<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: JUNE 27, 1998 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 July 24, 1998, there were issued and outstanding 16,768,770 shares of
common stock, par value $.01 per share.
Index to Exhibits at Page 14
Page 1 of 27
<PAGE>
SEATTLE FILMWORKS, INC.
INDEX
-----
Page No.
--------
PART I -- FINANCIAL INFORMATION
Item 1 - Financial Statements 3-7
Consolidated Balance Sheets as of June 27, 1998
and September 27, 1997 3-4
Consolidated Statements of Income for the third quarter
and nine months ended June 27, 1998 and June 28, 1997 5
Consolidated Statements of Cash Flows for the nine months
ended June 27, 1998 and June 28, 1997 6
Notes to Consolidated Financial Statements 7
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-12
PART II -- OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K 12
SIGNATURES 13
INDEX TO EXHIBITS 14
EXHIBITS 15-27
Page 2 of 27
<PAGE>
PART I -- FINANCIAL INFORMATION
-------------------------------
ITEM 1 - FINANCIAL STATEMENTS
SEATTLE FILMWORKS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
(UNAUDITED) (NOTE)
June 27, September 27,
ASSETS 1998 1997
===================================================================================================
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 6,635 $10,252
Securities available-for-sale 6,173 5,062
Accounts receivable, net of allowance for doubtful accounts 2,237 3,680
Inventories 11,062 8,998
Capitalized promotional expenditures 302 211
Prepaid expenses and other 388 743
Deferred income taxes 385 313
------- -------
TOTAL CURRENT ASSETS 27,182 29,259
FURNITURE, FIXTURES, AND EQUIPMENT,
at cost, less accumulated depreciation 11,274 7,564
CAPITALIZED CUSTOMER ACQUISITION EXPENDITURES 16,645 13,882
DEPOSITS AND OTHER ASSETS 125 285
NON-COMPETE AGREEMENT,
net of accumulated amortization 94 376
------- -------
TOTAL ASSETS $55,320 $51,366
======= =======
</TABLE>
Note: The September 27, 1997 consolidated balance sheet has been derived from
audited consolidated financial statements.
See notes to consolidated financial statements.
Page 3 of 27
<PAGE>
SEATTLE FILMWORKS, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(in thousands, except per share and share data)
<TABLE>
<CAPTION>
(UNAUDITED) (NOTE)
June 27, September 27,
LIABILITIES AND SHAREHOLDERS' EQUITY 1998 1997
====================================================================================================
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 4,467 $ 3,588
Current portion of capital lease obligations 171
Accrued expenses 822 1,402
Accrued compensation 1,190 1,931
Income taxes payable 1,871 2,450
------- -------
TOTAL CURRENT LIABILITIES 8,521 9,371
LONG-TERM CAPITAL LEASE OBLIGATIONS, net of current portion (Note B) 751
DEFERRED INCOME TAXES 5,147 4,394
------- -------
TOTAL LIABILITIES 14,419 13,765
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 16,768,770 168 164
Additional paid-in capital 779 2,459
Retained earnings 39,954 34,978
------- -------
TOTAL SHAREHOLDERS' EQUITY 40,901 37,601
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $55,320 $51,366
======= =======
</TABLE>
Note: The September 27, 1997 consolidated balance sheet has been derived from
audited consolidated financial statements.
See notes to consolidated financial statements.
Page 4 of 27
<PAGE>
SEATTLE FILMWORKS, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(in thousands, except per share and share data)
<TABLE>
<CAPTION>
THIRD QUARTER ENDED NINE MONTHS ENDED
-------------------------- -------------------------
JUNE 27, JUNE 28, JUNE 27, JUNE 28,
1998 1997 1998 1997
============================================================================================
<S> <C> <C> <C> <C>
Net revenues $24,928 $25,553 $68,838 $68,446
Cost of goods and services 14,293 13,977 39,673 39,721
------- ------- ------- -------
GROSS PROFIT 10,635 11,576 29,165 28,725
Operating expenses:
Customer acquisition costs 4,309 4,289 12,669 11,533
Other selling expenses 1,882 2,332 5,872 6,192
Research and development 154 143 450 525
General and administrative 1,117 701 3,216 2,821
------- ------- ------- -------
Total operating expenses 7,462 7,465 22,207 21,071
------- ------- ------- -------
INCOME FROM OPERATIONS 3,173 4,111 6,958 7,654
Other income (expense):
Interest expense (11) (11)
Interest income 152 131 541 418
Non operating income, net 102 37 90 46
------- ------- ------- -------
Total other income 243 168 620 464
------- ------- ------- -------
INCOME BEFORE INCOME TAXES 3,416 4,279 7,578 8,118
Provision for income taxes (1,175) (1,487) (2,602) (2,823)
------- ------- ------- -------
NET INCOME $ 2,241 $ 2,792 $ 4,976 $ 5,295
======= ======= ======= =======
Diluted Earnings per Share $.13 $.16 $.28 $.30
======= ======= ======= =======
Basic Earnings per Share $.13 $.17 $.30 $.33
======= ======= ======= =======
Weighted Average Shares and
Equivalents Outstanding - Diluted 17,490,000 17,728,000 17,540,000 17,771,000
=========== =========== =========== ===========
Weighted Average Shares - Basic 16,669,000 16,308,000 16,591,000 16,280,000
=========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
Page 5 of 27
<PAGE>
SEATTLE FILMWORKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
--------------------
June 27, June 28,
1998 1997
===================================================================================
<S> <C> <C>
OPERATING ACTIVITIES:
- ---------------------
Net income $ 4,976 $ 5,295
Charges to income not affecting cash:
Depreciation and amortization 2,648 2,030
Amortization of capitalized customer
acquisition expenditures 11,767 10,566
Deferred income taxes 681 1,435
Net change in receivables, inventories, payables and other (1,302) (1,340)
Capitalized promotional expenditures, net (91) (18)
Additions to capitalized customer acquisition expenditures (14,530) (15,097)
-------- --------
NET CASH FROM OPERATING ACTIVITIES 4,149 2,871
INVESTING ACTIVITIES:
- ---------------------
Purchase of furniture, fixtures, and equipment (4,932) (4,346)
Purchases of securities available-for-sale (5,456) (7,549)
Sales of securities available-for-sale 4,345 6,344
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (6,043) (5,551)
FINANCING ACTIVITIES:
- ---------------------
Purchases of Common Stock (2,670) (824)
Proceeds from issuance of Common Stock 994 681
Payment on capital lease obligations (47)
-------- --------
NET CASH USED IN FINANCING ACTIVITIES (1,723) (143)
-------- --------
DECREASE IN CASH AND CASH EQUIVALENTS (3,617) (2,823)
Cash and cash equivalents at beginning of period 10,252 6,135
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 6,635 $ 3,312
======== ========
</TABLE>
Supplemental Information - Noncash financing and investing activity:
- --------------------------------------------------------------------
During the third quarter of fiscal 1998 the Company incurred a capital lease
obligation of $969,000 related to the financing of equipment purchases.
See notes to consolidated financial statements.
Page 6 of 27
<PAGE>
SEATTLE FILMWORKS, INC.
NOTES TO CONSOLIDATED 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 consolidated 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 third quarter and nine months ended June
27, 1998 are not necessarily indicative of the results that may be expected for
the fiscal year ending September 26, 1998. For further information, refer to the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and consolidated financial statements and footnotes thereto included
in the Company's Annual Report on Form 10-K for the year ended September 27,
1997.
NOTE B -- LEASES
During the third quarter of fiscal year 1998, the Company financed the
purchase of $969,000 of equipment via a five-year capital lease consisting of
sixty monthly payments of $19,000 commencing April 1998. The equipment is being
depreciated on a straight-line basis over five years.
NOTE C -- EARNINGS PER SHARE
In 1997 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings per Share. Statement No. 128
replaced the previously reported primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary earnings per share,
basic earnings per share excludes any dilutive effects of options. Diluted
earnings per share is similar to the previously reported primary earnings per
share. All earnings per share amounts for all periods have been presented, and
where necessary, restated to conform to Statement No. 128 requirements.
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
THIRD QUARTER ENDED NINE MONTHS ENDED
------------------------------- ------------------------------
JUNE 27, 1998 JUNE 28, 1997 JUNE 27, 1998 JUNE 28, 1997
====================================================================================================================================
<S> <C> <C> <C> <C>
Numerator for basic and diluted earnings per share:
Net income $ 2,241,000 $ 2,792,000 $ 4,976,000 $ 5,295,000
=========== =========== =========== ===========
Denominator:
Denominator for basic earnings per share -
weighted-average shares 16,669,000 16,308,000 16,591,000 16,280,000
Effect of dilutive securities:
Stock options 821,000 1,420,000 949,000 1,491,000
----------- ----------- ----------- -----------
Denominator for diluted earnings per share 17,490,000 17,728,000 17,540,000 17,771,000
=========== =========== =========== ===========
Basic Earnings per Share $ .13 $ .17 $ .30 $ .33
=========== =========== =========== ===========
Diluted Earnings per Share $ .13 $ .16 $ .28 $ .30
=========== =========== =========== ===========
</TABLE>
Page 7 of 27
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward-Looking Information
- ---------------------------
Statements in this report concerning development and introduction of new
services, expected future expenses and any other statement which may be
construed as a prediction of future performance or events are forward-looking
statements, the occurrence of which are subject to a number of known and unknown
risks and uncertainties which might cause actual results, achievements or
occurrences to differ materially from those expressed or implied by such
statements. These risks and uncertainties include the Company's ability to
create and implement effective customer acquisition techniques; timely
development, delivery and market acceptance of products and services which
differentiate the Company from other photofinishers; technological changes;
service and product development; production difficulties or delays due to
technical difficulties, equipment failures, supply constraints or other factors;
changing economic conditions; the impact of competitive products and pricing;
and other risks including those described in the Company's Annual Report on Form
10-K and those described from time to time in the Company's 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 fiscal 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. This shift in focus
included the targeted marketing of users of personal computers. Management
believes that these steps are the primary reasons for the growth of net revenues
during fiscal years 1996 and 1997. In addition, management believes its core
photofinishing business has benefited from the introduction of digital imaging
services and products, such as the January 1994 introduction of Pictures On
Disk(TM) and the October 1995 introduction of PhotoMail(TM) Internet delivery.
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.
The direct costs of customer acquisition are capitalized as an asset on the
Company's consolidated 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.
Page 8 of 27
<PAGE>
Customer acquisition costs as a percentage of net revenues increased to
18.4% in the first nine months of fiscal 1998 as compared to 16.9% in the first
nine months of fiscal 1997. 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 and a decrease in the rate of
growth in fiscal year-to-date net revenues. Future periods may reflect increased
customer acquisition costs due to timing of the amortization of capitalized
expenditures or the development and initiation of additional marketing programs.
For tax purposes, customer acquisition expenditures are expensed as incurred,
thereby reducing current federal income tax liabilities and increasing deferred
federal income tax liabilities.
Net income as a percentage of net revenues decreased to 7.2% for the first
nine months of fiscal 1998 as compared to 7.7% for the same period of fiscal
1997 primarily due to the relationship between changes in costs of goods sold,
customer acquisition costs, other selling expenses and other operating 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 typically 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, activities by competitors, production
difficulties 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 consolidated
statements of income, expressed as a percentage of net revenues for the periods
indicated.
<TABLE>
<CAPTION>
Third Quarter Ended Nine Months Ended
--------------------- --------------------
June 27, June 28, June 27, June 28,
1998 1997 1998 1997
================================================================================
<S> <C> <C> <C> <C>
Net revenues 100.0% 100.0% 100.0% 100.0%
Cost of goods and services 57.3 54.7 57.6 58.0
----- ----- ----- -----
GROSS PROFIT 42.7 45.3 42.4 42.0
Operating expenses:
Customer acquisition costs 17.3 16.8 18.4 16.9
Other selling expenses 7.5 9.1 8.5 9.0
Research and development 0.6 0.6 0.7 0.8
General and administrative 4.5 2.7 4.7 4.1
----- ----- ----- -----
Total operating expenses 29.9 29.2 32.3 30.8
----- ----- ----- -----
INCOME FROM OPERATIONS 12.8 16.1 10.1 11.2
Total other income 0.9 0.6 0.9 0.6
----- ----- ----- -----
INCOME BEFORE INCOME TAXES 13.7 16.7 11.0 11.8
Provision for income taxes 4.7 5.8 3.8 4.1
----- ----- ----- -----
NET INCOME 9.0% 10.9% 7.2% 7.7%
===== ===== ===== =====
</TABLE>
Page 9 of 27
<PAGE>
Net revenues for the third quarter of fiscal 1998 decreased 2.4% to
$24,928,000 as compared to net revenues of $25,553,000 in the third quarter of
fiscal 1997. For the nine months ended June 27, 1998, net revenues increased
0.6% to $68,838,000 compared to $68,446,000 for the same period of fiscal 1997.
Net revenues for the third quarter and for the first nine months in fiscal 1998
were affected by lower-than-expected photofinishing volumes and a decline in net
revenues from ancillary businesses. Photofinishing revenues were weaker in the
latter part of June and this pattern has continued into the month of July. While
increased competition and other factors may be contributing to reduced
photofinishing volumes, management's statistical analysis of marketing programs
indicates photofinishing volumes continue to be negatively affected by extended
delivery times experienced by customers during last summer. Production problems
associated with implementing certain new equipment during the third quarter of
fiscal 1997 resulted in shipping delays during the third and fourth quarters of
fiscal 1997. Management believes the Company lost a significant number of
customers due to the extended delivery times. During the third quarter of fiscal
1997 delayed customer orders resulted in the recording of $600,000 in deferred
revenues. Also, net revenues in future quarters will be affected by the
Company's decision in June 1998 to discontinue wholesale film sales in certain
markets in Asia. During the fourth quarter of fiscal 1997 international
wholesale film orders produced $2,300,000 in net revenues.
Cost of goods and services consist of labor, postage and supplies related
to the Company's services and products. Gross profit in the third quarter of
fiscal 1998 decreased to 42.7% of net revenues compared to 45.3% in the third
quarter of fiscal 1997. For the first nine months of fiscal 1998, gross profit
increased to 42.4% compared to 42.0% for the same period of fiscal 1997. Gross
profit in the third quarter of fiscal 1998 was negatively affected by higher
production labor costs and equipment costs incurred to ensure timely delivery of
the level of photofinishing volumes that had been planned for earlier in the
year. The fiscal year-to-date increase in gross profit was due primarily to a
decrease in certain materials costs and 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.
Fluctuations in gross profit may occur in future periods due to fluctuations in
revenues, mix of product sales, intensity of promotional activities, changes in
materials costs and other factors.
Total operating expenses in the third quarter of fiscal 1998 increased to
29.9% of net revenues compared to 29.2% in the third quarter of fiscal 1997. The
increase was primarily due to increased legal expenses related to the defense of
an action filed by Fuji Photo Film Co., Ltd. with the International Trade
Organization against a number of importers, including the Company's OptiColor,
Inc. subsidiary, regarding the import and sale of recycled cameras. Operating
expenses also include higher costs related to information systems to enhance and
support the marketing and production systems. For the first nine months of
fiscal 1998 total operating expenses increased to 32.3% of net revenues compared
to 30.8% for the same period of fiscal 1997. The increase, as a percent of net
revenues, was due primarily to an increase in customer acquisition expenses
partially offset by a decrease in other selling expenses. These expenses affect
revenues in current and future periods. The Company's principal technique for
acquiring new customers is its Introductory Offer of two rolls of 35 mm film for
$2.00 or less. The Company capitalized $14,530,000 of customer acquisition
expenditures in the first three quarters of fiscal 1998 compared to $15,097,000
for the first three quarters of fiscal 1997 while amortization of these costs
was $11,767,000 and $10,566,000 during these two same periods, respectively.
Capitalized customer acquisition expenditures as of June 27, 1998 increased to
$16,645,000 compared to $13,882,000 as of September 27, 1997. The increase
reflects higher levels of customer acquisition activity undertaken to expand the
customer base and to replace customers management believes were lost in fiscal
1997 due to summer processing delays. 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 ancillary
marketing activities building brand awareness, testing of new marketing
strategies and marketing to existing customers, as well as certain costs
associated with acquiring new customers. Other selling expenses in the third
quarter of fiscal 1998 decreased to 7.5% of net revenues compared to 9.1% of net
revenues for the third quarter of fiscal 1997. For the first nine months of
fiscal 1998, other selling expenses were 8.5% of net revenues compared to 9.0%
of net revenues for the first nine months of fiscal 1997. The decrease was due
mainly to a decrease in marketing activities directed at both new and existing
customers which the Company expenses when the activities occur.
Page 10 of 27
<PAGE>
Research and development expenses increased to $154,000 in the third
quarter of fiscal 1998 as compared to $143,000 for the third quarter of fiscal
1997. Research and development expenses for the first nine months of fiscal 1998
decreased to $450,000 as compared to $525,000 for the first nine months of
fiscal 1997 as a result of lower contract services and equipment costs. 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 $1,117,000 for the third
quarter of fiscal 1998 as compared to $701,000 for the third quarter of fiscal
1997. General and administrative costs increased to $3,216,000 for the first
nine months of fiscal 1998 as compared to $2,821,000 for the first nine months
of fiscal 1997. The increases were due primarily to legal expenses associated
with the defense of an action filed by Fuji Photo Film Co., Ltd. with the
International Trade Commission. Fuji alleges that a number of companies,
including the Company's OptiColor subsidiary, violates patents on single use
cameras by bringing recycled single use cameras into the United States for
resale. The Company anticipates increased legal expenses to continue into the
future periods. General and administrative expenses also contain higher costs
related to information systems to enhance and support the marketing and
production systems. General and administrative expenses consist of costs related
to computer operations, human resource functions, finance, accounting, legal,
investor relations and general corporate activities.
Total other income for the third quarter of fiscal 1998 increased to
$243,000 as compared to $168,000 for the third quarter of fiscal 1997. For the
first nine months of fiscal 1998, total other income was $620,000 as compared to
$464,000 for the same period of fiscal 1997. The increases in the fiscal 1998
periods resulted from higher interest income and cash discounts from materials
purchases.
The federal income tax rate for the first nine months of fiscal 1998 was
34.3% as compared to 34.8% in the first nine months of fiscal 1997. The decrease
was due primarily to a higher balance of tax exempt investments.
Net income in the third quarter of fiscal 1998 was $2,241,000, or $.13
diluted earnings per share, compared to $2,792,000 or $.16 diluted earnings per
share for the third quarter of fiscal 1997. Net income for the first nine months
of fiscal 1998 was $4,976,000 or $.28 diluted earnings per share as compared to
$5,295,000 or $.30 diluted earnings per share for the same period of fiscal
1997. The decreases in net income were primarily attributable to lower net
revenues and gross profit and increases in operating expenses.
LIQUIDITY AND CAPITAL RESOURCES
As of July 24, 1998, the Company's principal sources of liquidity included
cash and short-term investments of $14,230,000 and an unused revolving line of
credit of $6,000,000. The ratio of current assets to current liabilities for the
Company was 3.2 to 1 at the end of the third quarter of fiscal 1998, compared to
a current ratio of 3.1 to 1 at September 27, 1997. The Company increased
inventory levels by $2,064,000 to accommodate expanded marketing plans while
accounts receivable decreased by $1,443,000 primarily due to payments received
for wholesale film orders shipped in the fourth quarter of fiscal 1997. Accrued
compensation and accrued expenses decreased by $1,321,000 primarily as a result
of payment of fiscal year 1997 liabilities. 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 subject
to certain conditions established by the Company's Board of Directors. 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.
During the first nine months of fiscal 1998 the Company repurchased 270,767
shares of common stock for a total of $2,670,000.
Page 11 of 27
<PAGE>
The Company currently expects to spend approximately $750,000 for capital
expenditures during the remainder of fiscal 1998, principally for photofinishing
equipment, data processing equipment to support its digital and Internet-related
imaging services and for leasehold improvements. During the third quarter of
fiscal 1998 approximately $969,000 of capital purchases was financed through a
capital leasing transaction consisting of sixty monthly payments of $19,000
commencing April 1998.
The Company is currently evaluating its computer systems to identify
potential problems relating to the Year 2000 date change but has not yet
determined whether it has material Year 2000 issues. The Company does not expect
the cost to modify its computer systems to address Year 2000 issues will be
material to its financial condition or results of operations, and does not
anticipate any material disruption in its operations as a result of Year 2000
issues. The Company is also contacting its suppliers to get information
regarding the potential impact of Year 2000 issues. In the event that the
Company or any of the Company's significant suppliers or customers does not
successfully and timely address Year 2000 issues, the Company's business or
operations could be adversely affected.
The Company currently anticipates that existing funds together with
anticipated cash flow from operations and the Company's available line of credit
of $6,000,000 will be sufficient to finance its operations and planned capital
expenditures and to service its indebtedness for the foreseeable future.
However, if the Company does not generate sufficient cash from operations to
satisfy its ongoing expenses, the Company will be required to seek external
sources of financing or to refinance its obligations. Possible sources of
financing include the sale of equity securities or additional bank borrowings.
There can be no assurance that the Company will be able to obtain adequate
financing in the future.
PART II -- OTHER INFORMATION
----------------------------
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS.
---------
10.1 First Amendment to Credit Agreement with Wells Fargo Bank,
National Association as of February 24, 1998
27.1 Financial Data Schedule 1998
27.2 Financial Data Schedule Restated 1997
(b) REPORTS ON FORM 8-K.
--------------------
None
Page 12 of 27
<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: July 30, 1998 /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 27
<PAGE>
INDEX TO EXHIBITS
SEATTLE FILMWORKS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 27, 1998
<TABLE>
<CAPTION>
Exhibit Description Page No.
- --------- ------------------------------------------------------------------- --------
<S> <C> <C>
10.1 First Amendment to Credit Agreement with Wells Fargo Bank, National 15
Association as of February 24, 1998
27.1 Financial Data Schedule 1998 27
27.2 Financial Data Schedule Restated 1997
</TABLE>
Page 14 of 27
<PAGE>
EXHIBIT 10.1
FIRST AMENDMENT TO CREDIT AGREEMENT
THIS FIRST AMENDMENT TO CREDIT AGREEMENT (this "Amendment") is entered into
as of February 24, 1998, by and between SEATTLE FILMWORKS, INC., a Washington
corporation, OPTICOLOR, INC., a Washington corporation, and SEATTLE FILMWORKS
MANUFACTURING COMPANY, a Washington corporation (collectively, "Borrowers," and
each individually, a "Borrower"), and WELLS FARGO BANK, NATIONAL ASSOCIATION
("Bank").
RECITALS
--------
WHEREAS, Borrowers are currently indebted to Bank pursuant to the terms and
conditions of that certain Credit Agreement between Borrowers and Bank dated as
of March 1, 1997, as amended from time to time ("Credit Agreement").
WHEREAS, Bank and Borrowers have agreed to certain changes in the terms and
conditions set forth in the Credit Agreement and have agreed to amend the Credit
Agreement to reflect said changes.
NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto agree that the Credit
Agreement shall be amended as follows:
1. Section 1.1.(a) is hereby amended by deleting "March 31, 1998" as the
last day on which Bank will make advances under the Line of Credit, and by
substituting for said date "March 31, 1999," with such change to be effective
upon the execution and delivery to Bank of a promissory note substantially in
the form of Exhibit A attached hereto (which promissory note shall replace and
be deemed the Line of Credit Note defined in and made pursuant to the Credit
Agreement) and all other contracts, instruments and documents required by Bank
to evidence such change.
2. Section 1.1.(d) is hereby deleted in its entirety, and the following
substituted therefor:
"(d) Conversion of Line of Credit. Subject to the terms and
conditions hereof, the principal balance of the Line of Credit
outstanding on March 31, 1999, which is not in excess of
$3,000,000.00, shall automatically be converted to a term loan (the
"Converted Term Loan"). Any amount of principal balance in excess of
$3,000,000.00
<PAGE>
shall be due and payable on such date in accordance with the terms of
the Line of Credit Note. The obligation of Borrowers to repay the
Converted Term Loan shall be evidenced by a promissory note
substantially in the form of Exhibit B attached hereto ("Converted
Term Loan Note"), all terms of which are incorporated herein by this
reference. Principal and interest on the Converted Term Loan shall be
repaid in accordance with the provisions of the Converted Term Loan
Note. Borrowers may prepay principal on the Converted Term Loan solely
in accordance with the provisions of the Converted Term Loan Note."
Exhibit B attached hereto shall replace Exhibit B to the Credit Agreement
and be deemed the Converted Term Loan Note defined in and made pursuant to the
Credit Agreement.
The parties acknowledge and agree that no conversion of the Line of Credit
balance has occurred under Section 1.1(d).
3. Sections 4.8.(b) and (c) are hereby deleted in their entireties, and
the following substituted therefor:
"(b) Net Worth measured quarterly at the end of each fiscal
quarter, not less than $30,000,000.00, with "Net Worth" defined as
total stockholders' equity.
(c) Total Liabilities divided by Net Worth not greater than 1.5
to 1.0, measured quarterly at the end of each fiscal quarter, with
"Total Liabilities" defined as the aggregate of current liabilities
and non-current liabilities, and with "Net Worth" as defined above."
4. Section 5.2(b) is hereby deleted in its entirety, and the following
substituted therefor:
"CAPITAL EXPENDITURES. Make any additional investment in fixed or
capital assets in any fiscal year, which, when combined with (a) all
other investments in fixed or capital assets made by Borrowers in such
fiscal year as of the date such proposed additional investment, and
(b) the Aggregate Consideration (as such term is defined in Section
5.4 hereof) paid by Borrowers in Permitted Acquisitions (as such term
is
-2-
<PAGE>
defined in Section 5.4) in such fiscal year as of such date, exceeds
the greater of (i) $7,000,000.00, less outstanding bank debt, or (ii)
Borrowers' consolidated cash and marketable securities, less
outstanding bank debt, in either case as reported by Parent Company in
its most recent report filed with the SEC on Form 10-Q or 10-K.
Notwithstanding the foregoing, no additional investment in fixed or
capital assets shall be made if Parent Company is then delinquent in
filing its annual or quarterly report on Form 10-Q or Form 10-K with
the SEC."
5. Borrowers shall pay to Bank a non-refundable commitment fee for the
Line of Credit equal to $7,500.00, which fee shall be due and payable in full
upon the execution of this Amendment.
6. Except as specifically provided herein, all terms and conditions of
the Credit Agreement remain in full force and effect, without waiver or
modification. All terms defined in the Credit Agreement shall have the same
meaning when used in this Amendment. This Amendment and the Credit Agreement
shall be read together, as one document.
7. Borrowers hereby remake all representations and warranties contained
in the Credit Agreement and reaffirm all covenants set forth therein. Borrowers
further certify that as of the date of this Amendment there exists no Event of
Default as defined in the Credit Agreement, nor any condition, act or event
which with the giving of notice or the passage of time or both would constitute
any such Event of Default.
8. References in the Credit Agreement to Seattle Filmworks Manufacturing
Company, Inc. are hereby deemed to read "Seattle Filmworks Manufacturing
Company."
ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY, EXTEND CREDIT OR TO FORBEAR
ENFORCING REPAYMENT OF A DEBT ARE NOT ENFORCEABLE UNDER WASHINGTON LAW.
-3-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed as of the day and year first written above.
WELLS FARGO BANK,
SEATTLE FILMWORKS, INC. NATIONAL ASSOCIATION
By: /s/ Case H. Kuehn By: /s/ Donald Ralston
Donald Ralston
Title: Vice President Vice President
OPTICOLOR, INC.
By: /s/ Case H. Kuehn
Title: Vice President
SEATTLE FILMWORKS MANUFACTURING COMPANY
By: /s/ Case H. Kuehn
Title: Vice President
-4-
<PAGE>
"EXHIBIT A"
REVOLVING LINE OF CREDIT NOTE
$6,000,000.00 Seattle, Washington
February 24, 1998
FOR VALUE RECEIVED, the undersigned SEATTLE FILMWORKS, INC., OPTICOLOR,
INC., and SEATTLE FILMWORKS MANUFACTURING COMPANY (collectively, "Borrowers,"
individually a "Borrower"), promise to pay to the order of WELLS FARGO BANK,
NATIONAL ASSOCIATION ("Bank") at its office at Puget Sound RCBO, 999 Third
Avenue, 11th Floor, Seattle, Washington, or at such other place as the holder
hereof may designate, in lawful money of the United States of America and in
immediately available funds, the principal sum of Six Million Dollars
($6,000,000.00), or so much thereof as may be advanced and be outstanding, with
interest thereon, to be computed on each advance from the date of its
disbursement as set forth herein.
DEFINITIONS:
As used herein, the following terms shall have the meanings set forth after
each, and any other term defined in this Note shall have the meaning set forth
at the place defined:
(a) "Business Day" means any day except a Saturday, Sunday or any other
day on which commercial banks in Washington are authorized or required by law to
close.
(b) "Fixed Rate Term" means a period commencing on a Business Day and
continuing for one (1), two (2) or three (3) months, as designated by any
Borrower, during which all or a portion of the outstanding principal balance of
this Note bears interest determined in relation to LIBOR; provided however, that
no Fixed Rate Term may be selected for a principal amount less than Five Hundred
Thousand Dollars ($500,000.00); and provided further, that no Fixed Rate Term
shall extend beyond the scheduled maturity date hereof. If any Fixed Rate Term
would end on a day which is not a Business Day, then such Fixed Rate Term shall
be extended to the next succeeding Business Day.
(c) "LIBOR" means the rate per annum (rounded upward, if necessary, to the
nearest whole 1/8 of 1%) and determined pursuant to the following formula:
LIBOR = Base LIBOR
-------------------------------
100% - LIBOR Reserve Percentage
(i) "Base LIBOR" means the rate per annum for United States dollar
deposits quoted by Bank as the Inter-Bank Market Offered Rate, with the
understanding that such rate is quoted by Bank for
<PAGE>
the purpose of calculating effective rates of interest for loans making
reference thereto, on the first day of a Fixed Rate Term for delivery of funds
on said date for a period of time approximately equal to the number of days in
such Fixed Rate Term and in an amount approximately equal to the principal
amount to which such Fixed Rate Term applies. Each Borrower understands and
agrees that Bank may base its quotation of the Inter-Bank Market Offered Rate
upon such offers or other market indicators of the Inter-Bank Market as Bank in
its discretion deems appropriate including, but not limited to, the rate offered
for U.S. dollar deposits on the London Inter-Bank Market.
(ii) "LIBOR Reserve Percentage" means the reserve percentage prescribed by
the Board of Governors of the Federal Reserve System (or any successor) for
"Eurocurrency Liabilities" (as defined in Regulation D of the Federal Reserve
Board, as amended), adjusted by Bank for expected changes in such reserve
percentage during the applicable Fixed Rate Term.
(d) "Prime Rate" means at any time the rate of interest most recently
announced within Bank at its principal office as its Prime Rate, with the
understanding that the Prime Rate is one of Bank's base rates and serves as the
basis upon which effective rates of interest are calculated for those loans
making reference thereto, and is evidenced by the recording thereof after its
announcement in such internal publication or publications as Bank may designate.
INTEREST:
(a) Interest. The outstanding principal balance of this Note shall bear
interest (computed on the basis of a 365-day year, actual days elapsed) either
(i) at a fluctuating rate per annum equal to the Prime Rate in effect from time
to time, or (ii) at a fixed rate per annum determined by Bank to be three
quarters of a percent (.75%) above LIBOR in effect on the first day of the
applicable Fixed Rate Term. When interest is determined in relation to the Prime
Rate, each change in the rate of interest hereunder shall become effective on
the date each Prime Rate change is announced within Bank. With respect to each
LIBOR selection hereunder, Bank is hereby authorized to note the date, principal
amount, interest rate and Fixed Rate Term applicable thereto and any payments
made thereon on Bank's books and records (either manually or by electronic
entry) and/or on any schedule attached to this Note, which notations shall be
prima facie evidence of the accuracy of the information noted.
(b) Selection of Interest Rate Options. At any time any portion of this
Note bears interest determined in relation to LIBOR, it may be continued by any
Borrower at the end of the Fixed Rate Term applicable thereto so that all or a
portion thereof bears interest determined in relation to the Prime Rate
-2-
<PAGE>
or to LIBOR for a new Fixed Rate Term designated by any Borrower. At any time
any portion of this Note bears interest determined in relation to the Prime
Rate, any Borrower may convert all or a portion thereof so that it bears
interest determined in relation to LIBOR for a Fixed Rate Term designated by any
Borrower. At such time as any Borrower requests an advance hereunder or wishes
to select a LIBOR option for all or a portion of the outstanding principal
balance hereof, and at the end of each Fixed Rate Term, the applicable Borrower
shall give Bank notice specifying: (i) the interest rate option selected by the
Borrower; (ii) the principal amount subject thereto; and (iii) for each LIBOR
selection, the length of the applicable Fixed Rate Term. Any such notice may be
given by telephone so long as, with respect to each LIBOR selection, (A) Bank
receives written confirmation from not later than three (3) Business Days after
such telephone notice is given, and (B) such notice is given to Bank prior to
10:00 a.m., California time, on the first day of the Fixed Rate Term. For each
LIBOR option requested hereunder, Bank will quote the applicable fixed rate to
the applicable Borrower at approximately 10:00 a.m., California time, on the
first day of the Fixed Rate Term. If the applicable Borrower does not
immediately accept the rate quoted by Bank, any subsequent acceptance by the
applicable Borrower shall be subject to a redetermination by Bank of the
applicable fixed rate; provided however, that if the applicable Borrower fails
to accept any such rate by 11:00 a.m., California time, on the Business Day such
quotation is given, then the quoted rate shall expire and Bank shall have no
obligation to permit a LIBOR option to be selected on such day. If no specific
designation of interest is made at the time any advance is requested hereunder
or at the end of any Fixed Rate Term, the applicable Borrower shall be deemed to
have made a Prime Rate interest selection for such advance or the principal
amount to which such Fixed Rate Term applied.
(c) Additional LIBOR Provisions.
(i) If Bank at any time shall determine that for any reason adequate and
reasonable means do not exist for ascertaining LIBOR, then Bank shall promptly
give notice thereof to the applicable Borrower. If such notice is given and
until such notice has been withdrawn by Bank, then (A) no new LIBOR option may
be selected by any Borrower, and (B) any portion of the outstanding principal
balance hereof which bears interest determined in relation to LIBOR, subsequent
to the end of the Fixed Rate Term applicable thereto, shall bear interest
determined in relation to the Prime Rate.
(ii) If any law, treaty, rule, regulation or determination of a court or
governmental authority or any change therein or in the interpretation or
application thereof (each, a "Change in Law") shall make it unlawful for Bank
(A) to make LIBOR options available hereunder, or (B) to maintain interest rates
based on
-3-
<PAGE>
LIBOR, then in the former event, any obligation of Bank to make available such
unlawful LIBOR options shall immediately be canceled, and in the latter event,
any such unlawful LIBOR-based interest rates then outstanding shall be
converted, at Bank's option, so that interest on the portion of the outstanding
principal balance subject thereto is determined in relation to the Prime Rate;
provided however, that if any such Change in Law shall permit any LIBOR-based
interest rates to remain in effect until the expiration of the Fixed Rate Term
applicable thereto, then such permitted LIBOR-based interest rates shall
continue in effect until the expiration of such Fixed Rate Term. Upon the
occurrence of any of the foregoing events, Borrowers shall pay to Bank
immediately upon demand such amounts as may be necessary to compensate Bank for
any fines, fees, charges, penalties or other costs incurred or payable by Bank
as a result thereof and which are attributable to any LIBOR options made
available to Borrowers hereunder, and any reasonable allocation made by Bank
among its operations shall be conclusive and binding upon Borrowers.
(iii) If any Change in Law or compliance by Bank with any request or
directive (whether or not having the force of law) from any central bank or
other governmental authority shall:
(A) subject Bank to any tax, duty or other charge with respect to any
LIBOR options, or change the basis of taxation of payments to Bank of
principal, interest, fees or any other amount payable hereunder
(except for changes in the rate of tax on the overall net income of
Bank); or
(B) impose, modify or hold applicable any reserve, special deposit,
compulsory loan or similar requirement against assets held by,
deposits or other liabilities in or for the account of, advances or
loans by, or any other acquisition of funds by any office of Bank; or
(C) impose on Bank any other condition;
and the result of any of the foregoing is to increase the cost to Bank of
making, renewing or maintaining any LIBOR options hereunder and/or to reduce any
amount receivable by Bank in connection therewith, then in any such case,
Borrowers shall pay to Bank immediately upon demand such amounts as may be
necessary to compensate Bank for any additional costs incurred by Bank and/or
reductions in amounts received by Bank which are attributable to such LIBOR
options. In determining which costs incurred by Bank and/or reductions in
amounts received by Bank are attributable to any LIBOR options made available to
Borrowers hereunder, any reasonable allocation made by Bank among its operations
shall be conclusive and binding upon Borrowers.
(d) Payment of Interest. Interest accrued on this Note on
-4-
<PAGE>
any portion of the outstanding principal balance of this Note that bears
interest determined in relation to the Prime Rate shall be payable on the last
day of each month, commencing March 31, 1998, and at the earliest of (i)
repayment of the applicable borrowing, or (ii) the conversion of the borrowing
to a LIBOR borrowing hereunder. Interest accrued on this Note on any portion of
the outstanding principal balance of this Note that bears interest determined in
relation to LIBOR shall be payable on the last day of the relevant Fixed Rate
Term. Notwithstanding anything contained herein to the contrary, all accrued and
unpaid interest under this Note shall be fully due and payable on the maturity
date of this Note.
(e) Default Interest. From and after the maturity date of this Note, or
such earlier date as all principal owing hereunder becomes due and payable by
acceleration or otherwise, the outstanding principal balance of this Note shall
bear interest until paid in full at an increased rate per annum (computed on the
basis of a 360-day year, actual days elapsed) equal to four percent (4%) above
the rate of interest from time to time applicable to this Note.
BORROWING AND REPAYMENT:
(a) Borrowing and Repayment. Borrowers may from time to time during the
term of this Note borrow, partially or wholly repay its outstanding borrowings,
and reborrow, subject to all of the limitations, terms and conditions of this
Note and of any document executed in connection with or governing this Note;
provided however, that the total outstanding borrowings under this Note shall
not at any time exceed the principal amount stated above. The unpaid principal
balance of this obligation at any time shall be the total amounts advanced
hereunder by the holder hereof less the amount of principal payments made hereon
by or for any Borrower, which balance may be endorsed hereon from time to time
by the holder. The outstanding principal balance of this Note shall be due and
payable in full on March 31, 1999.
(b) Advances. Advances hereunder, to the total amount of the principal
sum stated above, may be made by the holder at the oral or written request of
(i) Gary R. Christophersen or Case H. Kuehn or Loran Cashmore Bond, any one
acting alone, who are authorized to request advances and direct the disposition
of any advances until written notice of the revocation of such authority is
received by the holder at the office designated above, or (ii) any person, with
respect to advances deposited to the credit of any account of any Borrower with
the holder, which advances, when so deposited, shall be conclusively presumed to
have been made to or for the benefit of each Borrower regardless of the fact
that persons other than those authorized to request advances may have authority
to draw against such account. The holder shall have no obligation to determine
whether any person requesting an advance
-5-
<PAGE>
is or has been authorized by any Borrower.
(c) Application of payments. Each payment made on this Note shall be
credited first, to any interest then due and second, to the outstanding
principal balance hereof. All payments credited to principal shall be applied
first, to the outstanding principal balance of this Note which bears interest
determined in relation to the Prime Rate, if any, and second, to the outstanding
principal balance of this Note which bears interest determined in relation to
LIBOR, with such payments applied to the oldest Fixed Rate Term first.
PREPAYMENT:
(a) Prime Rate. Borrowers may prepay principal on any portion of this
Note which bears interest determined in relation to the Prime Rate at any time,
in any amount and without penalty.
(b) LIBOR. Borrowers may prepay principal on any portion of this Note
which bears interest determined in relation to LIBOR at any time and in the
minimum amount of One Hundred Thousand Dollars ($100,000.00); provided however,
that if the outstanding principal balance of such portion of this Note is less
than said amount, the minimum prepayment amount shall be the entire outstanding
principal balance thereof. In consideration of Bank providing this prepayment
option to Borrowers, or if any such portion of this Note shall become due and
payable at any time prior to the last day of the Fixed Rate Term applicable
thereto by acceleration or otherwise, Borrowers shall pay to Bank immediately
upon demand a fee which is the sum of the discounted monthly differences for
each month from the month of prepayment through the month in which such Fixed
Rate Term matures, calculated as follows for each such month:
(i) Determine the amount of interest which would have accrued each month
on the amount prepaid at the interest rate applicable to such amount
had it remained outstanding until the last day of the Fixed Rate Term
applicable thereto.
(ii) Subtract from the amount determined in (i) above the amount of
interest which would have accrued for the same month on the amount
prepaid for the remaining term of such Fixed Rate Term at LIBOR in
effect on the date of prepayment for new loans made for such term and
in a principal amount equal to the amount prepaid.
(iii) If the result obtained in (ii) for any month is greater than zero,
discount that difference by LIBOR used in (ii) above.
Each Borrower acknowledges that prepayment of such amount may
-6-
<PAGE>
result in Bank incurring additional costs, expenses and/or liabilities, and that
it is difficult to ascertain the full extent of such costs, expenses and/or
liabilities. Each Borrower, therefore, agrees to pay the above-described
prepayment fee and agrees that said amount represents a reasonable estimate of
the prepayment costs, expenses and/or liabilities of Bank. If Borrowers fail to
pay any prepayment fee when due, the amount of such prepayment fee shall
thereafter bear interest until paid at a rate per annum four percent (4%) above
the Prime Rate in effect from time to time (computed on the basis of a 365-day
year, actual days elapsed). Each change in the rate of interest on any such past
due prepayment fee shall become effective on the date each Prime Rate change is
announced within Bank.
EVENTS OF DEFAULT:
This Note is made pursuant to and is subject to the terms and conditions of
that certain Credit Agreement between Borrowers and Bank dated as of March 1,
1997, as amended from time to time (the "Credit Agreement"). Any default in the
payment or performance of any obligation under this Note, or any defined event
of default under the Credit Agreement, shall constitute an "Event of Default"
under this Note.
MISCELLANEOUS:
(a) Remedies. Upon the occurrence of any Event of Default, the holder of
this Note, at the holder's option, may declare all sums of principal and
interest outstanding hereunder to be immediately due and payable without
presentment, demand, notice of nonperformance, notice of protest, protest or
notice of dishonor, all of which are expressly waived by each Borrower, and the
obligation, if any, of the holder to extend any further credit hereunder shall
immediately cease and terminate. Each Borrower shall pay to the holder
immediately upon demand the full amount of all payments, advances, charges,
costs and expenses, including reasonable attorneys' fees (to include outside
counsel fees and all allocated costs of the holder's in-house counsel), expended
or incurred by the holder in connection with the enforcement of the holder's
rights and/or the collection of any amounts which become due to the holder under
this Note, and the prosecution or defense of any action in any way related to
this Note, including without limitation, any action for declaratory relief,
whether incurred at the trial or appellate level, in an arbitration proceeding
or otherwise, and including any of the foregoing incurred in connection with any
bankruptcy proceeding (including without limitation, any adversary proceeding,
contested matter or motion brought by Bank or any other person) relating to any
Borrower or any other person or entity.
(b) Obligations Joint and Several. Should more than one
-7-
<PAGE>
person or entity sign this Note as a Borrower, the obligations of each such
Borrower shall be joint and several, as further provided in the Credit
Agreement.
(c) Governing Law. This Note shall be governed by and construed in
accordance with the laws of the State of Washington.
ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY, EXTEND CREDIT OR TO FORBEAR
ENFORCING REPAYMENT OF A DEBT ARE NOT ENFORCEABLE UNDER WASHINGTON LAW.
IN WITNESS WHEREOF, the undersigned has executed this Note as of the date
first written above.
SEATTLE FILMWORKS, INC.
By: /s/ Case H. Kuehn
Title: Vice President
OPTICOLOR, INC.
By: /s/ Case H. Kuehn
Title: Vice President
SEATTLE FILMWORKS MANUFACTURING COMPANY
By: /s/ Case H. Kuehn
Title: /s/ Vice President
-8-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SEATTLE
FILMWORKS THIRD QUARTER 1998 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-26-1998
<PERIOD-START> SEP-28-1997
<PERIOD-END> JUN-27-1998
<CASH> 12,808
<SECURITIES> 0
<RECEIVABLES> 2,237<F1>
<ALLOWANCES> 0
<INVENTORY> 11,062
<CURRENT-ASSETS> 27,182
<PP&E> 11,274<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 55,320
<CURRENT-LIABILITIES> 8,521
<BONDS> 0
0
0
<COMMON> 168
<OTHER-SE> 40,733
<TOTAL-LIABILITY-AND-EQUITY> 55,320
<SALES> 0
<TOTAL-REVENUES> 68,838
<CGS> 39,673
<TOTAL-COSTS> 22,207
<OTHER-EXPENSES> (631)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11
<INCOME-PRETAX> 7,578
<INCOME-TAX> 2,602
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,976
<EPS-PRIMARY> .30
<EPS-DILUTED> .28
<FN>
<F1>ASSET VALUES REPRESENT NET AMOUNTS
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SEATTLE
FILMWORKS, INC. THIRD QUARTER 10-Q - 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-27-1997
<PERIOD-START> SEP-29-1996
<PERIOD-END> JUN-28-1997
<CASH> 9,076
<SECURITIES> 0
<RECEIVABLES> 2,578<F1>
<ALLOWANCES> 0
<INVENTORY> 9,536
<CURRENT-ASSETS> 22,545
<PP&E> 7,564<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 47,067
<CURRENT-LIABILITIES> 10,148
<BONDS> 0
0
0
<COMMON> 164
<OTHER-SE> 31,663
<TOTAL-LIABILITY-AND-EQUITY> 47,067
<SALES> 0
<TOTAL-REVENUES> 68,446
<CGS> 39,721
<TOTAL-COSTS> 21,071
<OTHER-EXPENSES> (464)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 8,118
<INCOME-TAX> 2,823
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,295
<EPS-PRIMARY> .33
<EPS-DILUTED> .30
<FN>
<F1>ASSET VALUES REPRESENT NET AMOUNTS
</FN>
</TABLE>
