax purposes, customer
acquisition expenditures are expensed as incurred, thereby reducing current
federal income tax liabilities and increasing deferred federal income tax
liabilities.
Other selling expenses include marketing costs associated with building
brand awareness, testing of new marketing strategies and marketing to existing
customers, as well as certain costs associated with acquiring new customers.
Other selling expenses in the second quarter of fiscal 1996 increased to 11.9%
of net revenues compared to 7.6% of net revenues for the second quarter of
fiscal 1995. For the first six months of fiscal 1996, other selling expenses
increased to 10.0% of net revenues compared to 7.4% of net revenues for the
first six months of fiscal 1995. The increase in the 1996 periods is due
primarily to increased marketing activities associated with expanded promotional
activities to new and existing customers compared to fiscal 1995 periods. The
increase in the second quarter of fiscal 1996 includes approximately $43,000
resulting from an increase in amortization of a non-compete agreement due to a
change in the estimated life from ten years to five years and $126,000 in
expenses related to securing certain rights to the PhotoWorks(TM) mark claimed
by a third party.
Research and development expenses increased to $274,000 for the second
quarter of fiscal 1996 as compared to $94,000 for the second quarter of fiscal
1995. Research and development expenses for the first six months of fiscal 1996
increased to $521,000 as compared to $211,000 for the first six months of fiscal
1995. These increases were primarily related to the Company's continued
development of digital services and products.
General and administrative expenses increased $351,000 and $499,000 for
the second quarter and first six months of fiscal 1996, respectively, as
compared to the same periods of fiscal 1995 due to increased compensation
expenses based on the Company's profitability and increased legal and accounting
costs. General and administrative expenses as a percent of net revenue increased
to 5.7% for the second quarter of fiscal 1996 as compared to 5.4% for the second
quarter of fiscal 1995 and remained at 5.2% of net revenue for the six month
periods in fiscal 1996 and fiscal 1995.
Total net other income for the second quarter of fiscal 1996 increased to
$111,000 as compared to $55,000 for the second quarter of fiscal 1995. Total
net other income increased to $160,000 for the first six months of fiscal 1996
as compared to $118,000 for the first six months of fiscal 1995. The increases
are due primarily to interest income from short-term investments due to higher
levels of cash generated by operations.
Page 10 of 64
<PAGE>
The federal income tax rate for the first six months of fiscal 1996 as
compared to the first six months of fiscal 1995 increased to 34.7% from 33.6%.
The increase in the effective tax rate is due primarily to an increase in the
marginal federal corporate tax rate due to expected income levels.
Net income in the second quarter of fiscal 1996 was $503,000, or $.04 per
share, compared to $339,000 or $.03 per share for the second quarter of fiscal
1995. For the first six months of fiscal 1996, net income was $1,454,000, or
$.12 per share compared to $994,000, or $.09 per share for the same period in
fiscal 1995. The increase in net income compared to 1995 periods is primarily
attributable to the increase in net revenues and gross profit partially offset
by the increase in operating expenses.
Liquidity and Capital Resources
As of April 30, 1996, the Company's principal sources of liquidity
included cash and short-term investments of $5,771,135 and an unused revolving
line of credit of $6,000,000. The ratio of current assets to current liabilities
for the Company was 1.9 to 1 at the end of the second quarter of fiscal 1996,
down slightly from the current ratio of 2.0 to 1 at September 30, 1995. During
the first two quarters of fiscal 1996 the Company increased inventory levels by
$2,366,000 to accommodate expanded marketing plans, achieve faster turnaround of
customer orders, and support increased photofinishing volume. This planned
increase in inventory was also the principal reason for the $1,688,000 increase
in accounts payable. Federal income taxes payable were favorably affected by the
increase in capitalized customer acquisition expenditures which are expensed as
incurred for federal income tax purposes, thereby having the effect of
substantially reducing current federal income tax liabilities.
The Company has a commitment to purchase equipment related to its Pictures
On Disk(TM) product in the amount of $470,000 by January 1, 1997. In addition,
the Company plans to expend approximately $1,180,000 during the remainder of
fiscal 1996, principally for photofinishing and data processing equipment and
for leasehold improvements, although at this time it has no binding commitments
to do so.
The Company currently anticipates that existing funds together with
anticipated cash flow from operations and the Company's available line of credit
of $6,000,000 will be sufficient to finance its operations and planned capital
expenditures and to service its indebtedness for the foreseeable future.
However, if the Company does not generate sufficient cash from operations to
satisfy its ongoing expenses, the Company will be required to seek external
sources of financing or to refinance its obligations. Possible sources of
financing include the sale of equity securities or additional bank borrowings.
There can be no assurance that the Company will be able to obtain adequate
financing in the future.
PART II -- OTHER INFORMATION
----------------------------
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
On February 13, 1996, the Company held its annual meeting of shareholders.
The shareholders acted on the following matters at the annual meeting.
1. The following individuals were elected to the Company's Board of
Directors, to hold office for a term of one year. The number of votes cast for
each individual, the number of votes withheld, and the number of broker non-
votes are listed for each individual.
<TABLE>
<CAPTION>
For Withheld Non-votes
--------- -------- ---------
<S> <C> <C> <C>
Gary Christophersen 6,510,766 17,728 N/A
Sam Rubinstein 6,516,082 12,412 N/A
Douglas A. Swerland 6,515,202 13,292 N/A
Craig E. Tall 6,516,252 12,242 N/A
Peter H. van Oppen 6,516,252 12,242 N/A
</TABLE>
Page 11 of 64
<PAGE>
2. The shareholders approved a proposal to amend the Seattle FilmWorks,
Inc. 1987 Stock Option Plan and Incentive Stock Option Plan (the "Plans") to
increase by 300,000 the aggregate numbers of shares of Common Stock available
for purchase upon exercise of options granted under either Plan, to create a
maximum number of options that may be granted under the Plans to any one
employee in any one fiscal year and to extend the terms of the Plans until
December 31, 2005. There were 5,936,729 shares of Common Stock voted in favor
of the amendments, 491,839 shares voted against, 98,026 shares abstained from
voting and 0 shares were broker non-votes.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
---------
3 Second Restated Articles of Incorporation of Seattle FilmWorks,
Inc.
10.1 Business Loan Agreement effective January 31, 1996 with First
Interstate Bank of Washington, N.A.
10.2* Supplement to Agfa Division of Miles, Inc. sales contract dated
March 29, 1996
10.3 Addendum to lease agreement dated January 1, 1996, between
United States of America, Lessors, and the Company
10.64** Sales contract dated August 18, 1995 between the Company and
Agfa Division of Miles, Inc. with respect to the purchase of
certain products
11 Computation of Earnings Per Share
(b) Reports on Form 8-K.
--------------------
None
* Exhibits for which confidential treatment has been requested.
** Replaces exhibit previously filed with the Company's Annual
Report on Form 10-K for the year ended September 30, 1995
Page 12 of 64
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SEATTLE FILMWORKS, INC.
DATED: May 14, 1996 /s/ Gary R. Christophersen
------------------------------------
Gary R. Christophersen
President/Chief Executive Officer
(Principal Executive Officer)
/s/ Case H. Kuehn
------------------------------------
Case H. Kuehn
Vice President-Finance/Treasurer
(Principal Financial and Chief
Accounting Officer)
Page 13 of 64
<PAGE>
INDEX TO EXHIBITS
SEATTLE FILMWORKS, INC.
Quarterly Report on Form 10-Q
For The Quarter Ended March 30, 1996
<TABLE>
<CAPTION>
Exhibit Description Page No.
- ------- -------------------------- --------
<S> <C> <C>
3 Second Restated Articles of Incorporation of Seattle
FilmWorks, Inc. 15-22
10.1 Business Loan Agreement effective January 31, 1996 with
First Interstate Bank of Washington, N.A. 23-41
10.2* Supplement to Agfa Division of Miles, Inc. sales contract
dated March 29, 1996 42-44
10.3 Addendum to lease agreement dated January 1, 1996, between
United States of America, Lessors, and the Company. 45
10.64** Sales contract dated August 18, 1995 between the Company
and Agfa Division of Miles, Inc. with respect to the
purchase of certain products. 46-63
11 Computation of Earnings Per Share 64
</TABLE>
* Exhibits for which confidential treatment has been requested.
** Replaces exhibit previously filed with the Company's Annual Report
on Form 10-K for the year ended September 30, 1995.
Page 14 of 64
<PAGE>
SECOND RESTATED
ARTICLES OF INCORPORATION
OF
SEATTLE FILMWORKS, INC.
Except for the amendments to the Amended and Restated Articles of
Incorporation made pursuant to the Certificate of Information attached hereto as
Exhibit A, these Second Restated Articles of Incorporation correctly set forth
- ---------
without change the corresponding provisions of the Amended and Restated Articles
of Incorporation as theretofore amended and, together with the said amendments
which have been incorporated herein, supersede the original Amended and Restated
Articles of Incorporation and all amendments thereto.
ARTICLE I
---------
The name of this corporation is SEATTLE FILMWORKS, INC.
ARTICLE II
----------
This corporation has perpetual existence.
ARTICLE III
-----------
The purpose or purposes for which this corporation is organized are:
(1) To advertise and market various products and services, to
distribute film, to provide various film developing and processing services and
to develop and market various test preparation materials.
(2) To engage in any other lawful business or activity whatsoever
which may hereafter from time to time be authorized by the Board of Directors.
ARTICLE IV
----------
(1) Authorized Capital. The total number of shares which the
------------------
corporation is authorized to issue is sixty-nine million five hundred thousand
(69,500,000) consisting of sixty-seven million five hundred thousand
(67,500,000) shares of common stock, par value $.01, and two million (2,000,000)
shares of preferred stock, par value $.01. Shares shall be issued at such
prices as shall be determined by the Board of Directors. The common stock is
subject to the rights and preferences of the preferred stock as hereinafter set
forth.
15
<PAGE>
(2) Issuance of Preferred Stock in Series. The preferred stock may be
-------------------------------------
issued from time to time in one or more series in any manner permitted by law
and the provisions of these Restated Articles of Incorporation, as determined
from time to time by the Board of Directors and stated in the resolution or
resolutions providing for the issuance thereof, prior to the issuance of any
shares thereof. The Board of Directors shall have the authority to fix and
determine and to amend, subject to the provisions hereof, the rights and
preferences of the shares of any series that is wholly unissued or to be
established. Unless otherwise specifically provided in the resolution
establishing any series, the Board of Directors shall further have the
authority, after the issuance of shares of a series whose number it has
designated, to amend the resolution establishing such series to decrease the
number of shares of that series, but not below the number of shares of such
series then outstanding.
(3) Dividends. The holders of shares of the preferred stock shall be
---------
entitled to receive dividends, out of the funds of the corporation legally
available therefor, at the rate and at the time or times as may be provided by
the Board of Directors in designating a particular series of preferred stock.
If such dividends on the preferred stock shall be cumulative, and if dividends
shall not have been paid, then the deficiency shall be fully paid or the
dividends declared and set apart for payment at such rate, but without interest
on cumulative dividends, before any dividends on the common stock shall be paid
or declared and set apart for payment. The holders of the preferred stock shall
not be entitled to receive any dividends thereon other than the dividends
referred to in this section, unless otherwise provided by the Board of Directors
in designating a particular series of preferred stock.
(4) Redemption. The preferred stock may be redeemable in such
----------
amounts, and at such time or times as may be provided by the Board of Directors
in designating a particular series of preferred stock. In any event, such
preferred stock may be repurchased by the corporation to the extent legally
permissible.
(5) Liquidation. In the event of any liquidation, dissolution or
-----------
winding up of the affairs of the corporation, whether voluntary or involuntary,
then, before any distribution shall be made to the holders of the common stock,
the holders of the preferred stock at the time outstanding shall be entitled to
be paid the preferential amount or amounts per share as may be provided by the
Board of Directors in designating a particular series of preferred stock plus
dividends accrued thereon to the date of such payment. The holders of the
preferred stock shall not be entitled to receive any distributive amounts upon
the liquidation, dissolution or winding up of the affairs of the
16
<PAGE>
corporation other than the distributive amounts referred to in this section,
unless otherwise provided by the Board of Directors in designating a particular
series of preferred stock.
(6) Conversion. Shares of preferred stock may be convertible to
----------
shares of common stock at such rate and subject to such adjustments as may be
provided by the Board of Directors in designating a particular series of
preferred stock.
(7) Voting Rights. Holders of preferred stock shall have such voting
-------------
rights as may be provided by the Board of Directors in designating a particular
series of preferred stock.
ARTICLE V
---------
Shareholders of this corporation have no preemptive rights to acquire
additional shares issued by the corporation.
ARTICLE VI
----------
The first directors of the corporation are two in number and their names
and addresses are:
Name Address
---- -------
Gilbert D. Scherer 509 13th East
Seattle, WA 98102
Michael J. Gross 5220 Roosevelt Way N.E.
Seattle, WA 98105
The first directors shall serve until the first annual meeting of
shareholders and until their successors are elected and qualified.
ARTICLE VII
-----------
The names and addresses of the incorporators are:
Name Address
---- -------
Gilbert D. Scherer 509 13th East
Seattle, WA 98102
Michael J. Gross 5220 Roosevelt Way N.E.
Seattle, WA 98105
ARTICLE VIII
------------
17
<PAGE>
At each election for directors, every shareholder entitled to vote at such
election has the right to vote in person or by proxy the number of shares of
stock held by him for as many persons as there are directors to be elected. No
cumulative voting for directors shall be permitted.
ARTICLE IX
----------
(1) No contracts or other transactions between the corporation and any
other corporation, and no act of the corporation shall in any way be affected or
invalidated by the fact that any of the directors of the corporation are
pecuniarily or otherwise interested in, or are directors or officers of, such
other corporation; and
(2) Any director individually, or any firm of which any director may
he a member, may be a party to, or may be pecuniarily or otherwise interested
in, any contracts or transactions of the corporation, provided that the fact
that he or such firm is so interested shall be disclosed or shall have been
known to the Board of Directors or a majority thereof.
ARTICLE X
---------
The Corporation reserves the right to amend, alter, change or repeal
any provision contained in these Articles of Incorporation, in the manner now or
hereafter prescribed by law, and all rights and powers conferred herein on
shareholders and directors are subject to this reserved power.
ARTICLE XI
----------
(1) Prevention of Greenmail. Any purchase by the corporation of
-----------------------
voting shares from an interested shareholder (as hereinafter defined), other
than pursuant to an offer to the holders of all of the outstanding shares of the
same class of voting shares as those so purchased, at a per share price in
excess of its fair market value (as hereinafter defined) at the time of such
purchase of the shares so purchased, shall require the affirmative vote of the
holders of at least a majority of the shares entitled to be counted under this
Article XI, or if any class of shares is entitled under these Restated Articles
of Incorporation or under law to vote thereon as a class, then by the
affirmative vote of at least a majority of the shares of each class entitled to
be counted under this Article XI and of the total shares entitled to be counted
under this Article XI. All outstanding shares entitled to vote under these
Restated Articles of Incorporation or under law shall be entitled to be counted
under this Article XI except shares owned by or voted under the control of an
interested shareholder may not be counted to determine whether shareholders have
approved such purchase for
18
<PAGE>
purposes of this Article XI. The vote of the shares owned by or under the
control of an interested shareholder, however, shall be counted in determining
whether a quorum exists.
19
<PAGE>
(2) Definitions. For the purpose of this Article:
-----------
(a) A "person" means any individual, firm, corporation or other
entity.
(b) An "interested shareholder" means any person (other than the
corporation or any subsidiary) or group of affiliated persons who beneficially
own twenty percent (20%) or more of the outstanding voting shares of the
corporation, excluding any person who, in good faith and not for the purpose of
circumventing this Article XI, is an agent, bank, broker, nominee or trustee for
another person, if such person is not an interested shareholder.
(c) A "subsidiary" means any corporation of which a majority of each
class of equity security is owned directly or indirectly by the corporation.
(d) An "affiliated person" means any person who either her acts
jointly or in concert with, or directly or indirectly controls, is controlled
by, or is under common control with another person.
(e) "beneficially own" has the meaning ascribed to such term in Rule
13d-3 of the Rules and Regulations under the Securities Exchange Act of 1934, as
in effect on January 1, 1986.
(f) "fair market value" means the closing sale price on the trading
day immediately preceding the date in question of a share of such stock on the
Composite Tape for New York Stock Exchange - Listed Stocks, or, if such stock is
not quoted on the Composite Tape, on the New York Stock Exchange, or, if such
stock is not quoted on such exchange, on the principal United States securities
exchange registered under the Securities Exchange Act of 1934 on which such
stock is listed, or, if such stock is not listed on any such exchange, the last
sale price or closing bid quotation, whichever is available, with respect to a
share of such stock on the trading day immediately preceding the date in
question on the National Association of Securities Dealers, Inc. Automated
Quotations System or any system then in use, or, if no such quotations are
available, the fair market value on the date in question of a share of such
stock as determined by the Board of Directors in good faith.
ARTICLE XII
-----------
Pursuant to RCW 23B.17.020(3)(d), the Company expressly elects not to
be covered by the provisions of RCW 23B.17.020.
20
<PAGE>
ARTICLE XIII
------------
LIMITATION OF DIRECTOR LIABILITY
--------------------------------
No director of the corporation shall be personally liable to the
corporation or its shareholders for monetary damages for his or her conduct as a
director on or after the date this Article become effective, except for: (i)
acts or omissions that involve intentional misconduct or a knowing violation of
law by the director, (ii) approval of certain distributions or loans in
violation of RCW 23B.08.310, or (iii) any transaction from which the director
will personally receive a benefit in money, property or services to which the
director is not legally entitled. If, after approval by shareholders of this
Article, the Washington Business Corporation Act, is amended to authorize
corporate action further eliminating or limiting the personal liability of
directors, then the liability of a director of the corporation shall be
eliminated or limited to the fullest extent permitted by the Washington Business
Corporation Act, as so amended. Any amendment to or repeal of this Article
shall not adversely affect any right or protection of a director of the
corporation for or with respect to any acts or omissions of such director
occurring prior to such amendment or repeal.
DATED as of this 5th day of March, 1996.
SEATTLE FILMWORKS, INC.
By /s/ Gary R. Christophersen
Gary R. Christophersen
President
21
<PAGE>
Exhibit A
---------
CERTIFICATE OF INFORMATION
TO
SECOND RESTATED ARTICLES OF INCORPORATION
OF
SEATTLE FILMWORKS, INC.
This Certificate of Information accompanies and is submitted in
connection with the filing of Second Restated Articles of Incorporation of
Seattle FilmWorks, Inc., a Washington corporation, pursuant to RCW
23B.10.070(4).
1. The name of the corporation is Seattle FilmWorks, Inc.
2. The amendments to the Amended and Restated Articles of
Incorporation of the corporation are as follows:
(1) Delete Article IV in its entirety.
(2) Amend Article XIII to reflect current statute cites by
replacing reference to RCW 23A.08.425(3)(d) and RCW 23A.08.425 with RCW
23B.17.020(3)(d) and RCW 23B.17.020, respectively.
(3) Amend Article XIV to reflect the current statute cite by
replacing reference to RCW 23A.08.450 with RCW 23B.08.310.
(4) Renumber Articles V through XIV as Articles IV through XIII,
respectively, and amend the reference to Article XII in Article XII prior to
renumbering to Article XI in Article XI after renumbering.
3. The amendments and the Second Restated Articles of Incorporation
were duly adopted by the Board of Directors by unanimous consent on
March 5, 1996, pursuant to the provisions or RCW 23B.10.020.
DATED as of this 5th day of March, 1996.
SEATTLE FILMWORKS, INC.
By /s/ Gary R. Christophersen
Gary R. Christophersen
President
22
<PAGE>
LOAN AGREEMENT
This Agreement is made and executed as of April 10, 1996 by and between SEATTLE
FILMWORKS, INC., a Washington corporation, referred to in this Agreement as
"Borrower," and FIRST INTERSTATE BANK OF WASHINGTON, N.A., a national banking
association, referred to in this Agreement as "Bank". It is effective as of
January 31, 1996, and supersedes and replaces that certain Loan Agreement dated
February 28, 1995, as subsequently modified. All amounts outstanding under the
previous Loan Agreement and related promissory notes shall be deemed outstanding
under this Loan Agreement and related promissory notes from and after the
effective date hereof.
In consideration of the mutual promises contained herein, the parties agree as
follows:
1. DEFINITIONS. As used in this Agreement, the following terms shall have the
-----------
meanings indicated which shall apply both to the singular and the plural of the
terms defined:
"Agreement" means this agreement, as it may be extended or modified from
---------
time to time.
"Borrower" means Seattle FilmWorks, Inc. and any successor thereto or any
--------
subsidiary as described in Section 6.11 below.
"Borrowing" means that portion of the Convertible Line or Convertible Loan
representing direct advances of funds (not letters of credit, to the extent
available thereunder) subject to an identical and co-terminus Interest Period,
and bearing interest at the same rate of interest and calculated by the same
method. A Borrowing is (a) a "Prime Borrowing" if the interest rate is based on
the Prime Rate, (b) a "LIBOR Borrowing" if the interest rate is based on LIBOR
and (c) a Fixed Rate Borrowing if the interest rate is based on the Cost of
Funds Rate. A Borrowing may include an Initial Borrowing and/or a Subsequent
Borrowing.
"Business Day" means a day of the year on which banks are not required or
------------
authorized to close in the State of Washington and, if the term is used in
connection with any Borrowing(s) bearing interest based on LIBOR, also on a day
on which dealings in United States dollars are carried on in the London
Interbank Market.
"Capital Expenditures" means investment in fixed or capital assets
--------------------
(including capitalized leases).
"Convertible Line" means the revolving line of credit extended to Borrower
----------------
pursuant to Section 2.1 hereof.
"Convertible Line Limit" means the maximum aggregate amount of all
----------------------
Borrowings and import letters of credit which may be outstanding at any time and
which shall in no event exceed six million dollar ($6,000,000.00).
"Convertible Line Note" means the promissory note evidencing Borrowings
---------------------
under the Convertible Line, to be executed by Borrower pursuant to Section 2.1g
hereof.
23
<PAGE>
"Convertible Loan" means the outstanding balance of Borrowings under the
----------------
Convertible Line which are converted to a term loan on Maturity of the
Convertible Line Note, pursuant to Section 2.2 hereof.
"Convertible Loan Note" means the promissory note evidencing the
---------------------
Convertible Loan, to be executed upon conversion of the Convertible Line to the
Convertible Loan on Maturity of the Convertible Line Note , in accordance with
Section 2.2d hereof.
"Convertible Loan Term" means five (5) years.
---------------------
"Cost of Funds Rate" means the index rate quoted by First Interstate Bank
------------------
of California or its successors as the "First Interstate Long-Term Cost of Funds
Rate" for the period approximately equal to the Convertible Loan Term, which
rate may not be the actual cost of funds for Bank or First Interstate Bank of
California or the successor of either of them.
"Event of Default" means any of the events described in Section 8.1 hereof.
----------------
"GAAP" means generally accepted accounting principles set forth in the
----
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as may be approved by a significant segment of the accounting
profession.
"Initial Borrowing" means a Borrowing under which the net effect is that
additional funds are advanced by Bank hereunder rather than merely changing the
interest rate calculation method or Interest Period.
"Interest Period" means
(A) with respect to each LIBOR Borrowing, the period commencing on the date of
such Borrowing and ending one (1), two (2) or three (3) months thereafter, as
Borrower may elect in the applicable Borrowing request; provided that the first
day of any such Interest Period shall be (i) for an Initial Borrowing, the date
new funds are advanced; or (ii) for a Subsequent Borrowing, the last day of the
next preceding Interest Period applicable to such Borrowing, which day shall
also be a Business Day; provided further that in determining the Interest Period
for each LIBOR Borrowing:
(a) any Interest Period which would otherwise end on a day which is not
a Business Day shall be extended to the next succeeding Business Day unless
such Business Day falls in another calendar month, in which case such
Interest Period shall end on the next preceding Business Day;
(b) any Interest Period which begins on the last Business Day of a
calendar month (or on a day for which there is no numerically corresponding
day in the calendar month at the end of such Interest Period) shall end on
the last Business Day of a calendar month; and
(c) in no event shall Borrower elect any Interest Period ending later
than Maturity of the Convertible Line Note or Convertible Loan Note, as
applicable, or, to the extent that the Borrowing represents principal which
is required to be paid on the next date on which a principal payment is
required to be made, ending later than the next date on which a principal
payment is required to be made; and
24
<PAGE>
(B) with respect to each Fixed Rate Borrowing, the period commencing on, as the
case may be, the Borrowing or conversion date with respect to such Fixed Rate
Borrowing and ending on the date which is five (5) years thereafter; provided,
---------
that no such Interest Period shall extend beyond the Maturity of the Convertible
Line Note or Convertible Loan Note, as applicable, or shall end on a day which
is not a Business Day.
"LIBOR" means, for each Interest Period (i) the rate of interest determined
by Bank at which Dollar deposits for the relevant Interest Period would be
offered to Bank in the approximate amount of the relevant LIBOR Borrowing in the
London interbank market upon request of Bank at 11:00 a.m. (London time) on the
day which is two (2) LIBOR Business Days prior to the first day of such Interest
Period, divided by (ii) a number equal to 1.00 minus the aggregate (but without
duplication) of the rates (expressed as a decimal fraction) of reserve
requirements in effect on the day on which the pricing for the relevant LIBOR
Borrowing is set (including, without limitation, basic, supplemental, marginal
and emergency reserves under any regulations of the Board of Governors of the
Federal Reserve System or other governmental authority having jurisdiction with
respect thereto, as in effect at the time Bank quotes the rate to Borrower) for
Eurocurrency funding of domestic assets (currently referred to as "Eurocurrency
liabilities" in Regulation D of such Board) which are required to be maintained
by a member bank of such System (such rate to be adjusted to the next higher
1/16 of 1%).
"Loan Agreement" means this Loan Agreement between Borrower and Bank.
--------------
"Maturity" means the date on which all principal and interest of any
Borrowings under the Convertible Line Note or Convertible Loan Note, as
applicable, is fully due and payable and after which date no additional
Borrowings will be made or letters of credit issued
(a) by its terms, which
(i) for the Convertible Line Note in no event shall be later than
January 31, 1997, and
(ii) for the Convertible Loan Note shall be January 31, 2002 or
(b) by acceleration.
"Prime Rate" means the index rate of interest established from time to time
by Bank in connection with the pricing of certain of its loans. Bank may make
loans priced at, above or below the Prime Rate. Information concerning the
Prime Rate may be obtained from Bank.
"Subsequent Borrowing" means a Borrowing which results in no net increase
in the aggregate amount of the Loan under which it was made, and for which
Borrower may elect a new or different Interest Period or interest rate pursuant
to the terms of this Agreement.
2. INDEBTEDNESS
2.1 Revolving Period.
----------------
a. Convertible Line Limit. Subject to all of the terms and conditions of
----------------------
this Agreement, and provided no Event of Default or event which with notice or
passage of time or both would be an Event of Default has occurred and is
continuing, Bank agrees to make such Borrowings or issue such import letters of
credit to Borrower as Borrower may from time to time request during the period
from the date hereof to Maturity of the Convertible Line Note; provided, that in
--------
no event shall Bank be
25
<PAGE>
obligated to make Borrowings and/or import letters of credit to Borrower which,
in the aggregate, would exceed the Convertible Line Limit. Within the limits of
the Convertible Line Limit and the other terms and conditions hereof, Borrower
may borrow, repay, prepay and reborrow from time to time until Maturity of the
Convertible Line Note, when the outstanding principal balance up to a maximum of
three million dollars ($3,000,000.00) will be automatically converted to the
Convertible Loan, any excess will be immediately due and payable, and Borrower
will not be able to reborrow any portion of principal which has been repaid.
Bank may, from time to time, at its sole option and for such periods as it may
determine, extend the Convertible Line or any outstanding balance thereon.
b. Borrowing Requests.
------------------
(i) Borrowings may be requested telephonically by an authorized
representative of Borrower. Bank may rely on any oral or written request,
specification or direction which Bank believes to be genuine and shall be fully
protected in doing so without any requirement to make further inquiry.
(ii) Bank shall have no obligation to make any Initial Borrowing
after Maturity of the Convertible Line Note unless the time for advancing
Initial Borrowings is expressly extended by Bank, in writing, at its sole
option; however, any Initial Borrowing actually made by Bank to Borrower shall
be entitled to all of the benefits of this Agreement, including but not limited
to the Events of Default and related remedies set forth herein.
(iii) Any request for an Initial Borrowing or other extension of
credit under the Convertible Line shall be deemed a representation and warranty
by Borrower that all of the conditions precedent of Section 4 are satisfied as
of the date of the request and that such Borrowing or extension of credit will
be in compliance with the Convertible Line Limit.
c. Import Letters of Credit. The Convertible Line will be available to
------------------------
Borrower for issuance by Bank of import commercial letters of credit for the
account of Borrower in an aggregate face amount at any time not to exceed one
million dollars ($1,000,000.00), subject to documentation acceptable to Bank;
provided that in no event shall the outstanding amount of all credit under the
Convertible Line, including the face amount of such letters of credit, exceed
the Convertible Line Limit. Letters of credit issued by Bank for the account of
Borrower hereunder will expire within one hundred eighty (180) days of issuance.
Issuance of import letters of credit is subject to standard fees and
documentation requirements of Bank in effect on the date of issuance, including
but not limited to execution by Borrower of a reimbursement agreement in form
and substance satisfactory to Bank.
d. Purpose. All Borrowings and letters of credit requested under the
-------
Convertible Line shall be used solely for general operating purposes of
Borrower, including issuance of letters of credit, repurchase by Borrower of its
outstanding stock, Capital Expenditures and acquisitions.
e. Interest. Except as provided in Section 8.2 hereof, prior to
--------
conversion to the Convertible Loan, all Borrowings made to Borrower under the
Convertible Line shall accrue interest at one of the following rates, as
selected by Borrower:
(i) Prime Borrowings. Interest shall accrue on Prime Borrowings
----------------
under the Convertible Line at a per annum rate equal to the Prime Rate, which
interest rate shall be adjusted concurrently with and on the same day as any
change in the Prime Rate; or
26
<PAGE>
(ii) LIBOR Borrowings. Interest shall accrue on LIBOR Borrowings under
----------------
the Convertible Line at a per annum rate equal to one and one-quarter percent
(1.25%) plus LIBOR for the Interest Period selected by Borrower, subject to
availability of the LIBOR market to Bank.
f. Repayment.
---------
(i) Accrued interest on all Prime Borrowings under the Convertible
Line shall be payable monthly on the last day of the month. Accrued interest on
all LIBOR Borrowings under the Convertible Line shall be payable on the last day
of the relevant Interest Period. Notwithstanding anything contained herein, all
accrued and unpaid interest on Borrowings under the Convertible Line shall be
fully due and payable on the Maturity of the Convertible Line Note.
(ii) If at any time prior to Maturity of the Convertible Line Note the
outstanding amount of the Borrowings plus the outstanding face amount of all
letters of credit made under the Convertible Line exceeds the Convertible Line
Limit, Borrower shall immediately pay Bank such amount as may be necessary to
reduce the outstanding aggregate amount to an amount which is not greater than
the Convertible Line Limit.
(iii) If the outstanding amount of the Convertible Line outstanding
on Maturity of the Convertible Line Note is in excess of three million dollars
($3,000,000), Borrower shall pay to Bank on Maturity of the Convertible Line
Note the amount of such excess principal.
(iv) Prepayment of the principal amount of any LIBOR Borrowing before
the end of the applicable Interest Period will not be allowed.
(v) If any payment date hereunder or under any notes or other
agreement for payment of money or any date on which performance is required
hereunder or under any such agreement occurs on a day other than a Business Day,
such payment shall be made or performance occur on the next succeeding Business
Day; provided, that interest shall continue to accrue on any outstanding
Borrowings until paid.
g. Convertible Line Note. To evidence Borrower's indebtedness under the
---------------------
Convertible Line, Borrower shall execute and deliver to Bank a promissory note
in form acceptable to Bank.
2.2 Convertible Loan.
----------------
a. Payments.
--------
(i) Accrued interest on all Prime Borrowings and any Fixed Rate
Borrowing under the Convertible Loan shall be payable quarterly on the same date
as any payment of principal required below. Accrued interest on all LIBOR
Borrowings under the Convertible Loan shall be payable on the last day of the
relevant Interest Period. Notwithstanding anything contained herein, all
accrued and unpaid interest on Borrowings under the Convertible Line shall be
fully due and payable on the Maturity of the Convertible Line Note.
(ii) Up to a maximum of three million dollars ($3,000,000)of the
principal balance of Borrowings under the Convertible Line outstanding on
Maturity of the Convertible Line Note will be automatically converted to a term
loan (the "Convertible Loan") and will be due and payable according to the
schedule set forth below until Maturity of the Convertible Loan Note, when the
entire balance of outstanding principal and accrued interest on the Convertible
Loan shall be immediately due and
27
<PAGE>
payable. Borrower shall make principal reductions on the Convertible Loan of at
least one-fifth (1/5) of the initial outstanding balance of the Convertible Loan
in each calendar year from the date of the Convertible Loan to Maturity of the
Convertible Loan Note, at which time the entire outstanding balance thereof,
both principal and interest, shall be paid in full. Beginning on June 30, 1997,
Borrower shall make a quarterly principal payment equal to the following
percentages of the annual required principal payment (which will be based on a
full amortization over the Convertible Loan Term of the actual principal balance
outstanding on Maturity of the Convertible Line Note):
<TABLE>
<CAPTION>
% of Required
Payment Due Annual Reduction
-------------- ----------------
<S> <C>
March 31 0%
June 30 25%
September 30 50%
December 31 25%
</TABLE>
b. Interest. Except as provided in Section 8.2 hereof, the outstanding
--------
principal balance of the Convertible Loan shall accrue interest at one of the
following rates, as selected by Borrower:
(i) Prime Borrowings. Interest shall accrue on Prime Borrowings under
----------------
the Convertible Loan at a per annum rate equal to the Prime Rate, which interest
rate shall be adjusted concurrently with and on the same day as any change in
the Prime Rate; or
(ii) LIBOR Borrowings. Interest shall accrue on LIBOR Borrowings under
----------------
the Convertible Loan at a per annum rate equal to one and one-half percent
(1.50%)plus LIBOR for the Interest Period selected by Borrower, subject to
availability of the LIBOR market to Bank.
(iii) Fixed Rate Borrowing. Interest shall accrue on a Fixed
----- --------------------
Rate Borrowing at a per annum rate equal to one and one-half percent (1.50%)
plus the Cost of Funds Rate, fixed at the date of conversion of the Convertible
Line to the Convertible Loan.
c. Prepayment of Convertible Loan. Borrower may prepay the principal
-------------------------------
amount of the Convertible Loan only on the following conditions:
(i) Prime Borrowings. Borrower may prepay Prime Borrowings at any
----------------
time.
(ii) LIBOR Borrowings. Borrower may repay LIBOR Borrowings at the end
----------------
of the applicable Interest Period only, and Borrower shall not select an
Interest Period which will require prepayment of principal in order to comply
with Section 2.2a hereof.
(iii) Fixed Rate Borrowings. Borrower may repay all or part of a
---------------------
Fixed Rate Borrowing at any time; provided, however, that any such reductions
will in no event lessen or postpone the payments to be made pursuant to the
schedule provided in Section 2.2a hereof, and such prepayments shall be applied
in inverse order of principal payments due; provided further, that unless Bank
-------- -------
shall have requested compensation pursuant to subparagraph (A) hereof, any such
prepayment shall be subject to the fee required under subparagraph (B) hereof.
(A) Adjustment to Interest Rate. If after the date hereof, Bank shall
---------------------------
have determined that the adoption of any applicable law, rule or regulation
regarding capital adequacy, or any change therein, or any change in the
interpretation or administration thereof by any governmental
28
<PAGE>
authority, central bank or comparable agency charged with the interpretation or
administration thereof, or compliance by any national banking association in the
position of lender hereunder with any request or directive after the date hereof
regarding capital adequacy (whether or not having the force of law) of any such
authority, central bank or comparable agency, has or would have the effect of
reducing the rate of return on Bank's capital as a consequence of its
obligations hereunder to a level below that which Bank could have achieved but
for such adoption, change or compliance by an amount deemed by Bank to be
material, then from time to time, within fifteen (15) days after demand by Bank,
Borrower shall pay to Bank such additional amount or amounts as will compensate
Bank for such reduction. Bank will promptly notify Borrower of any event of
which it has knowledge, occurring after the date hereof, which will entitle Bank
to compensation pursuant to this paragraph and setting forth the additional
amount or amounts to be paid to it hereunder shall be conclusive in the absence
of manifest error. In determining such amount, Bank may use any reasonable
averaging and attribution methods.
(B) Funding Losses. If Borrower makes any payment of principal with
--------------
respect to the Convertible Loan other than those scheduled in Section 2.2a
hereof, Borrower shall reimburse Bank on demand for (x) the present value of the
difference between interest which would have accrued on the amount so prepaid
through the time when such principal would have been paid according to the
schedule contained in Section 2.2a herein (taking into account the agreement
with respect to application of amounts prepaid) and the return which could be
earned by Bank by making a Borrowing of a principal amount equal to the amount
so repaid for the same period at the Cost of Funds Rate then in effect plus four
150 basis points, and (y) an amount not to exceed Two Thousand Dollars
($2,000.00) for any actual loss or expense incurred by Bank, including (without
limitation) any loss incurred in obtaining, liquidating or employing deposits
from third parties; provided, that Bank shall have delivered to Borrower a
---------
certificate as to the amount of such loss or expense, which certificate shall be
prima facie evidence of such loss or expense and the amount thereof. For
- ----- -----
purposes of calculating the present value of the amount described in clause (x)
of this paragraph, the actual interest on the Convertible Loan Note shall be
used as the "discount rate."
d. Convertible Loan Note. To evidence Borrower's indebtedness under the
---------------------
Convertible Loan, Borrower shall execute and deliver to Bank at the time of
conversion a promissory note in form acceptable to Bank, setting forth the
outstanding balance of the Convertible Loan, payments, term and interest rate,
as provided in this Section 2.2.
2.3 Additional Rules Applicable to Borrowings Under the Convertible Line and
------------------------------------------------------------------------
the Convertible Loan. The following rules will apply to Borrowings under either
- --------------------
of the Convertible Line or the Convertible Loan, and the outstanding principal
balance related thereto.
a. Borrowing and Rate Requests. In addition to the terms and conditions
---------------------------
of any promissory note, the following terms and conditions will apply to any
Borrowings unless modified in writing by the parties hereto. No delay, omission
or course of dealing shall be deemed a waiver or modification thereof unless
agreed to in writing, and shall be effective only to the extent specifically set
forth in writing.
(i) Borrowings hereunder and requests for interest rates and
selections of Interest Period may be telephonically or otherwise requested by an
authorized representative of Borrower. Bank may rely on any oral or written
request, specification or direction from any person authorized to request a
Borrowing pursuant to this paragraph, which Bank believes to be genuine and
shall be fully protected in doing so without any requirement to make further
inquiry.
29
<PAGE>
(ii) Each Borrowing request, whether for an Initial Borrowing or for a
Subsequent Borrowing, written or verbal, shall specify the date, amount, the
rate calculation method and, if applicable, the Interest Period and/or
Borrowing(s) to which the request applies.
(iii) In no event shall any request for a Subsequent Borrowing take
effect prior to the end of the current Interest Period for the outstanding
Borrowing(s) so effected; any such request shall be deemed to be a request for a
new Borrowing.
(iv) In the event that Borrower fails to make and/or Bank does not
approve a new request for Borrowing on or before the end of an Interest Period
for any outstanding Borrowing(s), to take effect immediately following such
Interest Period, such Borrowing(s) shall, after the current Interest Period,
bear interest as Prime Borrowings until repaid or until a new request is
received and approved by Bank.
(v) If agreed by Bank, requests for Prime Borrowings received by 3:00
P.M. Seattle time, of a Business Day will be funded on the same Business Day;
requests for LIBOR Borrowings received by 10:00 A.M. of a Business Day will be
funded on the second Business Day following receipt by Bank of the request.
(vi) Notwithstanding anything herein, Bank reserves the right to
require minimum increments of five hundred thousand dollars ($500,000.00) for
LIBOR Borrowings.
(vii) Interest on Prime Borrowings shall be calculated on the basis
of a year of three hundred sixty-five (365) days and the actual number of days
elapsed. Interest on LIBOR Borrowings or the Fixed Rate Borrowings shall be
calculated on the basis of a year of three hundred sixty (360) days and the
actual number of days elapsed.
(viii) Borrower agrees to indemnify and hold Bank harmless from any
costs, expenses or losses of any kind incurred solely because Borrower requested
a Borrowing which Borrowing request Borrower later cancels.
c. Increased Costs; Illegality.
----------------------------
(i) If the adoption of or compliance by Bank with any applicable law,
rule or regulation, or any change therein after the date hereof, or any change
in the interpretation or administration thereof by any governmental authority,
central bank or comparable agency charged with the interpretation or
administration thereof, or if compliance by Bank with any request, guideline,
regulation or directive (whether or not having the force of law) of any such
authority, central bank or comparable agency now in effect or at any later time
adopted: (A) shall subject Bank to any tax, duty, or other charge with respect
to Borrowings made hereunder (except for changes in the rate of tax on the
overall net income of Bank imposed by the jurisdiction in which Bank's principal
executive office or office through which such Borrowings are made is located);
or (B) shall impose, modify or deem applicable any reserve, special deposit or
similar requirement (including, without limitation, any such requirement imposed
by the Board of Governors of the Federal Reserve System or reserves necessary to
meet capital adequacy guidelines whether as part of any phase-in, final rule or
otherwise, but excluding, with respect to LIBOR Borrowings, any such requirement
included in an applicable reserve requirements used in computing LIBOR) and the
result of any of the foregoing is to increase the cost to Bank of making or
maintaining any fixed rate Borrowing hereunder, or to reduce the amount of any
sum received or receivable by Bank under its note with respect thereto, by an
amount deemed by Bank to be material,
30
<PAGE>
then within fifteen (15) days after demand by Bank to Borrower, Borrower shall
pay to Bank such additional amount or amounts as will compensate Bank for such
increased cost or reduction.
(ii) Notwithstanding any other provision of this agreement, if the
introduction of or any change in or interpretation of any law or regulation
shall make it unlawful, or any central bank or other governmental authority
shall assert that it is unlawful, for Bank to make advances funded through LIBOR
sources or to continue to maintain such Borrowings hereunder, Bank may, by
notice to Borrower, if necessary in the reasonable opinion of Bank to comply
with such law or regulation, convert all such Borrowings to Prime Borrowings.
In the event that Bank invokes the provisions of this subparagraph, at
Borrower's request, Bank shall consider alternative rates to those for Prime
Borrowings, but in no event shall Bank have any obligation to consent to such
alternative rate(s).
d. Payment.
--------
(i) Principal and accrued interest on each Borrowing shall be due and
payable at the end of the applicable Interest Period for such Borrowing (except
for Prime) and at maturity. For Prime Borrowings, interest shall be due and
payable on the last Business Day of each month commencing on the first such date
after the Borrowing is made and at the earliest of (A) repayment of such
Borrowing, or (B) until readvance of such Borrowing under a different rate
option, or (C) until Maturity of the Convertible Line Note or the Convertible
Loan Note, as applicable.
(ii) The date, amount, interest rate and maturity date of each
Borrowing and all payments made on account of principal and interest shall be
recorded by Bank in its books and records, computerized or manual, such records
being incorporated as a part hereof. All such entries shall be prima facie
----- -----
evidence of all Borrowings made, interest rate, payments of principal and
interest and of the outstanding principal balance owed by Borrower.
(iii) Principal and interest shall be payable in Federal or other
immediately available funds at First Interstate Bank of Washington, N.A.,
Washington Corporate Commercial Banking Center, First Interstate Center, 999
Third Avenue, P. O. Box 160, Seattle, Washington 98111, Attention: Loan Support,
or such other location as Bank may designate.
(iv) Unless an Event of Default has occurred and is continuing, all
payments made by Borrower shall be applied as directed by Borrower. After the
occurrence of an Event of Default or if Borrower does not direct how payments
are to be applied, any such payments may be applied to any indebtedness of
Borrower to Bank, at Bank's discretion. Borrower authorizes Bank to deduct from
any of Borrower's deposit accounts with Bank such amounts as may from time to
time be necessary to effect the payment required hereunder.
2.4 Fees.
----
a. Facility Fee. On or before the first Borrowing is made or letter of
------------
credit issued under the Convertible Line, Borrower shall pay to Bank a facility
fee of seven thousand five hundred dollars ($7,500).
b. Conversion Fee. Borrower shall pay to Bank on Maturity of the
--------------
Convertible Line Note Borrowings outstanding under the Convertible Line an
additional fee of one-eighth of one percent (1/8%) of the outstanding balance of
the Convertible Line converted to the Convertible Loan on the date of
conversion.
31
<PAGE>
3. ADDITIONAL LOANS. Unless expressly agreed in writing by Bank, any
----------------
subsequent loans made to Borrower as long as this Agreement is in effect shall
be subject to the terms of this Agreement.
4. CONDITIONS PRECEDENT. In no event will Bank lend funds to Borrower, issue
--------------------
letters of credit or extend any other credit pursuant hereto unless all of the
following conditions are satisfied:
4.1 Delivery of Documents. Borrower shall have delivered to Bank this
---------------------
Agreement, duly executed; any promissory notes and related instruments and
documents required by this Agreement, duly executed and in full force and
effect.
4.2 Authority. Borrower shall have delivered to Bank such articles of
---------
incorporation, corporate resolutions, certificates of incumbency, certificate of
assumed name (if applicable), and other documentation as Bank deems necessary to
show that Borrower has the authority to execute, deliver and perform its
obligations under this Agreement and the documents and instruments executed
pursuant hereto, including but not limited to authority to give notices of
borrowing or enter into reimbursement agreements for letters of credit
hereunder.
4.3 Representations and Warranties. All representations and warranties set
------------------------------
forth in Section 5 hereof shall be true as of the date of any Borrowing, letter
of credit or other extension of credit requested by Borrower with the same
effect as though such representations and warranties were made on and as of the
date of such Borrowing, letter of credit or other extension of credit.
4.4 Events of Default. No Event of Default or event which, with the passage of
-----------------
time or the giving of notice or both, would become an Event of Default, shall
have occurred and be continuing.
4.5 Fees. Borrower shall have paid to Bank any and all fees then due
----
hereunder.
4.6 Other Evidence. Borrower shall have furnished to Bank such other evidence
--------------
which Bank may reasonably request to establish the consummation of the
transactions contemplated by this Agreement and the taking of all necessary
corporate action and compliance with the conditions set forth herein.
5. REPRESENTATIONS AND WARRANTIES OF BORROWER. As inducement to Bank to
------------------------------------------
provide the Convertible Line and the Convertible Loan to Borrower, and to extend
each Borrowing and letter of credit under the Convertible Line, Borrower makes
the following representations and warranties, each of which shall survive the
extension of any Borrowing or letter of credit pursuant hereto and until the
expiration of the Convertible Line and the Convertible Loan and complete
repayment of all of Borrower's obligations pursuant hereto:
5.1 Valid Entity. Borrower is a corporation duly organized and validly
------------
existing and in good standing under the laws of the State of Washington and is
qualified to do business in all jurisdictions in which the character of the
property owned or leased or the nature of the business conducted by it requires
licensing or qualification, and to the best of its knowledge and belief has
complied with all applicable laws and regulations in the conduct of its
business.
5.2 Authorization. The execution, delivery and performance of this Agreement,
-------------
the promissory notes and any other instruments or documents to be executed
and/or delivered pursuant hereto and the incurring of indebtedness hereunder
have all been duly authorized, are not in contravention of law or the terms of
Borrower's articles of incorporation or bylaws or any amendment thereof, or of
any agreement or undertaking to which Borrower is a party or by which it is
bound. They will, when duly executed and
32
<PAGE>
delivered to Bank, constitute the valid and binding obligations of Borrower to
Bank, in accordance with the respective terms thereof, and have not been
canceled or limited in any way.
5.3 Financial Condition. The financial position of Borrower as reported to
-------------------
Bank prior to this Agreement is accurate and dependable and there has not been
any material adverse change in such financial position as would adversely affect
the ability of Borrower to repay such indebtedness.
5.4 Litigation; Judgments. There is no material litigation at law or in equity
---------------------
and no proceedings before any commission or other administrative authority
pending or, to the knowledge of Borrower or its officers, directors or
principals, threatened against it or any of its subsidiaries. Borrower is not
in default with respect to any order, writ, injunction, decree, or demand of any
court or administrative body of any governmental unit having jurisdiction over
Borrower or Borrower's properties or operations, except as allowed by Section
5.5 hereof, and there are no outstanding judgments against Borrower which would
have a material adverse effect on Borrower's operations or financial condition.
5.5 Licenses, Taxes. Borrower has duly paid or caused to be paid any and all
---------------
license, franchise and corporation fees. All reports and forms required to be
filed by Borrower with the Internal Revenue Service, the State of Washington,
the City of Seattle and any other jurisdictions in which Borrower is licensed to
do business have been filed and Borrower has paid all taxes shown due on the
returns so filed as well as all other taxes, assessments, fees, duties and
governmental charges which have become due, except such taxes, if any, as are
being contested in good faith by appropriate proceedings and as to which
adequate reserves have been provided if so required by GAAP.
5.6 Employee Benefit Plan. Borrower is in compliance in all material respects
---------------------
with any applicable provisions of the Employee Retirement Income Security Act of
1974, as amended ("ERISA") and the regulations and published interpretations
thereunder. No "Reportable Event" within the terms of ERISA has occurred with
respect to any pension plan administered by it or any administrator designated
by it.
5.7 Representations as a Whole. This Agreement, all financial statements
--------------------------
provided to Bank and all other documents, certificates and written statements
furnished to Bank by Borrower, taken as a whole, are complete and do not contain
any untrue statement of a material fact or omit to state any material fact
necessary in order to make the statements contained herein or therein complete
and not misleading.
6. AFFIRMATIVE COVENANTS. Borrower covenants that so long as Bank shall have
---------------------
any commitment hereunder and as long as this Agreement remains in effect and
until complete repayment of all of Borrower's obligations pursuant hereto, the
following covenants will be binding on it:
6.1 Payment. Borrower agrees to pay to Bank the principal of and interest on
-------
each Borrowing under the Convertible Line and the Convertible Loan and all other
sums due to Bank in accordance with the terms of this Agreement and any
instruments, documents and agreements related to or executed pursuant hereto,
and to perform all of the obligations pursuant thereto.
6.2 Books and Records. Borrower shall at all times keep proper books and
-----------------
records of account in which full, true and correct entries will be made of its
transactions such that annual financial statements may be prepared in accordance
with GAAP.
6.3 Legal Existence and Operations. Borrower shall maintain its legal
------------------------------
existence and right to carry on business; continuously operate its business
except for periodic shutdowns in the ordinary course of business and
interruptions caused by strike, labor dispute, catastrophe or any other events
over which it has no control; and maintain, preserve and keep its buildings,
machinery and equipment in good
33
<PAGE>
condition, repair and working order for the proper and efficient operation of
its business. If Borrower operates under a trade name, all registrations
required by law will be obtained for proper use of such name. Borrower shall
maintain in full force and effect any relevant governmental approvals, licenses
and permits necessary for the continued operation of its business.
6.4 Insurance. Borrower shall maintain with financially sound and reputable
---------
insurance companies or associations insurance of the kinds, covering the risks,
and in the relative proportionate amounts usually carried by companies engaged
in a business similar to that of Borrower. Borrower agrees to deliver to Bank
the policies concerned or such evidence of said insurance as Bank may from time
to time request.
6.5 Compliance; Taxes. Borrower shall promptly pay or cause to be paid as they
-----------------
become due and payable all taxes, assessments, liens and other governmental
charges levied, assessed or imposed against it or its properties or arising out
of its operations and shall promptly comply with all laws, rules and regulations
of the United States government or any of its departments or agencies, including
but not limited to the Federal Trade Commission, the U.S. Postal Service and
federal environmental agencies, the State of Washington, the City of Seattle,
and any other jurisdictions in which it transacts business or owns property,
except where such amounts or the applicability or validity of such assessments,
charges, laws, rules or regulations as they apply to Borrower are being
contested in good faith by appropriate proceedings and as to which adequate
reserves have been provided if so required by GAAP.
6.6 Financial Covenants. Borrower shall at all times maintain the following
-------------------
financial conditions, with all ratios calculated in accordance with GAAP,
consistently applied:
a. Debt Service Coverage Ratio, measured annually at the end of each of
Borrower's fiscal years, of not less than 1.5:1.0. For purposes of this
covenant, Debt Service Coverage Ratio is defined as:
Net Profit + Depreciation + Interest Exp. + Dividends
-----------------------------------------------------
Current Portion Long Term Debt + Interest Exp. + Dividends
b. Net Worth, measured quarterly at the end of each fiscal quarter, of
not less than ten million dollars ($10,000,000.00).
c. Ratio of Total Liabilities to Net Worth, measured quarterly at the end
of each fiscal quarter, not to exceed 2.5:1.0.
6.7 Financial Reports. Borrower shall deliver to Bank financial data and
-----------------
financial statements, in such manner and detail as Bank may request from time to
time, including but not limited to the following:
a. A copy of Borrower's 10-Q Report, as filed with the SEC, within forty-
five (45) days of each quarter end;
b. Annual financial statements for each fiscal year end of Borrower,
audited in accordance with GAAP by a certified public accounting firm of
national standing, and a copy of Borrower's 10-K Report, as filed with the SEC,
within ninety (90) days of each fiscal year end; and
34
<PAGE>
c. Quarterly report of repurchases by Borrower of its stock, within
forty-five (45) days of the end of each calendar quarter, specifying the
aggregate amount spent on such repurchases, but only if such aggregate amount
spent on such repurchases is in excess of $500,000.00.
6.8 Inspection, Verification. Borrower agrees that Bank may from time to time,
------------------------
through its duly authorized representative or representatives, visit and inspect
its properties and offices and examine, check, make copies of or extracts from
its books, accounts, orders, records and original correspondence and conduct
such investigations as Bank may deem appropriate. Borrower agrees that it will
make available to representatives of Bank, at Borrower's place of business
during normal business hours, its books, records and files for such purposes.
6.9 Notification. Borrower shall promptly notify Bank in writing of the
------------
occurrence of any Event of Default or event which, with notice or passage of
time or both, would constitute an Event of Default; any change in the name or
address of Borrower or location of its books and records; the entry of any
judgment against Borrower in excess of two hundred fifty thousand dollars
($250,000.00); any lawsuit, claim, proceeding or action of any kind against
Borrower and/or any subsidiary in which the uninsured amount sought is or may be
two hundred fifty thousand dollars ($250,000.00) or more, or for which the
aggregate uninsured amount sought at any one time threatened or pending is or
may be two hundred fifty thousand dollars ($250,000.00) or more (in each case
"uninsured" includes circumstances in which the insurance carrier has reserved
rights against payment or otherwise evidenced an unwillingness or inability to
allow or make good on coverage or failed to accept tender of the claim), or
which otherwise, if determined adversely, would have a material adverse effect
on the operations of Borrower or any subsidiary.
6.10 Bank Accounts. Borrower shall at all times maintain bank accounts with
-------------
Bank. This requirement is not meant as a restriction upon the maintenance of
other banking relationships as may be convenient or necessary for the business
of Borrower but for the purpose that the principal banking relationships may be
maintained with the principal source of financing so that loan transactions
hereunder may be facilitated, and so that Bank may have the fullest possible
information as to Borrower's financial activities, and so that Bank may have
reasonably available to it opportunities to set-off in the event of collection
of indebtedness hereunder.
6.11 Additional Borrowers. In the event that Borrower reorganizes its structure
in such a way that all, substantially all or a major portion of its operating
assets are transferred to a subsidiary, Borrower shall, not more than thirty
(30) days from the effective date of such transfer or reorganization cause such
subsidiary to execute this Agreement, the Convertible Line Note and the
Convertible Loan Note as an additional "Borrower" and not a guarantor or surety
and to take such other actions as will cause Bank to be in no less favorable
position as it was prior to the reorganization or transfer. Notwithstanding the
foregoing, this paragraph shall in no way relieve Borrower of its obligations
hereunder or under the related documents or agreements, nor shall it be deemed
in any way a waiver of any provisions contained in Section 7 below.
7. NEGATIVE COVENANTS. As long as Bank shall have any commitment hereunder
------------------
and as long as this Agreement remains in effect and until complete repayment of
all of Borrower's obligations pursuant hereto, Borrower agrees that it will not,
without the prior written consent of Bank:
7.1 Encumbrances of Property. Mortgage, pledge, assign, grant a security
------------------------
interest in, encumber or hypothecate to any person or entity other than Bank any
of Borrower's assets other than (a) liens for taxes, assessments, or similar
charges either not yet due or being contested in good faith; (b) liens of
materialmen, mechanics, warehousemen, or carriers, or other like liens arising
in the ordinary course of business and
35
<PAGE>
securing obligations which are not yet delinquent; (c) liens and security
interests which, as of the date of this Agreement, have been disclosed to and
approved by Bank in writing; (d) liens on real property purchased or otherwise
acquired by Borrower for its own use and occupancy after the date of this
agreement so long as such liens to not exceed the purchase price of such
property; and (e) those liens and security interests which in the aggregate
constitute an immaterial and insignificant monetary amount with respect to the
net value of Borrower's assets;
7.2 Indebtedness. Incur or commit itself to incur any indebtedness for
------------
borrowed money (except for capitalized leases unless not within the limitation
of Section 7.3 hereof) in excess of five hundred thousand dollars ($500,000.00)
in any one fiscal year, non-cumulative from year to year;
7.3 Capital Expenditures. Invest or commit itself to invest in fixed or
--------------------
capital assets (including capitalized leases) in any fiscal year, non-cumulative
from year to year, in the aggregate (combined with investments pursuant to
Section 7.7 hereof) in excess of the greater of four million five hundred
thousand dollars ($4,500,000.00) or Borrower's cash and short-term investment
position, less outstanding bank debt, as reported by Borrower in its most recent
10-Q or 10-K Report filed by Borrower with the Securities and Exchange
Commission;
7.4 Guaranties. Guarantee or otherwise become surety in respect to the
----------
obligations of, or lend its credit to, any other person or entity, except for
guaranties of indebtedness of wholly owned subsidiaries of Borrower in the
aggregate in excess of one million dollars ($1,000,000.00);
7.5 Nature of Business. Change the general character of its business as
------------------
proposed to be conducted at the date hereof, or engage in any type of business
not reasonably related to such business as normally conducted;
7.6 Merger, Liquidation, Sale of Assets. Dissolve, liquidate or merge with or
-----------------------------------
into any other business entity; or sell, lease or otherwise dispose of all or
substantially all of its assets except as specifically permitted in Section 6.11
above;
7.7 Expansion. Acquire capital stock or assets of, or any interest in, any
---------
other entity; provided that Borrower may invest in capital stock or assets in a
similar line of business (direct to consumer marketing, digital image
processing, sales and distribution of imaging materials and/or photofinishing)
in the aggregate (combined with capital expenditures pursuant to Section 7.3
hereof) in excess of the greater of three million dollars ($3,000,000.00) or
Borrower's cash and short-term investment position, less outstanding bank debt,
as reported by Borrower in its most recent 10-Q or 10-K Report filed by Borrower
with the Securities and Exchange Commission in any fiscal year, non-cumulative
from year to year. Borrower shall notify Bank of any such investment in excess
of one hundred thousand dollars ($100,000.00);
7.8 Distributions. Declare or pay any dividends on its capital shares of any
-------------
class, make any distribution to any stockholder as such or to any partner,
owner, or principal, or purchase, redeem or otherwise acquire for value shares
of stock of any class in the aggregate in excess of four million dollars
($4,000,000.00) in any fiscal year, non-cumulative from year to year; or
7.9 Investments; Loans. Purchase or otherwise acquire, hold or invest in the
------------------
securities of, or make any loans or advances to, any other person or entity,
except loans or investments in the ordinary course of business or as allowed by
Section 7.7 hereof.
36
<PAGE>
8. DEFAULT.
-------
8.1 Events of Default. The occurrence of any of the following shall constitute
-----------------
an Event of Default hereunder and under each of the notes, security agreements
and other documents related hereto or executed pursuant hereto:
a. Nonpayment. Borrower shall fail to pay when due the amount of any
----------
principal, interest or fees on either of the Convertible Line or Convertible
Loan, or on any other loans made to Borrower by Bank under this Agreement, as
it may be amended from time to time, and such failure shall not be cured within
twenty (20) days after written notice to Borrower by Bank of such Event of
Default; or
b. Selected Covenants. Borrower shall fail to perform any of the
------------------
covenants or agreements on its part under Sections 6.2, 6.3, 6.4, 6.5, 6.6, 6.7,
7.1, 7.2, 7.3, 7.4, 7.5, 7.7, 7.8 or 7.9 hereof and such failure shall not be
cured within thirty (30) days after written notice to Borrower by Bank of such
Event of Default; or
c. Other Covenants. Borrower shall fail to perform any of the other
---------------
covenants or agreements on its part under this Agreement, as it may be amended
from time to time, or under any documents executed pursuant hereto; or
d. Breach of Warranty. Any representation or warranty made by Borrower
------------------
in this Agreement or related to this transaction shall prove to have been false,
misleading or inaccurate in any material respect when made; or
e. Other Agreements. Any of the security agreements or other documents
----------------
required by this Agreement, as it may be amended from time to time, shall not
continue in full force and effect or a default shall occur thereunder; or
f. Insolvency. The insolvency of Borrower; the filing by or against
----------
Borrower of a petition for bankruptcy, liquidation or reorganization, seeking,
consenting to or acquiescing in the appointment of any trustee, receiver,
liquidator or custodian of all or such part of its property as in the opinion of
the Bank is a substantial part of its assets; or any such proceeding instituted
against Borrower is not dismissed within thirty (30) days after institution
thereof; the general inability of Borrower to pay its debts as they come due or
any admission in that regard; or the making by Borrower of a general assignment
for the benefit of creditors; or the taking of corporate action by Borrower to
authorize any of the actions set forth in this subsection; or
g. Cessation of Existence. The cessation of corporate existence of
----------------------
Borrower; or
h. Cross-Default. Borrower shall fail to pay when due any indebtedness
-------------
or perform any term or covenant pursuant to agreement with any other party and
such failure shall continue after any applicable grace period if the effect of
such failure is to accelerate or permit the acceleration of the maturity of any
indebtedness of five hundred thousand dollars ($500,000.00) or more to such
party; or
i. Judgments. A final judgment is entered against Borrower in excess of
---------
one hundred thousand dollars ($100,000.00) and is not satisfied or stayed within
thirty (30) days; or
j. Condemnations. All or a substantial portion of the property of
-------------
Borrower shall be condemned, seized or otherwise apportioned.
37
<PAGE>
8.2 Remedies. Upon the occurrence of one or more of the Events of Default set
--------
forth herein, Bank shall have no obligation to make any further Borrowings,
issue letters of credit or extend further credit to Borrower and Bank shall be
entitled, at its sole option and without further notice to Borrower, to declare
any or all indebtedness due on the Convertible Line or Convertible Loan, as
applicable, and all other indebtedness of Borrower to Bank immediately due and
payable without the expiration of any further period of grace other than
specified in Section 8.1 hereof; and Bank shall be entitled to all legal
recourse against Borrower and to pursue and enforce, either successively or
concurrently, all rights and remedies set forth in this Agreement and any other
agreements executed pursuant hereto and such other rights and remedies as Bank
may have under applicable law. Further, upon demand by Bank in an Event of
Default, Borrower shall pay to the credit of such account as Bank shall
stipulate, an amount equal to the maximum actual and contingent liabilities of
Bank under each letter of credit issued and outstanding hereunder, which account
Bank shall be authorized to hold as collateral until all obligations of Borrower
to Bank hereunder, matured and unmatured, shall have been paid in full and
against which Bank is hereby authorized to draw for payment of such obligations
as they may become due; unless and until such time as Borrower shall have paid
all of its indebtedness to bank hereunder, Borrower shall have no rights to any
funds in such account. All remedies available to Bank shall be cumulative and
not alternate. In addition, interest shall accrue on the outstanding balance of
the Convertible Line or Convertible Loan and any other indebtedness of Borrower
to Bank pursuant hereto at a rate per annum equal to two percent (2%) in excess
of Bank's Prime Rate.
9. COSTS AND EXPENSES; ATTORNEYS' FEES. Borrower shall pay all fees, costs,
-----------------------------------
charges and expenses of Bank, including without limitation expenses for the
services of counsel both retained and employed by Bank, in perfecting Bank's
security interest in the Collateral (other than attorneys' fees); in collecting
or attempting to collect any indebtedness referred to in this Agreement
(including trial, appellate, arbitration and bankruptcy proceedings and actions
without suit); or in enforcing any right of Bank hereunder or pursuant to any
agreements or instruments related to or executed pursuant hereto.
10. NON-WAIVER. No delay or failure of Bank to enforce its rights, remedies or
----------
options under this Agreement, or any other agreement between Borrower and Bank
shall be deemed to be a waiver thereof nor shall any single or partial exercise
of any such right or power preclude any further exercise thereof or the exercise
of any other right or power. Any waiver, permit, consent or approval of any
kind by Bank must be in writing and shall be effective only to the extent
specifically set out in such writing.
11. NOTICES. Any notice to be given to Bank hereunder may be given to Bank at
-------
P.O. Box 160 (M/S 984), Seattle, Washington 98111, Attention: Washington
Corporate Banking - Jo Surbrugg. Any notice to be given to Borrower may be
given to it at 1260 - 16th Ave. W., Seattle, Washington 98119-3401, Attention:
Treasurer. Such addresses for notices may be changed by giving ten (10) days
written notice to the other party.
12. CONSTRUCTION; ARBITRATION; CONSENT TO VENUE. This Agreement and all
-------------------------------------------
promissory notes, security agreements and other instruments and documents
related hereto (the "Loan Documents") shall be governed by and construed in
accordance with the laws of the State of Washington. Any agreement herein to
grant a security interest to Bank in any property shall be deemed to constitute
a grant of such a security interest, subject to the terms and conditions of any
security agreements executed pursuant hereto; provided however that in the case
of any inconsistency, the terms of this Agreement will prevail. Any and all
disputes arising out of or in connection with or related to this Agreement or
any of the related Loan Documents shall be resolved in accordance with the First
Interstate Bank Arbitration Program, a copy of which is attached hereto as
Exhibit A and
38
<PAGE>
made a part of this Agreement. Subject to the terms of the First Interstate Bank
Arbitration Program, jurisdiction over and venue of any action to enforce,
interpret, construe or otherwise in connection with this Agreement or any of the
Loan Documents shall be in the United States District Court for the Western
District of Washington at Seattle or Superior Court, King County, Washington in
Seattle.
13. ASSIGNMENT. This Agreement shall be binding upon and inure the benefit of
----------
the parties and their respective successors and assigns, provided that neither
party may assign or otherwise transfer all or any part of its rights or
obligations hereunder without the prior written consent of the other party.
This shall not preclude an assignment by Bank to an affiliate, parent or
subsidiary or an assignment by operation of law to a successor in interest to
Bank.
14. SEVERABILITY. Any provision of this Agreement which is prohibited or
------------
unenforceable in any jurisdiction shall as to such jurisdiction be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining provisions or affecting the validity or enforceability of such
provision in any other jurisdiction.
ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY, EXTEND CREDIT, OR TO FORBEAR
FROM ENFORCING REPAYMENT OF A DEBT ARE NOT ENFORCEABLE UNDER WASHINGTON LAW.
FIRST INTERSTATE BANK SEATTLE FILMWORKS, INC.
OF WASHINGTON, N.A.
By /s/ Jo Surbrugg By /s/ Case H. Kuehn
Its Vice President Its Vice President
g:lrr-071.doc
39
<PAGE>
Exhibit A
---------
FIRST INTERSTATE BANK ARBITRATION PROGRAM
1. Binding Arbitration. Upon the demand of any party ("Party/Parties"), to a
-------------------
Document (as defined below), whether made before the institution of any judicial
proceeding or not more than 60 days after service of a complaint, third party
complaint, third party complaint, cross-claim or counterclaim or any answer
thereto or any amendment to any of the above, any Dispute (as defined below)
shall be resolved by binding arbitration in accordance with the terms of this
Arbitration Program. A "Dispute" shall include any action, dispute, claim or
controversy of any kind, whether founded in contract, tort, statutory or common
law, equity, or otherwise, now existing or hereafter arising between any of the
Parties arising out of, pertaining to or in connection with any agreement,
document or instrument to which this Arbitration Program is attached or in which
it appears or is referenced or any related agreements, documents, or instruments
("Documents"). Any Party who fails to submit to binding arbitration following a
lawful demand by another Party shall bear all costs and expenses, including
reasonable attorneys' fees (including those incurred in any trial, bankruptcy
proceeding or on appeal) incurred by the other Party in obtaining a stay of any
pending judicial proceeding or compelling arbitration of any Dispute. The
Parties agree that any agreement, Document or instrument which includes,
attaches to or incorporates this Arbitration Program represents a transaction
involving commerce as that term is used in the Federal Arbitration Act, ("FAA")
Title 9 United States Code. THE PARTIES UNDERSTAND THAT BY THIS AGREEMENT THEY
HAVE DECIDED THAT UPON DEMAND OF ANY OF THEM, THEIR DISPUTES SHALL BE RESOLVED
BY BINDING ARBITRATION RATHER THAN IN COURT, AND ONCE DECIDED BY ARBITRATION NO
DISPUTE CAN LATER BE BROUGHT, FILED OR PURSUED IN COURT.
2. Governing Rules. Arbitrations conducted pursuant to this Arbitration
---------------
Program shall be administered by the American Arbitration Association ("AAA"),
or other mutually agreeable administrator ("Administrator") in accordance with
the terms of this Arbitration Program and the Commercial Arbitration Rules of
the AAA. Proceedings hereunder shall be governed by the provisions of the FAA.
The arbitrator(s) shall resolve all Disputes in accordance with the applicable
substantive law designated in the Documents. Judgment upon any award rendered
hereunder may be entered in any court having jurisdiction provided, however,
that nothing herein shall be construed to be a waiver by any party that is a
bank of the protections afforded pursuant to 12 U.S.C. 91 or any similar
applicable state law.
3. Preservation of Remedies. No provision of, nor the exercise of any rights
------------------------
under, this arbitration clause shall limit the right of any Party to: (1)
foreclose against any real or personal property collateral or other security, or
obtain a personal or deficiency award; (2) exercise self-help remedies
(including repossession and setoff rights); or (3) obtain provisional or
ancillary remedies such as injunctive relief, sequestration, attachment,
replevin, garnishment, or the appointment of a receiver from a court having
jurisdiction. Such rights can be exercised at any time except to the extent
such action is contrary to a final award or decision in any arbitration
proceeding. The institution and maintenance of an action as described above
shall not constitute a waiver of the right of any Party to submit the Dispute to
arbitration, nor render inapplicable the compulsory arbitration provisions
hereof. Any claim or Dispute related to exercise of any self-help, auxiliary or
other rights under this paragraph shall be a Dispute hereunder.
4. Arbitrator Powers and Qualifications; Awards. The Parties agree to select
--------------------------------------------
a neutral "qualified" arbitrator or a panel of three "qualified" arbitrators to
resolve any Dispute hereunder. "Qualified" means a practicing attorney, with
not less than 10 years practice in commercial law, licensed to practice in the
state of the applicable substantive law designated in the Documents. A Dispute
in which the claims or amounts in controversy do not exceed $1,000,000.00, shall
be decided by a single arbitrator. A single arbitrator shall have authority to
render an award up to but not to exceed $1,000,000.00 including all damages of
any kind whatsoever, costs, fees, attorneys' fees and expenses. Submission to a
single arbitrator shall be a waiver of all Parties' claims to recover more than
$1,000,000.00. A Dispute involving claims or amounts in controversy exceeding
$1,000,000.00 shall be decided by a majority vote of a panel of three qualified
arbitrators. The arbitrator(s) shall be empowered to, at the written request of
any Party in any Dispute, 1) to consolidate in a single proceeding any multiple
party claims that are substantially identical or based upon the same underlying
transaction; 2) to consolidate any claims and Disputes
40
<PAGE>
between other Parties which arise out of or relate to the subject matter hereof,
including all claims by or against borrowers, guarantors, sureties and or owners
of collateral; and 3) to administer multiple arbitration claims as class actions
in accordance with Rule 23 of the Federal Rules of Civil Procedure. In any
consolidated proceeding the first arbitrator(s) selected in any proceeding shall
conduct the consolidated proceeding unless disqualified due to conflict of
interest. The arbitrator(s) shall be empowered to resolve any dispute regarding
the terms of this arbitration clause, including questions about the
arbitrability of any Dispute, but shall have no power to change or alter the
terms of this Arbitration Program. The prevailing Party in any Dispute shall be
entitled to recover its reasonable attorneys' fees in any arbitration, and the
arbitrator(s) shall have the power to award such fees. The award of the
arbitrator(s) shall be in writing and shall set forth the factual and legal
basis for the award.
5. Miscellaneous. All statutes of limitation applicable to any Dispute shall
-------------
apply to any proceeding in accordance with this arbitration clause. The Parties
agree, to the maximum extent practicable, to take any action necessary to
conclude an arbitration hereunder within 180 days of the filing of a Dispute
with the Administrator. The arbitrator(s) shall be empowered to impose
sanctions for any Party's failure to proceed within the times established
herein. Arbitrations shall be conducted in the state of the applicable
substantive law designated in the Documents. The provisions of this Arbitration
Program shall survive any termination, amendment, or expiration hereof or of the
Documents unless the Parties otherwise expressly agree in writing. Each Party
agrees to keep all Disputes and arbitration proceedings strictly confidential,
except for disclosures of information required in the ordinary course of
business of the Parties or as required by applicable law or regulation. If any
provision of this Arbitration Program is declared invalid by any court, the
remaining provisions shall not be affected thereby and shall remain fully
enforceable.
THE UNDERSIGNED HEREBY ACKNOWLEDGE RECEIPT OF A COPY OF THIS ARBITRATION
PROGRAM.
Dated: April 15, 1996
SEATTLE FILMWORKS, INC.
By /s/Case H. Kuehn
Its Vice President
FIRST INTERSTATE BANK
OF WASHINGTON, N.A
By /s/ Jo Surbrugg
Its Vice President
41
<PAGE>
SUPPLEMENT TO SEATTLE FILM WORKS
CONTRACT DATED AUGUST 18, 1995
[Note: Confidential portions of this document have been omitted (such portions
being marked by brackets) and have been filed separately with the Securities and
Exchange Commission.]
Re: Changes to the contract addendum
2. Products/Pricing
----------------
Film
<TABLE>
<CAPTION>
Running Meters
<S> <C>
Invoice
CN 100 135 RM $[____]/RM
CN 200 135 RM $[____]/RM
CN 400 135 RM $[____]/RM
======================================
</TABLE>
During each [_____ (__)_____] period of this contract (starting
October 1, 1995), once Seattle Film Works has purchased
[_____________] running meters (all speeds combined) the following
prices will go into effect for the balance of the period:
<TABLE>
<S> <C>
CN 100 135 RM $[____]/RM
CN 200 135 RM $[____]/RM
CN 400 135 RM $[____]/RM
======================================
20-Exposure Pre-Spooled:
======================================
CN 200 135-20 $[__]/ea
CN 400 135-20 $[__]/ea
======================================
</TABLE>
During each [__________ (__) ____] period of this contract (starting
October 1, 1995), once Seattle Film Works has purchased [_________]
rolls of 20-exposure pre-spooled film (all speeds combined) the
following prices will go into effect for the balance of the period:
<TABLE>
<S> <C>
CN 200 135-20 $[__]/roll
CN 400 135-20 $[__]/roll
======================================
</TABLE>
42
<PAGE>
[Note: Confidential portions of this document have been omitted (such portions
being marked by brackets) and have been filed separately with the Securities and
Exchange Commission.]
Minimum shipments per order [_____] rolls per speed.
During each [_____ (__) ____] period of this contract Seattle Film
Works will receive a [__]% rebate when the combined purchases of
running meters and pre-spooled 20-exposure exceed $[_________].
Seattle Film Works will provide Agfa a [______] rolling forecast, the
first [______] are fixed. If Agfa fails to meet the delivery dates at
the fixed forecast a penalty of a [__]% will apply to the value of the
late delivery.
3. Pricing Review
--------------
The first paragraph of this section is deleted and replaced by the
following:
Both parties agree to a pricing review upon each anniversary date of
this agreement. In view of the constant, rapidly rising costs of
pulp, plastics and other raw material costs for producing paper, film
and chemistry, Agfa will seek an annual price increase of at least
[__]% to compensate for such inflationary costs. The adjustment could
however, be more depending on general price increases in the
marketplace.
Agfa will propose a proper raw material indexing system as a basis for
future price adjustments.
Should both parties not come to terms upon the price adjustments by
the anniversary date, either SFW or Agfa can cancel the contract for
either paper, film or chemistry or all with [__] days notice. In such
an event, Agfa agrees to ship product at the original price in
reasonable quantities for [__] days from date of cancellation. Price
renegotiations can also occur should SFW deviate significantly from
the projected volumes.
43
<PAGE>
In case of extraordinary circumstances, such as rampant inflation of
related costs beyond seller's control, seller can require
renegotiations at any time and the aforementioned exit clause will
also apply.
AGREED TO:
Date: March 29, 1996 Date: March 29, 1996
By:/s/ Case H. Kuehn By:/s/ Urs W. Stampfli
Case H. Kuehn Urs W. Stampfli
Title: Treasurer Title: Vice President Marketing
44
<PAGE>
GENERAL SERVICES ADMINISTRATION SUPPLEMENTAL AGREEMENT DATE:
PUBLIC BUILDINGS SERVICE NO. 1 JANUARY 25, 1996
SUPPLEMENTAL LEASE AGREEMENT TO LEASE NO. GS-10PES-OL-5-42
ADDRESS OF PREMISES: Federal Center South
1202 Warehouse
4735 E. Marginal Way South
Seattle, WA 98134
THIS AGREEMENT, made and entered into this date by and between Seattle
FilmWorks, Inc.
whose address is 1260 16th Avenue West
Seattle, WA 98119
hereinafter called the Lessee, and the UNITED STATES OF AMERICA, hereafter
called the Government:
WHEREAS, the parties hereto desire to amend the above Lease.
NOW THEREFORE, these parties for the considerations hereinafter mentioned
covenant and agree that the said Lease is amended, effective January 1, 1996, as
follows:
This SLA reflects an increase in square footage of 10,000 square feet of
warehouse space, located at Federal Center South, 1202 Warehouse, 4734 E.
Marginal Way S., Seattle, WA 98134.
Paragraphs 2 and 4 are amended as follows:
2. WITNESSETH: The Lessor hereby leases to the Lessee approximately 80,000
square feet of enclosed warehouse space, located in the northern most portion of
the 1202 Warehouse, at column markers C46 south to F33 north, west to F33 north,
south to G36 inclusive, Federal Center South, 4735 E. Marginal Way South,
Seattle, WA 98134.
4. The Lessee shall pay the Lessor an annual rental of $249,600.00 (Two hundred
forty nine thousand six hundred dollars and no/100), payable at the rate of
$20,800.00 (Twenty thousand eight hundred dollars and no/100), per month in
advance.
All other terms and conditions of the lease shall remain in force and effect.
IN WITNESS WHEREOF, the parties subscribed their names as of the above date.
LESSEE
BY /s/ Case H. Kuehn Vice President, Chief Financial Officer and Treasurer
(Signature) (Title)
IN PRESENCE OF
/s/ Linda M. Clay 910-223rd Court N.E., Redmond, WA 98053
(Signature) (Address)
UNITED STATES OF AMERICA
BY /s/ Brenda Dang 1/25/96 CONTRACTING OFFICER, GENERAL SERVICES
ADMINISTRATION
(Signature) (Official Title)
45
<PAGE>
SALES CONTRACT
SOLD TO: SEATTLE FILMWORKS
1260 16th Avenue West
Seattle, WA 98119-3401
CONTRACT PERIOD: October 1, 1995 - September 30, 1998
PRODUCTS: Agfa Color Negative Paper
Agfa Color Negative Film
Agfa Chemistry
Agfa Equipment
ATTACHMENTS: A, B, C, D
This Agreement or order is subject to the terms and conditions set forth on
the front and back hereof.
All orders received shall be subject to credit approval. Likewise, all
Agreements or orders shall not be considered binding or valid until accepted by
a Vice President of Agfa Division, Bayer Corporation (hereinafter "Agfa") at its
principle office in New Jersey.
All accounts will be reviewed after six months. If Buyer's purchases are
not at the level forecasted herein, pricing will revert to the appropriate price
group, and Agfa Division, Bayer Corporation will issue corrected invoices
reflecting the appropriate pricing.
Accepted Agfa Division of
Bayer Corporation
Dated: August 18, 1995 Dated: August 18, 1995
-------------------------- ---------------------------
By:/s/ Case H. Kuehn By:/s/ Hans R. Thieme
----------------------------- ------------------------------
Print Name: Case H. Kuehn Print Name: Hans R. Thieme
--------------------- ----------------------
Title: V.P. Treasurer and C.F.O. Title: Sr V.P.
--------------------- ---------------------------
46
<PAGE>
[Note: Confidential portions of this document have been omitted (such portions
being marked by brackets) and have been filed separately with the Securities and
Exchange Commission.]
TERMS AND CONDITIONS
General
- -------
1. Prices are exclusive of taxes which, if applicable, will be shown
separately on the invoice.
2. The minimum acceptable order is [$___] at net billing prices and only
items contained herein may be used to meet the [$___] minimum order requirement.
Seller may change the minimum acceptable order at any time during the term of
this Agreement.
3. All orders received shall be subject to credit approval. Likewise, all
agreements or orders shall not be considered binding or valid until accepted by
a vice president of Agfa Division, Bayer Corporation (hereinafter "Agfa") at its
principle office in New Jersey.
4. No drop shipments will be made.
5. It is agreed that any trademarks, trade names, trade dress and original
packaging of Agfa Division, Bayer Corporation, and/or the affiliates shall not
be used improperly.
6. In the event of any clerical or mathematical error, Agfa is hereby
authorized to and reserves the right to correct such errors.
7. Agfa reserves the right to add late charges on any past due amount
equivalent to the greater of [___] percent or the maximum allowed by local
statutes.
8. No deductions or setoffs may be made from any statement or invoice for
any reason without prior written authorization from Agfa. Any unauthorized
deduction shall be of no effect and shall be null and void.
9. The resale of Agfa product to a reseller not owned by Buyer is
prohibited in this agreement.
Transportation
- --------------
All shipments will be made F.O.B. [_________________]. Transportation
charges will be prepaid on each order totaling
47
<PAGE>
$[___] or more, except where indicated, at net billing prices shown in current
catalogs, provided such order calls for a single
[Note: Confidential portions of this document have been omitted (such portions
being marked by brackets) and have been filed separately with the Securities and
Exchange Commission.]
shipment to one destination. If an order totals less than $[___],
transportation charges will be added to the invoice. All shipments will be made
by surface transportation by carriers of Agfa's choice in accordance with Agfa's
standard transportation policy. If shipment is made by other means, in
accordance with the instructions of the customer, transportation charges will be
added to the invoice with no freight allowance, regardless of the amount of the
order. Seller may change this transportation minimum at any time during the
term of this agreement.
Transportation for Equipment Only
- ---------------------------------
All shipments will be made F.O.B. [_________________] with transportation
charges to be billed to customer in accordance with Conditions of Sale on the
Agfa lab equipment purchase order.
Damages, Shortages and Errors
- -----------------------------
Inasmuch as all shipments are receipted by the delivering carrier as being
in good order, all shipments must be checked immediately on arrival for damage
and carton count. If outside damage and/or shortage of carton count, note on
Bill of Lading before signing carrier receipt and file claim at once with
delivering carrier.
If concealed (inside) damage, file claim with delivering carrier within 15
working days of receipt of merchandise. Request inspection by delivering carrier
and obtain inspection report. If shortages (inside carton) and/or error in
shipment, notify Agfa Division, Bayer Corporation within 48 hours of day
merchandise was received.
Returns
- -------
No returns will be accepted without a prior written authorization form from
Agfa Division, Bayer Corporation which will set forth the terms of such returns.
Prepaid returns may be required in cases where Agfa Division, Bayer Corporation
is free from fault. It is recommended that parcel post shipments be insured.
Returns for Equipment shall be in accordance with Conditions of Sale on the Agfa
- ---------------------
lab equipment purchase order.
48
<PAGE>
[Note: Confidential portions of this document have been omitted (such portions
being marked by brackets) and have been filed separately with the Securities and
Exchange Commission.]
Terms of Payment
- ----------------
Subject to Credit Department approval and unless otherwise specified,
terms of payment shall be [__]% [__] days [___], net [__] days [___]. No cash
discount will be allowed where an account is past due. All remittances should
be made to Agfa Division, Bayer Corporation at the address shown on the monthly
statement.
Terms of Payment for Equipment shall be in accordance with the Conditions of
- ------------------------------
Sale on the Agfa lab equipment purchase order.
Force Majeure
- -------------
The nonperformance of Agfa Division, Bayer Corporation of its obligations
to deliver any merchandise ordered hereunder shall be excused if such
nonperformance is occasioned by any strike or any other labor trouble, flood,
fire, accident or any other casualty, act of God, war, governmental
restrictions, shortage or inability to obtain raw materials, damage by the
elements, failure of equipment or other cause of like or unlike nature beyond
the control of Agfa Division, Bayer Corporation. Agfa Division, Bayer
Corporation may, in the exercise of reasonable discretion, discontinue shipments
to any account, revoke or modify any provisions in this agreement or allocate
distribution of any of its products.
Warranty
- --------
All sales are without warranty of any kind, express or implied including,
but not limited to, any warranty of merchantability or fitness for a particular
purpose. Agfa's liability is limited to the replacement of products defective in
manufacture, labeling, or packaging. In no event shall Agfa Division, Bayer
Corporation or its parent, subsidiary or affiliated companies be liable for
special or indirect, or consequential damages arising out of any sale or
subsequent handling of any product, even where such damages are caused by
negligence of Agfa Division, Bayer Corporation or that of its parent, subsidiary
or affiliated companies. Warranty for photofinishing equipment shall be in
accordance with Conditions of Sale on the Agfa Division, Bayer Corporation lab
equipment purchase order.
49
<PAGE>
Assurances
- ----------
Whenever, in the reasonable judgment of Seller, there exists the
possibility that Buyer is unwilling or unable to perform fully its obligations
under this agreement, the Seller shall be entitled to demand of Buyer further
assurances of due performance as Seller shall reasonably deem proper. If Buyer
fails to provide reasonable assurances under this paragraph, Seller may ship
goods C.O.D. or terminate this agreement without further liability to Buyer.
Security Interest
- -----------------
Agfa Division, Bayer Corporation shall retain and the Buyer hereby grants
Agfa a purchase money security interest in all equipment and good and their
proceeds until all moneys due hereunder are paid in full. Customer shall perform
all acts necessary to protect Agfa's security interest. Agfa may file this
Agreement or a copy of its as a financing statement.
Strict Compliance
- -----------------
The waiver of strict compliance or performance of any of the terms of this
Agreement or of any breach thereof on the part of Seller shall not be held or
deemed to be a waiver of any subsequent failure to comply strictly with, or
perform the same or any other term or condition of this Agreement, or of any
breach thereof.
Applicable Law
- --------------
The interpretation, instruction, performance, and/or enforcement of this
document shall be governed by the laws of the State of New Jersey. Should any
provision herein be held invalid or unenforceable as written by court of
competent jurisdiction, said provision, along with the remainder of the
Agreement, shall nonetheless be enforceable to the extent allowable under
applicable law.
Entire Agreement
- ----------------
All previous understanding and commitments, oral or written, made between
the parties hereto are merged in this Agreement, which represents the entire
Agreement between the parties hereto relating to the subject matter hereof.
Except as otherwise stated herein, no amendment or change hereof shall be
effective or binding upon the parties hereto unless reduced to writing and
signed by both Seller and Buyer. In the event of any conflict between the terms
of this Agreement and the terms of any purchase order, the terms hereof shall
prevail.
50
<PAGE>
Equipment
- ---------
All purchases and leases of equipment must be accompanied by an Agfa lab
equipment purchase order.
Termination
- -----------
The Seller reserves the right, among other remedies, to either cancel this
contract or suspend further deliveries under it in the event Buyer fails to pay
for any one shipment when same becomes due. Should Buyer's financial
responsibility become unsatisfactory to Seller, cash payments or satisfactory
security may be required by Seller.
Prices
- ------
This contract is firm and not renegotiable during its term. Prices, as
stated on the front hereof, shall remain in effect for the period of the
contract unless:
1. There is a significant change in the Seller's cost beyond Seller's
control.
2. The price in the market increases by three percent or more. In either
event, prices are guaranteed for a minimum of 90 days from the date of
this contract. Thirty days written notice must be provided before a
price change becomes effective.
Confidentiality
- ---------------
It is understood that the terms of this Agreement shall be kept
confidential between the parties herein and shall be disclosed only as required
to lenders, counsel, auditors or others having legitimate business interest in
the contents hereof. Buyer shall not, without Seller's permission, reveal any
confidential information or trade secrets regarding Seller's products, business
or methods of operation learned by Buyer during the term of this Agreement.
Effective April 1995.
51
<PAGE>
[Note: Confidential portions of this document have been omitted (such portions
being marked by brackets) and have been filed separately with the Securities and
Exchange Commission.]
Seattle FilmWorks Sales Contract Addendum
-----------------------------------------
1. Period: October 1, 1995 to September 30, 1998.
------
2. Products/Pricing:
----------------
* Paper:
-----
- Invoice Price $[____]/ft/2/
- Projected min. [_________]/ft/2/ or 100% of SFW's requirements
* Film:
----
- Projected min. [__________] running meters
ISO 100 135 invoice price $[____]/RM [________] RM est.
ISO 200 135 invoice price $[____]/RM [________] RM est.
ISO 400 135 invoice price $[____]/RM [________] RM est.
- Projected min. [________] 135-20 rolls in bulk:
ISO 200 invoice price $[___]/ea. [_________] rolls est.
ISO 400 invoice price $[___]/ea. [_________] rolls est.
* Chemistry:
---------
- 100% of SFW's requirements
- Invoice Price see Attachment A
* Equipment:
---------
- SFW will be entitled to purchase [___ (_)] MSP [_______] and
[__(_)] Labomater [__] as specified in the enclosed price
quotes - Attachments B and C.
* Prices:
------
- The above prices are valid through 9/30/96.
* Free Goods:
----------
- SFW will be entitled to [___] million sq. ft of free color
negative paper based on [___] million sq. ft purchased during the
contract period. This equals [____]% to be released on a
quarterly basis based on the number of sq. ft purchased during
the previous quarter. SFW will determine the sizes and surfaces
of such free goods.
52
<PAGE>
[Note: Confidential portions of this document have been omitted (such portions
being marked by brackets) and have been filed separately with the Securities and
Exchange Commission.]
3. Pricing Review: Both parties agree to a pricing review upon each
--------------
anniversary date of this agreement.
In view of the constant, rapidly rising costs of pulp, plastics and other
raw material costs for producing paper, film and chemistry, Agfa will seek an
annual price increase of at least [___]% to compensate for such inflationary
costs. The adjustment could, however, be more depending on general price
increases in the marketplace.
Agfa will propose a proper raw material indexing system as a basis for
future price adjustments.
Should both parties not come to terms upon the price adjustments by the
anniversary date, either SFW or Agfa can cancel the contract for either paper,
film or chemistry or all with [__] days notice. In such an event, Agfa agrees
to ship product at the original price in reasonable quantities for [__] days
from date of cancellation. Price re-negotiations can also occur should SFW
deviate significantly from the projected volumes.
In case of extraordinary circumstances, such as rampant inflation of
related costs beyond seller's control, seller can require renegotiations at any
time and the aforementioned exit clause will also apply.
4. Terms of Payment: Net [___] days [___].
----------------
5. Terms and Conditions: See Attachment D.
--------------------
6. This contract supersides any previous agreement, understandings or
commitments.
53
<PAGE>
[Note: Confidential portions of this document have been omitted (such portions
being marked by brackets) and have been filed separately with the Securities and
Exchange Commission.]
<TABLE>
<CAPTION>
ATTACHMENT A
==================================================================================================================================
SEATTLE FILM WORKS
- ----------------------------------------------------------------------------------------------------------------------------------
New Chemical Pricing
- ----------------------------------------------------------------------------------------------------------------------------------
Product Invoice
Code Product Name Description Size Makes Price
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
B3C12 94 CDS RA-4 DEVELOPER STARTER CONC. 1 GAL. 33 GAL. [$____]
- ----------------------------------------------------------------------------------------------------------------------------------
B1FJD 94 CDJ PT. A RA-4 DEVELOPER REGENERATOR PT. A 60 L. 1,371 GAL. [$____]
- ----------------------------------------------------------------------------------------------------------------------------------
B20TQ 94 CDJ PT. B RA-4 DEVELOPER REGENERATOR PT. B 60 L. 1,371 GAL. [$____]
- ----------------------------------------------------------------------------------------------------------------------------------
B1GAK 94 CDJ PT. C RA-4 DEVELOPER REGENERATOR PT. C 60 L. 619 GAL. [$____]
- ----------------------------------------------------------------------------------------------------------------------------------
B3S54 94 CDLR PT. A RA-4 DEVELOPER REPLENISHER PT. A 75 GAL. 75 GAL. [$____]
- ----------------------------------------------------------------------------------------------------------------------------------
B3S66 94 CDLR PT. B RA-4 DEVELOPER REPLENISHER PT. B 75 GAL. 75 GAL. [$____]
- ----------------------------------------------------------------------------------------------------------------------------------
B3S78 94 CDLR PT. C RA-4 DEVELOPER REPLENISHER PT. C 75 GAL. 75 GAL. [$____]
- ----------------------------------------------------------------------------------------------------------------------------------
B3TSJ 94 CDLR PTS. A-C RA-4 DEVELOPER REPLENISHER 25 GAL. 25 GAL. [$____]
- ----------------------------------------------------------------------------------------------------------------------------------
B3S8B 94 BXMR PTS. A&C RA-4 BLEACH FIX REPLENISHER 25 GAL. 25 GAL. [$____]
- ----------------------------------------------------------------------------------------------------------------------------------
B3S9D 94 BXMR PTS. B RA-4 BLEACH FIX REPLENISHER 25 GAL. 25 GAL. [$____]
- ----------------------------------------------------------------------------------------------------------------------------------
B28E6 94 LIGHT BLJ RA-4 LIGHT BLEACH REGENERATOR 300 L. 97 GAL. [$____]
- ----------------------------------------------------------------------------------------------------------------------------------
B28F8 94 LIGHT BLJ RA-4 LIGHT BLEACH REGENERATOR 1,000 L. 322 GAL. [$____]
- ----------------------------------------------------------------------------------------------------------------------------------
S9YMY SC94 SBR SOLID PAPER STABILIZER 100 L. 26.4 GAL. [$____]
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
54
<PAGE>
<TABLE>
<CAPTION>
==================================================================================================================================
SEATTLE FILM WORKS
- ----------------------------------------------------------------------------------------------------------------------------------
New Chemical Pricing
- ----------------------------------------------------------------------------------------------------------------------------------
Product Invoice
Code Product Name Description Size Makes Price
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BQDBT 70 CDLR PT. A C-41 DEVELOPER LOW REPLENISHER 300 L. 79.3 GAL. [$____]
- ----------------------------------------------------------------------------------------------------------------------------------
BQDCV 70 CDLR PT. B&C C-41 DEVELOPER LOW REPLENISHER 300 L. 79.3 GAL. [$____]
- ----------------------------------------------------------------------------------------------------------------------------------
BRE5V 70 BL CONC. C-41 BLEACH CONCENTRATE 15 GAL. 267 GAL. [$____]
- ----------------------------------------------------------------------------------------------------------------------------------
B3ZXK 70 LIGHT BLJ C-41 LIGHT BLEACH REGENERATOR 210 L. 1,003 GAL. [$____]
- ----------------------------------------------------------------------------------------------------------------------------------
BRE94 FX UNIV. UNIVERSAL FIXER CONCENTRATE 15 GAL. VAR. [$____]
- ----------------------------------------------------------------------------------------------------------------------------------
BIY14 70 FI C-41 FINAL BATH REPLENISHER 75 GAL. 75 GAL. [$____]
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
BWA8S 44 FDR-AR E-6 FIRST DEVELOPER REPLENISHER 5 GAL. 25 GAL. [$____]
- ----------------------------------------------------------------------------------------------------------------------------------
BWA9U 44 RE-AR E-6 REVERSAL BATH REPLENISHER 5 GAL. 100 GAL. [$____]
- ----------------------------------------------------------------------------------------------------------------------------------
BWBAY 44 CDR-AR PT. A E-6 COLOR DEVELOPER REPL. PT. A 5 GAL. 25 GAL. [$____]
- ----------------------------------------------------------------------------------------------------------------------------------
BWBB1 44 CDR-AR PT. B E-6 COLOR DEVELOPER REPL. PT. B 5 GAL. 25 GAL. [$____]
- ----------------------------------------------------------------------------------------------------------------------------------
BWBC3 44 BC-AR E-6 BLEACH CONDITIONER REPLENISHER 5 GAL. 25 GAL. [$____]
- ----------------------------------------------------------------------------------------------------------------------------------
BWB9Y 44 BLR-AR E-6 BLEACH REPLENISHER 5 GAL. 5 GAL. [$____]
- ----------------------------------------------------------------------------------------------------------------------------------
B12YD 44 FI-AR E-6 FINAL BATH REPLENISHER 5 GAL. 500 GAL. [$____]
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
BZXVG 73 CDR CN-16Q DEVELOPER REPLENISHER 40 L. 10.6 GAL. [$____]
- ----------------------------------------------------------------------------------------------------------------------------------
BZXWJ 73 BLR CN-16Q BLEACH REPLENISHER 8 L. 2.1 GAL. [$____]
</TABLE>
55
<PAGE>
<TABLE>
<CAPTION>
==================================================================================================================================
SEATTLE FILM WORKS
- ----------------------------------------------------------------------------------------------------------------------------------
New Chemical Pricing
- ----------------------------------------------------------------------------------------------------------------------------------
Product Invoice
Code Product Name Description Size Makes Price
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BZXXL 73 FXR CN-16Q FIXER REPLENISHER 24 L. 6.3 GAL. [$____]
- ----------------------------------------------------------------------------------------------------------------------------------
BZZSJ 73 SBR CN-16Q STABILIZER REPLENISHER 40 L. 10.6 GAL. [$____]
==================================================================================================================================
</TABLE>
56
<PAGE>
[Note: Confidential portions of this document have been omitted (such portions
being marked by brackets) and have been filed separately with the Securities and
Exchange Commission.]
ATTACHMENT B
MSP [ ] AUTOMATIC PRINTER
- ----------------------------------
[$________] each
Shipping and handling [$_____] (FOB [________)]
Terms: Net [___] days [___]
This quote is valid for 30 days.
Subject to credit approval.
PRODUCT SPECIFICATIONS - AS STATED IN MSP PRODUCT LITERATURE
INCLUDES:
- --------
[______________________________]
OPTIONAL ACCESSORIES:
- ---------------------------
PAPER MAGAZINES $ [_____]
110, 126 FILM GUIDES [_____]
MIRROR BOX [_____]
* MSP-URS CONVERSION KIT [_____]
URS DECKS [_____]
URS SOFT MIRROR BOX [_____]
* GREETING CARDS [_____]
EXTENDED DX & FNS [_____]
* INK JET BACK PRINTER [_____]
* TRI PRINT [_____]
AUTOMATIC 1/2 FRAME [____] FACTORY INSTALLED
MANUAL 1/2 FRAME [_____]
* WALLET PRINTS FOR REPRINT [_____]
BORDER PRINTS [_____]
* BLACK & WHITE [_____]
* PANORAMIC KIT (3.5" x 10") [_____]
* DUAL FILM TAKE UP (USE CORES) [_____]
DUAL PAPER SYSTEM [____] FACTORY INSTALLED
Note:
* Panoramic Kit: The 10" paper deck can not make a 3.5" paper advance such
as 3.5" x 3.5" 126 or manual half frame 5" x 3.5".
* Installation additional on conversion kits.
57
<PAGE>
[Note: Confidential portions of this document have been omitted (such portions
being marked by brackets) and have been filed separately with the Securities and
Exchange Commission.]
ATTACHMENT C
LABOMATOR[ ] 4" PAPER PROCESSING
- -------------------------------------------------
[______________________________________________]
[$_______] each
INCLUDES:
- --------
[____________________]
Shipping and handling [$_____] (FOB [________)]
Terms: Net [__] days [___]
This quote is valid for 30 days.
SUBJECT TO CREDIT APPROVAL.
PRODUCT SPECIFICATIONS - AS STATED IN LAB H PRODUCT LITERATURE
58
<PAGE>
[Note: Confidential portions of this document have been omitted (such portions
being marked by brackets) and have been filed separately with the Securities and
Exchange Commission.]
ATTACHMENT D
TERMS AND CONDITIONS
--------------------
General
- -------
1. Prices are exclusive of taxes which, if applicable, will be shown
separately on the invoice.
2. The minimum acceptable order is $[___] at net billing prices and only
items contained herein may be used to meet the $[___] minimum order requirement.
Seller may change the minimum acceptable order at any time during the term of
this Agreement.
3. All orders received shall be subject to credit approval. Likewise, all
agreements or orders shall not be considered binding or valid until accepted by
a vice president of Agfa Division, Bayer Corporation (hereinafter "Agfa") at its
principle office in New Jersey.
4. No drop shipments will be made.
5. It is agreed that any trademarks, trade names, trade dress and original
packaging of Agfa Division, Bayer Corporation, and/or the affiliates shall not
be used improperly.
6. In the event of any clerical or mathematical error, Agfa is hereby
authorized to and reserves the right to correct such errors.
7. Agfa reserves the right to add late charges on any past due amount
equivalent to the greater of [___] percent or the maximum allowed by local
statutes.
8. No deductions or setoffs may be made from any statement or invoice for
any reason without prior written authorization from Agfa. Any unauthorized
deduction shall be of no effect and shall be null and void.
9. The resale of Agfa product to a reseller not owned by Buyer is
prohibited in this agreement.
Transportation
- --------------
59
<PAGE>
All shipments will be made F.O.B. [_________________]. Transportation
charges will be prepaid on each order totaling
[Note: Confidential portions of this document have been omitted (such portions
being marked by brackets) and have been filed separately with the Securities and
Exchange Commission.]
$[____] or more, except where indicated, at net billing prices shown in current
catalogs, provided such order calls for a single shipment to one destination.
If an order totals less than $[____], transportation charges will be added to
the invoice. All shipments will be made by surface transportation by carriers
of Agfa's choice in accordance with Agfa's standard transportation policy. If
shipment is made by other means, in accordance with the instructions of the
customer, transportation charges will be added to the invoice with no freight
allowance, regardless of the amount of the order. Seller may change this
transportation minimum at any time during the term of this agreement.
Transportation for Equipment Only
- ---------------------------------
All shipments will be made F.O.B. [________________] with transportation
charges to be billed to customer in accordance with Conditions of Sale on the
Agfa lab equipment purchase order.
Damages, Shortages and Errors
- -----------------------------
Inasmuch as all shipments are receipted by the delivering carrier as
being in good order, all shipments must be checked immediately on arrival for
damage and carton count. If outside damage and/or shortage of carton count,
note on Bill of Lading before signing carrier receipt and file claim at once
with delivering carrier.
If concealed (inside) damage, file claim with delivering carrier within 15
working days of receipt of merchandise. Request inspection by delivering carrier
and obtain inspection report. If shortages (inside carton) and/or error in
shipment, notify Agfa Division, Bayer Corporation within 48 hours of day
merchandise was received.
Returns
- -------
No returns will be accepted without a prior written authorization form from
Agfa Division, Bayer Corporation which will set forth the terms of such returns.
Prepaid returns may be required in cases where Agfa Division, Bayer Corporation
is free from fault. It is recommended that parcel post shipments be insured.
60
<PAGE>
Returns for Equipment shall be in accordance with Conditions of Sale on the Agfa
- ---------------------
lab equipment purchase order.
[Note: Confidential portions of this document have been omitted (such portions
being marked by brackets) and have been filed separately with the Securities and
Exchange Commission.]
Terms of Payment
- ----------------
Subject to Credit Department approval and unless otherwise specified, terms
of payment shall be [__]% [__] days [___], net [__] days [___]. No cash discount
will be allowed where an account is past due. All remittances should be made to
Agfa Division, Bayer Corporation at the address shown on the monthly statement.
Terms of Payment for Equipment shall be in accordance with the Conditions of
- ------------------------------
Sale on the Agfa lab equipment purchase order.
Force Majeure
- -------------
The nonperformance of Agfa Division, Bayer Corporation of its obligations
to deliver any merchandise ordered hereunder shall be excused if such
nonperformance is occasioned by any strike or any other labor trouble, flood,
fire, accident or any other casualty, act of God, war, governmental
restrictions, shortage or inability to obtain raw materials, damage by the
elements, failure of equipment or other cause of like or unlike nature beyond
the control of Agfa Division, Bayer Corporation. Agfa Division, Bayer
Corporation may, in the exercise of reasonable discretion, discontinue shipments
to any account, revoke or modify any provisions in this agreement or allocate
distribution of any of its products.
Warranty
- --------
All sales are without warranty of any kind, express or implied including,
but not limited to, any warranty of merchantability or fitness for a particular
purpose. Agfa's liability is limited to the replacement of products defective in
manufacture, labeling, or packaging. In no event shall Agfa Division, Bayer
Corporation or its parent, subsidiary or affiliated companies be liable for
special or indirect, or consequential damages arising out of any sale or
subsequent handling of any product, even where such damages are caused by
negligence of Agfa Division, Bayer Corporation or that of its parent, subsidiary
or affiliated companies. Warranty for photofinishing equipment shall be in
accordance with Conditions of Sale on the Agfa Division, Bayer Corporation lab
equipment purchase order.
61
<PAGE>
Assurances
- ----------
Whenever, in the reasonable judgment of Seller, there exists the
possibility that Buyer is unwilling or unable to perform fully its obligations
under this agreement, the Seller shall be entitled to demand of Buyer further
assurances of due performance as Seller shall reasonably deem proper. If Buyer
fails to provide reasonable assurances under this paragraph, Seller may ship
goods C.O.D. or terminate this agreement without further liability to Buyer.
Security Interest
- -----------------
Agfa Division, Bayer Corporation shall retain and the Buyer hereby grants
Agfa a purchase money security interest in all equipment and good and their
proceeds until all moneys due hereunder are paid in full. Customer shall perform
all acts necessary to protect Agfa's security interest. Agfa may file this
Agreement or a copy of its as a financing statement.
Strict Compliance
- -----------------
The waiver of strict compliance or performance of any of the terms of this
Agreement or of any breach thereof on the part of Seller shall not be held or
deemed to be a waiver of any subsequent failure to comply strictly with, or
perform the same or any other term or condition of this Agreement, or of any
breach thereof.
Applicable Law
- --------------
The interpretation, instruction, performance, and/or enforcement of this
document shall be governed by the laws of the State of New Jersey. Should any
provision herein be held invalid or unenforceable as written by court of
competent jurisdiction, said provision, along with the remainder of the
Agreement, shall nonetheless be enforceable to the extent allowable under
applicable law.
Entire Agreement
- ----------------
All previous understanding and commitments, oral or written, made between
the parties hereto are merged in this Agreement, which represents the entire
Agreement between the parties hereto relating to the subject matter hereof.
Except as otherwise stated herein, no amendment or change hereof shall be
effective or binding upon the parties hereto unless reduced to writing and
signed by both Seller and Buyer. In the event of any conflict between the terms
of this Agreement and the terms of any purchase order, the terms hereof shall
prevail.
62
<PAGE>
Equipment
- ---------
All purchases and leases of equipment must be accompanied by an Agfa lab
equipment purchase order.
Termination
- -----------
The Seller reserves the right, among other remedies, to either cancel this
contract or suspend further deliveries under it in the event Buyer fails to pay
for any one shipment when same becomes due. Should Buyer's financial
responsibility become unsatisfactory to Seller, cash payments or satisfactory
security may be required by Seller.
Prices
- ------
This contract is firm and not renegotiable during its term. Prices, as
stated on the front hereof, shall remain in effect for the period of the
contract unless:
1. There is a significant change in the Seller's cost beyond Seller's
control.
2. The price in the market increases by three percent or more. In either
event, prices are guaranteed for a minimum of 90 days from the date of
this contract. Thirty days written notice must be provided before a
price change becomes effective.
Confidentiality
- ---------------
It is understood that the terms of this Agreement shall be kept
confidential between the parties herein and shall be disclosed only as required
to lenders, counsel, auditors or others having legitimate business interest in
the contents hereof. Buyer shall not, without Seller's permission, reveal any
confidential information or trade secrets regarding Seller's products, business
or methods of operation learned by Buyer during the term of this Agreement.
Effective April 1995.
63
<PAGE>
Exhibit 11
SEATTLE FILMWORKS, INC.
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Second Quarter Ended Six Months Ended
March 30, March 25, March 30, March 25,
1996 1995 1996 1995
=====================================================================================================================
<S> <C> <C> <C> <C>
COMPUTATION OF PRIMARY EARNINGS PER SHARE:
- ------------------------------------------
Weighted average shares outstanding 10,761,135 10,569,869 10,744,079 10,556,409
Net effect of dilutive stock options based on the
treasury stock method using average market price 1,044,137 998,967 1,045,128 979,716
----------- ----------- ----------- -----------
Total shares and equivalents 11,805,272 11,568,836 11,789,207 11,536,125
========== ========== ========== ==========
Net income $503,461 $338,962 $1,454,172 $994,182
======== ======== ========== ========
PRIMARY EARNINGS PER SHARE $.04 $.03 $.12 $.09
==== ==== ==== ====
COMPUTATION OF FULLY DILUTED EARNINGS PER SHARE:
- ------------------------------------------------
Weighted average shares outstanding 10,761,135 10,569,869 10,744,079 10,556,409
Net effect of dilutive stock options based on the
treasury stock method using the higher of quarter-end
market price or average market price 1,086,918 1,001,877 1,099,945 999,293
----------- ----------- ----------- -----------
Total shares and equivalents 11,848,053 11,571,746 11,844,024 11,555,702
========== ========== ========== ==========
Net income $503,461 $338,962 $ 1,454,172 $994,182
======== ======== =========== ========
FULLY DILUTED EARNINGS PER SHARE $.04 $.03 $.12 $.09
==== ==== ==== ====
</TABLE>
Note - All share data has been retroactively restated to reflect a three-for-two
stock split effected in the form of a stock dividend on March 15, 1996.
Page 46 of 46
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SEATTLE
FILMWORKS, INC. SECOND QUARTER 1996 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-28-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> MAR-30-1996
<CASH> 7,114
<SECURITIES> 0
<RECEIVABLES> 1,286<F1>
<ALLOWANCES> 0
<INVENTORY> 6,992
<CURRENT-ASSETS> 16,334
<PP&E> 4,329<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 31,492
<CURRENT-LIABILITIES> 8,727
<BONDS> 0
0
0
<COMMON> 108
<OTHER-SE> 19,531
<TOTAL-LIABILITY-AND-EQUITY> 31,402
<SALES> 0
<TOTAL-REVENUES> 34,510
<CGS> 20,907
<TOTAL-COSTS> 11,537
<OTHER-EXPENSES> (161)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1
<INCOME-PRETAX> 2,226
<INCOME-TAX> 772
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,454
<EPS-PRIMARY> .12
<EPS-DILUTED> .12
<FN>
<F1>ASSET VALUES REPRESENT NET AMOUNTS
</FN>
</TABLE>
