<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: June 29, 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 August 1, 1996, there were issued and outstanding 10,819,213
shares of common stock, par value $.01 per share.
Index to Exhibits at Page 14
<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 June 29, 1996
and September 30, 1995 3-4
Statements of Income for the third quarter and nine
months ended June 29, 1996 and June 24, 1995 5
Statements of Cash Flows for the nine months ended
June 29, 1996 and June 24, 1995 6
Notes to Financial Statements 7
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-12
PART II -- OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K 12
SIGNATURES 13
INDEX TO EXHIBITS 14
EXHIBITS 15-41
</TABLE>
<PAGE>
PART I -- FINANCIAL INFORMATION
-------------------------------
ITEM 1 - FINANCIAL STATEMENTS
SEATTLE FILMWORKS, INC.
BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
(UNAUDITED) (NOTE)
June 29, September 30,
ASSETS 1996 1995
===============================================================================
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 5,565 $ 8,560
Securities available for sale 1,066 1,345
Accounts receivable, net of
allowance for doubtful accounts 2,337 1,242
Inventories 8,450 4,626
Capitalized promotional expenditures 281 158
Prepaid expenses and other 353 164
Deferred income taxes 384 398
------- -------
TOTAL CURRENT ASSETS 18,436 16,493
FURNITURE, FIXTURES, AND EQUIPMENT,
at cost, less accumulated depreciation 5,071 3,200
CAPITALIZED CUSTOMER ACQUISITION EXPENDITURES 10,900 7,356
DEPOSITS AND OTHER ASSETS 236 68
NON-COMPETE AGREEMENTS,
net of accumulated amortization 845 1,127
------- -------
TOTAL ASSETS $35,488 $28,244
======= =======
</TABLE>
Note: The September 30, 1995 balance sheet has been derived from audited
financial statements.
See notes to financial statements.
<PAGE>
SEATTLE FILMWORKS, INC.
BALANCE SHEETS (CONTINUED)
(in thousands, except share information)
<TABLE>
<CAPTION>
(UNAUDITED) (NOTE)
June 29, September 30,
LIABILITIES AND SHAREHOLDERS' EQUITY 1996 1995
=======================================================================================
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 6,752 $ 4,782
Accrued expenses 2,604 2,364
Income taxes payable 692 856
------- -------
TOTAL CURRENT LIABILITIES 10,048 8,002
DEFERRED INCOME TAXES 3,525 2,310
------- -------
TOTAL LIABILITIES 13,573 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 10,818,688 108 107
Additional paid-in capital 1,241 955
Retained earnings 20,566 16,870
------- -------
TOTAL SHAREHOLDERS' EQUITY 21,915 17,932
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $35,488 $28,244
======= =======
</TABLE>
Note: The September 30, 1995 balance sheet has been derived from audited
financial statements.
See notes to financial statements.
<PAGE>
SEATTLE FILMWORKS, INC.
STATEMENTS OF INCOME (UNAUDITED)
(in thousands, except share information)
<TABLE>
<CAPTION>
Third Quarter Ended Nine Months Ended
June 29, June 24, June 29, June 24,
1996 1995 1996 1995
======================================================================================
<S> <C> <C> <C> <C>
Net revenues $22,509 $15,791 $57,019 $40,354
Cost of goods and services 13,582 9,655 34,489 25,476
------- ------- ------- -------
GROSS PROFIT 8,927 6,136 22,530 14,878
Operating expenses:
Customer acquisition costs 2,974 2,177 8,748 6,233
Other selling expenses 1,706 948 5,168 2,763
Research and development 118 144 639 355
General and administrative 780 617 2,560 1,898
------- ------- ------- -------
Total operating expenses 5,578 3,886 17,115 11,249
------- ------- ------- -------
INCOME FROM OPERATIONS 3,349 2,250 5,415 3,629
Other income (expense):
Interest expense (1) (1) (3)
Interest income 94 55 348 172
Non operating income (expense), net (9) (29) (102) (26)
------- ------- ------- -------
Total other income 85 25 245 143
------- ------- ------- -------
INCOME BEFORE INCOME TAXES 3,434 2,275 5,660 3,772
Provision for income taxes (1,192) (762) (1,964) (1,265)
------- ------- ------- -------
NET INCOME $ 2,242 $ 1,513 $ 3,696 $ 2,507
======= ======= ======= =======
EARNINGS PER SHARE $.19 $.13 $.31 $.21
==== ==== ==== ====
WEIGHTED AVERAGE SHARES AND
EQUIVALENTS OUTSTANDING 11,852,528 11,687,504 11,811,553 11,662,856
========== ========== ========== ==========
</TABLE>
See notes to financial statements.
<PAGE>
SEATTLE FILMWORKS, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
June 29, June 24,
1996 1995
=====================================================================================
<S> <C> <C>
OPERATING ACTIVITIES:
- ---------------------
Net income $ 3,696 $ 2,507
Charges to income not affecting cash:
Depreciation and amortization 1,571 1,213
Amortization of capitalized customer
acquisition expenditures 7,827 4,291
Deferred income taxes 1,229 1,029
Loss on disposal of equipment 88 24
Net change in receivables, inventories, payables and other (3,060) (1,214)
Capitalized promotional expenditures, net (123) 300
Additions to capitalized customer acquisition expenditures (11,371) (7,733)
-------- -------
NET CASH FROM (USED IN) OPERATING ACTIVITIES (143) 417
INVESTING ACTIVITIES:
- ---------------------
Purchase of furniture, fixtures, and equipment (3,420) (1,170)
Purchases of securities available for sale (3,416) (11)
Sales of securities available for sale 3,695 1,197
Proceeds from sale of equipment 2 19
-------- -------
NET CASH FROM (USED IN) INVESTING ACTIVITIES (3,139) 35
FINANCING ACTIVITY: Proceeds from issuance of Common Stock 287 323
- ------------------- -------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,995) 775
Cash and cash equivalents at beginning of period 8,560 2,711
-------- -------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 5,565 $ 3,486
======== =======
</TABLE>
See notes to financial statements.
<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 third quarter and
nine months ended June 29, 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 incremental amortization of $414,000 of previously
deferred customer acquisition costs in the second quarter of fiscal 1996. The
Company also recorded an additional $43,000 of amortization in the second
quarter of fiscal 1996 related to a change in estimated life of the benefit of a
non-compete agreement from ten years to five years.
<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, those stated in the Company's Annual Report on Form 10-K
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 a leading direct-to-consumer
marketer and provider of high-quality amateur photofinishing services and
products. The Company offers an array of complementary services and products
primarily on a mail-order basis under the brand name Seattle FilmWorks(R). The
Company has experienced an increase in net revenues in each year since 1990.
Management believes this growth is attributable principally to its direct-
marketing programs, including the customer acquisition technique of offering two
rolls of film for $2.00 or less (the "Introductory Offer"). The Introductory
Offer has been nationally advertised in package inserts, newspaper supplements
and magazines and through various other direct-response media.
Beginning in fiscal 1995, the Company shifted the focus of, and
substantially expanded, its customer acquisition programs. Management believes
that these steps are the primary reasons for the acceleration in growth of net
revenues and net income during fiscal 1995 and the first nine months of fiscal
1996. In addition, management believes its core photofinishing business has
benefited from the introduction of new products, such as the January 1994
introduction of Pictures On Disk(TM) and PhotoWorks(TM).
Customer acquisition costs are comprised of the costs of generating a lead
and the amortization of direct costs associated with the Company's promotional
offers sent to prospective and existing customers. The costs of generating a
lead include all direct-response media, advertising and other costs associated
with developing target customer lists. These costs per lead have declined
during each of the last three fiscal years. The direct costs of customer
acquisition include film, postage and printed material costs associated with
mailings to prospective and existing customers. These direct costs per
recipient of the Introductory Offer have also declined during each of the last
three fiscal years.
The direct costs of customer acquisition are capitalized as an asset on the
Company's balance sheet under "capitalized customer acquisition expenditures."
Capitalized customer acquisition expenditures relating to the prospective
customers are amortized over three years, and capitalized customer acquisition
expenditures relating to certain marketing activities to groups of existing
customers are amortized over six months. These amortization rates are based on
estimates of the timing of future roll processing volumes per customer. The
proportion of capitalized customer acquisition expenditures to be amortized over
three years relative to those to be amortized over six months will vary from
period to period based on the timing and mix of promotional activities. Rates
of amortization are compared from time to time with the actual timing of roll
processing volumes in order to assess whether the amortization rates
appropriately match the direct costs of customer acquisition with the related
revenues. If the Company were to experience a material change in the timing of
roll processing volumes, it could be required to accelerate the rate of
amortization of capitalized customer acquisition expenditures, which could have
a material adverse effect on the Company's business, financial condition and
operating results.
<PAGE>
Customer acquisition costs as a percentage of net revenues have decreased
slightly in the first nine months of fiscal 1996 as compared to the same period
of fiscal 1995. Management believes this decrease in customer acquisition costs
as a percentage of net revenues is due primarily to more efficient customer
acquisition programs. Future periods may reflect increased customer acquisition
costs due to timing of 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.
Net income as a percentage of net revenues has increased to 6.5% for the
first nine months of fiscal 1996 as compared to 6.2% for the same period of
fiscal 1995 primarily due to the relationship between changes in costs of goods
sold, customer acquisition costs and other selling expenses which in turn are
primarily driven by changes in sales mix and the Company's customer acquisition
strategy. Operating results will fluctuate in the future due to changes in the
mix of sales, intensity of promotion activities, price increases by suppliers,
introductions of new products, research and development requirements, actions by
competitors, foreign currency exchange rates, conditions in the direct-to-
consumer market and the photofinishing industry in general, national and global
economic conditions and other factors.
Demand for the Company's photo-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 greater photofinishing net
revenues during the last half of the Company's fiscal year (April through
September), with a peak occurring in the fourth fiscal quarter. Net income is
affected by the seasonality of the Company's net revenues due to the fixed
nature of a portion of the Company's operating expenses, seasonal variation in
sales mix and the Company's practice of relatively higher expenditures on
marketing programs prior to the summer months.
<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>
Third Quarter Ended Nine Months Ended
June 29, June 24, June 29, June 24,
1996 1995 1996 1995
==============================================================================
<S> <C> <C> <C> <C>
Net revenues 100.0% 100.0% 100.0% 100.0%
Cost of goods and services 60.3 61.1 60.5 63.1
----- ----- ----- -----
GROSS PROFIT 39.7 38.9 39.5 36.9
Operating expenses:
Customer acquisition costs 13.2 13.8 15.3 15.5
Other selling expenses 7.6 6.0 9.0 6.8
Research and development 0.5 0.9 1.2 0.9
General and administrative 3.5 3.9 4.5 4.7
----- ----- ----- -----
Total operating expenses 24.8 24.6 30.0 27.9
----- ----- ----- -----
INCOME FROM OPERATIONS 14.9 14.3 9.5 9.0
Total other income 0.4 0.1 0.4 0.3
----- ----- ----- -----
INCOME BEFORE INCOME TAXES 15.3 14.4 9.9 9.3
Provision for income taxes 5.3 4.8 3.4 3.1
----- ----- ----- -----
NET INCOME 10.0% 9.6% 6.5% 6.2%
===== ===== ===== =====
</TABLE>
The Company's net revenues for the third quarter of fiscal 1996 increased
42.5% to $22,509,000 as compared to net revenues of $15,791,000 in the third
quarter of fiscal 1995. For the nine months ended June 29, 1996, net revenues
increased 41.3% to $57,019,000 compared to $40,354,000 for the same period of
fiscal 1995. The increased net revenues in fiscal 1996 were primarily due to
expanded customer acquisition activities and marketing to existing customers
during fiscal year 1995 and the first nine months of fiscal year 1996 which have
resulted in increased net revenues from photofinishing services and products.
Management also believes that its Seattle FilmWorks(R) branded business has
benefited from the Company's entry into the personal 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 third quarter of
fiscal 1996 increased to 39.7% of net revenue compared to 38.9% in the third
quarter of fiscal 1995. For the first nine months of fiscal 1996, gross profit
increased to 39.5% as compared to 36.9% 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 services and
products. Gross profit was also favorably impacted during 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.
Total operating expenses in the third quarter of fiscal 1996 increased to
24.8% of net revenue compared to 24.6% in the third quarter of fiscal 1995. For
the first nine months of fiscal 1996 total operating expenses increased to 30.0%
of net
<PAGE>
revenue compared to 27.9% for the same period of fiscal 1995. The increase in
total operating expenses for fiscal 1996 periods was due primarily to an
increase in customer acquisition and other selling activities, which affect
revenues in current and future periods. 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. Effective as of 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 in the second quarter of fiscal 1996 of previously
deferred customer acquisition costs. The Company capitalized $11,371,000 of
customer acquisition expenditures in the nine-month period of fiscal 1996
compared to $7,733,000 for the nine-month period of fiscal 1995. Capitalized
customer acquisition expenditures as of June 29, 1996, increased to $10,900,000
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 timing of the
amortization of capitalized expenditures or the development and initiation of
additional marketing programs.
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 third quarter of fiscal 1996 increased to 7.6% of
net revenues compared to 6.0% of net revenues for the third quarter of fiscal
1995. For the first nine months of fiscal 1996, other selling expenses
increased to 9.0% of net revenues compared to 6.8% of net revenues for the first
nine months of fiscal 1995. The increase in fiscal 1996 periods was primarily
due to increased marketing activities associated with expanded promotional
activities to new and existing customers compared to fiscal 1995 periods. The
second quarter of fiscal 1996 also included 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 decreased to $118,000 in the third
quarter of fiscal 1996 as compared to $144,000 for the third quarter of fiscal
1995. The decrease resulted primarily from lower contract service costs.
Research and development expenses for the first nine months of fiscal 1996
increased to $639,000 as compared to $355,000 for the first nine months of
fiscal 1995. The increase for the nine-month period was primarily related to
the Company's continued development of digital services and products. Research
and development expenses consist primarily of costs incurred in researching new
computerized digital imaging concepts, developing computer software products and
creating equipment necessary to provide customers with new computer-related
photographic services and products.
General and administrative expenses increased to $780,000 for the third
quarter of fiscal 1996 as compared to $617,000 for the third quarter of fiscal
1995. For the first nine months of fiscal 1996, general and administrative
expenses increased to $2,560,000 from $1,898,000 for the same period of fiscal
1995. The increases in fiscal 1996 periods were 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 revenues
decreased to 3.5% for the third quarter of fiscal 1996 as compared to 3.9% for
the third quarter of fiscal 1995 and decreased to 4.5% for the first nine months
of fiscal 1996 as compared to 4.7% of net revenues for the first nine months of
fiscal 1995. General and administrative expenses consist of costs related to
computer operations, human resource functions, finance, accounting, investor
relations and general corporate activities.
Total other income for the third quarter of fiscal 1996 increased to
$85,000 as compared to $25,000 for the third quarter of fiscal 1995. Total
other income increased to $245,000 for the first nine months of fiscal 1996 as
compared to $143,000 for the first nine months of fiscal 1995. The increases
were due primarily to interest income from short-term investments due to higher
levels of cash generated by operations.
The federal income tax rate for the first nine months of fiscal 1996 as
compared to the first nine months of fiscal 1995 increased to 34.7% from 33.5%.
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 and the
expiration of the federal research and development tax credit.
<PAGE>
Net income in the third quarter of fiscal 1996 was $2,242,000, or $.19 per
share, compared to $1,513,000 or $.13 per share for the third quarter of fiscal
1995. For the first nine months of fiscal 1996, net income was $3,696,000, or
$.31 per share compared to $2,507,000, or $.21 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 July 26, 1996, the Company's principal sources of liquidity included
cash and short-term investments of $6,128,726 and an unused revolving line of
credit of $6,000,000. The ratio of current assets to current liabilities for
the Company was 1.8 to 1 at the end of the third quarter of fiscal 1996, down
slightly from the current ratio of 2.0 to 1 at September 30, 1995. During the
first three quarters of fiscal 1996 the Company increased inventory levels by
$3,824,000 to accommodate expanded marketing plans, achieve faster turnaround of
customer orders, and support increased photofinishing volume. This increase in
inventory was also the principal reason for the $1,970,000 increase in accounts
payable at the end of the third quarter. 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 reducing current federal income tax liabilities and
increasing deferred 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 $500,000 during the remainder of
fiscal 1996, principally for photofinishing 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 6 - EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS.
---------
10.1 Incentive Stock Option Plan, as amended and restated as of
April 1, 1996
10.2 1987 Stock Option Plan, as amended and restated as of April 1,
1996
11 Computation of Earnings Per Share
(b) REPORTS ON FORM 8-K.
--------------------
None
<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: August 7, 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>
INDEX TO EXHIBITS
SEATTLE FILMWORKS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 29, 1996
<TABLE>
<CAPTION>
Exhibit Description Page No.
- ------- ----------- --------
<S> <C> <C>
10.1 Incentive Stock Option Plan, as amended and restated as of April 1, 1996 15-26
10.2 1987 Stock Option Plan, as amended and restated as of April 1, 1996 27-40
11 Computation of Earnings Per Share 41
</TABLE>
<PAGE>
EXHIBIT 10.1
SEATTLE FILMWORKS, INC.
INCENTIVE STOCK OPTION PLAN
AMENDED AND RESTATED
AS OF APRIL 1, 1996
This Incentive Stock Option Plan (the "Plan") provides for the grant of
options (the "Options") to acquire shares of Common Stock, $.01 par value (the
"Common Stock") of Seattle FilmWorks, Inc. (the "Corporation") and is intended
to qualify under Section 422 of the Internal Revenue Code of 1986, as amended
(the "Code"). Options qualifying under Section 422 of the Code are referred to
herein as "Incentive Stock Options" and Options not qualifying under section 422
are referred to herein as "Non-Qualified Stock Options."
1. PURPOSE
-------
The purpose of this Plan is to retain the services of key employees of the
Corporation, to encourage such employees to acquire a greater proprietary
interest in the Corporation, thereby strengthening their incentive to achieve
the objectives of the shareholders, and to serve as an aid and inducement in the
hiring of new key employees.
2. ADMINISTRATION
--------------
This Plan shall be administered by the Board of Directors of the
Corporation (the "Board"), if each director is both a "disinterested person" (as
defined below) and an "outside director" (as defined below). If all directors
are not "disinterested persons" and "outside directors," or if the Board so
desires, the Plan shall be administered by a committee designated by the Board
and composed solely of two (2) or more members of the Board, each of whom is a
"disinterested person" and an "outside director" which committee (the
"Committee") may be an executive, compensation or other committee, including a
separate committee especially created for this purpose. The Committee shall have
the powers and authority vested in the Board hereunder (including the power and
authority to interpret any provision of this Plan or of any Option). The members
of any such Committee shall serve at the pleasure of the Board. A
1
<PAGE>
majority of the members of the Committee shall constitute a quorum, and all
actions of the Committee shall be taken by a majority of the members present.
Any action may be taken by a written instrument signed by all of the members of
the Committee and any action so taken shall be fully effective as if it had been
taken at a meeting. The Board, or any committee thereof appointed to administer
the Plan, is referred to herein as the "Plan Administrator." "Disinterested
person" shall be defined by reference to the rules and regulations promulgated
under Section 16(b) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). "Outside director" shall be defined by reference to the
regulations promulgated under Section 162(m)(4)(C)(i) of the Code.
Subject to the provisions of this Plan, and with a view to effecting its
purpose, the Plan Administrator shall have sole authority, in its absolute
discretion, to (a) construe and interpret this Plan; (b) define the terms used
in this Plan; (c) prescribe, amend and rescind rules and regulations relating to
this Plan, (d) correct any defect, supply any omission or reconcile any
inconsistency in this Plan; (e) determine the individuals to whom Options shall
be granted under this Plan and whether the Option is an Incentive Stock Option
or a Non-Qualified Stock Option; (f) determine the time or times at which
Options shall be granted under this Plan; (g) determine the number of shares of
Common Stock subject to each Option, the exercise price of each Option, the
duration of each Option and the times at which each Option shall become
exercisable; (h) determine all other terms and conditions of Options; and (i)
make all other determinations necessary or advisable for the administration of
this Plan. All decisions, determinations and interpretations made by the Plan
Administrator shall be binding and conclusive on all participants in this Plan
and on their legal representatives, heirs and beneficiaries.
The Board or the Committee may delegate to one or more executive officers
of the Corporation the authority to grant Options under this Plan to employees
of the Corporation who, at the time of grant, are neither subject to Section
16(b) of the Exchange Act with respect to the Common Stock nor a "covered
employee" within the meaning of Section 162(m)(3) of the Code ("Non-Insiders")
and in connection therewith the authority to
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<PAGE>
determine: (a) whether the Option is an Incentive Stock Option or a NonQualified
Stock Option; (b) the number of shares of Common Stock subject to such Option;
(c) the duration of the Option; (d) the vesting schedule for determining the
times at which such Option shall become exercisable; and (e) all other terms and
conditions of such Options. The exercise price for any Option granted by action
of an executive officer pursuant to such delegation of authority shall not be
less than the fair market value per share of the Common Stock on the Date of
Grant. Unless expressly approved in advance by the Board or the Committee, such
delegation of authority shall not include the authority to accelerate the
vesting, extend the period for exercise or otherwise alter the terms of
outstanding Options. The term "Plan Administrator" when used in any provision of
this Plan other than Sections 2, 5(k), 5(l) and 11 shall be deemed to refer to
the Board or the Committee, as the case may be, and an executive officer who has
been authorized to grant Options pursuant hereto, insofar as such provision may
be applied to Non-Insiders and Options granted to Non-Insiders.
Pursuant to action taken by the Board, the President of the Corporation is
authorized to grant options to Corporation personnel, all of whom must be Non-
Insiders, in amounts to be determined from time to time by the Board.
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<PAGE>
3. ELIGIBILITY
-----------
Persons eligible to receive Options shall be such regular and full-time
employees of the Corporation holding key positions (the "Employees" or
"Employee") as the Plan Administrator in its discretion, may select. Options
may be granted in substitution for outstanding options of another corporation in
connection with the merger, consolidation, acquisition of property or stock or
other reorganization between such other corporation and the Corporation or any
subsidiary of the Corporation. Options also may be granted in exchange for
outstanding Options. If any Option granted pursuant to this Plan expires or is
terminated for any reason, those shares of Common Stock allocable to the
unexercised portion of such Option may again be subject to an Option granted to
the same or a different Optionee. No person shall be granted options to
purchase more than 375,000 shares of Common Stock in any fiscal year (subject to
adjustment as set forth in Section 5(m) hereof). Any person to whom an Option
is granted under this Plan is referred to herein as an "Optionee."
4. STOCK
-----
The Stock for which Options may be granted under this Plan and under the
Corporation's 1987 Stock Option Plan shall be an aggregate of not more than
4,603,125 of the Corporation's authorized but unissued, or reacquired, Common
Stock, subject to adjustment as set forth in Section 5(1). If any outstanding
Option expires or is terminated for any reason, those shares of Stock allocable
to the unexercised portion of such Option may again be subject to an Option to
the same or to a different Employee; provided however, that any cancelled
----------------
Options will be counted against the maximum number of shares with respect to
which Options may be granted to any particular person as set forth in Section 3
hereof.
5. TERMS AND CONDITIONS OF OPTIONS
-------------------------------
Each Option granted pursuant to this Plan shall be evidenced by written
agreements approved by the Plan Administrator (the "Agreements"). Agreements
may contain such additional provisions, not inconsistent herewith, as the Plan
Administrator
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<PAGE>
in its discretion may deem advisable. All Options shall also comply with the
following requirements:
a. Number of Shares
----------------
Each Agreement shall state the number of shares to which it pertains and
whether the Option evidenced thereby is an Incentive Stock Option or a Non-
Qualified Option. The aggregate fair market value (determined at the Date of
Grant, as defined below) of the stock with respect to which Incentive Stock
Options are exercisable for the first time by the Optionee during any calendar
year (granted under this Plan and all other Incentive Stock Option plans of the
Corporation or a predecessor corporation) shall not exceed $100,000, or such
other limit as may be prescribed by the Code as it may be amended from time to
time. Any Option which exceeds the annual limit shall not be void but rather
shall be a Non-Qualified Stock Option.
b. Date of Grant
-------------
Each Agreement shall state the date which the Plan Administrator has deemed
to be the effective date of the Option for purposes of this Plan (the "Date of
Grant").
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<PAGE>
c. Option Price
------------
(1) Each Option shall state the price per share of Stock at which it
is exercisable. This price shall be equal to or greater than the fair market
value of the Stock on the Date of Grant. For the purposes of this Section the
term "fair market value" on any given day means: (i) if the Common Stock is
listed on a national securities exchange, the average of the high and low prices
of the Common Stock of the Corporation on such exchange or such other national
securities exchange as shall be designated by the Plan Administrator; or (ii) if
the Common Stock is traded in the over-the-counter securities market, the last
sale price of the Common Stock as quoted by NASDAQ National Market System or, if
the Common Stock is not quoted in the National Market System, the mean between
the closing bid and asked prices of Common Stock as quoted by NASDAQ. Incentive
Stock Options granted in substitution for outstanding Options of another
corporation in connection with the merger, consolidation, acquisition of
property or stack or other reorganization involving such other corporation and
the Corporation or any subsidiary of the Corporation may be granted with an
exercise price equal to the exercise price for the substituted Option of the
other corporation, subject to any adjustment consistent with the terms of the
transaction pursuant to which the substitution is to occur.
(2) If an Employee owns more than ten percent (10%) of the total
combined voting power of all classes of stock of the Corporation or its parent
or subsidiary corporation the Option price for any Incentive Stock Option
granted hereunder shall be one hundred ten percent (110%) of the value otherwise
determined in section 5(c)(1) and such Incentive Stock Option must lapse by its
terms within five (5) years from the date of grant. The attribution of stock
ownership rules in section 424(d) of the Code are incorporated herein by this
reference and apply for purposes of calculating the ten percent (10%) voting
power limitation.
6
<PAGE>
d. Termination of Employment
-------------------------
(1) Death: If Employee's employment with the Corporation is
-----
terminated by reason of death, the Employee's personal representative, heirs or
devisees shall be entitled to exercise all vested Options for one (1) year after
the date of death.
(2) Disability: If Employee's employment with the Corporation is
----------
terminated by reason of disability the Employee shall be entitled to exercise
all vested Options for one (1) year after the date of disability.
For purposes of the Plan, unless otherwise defined in the Agreement,
the Plan Administrator shall determine whether an Optionee has incurred a
disability on the basis of medical evidence acceptable to the Plan
Administrator. Upon making a determination of disability, the Plan
Administrator shall, for purposes of the Plan, determine the date of an
Optionee's termination of employment or contractual relationship.
(3) Other Termination: If Employee's employment by the corporation is
-----------------
terminated, voluntarily or involuntarily, for any other reason, the Employee
shall be entitled to exercise all Options which are vested on the date of
termination for a period of three (3) months after such date of termination.
(4) All Options not exercised during the periods prescribed in section
5(d), herein, shall terminate. Unless accelerated in accordance with Section
5(e) below, unvested Options shall terminate immediately upon the termination of
employment of the Optionee by the Corporation for any reason whatsoever,
including death or disability.
e. Term and Vesting of Options
---------------------------
In order to ensure that the Corporation will receive the benefits
contemplated in exchange for the grant of Options pursuant hereto, no Option
shall be exercisable until it has vested or as provided in subsections (k) or
(1) below. The vesting schedule for each Option shall be specified by the Plan
7
<PAGE>
Administrator at the time of grant of the Option. Each Option shall terminate,
to the extent not previously exercised, upon the occurrence of the first to
occur of the following events: (i) the expiration of the period prescribed in
Section 5(c) or (d) herein; or (ii) the date which is ten (10) years after the
date of grant.
All outstanding Options shall become immediately vested and fully
exercisable on the day before the first to occur of the following events (each
an "Event"), unless a majority of the Board of Directors in office on the date
an Event occurs shall approve a resolution providing otherwise within three
business days after an Event occurs:
(i) Any Person (as defined in Section 13(d) of the Securities
Exchange Act of 1934 (the "Exchange Act")), other than a broker, bank or
trust company holding Common Stock of the Corporation for the account of
customers who are not members of a "group" (within the meaning of section
13(d) of the Exchange Act), becomes the record or beneficial owner of 30%
or more of any class of the Corporation's voting equity securities, as
disclosed in the Corporation's stock records or in any other way,
including, without limitation, any filing with the Securities and Exchange
Commission or otherwise; or
(ii) The purchase of 30% or more of any class of the Corporation's
stock pursuant to any tender offer or exchange offer for shares of the
Corporation's stock, other than one made by the Corporation; or
(iii) Approval by the shareholders of the Corporation (or, if later,
approval by the shareholders of a third party) of any merger,
consolidation, reorganization or other transaction providing for the
conversion or exchange of more than 50% of the outstanding shares of the
Corporation's stock into securities of a third party, or cash, or property,
or a combination of any of the foregoing.
f. Exercise of Options
-------------------
8
<PAGE>
Options shall be exercisable, to the extent vested, either all or in part,
at any time during the term prescribed above; provided, however, that no
Incentive Stock Options granted prior to January 1, 1987 may be exercised until
all previously granted Incentive Stock Options have been exercised or lapsed in
accordance with their terms. The foregoing proviso shall not apply to Incentive
Stock Options granted on or after January 1, 1987. If less than all of the
vested shares under the terms of any Option are purchased, the difference
between the amount vested and the amount purchased may be purchased at any
subsequent time prior to the expiration of the Option term with respect to said
shares. Only whole shares may be issued pursuant to an Option, and to the
extent that an Option covers a fraction of a share, it is unexercisable.
Options or portions thereof may be exercised by giving written notice thereof to
the Corporation, which notice shall specify the number of shares to be
purchased, and be accomplished by payment in cash or by certified or cashier's
check in the amount of the aggregate Option price for the Stock so purchased.
The Corporation shall not be obligated to issue, transfer, or deliver a
certificate evidencing Common Stock to any Employee, or his personal
representative, until the entire Option price for all shares for which the
Option shall have been exercised is paid.
g. Payment Upon Exercise of Option
-------------------------------
In addition to payment in cash by certified check or cashier's check, an
Optionee may pay for all or any Stock purchased upon the exercise of any Option
by delivering to the Corporation shares of Stock previously held by such
Optionee or, with the permission of the Plan Administrator, by having shares
withheld from the amount of shares of Stock to be received by the Optionee. The
shares of Stock received by the Corporation or withheld by the Corporation as
payment for shares of Stock purchased upon the exercise of Options shall have a
fair market value (as established by the Plan Administrator) equal to the
aggregate Option exercise price (or portion thereof) to be paid through the
exchange of previously held shares of Stock or through the withholding of shares
of Stock to be received by the Optionee upon exercise.
h. Rights as a Shareholder
-----------------------
9
<PAGE>
An Optionee or a transferee of an Option shall have no rights as a
shareholder with respect to any shares covered by the Option, until the Optionee
becomes a record holder of such shares, irrespective or whether or not he has
given notice of exercise. Subject to the provisions of Section 5(1) hereof, no
rights shall accrue to an Optionee and no adjustments shall be made on account
of dividends (ordinary or extraordinary whether in cash, securities or other
property) or distributions or other rights declared on, or created in, the
capital stock of the Corporation for which the record date is prior to the date
the Optionee becomes a record holder of the shares covered by the Option,
irrespective of whether or not he has given notice of exercise.
i. Transfer of Options
-------------------
Options shall not be transferred by the Optionee other than by will or the
laws of descent and distribution.
j. Securities Regulation
---------------------
(1) No Option shall be exercisable unless such Option and Stock to be
issued pursuant thereto shall be registered under appropriate federal and state
securities laws, or shall be exempt therefrom, in the opinion of the Plan
Administrator upon advice of counsel to the Company.
Each Agreement shall contain adequate provisions to assure that there are
no violations of the relevant provisions of laws. Where necessary to effect
exemption from registration under such laws, an Optionee hereunder shall be
required, upon the exercise of an Option, to take the Common Stock with
investment intent and not with a view to its distribution, and to present to the
Plan Administrator a letter to that effect in a form suitable to the Plan
Administrator. The Plan Administrator may take such other action or require
such other action or agreement by an Optionee as may from time to time be
necessary to comply with appropriate federal and state securities laws. This
provision shall in no way obligate the Corporation to undertake the registration
of the Options or shares of Common Stock issuable upon exercise thereof.
10
<PAGE>
(2) Issue, transfer or delivery of certificates of Common Stock
pursuant to the exercise of Options may be delayed, at the discretion of the
Plan Administrator, until the Plan Administrator is satisfied that the
applicable requirements of the federal and state securities laws and the
withholding provisions of the Code have been met.
k. Mandatory Exercise
------------------
If the Corporation files a registration statement under the Securities Act
of 1933, as amended with respect to the Corporation's Common Stock, the Plan
Administrator may require the holders of any outstanding Options to exercise any
portion of or all of the Options held by them within thirty (30) days after the
receipt by such Option holders of notice from the Corporation. Any outstanding
Options required to be exercised by the Corporation pursuant to this subsection
and not exercised within said thirty day period shall terminate.
l. Stock Dividend, Reorganization or Liquidation
---------------------------------------------
Until the Optionee becomes a record holder of the shares of Common Stock
covered by each outstanding Option, the number of such shares and the Option
price per share thereof shall be proportionately adjusted for an increase or
decrease in the number of issued shares of the Corporation resulting from a
subdivision or consolidation of shares, payment of a stock dividend, or any
other increase or decrease in the number of shares effected by the Corporation
without receipt of or for a nominal consideration, and to the extent that such
action shall include an increase or decrease in the number of shares of Common
Stock subject to outstanding Options. The number of shares available under
Section 4 of this Plan shall automatically be increased or decreased, as the
case may be, proportionately, without further action on the part of the Plan
Administrator, the Corporation or the Corporation's shareholders.
If the presently authorized capital stock of the Corporation is changed
into the same number of shares with a different par value, the stock resulting
from any such change shall be deemed to be Common Stock within the meaning of
the Plan, and each
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<PAGE>
Option shall apply to the same number of shares of such new stock as it applied
to old shares immediately prior to such change.
If the Corporation is the surviving or resulting corporation in any
"reorganization," as that term is defined in Section 368 of the Code, each
outstanding Option shall apply to such securities of the Corporation after the
reorganization as a holder of the number of shares of Common Stock subject to
the Option would be entitled under the terms of the reorganization. If, pursuant
to the terms of any reorganization in which the Corporation is not the surviving
or resulting corporation, Options granted hereunder are assumed by the surviving
or resulting corporation, each Option shall continue in full force and effect,
and shall apply to the same number and class of securities of the surviving
corporation as a holder of the number of shares of Common Stock subject to the
Option would be entitled under the terms of the reorganization. Should any such
surviving or resulting corporation assume Options granted hereunder, the type
and terms of securities of the surviving of resulting corporation to which
Options would then be deemed to apply shall be fixed solely by the terms of any
applicable reorganization agreement, and holders of Options shall have no rights
whatsoever concerning the type and terms of the substituted securities to which
Options would then apply. In particular, holders of Options shall have no
rights as to the setting of distribution, payment, expiration or maturity dates
of any preferred stock, certificates of contingent interest, bonds, debentures,
warrants rights, Options or other securities of any surviving or resulting
corporation, with respect to the date or dates of exercise of such Options; but
any such distribution, payment, expiration or maturity date shall be determined
solely by the terms of any such reorganization agreement.
If the Corporation is liquidated or dissolved, or if there is a
reorganization in which the corporation is not the surviving or resulting
corporation and the Options granted hereunder are not assumed by the surviving
or resulting corporation, the Plan Administrator, in its sole discretion may
allow the holders of any outstanding Options to exercise all or any part of the
unvested portion of the Options held by them; provided, however, that such
Options are exercised prior to the effective date of the liquidation or
dissolution or reorganization. If the Option
12
<PAGE>
holders do not exercise their Options prior to such effective date, or if the
Corporation does not allow the Option holders to exercise the unvested portion
of such Options, each outstanding Option shall terminate as of the effective
date of the liquidation or dissolution or reorganization.
In lieu of assuming any Option, any resulting or surviving corporation may
substitute new options for Options, as contemplated by (S) 424 of the Code, and
in such event each outstanding Option shall terminate as of the date of
effectiveness of the corresponding substitute option. In the event of
reorganization, surviving Options or substitute options shall have the same
vesting dates as the corresponding Incentive Stock Options granted hereunder.
The foregoing adjustments in the shares subject to Options shall be made by
the Plan Administrator, or by any successor administrator of the Plan, or by the
applicable terms of any assumption or substitution document, any adjustments so
made shall be final, binding and conclusive.
Except as provided in this Section 5(1), no Optionee shall have rights by
reason of any subdivision or consolidation of shares of Common Stock of any
class including shares of Common Stock, or the payment of any Common Stock
dividend on shares of Common Stock or any other increase or decrease in the
number of shares of Common Stock, or by reason of any liquidation, dissolution,
corporate combination or division; and any issue by the Corporation of shares of
Common Stock of any class including shares of Common Stock, or securities
convertible into shares of Common Stock of any class including shares of Common
Stock shall not affect, and no adjustment by reason thereof shall be made with
respect to, the number or price of shares of Common Stock subject to any Option.
The grant of an Option shall not affect in any way the right or power of
the Corporation to make adjustments, reclassification, reorganizations or
changes in its capital or business structure, or to merge, consolidate, dissolve
or liquidate, or to sell or transfer all or any part of its business or assets.
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<PAGE>
6. TERM OF PLAN
------------
Options may be granted pursuant to this Plan from time to time until
December 31, 2005.
7. NO OBLIGATION TO EXERCISE STOCK OPTIONS
---------------------------------------
The granting of an Option shall impose no obligation upon the Optionees to
exercise such Option.
8. NO RIGHT TO OPTIONS OR EMPLOYMENT
---------------------------------
The decision as to whether to grant or to whom to grant any Options to be
granted hereunder shall be exclusively within the discretion of the Plan
Administrator, and nothing contained herein shall be construed as giving any
Employee any right to participate hereunder. The granting of an Option hereunder
shall in no way constitute any form of agreement or understanding binding on the
corporation, express or implied, that the Corporation will employ an Optionee
for any length of time.
9. APPLICATION OF FUNDS
--------------------
The proceeds received by the Corporation from the sale of Stock, pursuant
to Options granted hereunder, will be used for general corporate purposes.
10. INDEMNIFICATION OF PLAN ADMINISTRATOR
-------------------------------------
In addition to all other rights of indemnification they may have as
directors of the Corporation or as members of the Committee, members of the
Board and of the Plan Administrator shall be indemnified by the Corporation for
all reasonable expenses and liabilities of any type and nature, including
attorneys' fees, incurred in connection with any action, suit or proceeding to
which they or any of them are a party by reason of, or in connection with, any
Option granted hereunder; and against all amounts paid by them in settlement
thereof (if such settlement be approved by the independent legal counsel
selected by the Corporation), except to the extent that such expenses relate to
matters for which it be adjudged such Plan Administrator members are liable for
willful misconduct; provided
14
<PAGE>
that within fifteen (15) days after institution of any such action, suit or
proceeding the Plan Administrator member(s) involved therein shall, in writing,
notify the Corporation thereof, so that the Corporation may have the opportunity
to make appropriate arrangements to prosecute or defend the same.
11. AMENDMENT OF PLAN
-----------------
The Plan Administrator may, at any time, modify or amend this Plan and
Options granted hereunder, except that no amendment with respect to an
outstanding Option shall be made over the objection of the Optionee thereof; and
provided further, that any amendment for which shareholder approval is required
by Securities and Exchange commission Rule 16b-3, as amended from time to time,
or any successor rule or regulatory requirements (the "Rule"), in order for the
Plan to be eligible or continue to qualify for the benefits of the Rule shall be
subject to approval of the requisite percentage of the shareholders of the
Corporation in accordance with the Rule. Without limiting the generality of the
foregoing, the Plan Administrator may modify grants to persons who are eligible
to receive Options under this Plan who are foreign nationals or employed outside
the United States to recognize differences in local law, tax policy or custom.
SEATTLE FILMWORKS, INC.
/s/ Case H. Kuehn
----------------------------------------
Case H. Kuehn, Vice President, Treasurer
and Chief Financial Officer
15
<PAGE>
EXHIBIT 10.2
SEATTLE FILMWORKS, INC.
1987 STOCK OPTION PLAN
AMENDED AND RESTATED
AS OF APRIL 1, 1996
This Stock Option Plan (the "Plan") provides for the grant of options (the
"Options") to acquire shares of Common Stock, $.01 par value (the "Common
Stock") of Seattle FilmWorks, Inc. (the "Corporation").
1. PURPOSES
--------
The purposes of this Plan are to retain the services of valued key
employees and consultants of the Corporation and such other persons as the Plan
Administrator shall select in accordance with Section 3 below, to encourage such
employees to acquire a greater proprietary interest in the Corporation, thereby
strengthening their incentive to achieve the objectives of the shareholders, to
serve as an aid and inducement in the hiring of new key employees and to provide
an equity incentive to directors, consultants and other persons selected by the
Plan Administrator.
2. ADMINISTRATION
--------------
This Plan shall be administered by the Board of Directors of the
Corporation (the "Board"), if each director is both a "disinterested person" (as
defined below) and an "outside director" (as defined below). If all directors
are not "disinterested persons" and "outside directors," or if the Board so
desires, the Plan shall be administered by a committee designated by the Board
and composed solely of two (2) or more members of the Board, each of whom is a
"disinterested person" and an "outside director" which committee (the
"Committee") may be an executive, compensation or other committee, including a
separate committee especially created for this purpose. The Committee shall
have the powers and authority vested in the Board hereunder (including the power
and authority to interpret any provision of this Plan or of any Option). The
members of any such Committee shall serve at the pleasure of the Board. A
1
<PAGE>
majority of the members of the Committee shall constitute a quorum, and all
actions of the Committee shall be taken by a majority of the members present.
Any action may be taken by a written instrument signed by all of the members of
the Committee and any action so taken shall be fully effective as if it had been
taken at a meeting. The Board, or any committee thereof appointed to administer
the Plan, is referred to herein as the "Plan Administrator." "Disinterested
person" shall be defined by reference to the rules and regulations promulgated
under Section 16(b) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). "Outside director" shall be defined by reference to the
regulations promulgated under Section 162(m)(4)(C)(i) of the Code.
Subject to the provisions of the Plan, and with a view to effecting its
purpose, the Plan Administrator shall have sole authority, in its absolute
discretion, (a) to construe and interpret the Plan; (b) to define the terms used
herein; (c) to prescribe, amend, and rescind rules and regulations relating to
the Plan; (d) to correct any defect, supply any omission or reconcile any
inconsistency herein; (e) to determine the individuals to whom Options to
purchase shares of Common Stock shall be granted under the Plan; (f) to
determine the time or times at which Options shall be granted under the Plan;
(g) to determine the number of shares of Common Stock subject to each Option,
the Option Price, the duration of each Option granted under the Plan and the
times at which each Option shall become exercisable; (h) to determine all of the
other terms and conditions of Options granted under the Plan; and (i) to have
all other determinations necessary or advisable for the administration of the
Plan and do everything necessary or appropriate to administer the Plan. All
decisions, determinations, and interpretations made by the Plan Administrator
shall be binding and conclusive on all participants in the Plan and on their
legal representatives, heirs, and beneficiaries.
The Board or the Committee may delegate to one or more executive officers
of the Corporation the authority to grant Options under this Plan to employees
of the Corporation who, at the time of grant, are neither subject to Section
16(b) of the Exchange Act with respect to the Common Stock nor a "covered
2
<PAGE>
employee" within the meaning of Section 162(m)(3) of the Code ("Non-Insiders")
and in connection therewith the authority to determine: (a) the number of
shares of Common Stock subject to such Option; (b) the duration of the Option;
(c) the vesting schedule for determining the times at which such Option shall
become exercisable; and (d) all other terms and conditions of such Options. The
exercise price for any Option granted by action of an executive officer pursuant
to such delegation of authority shall not be less than the fair market value per
share of the Common Stock on the Date of Grant. Unless expressly approved in
advance by the Board or the Committee, such delegation of authority shall not
include the authority to accelerate the vesting, extend the period for exercise
or otherwise alter the terms of outstanding Options. The term "Plan
Administrator" when used in any provision of this Plan other than Sections 2,
5(m) and 12 shall be deemed to refer to the Board or the Committee, as the case
may be, and an executive officer who has been authorized to grant Options
pursuant hereto, insofar as such provision may be applied to Non-Insiders and
Options granted to Non-Insiders.
Pursuant to action taken by the Board, the President of the Corporation is
authorized to grant options to Corporation personnel, all of whom must be Non-
Insiders, in amounts to be determined from time to time by the Board.
3
<PAGE>
3. ELIGIBILITY
-----------
Options may be granted to any individual who, at the time the Option is
granted, is an employee, officer, consultant or independent contractor of the
Corporation or any "related corporation" (as defined below). Options may also
be granted to directors who are not employees of the Corporation, but solely
upon the terms and conditions set forth in Section 6 hereof. Options may be
granted in substitution for outstanding options of another corporation in
connection with the merger, consolidation, acquisition of property or stock or
other reorganization between such other corporation and the Corporation or any
subsidiary of the Corporation. Options also may be granted in exchange for
outstanding Options. No person shall be granted options to purchase more than
375,000 shares of Common Stock in any fiscal year (subject to adjustment as set
forth in Section 5(m) hereof). Any person to whom an Option is granted under
this Plan is referred to herein as an "Optionee."
As used in this Plan, the term "related corporation," when referring to a
subsidiary corporation, shall mean any corporation (other than the Corporation)
in an unbroken chain of corporations beginning with the Corporation if, at the
time of the granting of the Option, each of the corporations other than the last
corporation in the unbroken chain owns stock possessing fifty percent (50%) or
more of the total combined voting power of all classes of stock of one of the
other corporations in such chain. When referring to a parent corporation, the
term "Related Corporation" shall mean any corporation (other than the
Corporation) in an unbroken chain of corporations ending with the Corporation
if, at the time of granting of the Option, each of the corporations other than
the Corporation owns stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock of one of the other corporations
in such chain.
4. STOCK
-----
Options to acquire an aggregate of 4,603,125 shares of the Corporation's
authorized but unissued, or reacquired, Common Stock, subject to adjustment as
set forth in Section 5(m) hereof, may be granted pursuant to this Plan and the
Corporation's
4
<PAGE>
Amended and Restated Incentive Stock Option Plan ("Incentive Plan"). Of these
4,603,125 shares, 540,000 shares are available exclusively for grant to certain
directors of the Corporation under Section 6 hereof. In the event that any
Option granted pursuant to either this Plan or the Incentive Plan expires or is
terminated for any reason, those shares of Common Stock allocable to the
unexercised portion of such terminated Option may again be subject to an Option
granted to the same or to a different Optionee under either this Plan or the
Incentive Plan; provided however, that any cancelled Options will be counted
----------------
against the maximum number of shares with respect to which Options may be
granted to any particular person as set forth in Section 3 hereof.
5. TERMS AND CONDITIONS OF OPTIONS
-------------------------------
Each Option granted pursuant to this Plan shall be evidenced by a written
agreement approved by the Plan Administrator (the "Agreement"). Agreements may
contain such additional provisions, not inconsistent herewith, as the Plan
Administrator, in its discretion, may deem advisable. All Options shall also
comply with the following requirements:
a. Number of Shares
----------------
Each Agreement shall state the number of shares of Common Stock to which it
pertains.
b. Date of Grant
-------------
Each Agreement shall state the date which the Plan Administrator has deemed
to be the effective date of the Option for purposes of this Plan (the "Date of
Grant").
c. Option Price
------------
Each Agreement shall state the price per share of Common Stock at which it
is exercisable. The exercise price shall be fixed by the Plan Administrator at
whatever price the Plan Administrator may determine in the exercise of its sole
discretion, provided that the exercise price shall not be less than 50% of the
fair market value of the Common Stock on the Date
5
<PAGE>
of Grant. For the purposes of this Section the term "fair market value" on any
given day means: (i) if the Common Stock is listed on a national securities
exchange, the average of the high and low prices of the Common Stock of the
Corporation on such exchange or such other national securities exchange as shall
be designated by the Plan Administrator; or (ii) if the Common Stock is traded
in the over-the-counter securities market, the last sale price of the Common
Stock as quoted by NASDAQ National Market System or, if the common Stock is not
quoted in the National Market System, the mean between the closing bid and asked
prices of Common Stock as quoted by NASDAQ.
d. Duration of Options
-------------------
At the time of the grant of the Option, the Plan Administrator shall
designate, subject to paragraph 5(g) below, the expiration date of the Option,
which shall not be later than eleven years from the Date of Grant. In the
absence of action to the contrary by the Plan Administrator in connection with
the grant of a particular Option, all Options granted hereunder shall expire ten
years and one day from the Date of Grant.
e. Vesting Schedule
----------------
In order to ensure that the corporation will receive the benefits
contemplated in exchange for the Options granted pursuant hereto, no Option
shall be exercisable until it has vested. The vesting schedule for each Option
shall be specified by the Plan Administrator at the time of the grant of the
Option and shall be set forth in the Agreement. If no vesting schedule is
specified by the Plan Administrator at the time of the grant of an Option
hereunder, the Option shall become exercisable in full on the date of completion
by the Optionee of five years of employment with the Corporation.
f. Acceleration of Vesting
-----------------------
The vesting of one or more outstanding Options may be accelerated by the
Plan Administrator at such time and in such amounts as it shall determine in its
sole discretion. The vesting of Options also shall be accelerated under the
circumstances described as follows and in Section 5(m) below.
6
<PAGE>
All outstanding Options shall become immediately vested and fully
exercisable on the day before the first to occur of the following events (each
an "Event"), unless a majority of the Board of Directors in office on the date
an Event occurs shall approve a resolution providing otherwise within three
business days after an Event occurs:
(i) Any Person (as defined in Section 13(d) of the Securities Exchange
Act of 1934 (the "Exchange Act")), other than a broker, bank or trust
company holding Common Stock of the Corporation for the account of
customers who are not members of a "group" (within the meaning of Section
13(d) of the Exchange Act), becomes the record or beneficial owner of 30%
or more of any class of the Corporation's voting equity securities, as
disclosed in the Corporation's stock records or in any other way,
including, without limitation, any filing with the Securities and Exchange
Commission or otherwise; or
(ii) The purchase of 30% or more of any class of the Corporation's
stock pursuant to any tender offer or exchange offer for shares of the
Corporation's stock, other than one made by the Corporation; or
(iii) Approval by the shareholders of the Corporation (or, if later,
approval by the shareholders of a third party) of any merger,
consolidation, reorganization or other transaction providing for the
conversion or exchange of more than 50% of the outstanding shares of the
Corporation's stock into securities of a third party, or cash, or property,
or a combination of any of the foregoing.
g. Term of Option
--------------
Each Option shall terminate, to the extent not previously exercised, upon
the occurrence or the first of the following events: (i) the expiration of the
duration of the Option, as designated by the Plan Administrator in accordance
with Section 5(d) above; (ii) the expiration of 95 days from the date of the
Optionee's termination of employment with the Corporation (190 days if the
Optionee is an officer or director of the Corporation) for any reason whatsoever
other than death or disability, or, in the case of Optionees who are not
employees of the Corporation, the expiration of 95 days from the date that the
Optionee ceases to provide services to or on behalf of the Corporation (190 days
if the Optionee is an officer or director of the
7
<PAGE>
Corporation) unless the exercise period is extended by the Plan Administrator to
a date not later than the expiration date of the Option; or (iii) the expiration
of one year from (A) the date of death of the Optionee or (b) cessation of
employment or provision of services by reason of disability.
For purposes of the Plan, unless otherwise defined in the Agreement,
"disability" shall mean any physical, mental or other health condition which
substantially impairs the Optionees ability to perform her or his assigned
duties for one hundred twenty (120) days or more in any two hundred forty (240)
day period or that can be expected to result in death. The Plan Administrator
shall determine whether an Optionee has incurred a disability on the basis of
medical evidence acceptable to the Plan Administrator. Upon making a
determination of disability, the Plan Administrator shall, for purposes of the
Plan, determine the date of an Optionee's termination of employment or
contractual relationship. Unless accelerated in accordance with Section 5(f)
above, unvested Options shall terminate immediately upon the termination of
employment of the Optionee by the Corporation for any reason whatsoever,
including death or disability.
8
<PAGE>
h. Exercise of Options
-------------------
Options shall be exercisable, either all or in part, at any time after
vesting. If less than all of the shares included in the vested portion of any
Option are purchased, the remainder may be purchased at any subsequent time
prior to the expiration of the Option term. Only whole shares may be issued
pursuant to an Option, and to the extent than an Option covers a fraction of a
share, it is unexercisable. Options or portions thereof may be exercised by
giving written notice to the Corporation, which notice shall specify the number
of shares to be purchased, and be accompanied by payment in the amount of the
aggregate Option exercise price for the Common Stock so purchased, which payment
shall be in the form specified in Section 5(i) hereof. The corporation shall
not be obligated to issue, transfer, or deliver a certificate of Common Stock to
any Optionee, or to his personal representative, until the aggregate Option
Price has been paid for all shares for which the Option shall have been
exercised and adequate provision has been made by the Optionee for satisfaction
of any tax withholding obligations associated with such exercise. During the
lifetime of an Optionee, Options are exercisable only by the Optionee.
i. Payment upon Exercise of Option
-------------------------------
Upon exercise of any Option the aggregate Option exercise price shall be
paid to the Corporation in cash or by certified or cashier's check. In
addition, an Optionee may pay for all or any Stock purchased upon the exercise
of any Option by delivering to the corporation shares of Stock previously held
by such Optionee or, with the permission of the Plan Administrator, by having
shares withheld from the amount of shares of Stock to be received by the
Optionee (provided that at the time of any such exercise the Optionee then holds
shares of Stock with a market value of at least the exercise price), or by
complying with any other payment mechanism which the Plan Administrator may
approve from time to time. The shares of Stock received by the Corporation or
withheld by the Corporation as payment for shares of Stock purchased upon the
exercise of Options shall have a fair market value (as established by the Plan
Administrator) equal to the aggregate Option exercise price (or portion thereof)
to be paid through the exchange of previously held shares of Stock or
9
<PAGE>
through the withholding of shares of Stock to be received by the Optionee upon
exercise.
j. Rights as a Shareholder
-----------------------
An Optionee shall have no rights as a shareholder with respect to any
shares covered by the Option until the Optionee becomes a record holder of such
shares, irrespective of whether he has given notice of exercise. Subject to the
provisions of Section 5(m) hereof, no rights shall accrue to an Optionee and no
adjustments shall be made on account of dividends (ordinary or extraordinary,
whether in cash, securities or other property) or distributions or other rights
declared on, or created in, the Common Stock for which the record date is prior
to the date the Optionee becomes a record holder of the shares of Common Stock
covered by the Option, irrespective of whether the Optionee has given notice of
exercise.
k. Transfer of Option
------------------
Options granted under this Plan and the rights and privileges conferred
hereby may not be transferred, assigned, pledged, or hypothecated in any manner
(whether by operation of law or otherwise) other than by will or by the
applicable laws of descent and distribution, or pursuant to a qualified domestic
relations order, and shall not be subject to execution, attachment, or similar
process. Upon any attempt to transfer, assign, pledge, hypothecate or otherwise
dispose of any Option under this Plan or of any right or privilege conferred
hereby, contrary to the provisions hereof, or upon the sale, levy or any
attachment or similar process upon the rights and privileges conferred hereby,
such Option shall thereupon terminate and become null and void.
l. Securities Regulation and Tax Withholding
-----------------------------------------
(1) No Option shall be exercisable unless the Option and the
Common Stock to be issued pursuant thereto shall comply with all relevant
provisions of law, including, without limitation, any applicable state
securities laws, the Securities Act of 1933, as amended, the Exchange Act, the
rules and regulations thereunder and the requirements of any stock exchange
10
<PAGE>
upon which such shares may then be listed and such issuance shall be further
subject to the approval of counsel for the Corporation with respect to such
compliance, including the availability of an exemption from registration for the
issuance and sale of such shares. The inability of the corporation to obtain
from any regulatory body the authority deemed by the Corporation to be necessary
for the lawful issuance and sale of any shares under this Plan, or the
unavailability of an exemption from registration for the issuance and sale of
any shares under this Plan, shall relieve the Corporation of any liability with
respect to the non-issuance or sale of such shares.
Each Agreement shall contain adequate provisions to assure that there are
no violations of the relevant provisions of laws. Where necessary to effect
exemption from registration under such laws, an Optionee hereunder shall be
required, upon the exercise of an Option, to take the Common Stock with
investment intent and not with a view to its distribution, and to present to the
Plan Administrator a letter to that effect in a form suitable to the Plan
Administrator. The Plan Administrator may take such other action or require
such other action or agreement by an Optionee as may from time to time be
necessary to comply with appropriate federal and state securities laws. This
provision shall in no way obligate the Corporation to undertake the registration
of the Options or shares of Common Stock issuable upon exercise thereof.
(2) The Plan Administrator may take such measures as it deems
appropriate to ensure that the Corporation's obligations under the withholding
provisions of the Internal Revenue Code of 1986, as amended (the "Code"), and
other provisions of state and federal laws are satisfied in respect of the grant
or exercise of Options.
(3) Issue, transfer or delivery of certificates of Common Stock
pursuant to the exercise of Options may be delayed, at the discretion of the
Plan Administrator, until the Plan Administrator is satisfied that the
applicable requirements of the federal and state securities laws and the
withholding provisions of the Code have been met.
m. Stock Dividend, Reorganization or Liquidation
---------------------------------------------
11
<PAGE>
Until the Optionee becomes a record holder of the shares of Common stock
covered by each outstanding Option, the number of such shares and the Option
Price per share thereof shall be proportionately adjusted for an increase or
decrease in the number of issued shares of the Corporation resulting from a
subdivision or consolidation of shares, payment of a stock dividend, or any
other increase or decrease in the number of shares effected by the Corporation
without receipt of or for a nominal consideration, and to the extent that such
action shall include an increase or decrease in the number of shares of Common
Stock subject to outstanding Options, the number of shares available under
Section 4 of this Plan (including those shares which are reserved for Options
granted under Section 6 hereof) and the number of shares underlying Options
granted pursuant to Section 6(a) hereof shall automatically be increased or
decreased, as the case may be, proportionately, without further action on the
part of the Plan Administrator, the Corporation or the Corporation's
shareholders.
In the event the presently authorized capital stock of the Corporation is
changed into the same number of shares with a different par value, the stock
resulting from any such change shall be deemed to be Common Stock within the
meaning of the Plan, and each Option shall apply to the same number of shares of
such new stock as it applied to old shares immediately prior to such change.
If the Corporation is the surviving or resulting corporation in any
"reorganization," as that term is defined in Section 368 of the Code, each
outstanding Option shall apply to such securities of the Corporation after the
reorganization as a holder of the number of shares of Common Stock subject to
the Option would be entitled under the terms of the reorganization. If, pursuant
to the terms of any reorganization in which the Corporation is not the surviving
or resulting corporation, Options granted hereunder are assumed by the surviving
or resulting corporation, each Option shall continue in full force and effect,
and shall apply to the same number and class of securities of the surviving
corporation as a holder of the number of shares of Common Stock subject to the
Option would be entitled under the terms of the reorganization. Should any such
surviving or resulting corporation assume Options granted hereunder, the
12
<PAGE>
type and terms of securities of the surviving or resulting corporation to which
Options would then be deemed to apply shall be fixed solely by the terms of any
applicable reorganization agreement, and holders of Options shall have no rights
whatsoever concerning the type and terms of the substituted securities to which
Options would then apply. In particular, holders of Options shall have no rights
as to the setting of distribution, payment, expiration or maturity dates of any
preferred stock, certificates of contingent interest, bonds, debentures,
warranties, rights, Options or other securities of any surviving or resulting
corporation, with respect to the date or dates of exercise of such Options, and
any such distribution, payment, expiration or maturity dates and shall be
determined solely by the terms of the reorganization agreement. In the event of
any dissolution or liquidation of the Corporation, or of any reorganization in
which the Corporation is not the surviving or the resulting corporation, and in
connection with which no assumption of or substitution of new Options for
Options is made, each outstanding Option shall terminate as of the effective
date of such dissolution liquidation or reorganization. In lieu of assuming any
Option, any resulting or surviving corporation may substitute new Options
("Substitute Options") for Options and in such event each outstanding Option
shall terminate as of the date of effectiveness of the corresponding Substitute
Option. In the event of any such reorganization, surviving Options or Substitute
Options shall have the same vesting dates as the corresponding Options granted
hereunder.
The foregoing adjustments in the shares subject to Options shall be made by
the Plan Administrator, or by any successor administrator of the Plan, or by the
applicable terms of any assumption or substitution document, any adjustments so
made shall be final, binding and conclusive.
Except as provided in this Section 5(m), no Optionee shall have rights by
reason of any subdivision or consolidation of shares of Common Stock of any
class including shares of Common Stock, or the payment of any Common Stock
dividend on shares of Common Stock or any other increase or decrease in the
number of shares of Common Stock, or by reason of any liquidation, dissolution,
corporate combination or division; and any issue by the Corporation of shares of
Common Stock of any class including shares of Common Stock, or securities
convertible into shares of Common Stock of any class including
13
<PAGE>
shares of Common Stock, shall not affect, and no adjustment by reason thereof
shall be made with respect to, the number or price of shares of Common Stock
subject to any Option.
The grant of an Option shall not affect in any way the right or power of
the Corporation to make adjustments, reclassification, reorganizations or
changes in its capital or business structure, or to merge, consolidate, dissolve
or liquidate, or to sell or transfer all or any part of its business or assets.
6. NON-EMPLOYEE DIRECTORS
----------------------
Directors who are not also employees of the Corporation ("Non-Employee
Directors") shall be eligible to receive Options under the Plan only in
accordance with the terms and conditions of this Section 6.
a. Number of Shares and Date of Grant
----------------------------------
Each Non-Employee Director shall automatically receive an annual Option to
purchase up to 7,500 shares of Common Stock of the Corporation, subject to
adjustment as set forth in Section 5(m) hereof. The annual Date of Grant shall
be the first Wednesday of March for so long as shares are available for grant
pursuant to Section 4.
b. Option Price
------------
The exercise price shall be the fair market value of the Corporation's
Common Stock on the Date of Grant. For the purposes of this Section the term
"fair market value" on any given day means: (i) if the Common Stock is listed
on a national securities exchange, the average of the high and low prices of the
Common Stock of the Corporation on such exchange or such other national
securities exchange as shall be designated by the Plan Administrator; or (ii) if
the Common Stock is traded in the over-the-counter securities market, the last
sale price of the Common Stock as quoted by NASDAQ National Market System or, if
the Common Stock is not quoted in the National Market System, the
14
<PAGE>
mean between the closing bid and asked prices of Common Stock as quoted by
NASDAQ.
c. Duration of Options
-------------------
Each Option granted to a Non-Employee Directors shall expire, unless
otherwise terminated pursuant to Section 5(g), 5 years from its Date of Grant.
d. Vesting Schedule
----------------
In order to ensure that the Corporation will receive the benefits
contemplated in exchange for the Options granted pursuant hereto, no Option
shall be exercisable until it has vested. Each Option granted to a Non-Employee
Director pursuant to this Section 6 shall vest in full on the last day of the
Corporation's fiscal year in which the Option was granted, provided that the
Non-Employee Director continues to serve as a director on such day.
e. The provisions of this Section 6 shall not be amended more than
once every six (6) months, other than to comport with changes in the Code, the
Employee Retirement Income Security Act, or the rules thereunder.
f. Other Terms
-----------
Except as otherwise provided in this Section 6, all Options granted to Non
Employee Directors shall be subject to the provisions of the Plan.
7. EFFECTIVE DATE: TERM
--------------------
This Plan shall be effective as of January 1, 1987 and Options may be
granted by the Plan Administrator from time to time thereafter until December
31, 2005; provided, however, that termination of the Plan shall not terminate
any Option granted prior thereto. Options granted by the Board prior to the
date of the first meeting of the shareholders of the Corporation duly convened
following the effective date of this Plan shall be granted subject to
ratification of this Plan by the shareholders of the Corporation at such duly
convened meeting, and if
15
<PAGE>
shareholder ratification is not obtained at such meeting, each and every Option
granted under this Plan shall be null and void and shall convey no rights to the
holder thereof.
8. NO OBLIGATION TO EXERCISE OPTION
--------------------------------
The granting of an Option shall impose no obligation upon the Optionees to
exercise such Option.
9. NO RIGHT TO OPTIONS OR EMPLOYMENT
---------------------------------
Except as provided in Section 6, whether or not any Options are to be
granted hereunder shall be exclusively with the discretion of the Plan
Administrator, and nothing contained herein shall be construed as giving any
Optionee any right to participate hereunder. Granting of an Option hereunder
shall in no way constitute any form of agreement or understanding binding on the
Corporation, express or implied, that the Corporation will employ or contract
with an Optionee for any length of time.
10. APPLICATION OF FUNDS
--------------------
The proceeds received by the Corporation from the sale of Common Stock,
pursuant to Options granted hereunder, will be used for general corporate
purposes.
11. INDEMNIFICATION OF PLAN ADMINISTRATOR
-------------------------------------
In addition to all other rights of indemnification they may have as members
of the Board or of any Committee, members of the Plan Administrator shall be
indemnified by the Corporation for all reasonable expenses and liabilities of
any type or nature, including attorneys' fees, incurred in connection with any
action, suit or proceeding to which they or any of them are a party by reason
of, or in connection with, the Plan or any Option granted hereunder, and against
all amounts paid by them in settlement thereof (provided such settlement is
approved by independent legal counsel selected by the Corporation), except to
the extent that such expenses relate to matters for which it is adjudged that
such Plan Administrator is liable for willful misconduct; provided within
fifteen (15) days after the institution of any such action, suit or proceeding,
the members
16
<PAGE>
of the Plan Administrator involved therein shall, in writing, notify the
Corporation of such action, suit or proceeding, so that the Corporation may have
the opportunity to make appropriate arrangements to prosecute or defend the
same.
12. AMENDMENT OF THE PLAN
---------------------
The Plan Administrators may, at any time, modify or amend this Plan and
Options granted hereunder, except that no amendment with respect to an
outstanding Option shall be made over the objection of the Optionee thereof; and
provided further, that any amendment for which shareholder approval is required
by securities and Exchange Commission Rule 16b-3, as amended from time to time,
or any successor rule or regulatory requirements (the "Rule"), in order for the
Plan to be eligible or continue to qualify for the benefits of the Rule shall be
subject to approval of the requisite percentage of the shareholders of the
Corporation in accordance with the Rule. Without limiting the generality of the
foregoing, the Plan Administrator may modify grants to persons who are eligible
to receive Options under this Plan who are foreign nationals or employed outside
the United States to recognize differences in local law, tax policy or custom.
SEATTLE FILMWORKS, INC.
/s/ Case H. Kuehn
----------------------------------------
Case H. Kuehn, Vice President, Treasurer
and Chief Financial Officer
17
<PAGE>
EXHIBIT 11
SEATTLE FILMWORKS, INC.
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
THIRD QUARTER ENDED NINE MONTHS ENDED
JUNE 29, JUNE 24, JUNE 29, JUNE 24,
1996 1995 1996 1995
==========================================================================================================
<S> <C> <C> <C> <C>
COMPUTATION OF PRIMARY EARNINGS PER SHARE:
- ------------------------------------------
Weighted average shares outstanding 10,812,173 10,623,188 10,766,777 10,578,668
Net effect of dilutive stock options based on the
treasury stock method using average market price 1,040,355 1,032,650 1,044,283 999,783
----------- ----------- ----------- -----------
Total shares and equivalents 11,852,528 11,655,838 11,811,060 11,578,451
=========== =========== =========== ===========
Net income $ 2,241,906 $ 1,512,619 $ 3,696,078 $ 2,506,801
=========== =========== =========== ===========
PRIMARY EARNINGS PER SHARE $ .19 $ .13 $ .31 $ .22
=========== =========== =========== ===========
COMPUTATION OF FULLY DILUTED EARNINGS PER SHARE:
- ------------------------------------------------
Weighted average shares outstanding 10,812,173 10,623,188 10,766,777 10,578,668
Net effect of dilutive stock options based on the
treasury stock method using the higher of quarter-end
market price or average market price 1,040,355 1,064,316 1,044,776 1,084,188
----------- ----------- ----------- -----------
Total shares and equivalents 11,852,528 11,687,504 11,811,553 11,662,856
=========== =========== =========== ===========
Net income $ 2,241,906 $ 1,512,619 $ 3,696,078 $ 2,506,801
=========== =========== =========== ===========
FULLY DILUTED EARNINGS PER SHARE $ .19 $ .13 $ .31 $ .21
=========== =========== =========== ===========
</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.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SEATTLE
FILMWORKS INC., THIRD QUARTER 1996 10-Q, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-28-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> JUN-29-1996
<CASH> 6,631
<SECURITIES> 0
<RECEIVABLES> 2,337<F1>
<ALLOWANCES> 0
<INVENTORY> 8,450
<CURRENT-ASSETS> 18,436
<PP&E> 5,071<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 35,488
<CURRENT-LIABILITIES> 10,048
<BONDS> 0
0
0
<COMMON> 108
<OTHER-SE> 21,807
<TOTAL-LIABILITY-AND-EQUITY> 35,488
<SALES> 0
<TOTAL-REVENUES> 57,019
<CGS> 34,489
<TOTAL-COSTS> 17,115
<OTHER-EXPENSES> (246)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1
<INCOME-PRETAX> 5,660
<INCOME-TAX> 1,964
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,696
<EPS-PRIMARY> .31
<EPS-DILUTED> .31
<FN>
<F1>ASSET VALUES REPRESENT NET AMOUNTS
</FN>
</TABLE>
