<PAGE>
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: MARCH 29, 1997 Commission file No.0-15338
-------------- -------
SEATTLE FILMWORKS, INC.
------------------------
(Exact name of registrant as specified in its charter.)
WASHINGTON 91-0964899
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1260 16TH AVENUE WEST, SEATTLE, WA 98119
- ----------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (206) 281-1390
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to the
filing requirements for the past 90 days.
Yes X No
---- ----
As of April 30, 1997, there were issued and outstanding 16,280,127 shares
of common stock, par value $.01 per share.
Index to Exhibits at Page 14
Page 1 of 49
<PAGE>
SEATTLE FILMWORKS, INC.
INDEX
-----
Page No.
--------
PART I -- FINANCIAL INFORMATION
Item 1 - Financial Statements 3-7
Balance Sheets as of March 29, 1997
and September 28, 1996 3-4
Statements of Income for the second quarter and six months
ended March 29, 1997 and March 30, 1996 5
Statements of Cash Flows for the six months ended
March 29, 1997 and March 30, 1996 6
Notes to Financial Statements 7
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-11
PART II -- OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of Security Holders 12
Item 6 - Exhibits and Reports on Form 8-K 12
SIGNATURES 13
INDEX TO EXHIBITS 14
EXHIBITS 15
Page 2 of 49
<PAGE>
PART I -- FINANCIAL INFORMATION
-------------------------------
ITEM 1 - FINANCIAL STATEMENTS
SEATTLE FILMWORKS, INC.
BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
(UNAUDITED) (NOTE)
March 29, September 28,
ASSETS 1997 1996
============================================================================================================================
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 4,758 $ 6,135
Securities available-for-sale 5,874 4,559
Accounts receivable, net of allowance for doubtful accounts 1,650 1,980
Inventories 8,494 6,577
Capitalized promotional expenditures 41 238
Prepaid expenses and other 483 351
Deferred income taxes 439 311
------- -------
TOTAL CURRENT ASSETS 21,739 20,151
FURNITURE, FIXTURES, AND EQUIPMENT,
at cost, less accumulated depreciation 6,183 5,337
CAPITALIZED CUSTOMER ACQUISITION EXPENDITURES 13,139 11,334
DEPOSITS AND OTHER ASSETS 374 253
NON-COMPETE AGREEMENT,
net of accumulated amortization 563 751
------- -------
TOTAL ASSETS $41,998 $37,826
======= =======
</TABLE>
Note: The September 28, 1996 balance sheet has been derived from audited
financial statements.
See notes to financial statements.
Page 3 of 49
<PAGE>
SEATTLE FILMWORKS, INC.
BALANCE SHEETS (CONTINUED)
(in thousands, except per share and share data)
<TABLE>
<CAPTION>
(UNAUDITED) (NOTE)
March 29, September 28,
LIABILITIES AND SHAREHOLDERS' EQUITY 1997 1996
====================================================================================================================================
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 5,720 $ 3,490
Accrued expenses 1,090 1,086
Accrued compensation 1,517 2,001
Income taxes payable 311 972
------- -------
TOTAL CURRENT LIABILITIES 8,638 7,549
DEFERRED INCOME TAXES 4,148 3,602
------- -------
TOTAL LIABILITIES 12,786 11,151
SHAREHOLDERS' EQUITY
Preferred Stock, $.01 par value,
authorized 2,000,000 shares, none issued
Common Stock, $.01 par value, authorized 101,250,000
shares, issued and outstanding 16,280,127 163 162
Additional paid-in capital 1,713 1,680
Retained earnings 27,336 24,833
------- -------
TOTAL SHAREHOLDERS' EQUITY 29,212 26,675
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $41,998 $37,826
======= =======
</TABLE>
Note: The September 28, 1996 balance sheet has been derived from audited
financial statements.
See notes to financial statements.
Page 4 of 49
<PAGE>
SEATTLE FILMWORKS, INC.
STATEMENTS OF INCOME (UNAUDITED)
(in thousands, except per share and share data)
<TABLE>
<CAPTION>
Second Quarter Ended Six Months Ended
------------------------ -------------------------
March 29, March 30, March 29, March 30,
1997 1996 1997 1996
====================================================================================================================================
<S> <C> <C> <C> <C>
Net revenues $21,657 $17,821 $42,893 $34,510
Cost of goods and services 12,762 10,510 25,744 20,907
------- ------- ------- -------
GROSS PROFIT 8,895 7,311 17,149 13,603
Operating expenses:
Customer acquisition costs 3,762 3,236 7,244 5,774
Other selling expenses 2,100 2,130 3,860 3,462
Research and development 209 274 382 521
General and administrative 1,213 1,012 2,120 1,780
------- ------- ------- -------
Total operating expenses 7,284 6,652 13,606 11,537
------- ------- ------- -------
INCOME FROM OPERATIONS 1,611 659 3,543 2,066
Other income (expense):
Interest expense (1) (1)
Interest income 141 112 287 254
Non operating income (expense), net 7 - 9 93
------- ------- ------- -------
Total other income 148 111 296 160
------- ------- ------- -------
INCOME BEFORE INCOME TAXES 1,759 770 3,839 2,226
Provision for income taxes (613) (267) (1,336) (772)
------- ------- ------- -------
NET INCOME $ 1,146 $ 503 $ 2,503 $ 1,454
======= ======= ======= =======
EARNINGS PER SHARE $.06 $.03 $.14 $.08
==== ==== ==== ====
WEIGHTED AVERAGE SHARES AND
EQUIVALENTS OUTSTANDING 17,761,909 17,772,080 17,797,503 17,766,036
========== ========== ========== ==========
</TABLE>
See notes to financial statements.
Page 5 of 49
<PAGE>
SEATTLE FILMWORKS, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended
-----------------------
March 29, March 30,
1997 1996
====================================================================================================================================
<S> <C> <C>
OPERATING ACTIVITIES:
- ---------------------
Net income $ 2,503 $ 1,454
Charges to income not affecting cash:
Depreciation and amortization 1,393 1,111
Amortization of capitalized customer
acquisition expenditures 6,594 5,124
Deferred income taxes 418 861
Loss on disposal of equipment 88
Net change in receivables, inventories, payables and other (630) (2,066)
Capitalized promotional expenditures, net 197 115
Additions to capitalized customer acquisition expenditures (8,399) (7,413)
------- -------
NET CASH FROM (USED IN) OPERATING ACTIVITIES 2,076 (726)
INVESTING ACTIVITIES:
- ---------------------
Purchase of furniture, fixtures, and equipment (2,172) (2,320)
Purchases of securities available-for-sale (6,257) (2,350)
Sales of securities available-for-sale 4,942 3,195
Proceeds from sale of equipment 2
------- -------
NET CASH USED IN INVESTING ACTIVITIES (3,487) (1,473)
FINANCING ACTIVITIES:
- ---------------------
Proceeds from issuance of Common Stock 214 253
Payment on purchase of Common Stock (180)
------- -------
NET CASH FROM FINANCING ACTIVITIES 34 253
------- -------
DECREASE IN CASH AND CASH EQUIVALENTS (1,377) (1,946)
Cash and cash equivalents at beginning of period 6,135 8,560
------- -------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 4,758 $ 6,614
======= =======
</TABLE>
See notes to financial statements.
Page 6 of 49
<PAGE>
SEATTLE FILMWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
NOTE A -- BASIS OF PRESENTATION
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). To a
lesser extent, the Company provides services, products and photofinishing
supplies on a wholesale basis to a variety of commercial customers.
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) considered necessary for fair presentation of interim
results have been included. The Company follows a policy of recording its
interim periods and year-end on a 5 week, 4 week and 4 week basis for
comparability of results and to be consistent with its internal weekly
reporting. Operating results for the second quarter and six months ended March
29, 1997 are not necessarily indicative of the results that may be expected for
the fiscal year ending September 27, 1997. 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 28, 1996.
NOTE B -- STOCK SPLIT
On March 17, 1997 the Company effected a three-for-two stock split by
declaring a stock dividend of one share for every two shares outstanding. All
share data, per share data and related accounts in the accompanying financial
statements have been retroactively adjusted for this stock split.
NOTE C -- 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 related to
groups of existing customers. This change in accounting estimate was made to
more accurately match incremental revenues and expenses. At that time the
Company also changed the estimated life of the benefit of a non-compete
agreement from ten years to five years.
NOTE D -- EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, Earnings per Share, which shall be effective for financial statements
for both interim and annual periods ending after December 15, 1997. At that
time, the Company will be required to change the method currently used to
compute earnings per share and to restate all prior periods. Under the new
requirements for calculating primary earnings per share, the dilutive effect of
stock options will be excluded. The impact is expected to result in an increase
in primary earnings per share for the second quarter and six months ended March
29, 1997, and the six-months ended March 30, 1996, of $.01 per share. The impact
of Statement No. 128 on the calculation of fully diluted earnings per share for
these same periods is not expected to be material.
Page 7 of 49
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward-Looking Information
- ---------------------------
Statements in this report concerning expectations for the future constitute
forward-looking statements which are subject to a number of known and unknown
risks, uncertainties and other factors which may cause actual results,
performance or achievements of the Company or industry trends to differ
materially from those expressed or implied by such forward-looking statements.
Relevant risks and uncertainties include, among others, 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 growth of net revenues and net
income during fiscal 1995, 1996 and the first six months of fiscal 1997. 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(R).
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 as "capitalized customer acquisition expenditures."
Capitalized customer acquisition expenditures relating to 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.
Customer acquisition costs as a percentage of net revenues have increased
to 16.9% in the first six months of fiscal 1997 as compared to 16.7% in the
first six months of fiscal 1996. Management believes this increase in customer
acquisition costs as a percentage of net revenues was due primarily to expansion
of the Company's 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.
Page 8 of 49
<PAGE>
Net income as a percentage of net revenues increased to 5.8% for the first
six months of fiscal 1997 as compared to 4.2% for the same period of fiscal 1996
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 and effectiveness of promotional 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. However, seasonality of demand may be offset by the
introduction of new services and products, changes in the level of effectiveness
of customer acquisition programs and other factors. 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.
RESULTS OF OPERATIONS
The following table presents information from the Company's statements of
income, expressed as a percentage of net revenues for the periods indicated.
<TABLE>
<CAPTION>
Second Quarter Ended Six Months Ended
March 29, March 30, March 29, March 30,
1997 1996 1997 1996
====================================================================================================================================
<S> <C> <C> <C> <C>
Net revenues 100.0% 100.0% 100.0% 100.0%
Cost of goods and services 58.9 59.0 60.0 60.6
----- ----- ----- -----
GROSS PROFIT 41.1 41.0 40.0 39.4
Operating expenses:
Customer acquisition costs 17.4 18.2 16.9 16.7
Other selling expenses 9.7 11.9 9.0 10.0
Research and development 1.0 1.5 0.9 1.5
General and administrative 5.6 5.7 4.9 5.2
----- ----- ----- -----
Total operating expenses 33.7 37.3 31.7 33.4
----- ----- ----- -----
INCOME FROM OPERATIONS 7.4 3.7 8.3 6.0
Total other income 0.7 0.6 0.6 0.4
----- ----- ----- -----
INCOME BEFORE INCOME TAXES 8.1 4.3 8.9 6.4
Provision for income taxes 2.8 1.5 3.1 2.2
----- ----- ----- -----
NET INCOME 5.3% 2.8% 5.8% 4.2%
===== ===== ===== =====
</TABLE>
Net revenues for the second quarter of fiscal 1997 increased 21.5% to
$21,657,000 as compared to net revenues of $17,821,000 in the second quarter of
fiscal 1996. For the six months ended March 29, 1997, net revenues increased
24.3% to $42,893,000 compared to $34,510,000 for the same period of fiscal 1996.
The increased net revenues in fiscal 1997 were primarily due to expanded
customer acquisition activities and marketing to existing customers during
fiscal year 1996 and the first six months of fiscal year 1997 which have
resulted in increased net revenues from photofinishing services and products.
Management believes that its Seattle FilmWorks(R) branded business has benefited
from the Company's entry into
Page 9 of 49
<PAGE>
the personal computer market with its PhotoWorks(R) and Pictures On Disk[TM]
products, which were first introduced in January 1994.
Cost of goods and services consist of labor, postage and supplies related
to the Company's services and products. Gross profit in the second quarter of
fiscal 1997 increased to 41.1% of net revenues compared to 41.0% in the second
quarter of fiscal 1996. For the first six months of fiscal 1997, gross profit
increased to 40.0% compared to 39.4% for the same period of fiscal 1996. The
increase in fiscal 1997 periods was 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 favorably impacted in the second quarter of fiscal
1996 by the reversal of $227,000 of state tax reserves upon the resolution of
uncertainties related to a 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 second quarter of fiscal 1997 decreased to
33.7% of net revenues compared to 37.3% in the second quarter of fiscal 1996.
For the first six months of fiscal 1997 total operating expenses decreased to
31.7% of net revenues compared to 33.4% for the same period of fiscal 1996. The
decreases, as a percent of net revenues, were due primarily to a decrease in
customer acquisition and other selling expenses. Effective as of the beginning
of the second quarter of fiscal 1996 the Company reduced from twelve to six
months the amortization period for certain marketing activities to specific
groups of existing customers. This change in accounting estimate resulted in
incremental amortization of $414,000 of previously deferred customer acquisition
costs in the second quarter of fiscal 1996. 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. The Company capitalized $8,399,000 of customer acquisition
expenditures in the first two quarters of fiscal 1997 compared to $7,413,000 for
the first two quarters of fiscal 1996 while amortization of these costs was
$6,594,000 and $5,124,000 during these two same periods, respectively.
Capitalized customer acquisition expenditures as of March 29, 1997, increased to
$13,139,000 compared to $11,334,000 as of September 28, 1996. 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 second quarter of fiscal 1997 decreased to 9.7% of
net revenues compared to 11.9% of net revenues for the second quarter of fiscal
1996. For the first six months of fiscal 1997, other selling expenses decreased
to 9.0% of net revenues compared to 10.0% of net revenues for the first six
months of fiscal 1996. The second quarter of fiscal 1996 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 rights to the PhotoWorks(R) mark claimed by a
third party.
Research and development expenses decreased to $209,000 in the second
quarter of fiscal 1997 as compared to $274,000 for the second quarter of fiscal
1996. Research and development expenses for the first six months of fiscal 1997
decreased to $382,000 as compared to $521,000 for the first six months of fiscal
1996. The decreases resulted primarily from lower contract service costs for the
first and second quarters of fiscal 1997. 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 $1,213,000 for the second
quarter of fiscal 1997 as compared to $1,012,000 for the second quarter of
fiscal 1996. General and administrative costs increased to $2,120,000 for the
first six months of fiscal 1997 as compared to $1,780,000 for the first six
months of fiscal 1996. The increases were due to increased compensation expenses
based on the Company's profitability, increased costs related to the Company's
management information systems and increased legal and accounting costs. General
and administrative expenses as a percent of net
Page 10 of 49
<PAGE>
revenues decreased to 4.9% for first six months of fiscal 1997 as compared to
5.2% for the same period of fiscal 1996. 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 second quarter of fiscal 1997 increased to
$148,000 as compared to $111,000 for the second quarter of fiscal 1996. For the
first six months of fiscal 1997, total other income was $296,000 as compared to
$160,000 for the same period of fiscal 1996. The increases in the fiscal 1997
periods resulted from higher interest income and a $90,000 loss on equipment
disposals during the first quarter of fiscal 1996.
The federal income tax rate for the first six months of fiscal 1997 as
compared to the first six months of fiscal 1996 increased to 34.8% from 34.7%.
The increase in the effective tax rate was due primarily to an increase in the
marginal federal corporate tax rate due to expected income levels.
Net income in the second quarter of fiscal 1997 was $1,146,000, or $.06 per
share, compared to $503,000 or $.03 per share for the second quarter of fiscal
1996. Net income for the first six months of fiscal 1997 was $2,503,000 or $.14
per share as compared to $1,454,000 or $.08 per share for the same period of
fiscal 1996. The increases in net income were primarily attributable to the
increase in net revenues and gross profit and decreases in operating expenses,
as a percent of net revenues, as compared to fiscal 1996.
LIQUIDITY AND CAPITAL RESOURCES
As of May 2, 1997, the Company's principal sources of liquidity included
cash and short-term investments of $11,536,535 and an unused revolving line of
credit of $6,000,000. The ratio of current assets to current liabilities for
the Company was 2.5 to 1 at the end of the second quarter of fiscal 1997, down
slightly from the current ratio of 2.7 to 1 at September 28, 1996. During the
second quarter of fiscal 1997 the Company increased its investment in securities
available-for-sale by $1,315,000 which was the primary reason for the decrease
in cash and cash equivalents. The Company also increased inventory levels by
$1,917,000 to accommodate expanded marketing plans, achieve faster turnaround of
customer orders, and support increased photofinishing volume. This increase in
inventory was the principal reason for the $2,230,000 increase in accounts
payable at the end of the second 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.
On January 22, 1997, the Company announced that it may repurchase shares of
its Common Stock, either through open market purchases at prevailing market
prices, through block purchases or in privately negotiated transactions.
Repurchases may be commenced or discontinued by the Company at any time.
Although the number of shares to be repurchased is uncertain, any repurchased
shares will to some degree offset the dilutive effect on earnings per share of
shares of Common Stock issued under the Company's stock option and stock
purchase plans.
On March 4, 1997 the Company signed a lease agreement for office and
warehouse space in Seattle, Washington, which will be primarily utilized as
office space and certain photofinishing and mail order operations. This lease
commenced on April 1, 1997, for a term of forty-two months and includes 46,317
of total square feet including 7,700 square feet of mezzanine office space. The
monthly base rent for this building is $18,766 throughout the lease.
Although the Company does not currently have any fixed material commitments
with regard to capital expenditures, it currently expects to spend approximately
$2,500,000 during the remainder of fiscal 1997, principally for photofinishing
equipment and for leasehold improvements.
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.
Page 11 of 49
<PAGE>
PART II -- OTHER INFORMATION
----------------------------
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
On February 12, 1997, the Company held its annual meeting of shareholders.
The meeting was reconvened on March 5, 1997. The shareholders acted on the
following matters at the annual meeting.
1. An amendment to the Company's Restated Articles of Incorporation to
establish a classified Board of Directors and to provide for removal of
directors only for cause was approved. The number of votes cast for the
proposal, the number of votes against the proposal, the number of votes
withheld, and the number of broker non-votes are listed.
For Against Abstain Non-votes
--- ------- ------- ---------
5,444,853 2,971,352 43,660 1,575,646
2. The following individuals were elected to the Company's Board of
Directors, to hold office for the specified terms and until their successors are
duly elected and qualified. The number of votes cast for each individual, the
number of votes withheld, and the number of broker non-votes are listed for each
individual.
<TABLE>
<CAPTION>
For Withheld Non-votes
--- -------- ---------
<S> <C> <C> <C>
Gary Christophersen 9,755,343 280,168 N/A
Sam Rubinstein 9,751,255 284,256 N/A
Douglas A. Swerland 9,751,341 284,170 N/A
Craig E. Tall 9,754,466 281,045 N/A
Peter H. van Oppen 9,754,166 281,345 N/A
</TABLE>
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K.
(A) EXHIBITS.
---------
3 Articles of Amendment of Incorporation of Seattle FilmWorks, Inc.
10.1* Supply Agreement effective January 1, 1997 with Fuji Photo Film
U.S.A., Inc.
10.2* AT&T Agreement dated March 5, 1997
10.3 Lease Agreement dated March 4, 1997, between Smith Cove
Partnership and the Company.
11 Computation of Earnings Per Share
(B) REPORTS ON FORM 8-K.
--------------------
None
* Portions of this exhibit have been omitted pursuant to an application
for an order granting confidential treatment filed with the Commission on May
13, 1997. The omitted portions have been separately filed with the Commission.
Page 12 of 49
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SEATTLE FILMWORKS, INC.
DATED: May 12, 1997 /s/ Gary R. Christophersen
--------------------------------------------------
Gary R. Christophersen
President/Chief Executive Officer
(Principal Executive Officer)
/s/ Case H. Kuehn
--------------------------------------------------
Case H. Kuehn
Vice President-Finance/Treasurer
(Principal Financial and Chief Accounting Officer)
Page 13 of 49
<PAGE>
INDEX TO EXHIBITS
SEATTLE FILMWORKS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 29, 1997
<TABLE>
<CAPTION>
Exhibit Description Page No.
- ------- ----------- --------
<S> <C> <C>
3 Articles of Amendment of Incorporation of Seattle FilmWorks, Inc. 15
10.1* Supply Agreement effective January 1, 1997 with Fuji Photo Film U.S.A., Inc. 16
10.2* AT&T Agreement dated March 5, 1997 29
10.3 Lease Agreement dated March 4, 1997, between Smith Cove Partnership and the Company. 33
11 Computation of Earnings Per Share 49
27 Financial Data Schedule
</TABLE>
* Portions of this exhibit have been omitted pursuant to an
application for an order granting confidential treatment filed with
the Commission on May 13, 1997. The omitted portions have been
separately filed with the Commission.
Page 14 of 49
<PAGE>
EXHIBIT 3
ARTICLES OF AMENDMENT
OF
SEATTLE FILMWORKS, INC.
Pursuant to RCW 23B.10.060, the undersigned corporation adopts the
following Articles of Amendment to its Restated Articles of Incorporation:
FIRST: The name of the corporation is SEATTLE FILMWORKS, INC. (the
"Corporation").
SECOND: The Restated Articles of Incorporation are hereby amended by
deleting Article IV, Section 1 in its entirety and replacing it with a new
Article IV, Section 1 to read as follows:
ARTICLE IV
(1) Authorized Capital. The total number of shares which
the Corporation is authorized to issue is one hundred three million
two hundred fifty thousand (103,250,000), consisting of one hundred
one million two hundred fifty thousand (101,250,000) shares of common
stock, par value $.01, and two million (2,000,000) shares of preferred
stock, par value $.01. Shares shall be issued at such prices as shall
be determined by the Board of Directors. The common stock is subject
to the rights and preferences of the preferred stock as hereinafter
set forth.
THIRD: This amendment does not provide for an exchange,
reclassification or cancellation of issued shares.
FOURTH: The foregoing amendment was adopted by the Board of Directors
of the Corporation on February 12, 1997 without shareholder action. Pursuant to
RCW 23B.10.020(4), shareholder action with regard to this amendment of the
Restated Articles of Incorporation of the Corporation is not required.
SEATTLE FILMWORKS, INC.
By:/s/ Gary R. Christophersen
Date: February 13, 1997 Gary R. Christophersen, President
<PAGE>
EXHIBIT 10.1
[*] DESIGNATES MATERIAL FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN
REQUESTED, WHICH MATERIAL HAS BEEN SEPARATELY FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION.
SUPPLY AGREEMENT
----------------
SUPPLY AGREEMENT, made as of January 1, 1997, between FUJI PHOTO FILM
U.S.A., INC., a New York corporation ("Fuji"), and SEATTLE FILM WORKS, INC., a
Washington corporation ("Customer"),
W I T N E S S E T H:
-------------------
WHEREAS, Customer is engaged in the retail businesses of photofinishing and
sales of photographic products, and Fuji is engaged in the manufacture, through
its affiliated companies, and distribution of photographic products.
WHEREAS, Customer desires to purchase quantities of Fuji's color negative
photographic film, packaged to Customer's specifications, from Fuji, and Fuji is
willing to sell such quantities of its color negative photographic film, so
packaged, to Customer on the terms and subject to the conditions set forth in
this Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual promises
herein contained, the parties hereby agree as follows:
1. Definitions. When used in this Agreement, the following terms will
-----------
have the respective meanings set forth in this Article 1. Definitions used
herein are used without regard to gender, and definitions in the singular shall
apply equally when used in the plural.
"Annual Period" means a period of time, the first of which begins on
the date of the first shipment of Product and ends on the anniversary day
thereof; the second and each successive Annual Period shall be each successive
twelve-month period ending on an anniversary of the end of the first Annual
Period.
"Calendar Quarter" means a period of time of three-calendar months, or
such part thereof which occurs during the term of this Agreement, commencing on
January 1, April 1, July 1 and October 1 of each calendar year.
"Confidential Information" means all information and data of the
disclosing party designated as confidential concerning products or the business
of the disclosing party or its affiliated companies, disclosed to the receiving
party orally or in writing, including, without limitation, the Specifications.
If either party hereunder discloses information to the other party orally, then
within two (2) weeks after such disclosure the disclosing party will confirm in
1
<PAGE>
writing to the receiving party the confidential nature of the information so
disclosed. "Confidential Information" shall not include any information which
the receiving party can establish:
(a) is now generally known or available to the public or which
hereafter through no act or failure on the part of the receiving party becomes
generally known or available to the public;
(b) is legally known to the receiving party at the time of
receiving such information;
(c) is furnished to others by the disclosing party without a
restriction on disclosure;
(d) is hereafter furnished to the receiving party in writing by a
third party without restriction on disclosure, where such third party legally
obtained such information and the right to disclose it to the receiving party;
or
(e) is independently developed by the receiving party without
violation of any legal rights which the disclosing party may have in such
information.
"Fuji," as the context may require, means the corporation under common
control with Fuji Photo Film U.S.A., Inc. to which the manufacture and packaging
of the Products will be delegated hereunder and Fuji Photo Film U.S.A., Inc.,
collectively.
"Product" means the [*] color negative
photographic film manufactured by Fuji, as the same may be improved from time to
time, or such new color negative photographic film that Fuji introduces as a
replacement for the foregoing to be cut into [*] exposure lengths and marked and
packaged by Fuji for sale to Customer under this Agreement.
"Specifications" means the technical and other specifications for the
Product and the packaging therefor set forth on Exhibit A attached hereto.
---------
"UCC" means the Uniform Commercial Code, as in force in the State of
Washington on the date of this Agreement.
2. Manufacture and Sale.
--------------------
2.1 Fuji will manufacture, mark and package the Product in strict
accordance with the Specifications.
2.2 Customer will be solely responsible for the content and layout
of all packaging and labeling as set forth in the Specifications, including any
warranties and limitations of liability or remedies, disclaimers, cautionary
statements or warnings or notices on care and instructions directed to the end
user of the Product.
2
<PAGE>
3. Forecasts; Orders.
-----------------
3.1 Prior to the execution of this Agreement, Customer has
submitted to Fuji a forecast of its requirements of the Product during the first
Annual Period. Hereafter, Customer will submit to Fuji on a monthly basis, not
less than fifteen (15) days prior to the commencement of each month, a written
estimate for its requirements for the Product during the next following six
months, on a rolling basis. The parties agree that, although Fuji may, in its
sole discretion, permit adjustments, the forecast of Products required for a
particular calendar month shall become a "firm order" within the meaning of
Section 2-205 of the UCC three months prior to the commencement of such month.
The format for such written forecasts will be mutually agreeable to both
parties.
3.2 Customer will submit purchase orders to Fuji in writing, which
may be transmitted to Fuji by electronic facsimile or by electronic data
interchange system. Customer will submit its purchase orders not less than
ninety (90) days prior to the requested shipment date of such order. Each such
purchase order will be a "firm offer" within the meaning of Section 2-205 of the
UCC.
(a) Customer must place orders in minimum lots of one full
container of each Product ordered.
(b) Customer's purchase orders will be subject to acceptance by
Fuji, which will not be unreasonably withheld or delayed; provided that, in all
events, Fuji will be entitled to withhold or delay its acceptance of Customer's
purchase orders or to refuse to ship Products ordered if Customer is in default
(and any grace or cure period therefor has elapsed) in payment of any amounts
due to Fuji hereunder and such default is continuing. Should Fuji decline to
accept any purchase order from Customer when Customer is not in default under
this Agreement, Customer may, in its sole discretion, terminate this Agreement.
4. Purchase Targets.
----------------
4.1 The parties hereto have agreed on an aggregate annual
purchase target for all Products to be purchased by Customer during the three
Annual Periods occurring during the term of this Agreement, as follows:
Annual Period Number of Rolls
------------- ---------------
First [*]
Second [*]
Third [*]
4.2 The parties agree that such purchase targets are not
purchase orders and that Customer is not required to purchase all pieces of the
Product specified in such targets. However, such targets constitute an
inducement to Fuji to enter into this Agreement, and Customer's failure to place
purchase orders for the minimum number of rolls of the Products
3
<PAGE>
specified above for the applicable purchase target during any Annual Period will
constitute cause for Fuji to terminate this Agreement as provided in Section
10.2(d).
For any renewal or extension of this Agreement pursuant to Section 10.1
hereof, the parties agree to negotiate in good faith to set new purchase targets
for any additional Annual Periods.
5. Sales Terms; Delivery.
---------------------
5.1 Fuji will sell the Product to Customer pursuant to the terms
and conditions of sale (the "Sales Terms") set forth in this Agreement.
5.2 The Sales Terms govern the sales transactions between the
parties except to the extent otherwise provided herein. If there are any
inconsistencies between the Sales Terms and the provisions of this Agreement,
the provisions of this Agreement will control. If there are any inconsistencies
between the Sales Terms or the provisions of this Agreement and the terms of any
purchase order, invoice or other writing used by the parties regarding sale
transactions involving the Products, the Sales Terms or provisions of this
Agreement will control. No additional or different terms or conditions contained
in any such writing will be binding on a party unless expressly and
affirmatively accepted in writing by that party.
5.3 Fuji will deliver Products F.O.B. Customer's dock at Seattle.
Shipments will be made by carrier selected by Fuji and approved by Customer.
Product ordered by Customer pursuant to a particular purchase order shall be
completed and made available for delivery or other disposition as specified
herein in approximately one hundred twenty (120) days from Fuji's receipt of
such purchase order; provided that Fuji's specification of any delivery date is
approximate and Fuji will have no liability if delivery is not made on or by
such date; further provided, however, that if Customer is not in default of this
Agreement and Fuji shall fail to deliver Product pursuant to a particular
purchase order within approximately one hundred twenty (120) days from Fuji's
receipt of such purchase order, Customer may, except as otherwise provided in
this Agreement, terminate this Agreement.
6. Prices; Payment.
---------------
6.1 The prices for Products during the term hereof are as follows:
Product Price Per Roll
------- --------------
[*] [*]
[*] [*]
6.2 The foregoing notwithstanding, upon the occurrence of any
economic, governmental or political events which affect manufacturers or
distributors of color negative photographic film and which result in an
extraordinary increase or decrease in prices to U.S. customers for color
negative photographic film, Fuji or Customer, as the case may be, may give
4
<PAGE>
notice of such events to the other party and Fuji and Customer shall thereupon
renegotiate the prices of Product hereunder. For purposes of this Agreement,
"extraordinary increase or decrease" means an aggregate increase or decrease on
or after the commencement of the term hereof of [*] or more.
If, within forty-five (45) days after the date of such notice, Fuji and Customer
fail to agree upon new prices for Product, then either Fuji or Customer may
terminate this Agreement. If the parties fail to agree upon new prices and the
party who did not provide the notice of the need to renegotiate fails to
terminate this Agreement pursuant to this Section 6.2 within ten (10) days of
the end of the 45 day renegotiation period, the Agreement shall continue in
effect at the new prices reasonably substantiated as necessary by the notifying
party. After prices for Product are renegotiated or reset pursuant to this
Section 6.2, upon the occurrence of any subsequent extraordinary increase or
decrease in prices to U.S. customers for color negative photographic film, the
provisions of this Section 6.2 shall again apply.
For any renewal or extension of this Agreement pursuant to Section 10.1
hereof, the parties agree to negotiate in good faith to revise the Product
prices set forth in Section 6.1 hereof.
6.3 Prices are exclusive of all federal, state, local, excise, use
and similar taxes. All taxes of any nature which are billed to Customer shall
be identified, separately stated and paid by Customer or, in lieu thereof,
Customer shall provide Fuji with a tax-exemption certificate acceptable to the
relevant taxing authorities. Prices include duty and freight.
6.4 Payment shall be due net thirty (30) days after invoice date.
7. Warranty.
--------
7.1 Fuji's Warranty. Fuji warrants to Customer that all pieces of
---------------
the Products sold hereunder will conform in all respects to the Specifications
and will be free from defects in manufacturing and packaging. This warranty
will survive any delivery, acceptance, inspection or payment by Customer or a
third person of and for pieces of the Product. Fuji will, at Fuji's option,
replace any pieces of the Product which Fuji finds do not conform to the
Specifications or contain defects in manufacturing or packaging after delivery
to Customer or to Customer's customer.
7.2 Customer Warranty. Fuji acknowledges that Customer's warranty
-----------------
to its customers for the Products is initially as set forth in Exhibit B
---------
attached hereto. Fuji shall have no responsibility for such warranty extended by
Customer except to the extent expressly stated in this Article 7.
7.3 Intellectual Property Warranty. Fuji hereby warrants that the
------------------------------
Products do not infringe any rights of third persons.
7.4 Limited Liability. Except as specifically and unambiguously
-----------------
provided herein, Fuji does not make any warranties to Customer or to Customer's
customers with respect to the Products. THIS ARTICLE 7 IS A COMPLETE STATEMENT
OF FUJI'S
5
<PAGE>
WARRANTIES REGARDING THE PRODUCTS AND IS IN LIEU OF ALL OTHER WARRANTIES,
EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, WARRANTIES OF MERCHANTABILITY
AND FITNESS FOR A PARTICULAR PURPOSE. THE WARRANTIES SET FORTH IN THIS ARTICLE 7
PROVIDE THE EXCLUSIVE REMEDIES FOR ANY NON-CONFORMITY OR DEFECT IN THE PRODUCTS.
If any court having jurisdiction finally holds that this limitation of remedies
is void or unenforceable, Fuji's liability for any claim shall be limited to the
invoice price of the Product giving rise to the claim. IN NO EVENT WILL FUJI BE
LIABLE FOR INCIDENTAL, CONSEQUENTIAL OR SPECIAL DAMAGES, EVEN IF SUCH DAMAGES
RESULT FROM NEGLIGENCE OR OTHER FAULT.
8. Confidential Information.
------------------------
8.1 Both during and after the term of this Agreement, each party
will maintain in secrecy, and will neither disclose to a third person nor use
for any purpose other than its performance hereunder, the other party's
Confidential Information. In implementation of the preceding sentence, forthwith
upon the expiration or earlier termination of this Agreement, each party will
return to the other party, at no charge, all Confidential Information previously
delivered to the receiving party in written, quantitative or schematic
expression or other tangible form and all copies of the foregoing (including as
Confidential Information for purposes hereof Exhibit A provided by Customer to
---------
Fuji). Fuji shall limit access to Confidential Information to those of its
employees and subcontractors for whom access is necessary in order to perform
their employment or subcontracting duties.
8.2 Neither Fuji nor Customer shall, at any time, disclose
Confidential Information to any third party except (i) with the prior written
consent of the other party, or (ii) by reason of legal compulsion in any legal
proceedings or pursuant to law. In the event either party proposes to make any
such disclosure pursuant to the exclusion contained in clause (ii) of the
preceding sentence, such party shall, prior to or concurrently with such
disclosure, furnish the other party a written opinion of legal counsel to the
effect that such disclosure is made by reason of legal compulsion.
9. Trademarks; Product Origin.
--------------------------
9.1 Fuji will cause the Customer trade name, trademarks and logo
(collectively the "Mark") and applicable product designations to be imprinted on
the Product therefor in strict conformity to the Specifications; provided,
however, that nothing herein contained will confer on Fuji any right to or
interest in the Mark, and Fuji shall not use the Mark except on the Product
ordered by Customer pursuant to this Agreement, and shall not sell pieces of the
Product bearing the Mark to any person other than Customer. Forthwith upon the
expiration or earlier termination of this Agreement, except as may be required
to fill any orders outstanding hereunder as of the date of expiration or earlier
termination (and not cancelled by Customer pursuant to Article 9), Fuji will
cease and desist from the use of the Mark and any name, mark or logo similar
thereto.
6
<PAGE>
9.2 Neither party shall, at any time, disclose to any third party
the fact that Fuji manufactures the Product sold under the Mark, disclose the
terms and conditions of this Agreement or in any manner advertise or publish any
information concerning this Agreement, except that either party may make such
disclosure (i) with the prior written consent of the other party, or (ii) by
reason of legal compulsion in any legal proceedings or pursuant to law,
including any disclosure requirements existing under federal Securities Laws
relating to public companies. In the event either party proposes to make any
such disclosure pursuant to the exclusion contained in clause (ii) of the
preceding sentence, such party shall, prior to or concurrently with such
disclosure, furnish the other party an opinion of outside legal counsel in the
same manner as provided in Section 8.2. Each party shall take all reasonable
measures to cause its employees and agents to hold in confidence the fact that
Fuji manufactures the Product sold under the Mark and the terms and conditions
of this Agreement. For purposes of the preceding sentence, each party shall be
deemed to take "reasonable measures" to the extent that it adopts, or causes to
be adopted, the same or more stringent procedures and acts with the same or
greater care that it adopts in respect of its own proprietary information, know-
how and trade secrets.
10. Term and Termination.
--------------------
10.1 This Agreement will become effective as of the date and year
first above written and, unless earlier terminated in accordance with Section
10.2, will continue in effect until the end of the third Annual Period.
Thereafter, this Agreement shall renew automatically for successive one year
periods, each of which shall constitute an additional Annual Period, unless
either party provides the other with at least sixty (60) days' prior notice of
its intent not to renew the Agreement.
10.2 This Agreement may be terminated prior to expiration as
follows:
(a) Upon any of the following events, either party may give
notice of termination, effective immediately: (i) the other party becomes
insolvent or admits its inability to pay its debts generally as they come due;
(ii) any sheriff, marshall, custodian, trustee or receiver is appointed by order
of any court of competent jurisdiction to take charge of or sell any material
portion of the other party's property; (iii) a case is filed by the other party
under the Bankruptcy Code or any other insolvency law; (iv) a case is filed
against the other party without such party's application or consent under the
Bankruptcy Code or any other insolvency law and such case continues undismissed
for 60 days; (v) the other party makes a general assignment for the benefit of
creditors; or (vi) the other party is dissolved or liquidated or takes any
corporate action for such purpose.
(b) Either party may terminate this Agreement if the other
party commits a material breach of this Agreement and such breach shall continue
more than 30 days after written notice of such breach is given to the party in
breach by the party not in breach.
(c) Either party may terminate this Agreement as provided in
Section 11.9.
7
<PAGE>
(d) Fuji may terminate this Agreement for the cause set forth
in Section 4.2 by written notice to Customer given within 90 days following the
end of the Annual Period during which the minimum purchase target was not
satisfied, such termination to be effective as of the end of the next Calendar
Quarter.
10.3 Upon expiration or termination of this Agreement for any
cause, Customer shall purchase from Fuji all finished Product which are the
subject of unfilled purchase orders outstanding at the price specified in the
respective purchase orders.
10.4 Upon termination of this Agreement for any reason specified in
Sections 10.2(a), 10.2(b) or 10.2(d) of this Agreement, all amounts payable by
Customer hereunder will be accelerated and will become due immediately.
11. General.
-------
11.1 Each of the parties has taken all corporate action required to
duly authorize its execution, delivery and performance of this Agreement, and
this Agreement constitutes an obligation enforceable against it in accordance
with its terms.
11.2 Fuji and Customer are acting in the capacity of independent
contractors. Nothing herein contained may be construed as constituting either
party the agent, employee, partner or co-venturer of the other party.
11.3 This Agreement may be amended by the parties hereto only by an
instrument in writing signed on behalf of each of the parties hereto.
11.4 Any waiver of any default in performance of the provisions
hereof must be in writing and shall not operate as a waiver of, or estoppel with
respect to, any subsequent default.
11.5 All notices, consents, approvals, or other communications
hereunder (other than routine operational communications) shall be in writing
and shall be delivered personally or by overnight delivery service (e.g., FedEx)
or registered or certified mail, postage prepaid, or sent by telecopy, promptly
confirmed by mail as set forth above, addressed to the parties at the following
addresses (or at such other address for a party as shall be specified by like
notice):
If to Fuji, to
Fuji Photo Film U.S.A., Inc.
555 Taxter Road
Elmsford, New York 10523
Attention: Mr. Manny Almeida
Fax: (914) 789-8179
8
<PAGE>
with a copy to:
Fuji Photo Film U.S.A., Inc.
555 Taxter Road
Elmsford, New York 10523
Attention: Jonathan E. File, Esq.
Fax: (914) 789-8142
If to Customer, to:
Seattle Film Works
1260 16th Avenue West
Seattle, WA 98119-3401
Attention: Mr. Rob Brammer
Fax: (206) 284-5357
with a copy to:
Seattle Film Works
1260 16th Avenue West
Seattle, WA 98119-3401
Attention: Case Kuehn
Fax: (206) 284-5357
Any such notice, consent, approval and other communication shall be deemed
given, in the case of mailing, on the third day following its deposit in the
mail, in the case of telecopy, upon transmission if confirmed by mail as set
forth above, and in all other cases upon receipt.
11.6 Neither this Agreement nor any of the rights, interests or
obligations hereunder shall be assigned (either consensually or by operation of
law) by either of the parties hereto without the prior written consent of the
other party, and any purported assignment in the absence of such consent will be
void. The foregoing notwithstanding, Fuji acknowledges that Customer may, from
time to time, purchase Product on behalf of its wholly owned subsidiary, Seattle
Film Works Manufacturing Company pursuant to the terms of this Agreement, and
(ii) Customer acknowledges that Fuji will cause one or more corporations under
common control with it to manufacture and package the Products Fuji will sell to
Customer hereunder; provided that Fuji remains obligated for the performance of
all of Fuji's obligations hereunder.
11.7 This Agreement shall be governed by and construed in accordance
with the laws of the State of Washington (without giving effect to its
principles of conflict of laws). The parties acknowledge and agree that each
has entered into this Agreement in the mutual expectation that its terms and
conditions will be governed by and interpreted in accordance with the
substantive law of the State of Washington. Therefore, the parties waive any
right which either may have to challenge the efficacy of this provision or to
contend that the laws of any
9
<PAGE>
other jurisdiction should govern the interpretation of this Agreement because
such other jurisdiction has more significant contacts with, or a greater
interest in, the matter in dispute than does the State of Washington.
11.8 The expiration or earlier termination of this Agreement will
not operate to release either party hereto from its obligations under Articles 7
or 8 and Section 9.2 (which obligations will survive such expiration or
termination) or from any liability which has already accrued to the other party
as of the date of expiration or termination or which may thereafter accrue in
respect of an act or omission occurring prior to expiration or termination. The
expiration or earlier termination of this Agreement will not operate to relieve
either party hereto of the obligation to perform in a timely manner all duties
which it is required hereunder to perform in respect of any orders for pieces of
the Product outstanding as of the date of expiration or earlier termination and
not cancelled by Customer as permitted hereby.
11.9 Neither party shall be held liable for any failure or delay in
the performance of any of the obligations on its part to be performed hereunder,
if and to the extent such failure or delay results from any cause or causes
beyond the reasonable control of such party, including, but not limited to,
fire, storm, flood, earthquake, explosion, accident, military operation, war,
rebellion, riot, wreck, epidemic, quarantine, regulations, labor, labor dispute,
shortage of manpower, embargo, failure or delay in transportation, governmental
regulations, or inability to obtain required raw materials or machines. Both
parties will have the right to terminate or suspend performance under this
Agreement by reasonable notice due to circumstances beyond the affected party's
control, including but not limited to actions or impending proceedings by
governmental authorities or other events of force majeure specified above, for
the duration of such event.
11.10 The headings in this Agreement are for convenience only and in
no way alter, modify, amend, limit or restrict the contractual obligations of
the parties.
11.11 This Agreement may be executed simultaneously in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
11.12 This Agreement, including the preamble and the Exhibits hereto,
contains the entire agreement between Fuji and Customer with respect to the
transaction which is the subject matter hereof.
10
<PAGE>
IN WITNESS WHEREOF, Fuji and Customer have caused this Agreement to be
executed by their duly authorized representatives as of the date and year first
above written.
FUJI PHOTO FILM U.S.A., INC.
By: /s/ Osamu Inoue
Name: Osamu Inoue
Title: President
SEATTLE FILM WORKS, INC.
By: /s/Case H. Kuehn
Name: Case H. Kuehn
Title: Vice President
List of Exhibits
----------------
EXHIBIT A Specifications
EXHIBIT B Customer's Warranty
11
<PAGE>
EXHIBIT A
SPECIFICATIONS
1. FILM
Type: [*]
Speed: [*]
Size: [*]
Edge Prints: [*] [*]
[*] [*]
[*] [*]
[*] [*]
[*] [*]
[*] [*]
[*] [*]
[*] [*]
2. 135 METAL CARTRIDGE
Graphic Design: To be Provided by Customer
Bar Code: Position and Bar Code as Specified by ISO
CAS Patterns: Position and Patterns as Specified by ISO
Lot No.: Printed, Customer's Own Lot Number
Expiration Date: Printed
3. PLASTIC CASE (to contain film in 135 metal cartridge)
Color: Black
Recycling Mark: Yes, with Abbreviated Description of the Plastic
Material Used.
Outer Label: No
4. SHIPPING CASE
Case Quantity: Eight Thousand (8,000) Rolls of a Film Speed in Plastic
Case.
Case Mark: At Fuji's Option
12
<PAGE>
EXHIBIT B
CUSTOMER'S WARRANTY
LIMIT OF LIABILITY: The photographic material you send us for handling will be
treated with care. However, our responsibility for damage or loss, even though
due to negligence or other fault, will be limited to the cost of unexposed film
unless you have declared a higher value and paid a premium for that value in
advance. SFW is wholly separate from any shipper and all other warranties,
express or implied, and all incidental or consequential damages are specifically
excluded. SFW reserves the right to refuse to reproduce any image when such
action would be prohibited under copyright law (Title 17 of the United States
code).
Pictures On Disk, PhotoWorks, PhotoMail and Pictures Plus are trademarks of
Seattle FilmWorks, Inc. Windows is a trademark of Microsoft Corporation.
Macintosh is a registered trademark of Apple Computer Corporation.
13
<PAGE>
EXHIBIT 10.2
[*] DESIGNATES MATERIAL FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN
REQUESTED, WHICH MATERIAL HAS BEEN SEPARATELY FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION.
<TABLE>
<CAPTION>
CUSTOMER AT&T
- -------- ----
<S> <C>
1. NAME: SEATTLE FILMWORKS, INC. 6. CONTRACT TARIFF NO.
2. STREET: 1260 16TH AVENUE WEST 7. STREET: 2601 4TH STREET-SUITE 500
3. CITY: SEATTLE S. CITY: SEATTLE
4. STATE & ZIP: WASHINGTON 98119 9. STATE & ZIP: WA 98121
5. Att'n: CASE KUEHN 10. Att'n: HEIDI DUFFY
- ----------------------------------------------------------------------------
</TABLE>
1. CUSTOMER hereby orders and AT&T agrees to provide communications services
("Services") pursuant to the Contract Tariff ("CT") referenced above, a copy of
which is attached hereto and is incorporated by reference. The Availability
provisions of the CT may be revised by AT&T from time to time. Services will be
provided in accordance with the rates, terms and conditions described in the CT
and, except as provided in the CT, the rates, terms and conditions in Applicable
Tariffs pertaining to Services provided under this Agreement. Applicable
Tariffs are the AT&T tariffs referenced in CT, as such tariffs may be revised
from time to time.
2. The term of this Agreement is as specified in the CT. Notices pursuant to
this Agreement shall be in writing to the addresses specified above.
3. In the event of any inconsistency between the terms of any Applicable
Tariff and the CT, the terms of the CT shall prevail. In the event of any
inconsistency between the terms of this Agreement and any Applicable Tariff or
the CT, the terms of the Applicable Tariff or the CT shall prevail. Nothing
contained in this Agreement shall require AT&T to take any action prohibited or
omit to take any action required by the FCC or any other regulatory authorities.
4. EXCEPT FOR ANY WARRANTIES EXPRESSLY MADE IN THE CT OR THE APPLICABLE
TARIFFS, AT&T EXCLUDES ALL WARRANTIES, EXPRESS OR IMPLIED, INCLUDING BUT NOT
LIMITED TO ANY IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A
PARTICULAR PURPOSE. AT&T'S LIABILITY TO CUSTOMER IS SUBJECT TO THE LIMITATIONS
STATED IN THE CT AND APPLICABLE TARIFFS.
5. This Agreement (whether in contract, indemnity, warranty, strict liability,
tort or otherwise, except choice of law) shall be governed by the law of the
State of New York, or applicable federal statutes.
6. If any provision of the CT is held to be invalid or unenforceable, then
AT&T and CUSTOMER shall cooperate to develop a mutually agreeable replacement
for such provision. If the parties are unable to reach agreement on a
replacement for the CT provision within 30 days after the provision is held to
be invalid or unenforceable (or within such additional time as the parties agree
in writing), then this Agreement shall be immediately terminated. CUSTOMER
shall remain liable for all charges and liabilities for services provided under
the CT prior to such termination.
7. Neither party shall publish or use any advertising, sales promotions, press
releases or other publicity matters which use the other party's name, logo,
trademarks or service marks without the prior written approval of the other
party. Neither party is licensed hereunder to conduct business under any name,
logo, trademark, service mark or tradename (or any derivative thereof) of the
other party.
8. AT&T's relationship with CUSTOMER under this Agreement shall be that of an
independent contractor.
9. THIS AGREEMENT, THE CT, AND THE APPLICABLE TARIFFS CONSTITUTE THE ENTIRE
AGREEMENT BETWEEN THE PARTIES WITH RESPECT TO THE SERVICES TO BE PROVIDED
HEREUNDER. THIS AGREEMENT SUPERSEDES ALL PRIOR AGREEMENTS, PROPOSALS,
REPRESENTATIONS, STATEMENTS, OR UNDERSTANDINGS, WHETHER WRITTEN OR ORAL,
CONCERNING SUCH SERVICES OR THE RIGHTS AND OBLIGATIONS RELATING THERETO. No
change, modification or waiver of any of the terms of this Agreement, except for
revisions to the Applicable Tariffs and the Availability provisions of the CT,
shall be binding unless reduced to writing and signed by authorized
representatives of both parties hereto.
10. Each party represents and warrants that the person executing this
Agreement on its behalf is fully authorized to do so.
<TABLE>
<CAPTION>
ORDERED BY CUSTOMER: ACCEPTED BY AT&T:
<S> <C>
11. Signature: /s/ Case Kuehn 15. Signature: /s/ Paul Pinard
12. Printed Name: Case Kuehn 16. Printed Name: Paul Pinard
13. Title: CFO, VP, Treasurer 17. Title: General Manager
14. Date: 3-5-97 18. Date: 3-5-97
- ------------------------------------------------------------------
</TABLE>
<PAGE>
AT&T UNIPLAN(R) BASIC SERVICE OPTION
ATTACHMENT "A"
1. SERVICES PROVIDED: AT&T UniPlan Basic Service and the associated optional
AT&T 800 Services, ACCUNET T1.5 Access Connections and Terrestrial 1.544 Mbps
Local Channel Service.
2. TERM OF CONTRACT; RENEWAL OPTIONS: The Customer has selected a term of 3
year(s). The term begins with the first day of the first full billing month
(hereinafter referred to as the Customer's Initial Service Date [CISD]) for the
Services provided under this Contract Tariff; no renewal option.
3. MONTHLY USAGE COMMITMENT: The Customer has selected a Gross Monthly Minimum
Revenue Commitment (MMRC) for AT&T UniPlan Basic Service and the Associated
Optional AT&T 800 Services of
[*]
for the Contract Tariff term. If, within the term, the Customer fails to meet
the annualized MMRC, the Customer will be billed the difference between the
annualized MMRC and the gross actual billed charges.
A. The Customer may increase the MMRC to a higher available MMRC specified in
the Contract Tariff any time during the term of the Contract Tariff. When the
Customer increases the MMRC, the term originally selected by the Customer will
be restarted beginning with the first day of the first full billing month
following the month in which the Customer increased the MMRC.
B. If the Customer selects an MMRC of $3,000 or higher, and within 90 days
following the CISD, the customer fails to satisfy the MMRC in any preceding
billing month, the customer may decrease the MMRC one commitment level. When
the customer decreases the MMRC, the term originally selected by the customer
will be restarted beginning with the first day of the first full billing month
following the month in which the customer decreased the MMRC. The customer may
exercise this option only once.
C. If the Customer migrates from switched access to dedicated access, after the
3rd billing month following the customer's CISD under this Contract Tariff, and
as a result the customer's usage is reduced so that the customer cannot satisfy
the monthly MMRC, the customer may decrease the MMRC provided the value of the
new MMRC and term is equal to or greater than the remaining value of the
existing MMRC and term at the time this election is made. Remaining value shall
mean the total amount of the MMRC multiplied by the number of months remaining
in the term.
4. CONTRACT PRICE: The Contract Price for AT&T UniPlan Basic Service and
Associated Optional AT&T 800 Services is the same as the undiscounted Recurring
and Non-recurring Rates and Charges specified in AT&T Tariff F.C.C. No. 1, as
amended from time to time.
The customer has selected the East/West Regional Trade Zone Option. The
Customer may, at any time, after the 6th billing month following the Customer's
CISD, during the Contract Tariff Term, change to a different Regional Trade Zone
for international calling.
If, as a result of the Customer selecting one of the Regional Trade Zones, or as
a result of the Customer changing from one Regional Trade Zone to another
Regional Trade Zone, after the 3rd billing month following the Customer's CISD
under this contract tariff, the volume of the Customer's usage is sufficiently
reduced so that the Customer cannot satisfy the MMRC, the Customer may decrease
the MMRC provided the value of the new MMRC and term is equal to or greater than
the Remaining Value of the existing MMRC and term at the time this election is
made. Remaining Value shall mean the total amount of the MMRC multiplied by the
number of months remaining in the term. When the Customer decreases the MMRC,
the new term selected by the Customer will commence with the first day of the
first full billing month following the month in which the Customer decreased the
MMRC.
The usage rates for the selected Regional Trade Zone will be the same as
specified in AT&T Tariff F.C.C. No. 1, as amended from time to time.
The Contract Price for ACCUNET T1.5 Access Connections is the same as specified
in AT&T Tariff F.C.C. No. 9, as amended from time to time.
Customer Initials and Date
--------------
AT&T Proprietary (Restrictred)
Solely for authorized persons having a new to know
1
<PAGE>
AT&T UNIPLAN(R) BASIC SERVICE OPTION
ATTACHMENT "A"
The Contract Price for AT&T Terrestrial 1.544 Mbps Local Channel Service is the
same as specified in AT&T Tariff F.C.C. No. 11, as amended from time to time.
5. DISCOUNTS: The Customer will receive the following discounts associated
with the services provided under this Contract Tariff:
A. The Customer has selected a Contract Tariff Term length of
36 Months
B. The Customer will receive the Business-to-Business Discount Plan as
specified in AT&T Tariff F.C.C. No. 1.
C. The Customer will receive the following discount each month, on AT&T UniPlan
Basic Service and the Associated Optional AT&T 800 Services gross usage charges
on amounts up to [*] . No discount will apply to gross usage amounts over
[*] . For customers who have usage billing prior to the beginning of the
Contract Tariff Term, the discount will be based on the terms that the Customer
selects and will be applied in the same manner as the UniPlan Basic Optional
Term Plan as specified in the AT&T Tariff F.C.C. No. 1.
Gross Monthly
Usage Commitment 36 Month Term
---------------- -------------
[*] [*]
D. No other Tariff F.C.C. No. I or No. 2 Volume or Term Plan Discounts will
apply.
6. CLASSIFICATIONS, PRACTICES AND REGULATIONS: Except as otherwise provided,
the terms, conditions, regulations and charges for AT&T UniPlan Service as set
forth in AT&T Tariff F.C.C. No. 1, for ACCUNET T1.5 Access Connections as set
forth in AT&T Tariff F.C.C. No. 9 and for Terrestrial 1.544 Mbps Local Channel
Service as set forth in AT&T Tariff F.C.C. No. 11 apply, as these tariffs are
amended from time to time.
A. PROMOTIONS, CREDITS AND WAIVERS: The customer is ineligible for any
promotions, credits or waivers for the Services provided under this Contract
Tariff, which are filed or which may be filed in the AT&T tariffs specified in
Section 1, preceding, except for which the Customer qualifies under those
promotions and except for the promotion(s) specified below, which even though
such promotion(s) may be due to expire or have expired, remain available to any
Customer who orders this Contract Tariff during the Availability Period.
<TABLE>
<CAPTION>
AT&T Tariff F.C.C. No. Section Number Expiration Date
- ------------------------- -------------- ---------------
<S> <C> <C>
[*] [*] [*]
[*] [*] [*]
[*] [*] [*]
[*] [*] [*]
[*] [*] [*]
[*] [*] [*]
</TABLE>
The preceding promotions will be applied to the Customer's bill for the Services
provided under this Contract Tariff, provided the Customer is current in payment
to AT&T for all services provided under this Contract Tariff at the time the
promotion is to be applied.
There are no credits or waivers that will be applied to the Customer's bill for
the Services provided under this Contract Tariff.
B. MONITORING CONDITIONS: The Customer must satisfy the following conditions
at all times during the term of this Contract Tariff:
1. The Customer must not exceed [*] Customer Premises associated with UniPlan
Basic.
Customer Initials and Date
--------------
AT&T Proprietary (Restricted)
Solely for authorized persons having a need to know
2
<PAGE>
AT&T UniPlan(R) Basic Service Option
ATTACHMENT "A"
2. At least [*] of the total gross monthly Domestic billed usage must be
Interstate Outbound Direct Dialed and/or Interstate Dialed.
Compliance with these provisions shall be monitored each quarter. If in any
such monitoring period the Customer has failed to satisfy the above Monitoring
Conditions, the Customer will be billed an amount equal to 50% of the discount
specified in Section 5.C. preceding, that the customer received during the
monitoring period. Any such bill must be paid by the customer within 30 days.
C. DISCONTINUANCE: In lieu of any Discontinuance With or Without Liability
provisions that are specified in the AT&T Tariff F.C.C. Nos. I and 2, the
following provisions shall apply, except for the AT&T UniPlan Service Term Plan
Satisfaction Guarantee.
Customers who select a three-year term, may discontinue this Contract Tariff
after the 24th month following the CISD, provided the Customer has met the
following conditions:
1. Notifies AT&T in writing no less than 30 days prior to such intent of
discontinuance;
2. The Customer has met the MMRC for the entire Contract Tariff Term; and
3. The Customer is current in payment to AT&T for all services provided under
this Contract Tariff.
The customer may discontinue this Contract Tariff without liability for
termination charges prior to the end of the Contract Tariff Term provided: 1)
the customer replaces this Contract Tariff with a different Contract Tariff for
AT&T UniPlan Service or AT&T UniPlan Service with FlatRate Pricing Option; and
2) the value of the new term and commitment is equal to or greater than the
Remaining Value of the existing plan.
The customer may discontinue this Contract Tariff without liability for
termination charges after the 6th billing month following the CISD, provided: 1)
the customer replaces this Contract Tariff with other AT&T Tariff F.C.C. Nos. 1
and 2 Services applicable to Contract Tariffs and 2) the value of the new term
and commitment is equal to or greater than the Remaining Value of the existing
plan.
If the customer discontinues this Contract Tariff for any reason other than
specified above, prior to the expiration of the Contract Tariff Term, a
Termination Charge will apply. The Termination Charge for the AT&T UniPlan
Basic Service and the Associated Optional AT&T 800 Services will be an amount
equal to 100% of the unsatisfied annualized MMRC for the year in which the
customer discontinues this Contract Tariff and 100% of the annualized MMRC for
each year remaining in the term.
D. AVAILABILITY: This Contract Tariff has been designed to respond to
competitive circumstances affecting specific Customers. The initial customer
received an offer from another Interexchange Carrier for substantially similar
service. This Contract Tariff has been developed for Customers who will order
this Contract Tariff only once. This Contract Tariff is available to any
similarly situated Customer that orders service within 90 days after the
effective date of this Contract Tariff and requests initial installation of the
Services provided no later than 30 days after the date service is ordered.
Customer Initials and Date
--------------
AT&T Proprietary (Restricted)
Solely for authorized persons having a need to know
3
<PAGE>
EXHIBIT 10.3
LEASE AGREEMENT
1. PARTIES. This Lease, dated for reference purposes only, MARCH 4, 1997
------- ------- --
is made by and between SMITH COVE PARTNERSHIP, a WASHINGTON GENERAL PARTNERSHIP
---------------------- ------------------------------
(herein called "Landlord"), and SEATTLE FILMWORKS, INC., A WASHINGTON
-------------------------------------
CORPORATION (herein called "Tenant").
- -----------
2. PREMISES. Landlord hereby leases to Tenant and Tenant leases from
--------
Landlord for the term, at the rental, and upon all of the conditions set forth
herein, that certain real property situated in the City of Seattle, County of
King, State of Washington, commonly known as 38,617 square feet of office and
------
warehouse space located at 1240 AND 1250 16TH AVENUE WEST, SEATTLE, Washington
------------------------------ -------
and described as see Legal Description attached as Exhibit "A". Said real
property, including the land and all improvements thereon, is herein called the
"Premises". A map showing the Premises outlined in red is attached hereto as
Exhibit "B" and is by this reference made a part hereof.
3. TERM.
----
3.1 TERM. The term of this Lease shall be for FORTY-TWO (42) MONTHS
---- ---------------------
commencing on APRIL 1, 1997 and ending on SEPTEMBER 30, 2000 unless sooner
------------- ------------------
terminated pursuant to any provisions hereof.
3.2 DELAY IN COMMENCEMENT. Notwithstanding said commencement date,
---------------------
if for any reason Landlord cannot deliver possession of the Premises to Tenant
on said date, Landlord shall not be subject to any liability therefore, nor
shall such failure affect the validity of this Lease or the obligations of
Tenant hereunder or extend the term hereof, but in such case Tenant shall not be
obligated to pay rent until possession of the Premises is tendered to Tenant.
If the actual term commencement date be a date other than the scheduled term
commencement date, all dates set forth in this Lease Agreement shall be adjusted
accordingly. However, if Landlord shall not have delivered possession of the
Premises within one hundred twenty (120) sixty (60) days from said commencement
date, Tenant may, at Tenant's option, by notice in writing to Landlord within
ten (10) days thereafter, AT ANY TIME THEREAFTER BUT PRIOR TO THE ACTUAL
----------------------------------------------
DELIVERY OF POSSESSION, cancel this lease. If either party cancels as herein
- -----------------------
provided, Landlord shall return any money previously deposited by Tenant and the
parties shall be discharged from all obligations hereunder. In no event,
however, shall Tenant have the right to cancel this Lease because of any delay
in delivering possession of the Premises as the result of (i) any act of God or
the elements, (ii) shortage or unavailability of necessary materials, supplies,
or labor, (iii) shortage of or interruption in transportation or facilities,
(iv) regulations or restrictions, or (v) any other cause beyond Landlord's
reasonable control unless such delay exceeds one year from said commencement
date, then either party may cancel on written notice to the other prior to
delivery of possession.
3.3 EARLY POSSESSION. In the event that Landlord shall permit Tenant
----------------
to occupy the Premises prior to the commencement date of the term, such
occupancy shall be subject to all of the provisions of this Lease. Said early
possession shall not advance the termination date of this Lease.
3.4 DELIVERY OF POSSESSION. Tenant shall be deemed to have taken
----------------------
possession of the Premises when any of the following occur: (a) a Certificate
of Occupancy is granted by the proper governmental agency, or (b) upon issuance
of a Certificate by Landlord's architect or contractor stating that the Premises
are ready for occupancy. BOTH THE 1240 AND 1250 BUILDINGS ARE VACATED BY PORT
-----------------------------------------------------
CHATHAM PACKING COMPANY.
- -------------------------
4. RENT. Tenant shall, without notice or demand, pay to Landlord as rent
----
for the Premises equal monthly installments of EIGHTEEN THOUSAND SEVEN HUNDRED
-------------------------------
SIXTY-SIX AND NO/100 Dollars ($18,766.00) in advance, on the first day of each
- -------------------- ---------
month of the term hereof. Tenant shall pay Landlord upon execution hereof the
sum of EIGHTEEN THOUSAND SEVEN HUNDRED SIXTY-SIX AND NO/100 Dollars
----------------------------------------------------
($18,766.00), AS RENT FOR THE FIRST MONTH OF THE TERM, As of the commencement
- ----------- ------------------------------------------
date, Tenant shall not be obligated as to rental payments for a period of
________________________. Tenant shall continue to be obligated for all other
charges and expenses specified within this Lease Agreement. Rent for any
period during the term hereof which is for less than one (1) month shall be a
pro rata portion of the monthly installment. Rent shall be payable without
notice or demand and without any deduction, offset, or abatement, in lawful
money of the United States of America to Landlord at the address stated herein
or to such other persons or at such places as Landlord may designate in writing.
1
<PAGE>
5. SECURITY DEPOSIT. Tenant shall deposit with Landlord upon execution
----------------
hereof the sum of EIGHTEEN THOUSAND SEVEN HUNDRED SIXTY-SIX AND NO/100 Dollars
----------------------------------------------------
($18,766.00) as security for Tenant's faithful performance of Tenant's
---------
obligations hereunder. If Tenant fails to pay rent or other charges due
hereunder, or otherwise defaults with respect to any provision of this Lease,
Landlord may use, apply or retain all or any portion of said deposit for the
payment of any rent or other charge in default or for the payment of any other
sum to which Landlord may become obligated by reason of Tenant's default, or to
compensate Landlord for any loss or damage which Landlord may suffer thereby.
If Landlord so uses or applies all or any portion of said deposit, Tenant shall
within ten (10) days after written demand therefore deposit cash with Landlord
in an amount sufficient to restore said deposit to the full amount hereinabove
stated, and Tenant's failure to do so shall be a breach of this Lease and
Landlord may at its option terminate this Lease. Landlord shall not be required
to keep said deposit separate from its general accounts. If Tenant performs all
of Tenant's obligations hereunder, said deposit or so much thereof as has not
theretofore been applied to Landlord, shall be returned, without payment of
interest or other increment for its use, to Tenant (or, at Landlord's option, to
the last assignee, if any, of Tenant's interest hereunder) within fifteen (15)
days after the expiration of the term hereof, or after Tenant has vacated the
Premises, whichever is later.
6. USE.
---
6.1 USE. The Premises shall be used and occupied only for office,
---
light manufacturing, and storage of Tenant's products, and all other uses
incidental thereto and for no other purpose without prior written consent of
Landlord, which consent may be withheld or conditioned as Landlord may deem
appropriate within the exercise of its sole REASONABLE discretion.
----------
6.2 COMPLIANCE WITH LAW. Tenant shall, at Tenant's expense, comply
-------------------
promptly with all laws, rules, orders, ordinances, directions, regulations, and
requirements of federal, state, county and municipal authorities, including
without limitation, those relating to persons with disabilities (ADA) now in
force or which may hereafter be in force, which shall impose any duty upon
Landlord or Tenant with respect to the use, occupation or alteration of the
Premises. Tenant shall not use or permit the use of the Premises in any manner
that will tend to create waste or a nuisance, or, if there shall be more than
one tenant of the building containing the Premises, which shall tend to
unreasonably disturb such other tenants.
6.3 CONDITION OF PREMISES. Tenant hereby accepts the Premises in
---------------------
their condition existing as of the date of the possession hereunder, subject to
all applicable zoning, municipal, county and state laws, ordinances and
regulations governing and regulating the use of the Premises, and accepts this
Lease subject thereto and to all matters disclosed thereby and by any exhibits
attached hereto. LANDLORD REPRESENTS AND WARRANTS, AS OF THE DATE OF THE
-------------------------------------------------------
EXECUTION OF THIS LEASE AND AS OF THE COMMENCEMENT DATE TENANT ACCEPTS
- ----------------------------------------------------------------------
POSSESSION OF THE PREMISES, THAT, TO THE BEST OF LANDLORD'S ACTUAL KNOWLEDGE,
- -----------------------------------------------------------------------------
(I) THE PREMISES MEET THE REQUIREMENTS OF ALL APPLICABLE FEDERAL, STATE AND
- ---------------------------------------------------------------------------
LOCAL LAWS AND REGULATIONS EXCEPT COMPLIANCE WITH AND REQUIREMENTS OF THE
- -------------------------------------------------------------------------
AMERICANS WITH DISABILITIES ACT; AND (II) ALL SYSTEMS AND EQUIPMENT LOCATED IN
- ------------------------------------------------------------------------------
OR UPON THE PREMISES, INCLUDING, WITHOUT LIMITATION, ALARM, PLUMBING, HEATING,
- ------------------------------------------------------------------------------
AIR CONDITIONING, VENTILATION, ELECTRICAL AND LIGHTING FACILITIES AND EQUIPMENT,
- --------------------------------------------------------------------------------
ARE IN GOOD WORKING ORDER, CONDITION AND REPAIR AND MEET THE REQUIREMENT OF ALL
- -------------------------------------------------------------------------------
APPLICABLE FEDERAL, STATE, AND LOCAL LAWS AND REGULATIONS. Tenant acknowledges
- ----------------------------------------------------------
that neither Landlord nor Landlord's agent has made any representation or
warranty as to the suitability of the Premises for the conduct of Tenant's
business.
6.4 INSURANCE CANCELLATION. Notwithstanding the provisions of
----------------------
Article 6.1 hereinabove, no use shall be made or permitted to be made of the
Premises nor acts done which will cause the cancellation of any insurance policy
covering said Premises or any building of which the Premises may be a part, and
if Tenant's use of the Premises causes an increase in said insurance rates,
Tenant shall pay any such increase.
7. MAINTENANCE, REPAIRS AND ALTERATIONS.
------------------------------------
7.1 LANDLORD'S OBLIGATIONS. Subject to the provisions of Article 9,
----------------------
and except for damage caused by any negligent or intentional act or omission of
Tenant, Tenant's agents, employees, or invitees, Landlord, at Landlord's
expense, shall keep in good order, condition and repair the foundations and
exterior walls of the Premises. Landlord shall not however, be obligated to
paint such exterior, nor shall Landlord be required to maintain the interior
surface of exterior walls, windows, doors or plate glass. Landlord shall have
no obligations to make repairs under this Article 7.1 until a reasonable time
after receipt of written notice of the need for such
2
<PAGE>
repairs. Tenant expressly waives the benefits of any statute now or hereafter in
effect which would otherwise afford Tenant the right to make repairs at
Landlord's expense or to terminate this Lease because of Landlord's failure to
keep the Premises in good order, condition and repair. IF LANDLORD FAILS TO
--------------------
COMMENCE SUCH REPAIRS OR MUTUALLY AGREE TO A PLAN OF ACTION WITHIN THIRTY (30)
- ------------------------------------------------------------------------------
DAYS OF RECEIPT OF SUCH NOTICE OR FAILS TO PROSECUTE SUCH REPAIRS TO COMPLETION
- -------------------------------------------------------------------------------
WITH REASONABLE DILIGENCE, TENANT MAY MAKE ANY SUCH REPAIRS, AT LANDLORD'S
- --------------------------------------------------------------------------
EXPENSE, AND TENANT MAY DEDUCT ANY COSTS AND EXPENSES ASSOCIATED WITH SUCH
- --------------------------------------------------------------------------
REPAIR FROM THE NEXT MONTHLY RENTAL PAYMENTS DUE TO LANDLORD UNTIL ALL SUCH
- ---------------------------------------------------------------------------
COSTS AND EXPENSES ARE REIMBURSED TO TENANT.
- -------------------------------------------
7.2 TENANT'S OBLIGATIONS. Subject to the provisions of Article 7.1
--------------------
and Article 9. Tenant, at Tenant's expense, shall keep in good order, condition
and repair the Premises and every part thereof (regardless of whether the
damaged portion of the Premises or the means of repairing the same are
accessible to Tenant) including, without limiting the generality of the
foregoing, all plumbing, heating, air conditioning, ventilating, electrical and
lighting facilities and equipment, fixtures, interior walls, ceilings, roof,
windows, doors, plate glass, and skylights, tenant identification signs and
fences surrounding the Premises including but not limited to damage due to
break-ins, theft or vandalism. If the Premises include a fire sprinkler system
Tenant shall be responsible for all repairs and maintenance including performing
an annual inspection of said system and providing Landlord with a copy of the
inspection report. If the system is monitored by a central monitoring station
Tenant shall be responsible for all costs. During the term of this Lease.
Tenant shall contract for preventative maintenance and a minimum of four (4)
filter changes per year on the heating, ventilating and air conditioning (HVAC)
systems. Annually Tenant shall provide Landlord with evidence that a
maintenance contract exists. Tenant shall be directly responsible for any
repairs to the HVAC System serving the Premises. Tenant is responsible for
maintenance (including periodic cleaning) of the catch basins serving the
parking lot areas. Tenant shall reimburse Landlord for all damage done to the
Premises, normal wear and tear excepted, occasioned by any act or omission of
Tenant or Tenant's officers, contractors, agents, invitees, licensees, or
employees, including, but not limited to, cracking or breaking of glass.
7.3 SURRENDER. On the last day of the term hereof, or on any sooner
---------
termination, Tenant shall surrender the Premises to Landlord in good condition,
broom clean, ordinary wear and tear excepted. Tenant shall repair any damage to
the Premises occasioned by its use thereof, or by the removal of Tenant's trade
fixtures, signs, furnishings and equipment pursuant to Article 7.5, which repair
shall include the patching and filling of holes and repair of structural damage.
7.4 LANDLORD'S RIGHTS. If Tenant fails to perform Tenant's
-----------------
obligations under this Article 7, Landlord may, at its option (but shall not be
required to) enter upon the Premises, after ten (10) days prior written notice
to Tenant or with no prior written notice if an emergency, and put the same in
good order, condition and repair, and the cost thereof together with interest
thereon at the rate of sixteen percent (16%) per annum, shall become due and
payable as additional rent to Landlord together with Tenant's next rental
installment.
7.5 ALTERATIONS AND ADDITIONS.
-------------------------
(a) LANDLORD ACKNOWLEDGES TENANT INTENDS TO MAKE SUBSTANTIAL
--------------------------------------------------------
ALTERNATIONS TO THE PREMISES. NEVERTHELESS, Tenant shall not, without
- ---------------------------------------------
Landlord's prior written consent, make any alterations, improvements, or
additions in, on, or about the Premises, except for non structural alterations
not exceeding TWENTY FIVE One Thousand Dollars ($25,000) ($1,000) in cost. As a
----------- ---------
condition to giving such consent, Landlord may require that Tenant remove any
such alterations, improvements, additions or utility installations at the
expiration of the term, and to restore the Premises to their prior condition.
(b) Before commencing any work relating to alterations, additions and
improvements affecting the Premises (none of which are required or requested by
Landlord, nor any obligation of Tenant under this Lease), Tenant shall notify
Landlord in writing of the expected date of commencement thereof. Landlord
shall then have the right at any time and from time to time to post and maintain
on the Premises such notices as Landlord reasonably deems necessary to protect
the Premises and Landlord from mechanic's liens, materialmen's liens, or any
other liens. In any event, Tenant shall pay, when due, all claims for labor or
materials furnished to or for Tenant or for use in the Premises. Tenant shall
not permit any mechanic's or materialmen's liens to be levied against the
Premises for any labor or material furnished to Tenant or claimed to have been
furnished to Tenant or
3
<PAGE>
to Tenant's agents or contractors in connection with work of any character
performed or claimed to have been performed on the Premises by or at the
direction of Tenant.
(c) Unless Landlord requires their removal, as set forth in Article
7.5(a), all alterations, improvements, or additions which may be made on the
Premises shall become the property of Landlord and remain upon and be
surrendered with the Premises at the expiration of the term. Notwithstanding
the provisions of this Article 7.5(c), Tenant's machinery, equipment and trade
fixtures, other than that which is affixed to the Premises so that it cannot be
removed without material damage to the Premises, shall remain the property of
Tenant and may be removed by Tenant subject to the provisions of Article 7.3.
TENANT MAY HOWEVER, REMOVE ANY MACHINERY, EQUIPMENT OR TRADE FIXTURES PROVIDED
- ------------------------------------------------------------------------------
THE PREMISES ARE RESTORED TO BUILDING STANDARDS.
- ------------------------------------------------
8. INSURANCE INDEMNITY.
-------------------
8.1 INSURING PARTY. As used in this Article 8, the term "insuring
--------------
party" shall mean the party who has the obligation to obtain the insurance
required hereunder. The insuring party in this case shall be the Landlord.
Tenant shall reimburse Landlord for the cost of the insurance, as additional
rent, upon fifteen (15) days advance written notice.
8.2 LIABILITY INSURANCE. Tenant shall obtain and keep in force
-------------------
during the term of this Lease a policy of comprehensive public liability
insurance insuring Landlord and Tenant against all liability arising out of the
ownership, use, occupancy or maintenance of the Premises and all areas
appurtenant thereto. Such insurance shall be in an amount of not less than One
Million Dollars ($1,000,000) for injury or death of any person in any one
accident or occurrence. Such insurance shall further insure Landlord and Tenant
against liability for property damage of at least Five Hundred Thousand Dollars
($500,000). The limits of said insurance shall not, however, limit the
liability of Tenant hereunder. In the event that the Premises constitute a part
of a larger property said insurance shall have a Landlord's Protective Liability
endorsement attached thereto. If Tenant shall fail to procure and maintain said
insurance Landlord may, but shall not be required to, procure and maintain the
same, but at the expense of Tenant.
8.3 PROPERTY INSURANCE. The insuring party shall obtain and keep in
------------------
force during the term of this Lease a policy or policies of insurance covering
loss or damage to the Premises, in the amount of the full replacement value
thereof, or as required by any lender, providing protection against all perils
included within the classification of fire, extended coverage, vandalism,
malicious mischief, special extended perils (all risk) and sprinkler leakage as
well as earthquake and flood. Said policy may include a deductible, the cost of
said deductible shall be borne in accordance with Articles 7.1 and 7.2. In
addition thereto, insuring party shall maintain (i) full coverage plate glass
insurance on the Premises, and (ii) INSURANCE OF air conditioning equipment, and
-------------
other pressure vessels systems located in, on, or about the Premises with limits
of not less than One Hundred Thousand Dollars ($100,000) per occurrence and (ii)
rent loss insurance in favor of Landlord insuring Landlord against any loss of
rental from damage or destruction of the premises for a period of least twelve
(12) months from the date of such damage or destruction. Said insurance shall
provide for payment for loss thereunder to Landlord or to the holder of a first
mortgage or deed of trust on the Premises. If the insuring party shall fail to
procure and maintain said insurance, the other party may, but shall not be
required to, procure and maintain the same, but at the expense of the Tenant.
8.4 INSURANCE POLICIES. Insurance required hereunder shall be in
------------------
companies rated A1, AAA or better in "Best Insurance Guide". The insuring party
shall deliver prior to possession, to the other party, copies of policies of
such insurance or certificates evidencing the existence and amounts of such
insurance with loss payable clauses satisfactory to Landlord. No such policy
shall be cancelable or subject to reduction of coverage or other modification
except after ten (10) days prior written notice to Landlord. If Tenant is the
insuring party, Tenant shall, within ten (10) days prior to the expiration of
such policies, furnish Landlord with renewals thereof, or Landlord may order
such insurance and charge the cost thereof to Tenant, which amount shall be
payable by Tenant upon demand. Tenant shall not do or permit to be done
anything which shall invalidate the insurance policies referred to in Article
8.3. Tenant shall forthwith, upon Landlord's demand, reimburse Landlord for any
additional premiums attributable to any act or omission or operation of Tenant
causing such increase in the cost of insurance. If Landlord is the insuring
party, and if the insurance policies maintained hereunder cover other
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improvements in addition to the Premises, Landlord shall deliver to Tenant a
written statement setting forth the amount of any such cost increase and showing
in reasonable detail the manner in which it has been computed.
8.5 WAIVER OF SUBROGATION. Tenant and Landlord each waive any and
---------------------
all rights of recovery against the other, or against the officers, employees,
agents and representatives of the other, for loss of or damage to such waiving
party or its property or the property of others under its control, where such
loss or damage is insured against under any insurance policy in force at the
time of such loss or damage provided that this waiver of subrogation shall not
in any manner absolve Tenant of its obligations to make repairs pursuant to
Article 7.2 or its obligation to indemnify Landlord pursuant to Article 8.6.
Tenant and Landlord shall, upon obtaining the policies of insurance required
hereunder, give notice to the insurance carriers that the foregoing mutual
waiver of subrogation is contained in this Lease.
8.6 HOLD HARMLESS. Tenant shall indemnify, defend and hold Landlord
-------------
harmless from any and all claims arising from Tenant's use of the Premises or
from the conduct of its business or from any activity, work or things which may
be permitted or suffered by Tenant in or about the Premises and shall further
indemnify, defend and hold Landlord harmless from and against any and all claims
arising from any breach or default in the performance of any obligation on
Tenant's part to be performed under the provisions of this Lease or arising from
any negligence of Tenant or any of its agents, contractors, employees or
invitees and from any and all costs, attorney's fees, expenses and liabilities
incurred in the defense of any such claim or action or proceeding brought
thereon. Tenant hereby assumes all risk of damage to property or injury to
persons in or about the Premises from any cause, and Tenant hereby waives all
claims in respect thereof against Landlord, excepting where said damage arises
out of negligence of Landlord.
8.7 EXEMPTION OF LANDLORD FROM LIABILITY. Tenant hereby agrees that
------------------------------------
Landlord shall not be liable for injury to Tenant's business or any loss of
income therefrom or from damage to the goods, wares, merchandise or other
property of Tenant, or about the Premises, nor, unless through its negligence,
shall Landlord be liable for injury to the person of Tenant, Tenant's employees,
agents, contractors and invitees, whether such damage or injury is caused by or
results from fire, steam, electricity, gas, water, or rain, or from the
breakage, leakage, obstruction or other defects of pipes, sprinklers, wires,
appliances, plumbing, air conditioning or lighting fixtures, or from any other
cause, whether the said damage or injury results from conditions arising upon
the Premises or upon other portions of the building of which the Premises are a
part, or from other sources or places, and regardless of whether the cause of
such damage or injury or the means of repairing the same is inaccessible to
Landlord or Tenant. Landlord shall not be liable for any damages arising from
any act or neglect of any other tenant, if any, of the building in which the
Premises are located.
9. DAMAGE OR DESTRUCTION. Partial damage is defined as not greater than
---------------------
forty percent (40%) of the total rentable square feet improved building area
within the Tenant space.
9.1 PARTIAL DAMAGE - INSURED. Subject to the provisions of Article
------------------------
7.1, if the Premises are damaged and such damage was caused by a casualty
covered under an insurance policy required to be maintained pursuant to Article
8.3, Landlord shall, at Landlord's expense, repair such damage as soon as
reasonably possible, and this Lease shall continue in full force and effect.
9.2 DAMAGE - UNINSURED. In the event the Premises may be damaged or
------------------
destroyed by a casualty which is not covered by fire and extended coverage
insurance carried by Landlord, the Landlord shall restore same, provided that if
the damage or destruction is to an extent greater than ten FIFTEEN percent (10%)
-------
(15%) of the then replacement cost of improvements on the Premises (exclusive of
- -----
Tenant's trade fixtures and equipment and exclusive of foundations) then
Landlord may elect not to restore and to terminate this Lease. Landlord must
give Tenant written notice of its election not to restore within thirty (30)
days from the date Landlord received notice of such damage and, if not given,
Landlord shall be deemed to have elected to restore and in such event shall
repair any damage as soon as reasonably possible. In the event Landlord elects
to give such notice of Landlord's intention to cancel and terminate this Lease,
Tenant shall have the right within ten (10) days after receipt of such notice to
give written notice to Landlord of Tenant's intention to repair such damage at
Tenant's expense, without reimbursement from Landlord, in which event this Lease
shall continue in full force and effect and Tenant shall proceed to make such
repairs as soon as reasonably possible. If Tenant does not give such
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notice within such ten (10) day period, this Lease shall be canceled and
terminated as of the date of the occurrence of such damage.
9.3 TOTAL DESTRUCTION. If at any time during the term hereof the
-----------------
Premises are totally destroyed to an extent greater than forty percent (40%) of
rentable square feet from any cause whether or not covered by the insurance
required to be maintained by the insuring party pursuant to Article 8.3
(including total destruction required by any authorized public authority), this
Lease shall automatically terminate as of the date of such total destruction,
unless Landlord elects to repair per Paragraph 9.1.
9.4 DAMAGE NEAR END OF TERM. If the Premises are partially destroyed
-----------------------
or damaged during the last twelve (12) months of the term of this Lease,
Landlord may, at Landlord's option cancel and terminate this Lease as of the
date of occurrence of such damage by giving written notice to Tenant of
Landlord's election to do so within thirty (30) days after Landlord receives
notice of occurrence of such damage.
9.5 ABATEMENT OF RENT.
-----------------
(a) If the Premises are partially destroyed or damaged and Landlord
or Tenant repairs or restores them pursuant to the provisions of this Article 9,
the rent payable hereunder for the period during which such damage, repair or
restoration continues shall be abated in proportion to the degree to which
Tenant's reasonable use of the Premises is substantially impaired. Except for
abatement of rent, if any, Tenant shall have no claim against Landlord for any
damage suffered by reason of any such damage, destruction, repair or
restoration.
(b) If Landlord shall be obligated to repair or restore the Premises
under the provisions of this Article 9 and shall not commence such repair or
restoration within ninety (90) days after such obligations shall accrue, Tenant
may, at Tenant's option, cancel and terminate this Lease by giving Landlord
written notice of Tenant's election to do so at any time prior to the
commencement of such repair or restoration. In such event this Lease shall
terminate as of the date of such notice. Any abatement in rent shall be computed
as provided in Article 9.5(a).
10. REAL PROPERTY TAXES.
-------------------
10.1 PAYMENT OF TAXES. Tenant shall pay all real property taxes, as
----------------
additional rent, upon fifteen (15) days advance written notice, applicable to
the Premises during the term of this Lease including reasonable costs for
attorneys or tax experts secured by Landlord in seeking reduction of the taxes
assessed on the Premises. If any such taxes shall cover any period of the time
prior to or after expiration of the term hereof, Tenant's share of such taxes
shall be equitably prorated to cover only the period of time within the tax
fiscal year during which this Lease shall be in effect.
10.2 DEFINITION OF "REAL PROPERTY TAXES". As used herein, the term
-----------------------------------
"real property tax" shall include any form of assessment, license fee, tax on
rent, levy, penalty, or tax (other than INCOME inheritance or estate taxes)
------
imposed by any authority having the direct or indirect power to tax, including
city, county, state or federal government, or any school, agricultural,
lighting, drainage or other improvement district thereof, as against any legal
or equitable interest of Landlord in the Premises or in the real property of
which the Premises are a part, as against Landlord's right to rent or other
income therefrom, or as against Landlord's business of leasing the Premises, and
Tenant shall pay any and all charges and fees which may be imposed by the EPA or
other similar governmental regulations or authorities.
10.3 PERSONAL PROPERTY TAXES.
-----------------------
(a) Tenant shall pay prior to delinquency all taxes assessed against
and levied upon leasehold improvements, fixtures, furnishings, equipment and all
other personal property of Tenant contained in the Premises or elsewhere.
Tenant shall cause said leasehold improvements, trade fixtures, furnishings,
equipment and all other personal property to be assessed and billed separately
from the real property of Landlord.
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(b) If any of Tenant's personal property shall be assessed with
Landlord's real property, Tenant shall pay Landlord the taxes attributable to
Tenant within ten (10) days after receipt of a written statement setting forth
the taxes applicable to Tenant's property.
11. EXTERIOR PARKING AND LANDSCAPE AREAS. During the term of this Lease,
------------------------------------
Tenant shall manage and maintain the exterior parking lot areas, sidewalks and
landscape areas so that they are clean and free from accumulation of debris,
filth, rubbish and garbage. Landscape maintenance shall include pruning,
fertlization, maintenance of the irrigation system (if any) and/or watering,
weeding and rebarking of the landscaped areas.
12. UTILITIES. Tenant shall pay for all water, gas, heat, light, power,
---------
telephone and other utilities and services supplied to the Premises, together
with any taxes thereon.
13. ASSIGNMENT AND SUBLETTING.
-------------------------
13.1 LANDLORD'S CONSENT REQUIRED. Tenant shall not voluntarily or by
---------------------------
operation of law assign, transfer, mortgage, sublet, or otherwise transfer or
encumber all or any part of Tenant's interest in this Lease or in the Premises
without Landlord's prior written consent, which Landlord shall not unreasonably
withhold. Any attempted assignment, transfer mortgage, encumbrance, or
subletting without consent shall be void and shall constitute a breach of this
Lease. Any transfer of Tenant's interest in this Lease or in the Premises from
Tenant by merger, consolidation, or liquidation, or by any subsequent change in
the ownership of thirty percent (30%) or more of the capital stock of Tenant or
thirty percent (30%) or more partnership interest of Tenant shall be deemed a
prohibited assignment within the meaning of this Article 13. Notwithstanding
any provisions to the contrary contained in this Lease, this Lease may be
assigned, or the Premises may be sublet, in whole or in part, without the
consent of Landlord and without payment of any charge to Landlord in connection
with such assignment or subletting to any corporation into or with which Tenant
may be merged or consolidated or to any corporation or other entity which shall
be an affiliate, subsidiary, parent or successor of Tenant, or of a corporation
into or with which Tenant may be merged or consolidated. Under no circumstances
shall a sale or transfer of a majority or more of the common stock of Tenant on
any stock exchange be deemed an assignment pursuant to the terms and provisions
of this Lease. Additionally, the public sale or transfer of the common stock of
Tenant or Tenant's parent shall not constitute an assignment under this Lease,.
AS TO ANY ASSIGNMENT OR SUBLEASE, the following conditions must be met: (a)
- ---------------------------------
Tenant shall not then be in default under this Lease beyond any applicable
notice and cure periods; (b) the assignment or subletting shall in no manner
relieve Tenant of ANY nay of the obligations undertaken by it under this Lease;
---
(c) the assignee or subtenant shall assume in writing all the conditions,
obligations and agreements contained in this Lease; (d) the assignment or
subletting shall not be binding on Landlord until a fully executed copy of the
document effecting such assignment or subletting and the assumption by the
assignee or sublessee shall be delivered to Landlord; (e) the net worth of the
succeeding entity immediately following such assignment shall not be less than
the net worth of Tenant as of the date hereof; and (f) the Premises shall
continue to be operated solely for the use specified herein. For purposes of
this section "subsidiary" or "affiliate" of Tenant shall mean the following:
(a) An "affiliate" shall mean any corporation which, directly or indirectly,
controls or is controlled by or is under common control with Tenant. For this
purpose, "control" shall mean the possession, directly or indirectly, of the
power to direct or cause the direction of the management and policies of such
corporation, whether through the ownership of voting securities or by contract
or otherwise; (b) a "subsidiary" shall mean any corporation not less than fifty
percent (50%) of whose outstanding stock is, and which continues to be, owned
directly or indirectly by Tenant. No option to extend, if any, may be assigned
by Tenant and no subtenant shall have any right to exercise any such option.
13.2 NO RELEASE OF TENANT. Regardless of Landlord's consent, no
--------------------
subletting or assignment shall release Tenant of Tenant's obligation to pay the
rent and to perform all other obligations to be performed by Tenant hereunder
for the term of this Lease. The acceptance of rent by Landlord from any other
person shall not be deemed to be a waiver by Landlord of any provision hereof.
Consent to one assignment or subletting, shall not be deemed consent to any
subsequent assignment or subletting.
13.3 ASSIGNMENT FEE. In the event that Landlord shall consent to a
--------------
sublease or assignment under Article 13.1, Tenant shall pay to Landlord
reasonable fees not to exceed Five Hundred Dollars ($500) incurred in connection
with giving such consent.
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All rent received by Tenant from its subtenants in excess of the rent
payable by Tenant to Landlord under this Lease shall be paid to Landlord, or any
sums to be paid by an assignee to Tenant in consideration of the assignment of
this Lease shall be paid to Landlord.
13.4 ASSIGNMENT BY LANDLORD. Landlord shall be permitted freely to
----------------------
assign all of its rights and obligations hereunder, and upon such assignment of
its obligations, Landlord shall no longer be liable under this Lease. Tenant
hereby agrees to attorn to any assignee of Landlord's interest hereunder,
whether such assignment is voluntary or by operation of law.
13.5 REASONABLE CONSENT. In aid to the Landlord's determination
------------------
whether to consent to any assignment, transfer or subletting but without
limiting reasons for which such consent may be withheld, Tenant, at Landlord's
request, shall submit in writing to Landlord: (1) the name and legal
composition of the proposed subtenant, assignee or transferees, and the nature
of the transaction contemplated and purposes of it; (2) the nature of the
proposed subtenant's business to be carried on in the Premises; (3) the terms
and provisions of the proposed sublease, assignment or transfer; and (4) current
financial statements of the subtenant or assignee and such other reasonable
financial information as Landlord may request concerning the proposed
transaction and the proposed subtenant, assignee or transferee without limiting
the authority of the Landlord to withhold reasonably its consent, Landlord may
require any assignee or subtenant to assume all of the obligations of the Tenant
with respect to this Lease, but such assumption shall not release the Tenant.
14. DEFAULTS; REMEDIES.
------------------
14.1 DEFAULTS. The occurrence of any one or more of the following
--------
events shall constitute a default and breach of this Lease by Tenant:
(a) The vacation or abandonment of the Premises by Tenant for a
period of thirty (30) days or more.
(b) The failure by Tenant to make any payment of rent or any other
payment required to be made by Tenant hereunder, as and when due, where such
failure shall continue for a period of ten (10) days.
(c) The failure by Tenant to observe or perform any of the covenants,
conditions, or provisions of this Lease to be observed or performed by Tenant,
other than described in Paragraph (b) above, where such failure shall continue
for a period of thirty (30) days after written notice thereof from Landlord to
Tenant provided, however, that if the nature of Tenant's default is such that
more than thirty (30) days are reasonably required for its cure, then Tenant
shall not be deemed to be in default if Tenant commenced such cure within said
thirty (30) day period and thereafter diligently prosecutes such cure to
completion.
(d) (i) The making by Tenant of any general assignment, or general
assignment for the benefit of creditors; (ii) the filing by or against Tenant of
a petition to have Tenant adjudged a bankrupt or petition for reorganization or
arrangement under any law relating to bankruptcy (unless, in the case of a
petition filed against Tenant, the same is dismissed within sixty (60) days);
(iii) the appointment of a trustee or receiver to take possession of
substantially all of Tenant's assets located at the Premises or of Tenant's
interest in this Lease, where possession is not restored to Tenant within
thirty (30) days; or (iv) the attachment, execution or other judicial seizure of
substantially all of Tenant's assets located at the Premises AND of Tenant's
---
interest in this Lease, where such seizure is not discharged within thirty (30)
days.
14.2 REMEDIES IN DEFAULT. In the event of any such default or breach
-------------------
by Tenant, Landlord may, SUBJECT TO APPLICABLE LAW, at any time thereafter, with
-----------------------------
or without notice or demand and without limiting Landlord in the exercise of any
right or remedy which Landlord may have by reason of such default or breach:
(a) Terminate Tenant's right to possession of the Premises by any
lawful means, in which case this Lease shall terminate and Tenant shall
immediately surrender possession of the Premises to Landlord. In such event
Landlord shall be entitled to recover from tenant all damages incurred by
Landlord by reason of Tenant's default, including but not limited to: (i) the
cost of recovering possession of the Premises; and (ii) expenses of reletting,
including necessary renovation and alteration of the Premises; and (iii)
reasonable attorney's
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<PAGE>
fees, and any real estate commission actually paid applicable to the unexpired
term of this Lease; and (iv) the worth at the time of award determined by the
court having jurisdiction thereof, of the unpaid rent that had been earned at
the time of termination of this Lease; and (v) any other amount, and court costs
necessary to compensate Landlord for all detriment proximately caused by
Tenant's default. In the event Tenant shall have abandoned the Premises,
Landlord shall have the option of (1) retaking possession of the Premises,
taking possession of all personal property remaining in the Premises and
recovering from Tenant the amount specified in this Article 14.2(a) and 14.2(d),
or (2) proceeding under Article 14.2(b). As used in this Paragraph, the term
"the worth at the time of award" is to be computed by discounting the total rent
payable by the amount of the discount rate of the Federal Reserve Bank of San
Francisco at the time of the award, plus one percent (1%).
(b) Maintain Tenant's right to possession, in which case this Lease
shall continue in effect whether or not Tenant shall have abandoned the
Premises. In such event, Landlord shall be entitled to all of Landlord's rights
and remedies under this Lease including the right to recover the rent as it
becomes due hereunder.
(c) Pursue any other remedy now or hereafter available to Landlord
under the laws or judicial decisions of the state in which the Premises are
located.
(d) Any rent or other charge that is not paid when due shall bear
interest from the date due until paid at the rate of sixteen (16%) per annum;
provided, however, that in no event shall such rate to be charged Tenant exceed
the rate otherwise permitted by law.
14.3 DEFAULT BY LANDLORD. Landlord shall not be in default unless
-------------------
Landlord fails to perform obligations required of Landlord within a reasonable
time, but in no event later than thirty (30) days after written notice by Tenant
to Landlord and to the holder of any first mortgage or deed of trust covering
the Premises, where name and address shall have theretofore been furnished to
Tenant in writing, specifying wherein Landlord has failed to perform such
obligation; provided, however, that the nature of the Landlord's obligation is
such that more than thirty (30) days are required for performance, then Landlord
shall not be in default if Landlord commences performances within such thirty
(30) day period and thereafter diligently prosecutes the same to completion.
14.4 LATE CHARGES. Tenant hereby acknowledges that late payment by
------------
Tenant to Landlord of rent and other sums due hereunder will cause Landlord to
incur costs not contemplated by this Lease, the exact amount of which will be
extremely difficult to ascertain. Such costs include, but are not limited to,
processing and accounting charges, and late charges which may be imposed on
Landlord by the term of any mortgage or trust deed covering the Premises.
Accordingly, if any installment of rent or any other sums due from Tenant shall
not be received by Landlord or Landlord's designee within ten (10) days after
said amount is due then Tenant shall pay to Landlord a late charge of ten
percent (10%) of such overdue amount, per each monthly period, but not any
interest thereon. ON THE FIRST TWO OCCASIONS OF A RENT DELINQUENCY, LANDLORD
----------------------------------------------------------
WILL VERBALLY NOTIFY TENANT. IN THE EVENT THAT TENANT ISSUES PAYMENT WITHIN
- ----------------------------------------------------------------------------
FIVE (5) DAYS FROM NOTIFICATION, LANDLORD AGREES TO WAIVE THE LATE CHARGE
- -------------------------------------------------------------------------
ALLOWED IN THE LEASE. THEREAFTER, LANDLORD SHALL BE ENTITLED TO ALL COLLECTION
- -------------------------------------------------------------------------------
REMEDIES AND CHARGES PROVIDED FOR UNDER THE LEASE. In no event shall any late
- ---------------------------------------------------
charge be required in violation of any law. Further, the parties agree that a
Twenty-Five Dollar ($25.00) charge shall be paid by Tenant to Landlord for any
returned check.
The parties hereby agree that such late charge represents a fair and
reasonable estimate of the cost Landlord will incur by reason of late payment by
Tenant. Acceptance of such late charge by Landlord shall in no event constitute
a waiver of Tenant's default with respect to such overdue amount, nor prevent
Landlord from exercising any of the other rights and remedies granted hereunder.
14.5 CURE BY LANDLORD. Landlord, at any time after Tenant
----------------
commits a default, may cure the default at Tenant's cost. If Landlord at any
time by reason of Tenant's default, pays any sum or does any act that requires
the payment of any sum, the sum paid by Landlord at the time the sum is paid
shall be due from Tenant to Landlord, and if paid at a later date shall bear
interest at the rate of sixteen percent (16%) per annum from the date the sum is
paid by Landlord until Landlord is reimbursed by Tenant. The sum, together with
interest shall be deemed additional rent hereunder.
9
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15. CONDEMNATION. If the Premises or any portion thereof are taken under
------------
the power of eminent domain, or sold by Landlord under the threat of the
exercise of said power (all of which is herein referred to as "condemnation"),
this Lease shall terminate as to the part so taken as of the date the condemning
authority takes title or possession; whichever occurs first. If more than
twenty-five percent (25%) of the floor area of any building on the Premises, or
more than twenty-five percent (25%) of the land area of the Premises not covered
with buildings, is taken by condemnation, either Landlord or Tenant may
terminate this Lease as of the date the condemning authority takes possession by
notice in writing of such election within twenty (20) days after Landlord shall
have notified Tenant of the taking, or, in the absence of such notice, then
within twenty (20) days after the condemning authority shall have taken
possession.
If this Lease is not terminated by either Landlord or Tenant, then it
shall remain in full force and effect as to the portion of the Premises
remaining, provided the rental shall be reduced in proportion to the floor area
of the buildings taken within the Premises as bears to the total floor area of
all buildings located on the Premises. In the event this Lease is not so
terminated, then Landlord agrees, at Landlord's sole costs, as soon as
reasonably possible, to restore the Premises to a complete unit of like quality
and character as existed prior to the condemnation. All awards for the taking
of any part of the Premises or any payment made under the threat of the exercise
of power of eminent domain shall be the property of Landlord, whether made as
compensation for diminution of value of the leasehold or for the taking of the
fees or as severance damages; provided, however, that Tenant shall be entitled
to any award for loss of or damage to Tenant's trade fixtures and removable
personal property.
16. GENERAL PROVISIONS.
------------------
16.1 ESTOPPEL CERTIFICATE.
--------------------
(a) Tenant shall, at any time, upon not less than ten (10) days prior
written notice from Landlord, execute, acknowledge and deliver to Landlord a
statement in writing (i) certifying that this Lease is unmodified and in full
force and effect (or, if modified, stating the nature of such modification and
certifying that this Lease, as so modified, is in full force and effect) and the
date to which the rent, security deposit, and other charges are paid in advance,
if any, and (ii) acknowledging that there are not, to Tenant's knowledge, any
uncured defaults on the part of Landlord hereunder, or specifying such defaults,
if any , which are claimed. Any such statement may be conclusively relied upon
by any prospective purchaser or encumbrancer of the Premises.
(b) Tenant's failure to deliver such statement within such time
period shall be conclusive upon Tenant that (i) this Lease is in full force and
effect, without modification except as may be represented by Landlord, (ii)
there are not uncured defaults in Landlord's performance, and (iii) not more
than one (1) month's rent has been paid in advance.
(c) If Landlord desires to finance or refinance the Premises, or any
part thereof, Tenant hereby agrees to deliver to any lender designated by
Landlord such financial statements of Tenant as may be reasonably required by
such lender. Such statements shall include the past three (3) years' financial
statements of Tenant. All such financial statements shall be received by
Landlord in confidence and shall be used only for the purposes herein set forth.
Tenant shall execute any estoppel certificate, subordination agreement, and/or
attornment agreement submitted to Tenant by Landlord for purposes of said
financing; provided however, that Tenant shall be allowed the quiet use and
enjoyment of the Premises as long as Tenant is not in default under the terms of
this Lease.
16.2 LANDLORD'S INTEREST. The term "Landlord" as used herein shall
-------------------
mean only the owner or owners at the time in question of the fee title, vendee's
interest under a real estate contract, or a tenant's interest in a ground lease
of the Premises. In the event of any transfer of such title or interest,
Landlord herein named (and in case of any subsequent transfers, the then
grantor) shall be relieved from and after the date of such transfer of all
liability as respects Landlord's obligations thereafter to be performed
ACCRUING, provided that any funds in the hands of Landlord or the then grantor
- --------
at the time of such transfer, in which Tenant has an interest, shall be
delivered to the grantee. The obligations contained in this Lease to be
performed by Landlord shall, subject to aforesaid, be binding upon Landlord's
successors and assigns, only during their respective periods of ownership.
10
<PAGE>
16.3 SEVERABILITY. The invalidity of any provision of this Lease, as
------------
determined by a court of competent jurisdiction, shall in no way affect the
validity of any other provision hereof.
16.4 INTEREST ON PAST DUE OBLIGATIONS. Except as expressly herein
--------------------------------
provided, any amount due to Landlord not paid when due shall bear interest at
sixteen percent (16%) per annum from the due date. Payment of such interest
shall not excuse or cure any default by Tenant under this Lease.
16.5 TIME OF ESSENCE. Time is of the essence.
---------------
16.6 CAPTIONS. Article and Paragraph captions are not a part hereof.
--------
16.7 INCORPORATION OF PRIOR AGREEMENT; AMENDMENTS. This Lease
--------------------------------------------
contains all agreements of the parties with respect to any matter mentioned
herein. No prior agreement or understanding pertaining to any such matter shall
be effective. This lease may be modified in writing only, signed by the parties
in interest at the time of modification.
16.8 WAIVERS. No waiver by Landlord of any provision hereof shall be
-------
deemed a waiver of any other provision hereof or of any subsequent breach by
Tenant of the same or any other provision. Landlord's consent to or approval of
any act shall not be deemed to render unnecessary the obtaining of Landlord's
consent to or approval of any subsequent act by Tenant. The acceptance of rent
hereunder by Landlord shall not be a waiver of any preceding breach by Tenant of
any provision hereof, other than the failure of Tenant to pay the particular
rent so accepted regardless of Landlord's knowledge of such preceding breach at
the time of acceptance of such rent.
16.9 RECORDING. Tenant shall not record this Lease without Landlord's
---------
prior written consent, and such recordation shall, at the option of Landlord,
constitute a noncurable default of Tenant hereunder. Either party shall, upon
request of the other, execute, acknowledge and deliver to the other a "short
form" memorandum of this Lease for recording purposes.
16.10 HOLDING OVER. If Tenant remains in possession of the Premises
------------
or any part thereof after the expiration of the term hereof without the express
written consent of Landlord, such occupancy shall be a tenancy from month to
month at a rental in the amount of 150 125% of the last monthly rental plus all
---
other charges payable hereunder, and upon the terms hereof applicable to month
to month tenancy.
16.11 CUMULATIVE REMEDIES. No remedy or election hereunder shall be
-------------------
deemed exclusive, but shall wherever possible, be cumulative with all other
remedies at law or in equity.
16.12 COVENANTS AND CONDITIONS. Each provision of this Lease
------------------------
performable by Tenant shall be deemed both a covenant and a condition.
16.13 BINDING EFFECT; CHOICE OF LAW; PRORATION. Subject to any
----------------------------------------
provisions hereof restricting assignment or subletting by Tenant and subject to
the provision of Article 13.2, this Lease shall bind the parties, their
representatives, successors and assigns. This Lease shall be governed by the
laws of the state where the Premises are located. All prorations shall be on
the basis of a thirty (30) day month.
16.14 SUBORDINATION.
-------------
(a) This Lease, at Landlord's option, shall be subordinate to any
ground lease, mortgage, deed of trust, or any hypothecation for security now or
hereafter placed upon the real property of which the Premises are a part and to
any and all advances made on the security thereof and to all renewals,
modifications, consolidations, replacements and extensions thereof.
Notwithstanding such subordination, Tenant's right to quiet possession of the
Premises shall not be disturbed if Tenant is not in default and so long as
Tenant shall pay the rent and observe and perform all of the provisions of this
Lease, unless this Lease is otherwise terminated pursuant to its terms. If any
mortgagee, trustee or ground lessor shall elect to have this Lease prior to the
lien of its mortgage, deed of trust or ground lease, and shall give written
notice thereof to Tenant, this Lease shall be
11
<PAGE>
deemed prior to such mortgage, deed of trust, or ground lease, whether this
Lease is dated prior or subsequent to the date of said mortgage, deed of trust
or ground lease, or the date of recording thereof.
(b) Tenant agrees to execute and deliver any documents required to
effectuate such subordination or to make this Lease prior to the lien of any
mortgage, deed of trust or ground lease, as the case may be, and failing to do
so within ten (10) TWENTY (20) days after written demand, does hereby make,
-----------
constitute and irrevocably appoint Landlord as Tenant's attorney-in-fact and in
Tenant's name, place and stead, to do so.
16.15 ATTORNEYS' FEES. If either party named herein brings an action
---------------
to enforce the terms hereof or declare rights hereunder the prevailing party in
any such action, on trial or appeal, shall be entitled to his reasonable
attorney's fees to be paid by the losing party as fixed by the court.
16.16 LANDLORD'S ACCESS. Landlord and Landlord's agents shall have
-----------------
the right to enter the Premises at reasonable times for the purpose of
inspecting the same, showing the same to prospective tenants, purchasers or
lenders, and making such alterations, repairs, improvements or additions to the
Premises or to the building of which they are a part as Landlord may deem
necessary or desirable. Landlord may at any time place on or about the Premises
any ordinary "For Sale" or "For Lease" signs, and Landlord may at any time
during the last one hundred twenty (120) days of the term hereof place on or
about the Premises any ordinary "FOR LEASE" signs all without rebate or rent or
-----------
liability to Tenant.
16.17 SIGNS. Tenant shall not place any sign upon the Premises
-----
without Landlord's prior written consent, WHICH CONSENT SHALL NOT BE
----------------------------
UNREASONABLY WITHHELD. All signs installed by Tenant shall be removed upon
- ---------------------
termination of this Lease with the sign location restored to its former state.
16.18 MERGER. The voluntary or other surrender of this Lease by
------
Tenant, or a mutual cancellation thereof, shall not work a merger, and shall, at
the option of Landlord, terminate all or any existing subtenancies, or may, at
the option of Landlord, operate as an assignment to Landlord of any or all of
such subtenancies.
16.19 CORPORATE AUTHORITY. If Tenant is a corporation, each
-------------------
individual executing this Lease on behalf of said corporation represents and
warrants that he is duly authorized to execute and deliver this Lease on behalf
of said corporation in accordance with a duly adopted resolution of the Board of
Directors of said corporation or in accordance with the ARTICLES AND bylaws of
-------------
said corporation, and that this Lease is binding upon said corporation in
accordance with its terms.
16.20 LANDLORD'S LIABILITY. If Landlord is a joint venture or
--------------------
limited partnership, the liability of the partners of Landlord pursuant to this
Lease shall be limited to assets of the partnership, and Tenant, its successors
and assigns, hereby waive all rights to proceed against any of the partners, or
the officers, shareholders, or directors of any corporate partner of Landlord,
except to the extent of their interest in the partnership. As used in this
Article, the term "Landlord" shall mean only the owner or owners at the time in
question of the fee title, vendee's interest under a real estate contract, or
its interest in a ground lease of the Premises, and in the event of any transfer
of such title or interest, Landlord herein named (and in case of any subsequent
transfers the then grantor) shall be relieved from and after the date of such
transfer, and any funds in the hands of Landlord or the obligations thereafter
to be performed ACCRUING; provided that nay ANY funds in the hands of Landlord
--------- ----
or the then grantor at the time of such transfer, in which Tenant has an
interest, shall be delivered to the grantee. The obligations contained in this
Lease to be performed by Landlord shall, subject as aforesaid, be binding on
Landlord's successors and assigns only during the respective period of
ownership.
16.21 FINANCING. Tenant shall not execute any document purporting to
---------
affect the Premises or any other property of which the Premises are a part,
including, without limitation; any financing statement, without prior written
consent of Landlord, which may be withheld or conditioned in Landlord's sole
discretion.
16.22 INABILITY TO PERFORM. This Lease and the obligations of the
--------------------
Tenant hereunder shall not be effected or impaired because the Landlord is
unable to fulfill any of its obligations hereunder or is delayed in doing so, if
such inability or delay is caused by reason of strike, labor troubles, force
majeure, weather and acts of God, or any other cause beyond the reasonable
control of the Landlord, and Landlord shall not be liable for any such delay.
12
<PAGE>
17. COMPLETION BOND. At any time, Tenant either desires to or is
---------------
required to make any repairs, alterations, additions, improvements or utility
installations thereon, pursuant to Articles 7.5 or 9.2 herein or otherwise,
Landlord may at its sole option, require Tenant, at Tenant's sole cost and
expense, to obtain and provide to Landlord a lien and completion bond in an
amount equal to one and one-half (1-1/2) times the estimated cost of such
improvements, to insure Landlord against any liability for mechanic's and
materialmen's liens and to insure completion of the work.
18. NOTICES. Wherever under this Lease provision is made for any demand,
-------
notice or declaration of any kind, or where it is deemed desirable or necessary
by either party to give or serve any such notice, demand or declaration to the
other party, it shall be in writing and served either personally or sent by
United States mail, postage prepaid, addressed to the address set forth herein
below:
To Landlord: SMITH COVE PARTNERSHIP, A WASHINGTON GENERAL
--------------------------------------------
PARTNERSHIP
--------------------------------------------
ROBERT M. CURLEY
--------------------------------------------
GENERAL PARTNER
--------------------------------------------
2021 FIRST AVENUE , #E-6
--------------------------------------------
SEATTLE, WA 98121
--------------------------------------------
To Tenant: SEATTLE FILMWORKS, INC.
--------------------------------------------
CASE H. KUEHN
--------------------------------------------
1260 16/TH/ AVENUE WEST
--------------------------------------------
SEATTLE, WA 98119
--------------------------------------------
19. HAZARDOUS AND TOXIC WASTE MATERIALS. Tenant shall be responsible for
-----------------------------------
all expenses, damages, liabilities, including reasonable attorneys' fees,
occurring as a result of Tenant's use or release of any hazardous and toxic
waste materials as they may affect the leased premises. "Release" means any
spill, visible leak, pumping, pouring, explosion, emission, discharge,
injection, escape, dumping, disposing or other entering into the environment of
any substance, chemical, material, pollutant or contaminant at, in, by, from or
related to the leased premises. Tenant's obligations in this regard shall
survive and extend beyond the termination date of this lease. Whereby the
statute of limitation for any indemnification action shall not begin to run
until Landlord has sustained damage. Landlord is entitled to indemnity under
the terms of this Agreement.
20. SPECIAL ARTICLES. The following numbered articles are made a part
----------------
hereof, 21, 22, 23, and 24 and appear below or are shown on Exhibit(s) A
-- -
attached hereto.
21. REPAYMENT OF FREE RENT. If this Lease provides for a postponement of
-----------------------
any monthly rental payments, a period of "free" rent or other rent concession,
such postponed rent of "free" rent is called the "Abated Rent." Tenant shall be
credited with having paid all of the Abated Rent on the expiration of the Lease
Term only of Tenant has fully, faithfully, and punctually performed all of
Tenant's obligations hereunder, including the payment of all rent (other than
the Abated Rent) and all other monetary obligations and the surrender of the
Property in the physical condition required by this Lease. Tenant acknowledges
that its right to receive credit for the Abated Rent is absolutely conditioned
upon Tenant's full, faithful and punctual performance of its obligations under
this Lease. If Tenant defaults and does not cure within any applicable grace
period, the Abated Rent shall immediately become due and payable in full and
this Lease shall be enforced as if there were no such rent abatement or other
rent concession.
21. Lease Termination. This Lease is conditioned upon executing a
-----------------
satisfactory Lease Termination Agreement with Port Chatham Packing Company
within fifteen (15) days of execution of this Agreement. If a Lease Termination
Agreement is not fully executed by Port Chatham Packing Company and Smith Cove
Partnership, this Lease Agreement shall be null and void and have no further
effect.
22. Lease Renewal Options.
---------------------
Option #1. Provided Tenant is not in default hereunder at the time
---------
Tenant exercises the option provided for herein or at the time of commencement
of the extension term, Tenant shall have the option to renew this Lease for an
additional sixty (60) months commencing October 1, 2000 and continuing through
September 30,
13
<PAGE>
2005, by giving written notice of its intent to extend on or before January 1,
1999 2000. All provisions of this Lease shall apply during the extended term,
----
except that rental for the renewal period shall be mutually agreed by Landlord
and Tenant, but in no event less than the last month's rental of this Lease. If
after sixty (60) days from the date of written notice, rent is in dispute, then
either party may by written notice delivered to the other party within five (5)
days after the expiration of the 60 day period, request arbitration by a single
arbitrator through the American Arbitration Association (in accordance with its
rules) with the cost to be divided equally between the parties. Said arbitration
shall be a "baseball type" arbitration (meaning Landlord and Tenant shall each
submit to the arbitrator a written proposal for their estimate of fair market
rental during the renewal period, and the arbitrator shall determine the rental
closest to fair market rental for the renewal period by selecting one of the two
proposals), which determination shall be binding upon both parties, and shall be
completed prior to the commencement of the renewal term. If neither party gives
notice of its desire to enter into arbitration within the five (5) day period,
this option shall become null and void.
Option #2. Provided Tenant is not in default hereunder at the time
---------
Tenant exercises the option provided for herein or at the time of commencement
of the extension term, Tenant shall have the option to renew this Lease for an
additional sixty (60) months commencing October 1, 2005 and continuing through
September 30, 2010, by giving written notice of its intent to extend on or
before January 1, 2004 2005. All provisions of this Lease shall apply during
----
the extended term, except that rental for the renewal period shall be mutually
agreed by Landlord and Tenant, but in no event less than the last month's rental
of Option #1. If after sixty (60) days from the date of written notice, rent is
in dispute, then either party may by written notice delivered to the other party
within five (5) days after the expiration of the 60 day period, request
arbitration by a single arbitrator through the American Arbitration Association
(in accordance with its rules) with the cost to be divided equally between the
parties. Said arbitration shall be a "baseball type" arbitration (meaning
Landlord and Tenant shall each submit to the arbitrator a written proposal for
their estimate of fair market rental during the renewal period, and the
arbitrator shall determine the rental closest to fair market rental for the
renewal period by selecting one of the two proposals), which determination shall
be binding upon both parties, and shall be completed prior to the commencement
of the renewal term. If neither party gives notice of its desire to enter into
arbitration within the five (5) day period, this option shall become null and
void.
23. Right of Opportunity. If Landlord decides during the term of this
--------------------
Lease Agreement to sell the Premises, it shall afford Tenant the opportunity to
purchase the Premises upon THE terms and conditions established TO BE OFFERED by
---- --------------
Landlord, provided that Tenant is not then in default under any of the terms and
conditions of this Lease Agreement. Tenant shall have ten (10) days after being
notified of the terms and conditions imposed by Landlord upon sale of the
Premises within which to notify Landlord of its election either to purchase said
Premises or waive the right. Once having waived the right to purchase, the
right granted Tenant hereunder shall terminate even though Landlord may
thereafter desire to sell said Premises.
24. PAYMENT OF MANAGEMENT FEES. IN CONJUNCTION WITH MONTHLY RENT
-------------------------------------------------------------
PAYMENTS, TENANT SHALL PAY AS ADDITIONAL RENT A MANAGEMENT FEE OF TWO HUNDRED
- -----------------------------------------------------------------------------
DOLLARS ($200).
- ---------------
14
<PAGE>
The parties hereto have executed this Lease at the place and on the dates
specified immediately adjacent to their respective signatures.
Dated this 5th day of MARCH, 1997,
----- --
at Seattle, Washington.
"Landlord": SMITH COVE PARTNERSHIP
---------------------------------------------------
a WASHINGTON GENERAL PARTNERSHIP
-------------------------------------------------
By: /s/ Robert M. Curley
Robert M. Curley
Title: General Partner
---------------
Dated this 5th day of MARCH, 1997,
----- --
at Seattle, Washington.
"Tenant": SEATTLE FILMWORKS, INC.
-----------------------
a WASHINGTON CORPORATION
----------------------
By: /s/ Case H. Kuehn
Case H. Kuehn
Title: Vice President & Chief Financial Officer
----------------------------------------
15
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
STATE OF WASHINGTON GENERAL PARTNERSHIP
COUNTY OF KING }
ss.
</TABLE>
On this 5th day of March, A.D. 1997, before me personally appeared Robert
M. Curley to me known to be the General Partner of Smith Cove Partnership, a
Washington General Partnership that executed the within and foregoing
instrument, and acknowledged the same instrument to be the free and voluntary
act and deed of said corporation, for the uses and purposes therein mentioned,
and on oath stated that they were authorized to execute said instrument.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official
seal, the day and year first above written.
/s/ Stephanie Bonsanti
Notary Public in and for the State of Washington, residing at
Kent, Washington.
STATE OF WASHINGTON } CORPORATE
ss.
COUNTY OF KING
On this 5th day of March, A.D. 1997, before me personally appeared Case H.
Kuehn to me known to be the Vice President and Chief Financial Officer of
Seattle FilmWorks, Inc., the corporation that executed the within and foregoing
instrument, and acknowledged the same instrument to be the free and voluntary
act and deed of said corporation, for the uses and purposes therein mentioned,
and on oath stated that they were authorized to execute said instrument.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official
seal, the day and year first above written.
/s/ Linda Marie Clay
Notary Public in and for the State of Washington, residing at Redmond,
Washington.
16
<PAGE>
EXHIBIT 11
SEATTLE FILMWORKS, INC.
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Second Quarter Ended Six Months Ended
------------------------ -------------------------
March 29, March 30, March 29, March 30,
1997 1996 1997 1996
========================================================================================================================
<S> <C> <C> <C> <C>
COMPUTATION OF PRIMARY EARNINGS PER SHARE:
- ----------------------------------------------------
Weighted average shares outstanding 16,278,331 16,141,703 16,265,623 16,116,119
Net effect of dilutive stock options based on the
treasury stock method using average market price 1,483,578 1,566,205 1,531,880 1,567,692
---------- ---------- ---------- ----------
Total shares and equivalents 17,761,909 17,707,908 17,797,503 17,683,811
========== ========== ========== ==========
Net income $1,145,925 $503,461 $2,502,844 $1,454,172
========== ========== ========== ==========
PRIMARY EARNINGS PER SHARE $.06 $.03 $.14 $.08
==== ==== ==== ====
COMPUTATION OF FULLY DILUTED EARNINGS PER SHARE:
- ------------------------------------------------
Weighted average shares outstanding 16,278,331 16,141,703 16,265,623 16,116,119
Net effect of dilutive stock options based on the
treasury stock method using the higher of quarter-end
market price or average market price 1,483,578 1,630,377 1,531,880 1,649,917
---------- ---------- ---------- ----------
Total shares and equivalents 17,761,909 17,772,080 17,797,503 17,766,036
========== ========== ========== ==========
Net income $1,145,925 $503,461 $2,502,844 $1,454,172
========== ========== ========== ==========
FULLY DILUTED EARNINGS PER SHARE $.06 $.03 $.14 $.08
==== ==== ==== ====
</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 17, 1997.
49 of 49
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
Seattle FilmWorks Inc. Second Quarter 1997 10Q
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-27-1997
<PERIOD-START> SEP-29-1996
<PERIOD-END> MAR-29-1997
<CASH> 10,632
<SECURITIES> 0
<RECEIVABLES> 1,650<F1>
<ALLOWANCES> 0
<INVENTORY> 8,494
<CURRENT-ASSETS> 21,739
<PP&E> 6,183<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 41,998
<CURRENT-LIABILITIES> 8,638
<BONDS> 0
0
0
<COMMON> 163
<OTHER-SE> 29,049
<TOTAL-LIABILITY-AND-EQUITY> 41,998
<SALES> 0
<TOTAL-REVENUES> 21,657
<CGS> 12,762
<TOTAL-COSTS> 7,284
<OTHER-EXPENSES> (148)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,759
<INCOME-TAX> 613
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,146
<EPS-PRIMARY> .06
<EPS-DILUTED> .06
<FN>
<F1>Asset values represent net amounts
</FN>
</TABLE>
