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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended SEPTEMBER 25, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission file No. 0-15338
SEATTLE FILMWORKS, INC.
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(Exact name of registrant as specified in its charter)
Washington 91-0964899
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1260 16th Avenue West, Seattle, WA 98119
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (206) 281-1390
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par
value $.01 per share.
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: [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
As of November 30, 1999, there were issued and outstanding 16,327,640
shares of Common Stock, par value $.01 per share. As of November 30, 1999, the
aggregate market value of the Registrant's Common Stock held by non-affiliates
of the Registrant was $47,106,904 based on the last sale price of the
Registrant's Common Stock as reported by the Nasdaq National Market.
Documents incorporated by reference:
Portions of the registrant's proxy statement relating to its 2000 annual
meeting of shareholders, to be held on February 15, 2000, are incorporated by
reference into Part III of this Annual Report on Form 10-K.
Page 1 of 96
Exhibit Index at Page 53
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PART I
ITEM 1 - BUSINESS
Description of Business
Seattle FilmWorks, Inc. ("Seattle FilmWorks" or the "Company") is a leading
direct-to-consumer Internet and mail order provider of film and image processing
and online image storage and management services.* The Company offers an array
of complementary services and products primarily under the brand names Seattle
FilmWorks(R) and PhotoWorks(R).
Since 1978, the Company has been an industry leader in the introduction of
value-added photo-related services and products and has continued this tradition
by launching its online image management service, PhotoWorks(R) in April 1999.*
The Company offers prints, slides, digital images and online archiving, all from
the same roll of 35mm film. Seattle FilmWorks can process any brand of 35mm
film, Advanced Photo Systems (24mm) film or 35mm single-use camera. Seattle
FilmWorks was among the first to provide express-mail delivery, cross-referenced
data on prints and negatives, a composite photo index and a convenient reorder
system. To a lesser extent, the Company provides photofinishing services,
products and supplies on a wholesale basis.
Since 1994, the Company has been a pioneer in providing digital-imaging
technologies which enable photofinishing customers to share personal photographs
with friends, family and business associates. Products incorporating these
technologies include (i) Pictures On Disk(TM) a floppy disk containing digital
images from a roll of film; (ii) PhotoWorks(R) software, which can be used to
create digital photograph albums and screen savers; (iii) Pictures On Disk(TM)
on CD, a CD containing digital images from a roll of film; and most recently,
(iv) PhotoWorks(R), an online image management system which enables customers to
view, share, order reprints and organize their photos online. The Company has
targeted for development additional products and services to enable customers to
view and share their photos simply and conveniently.* Recently, the Company
introduced PhotoWorks(R) Cards, an online service which allows customers to
create personalized greeting cards using their favorite photos. The Company
expects to introduce products in 2000 which will provide digital camera users
with a simple and convenient way to store and print their online digital
images.* In addition, the Company has partnered with other Internet-related
companies, to broaden the marketing of its PhotoWorks(R) services and provide
customers with new and interesting ways to share their photos. Recently, the
Company has entered into agreements with Amazon.com Auctions, RealNetworks, and
Vstream which enable customers to integrate their digital images into the
partnering companies services and products.
The Company primarily uses direct-marketing techniques to target selected
consumers, measure customer response and obtain direct customer feedback to
changes in marketing strategies. Over the past several years, the Company has
targeted the growing population of personal computer users in connection with
the introduction of digital-imaging services and products. The Company has
developed comprehensive statistical models for the design and analysis of its
direct-response marketing programs using proprietary customer data compiled over
18 years. The Company also uses other traditional advertising, such as radio
and print advertising, to promote its new PhotoWorks(R) services and products.
The Company was incorporated in Washington State in June 1976. The
executive offices of the Company are located at 1260 Sixteenth Avenue West,
Seattle, Washington 98119, and the Company's telephone number is (206) 281-1390.
References to Seattle FilmWorks and the Company in this Report include Seattle
FilmWorks, Inc., and its wholly-owned subsidiaries, Seattle FilmWorks
Manufacturing Company, OptiColor, Inc. and FilmWorks Express, Inc.
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Forward-Looking Information
This report contains forward-looking statements including, without
limitation, statements identified by an asterisk (*). These statements relate
to future events, product or service offerings or the future financial
performance of the Company. In some cases, you can identify forward-looking
statements by terminology such as "may," "will," "should," "expects," "plans,"
"anticipates," "believes," "estimates," "predicts," "potential," or "continue"
or the negative of such terms and other comparable terminology. These
statements only reflect the Company's managements' expectations and estimates.
Actual events or results may differ materially from those expressed or implied
by such forward-looking statements. Relevant risks and uncertainties include,
among others, those discussed in Item 1 of Part 1 under the heading "Risk
Factors" and elsewhere in this report and those described from time to time in
the Company's other filings with the Securities and Exchange Commission, press
releases and other communications. All forward-looking statements contained in
this report reflect the Company's expectations at the time of this report only,
and the Company disclaims any responsibility to revise or update any such
forward-looking statement except as may be required by law.
Photofinishing Industry, Direct-Marketing and Internet Overview
The dominant method of distributing photofinishing services and products is
through retail stores, including discount and mass merchants, drugstores,
supermarkets and camera/specialty stores. Management believes the majority of
rolls of film are sent to wholesale photofinishing laboratories for processing,
although a growing percentage are processed in-store using on-site equipment.
Outside the photofinishing industry, leading users of direct marketing
include mail-order houses and catalog mailers, magazine publishers, insurance
companies, book and record clubs, financial institutions and credit card
companies. Management believes growth in the use of direct-marketing is
generally attributable to social, economic and technological changes and to the
relative cost-effectiveness of direct-marketing techniques. Management also
believes several factors have enhanced consumer responsiveness to direct
marketing as a purchasing medium, including growth in the number of people in
the most active segment of the purchasing population, growth in the number of
two-career families that have more disposable income and less time to shop, and
increased availability and use of credit cards.
Increasingly, the Internet, online services and increased use of personal
computers provide additional channels for direct-to-consumer marketing.
According to a recent Nielsen/Net Ratings Internet Study, there are
approximately 38 million Internet homes in the United States connected to the
Internet. A November 1998 study conducted by Jupiter Research estimates 73% of
online users would like to e-mail their photos online. See "Risk Factors--
Dependence on Direct-Marketing Programs; Accounting for Customer Acquisition"
and "--Dependence on the Internet and Potential Liability for Content."
Operating Strategy
Seattle FilmWorks strives to achieve growth through the execution of its
operating strategy, the principal elements of which are the introduction of
innovative, value-added services and products, application of direct-to-consumer
marketing techniques, and a commitment to customer satisfaction.
Innovative, Value-Added Services and Products. Management believes that
Seattle FilmWorks has distinguished itself from its traditional photofinishing
competitors through service and product differentiation. The Company endeavors
to develop and introduce value-added photofinishing services and products based
on focused research and development efforts as well as anticipation of consumer
demand by monitoring customer feedback.
In the late 1970s, the Company introduced Seattle FilmWorks(R) branded film
and shortly thereafter offered its customers the option of prints and/or
individually color-corrected slides from the same roll of film. The Company
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continued to offer numerous other value-added features, including express-mail
delivery, cross-referencing data on prints and negatives, Pictures-Plus(R) Index
prints and a convenient Easy-Order System.
In addition, the Company has been a leader in providing digital-imaging
technologies. Products incorporating these technologies include (i) Pictures On
Disk(TM) a floppy disk containing digital images from a roll of film; (ii)
PhotoWorks(R) software, which can be used to create digital photograph albums
and screen savers; (iii) Pictures On Disk(TM) on CD, a CD containing digital
images from a roll of film; and most recently, (iv) PhotoWorks(R), an online
image management system which enables customers with a simple and convenient way
to view, share, print and organize their photos online. The Company has targeted
for development additional products and services to enable customers to view and
share their photos simply and conveniently.* Recently, the Company introduced
PhotoWorks(R) Cards, an online service which allows customers to create
personalized greeting cards using their favorite photos.
The Company expects to introduce products in 2000 which will provide
digital camera users with a simple and convenient way to store and print their
digital images.* In addition, the Company has partnered with other Internet-
related companies to broaden the marketing of its PhotoWorks(R) services and
provide customers with new and interesting ways to share their photos. Recent
agreements include Amazon.com Auctions, RealNetworks, and Vstream. See
"Business--Services and Products."
Direct-to-Consumer Marketing. The Company's business model is founded on
direct-response marketing. Management believes an important advantage of its
direct-marketing strategy is the opportunity to contact a large number of
consumers who may appreciate the convenience of online and mail order delivery
and the Company's array of complementary services and products. Direct access
to consumers permits the Company to target and monitor selected potential and
existing customers, measure customer response and obtain direct customer
feedback to changes in marketing strategies. Generally, the Company attempts to
identify prospective customers by targeting specific groups of individuals with
common characteristics. For example, the Company has targeted the growing
population of personal computer and online users in connection with the
introduction of its digital-imaging services and products. Information derived
from the Company's database compiled over 18 years has been used to create
statistical models to develop targeted marketing programs and estimate future
demand. In addition, the Company's proprietary database is used to plan,
personalize, implement and evaluate marketing programs for existing customers.
See "Business--Marketing and Customer Acquisition."
Commitment to Customer Satisfaction. The Company seeks to develop and
provide high-quality, user-friendly and reliable photofinishing and online
services and products to enhance brand recognition for "Seattle FilmWorks" and
"PhotoWorks" to engender customer loyalty. Management believes that a
significant portion of its business comes from repeat customers.* As part of
its dedication to customer service, Seattle FilmWorks offers a 100% satisfaction
guarantee and provides an Easy-Order System whereby a customer sets up a
standing order, thus avoiding the need to fill out an order form with each
order. In addition, to achieve its customer service goals the Company conducts
customer surveys and holds management meetings to identify areas for service
enhancement. Through investments in automation, state-of-the-art photofinishing
equipment, and the commitment of its employees to quality control, the Company
strives to deliver greater than 99.8% of its orders without loss or damage.*
See "Business--Customer Service and Support."
Growth Strategy
The Company's strategy for growth is to leverage the strength of its
services, products and marketing programs to acquire additional customers and
increase the level of business with prospective and existing customers. The
Company intends to continue its strategy of providing online image management
services to complement its mail order and retail distribution channels.*
New Customers. Historically, the Company grew its revenues primarily
through the acquisition of new customers. The Company continuously refines
existing marketing programs and develops, tests and implements new
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marketing programs to additional groups of consumers with different demographic
characteristics to offset the potential impact of market saturation in any given
target customer group. In addition, the Company has initiated efforts on the
Internet to acquire additional new customers through its own Web site
(www.filmworks.com) and from partnering agreements with other Internet
companies.*
Increasing Sales to New and Existing Customers. Management believes its
complementary value-added services and products promote customer loyalty and
increase customer demand.* The Company strives to increase both average order
size and order frequency by informing both targeted consumers and its existing
customer base of its integrated array of services and products. The Company's
commitment to expanding its service and product offerings, including
enhancements to its Internet-related offerings, is intended to support this
strategy. In addition, the Company employs a variety of other direct-marketing
techniques to increase business from existing customers and generate business
from inactive customers.*
Marketing and Customer Acquisition
One of the key elements of the Company's operating strategy is to generate
demand for its services and products by using its proprietary direct-marketing
techniques and extensive database to efficiently target existing and prospective
customers.* The Company maintains and analyzes extensive data and segments
markets using geographic and demographic information about potential customers.
The Company uses e-mail, partnership arrangements with other Internet
businesses, regular mail, print media, television, radio and retail outlets to
target groups of consumers and businesses.*
The Company makes extensive use of marketing tests in order to evaluate
which of a variety of marketing programs offers the best probable return on
investment. The Company's direct-marketing programs use coded advertisements to
monitor consumer response and to provide measurable results for each specific
marketing program. Measuring the effectiveness of marketing tests takes into
account both the response rate to advertised offers and estimates of customer
lifetime value to the Company, measured in terms of profit generated from the
estimated future stream of orders. In this way, the Company's measurements allow
the Company to target its marketing effort to specific market segments through
selected media. The Company also operates retail operations in the Pacific
Northwest to provide a "drop off" alternative to mail order delivery. Management
believes the Company's 39 retail stores attract customers who might not use the
Company's mail order services. The Company has recently closed 4 retail stores.
The costs associated with store closures are not material to the operating
results of the Company.
Since the early 1980s, the primary method the Company has used to acquire
new film processing customers has been its introductory offer of two rolls of
film for $2.00 or less. The Company regularly refines this introductory offer in
an effort to improve its effectiveness and reach a broader market. Currently,
the Company is testing a new introductory offer designed to showcase the
Company's online PhotoWorks(R) service. This new introductory offer provides
customers with free processing for their first roll of film if they provide an
e-mail address for online delivery of their photos via PhotoWorks(R). This
introductory offer has been advertised through direct-response media, print
media and radio advertising in certain test markets. The Company also promotes
its introductory offer on its Web site (www.filmworks.com). In addition, the
Company has a customer referral program for online and mail order customers
which encourages existing customers to suggest family and friends that may be
interested in the Company's services and products. See "Risk Factors--Dependence
on Developing Successful Marketing Programs" and "Change in Accounting for
Customer Acquisition Costs."
Services and Products
Seattle FilmWorks is a leader in the development and introduction of
innovative photofinishing services and products. Beginning in 1978 with the
introduction of Seattle FilmWorks(R) branded film and continuing with the option
of receiving both photographic prints and individually color-corrected slides
from the same roll of film, the Company established an early tradition of
service and product differentiation.
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The following table illustrates the Company's service and product introductions
during the past nine years:
<TABLE>
<CAPTION>
Service or Product Year of Introduction
- ---------------------------------------------------- --------------------
<S> <C>
PhotoWorks(R) Cards Online........................ 1999
WeddingWorks(TM).................................. 1999
CrossLoader(TM)................................... 1999
Hi-Resolution Pictures On Disk(TM) on CD.......... 1999
PhotoWorks(R)..................................... 1999
Pictures On Disk(TM) on CD........................ 1998
Digital Reprints via touch-tone telephone...... 1998
Enhanced PhotoMail(TM)............................ 1998
PhotoWorks(R) Cards Software...................... 1997
PictureWorks(R)................................... 1997
PhotoWorks(R) Composer for Windows................ 1997
PhotoWorks Plus - How to Use Every Feature(C)..... 1996
---------------------------------------------
FilmWorksNet(TM).................................. 1996
PhotoMail(TM)..................................... 1995
PhotoWorks(R) for Macintosh....................... 1995
PhotoWorks(R) Plus for Windows.................... 1994
PhotoWorks(R) for Windows......................... 1994
PhotoWorks(R) for MS-DOS.......................... 1994
Pictures On Disk(TM).............................. 1994
Pictures-Plus(R) Index............................ 1993
Professor FilmWorks(TM)........................... 1992
Backprinting & Referenced Negatives............ 1992
Easy-Order System.............................. 1991
Express-Mail Delivery.......................... 1991
</TABLE>
In 1991, the Company began to offer mail order photofinishing customers the
options of express-mail pickup and delivery service and the Easy-Order System,
whereby a customer can set up a standing order and avoid the need to fill out an
order form with each order. This pattern of service and product innovation
continued with the introduction in early 1992 of the Company's system for
printing the date, roll identification and print number on the back of each
print and the corresponding information on each strip of negatives (known as
backprinting) and free telephone pre-recorded mini-lessons on photography from
Professor FilmWorks(TM). In 1993, the Company introduced the Pictures-Plus
Index, which offers thumbnail-size copies of images from a roll of film on a
single 4" by 6" print as a handy reference for the customer.
Starting in 1994, the Company began introducing digital imaging products
and services with its introduction of Pictures On Disk(TM), which delivered, on
a floppy disk, a digital version of each photograph on a roll of film. This
product was coupled with the introduction of the Company's internally developed
PhotoWorks(R) software, which enabled users to create digital albums of their
photographs and to incorporate the digital images into text, slide shows and
screen savers. During 1995 and 1996 the Company continued to enhance its line of
digital services and products with such products as Photomail(TM) delivery
service, which provided the private delivery of digital images from its
laboratory directly to customers over the Internet and FilmWorksNet(TM), a free
service through which its customers could create and upload a private
personalized photographic home page to the Seattle FilmWorks Web site. In
addition, the Company published PhotoWorks(R) Plus - How to Use Every
Feature(C), a reference book providing customers with detailed information on
using the Company's PhotoWorks(R) Plus software. In 1997, the Company also
introduced PhotoWorks(R) Composer, which allowed consumers to create frame-ready
prints with a variety of backgrounds and create business reports, product
sheets, e-mail attachments and newsletters using Pictures On Disk(TM) images. In
addition, in 1997 the Company also introduced PictureWorks(R) a service that
allowed customers to upload personal digitized images directly to the Company
for printing digital images on photographic paper, as well as the first version
of PhotoWorks(R) Cards, a service which allowed customers to create greeting
cards using proprietary software included on PhotoWorks(R) Plus and
PhotoWorks(R) Composer. This software enabled customers to create a variety of
photo greeting cards from Pictures on Disk(TM) images, then upload these files
to Seattle FilmWorks for printing on photographic paper.
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In 1998, the Company enhanced Pictures On Disk(TM) by delivering the
digital version of each roll of film on a CD instead of a floppy disk. This
delivery method enabled the Company to provide higher quality digital images and
also to include PhotoWorks(R) and other software with the images. In 1998, the
Company also introduced an improved PhotoMail(TM) service which provided
customers faster and easier access to their pictures. Additionally, the Company
introduced a digital reprint service, which allows customers purchasing digital
products to order reprints over a touch-tone telephone.
In April 1999, the Company launched its PhotoWorks(R) service. This service
provides every customer who supplies an e-mail address with free scanning of
every photographic image processed with the Company. In addition, the
PhotoWorks(R) service currently provides storage of images on a private customer
Web site at no charge for as long as the customer maintains an active account.*
The digital images are available online for customers to privately view, store,
share, manage, post or e-mail to family and friends. As of December 1999, the
Company manages over 65 million customer photos in its online archive.
In April 1999, the Company also began offering as an upgrade Hi-Resolution
Pictures On Disk(TM) on CD. The Hi-Resolution Pictures On Disk(TM) on CD
offers a 1.5 megapixel (approximately 1,500 x 1,000 pixels) scanning resolution
which results in images with greater clarity and less graininess. The Company
also introduced WeddingWorks(TM), a simple way for newlyweds to share wedding
photos over the Internet and a new version of PhotoWorks(R) Cards, which allows
customers to create personalized greeting cards with their favorite photos from
their online archive. In addition, the Company introduced CrossLoader, a
service that enables the two-click transfer of consumer photographs from the
Seattle FilmWorks Web site to partnering sites such as Amazon.com Auctions,
EasyFoto and Homestead.com, via high bandwidth connections.
Although mail-order photofinishing is viewed as a convenience by many
consumers, mail-order turnaround time (generally seven to ten days) is longer
than many alternative sources for photofinishing services (in some cases within
one hour). The Company offers customers the option of express-mail pickup and
delivery service by means of the U.S. Postal Service for an extra charge. The
PhotoWorks(R) service improves turnaround time by offering immediate viewing and
sharing of processed photographs online with prints to follow in the mail.
However, turnaround time remains a competitive disadvantage for the Company.
Management believes that the prices for its services and products are
competitive.* Generally, the Company does not compete primarily on the basis of
price, but rather by offering a variety of value-added, innovative and high-
quality services and products, such as its online services, through which it
seeks to differentiate itself from other photofinishers.*
The Company also provides a variety of reprint, enlargement and photo-gift
services for its customers, and sells 35mm rolled film, single-use cameras and
photofinishing supplies on a wholesale basis to photofinishing minilabs, retail
stores and commercial users of photographic film. These products are packaged
by the Company and marketed under the brand OptiColor(TM) Film & Photo. Rolled
film and single-use cameras are also marketed on a private label basis with the
customer specifying its own brand name. Although it represents a small
percentage of revenues, the Company also provides photofinishing services on
private label and retail bases. The Company licenses certain digital
technology, including Pictures On Disk(TM) and PhotoWorks(R), to other
photofinishers outside of the U.S.
Net revenues generated by sales outside the United States accounted for
1.5% of the Company's total net revenues in fiscal 1999, as compared to 3.7% in
fiscal 1998 and 6.6% in fiscal 1997. In the fourth quarter of fiscal 1998, the
Company discontinued its international wholesale film sales to certain markets
in Asia.
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Research and Development
Through internal and external research and development efforts, the Company
has developed innovative digital media and photofinishing services and
products. The Company seeks to identify customer needs and shifts in consumer
preferences in order to design or refine the Company's services and products.
In fiscal 1999, 1998, and 1997, the Company incurred research and development
expenses of $2,049,000, $588,000 and $696,000, respectively, primarily in
connection with development and enhancement of its PhotoWorks(R) service and
other online digital services and products. See Item 7 of Part II--
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Customer Service and Support
Management believes that customer satisfaction is critical to the Company's
ongoing success. The Company has a 100% satisfaction-guarantee policy under
which it will provide a full refund if a customer's complaint cannot otherwise
be resolved.
The direct-to-consumer photofinishing business involves contacts with a
large number of customers. For customer convenience, the Company provides toll-
free telephone access at 1-800-FILMWORKS. As of November 20, 1999, the Company
had a customer service staff of 70. These personnel have direct access to the
Company's database and are trained to promote certain of the Company's services
and products, as well as to answer questions regarding order status, basic
photography and photofinishing and use of PhotoWorks(R) online services. In an
average week the Company's customer support personnel respond to approximately
35,000 telephone calls from customers, 3,000 written inquiries and 23,000 e-mail
messages. The majority of these inquiries are general information requests and
order status inquiries.
The Company maintains a Web site on the Internet (www.filmworks.com). While
online, customers may use the PhotoWorks(R) service to privately view, store,
share, manage, post or e-mail their photos to friends and family and order
reprints. Customers may also obtain the status of their orders, access answers
to frequently asked questions, order products and services, and send e-mail
messages to customer service.
Operations
The Company operates a single laboratory in Seattle, Washington, which is
designed to produce consistent, high-quality photofinishing. The Company's
photo processing system is designed for 24-hour in-house processing of most
photofinishing orders. The photofinishing process begins with the entry of each
order into the Company's customer database, primarily using information provided
by the customer. Each roll received for processing is bar-coded with an
identification number which enables the tracking of each order throughout the
production process. Following order entry, individual rolls of film are spliced
together into a reel of film which is then developed as a batch. Once the film
is developed, each negative is computer analyzed, and the color-corrected image
is printed on photographic paper using state-of-the-art equipment. Order
information is then printed on the back of customers' prints and the
corresponding information is printed on a paper tab which is attached to the
sleeved negatives. After a visual quality inspection, the orders are packaged
for delivery to the customer. Orders for which customers have provided e-mail
addresses are digitized and delivered through the Company's PhotoWorks(R)
service over the Internet with prints, negatives or CD's following in the mail.
Although much of the photofinishing and order handling process has been
automated, trained personnel operate machinery and regularly monitor product
quality with the assistance of computerized control and measurement systems.
The Company has the ability to process any type of 35mm color film,
including those manufactured by Eastman Kodak Company, Fuji Photo Film U.S.A.,
Inc., Konica U.S.A., Inc., Imation Enterprises Corp., Agfa Division of Bayer
Corporation and other major producers of conventional 35mm color negative film.
The Company also has the ability to process 35mm color negative film
manufactured by Eastman Kodak Company for professional motion picture
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studios which has been packaged by the Company or others for use in 35mm still
cameras. In addition, the Company can process 24mm format Advanced Photo System
film and 35mm single-use cameras.
Currently, the Company estimates that it is capable of processing up to
approximately 200,000 rolls of film per week with its existing facilities and
equipment.* The Company intends to continue to expand its processing facility
in fiscal 2000 as necessary to support production levels.*
Suppliers
The Company obtains its conventional 35mm film from a few large
manufacturers of photographic film, including Agfa and Ferrania USA, (formerly
Imation), and its photographic paper and chemicals from a single supplier,
Eastman Kodak Company. The individual cassettes into which the Company spools
35mm film for still cameras are manufactured for the Company by foreign sources,
principally in China and South Korea. In addition, the Company obtains single-
use cameras principally from China. Currently, substantially all of the
Company's purchases from foreign suppliers are paid for in U.S. dollars. The
Company's mail-order services and products are handled largely through the U.S.
Postal Service and other common carriers. See "Risk Factors--Reliance on Key
Vendor and Supplier Relationships; Foreign Sourcing."
Management Information Systems and Technology
The Company has implemented scalable technology to support customer order
processing, image archiving, and Internet accessibility. These services and
systems use a combination of proprietary technologies and commercially
available, licensed technologies. The systems used to process customers' orders
and payments are integrated with our accounting and financial systems. Internal
development is focused on efforts for creating and enhancing the specialized,
proprietary software that is unique to the business. The Company uses a set of
applications for:
. Accepting and validating customer orders
. Archiving images
. Internet image viewing, ordering reprints and other products
. Managing shipment of products to customers based on various
ordering criteria
Systems have been designed based on industry standard architectures and
have been designed to reduce downtime in the event of outages or catastrophic
occurrences. The systems provide a 24-hour-a-day, seven-day-a-week
availability. The Company is currently implementing load balancing systems and
redundant servers to provide for fault tolerance.
The market in which the Company competes is characterized by rapidly
changing technology, evolving industry standards, frequent new service and
product announcements and enhancements and changing customer demands.
Accordingly, future success will depend on the Company's our ability to:
. Adapt to rapidly changing technologies
. Adapt services to evolving industry standards
. Continually improve the performance, features and reliability of
service in response to competitive service and product offerings
and evolving demands of the marketplace
Failure to adapt to such changes would have a material adverse effect on
the Company's business, results of operations and financial condition. In
addition, the widespread adoption of new Internet, networking or
telecommunications technologies or other technological changes could require
substantial expenditures by the Company to modify or adapt its services or
infrastructure.
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The Company has taken a number of precautions against certain events
that could disrupt the operation of its management information systems,
including events associated with continuing software and hardware upgrades.
However, the Company could still experience systems failures or interruptions,
which could have a material adverse effect on its business, financial condition
and operating results.* See "Risk Factors--Dependence on Production
Capabilities, Statistical Models and Management Information Systems and
Technology" and "--Year 2000."
Competition
The market for consumer photofinishing services is characterized by intense
competition among a number of firms competing in a segment in which average
revenue per roll processed has declined during the 1990s, according to
available photofinishing industry data. The Company faces competition in the
consumer photofinishing market from other direct marketers and from competitors
in other distribution channels, including much larger companies which provide
photofinishing services on a wholesale basis to independent retail outlets and,
in some cases, through multiple retail outlets owned by the photofinisher, many
of which provide photofinishing service within hours. The largest of the
wholesale photofinishers are Qualex Inc. and Fuji TruColor, Inc. In addition,
management believes that the largest mail order photofinishers include District
Photo Inc. (dba York and Clark Labs) and Mystic Color Lab Inc. The Company also
faces competition in the online photo-sharing market with competitors such as
Kodak's and AOL's jointly sponsored feature, "You've Got Pictures", and other
online providers such as PhotoPoint and eMemories.com. Many of the Company's
competitors have substantially greater financial, technical and other resources
than the Company.
Management believes that the principal competitive factors in the online
and consumer photofinishing industry are price, convenience, range of available
services, quality of processing, speed of service and product differentiation.
There are no significant proprietary or other barriers to entry into the online
or consumer photofinishing industry. The Company has sought to differentiate its
services by offering a number of value-added services and products and
emphasizing quality and convenience rather than seeking to be a low-price or
rapid turnaround provider. Although management believes the Company is a leader
in developing and marketing innovative online and photo-related services and
products, competitors can and do provide similar services and products.* See
"Business--Photofinishing Industry, Direct-Marketing and Internet Overview."
In addition, the wholesale distribution market for rolled film, single-use
cameras and photofinishing supplies is highly competitive and is dominated by
suppliers which manufacture the products they sell and may, therefore,
potentially have lower costs of goods for these items than the Company.
Relatively few firms, however, have the capability to produce small-production
quantities of private label rolled film as the Company produces. Management
believes the principal competitive factors in this segment of the wholesale
distribution market are price, ability to provide private label products and
capability to deliver small-production quantities on short notice.*
The photography industry is characterized by evolving technology and
changing services and products. The introduction of photographic services and
products involving new technologies could render existing services and products
obsolete.* The Company's future success will depend on its ability to adapt to
new technologies and develop new or modify existing services and products to
satisfy evolving consumer needs.* For example, the commercialization of filmless
digital imaging technologies is having a negative impact on the photofinishing
industry. In addition, Advanced Photo Systems, which includes a 24mm film
format, is a small but growing percentage of the film that the Company is asked
to process. To respond to customer requests, the Company purchased equipment in
order to offer processing services for this format. The development of these or
other new technologies or any failure by the Company to anticipate or
successfully respond to such developments could have a material adverse effect
on the Company's business, financial condition and operating results.* See "Risk
Factors--Competition" and "--Rapid Technological Change."
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Proprietary Technology
The Company markets its services and products under registered and common-
law trademarks and service marks, including Seattle FilmWorks(R), PhotoWorks(R),
filmworks.com, Pictures On Disk(TM), Pictures On Disk(TM) on CD, OptiColor(TM)
Film & Photo, PhotoMail(TM), Pictures-Plus(R) Index, Professor FilmWorks(TM),
PictureWorks(R) and FilmWorksNet(TM). See "Risk Factors--Intellectual Property."
The Company considers a large portion of its PhotoWorks(R) software, its
process for production of Pictures On Disk(TM) and certain other processes to be
proprietary. The Company has not filed any patents or patent applications, in
part to avoid disclosure of its competitive strengths. The Company, however,
does attempt to protect its proprietary rights to software through a combination
of copyright, trademark and trade secret laws, employee and third-party
nondisclosure agreements, restricting access to certain portions of its premises
and contractual restrictions on use and disclosure in its end-user licenses. The
legal and practical enforceability and extent of liability for violations of
license agreements are unclear. *
This Report contains trademarks other than those of the Company.
Governmental Regulation
The Company's operations, including its transmission of digital images over
the Internet, are subject to regulation by the U.S. Postal Service, the Federal
Trade Commission and various state, local and private consumer protection and
other regulatory authorities. In general, these regulations govern the manner in
which orders may be solicited, the form and content of advertisements,
information which must be provided to prospective customers, the time within
which orders must be filled, obligations to customers if orders are not shipped
within a specified period of time and the time within which refunds must be paid
if the ordered merchandise is unavailable or returned. The federal government
has not adopted many laws and regulations to specifically regulate online
commerce and communications. However, Congress has recently enacted legislation
addressing such issues as the transmission of certain materials to children,
intellectual property protection, taxation, and the transmission of sexually
explicit material. In addition, some states have enacted legislation which made
the transmission of certain kinds of information, such as obscene content and
information which facilitates the commission of criminal acts, a crime. The law
of the Internet remains largely unsettled and it may take years to determine
whether and how existing laws such as those governing intellectual property,
privacy, libel and taxation may apply to the Internet. Legislation enacted by
Congress and the state legislatures could result in additional regulation or
prohibition of the transmission of certain types of content over the Internet or
in the imposition of taxes or fees on transactions conducted over the Internet.*
This could result in significant potential liability to the Company, as well as
additional costs and technological challenges in complying with mandatory
requirements.* See "Risk Factors--Dependence on the Internet and Potential
Liability for Content" and "--Governmental Regulation."
Environmental Compliance
The Company's photofinishing operations involve the use of several
chemicals which are subject to federal, state and local governmental regulations
relating to the storage, use, handling and disposal of such chemicals. The
Company actively monitors its compliance with applicable regulations and works
with regulatory authorities to ensure compliance. To the best of management's
knowledge, the Company has never received a significant citation or fine for
failure to comply with applicable environmental requirements. However, changes
in environmental regulations or in the kinds of chemicals used by the Company
could impose the need for additional capital equipment or other requirements.*
See "Risk Factors--Potential Adverse Impact of Environmental Regulations."
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Employees
As of November 20, 1999 the Company had 690 employees, of whom
approximately 495 were engaged in production operations, 80 in administration,
30 in marketing, 70 in customer service and 15 in research and development. None
of the Company's employees are covered by a collective bargaining agreement, and
the Company believes its relations with its employees are good.
Directors and Executive Officers of the Registrant
The executive officers and directors of the Company as of November 30, 1999
were:
<TABLE>
<CAPTION>
Name Age Position
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Gary R. Christophersen 53 President, Chief Executive Officer and Director
Michael F. Lass 45 Vice President-Operations
Gary T. Tashjian 46 Vice President-Marketing
Annette F. Bailey 42 Vice President-Human Resources
and Organizational Development
Loran Cashmore Bond 42 Chief Financial Officer and Treasurer (Interim)
Sam Rubinstein 82 Director
Douglas A. Swerland 54 Director
Craig E. Tall 53 Director
Peter H. van Oppen 47 Director
</TABLE>
Directors are divided into three classes, with each class as nearly equal
in number as possible with one class elected at each annual meeting to serve for
a three-year term. Directors may be removed only for cause and only by a vote of
a majority of shares of the Company's common stock entitled to vote on the
election of directors. Officers serve at the discretion of the Board of
Directors.
Gary R. Christophersen, has been the Company's President and Chief
Executive Officer since August 1988. Mr. Christophersen joined the Company in
January 1982 as Vice President-Operations and has served as a Director of the
Company since 1982. From May 1983 to August 1988, Mr. Christophersen was a
Senior Vice President of the Company and its General Manager.
Michael F. Lass, has been the Company's Vice President-Operations since
September 1988. Mr. Lass joined the Company in 1984 as Manager of Operations.
From 1982 to 1984, Mr. Lass was Vice President and General Manager of Breezin'
Sportswear, a manufacturer and marketer of sportswear, and, from 1980 to 1982,
General Manager and a director of Mountain Safety Research, Inc., a manufacturer
of outdoor recreational products.
Gary T. Tashjian, has been the Company's Vice President-Marketing since May
1998. From October 1991 to January 1997, Mr. Tashjian was employed by Eddie
Bauer, Inc., as Manager of Relationship Marketing and Director of Retail
Marketing. From January 1990 to October 1991, Mr. Tashjian was Director of
Marketing Communications for Holland America Line/Westours, Inc.
Annette F. Bailey, has been the Company's Vice President-Human Resources
since January 1996. Ms. Mack joined the Company in March 1986 as Human Resources
Manager, and, from August 1988 to December 1995, was its Director of Human
Resources.
Loran Cashmore Bond, has been the Company's Interim Chief Financial Officer
and Treasurer since August 1999. Ms. Cashmore Bond joined the Company in January
1986 as Accounting Manager, and, from 1989 to 1994 was the Controller for the
Company. In 1994, Ms. Cashmore Bond became an officer of the Company and
Corporate Controller.
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Sam Rubinstein became a Director of the Company in March 1986. From June
1985 to May 1988, he was the Chairman of the Board and Chief Executive Officer
of Farwest Fisheries, Inc., a seafood processing and marketing firm. From 1974
to December 1987, Mr. Rubinstein was the Chairman of the Board and Chief
Executive Officer of Bonanza Stores, Inc., an operator of variety stores and
drugstores, and, from February 1984 to January 1986, the Chairman of the Board
and Chief Executive Officer of Whitney-Fidalgo Seafoods, Inc., a seafood
processor.
Douglas A. Swerland became a Director of the Company in October 1988. In
December 1993, Mr. Swerland founded and became the Chairman and Chief Executive
Officer of SAVI, Inc., a clothing superstore retailer specializing in men's and
women's apparel and accessories. Mr. Swerland had been employed by Jay Jacobs,
Inc., the operator of a chain of specialty retail apparel stores, in various
capacities beginning in 1969, most recently as President and a director from
1978 to November 1993.
Craig E. Tall became a Director of the Company in October 1988. In June
1999, Mr. Tall was named Vice Chair at Washington Mutual, Inc. From September
1990 until June 1999, Mr. Tall was an Executive Vice President of Washington
Mutual, Inc., a bank holding company. In addition, since April 1987, Mr. Tall
has been an Executive Vice President of Washington Mutual Bank.
Peter H. van Oppen became a Director of the Company in October 1988. Since
February 1994, Mr. van Oppen has been Chairman and Chief Executive Officer of
Advanced Digital Information Corporation ("ADIC"), a developer and manufacturer
of network storage solutions. ADIC was a wholly-owned subsidiary of Interpoint
Corporation, a diversified publicly-traded manufacturer, until it was spun-off
as a separate public company in October 1996. Mr. van Oppen served as a Director
of Interpoint from 1984 to 1996, President and Chief Executive Officer from 1989
to 1996 and Chairman and Chief Executive Officer from 1995 through October 1996.
Mr. van Oppen is also a Director of ADIC, Spacelabs Medical, Inc., a provider of
integrated healthcare information systems and medical devices, and Key
Technology, Inc., a manufacturer of automated inspection and sorting systems.
13
<PAGE>
RISK FACTORS
In addition to the other information in this report, the following risk
factors should be carefully considered in evaluating the Company and its
business.
Changes in the Photofinishing Industry
During fiscal 1999 the Company experienced a decline in revenues and rolls
processed. The Company believes that this is primarily attributable to increased
competition for photofinishing services which has resulted in part from lower
retail pricing of film by major film suppliers. Also, the Company's traditional
direct marketing techniques have been yielding lower response rates than the
Company realized in past years. This may be due in part to a gradual market
shift towards Advanced Photo Systems film format, single-use cameras and digital
cameras away from traditional 35mm film.* The Company may not be successful in
developing new direct marketing techniques which generate new profitable
photofinishing customers. In addition, the photofinishing industry generally is
experiencing little or no growth in revenues. This may be due in part to the
declining prices for and increased availability and use of digital cameras. The
Company is attempting to offset these factors by offering Internet-based digital
image management services, such as free scanning and archiving of all rolls
processed by the Company for customers who provide an e-mail address and, on a
limited basis, an introductory offer of free film processing and scanning. The
Company also is developing a service, targeted for introduction in the first
half of 2000, to enable users of digital cameras to obtain high quality prints
of their digital images through a simple up-load of their images to Seattle
FilmWorks. The Company is investigating the development of additional products
and services designed to establish the Company as the Internet site of choice
for archiving, sharing, viewing and managing personal digital images. The
Company believes that this status will contribute to increased photofinishing
revenues and sales of other image-related services. However, a number of other
companies are attempting to establish this position. Competitors in this area
include Kodak, which has teamed up with AOL, and other traditional providers of
photofinishing services. Also, several Internet start-ups are attempting to draw
consumers to their sites by offering archiving and/or management of personal
images. The Company may not be successful against this competition. Even if the
Company is able to establish a strong position among consumers for image
management, it may not be able to generate significant revenues from this
community.
Ability to Manage Growth
Until fiscal 1998, the Company experienced significant growth in revenues
and profitability. This growth occurred despite little or no growth in the U.S.
photofinishing industry throughout most of the 1990s and an actual decline in
the number of rolls processed by the mail order portion of the domestic
photofinishing market during the same period. Future growth of the Company's
revenues and profitability depends in large part on the Company's ability to
acquire new customers at a reasonable cost.* The Company may not grow or
effectively be able to manage its growth. The Company could acquire other
businesses that are compatible with the Company's business, but the Company has
no current understanding, agreement or arrangement to make any acquisitions.*
Acquisitions involve numerous risks, which could have a negative effect on the
Company's business, financial condition and operating results. See--"Business-
Photofinishing Industry, Direct Marketing and Internet Overview" above and "Item
7 of Part II - Management's Discussion and Analysis of Financial Condition and
Results of Operations" which appears later in this report for more information.
Dependence on Developing Successful Marketing Programs
Historically, the Company had used, and the Company continues to use,
direct-marketing programs as its primary customer acquisition technique. Since
the early 1980's these programs were based on the customer acquisition
techniques of offering two rolls of film for $2.00 or less. Recently, these
programs have yielded lower customer response rates. As a result of declining
responses, as well as the Company's additional offerings of Internet-based
digital image management services, the Company is in the process of exploring
new marketing techniques to improve its ability to acquire and retain customers
and reach the Internet market. The Company's customer acquisition and
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<PAGE>
retention efforts may not be effective. If the Company is not able to market
successfully against competitors, the Company's business, financial condition
and operating results could be negatively affected. See "Business--Marketing and
Customer Acquisition" and "Risk Factors--Competition" below and "Item 7 of Part
II -Management's Discussion and Analysis of Financial Condition and Results of
Operations" which appears later in this report for more information.*
Change in Accounting for Customer Acquisition Costs
Prior to fiscal 1999, the direct costs of the Company's customer
acquisition program, primarily the cost of film, postage and printed materials
for the Company's free or low-cost film offers sent to prospective and existing
customer were deferred and amortized over a period of up to three years as part
of customer acquisition costs. The Company established amortization rates for
these capitalized assets based on estimates of the timing of future roll
processing volumes per customer. Rates of amortization were compared from time
to time with the actual timing of roll processing volumes in order to assess
whether the amortization rates appropriately matched the direct costs of
customer acquisition with the related revenues. During the fourth quarter of
fiscal 1998, management concluded that lower response rates to customer
acquisition programs required an adjustment to the amount of capitalized costs
associated with those programs. In addition, as a result of the negative trends
in customer responses, the Company's marketing plans and Internet and retail
distribution strategies, management concluded that the net profit margin on
identifiable responses would be insufficient to justify deferring such costs in
the future. Starting with the first quarter of fiscal 1999, the Company began
expensing all customer acquisition costs as incurred. In addition, management
estimated the period in which it would realize identifiable benefits from
customer acquisition expenditures to be twelve months. Therefore, the Company
fully amortized the $16,800,000 of previously deferred customer acquisition
costs during fiscal year 1999 on a straight-line basis. As a result of the
twelve-month amortization of previously capitalized costs and the expensing of
costs on a current basis, operating expenses related to customer acquisition
activities increased significantly in fiscal 1999 compared to prior periods.
Future periods may reflect increased or decreased operating expenses due to the
expensing of such costs as incurred as well as the timing and magnitude of
marketing activities. See "Business--Marketing and Customer Acquisition" and
"Risk Factors--Competition" below and "Item 7 of Part II -Management's
Discussion and Analysis of Financial Condition and Results of Operations" which
appears later in this report for more information.
Rapid Technological Change
The online and photography industry is characterized by evolving technology
and changing services and products. The introduction of online and photographic
services and products which use new technologies could render existing services
and products obsolete. The Company's future success will depend on its ability
to adapt to new technologies and develop new or modify existing services and
products and marketing techniques to satisfy changing consumer needs and attract
new customers. For example, the expanded use of digital cameras that do not use
traditional film are having a negative impact on companies such as Seattle
FilmWorks which primarily process traditional film-based images and slides. The
development of these or other new technologies, or failure by the Company to
anticipate or successfully respond to such developments, could have a negative
effect on the Company's business, financial condition and operating results. See
"Competition" below for more information.
Fluctuations in Quarterly Results and Seasonality
The Company's quarterly operating results have fluctuated in the past and
are expected to fluctuate in the future. Changes can occur due to sales mix,
promotional activities conducted by the Company, price increases by suppliers,
introductions of new products, research and development requirements, actions by
competitors, and changes in foreign currency exchange rates. In addition,
changes can occur due to conditions in the direct-to-consumer market, the
Internet and the photofinishing industry in general. Demand for the Company's
photo-related services and products is seasonal, with the highest volume of
photofinishing activity occurring during the summer months. As a result, the
Company's operating results for any period do not necessarily indicate the
results that can be expected for any future period. During fiscal 2000, the
Company will look for effective ways to market their online PhotoWorks(R)
services.
15
<PAGE>
This may cause significant variations between quarters and in comparison to
prior periods due to the timing of these marketing promotions and the variations
in customer acquisition costs which will be recognized as incurred. The
Company's operating results in a future period may be below the expectations of
public market analysts and investors which may cause the price of the Company's
common stock to decline. See "Dependence on Succesful Marketing Programs",
"Change in Accounting for Customer Acquisition Costs", and in "Item 7 of Part
II - Management's Discussion and Analysis of Financial Condition and Results of
Operations" which is contained in this report.
Competition
The market for consumer photofinishing and online digital imaging services
is highly competitive. Many of the Company's competitors have substantially
greater financial, technical and other resources than the Company. The Company
faces competition in the consumer photofinishing and online digital imaging
services from other direct marketers, Internet companies, and from competitors
in other distribution channels, including much larger companies. Many of these
companies provide photofinishing services on a wholesale basis to independent
retail outlets and, in some cases, through multiple retail outlets owned by the
photofinisher or online service provider. Many of these competitors also provide
photofinishing service within hours. There are no significant proprietary or
other barriers to entry into the traditional photofinishing or online digital
imaging industry. Many of the Company's competitors offer similar photofinishing
and online digital imaging services and products at lower prices and with a more
rapid turnaround time than those offered by the Company. The Company's ability
to compete effectively depends on its ability to continue to differentiate its
services by offering a number of value-added services and products and
emphasizing quality and convenience rather than seeking to be a low-price or
rapid turnaround provider. Although management believes the Company is a leader
in developing and marketing innovative online and photo-related services and
products, competitors can and do provide similar services and products. There
can be no assurance the Company will continue to compete effectively through
development of innovative services and products or respond appropriately to
industry trends or to activities of competitors. See "--Competition" above for
more information.
The wholesale distribution market for rolled film, single-use cameras and
photofinishing supplies is highly competitive and is dominated by suppliers that
also manufacture the products they sell. Competitors may have lower costs of
goods for these items than the Company. The Company was a defendant in a claim
filed by Fuji Photo Film Co., Ltd. with the International Trade Commission. Fuji
alleged that a number of companies, including the Company's OptiColor
subsidiary, violated patents held by Fuji on single-use cameras by bringing
recycled single-use cameras into the United States for resale. The ITC
Commissioners issued a final order in June 1999 prohibiting the Company and its
subsidiaries from importing and selling imported recycled single-use cameras.
The Company has the right to appeal the ITC Commissioners' order is subject to
the Federal Circuit Court of Appeals and is currently considering whether to
appeal the ITC order. There is risk that Fuji might bring a civil action against
OptiColor and the Company to pay damages caused by the infringement of Fuji's
patents found in the ITC proceeding. Fuji has brought civil actions for patent
infringement against three other companies and has stated in a press release
that it is reviewing its options with respect to other companies involved in the
sale of infringing products. If such an action were brought against the Company,
the ITC decision would not be binding in the civil proceeding and would not
prevent OptiColor and the Company from raising and litigating all available
defenses. At this time, the likelihood that such an action would be brought,
and, if brought, its ultimate outcome and impact on the Company, are not
determinable. The Company does not expect the litigation to have a significant
impact on its financial condition, results of operations or liquidity. See
"Legal Proceedings" below for more information.
Dependence on Key Personnel
The Company's success depends in large part on the abilities and continued
service of its executive officers and other key employees, in particular Gary R.
Christophersen, the Company's President and Chief Executive Officer. These
individuals, including Mr. Christophersen, are not subject to employment
agreements that would prevent them from leaving the Company. There can be no
assurance that the Company will be able to retain the services of such executive
officers and other key employees. The loss of key personnel could have a
negative effect on the Company's business, financial condition and operating
results. See "Management" above.
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Dependence on the Internet and Potential Liability for Content
The Company offers online digital imaging services and products over the
Internet primarily through its PhotoWorks(R) service which allows customers to
privately view, store, share, manage, reprint, post or e-mail their photos.
Although the Company provides its services and products through multiple
distribution channels as a result of the changes in the photofinishing industry
discussed above, the Company's success may depend in part on the continued
expansion of the Internet and its network infrastructure.
Critical issues concerning the commercial use of the Internet (including
security, reliability, cost, ease of use and access and quality of service)
remain unresolved and may affect both the growth of Internet use and the
Company's financial results. The Company's PhotoWorks(R) service relies on the
Internet to allow customers online access to their photos. Internet, network,
hardware or software failures or damage to information stored in its online
archive can cause potential damage to the Company's business. The federal
government has not adopted many laws and regulations to specifically regulate
online commerce and communications. However, Congress has recently enacted
legislation addressing such issues as the transmission of certain materials to
children, intellectual property protection, taxation, and the transmission of
sexually explicit material. In addition, some states have enacted legislation
which made the transmission of certain kinds of information, such as obscene
content and information which facilitates the commission of criminal acts, a
crime. The law of the Internet remains largely unsettled and it may take years
to determine whether and how existing laws such as those governing intellectual
property, privacy, libel and taxation may apply to the Internet. Other
legislation currently before Congress and the state legislatures could result in
additional regulation or prohibition of the transmission of certain types of
content over the Internet.* This legislation could result in significant
potential liability to the Company for content transmitted over its Website, as
well as additional costs and technological challenges in complying with
mandatory requirements. The Company does not currently assume responsibility to
edit the content of its customers' photographs, slides, digital images or
personal home pages unless responding to a specific complaint. Legislation which
imposes potential liability for content made available over the Internet through
its Web site could require the Company to implement additional measures to
reduce its exposure to such liability, which may require it to incur significant
costs or discontinue certain service or product offerings. Although the Company
carries general liability insurance, such insurance may not cover potential
claims of this type or may not be adequate to compensate the Company for the
amount of these liabilities. Any costs not covered by insurance incurred as a
result of such liability or asserted liability could have a negative effect on
the Company's business, financial condition and operating results. See
"Business--Governmental Regulation."
Reliance on Key Vendor and Supplier Relationships; Foreign Sourcing
The Company obtains its conventional 35mm film from a few large
manufacturers of photographic film, including Agfa Photo Imaging Systems, a
division of Bayer and Ferrania USA, (formerly Imation), and its photographic
paper and chemicals from a single supplier, Eastman Kodak. The individual
cassettes into which the Company spools 35mm film for still cameras are
manufactured for the Company by foreign sources, principally in China and South
Korea. The Company obtains new and recycled single use cameras principally from
suppliers in China. In addition, the Company acquires photofinishing equipment
to maintain and increase photofinishing production capacity from various
vendors. As there are relatively few suppliers of film, photographic paper and
chemicals and photofinishing equipment, the elimination of any one supplier or
failure of a supplier to deliver specified goods could cause a material
disruption in the Company's operations and could materially adversely affect the
Company's business, financial condition and operating results.
The Company's agreements with Agfa and Eastman Kodak are subject to
termination under certain circumstances. The Company has no other significant
long-term purchase contracts or agreements to insure continued supply, pricing
or access to film, paper, chemicals or cassettes. During fiscal 1997, the
Company experienced a delay in the delivery and implementation of certain new
equipment. This delay caused production problems which led to extended delivery
times to customers. Management believes the Company lost a significant number of
customers due to the extended delivery times. In addition, the Company has
experienced limited delays in the delivery of certain
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supplies and equipment in the past which have not had a significant impact on
the Company's operations. While management believes that alternate sources of
film, paper, chemicals, cassettes and equipment are available, it is possible
that the Company will not be able to continue to meet its requirements for
supplies and equipment, or purchase supplies and equipment in sufficient
quantities or on terms as favorable to the Company as those currently available.
Also, changing to an alternate supplier may cause delays, reduced quality or
other problems. The Company's operations may be adversely affected by political
instability resulting in disruption of trade with foreign countries in which the
Company's contractors and suppliers are located. Existing or potential duties,
tariffs or quotas may limit the quantity of certain types of goods that may be
imported into the United States. Sales of the Company's services and products on
a direct-to-consumer mail-order basis largely depend on the U.S. Postal Service
and other common carriers for receipt of orders and delivery of processed film
or other products. Any significant changes in the operations of or prices
charged by the U.S. Postal Service or other common carriers or extended
interruptions in postal deliveries could negatively affect the Company's
business, financial condition and operating results. See "Business-Operations"
and "-Suppliers" above for more information.
Dependence on Production Capabilities, Statistical Models, Management
Information Systems and Technology
The Company depends on its management information systems and technology
systems to process orders, provide rapid response to customer inquiries, manage
inventory and accounts receivable collections, and purchase, sell and ship
products efficiently. The Company periodically replaces and upgrades certain
portions of its systems software and hardware. The Company takes a number of
precautions against certain events that could disrupt its management information
systems, including events associated with continuing software and hardware
upgrades. Any damages or failures to the Company's computer equipment,
technology systems and the information stored in its data center could
negatively affect its business, financial condition and operating results. See
"Business--Management Information Systems and Technology" above and "Risk
Factors--Year 2000" below for more information.
The Company also depends on statistical models developed to measure the
effectiveness of its marketing programs and on employees who are knowledgeable
about such models. The Company continually faces risks regarding the
availability and cost of labor, the potential need for additional capital
equipment, plant and equipment obsolescence, quality control, excess or
insufficient capacity and disruption in the Company's operations. The loss of
employees knowledgeable about the Company's statistical models or a disruption
in the Company's online or photofinishing services could negatively affect the
Company's business, financial condition and operating results. See "Business--
Operations" and "--Suppliers."
Governmental Regulation
The Company's operations, including its transmission of digital images over
the Internet, are subject to regulation by the U.S. Postal Service, the Federal
Trade Commission and various state, local and private consumer protection and
other regulatory authorities. In general, these regulations govern the manner in
which orders may be solicited, the form and content of advertisements,
information which must be provided to prospective customers, the time within
which orders must be filled, obligations to customers if orders are not shipped
within a specified period of time and the time within which refunds must be paid
if the ordered merchandise is unavailable or returned. The federal government
has not adopted many laws and regulations to specifically regulate online
commerce and communications. However, Congress has recently enacted legislation
addressing such issues as the transmission of certain materials to children,
intellectual property protection, taxation, and the transmission of sexually
explicit material. In addition, some states have enacted legislation which made
the transmission of certain kinds of information, such as obscene content and
information which facilitates the commission of criminal acts, a crime. The law
of the Internet remains largely unsettled and it may take years to determine
whether and how existing laws such as those governing intellectual property,
privacy, libel and taxation may apply to the Internet.* Legislation enacted by
Congress and the state legislatures could result in additional regulation or
prohibition of the transmission of certain types of content over the Internet or
in the imposition of taxes or fees on transactions conducted over the Internet.
This could result in significant potential liability to the Company, as well as
additional costs and technological challenges in complying with mandatory
requirements. See "Business--Governmental Regulation" above for more
information.
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Potential Adverse Impact of Environmental Regulations
The Company's photofinishing operations involve the use of several
chemicals which are subject to federal, state and local governmental regulations
relating to the storage, use, handling and disposal of such chemicals. The
Company actively monitors its compliance with applicable regulations and works
with regulatory authorities to ensure compliance. Changes in environmental
regulations or in the kinds of chemicals used by the Company may impose the need
for additional capital equipment or other requirements. Any failure by the
Company to control the use or adequately restrict the discharge of hazardous
substances under present or future regulations could subject it to substantial
liability or its operations to be suspended. Such liability or suspension of
operations could negatively affect the Company's business, financial condition
and operating results. See "Business--Environmental Compliance" above for more
information.
State Sales Tax
Many states impose taxes on the sale or use of products and the sale of
certain services within the taxing state's borders. If a seller of taxable
products or services is subject to the jurisdiction of a taxing state, the state
may impose a sales or use tax directly on the seller. The state may impose a
duty on the seller to collect a sales or use tax from its customers. A seller is
generally considered subject to the jurisdiction of a taxing state for sales or
use tax purposes when it has an in-state presence that is beyond de minimis. An
in-state presence can include soliciting orders for sales in the taxing state
either in-person or through an employee or other agent. The Company currently
collects and pays sales tax only with respect to shipments in the state of
Washington. The Company structured its operations in a manner designed to
minimize the likelihood that it has more than a de minimis physical presence in
any state other than Washington. However, if a state taxing authority determines
that the Company has established more than a de minimis physical presence in
that particular state, the Company could be obligated to collect and pay a sales
or use tax on some sales of its services and products. If the Company is found
liable by a state taxing authority for unpaid prior sales and use taxes, such
liabilities could negatively affect the Company's business, financial condition
and operating results. From time to time, legislation has been introduced in the
U.S. Congress that, if enacted into law, would impose a state sales or use tax
collection obligation on out-of-state mail-order companies such as the Company.
In addition, a number of proposals have been made at the state and local levels
that would impose additional taxes on the sale of foods and services through the
Internet. Enactment of any such legislation could negatively affect the
Company's business, financial condition and operating results. In October 1998,
Congress passed the "Federal Internet Tax Freedom Act". This bill imposes a
three-year moratorium on new taxes on Internet access fees and on new state
taxes that discriminate or result in multiple taxation. A commission, the
Advisory Commission on Electronic Commerce, will review taxation of Internet
activities and taxation of other forms of remote selling such as mail order,
telemarketing and other forms of electronic commerce.
Intellectual Property
The Company considers a large portion of its PhotoWorks(R) software, its
process for production of Pictures On Disk(TM), and certain other processes to
be proprietary. The Company has not filed any patents or patent applications, in
part to avoid disclosure of its competitive strengths. The Company, however,
does attempt to protect its proprietary rights to software through a combination
of copyright, trademark and trade secret laws, employee and third-party
nondisclosure agreements, restricting access to certain portions of its premises
and contractual restrictions on use and disclosure in its end-user licenses. The
legal and practical enforceability and extent of liability for violations of
license agreements are unclear. See "Business--Proprietary Technology" above.
Possible Volatility of Stock Price
The market price of the Company's common stock has been, and is likely to
continue to be, volatile and subject to significant changes in response to a
number of factors. Factors which can cause such changes include actual or
anticipated changes in the Company's quarterly operating results, the
introduction of new services or products by the
19
<PAGE>
Company or by its competitors and changes in other conditions or trends in the
Company's industry. Changes in governmental regulations, changes in securities
analysts' estimates of the Company's, its competitors' or the industry's future
performance or general market conditions can also cause significant changes in
the market price of the Company's common stock. See Item 7 of Part II-
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." In addition, stock markets have experienced extreme price and
volume volatility in recent years. This volatility has a substantial effect on
the market prices of securities of many smaller public companies which do not
relate to the operating performance of such companies. See "Part II - Item 5 -
Market Prices and Dividends on Common Stock" below.
Year 2000
The Company believes that the Year 2000 issue will not pose significant
operational problems for the Company. However, if all Year 2000 issues are not
properly identified, or assessment, remediation and testing are not effected
timely with respect to Year 2000 problems that are identified, there can be no
assurance that the Year 2000 issue will not materially adversely affect the
Company's results of operations or adversely affect the Company's relationships
with customers, vendors, or others. Additionally, there can be no assurance that
the Year 2000 issues of other entities will not have a material adverse impact
on the Company's systems or results of operations. If the Company were to
experience a material disruption in its computer systems from Year 2000 issues,
the Company is prepared to conduct business, particularly the processing of
customer orders, utilizing manual processes and third party vendors and back-up
data routinely archived by the Company. The Company anticipates that the cost of
conducting business utilizing the Company's contingency plans would be higher
than conducting business utilizing current and anticipated operational plans.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operation - Year 2000" below for more information.
Antitakeover Considerations
In December 1999, The Company's Board of Directors adopted a shareholder
rights plan (commonly known as a poison pill) to make it more difficult for a
shareholder of the Company to effect a change of control without the prior
approval of the Company's Board of Directors. The rights granted under the
shareholder rights plan will cause substantial dilution to a person or group
that acquires 15 percent or more of the Company's common stock without the prior
consent of the Company's Board of Directors. However, the rights should not
interfere with any tender offer or merger which is approved by the Board since
the rights do not become exercisable with respect to any offer or other
acquisition which is exempted by the Board. In addition, the Company's Board of
Directors has the authority, without requiring shareholder approval, to issue up
to 2,000,000 shares of Preferred Stock and to define the rights and preferences
of those shares. The shareholder rights plan and the authority to issue
preferred stock, together with certain provisions of the Articles, including
those providing for a classified board and removal of directors only for cause,
and the Washington Business Corporation Act, may discourage takeover attempts or
tender offers that could result in shareholders receiving a premium over the
market price for the Common Stock or that shareholders may otherwise consider to
be in their best interests.
ITEM 2 - PROPERTIES
The Company's headquarters are located in Seattle, Washington. This 60,000
square foot building which houses the Company's photofinishing and mail order
operations, is occupied under a lease which expires in September 2005, with an
option to extend for an additional five years.
The Company has a lease agreement for 46,000 square feet of office and
production space adjoining the Company's headquarters. This lease expires in
September 2000 with two options to extend for additional five-year periods
through September 2010.
20
<PAGE>
The Company also occupies 80,000 square feet in a building primarily used
for warehouse storage. This building, located in Seattle, Washington, is
occupied under a three-year lease expiring January 31, 2000, with an option to
extend the lease for an additional one-year period to January 31, 2001.
The Company has various leases for its retail store locations with lease
terms generally ranging from three to five years.
ITEM 3 - LEGAL PROCEEDINGS
The Company was a defendant in a legal proceeding that was filed by Fuji
Photo Film Co., Ltd. with the International Trade Commission on February 13,
1998. The action was filed against a number of importers, including the
Company's OptiColor, Inc. subsidiary, alleging patent infringement of U.S.
patents held by Fuji on single-use cameras through the importation and resale of
recycled cameras. Fuji was seeking an order prohibiting importation of
infringing cameras into the U.S. and prohibiting further sales of such products
which had been imported. Sales of recycled cameras accounted for 4.1% of the
Company's net revenues during fiscal 1999 and 3.8% for fiscal 1998. After an
evidentiary hearing before an ITC Administrative Law Judge in November 1998, the
ITC Commissioners issued a final order in June 1999 prohibiting the Company and
its subsidiaries from importing and selling imported recycled single-use
cameras. The Company has appealed the ITC Commissioners' order to the Federal
Circuit Court of Appeals. A decision on the appeal is not expected until
sometime in the spring of 2000. There is a risk that Fuji might bring a civil
action against OptiColor and the Company for damages caused by the sales of
cameras which have been found in the ITC proceeding to infringe Fuji patents.
Fuji has brought civil action for patent infringement against three other
companies and has stated in a press release that it is reviewing its options
with respect to other companies involved in the sale of products that infringe
its patents. If such an action were brought against the Company, the ITC
decision would not be binding in the civil proceeding and would not prevent
OptiColor and the Company from raising and litigating all available defense, but
may be persuasive against the Company. At this time, the likelihood that such an
action would be brought, and, if brought, its ultimate outcome and impact on the
Company, are not determinable. The Company does not expect the litigation to
have a significant impact on its financial condition, results of operations or
liquidity. The Company is also involved in various routine legal proceedings in
the ordinary course of its business.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of shareholders during the fourth
quarter of the Company's fiscal year.
21
<PAGE>
PART II
ITEM 5 - MARKET PRICES AND DIVIDENDS ON COMMON STOCK
The Company's common stock trades on The Nasdaq Stock Market under the
symbol "FOTO." The following table sets forth, for the periods indicated, the
high and low sale prices of the Common Stock as reported on Nasdaq, as adjusted
for stock splits.
<TABLE>
<CAPTION>
High Low
------ -----
<S> <C> <C>
Fiscal Year Ended September 25, 1999
First Quarter....................... $ 6.44 $2.69
Second Quarter...................... 5.88 2.94
Third Quarter....................... 4.50 2.88
Fourth Quarter...................... 5.94 2.25
Fiscal Year Ended September 26, 1998
First Quarter....................... $12.19 $8.50
Second Quarter...................... 12.00 7.88
Third Quarter....................... 13.19 6.06
Fourth Quarter...................... 8.25 3.00
</TABLE>
On November 30, 1999, the last sale price reported for the Company's common
stock was $3.25 per share and as of that date, the common stock was held by an
estimated 9,500 shareholders with approximately 548 holders of record.
The Company has never declared or paid cash dividends on its common stock
and does not anticipate paying any dividends in the foreseeable future. The
Company is restricted under the covenants of a bank loan agreement from
declaring any dividends on shares of its capital stock without the bank's prior
consent. The Company currently intends to retain its earnings, if any, for
developing its business.
ITEM 6 - SELECTED FINANCIAL DATA
The selected financial data set forth below with respect to the Company's
consolidated statements of operations for the years ended September 25, 1999,
September 26, 1998 and September 27, 1997 and the Company's consolidated balance
sheets at September 25, 1999 and September 26, 1998 are derived from the audited
consolidated financial statements included elsewhere in this report and should
be read in conjunction with those consolidated financial statements and their
related footnotes. The selected income statement data for the years ended
September 28, 1996 and September 30, 1995 and selected balance sheet data at
September 27, 1997, September 28, 1996 and September 30, 1995 are derived from
audited consolidated financial statements which are not included in this report.
22
<PAGE>
SEATTLE FILMWORKS, INC.
SELECTED FINANCIAL DATA
(in thousands, except per share and share data)
<TABLE>
<CAPTION>
Fiscal Years
------------------------------------------------------------------
1999 1998 1997 1996 1995
===================================================================================================================
<S> <C> <C> <C> <C> <C>
Consolidated Statement of Operations Data:
- --------------------------------------------
Net revenues $ 89,613 $96,716 $ 101,189 $ 84,152 $ 62,185
Gross profit 31,741 40,693 42,565 34,993 24,057
Operating expenses 48,036 30,506 27,752 23,084 15,729
Net income (loss) $ (10,127) $ 7,575 $ 10,145 $ 8,017 $ 5,682
=========== ======= =========== =========== ===========
Diluted earnings (loss) per share $ (.62) $ .43 $ .57 $ .45 $ .33
=========== ======= =========== =========== ===========
Weighted average shares and
equivalents outstanding - Diluted 16,299,000 17,474,000 17,770,000 17,726,000 17,430,000
=========== =========== =========== =========== ===========
Consolidated Balance Sheet Data:
- --------------------------------
Capitalized customer acquisition
expenditures $ 0 (*) $16,800 $ 13,882 $ 11,334 $ 7,356
Total assets 41,100 (*) 55,116 51,366 37,826 28,244
Long-term obligations 521 706 0 0 0
Shareholders' equity $ 32,321 (*) $43,701 $ 37,601 $ 26,675 $ 17,932
=========== ======= =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
(*) During fiscal 1999, the Company fully amortized $16,800,000 of previously
capitalized customer acquisition costs in addition to current period marketing
costs.
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<PAGE>
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward-Looking Information
This report contains forward-looking statements including, without
limitation, statements identified by an asterisk (*). These statements relate to
future events, product or service offerings or the future financial performance
of the Company. In some cases, you can identify forward-looking statements by
terminology such as "may," "will," "should," "expects," "plans," "anticipates,"
"believes," "estimates," "predicts," "potential," or "continue" or the negative
of such terms and other comparable terminology. These statements only reflect
the Company's managements' expectations and estimates. Actual events or results
may differ materially from those expressed or implied by such forward-looking
statements. Relevant risks and uncertainties include, among others, those
discussed in Item 1 of Part 1 under the heading "Risk Factors" and elsewhere in
this report and those described from time to time in the Company's other filings
with the Securities and Exchange Commission, press releases and other
communications. All forward-looking statements contained in this report reflect
the Company's expectations at the time of this report only, and the Company
disclaims any responsibility to revise or update any such forward-looking
statement except as may be required by law.
Overview
Seattle FilmWorks, Inc. is a leading direct-to-consumer Internet and mail
order provider of film and image processing and online digital image storage and
management services.* The Company offers an array of complementary services and
products primarily under the brand names Seattle FilmWorks(R) and PhotoWorks(R).
To promote its service and products, the Company relies primarily on
direct-marketing programs, including the customer acquisition technique of
offering two rolls of film for $2.00 or less. The Company regularly refines
this introductory offer in an effort to improve its effectiveness and reach a
broader market. Currently, the Company is testing a new introductory offer
designed to showcase the Company's PhotoWorks(R) service.* The new introductory
offer provides customers with free processing for their first roll of film if
they provide an e-mail address for online delivery of their photos via
PhotoWorks(R). This introductory offer has been advertised through direct-
response media, print media and radio advertising in certain test markets. The
Company also promotes this introductory offer on its Web site
(www.filmworks.com). In addition, the Company has a customer referral program
for online and mail order customers which encourages existing customers to
suggest family and friends that may be interested in the Company's services and
products.
Until the end of fiscal 1998, the direct costs of customer acquisition were
capitalized as an asset on the Company's consolidated balance sheet as
"capitalized customer acquisition expenditures." The direct costs of customer
acquisition included film, postage and printed material costs associated with
mailings to prospective and existing customers.
Historically, the capitalized customer acquisition expenditures relating to
prospective customers were amortized over three years, and, beginning in fiscal
1996, capitalized customer acquisition expenditures relating to certain
marketing activities to groups of existing customers were amortized over six
months. These amortization rates were based on estimates of the timing of
future roll processing volumes per customer. The proportion of capitalized
customer acquisition expenditures amortized over three years relative to those
to be amortized over six months varied from period to period based on the timing
and mix of promotional activities.
Net recoverability estimates of the capitalized costs were assessed each
quarter based on identifiable responses to the programs for which costs were
recorded as an asset. Specifically, the Company compared amortized expense of
customer acquisition programs with the actual profitability of such programs to
assess whether the costs were fully recoverable. Quarterly analyses prior to
fiscal 1998 indicated that the marketing programs for which costs were
capitalized were consistently yielding net profits from identifiable responses
in excess of the program costs. During the first three quarters of fiscal
1998, although the quarterly analyses showed a decline in
24
<PAGE>
net profitability, capitalized costs appeared to be fully recoverable. During
the fourth quarter of fiscal 1998 the overall performance of customer
acquisition programs continued to decline. Upon completing the quarterly review
of the recoverability of capitalized costs as of September 26, 1998, management
concluded lower response rates to customer acquisition programs required an
adjustment to the amount of capitalized costs associated with those programs.
Accordingly, the Company reduced the capitalized customer acquisition cost asset
by $613,000, or 3.5% of the total asset of $17,400,000, and recognized the
$613,000 as a pre-tax expense in the fourth quarter of fiscal 1998. Management
attributed the need for this action to a gradual decline in profitability of the
average customer, primarily related to response rates.
Through fiscal 1998, capitalized customer acquisition costs were amortized
over 36 months on an accelerated basis. Historical statistical data supported
this amortization schedule as a good approximation of identifiable responses to
specific customer acquisition marketing programs. As a result, this
amortization estimate provided a good matching of the amortization of
capitalized direct marketing costs with related revenue in accordance with the
American Institute of Certified Public Accountants ("AICPA") Statement of
Position 93-7, Accounting for Advertising Costs ("SOP 93-7"). The Company had
not sent repeat mailings of its introductory free film to households which had
received such a mailing within the last 36 months, because to do so would have
obscured the response rates to the initial mailing. Given the negative trend in
identifiable response rates to the Company's marketing programs, management
believed there was growing uncertainty about the reliability of historical
response rates to predict future performance of its marketing programs.
The Company is actively pursuing Internet and retail distribution as a
complement to its mail order business which makes it more difficult to track
direct marketing program response rates because customers do not generally
submit their orders with coded response forms. As noted above, in accounting
for customer acquisition costs, the Company followed SOP 93-7 which had
previously required the Company to capitalize and then amortize customer
acquisition costs over the period for which revenue could be identifiably
attributed to those marketing efforts. However, as a result of recent trends of
lower customer responses and identifiable responses to individual programs, as
well as the Company's marketing plans and Internet and retail distribution
strategies, management believed that the net profit margin on identifiable
responses is insufficient to justify continued deferral of customer acquisition
costs in the future. As a result of these changes in circumstances, management
no longer had persuasive evidence that future direct response advertising would
have identifiable results to the degree of reliability that would otherwise
require capitalization of such costs pursuant to SOP 93-7. Consequently,
effective in the first quarter of fiscal 1999, the Company began expensing all
customer acquisition costs as incurred. In addition, management estimated
twelve months to be the period in which the benefits of the previously
capitalized marketing costs would be enjoyed before the benefits of those
previous programs would be obscured by supplemental marketing efforts.
Therefore, in fiscal 1999, the Company fully amortized the $16,800,000 of
capitalized customer acquisition costs over a twelve month period on a straight-
line basis. Accordingly, operating expenses related to customer acquisition
activities increased significantly in fiscal 1999 compared to prior periods.
Future periods may reflect increased or decreased customer acquisition costs due
to the expensing of such costs as incurred, as well as the timing and magnitude
of customer acquisition activities.*
The net loss for fiscal 1999 was $10,127,000, compared to net income for
fiscal 1998 of $7,575,000 and $10,145,000 of net income for fiscal 1997. The
net loss for the fiscal 1999 as compared to the net income in prior years was
primarily due to the accelerated amortization of previously deferred customer
acquisition costs combined with the expensing of current period marketing costs
and decreased net revenues. Operating results will fluctuate in the future due
to a number of factors including changes in the seasonal nature and mix of
sales, level and nature of marketing activities, price increases by suppliers,
introductions of new products, research and development requirements, actions by
competitors, conditions in the direct-to-consumer market and the online digital
imaging and photofinishing industry in general.*
Cost of goods and services consist of labor, postage, supplies and fixed
operating costs related to the Company's services and products. Marketing
expenses include costs associated with customer acquisition and retention,
building brand awareness, and testing of new marketing programs. Research and
development expenses
25
<PAGE>
consist primarily of costs incurred in developing computerized online image
management concepts, developing online photo archiving and photo sharing
services, and creating equipment necessary to provide customers with new
computer-related photographic services and products. General and administrative
expenses consist of costs related to computer operations, human resource
functions, finance, legal, accounting, investor relations and general corporate
activities.
Demand for the Company's services and products is highly seasonal, with the
highest volume of activity occurring during the summer months. However,
seasonality of demand may be offset by the introduction of new services and
products, changes in the effectiveness of marketing programs, actions by
competitors, production difficulties and other factors. This seasonality, when
combined with the general growth of the Company's photofinishing business, has
produced greater 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 marketing
program expenditures prior to the summer months.
Changes in the Photofinishing Industry
During fiscal 1999 the Company experienced a decline in revenues and rolls
processed. The Company believes that this is primarily attributable to
increased competition for photofinishing services which has resulted in part
from lower retail pricing of film by major film suppliers. Also, the Company's
traditional direct marketing techniques have been yielding lower response rates
than the Company realized in past years. This may be due in part to a gradual
market shift towards Advanced Photo Systems film format, single-use cameras and
digital cameras away from traditional 35mm film.* The Company may not be
successful in developing new direct marketing techniques which generate new
profitable photofinishing customers. In addition, the photofinishing industry
generally is experiencing little or no growth in revenues. This may be due in
part to the declining prices for and increased availability and use of digital
cameras. The Company is attempting to offset these factors by offering
Internet-based digital image management services, such as free scanning and
archiving of all rolls processed by the Company for customers who provide an e-
mail address and, on a limited basis, an introductory offer of free film
processing and scanning. The Company also is developing a service, targeted for
introduction in the first half of 2000, to enable users of digital cameras to
obtain high quality prints of their digital images through a simple up-load of
their images to Seattle FilmWorks. The Company is investigating the development
of additional products and services designed to establish the Company as the
Internet site of choice for archiving, sharing, viewing and managing personal
digital images. The Company believes that this status will contribute to
increased photofinishing revenues and sales of other image-related services.
However, a number of other companies are attempting to establish this position.
Competitors in this area include Kodak, which has teamed up with AOL, and other
traditional providers of photofinishing services. Also, several Internet start-
ups are attempting to draw consumers to their sites by offering archiving and/or
management of personal images. The Company may not be successful against this
competition. Even if the Company is able to establish a strong position among
consumers for image management, it may not be able to generate significant
revenues from this community.
26
<PAGE>
Results of Operations
The following table presents information from the Company's consolidated
statements of operations, expressed as a percentage of net revenues for the
periods indicated.
<TABLE>
<CAPTION>
Fiscal Years Ended
--------------------------------------------------
September 25, September 26, September 27,
1999 1998 1997
============================================================================================
<S> <C> <C> <C>
Net revenues 100.0% 100.0% 100.0%
Cost of goods and services 64.6 57.9 57.9
------ ----- -----
GROSS PROFIT 35.4 42.1 42.1
Operating expenses:
Amortized customer acquisition costs 18.8 17.1 14.6
Marketing expenses 27.4 9.3 8.7
Research and development 2.3 0.6 .7
General and administrative 5.1 4.5 3.5
------ ----- -----
Total operating expenses 53.6 31.5 27.5
------ ----- -----
INCOME (LOSS) FROM OPERATIONS (18.2) 10.6 14.6
Total other income 0.5 0.9 0.6
------ ----- -----
INCOME (LOSS) BEFORE INCOME TAXES (17.7) 11.5 15.2
Benefit (provision) for income taxes 6.4 (3.7) (5.2)
------ ----- -----
NET INCOME (LOSS) (11.3)% 7.8% 10.0%
====== ===== =====
</TABLE>
Net revenues decreased 7.3% to $89,613,000 in fiscal 1999 compared to
$96,716,000 in fiscal 1998. Net revenues in fiscal 1998 decreased 4.4% to
$96,716,000 in fiscal 1998 from $101,189,000 in fiscal 1997. The decreases in
net revenues for fiscal years 1999 and 1998 were primarily due to lower
photofinishing revenues which management attributes to increased competition,
primarily related to lower retail pricing of major film brands and competition
to traditional 35mm film from the Advanced Photo Systems format, single-use
cameras and digital cameras. In addition, net revenues for the fiscal 1999 and
1998 periods were affected by planned reductions in ancillary businesses
primarily related to discontinued wholesale film sales in Asia and the Company's
Photo Home Study course operations.
Gross profit as a percentage of net revenues for fiscal 1999 declined to
35.4%, compared to 42.1% for fiscal 1998 and 1997. The decrease in gross profit
in fiscal 1999 was primarily due to lower net revenues compared to the prior
years which has the effect of decreasing the operating leverage of fixed costs
embedded in the cost of sales. The reduction in gross profit margin also
reflects the cost of scanning photos online and the depreciation of the online
archive. In addition, this reduction in fiscal 1999 also reflected higher labor
and material costs associated with the PhotoWorks(R) online services and
products and to a lesser extent, retail operations. Fluctuations in gross
profit is expected in future periods due to the seasonal nature of revenues, mix
of product sales, level and nature of marketing activities and other factors.*
Total operating expenses as a percentage of net revenues for fiscal 1999
were 53.6% compared to 31.5% for fiscal 1998 and 27.5% for fiscal 1997. The
increase in operating costs as a percentage of net revenues for fiscal 1999 was
primarily due to the acceleration in amortization of previously deferred
customer acquisition costs of $16,800,000 combined with planned increases in
marketing expenditures.* In addition, operating expenses in fiscal 1999 also
include higher research and development costs related to the Company's new
online services and products. The increase in total operating expenses in fiscal
1998 as compared to fiscal 1997 was primarily due to increased customer
acquisition costs and legal expenses related to defending an action filed by
Fuji with the ITC against a numbers of
27
<PAGE>
importers of recycled single use cameras, including the Company's subsidiary,
OptiColor, Inc. See Item 3 of Part I-"Legal Proceedings." The Company is
actively marketing its online PhotoWorks(R) services and plans additional
marketing and advertising expenditures to introduce new digital and online
services and products.* Accordingly, operating expense may be significantly
higher in future periods.* Future periods may reflect increased or decreased
marketing costs due to the expensing of such costs as incurred, as well as the
timing and magnitude of marketing activities.*
Marketing expenses in fiscal 1999 increased as a percentage of net revenues
to 27.4% compared to 9.3% in fiscal 1998. The increase in fiscal 1999 was
primarily due to the expensing of current period marketing costs which had been
capitalized in prior periods. Previously, such costs were deferred and amortized
and were reflected as amortized customer acquisition costs rather than directly
as marketing expenditures. Marketing expenses for fiscal 1998 increased to 9.3%
compared to 8.7% of net revenues in fiscal 1997.
Research and development expenses during fiscal 1999 were $2,049,000 as
compared to $588,000 for fiscal 1998 and $696,000 for fiscal 1997. The increase
in research and development expenses in actual dollars in fiscal 1999 was due
primarily to higher labor and development costs associated with the Company's
expanding array of digital services and products. The decline in these
expenses in fiscal 1998 from fiscal 1997 was primarily due to lower contract
services and equipment costs as compared to fiscal 1997.
General and administrative expenses increased to $4,615,000 in fiscal 1999
as compared to $4,361,000 in fiscal 1998 and $3,503,000 in fiscal 1997. General
and administrative costs increased in fiscal 1999 as compared to fiscal 1998
primarily due to labor and equipment cost increases in the Company's management
and information systems to support the Company's growing computer-based and
Internet-related operations. The increase in these expenses in fiscal 1998 as
compared to fiscal 1997 was due primarily to increased legal expenses associated
with the Fuji Photo Film Co., Ltd. action. General and administrative expenses
in fiscal 1998 also included increased costs related to the Company's management
information systems.
Total other income in fiscal 1999 was $403,000 as compared to $940,000 in
fiscal 1998 and $574,000 in fiscal 1997. The decrease in total other income in
fiscal 1999 was due primarily to losses related to the disposal of certain
assets. In addition, fiscal 1998 included special vendor discounts from
materials purchased as compared to the fiscal 1999 period. The increase in
fiscal 1998 compared to fiscal 1997 was due primarily to higher interest income
and vendor discounts.
Federal income taxes for fiscal 1999 were recorded at a benefit rate of
36.3% compared to tax expenses of 31.9% for fiscal 1998 and 34.1% for fiscal
1997. The tax rate for fiscal 1999 is primarily affected by tax exempt interest
and the federal research and development tax credit. The decrease in the federal
tax rate for fiscal 1998 compared to fiscal 1997 was primarily due to a decrease
in the Company's marginal federal corporate tax rate which resulted from lower
income levels and a higher percentage of tax exempt interest and research and
development credits.
Net income decreased to a loss of $0.62 per share in fiscal 1999 as
compared to diluted earnings per share of $0.43 in fiscal 1998 and $0.57 in
fiscal 1997. The decrease in net income in fiscal 1999 and 1998 compared to the
prior year was primarily attributable to lower net revenues and increases in
operating expenses.
Liquidity and Capital Resources
Net cash provided by operating activities in fiscal 1999 was $8,573,000,
compared to $10,601,000 in fiscal 1998 and $9,493,000 in fiscal 1997. The
decrease in cash provided by operating activities for fiscal 1999 was primarily
a result of the net loss adjusted for depreciation and amortization,
amortization of customer acquisition expenditures, deferred taxes, and net
changes in receivables, inventories, payables, and other. The increase in net
cash provided by operating activities in fiscal 1998 compared to fiscal 1997 was
primarily a result of changes in net income adjusted for amortization of
customer acquisition expenditures, depreciation and amortization and net changes
in receivables, payables and other.
28
<PAGE>
Net cash used in investing activities was $3,886,000 in fiscal 1999,
$5,243,000 in fiscal 1998 and $5,282,000 in fiscal 1997. Net cash used in
investing activities during fiscal year 1999 decreased primarily to decreases in
purchases of furniture, fixtures and equipment.
Net cash used in financing activities was $1,466,000 in fiscal 1999,
$3,830,000 in fiscal 1998 and $94,000 in fiscal 1997. The decrease in net cash
used in financing activities in fiscal 1999 compared to fiscal 1998 was
primarily due to a decrease in the repurchase of common stock by the Company.
Fiscal 1998 increased compared to fiscal 1997 primarily due to an increase in
repurchases of common stock, partially offset by increases in the level of stock
options exercised. 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 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. During fiscal 1999, the Company repurchased 466,000 shares for
a total of $1,492,000 as compared to 843,000 shares for a total of $4,829,000 in
fiscal 1998 and 80,000 shares for a total of $824,000 in fiscal 1997.
As of November 30, 1999, the Company's principal sources of liquidity
included $20,843,000 in cash and securities available-for-sale together with an
unused operating line of credit of $6,000,000. The ratio of current assets to
current liabilities for the Company was 3.6 to 1 at the end of fiscal 1999,
compared to 4.9 to 1 at the end of fiscal 1998. The decrease in this ratio in
fiscal 1998 was primarily due to increases in accounts payable of $2,240,000 and
increases in accrued expenses, partially offset by increases in cash and
investments of $3,179,000 and prepaid income taxes of $1,085,000.
Net capital expenditures during fiscal 1999 totaled $3,928,000 principally
for photofinishing equipment, data storage equipment and computer network
equipment to support the Company's digital and online archive and image
management services. In fiscal 1998, net capital expenditures were $5,750,000
principally for photofinishing equipment, data processing equipment and for
leasehold improvements. During fiscal 1998, approximately $969,000 of capital
purchases were financed through a capital leasing transaction. In fiscal 1997,
the Company made capital expenditures of $4,779,000 relating to photofinishing
equipment, data processing equipment and for expanding the capacity of
photofinishing operations. The Company has plans to expend approximately
$7,000,000 for capital expenditures in fiscal 2000, principally for additional
data storage and computer network equipment and for photofinishing equipment,
although at this time it has no binding commitments to do so.*
The Company currently anticipates that existing funds together with
anticipated cash flow from operations and the Company's available line of credit
of $6,000,000 will be sufficient to finance its operations, including 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 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. See Item 1 of Part I-"Risk Factors."
Inflation
The results of the Company's operations have not been significantly
affected by inflation during any of the last three fiscal years.
Adoption of Accounting Standards
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 131, "Disclosure about Segments of an
Enterprise and Related Information." SFAS No. 131, which is effective for years
beginning after December 15, 1997, establishes standards for the way that public
29
<PAGE>
business enterprises report information about operating segments in published
financial reports. The Company adopted SFAS No. 131 in the first quarter of
fiscal 1999. Provisions of this statement require annual disclosure in the year
of adoption and interim reporting for periods thereafter. The Company currently
operates in one principal business segment.
In March 1998, the Accounting Standards Executive Committee issued
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 requires all
costs related to the development of internal use software other than those
incurred during the application development state to be expensed as incurred.
Costs incurred during the application development stage are required to be
capitalized and amortized over the estimated useful life of the software. The
Company will adopt SOP 98-1 in fiscal 2000 and does not believe the adoption of
this standard will have a significant impact on the Company's financial position
or operating results.
In April 1998, the American Institute of Certified Public Accountant issued
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities"
("SOP 98-5"). SOP 98-5 requires costs of start-up activities and organization
costs be expensed as incurred. The Company will adopt SOP 98-5 in fiscal 2000.
The adoption of this standard will not have a significant impact on the
Company's financial position or operating results upon adoption.
Year 2000
The Company recognizes the need to ensure that its operations will not be
adversely affected by Year 2000 systems failures. Year 2000 issues arise
because some computer software and hardware were designed to handle only a two-
digit year, not a four-digit year (e.g. 1999 is seen by the computer as "99").
When the year 2000 begins, these computer systems may interpret "00" as the year
1900 and not 2000, and could either stop processing date-related computations or
process them incorrectly.
In order to minimize the impact of the Year 2000 on the Company, the
Company established a Year 2000 committee to evaluate and manage risks
associated with material Year 2000 issues. The committee's plan included a
review of material computer and imbedded systems that the Company currently has
in place, modification or replacement of such systems if required, assessment of
Company's software products as relates to Year 2000 issues, inquiry to third-
party providers with whom the Company has material business relationships as to
their state of readiness for potential Year 2000 issues and the development of
contingency plans in the event material Year 2000 issues arise in Company or
third-party computer systems. The Company estimates that as of November 30,
1999, it had completed the majority of the initiatives that it believes will be
necessary to fully address potential Year 2000 issues relating to its computer
equipment and software.*
As of September 24, 1999, the Company has not expended any significant
amounts to address potential Year 2000 issues, exclusive of costs associated
with previously scheduled modifications, upgrades or replacements unrelated to
Year 2000 issues. Other non-Year 2000 information system efforts have not been
materially delayed or impacted by Year 2000 initiatives. The Company does not
anticipate spending significant amounts for additional testing, modification,
upgrade and replacement related to Year 2000.* Based on current and anticipated
operating needs, many of the Company's critical computer systems do not rely on
a two-digit year field as part of the process or are in the process of being
replaced with more technologically advanced versions. Each new system being
installed has been reviewed for Year 2000 compliance. The computer systems that
have been upgraded or replaced include, but are not limited to, the Company's
accounting system, inventory control system, payroll system, workstation and
network operating systems.* The remaining computer and embedded systems,
including but not limited to, plant equipment, alarm systems, phone equipment
and general office equipment have been reviewed for Year 2000 compliance as part
of the overall plan for testing and modification referenced above.
The Company has determined that most products the Company sells in the
ordinary course of business do not have issues relating to Year 2000.* Software
products previously supplied by the Company, in some cases, may display an
incorrect date but will continue to function.* At their option, customers may
upgrade to newer versions
30
<PAGE>
of the Company's software to correct the date display. Any Year 2000 issues in
products sold by the Company that are manufactured by another vendor will be
referred to that vendor.
In addition to reviewing its own computer systems, the Company sent letters
to material third-party providers, including, but not limited to, suppliers,
product sponsors, financial institutions, service providers, and other companies
with which the Company has material business relationships in order to assess
these companies' state of Year 2000 readiness. These letters requested, among
other things, disclosure of the companies' plans for minimizing the impact of
the Year 2000 on their computer systems and the Company. To date, the Company
has not received from any third-party provider with which a material business
relationship exist notice of a material Year 2000 issue or inability to address
material Year 2000 issues prior to the Year 2000. The Company is not in a
position to verify whether third-party service providers are or will become Year
2000 ready apart from such assurances or until a Year 2000 issue arises.
The Company believes that Year 2000 issues will not pose significant
operational problems for the Company.* However, if all Year 2000 issues are not
properly identified, or assessment, remediation and testing are not effected
timely with respect to Year 2000 problems that are identified, there can be no
assurance that the Year 2000 issue will not materially adversely affect the
Company's results of operations or adversely affect the Company's relationships
with customers, vendors, or others. Additionally, there can be no assurance
that the Year 2000 issues of other entities will not have a material adverse
impact on the Company's systems or results of operations. If the Company were
to experience a material disruption in its computer systems from Year 2000
issues, the Company is prepared to conduct business, particularly the processing
of customer orders, utilizing manual processes and third party vendors and back-
up data routinely archived by the Company. The Company anticipates that the
cost of conducting business utilizing the Company's contingency plans would be
higher than conducting business utilizing current and anticipated operational
plans.*
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not material.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See pages 32 through 46.
31
<PAGE>
Report of Ernst & Young LLP, Independent Auditors
Shareholders and Board of Directors
Seattle FilmWorks, Inc.
We have audited the accompanying consolidated balance sheets of Seattle
FilmWorks, Inc. (the Company) as of September 25, 1999 and September 26, 1998,
and the related consolidated statements of operations, shareholders' equity, and
cash flows for each of the three years in the period ended September 25, 1999.
Our audits also included the financial statement schedule listed in the Index at
Item 14(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Seattle FilmWorks, Inc. at September 25, 1999 and September 26, 1998, and the
results of its operations and its cash flows for each of the three years in the
period ended September 25, 1999, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
/s/ ERNST & YOUNG LLP
Seattle, Washington
November 5, 1999
32
<PAGE>
SEATTLE FILMWORKS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share and share data)
ASSETS
<TABLE>
<CAPTION>
September 25, September 26,
1999 1998
------------- -------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $15,001 $11,780
Securities available-for-sale 4,513 4,555
Accounts receivable, net of allowance for doubtful accounts
of $123 and $208 in 1999 and 1998, respectively 1,460 1,914
Inventories 6,475 7,561
Prepaid income taxes 1,439 354
Deferred income taxes 645 387
Prepaid expenses and other 431 477
Capitalized promotional expenditures - 121
------- -------
TOTAL CURRENT ASSETS 29,964 27,149
FURNITURE, FIXTURES, AND EQUIPMENT,
at cost, less accumulated depreciation (Note C) 10,424 10,954
CAPITALIZED CUSTOMER ACQUISITION EXPENDITURES (Note B) - 16,800
DEFERRED INCOME TAXES 689 -
DEPOSITS AND OTHER ASSETS 23 213
------- -------
TOTAL ASSETS $41,100 $55,116
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 4,599 $ 2,359
Accrued compensation 1,928 1,570
Accrued expenses 1,538 1,376
Current portion of capital lease obligation 186 174
Income taxes payable 7 7
------- --------
TOTAL CURRENT LIABILITIES 8,258 5,486
LONG-TERM CAPITAL LEASE OBLIGATIONS, net of current portion (Note D) 521 706
DEFERRED INCOME TAXES - 5,223
------- --------
TOTAL LIABILITIES 8,779 11,415
SHAREHOLDERS' EQUITY (Notes G and H)
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 16,303,460 and 16,641,891 in 1999
and 1998, respectively 163 167
Additional paid-in capital 154 981
Retained earnings 32,004 42,553
------- -------
TOTAL SHAREHOLDERS' EQUITY 32,321 43,701
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $41,100 $55,116
======= =======
</TABLE>
See notes to consolidated financial statements.
33
<PAGE>
SEATTLE FILMWORKS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share and share data)
<TABLE>
<CAPTION>
Fiscal Years Ended
----------------------------------------------
September 25, September 26, September 27,
1999 1998 1997
===============================================================================================
<S> <C> <C> <C>
Net revenues $ 89,613 $ 96,716 $ 101,189
Cost of goods and services 57,872 56,023 58,624
----------- ----------- -----------
GROSS PROFIT 31,741 40,693 42,565
Operating expenses:
Amortized customer acquisition costs 16,800 16,558 14,723
Marketing expenses 24,572 8,999 8,830
Research and development 2,049 588 696
General and administrative 4,615 4,361 3,503
----------- ----------- -----------
Total operating expenses 48,036 30,506 27,752
----------- ----------- -----------
INCOME (LOSS) FROM OPERATIONS (16,295) 10,187 14,813
Other income (expense):
Interest income 797 731 561
Nonoperating income (expense), net (394) 209 13
----------- ----------- -----------
Total other income 403 940 574
----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES (15,892) 11,127 15,387
Benefit (provision) for income taxes (Note F) 5,765 (3,552) (5,242)
----------- ----------- -----------
NET INCOME (LOSS) $ (10,127) $ 7,575 $ 10,145
=========== =========== ===========
Diluted earnings (loss) per share $ (.62) $ .43 $ .57
=========== =========== ===========
Basic earnings (loss) per share $ (.62) $ .45 $ .62
=========== =========== ===========
Weighted average shares and
equivalents outstanding - Diluted 16,299,000 17,474,000 17,770,000
=========== =========== ===========
Weighted average shares - Basic 16,299,000 16,652,000 16,307,000
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
34
<PAGE>
SEATTLE FILMWORKS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands, except share data)
<TABLE>
<CAPTION>
Common Stock
-------------------
Shares Par Paid-In Retained
Outstanding Value Capital Earnings Total
===============================================================================================
<S> <C> <C> <C> <C> <C>
BALANCE AS OF SEPTEMBER 28, 1996 16,231,846 $162 $ 1,680 $ 24,833 $ 26,675
Stock options exercised 247,002 2 358 360
Income tax benefit of stock options 875 875
Employee stock purchase plan 37,410 1 369 370
Purchase and retirement of Common Stock (80,000) (1) (823) (824)
Net income 10,145 10,145
---------- ------ ------- -------- --------
BALANCE AS OF SEPTEMBER 27, 1997 16,436,258 164 2,459 34,978 37,601
Stock options exercised 1,013,618 10 778 788
Income tax benefit of stock options 2,266 2,266
Employee stock purchase plan 35,382 1 299 300
Purchase and retirement of Common Stock (843,367) (8) (4,821) (4,829)
Net income 7,575 7,575
---------- ------ ------- -------- --------
BALANCE AS OF SEPTEMBER 26, 1998 16,641,891 167 981 42,553 43,701
Stock options exercised 60,412 26 26
Income tax benefit of stock options 40 40
Employee stock purchase plan 67,157 1 172 173
Purchase and retirement of Common Stock (466,000) (5) (1,065) (422) (1,492)
Net loss (10,127) (10,127)
---------- ------ ------- -------- --------
BALANCE AS OF SEPTEMBER 25, 1999 16,303,460 $163 $ 154 $ 32,004 $ 32,321
========== ====== ======= ======== ========
</TABLE>
See notes to consolidated financial statements.
35
<PAGE>
SEATTLE FILMWORKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Fiscal Years Ended
--------------------------------------------------
September 25, September 26, September 27,
1999 1998 1997
=============================================================================================================
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $(10,127) $ 7,575 $ 10,145
Charges to income not affecting cash:
Depreciation 4,648 3,422 2,488
Amortization of non-compete - 375 376
Amortization of capitalized customer
acquisition expenditures 16,800 16,558 14,723
Deferred income taxes (6,170) 755 790
Net change in receivables, inventories,
payables, and other 3,301 1,302 (1,785)
Capitalized promotional expenditures, net 121 90 27
Additions to capitalized customer
acquisition expenditures - (19,476) (17,271)
-------- -------- --------
NET CASH FROM OPERATING ACTIVITIES 8,573 10,601 9,493
INVESTING ACTIVITIES:
Purchase of furniture, fixtures, and equipment (3,928) (5,750) (4,779)
Purchases of securities available-for-sale (3,021) (4,898) (9,642)
Sales of securities available-for-sale 3,063 5,405 9,139
-------- -------- --------
NET CASH USED IN INVESTING ACTIVITIES (3,886) (5,243) (5,282)
FINANCING ACTIVITIES:
Proceeds from issuance of Common Stock 199 1,088 730
Payment on purchase of Common Stock (1,492) (4,829) (824)
Payment on capital lease obligations (173) (89) -
-------- -------- --------
NET CASH USED IN FINANCING ACTIVITIES (1,466) (3,830) (94)
-------- -------- --------
INCREASE IN CASH AND
CASH EQUIVALENTS 3,221 1,528 4,117
Cash and cash equivalents
at beginning of year 11,780 10,252 6,135
-------- -------- --------
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 15,001 $ 11,780 $ 10,252
======== ======== ========
Supplemental cash flow information:
Cash paid for interest $ 53 $ 26 -
Cash paid for income taxes $ 1,450 $ 3,315 $ 2,095
Supplemental non-cash financing and investing activity:
Capital lease obligation incurred - $ 969 -
</TABLE>
See notes to consolidated financial statements.
36
<PAGE>
SEATTLE FILMWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A -- OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
SEATTLE FILMWORKS, INC: ("Seattle FilmWorks" or the "Company") is a leading
direct-to-consumer Internet and mail order provider of film and image processing
and online image storage and management services. The Company offers an array of
complementary services and products primarily under the brand names Seattle
FilmWorks(R) and PhotoWorks(R). To a lesser extent, the Company provides
services, products, and photofinishing supplies on a wholesale basis to a
variety of commercial customers.
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include
Seattle FilmWorks, Inc. and its subsidiaries, all of which are wholly-owned.
Significant inter-company accounts and transactions have been eliminated in
consolidation.
CASH AND CASH EQUIVALENTS: Cash and cash equivalents include cash on hand and
highly liquid short-term investments with a maturity of three months or less on
the date of purchase.
SECURITIES AVAILABLE-FOR-SALE: Securities available-for-sale consist primarily
of bankers' acceptances, commercial paper, and government securities issued by
financial institutions with high credit ratings; all of which mature no later
than January 2001. Company policy limits the amount of credit exposure with any
one financial institution. The fiscal 1999 and fiscal 1998 balance consisted
primarily of government securities. Securities available-for-sale are carried at
amortized cost, which approximates market, and unrealized holding gains and
losses are not material.
OTHER FINANCIAL INSTRUMENTS: At September 25, 1999, the carrying value of
financial instruments such as trade receivables and payables, approximates their
fair values, based on the short-term maturities of these instruments.
ACCOUNTS RECEIVABLE: Accounts receivable primarily include amounts due from
wholesale customers from the sale of film and single-use cameras. An allowance
for doubtful accounts is established for an estimate of bad debts.
INVENTORIES: Inventories are stated at the lower of cost (using the first-in,
first-out method) or market. Inventories consist primarily of film and
photofinishing supplies.
DEPRECIATION: Furniture, fixtures, and equipment are depreciated using the
straight-line and accelerated methods based on the estimated useful asset lives
ranging from two to five years. Expenditures for major remodeling and
improvements are capitalized as leasehold improvements. Leasehold improvements
are depreciated over the shorter of the life of the lease or the life of the
asset.
INCOME TAXES: The benefit or provision for federal income taxes is computed
based on pretax income reported in the consolidated financial statements.
Research and development tax credits are recorded as a reduction of the
provision for federal income taxes in the year realized. The benefit or
provision for income taxes differs from income taxes currently payable because
certain items of income and expense are recognized in different periods for
financial reporting purposes than they are for federal income tax purposes.
Deferred income taxes have been recorded in recognition of these temporary
differences.
EARNINGS PER SHARE: Earnings per share is based on the weighted average number
of shares and dilutive Common Stock equivalents outstanding during the fiscal
year. Common Stock equivalents consist of stock options. The dilutive effect of
stock options is excluded from the calculation of basic earnings per share and
loss per share, but included in the computation of diluted earnings per share.
37
<PAGE>
SEATTLE FILMWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE A -- OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
STOCK-BASED COMPENSATION: The Company has adopted the disclosure-only
provisions of Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" and applies Accounting Principles Board Opinion No
25 (APB 25) and related Interpretations in accounting for its stock option
plans. Accordingly, the Company's stock-based compensation expense is recognized
based on the intrinsic value of the option on the date of grant. Pro forma
disclosure of diluted earnings per share under Statement 123 is provided in Note
G to the consolidated financial statements.
REVENUE RECOGNITION: The Company recognizes revenue when products are shipped
or services are delivered. The Company provides its customers with a 100%
satisfaction guarantee. The majority of the Company's products and services will
not be returned but customers can request a refund if not satisfied. During
fiscal year 1999 refunds were less than 1% of net revenues. An allowance is
recorded for expected future returns.
SEGMENT REPORTING: In June 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosure
about Segments of an Enterprise and Related Information." SFAS No. 131, which is
effective for years beginning after December 15, 1997, establishes standards for
the way that public business enterprises report information about operating
segments in published financial reports. The Company adopted SFAS No. 131 in the
first quarter of fiscal 1999. Provisions of this statement require annual
disclosure in the year of adoption and interim reporting for periods thereafter.
The Company currently operates in one principal business segment.
ACCOUNTING FOR COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL
USE: In March 1998, the Accounting Standards Executive Committee issued
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 requires all
costs related to the development of internal use software other than those
incurred during the application development state to be expensed as incurred.
Costs incurred during the application development stage are required to be
capitalized and amortized over the estimated useful life of the software. The
Company will adopt SOP 98-1 in fiscal 2000 and does not believe the adoption of
this standard will have a significant impact on the Company's financial position
or operating results.
REPORTING ON THE COSTS OF START-UP ACTIVITES: In April 1998, the American
Institute of Certified Public Accountant issued Statement of Position 98-5,
"Reporting on the Costs of Start-Up Activities" ("SOP 98-5"). SOP 98-5 requires
costs of start-up activities and organization costs be expensed as incurred. The
Company will adopt SOP 98-5 in fiscal 2000. The adoption of this standard will
not have a significant impact on the Company's financial position or operating
results upon adoption.
USE OF ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
RECLASSIFICATIONS: Certain prior year amounts have been reclassified to conform
to the current year's presentation.
38
<PAGE>
SEATTLE FILMWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE B -- CAPITALIZED CUSTOMER ACQUISITION EXPENDITURES
CAPITALIZED CUSTOMER ACQUISITION EXENDITURES: Historically, the Company's
principal technique for acquiring new customers was its Introductory Offer of
two rolls of 35mm film for $2.00 or less. Prior to the first quarter of fiscal
1999, the direct costs of customer acquisition were deferred as "capitalized
customer acquisition expenditures."
During the fourth quarter of fiscal 1998, the overall performance of the
customer acquisition programs showed a decline and management concluded the
lower response rates to customer acquisition programs required an adjustment to
the amount of capitalized costs associated with those programs. Accordingly, the
Company reduced the capitalized customer acquisition cost asset by $613,000 to
its net realizable value in the fourth quarter of fiscal 1998. Effective in the
first quarter of fiscal 1999, the Company began expensing customer acquisition
costs as incurred. The September 26, 1998 deferred capitalized customer
acquisition balance of $16,800,000 was fully amortized during fiscal 1999.
NOTE C -- FURNITURE, FIXTURES, AND EQUIPMENT
Furniture, fixtures, and equipment, at cost consist of the following:
September 25, September 26,
1999 1998
================================================================================
(in thousands)
Furniture, fixtures, and equipment $ 21,134 $ 20,437
Equipment under capital lease 969 969
Leasehold improvements 4,102 3,176
-------- --------
26,205 24,582
Less accumulated depreciation and amortization (15,781) (13,628)
-------- --------
$ 10,424 $ 10,954
======== ========
NOTE D-- PROPERTY AND LEASES
The Company's primary operating leases relate to its main operating
facilities. These two leases, one for 60,000 square feet and one for 46,000
square feet, expire in September 2005 and 2000, respectively. Both leases have
five-year options to extend through September 2010. The Company has a lease
agreement for additional warehouse and production space, which expires in
January 2000 with an option to extend the lease for an additional one-year
period. The Company also has various operating leases for its retail stores,
with lease terms generally ranging from three to five years. During fiscal 1998,
the Company entered into a five-year capital lease transactions to finance the
purchase of certain equipment.
39
<PAGE>
SEATTLE FILMWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE D-- PROPERTY AND LEASES (Continued)
At September 25 1999, future minimum payments under capital leases and non-
cancelable operating leases are as follows:
Capital Operating
Lease Leases
================================================================================
(in thousands)
Fiscal 2000 $227 $1,214
Fiscal 2001 227 736
Fiscal 2002 227 481
Fiscal 2003 111 404
Fiscal 2004 0 387
Thereafter 0 387
---- ------
792 $3,609
======
Amounts representing interest (85)
----
Present value of net minimum lease payments
(including current portion of $186) $707
====
Rental expense relating to operating leases for fiscal years 1999, 1998,
and 1997 was $1,478,000, $1,119,000, and $792,000, respectively. Interest
expense relating to the capital lease was $53,000 for fiscal year 1999 and
$26,000 for fiscal year 1998.
NOTE E -- CREDIT AGREEMENT
At September 25, 1999, the Company had a $6,000,000 available line of
credit. At the option of the Company, the interest rate on borrowings under the
agreement may be at the lending bank's prime rate or at a rate of 0.75% above
the London Interbank Offered Rate. There were no borrowings outstanding at the
end of fiscal 1999 or fiscal 1998 under the line of credit.
NOTE F -- INCOME TAXES
The provision for income taxes is as follows (in thousands):
1999 1998 1997
================================================================================
Benefit (provision) for income taxes:
Current $ (406) $(2,797) $(4,452)
Deferred 6,171 (755) (790)
------- -------- --------
$5,765 $(3,552) $(5,242)
======= ======== ========
40
<PAGE>
SEATTLE FILMWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE F -- INCOME TAXES (Continued)
A reconciliation of the federal statutory tax rates to the effective tax rates
is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
=============================================================
<S> <C> <C> <C>
Statutory tax rate (34.0%) 34.0% 35.0%
Research and development tax credits (.6) (.4) (.3)
Tax exempt interest (.5) (.8) (.5)
Other, net (1.2) (.9) (.1)
----- ---- ----
(36.3%) 31.9% 34.1%
===== ==== ====
</TABLE>
Principal items comprising the cumulative deferred income taxes are as follows:
<TABLE>
<CAPTION>
1999 1998
=============================================================
<S> <C> <C>
Deferred tax assets:
Accrued expenses $ 609 $ 577
Depreciation and amortization 458 289
Non-compete agreement 332 368
Other 144 -
------ -------
Total deferred tax assets 1,543 1,234
------ -------
Deferred tax liabilities:
Customer acquisition expenditures - 5,880
Other liabilities 209 190
------ -------
Total deferred tax liabilities 209 6,070
------ -------
Net deferred tax assets (liabilities) $1,334 $(4,836)
====== =======
</TABLE>
At the current time, management believes the net amount of deferred tax
assets are fully recoverable, and no valuation allowance has been provided.
NOTE G -- STOCK-BASED COMPENSATION
Stock Options
Pursuant to the Company's Stock Option Plans adopted in 1982 and 1987,
options may be granted to purchase up to 6,904,688 shares of Common Stock at
prices equal to the fair market value of the shares at the time the options are
granted. Options generally vest over four years and become exercisable
commencing one year after the date of grant and expiring five years after the
date of grant.
41
<PAGE>
SEATTLE FILMWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE G -- STOCK-BASED COMPENSATION (Continued)
The following schedule summarizes stock option activity for fiscal years
1997, 1998, and 1999.
<TABLE>
<CAPTION>
Number Price Per Weighted Average
of Shares Share Exercise Price
================================================================================
<S> <C> <C> <C>
Balance at September 28, 1996 1,976,219 $0.21 - $13.67 $ 2.67
Granted during 1997 194,100 $9.63 - $14.67 $12.04
Canceled during 1997 (25,679) $2.07 - $14.67 $ 5.48
Exercised during 1997 (247,002) $0.21 - $11.72 $ 1.45
----------
Balance at September 27, 1997 1,897,638 $0.21 - $14.67 $ 3.75
Granted during 1998 206,650 $3.75 - $11.31 $ 8.96
Canceled during 1998 (29,677) $2.67 - $14.67 $11.23
Exercised during 1998 (1,013,618) $0.21 - $ 4.96 $ .78
----------
Balance at September 26, 1998 1,060,993 $0.21 - $14.67 $ 7.41
Granted during 1999 415,515 $2.50 - $ 5.00 $ 3.50
Canceled during 1999 (352,557) $2.70 - $14.67 $ 9.20
Exercised during 1999 (60,412) $0.21 - $ 2.70 $ 0.44
----------
Balance at September 25, 1999 1,063,539 $0.67 - $13.06 $ 5.69
==========
</TABLE>
The following schedule summarizes the weighted-average remaining
contractual life and weighted-average exercise price of options outstanding and
options exercisable as of September 25, 1999.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------- ---------------------
Remaining
Range of Options Contractual Exercise Options Exercise
Exercise Prices Outstanding Life (Years) Price Exercisable Price
- --------------- ----------- ------------ -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 0.00 - $ 1.46 53,675 1.1 $ 0.94 53,675 $ 0.94
$ 1.47 - $ 2.93 108,650 3.2 $ 2.13 101,250 $ 2.10
$ 2.94 - $ 4.40 428,715 4.2 $ 3.59 105,775 $ 3.90
$ 4.41 - $ 5.86 91,263 .5 $ 5.07 86,063 $ 5.08
$ 5.87 - $ 7.33 65,025 5.1 $ 6.15 65,025 $ 6.15
$ 7.34 - $ 8.80 400 3.5 $ 8.69 100 $ 8.69
$ 8.81 - $10.26 129,974 3.4 $ 9.14 69,107 $ 9.10
$10.27 - $11.73 90,762 4.1 $11.37 81,379 $11.43
$11.74 - $13.20 95,075 2.3 $12.00 80,425 $12.00
--------- ------ -------
1,063,539 3.2 $ 5.69 642,799 $ 6.28
========= =======
</TABLE>
Options considered fully vested as of September 25, 1999, September 26,
1998 and September 27, 1997 were 642,799, 702,217 and 1,553,053, respectively,
at weighted average exercise prices of $6.28, $6.10 and $2.31, respectively.
Shares of Common Stock reserved for issuance under these stock option plans
totaled 1,209,102 at September 25, 1999, of which 145,563 shares were available
for options to be granted in the future.
The per share weighted-average fair value of stock options granted during
fiscal years 1999, 1998 and 1997 was $1.78, $.26, and $5.90, respectively.
42
<PAGE>
SEATTLE FILMWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE G -- STOCK-BASED COMPENSATION (Continued)
Pro forma information regarding net income and diluted earnings per share
required by Statement No. 123 has been determined as if the Company had
accounted for its employee stock options under the fair value method of that
Statement. The fair value for the options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions on the option grant date:
Fiscal 1999 Fiscal 1998 Fiscal 1997
==========================================================================
Risk free interest rate 5.12% 5.59% 6.39%
Expected volatility 72.66% 58.27% 46.75%
Expected option life 2.98 years 4.47 years 4.99 years
Dividend yield 0.00% 0.00% 0.00%
Under Statement No. 123, if the Company had elected to recognize the
compensation cost based upon the fair value of the options granted at grant
date, net income would have been reduced as follows:
<TABLE>
<CAPTION>
September 26, September 27, September 28,
1999 1998 1997
--------------------------------------------
(in thousands, except per share data)
<S> <C> <C> <C>
Net income (loss):
As reported............................................... $(10,127) $7,575 $10,145
Pro forma................................................. $(10,671) $7,034 $ 9,687
Diluted earnings (loss) per share:
As reported............................................... $ (.62) $ .43 $ .57
Pro forma................................................. $ (.65) $ .40 $ .54
Basic earnings (loss) per share:
As reported............................................... $ (.62) $ .45 $ .62
Pro forma................................................. $ (.65) $ .42 $ .59
</TABLE>
The pro forma effects on net income for fiscal year 1999, 1998 and 1997 are
not indicative of pro forma effects in future years because SFAS No. 123 does
not apply to grants prior to fiscal 1996 and additional grants in future years
are anticipated.
In September 1998, the Board of Directors passed a resolution to allow
employees the opportunity to surrender previously granted options in exchange
for a new option grant at current market prices. Employees were granted options
for two shares of common stock in exchange for the surrender of options for
three shares of common stock. All vesting periods started at the new grant date
at the rate of 25% for each year employed after the new grant date. The new
grant date was October 9, 1998, with a grant price equal to fair market value of
$3.125. Total old options surrendered and canceled were 217,150. Total new
options issued on October 9, 1998 were 144,765. Executive officers and non-
employee directors were not eligible to participate in this option exchange. No
compensation expense was recognized upon the October 9, 1998 exchange because
there was no intrinsic value in the new options as of that date.
On October 20, 1999 the Board of Directors adopted the Seattle FilmWorks
Inc. 1999 Employee Stock Option Plan. Employees, consultants, independent
contractors, advisors and agents are eligible to participate in this plan.
Officers and directors are not eligible to participate. Pursuant to this plan,
options may be granted to purchase up to 800,000 shares of Common Stock at
prices equal to the fair market value of the shares at the time the options are
granted. Options generally vest over four years and become exercisable
commencing one year after the date of grant and expiring five years after the
date of grant. As of November 30, 1999, shares of Common Stock reserved for
issuance under these stock option plans totaled 800,000 of which 395,650 shares
were available for options to be granted in the future
43
<PAGE>
SEATTLE FILMWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE G -- STOCK-BASED COMPENSATION (Continued)
Employee Stock Purchase Plan
Effective September 22, 1993, the Company adopted an Employee Stock
Purchase Plan under which substantially all employees have the option to
purchase 506,250 shares of Common Stock. Under the Plan, eligible employees may
purchase shares of the Company's Common Stock at six-month intervals at 85% of
the fair market value on the first or last day of the six-month offering period,
whichever is lower. Employees may purchase shares having a value not exceeding
10% of their gross compensation during the purchase period. During fiscal 1999
and 1998, shares totaling 67,157 and 35,382 were issued under the Plan at an
average price of $2.58 and $8.47 per share, respectively. At September 25, 1999,
164,335 shares were reserved for future issuance.
NOTE H -- SHAREHOLDERS' EQUITY
Dividends
The Company has never declared or paid cash dividends on its common stock
and does not anticipate paying any dividends in the foreseeable future. The
Company is restricted under the covenants of a bank loan agreement from
declaring any dividends on shares of its capital stock without the bank's prior
consent. The Company currently intends to retain its earnings, if any, for
developing its business.
Share Repurchases
In January 1997, the Board of Directors authorized the repurchase of the
Company's 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 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.
During fiscal year 1999, the Company purchased a total of 466,000 shares
for a total of $1,492,000.
NOTE I -- RETIREMENT AND PROFIT SHARING PLAN
The Company maintains a 401(k) Plan for substantially all employees. The
Company's contributions are based on matching a percentage of up to 2% of
voluntary employee contributions and discretionary profit sharing contribution
determined by the Board of Directors. The Company's contributions were $393,000
$377,000, and $547,000 for fiscal years 1999, 1998, and 1997, respectively.
44
<PAGE>
SEATTLE FILMWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE J -- EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
September 25, 1999 September 26, 1998 September 27, 1997
====================================================================================================================================
<S> <C> <C> <C>
Numerator for basic and diluted earnings per share:
Net income (loss) $(10,127,000) $ 7,575,000 $10,145,000
============ =========== ===========
Denominator:
Denominator for basic earnings per share -
weighted-average shares 16,299,000 16,652,000 16,307,000
Effect of dilutive securities:
Stock options - 822,000 1,463,000
------------ ----------- -----------
Denominator for diluted earnings per share 16,299,000 17,474,000 17,770,000
============ =========== ===========
Basic earnings (loss) per share $ (.62) $ .45 $ .62
============ =========== ===========
Diluted earnings (loss) per share $ (.62) $ .43 $ .57
============ =========== ===========
</TABLE>
Excluded from the computation of loss per share for the year ended
September 25, 1999 are options to acquire 1,063,539 shares of common stock with
a weighted average exercise price of $5.69. Excluded from the computation of
diluted earnings per share for the year ended September 26, 1998 are options to
acquire 575,049 shares of common stock with a weighted average exercise price of
$10.81. Excluded from the computation of diluted earnings per share for the year
ended September 27, 1997 are options to acquire 14,587 shares of common stock
with a weighted average exercise price of $13.44. The impact of these options
were excluded from the computation of diluted earnings per share because their
effects would be antidilutive.
NOTE K -- CONTINGENCIES
The Company was a defendant in a legal proceeding that was filed by Fuji Photo
Film Co., Ltd. with the International Trade Commission on February 13, 1998. The
action was filed against a number of importers, including the Company's
OptiColor, Inc. subsidiary, alleging patent infringement of U.S. patents held by
Fuji on single use cameras through the importation and resale of recycled
cameras. Fuji was seeking an order prohibiting importation of infringing cameras
into the U.S. and prohibiting further sales of such products which had been
imported. Sales of recycled cameras accounted for 4.1% of the Company's net
revenues during fiscal 1999 and 3.8% for fiscal 1998. After an evidentiary
hearing before an ITC Administrative Law Judge in November 1998, the ITC
Commissioners issued a final order in June 1999 prohibiting the Company and its
subsidiaries from importing and selling imported recycled single use cameras.
The Company has appealed the ITC Commissioners' order to the Federal Circuit
Court of Appeals. A decision on the appeal is not expected until sometime in the
spring of 2000. There is a risk that Fuji might bring a civil action against
OptiColor and the Company for damages caused by the sales of cameras which have
been found in the ITC proceeding to infringe Fuji patents. Fuji has brought
civil action for patent infringement against three other companies and has
stated in a press release that it is reviewing its options with respect to other
companies involved in the sale of products that infringe its patents. If such an
action were brought against the Company, the ITC decision would not be binding
in the civil proceeding and would not prevent OptiColor and the Company from
raising and litigating all available defense, but may be persuasive against the
Company. At this time, the likelihood that such an action would be brought, and,
if brought, its ultimate outcome and impact on the Company, are not
determinable. The Company does not expect the litigation to have a significant
impact on its financial condition,
45
<PAGE>
SEATTLE FILMWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE K -- CONTINGENCIES (Continued)
results of operations or liquidity. The Company is also involved in various
routine legal proceedings in the ordinary course of its business.
NOTE L -- SELECTED QUARTERLY FINANCIAL DATA (Unaudited)
The following table sets forth summary financial data for the Company by
quarter for fiscal years 1999 and 1998 (in thousands, except per share data).
<TABLE>
<CAPTION>
Quarters
------------------------------------------------
First Second Third Fourth
===================================================================================
<S> <C> <C> <C> <C>
Fiscal 1999
Net revenue $21,512 $19,302 $22,801 $ 25,998
Gross profit 7,705 6,552 7,863 9,621
Net (loss) (1,052) (2,533) (4,134) (2,408)
Diluted loss per share (.06) (.16) (.25) (.15)
Basic loss per share (.06) (.16) (.25) (.15)
Fiscal 1998
Net revenue $22,471 $21,439 $24,928 $27,878
Gross profit 9,499 9,031 10,635 11,528
Net income 1,558 1,177 2,241 2,599
Diluted earnings per share .09 .07 .13 .15
Basic earnings per share .09 .07 .13 .15
</TABLE>
The sum of quarterly diluted earnings per share will not necessarily equal
the diluted earnings per share reported for the entire year since the weighted
average shares outstanding used in the diluted earnings per share computation
changes throughout the year.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
46
<PAGE>
PART III
ITEM 10 -- DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
See "Directors and Executive Officers of the Registrant" under Item 1 -
Part I above.
Information concerning compliance with Section 16 of the Securities
Exchange Act is incorporated herein by reference to information appearing in the
Company's Proxy Statement for its annual meeting of shareholders to be held on
February 15, 2000, which information appears under the caption "Section 16(a)
Beneficial Ownership Reporting Compliance". Such Proxy Statement will be filed
within 120 days of the Company's last fiscal year-end, September 25, 1999.
ITEMS 11, 12, AND 13
The information called for by Part III (Items 11, 12, and 13) is included
in the Company's Proxy Statement relating to the Company's annual meeting of
shareholders to be held on February 15, 2000, and is incorporated herein by
reference. The information appears in the Proxy Statement under the captions
"Election of Directors," and "Remuneration of Executive Officers," "Voting
Securities and Principal Holders," "Compensation Committee Report on Executive
Compensation" and "Stock Price Performance Graph". Such Proxy Statement will be
filed within 120 days of the Company's last fiscal year-end, September 25, 1999.
PART IV
ITEM 14 -- EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
a. Index to Consolidated Financial Statements and Consolidated Financial
Statement Schedules
(1) Consolidated Financial Statements Page
Report of Ernst & Young LLP, Independent Auditors 32
Consolidated Balance Sheets as of September 25, 1999 and
September 26, 1998 33
Consolidated Statements of Operations for the years ended
September 25, 1999, September 26, 1998, and September 27, 1997 34
Consolidated Statements of Shareholders' Equity for the
years ended September 25, 1999, September 26, 1998, and
September 27, 1997 35
Consolidated Statements of Cash Flows for the years ended
September 25, 1999, September 26, 1998, and September 27, 1997 36
Notes to Consolidated Financial Statements 37-46
Supplemental Consolidated Financial Statement Schedule. The following
additional information should be read in conjunction with the Consolidated
Financial Statements of the Company included in Part II, Item 8.
47
<PAGE>
(2) Schedule Page
II - Valuation and Qualifying Accounts 51
All other schedules have been omitted because the required information is
included in the consolidated financial statements or the notes thereto, or is
not applicable or required.
b. Reports on Form 8-K
None.
c. Exhibits
The following list is a subset of the exhibits set forth below and contains
all compensatory plans, contracts, or arrangements in which any director or
executive officer of the Company is a participant, unless the method of
allocation of benefits thereunder is the same for management and non-management
participants:
(1) The Company's Incentive Stock Option Plan, as amended and restated
as of April 1, 1996. See Exhibit 10.5
(2) The Company's 1987 Stock Option Plan, as amended and restated as of
April 1, 1996. See Exhibit 10.7
Exhibit
Number Exhibit Description
- ------- -------------------
3.1 Bylaws of the Company, as amended and restated on November 13, 1996.
(Incorporated by reference to Exhibit 3.2 filed with the Company's
Annual Report on Form 10-K for the year ended September 28, 1996.)
3.2 Second Restated Articles of Incorporation of Seattle FilmWorks, Inc.
dated March 5, 1996. (Incorporated by reference to Exhibit 3.0 filed
with the Company's Quarterly Report on Form 10-Q for the quarter ended
March 30, 1996.)
3.3 Articles of Amendment to Articles of Incorporation dated February 13,
1997. (Incorporated by reference to Exhibit 3.0 filed with the
Company's Quarterly Report on Form 10-Q for the quarter ended March
29, 1997.)
3.4** Form of Certificate of Designation Preferences and Rights of Series
RP Preferred Stock.
4.1 Rights Agreement dated December 16, 1999 between the Registrant and
Chase Mellon Shareholder Services L.L.C., as Rights Agent
(Incorporated by reference to Exhibit 4.1 to the current report on
Form 8-K filed with the Commission on December 17, 1999.)
10.1 Lease Agreement dated September 10, 1985 between Gilbert Scherer and
Marlyn Friedlander, Lessors, and the Company with respect to certain
office and plant facilities in Seattle, Washington. (Incorporated by
reference to the exhibit with a corresponding number filed with the
Company's registration statement on Form S-1 (file no. 33-4388)
10.2 First Amendment to Facility Lease Agreement dated April 29, 1989,
with Gilbert Scherer and Marlyn Friedlander, Lessors. (Incorporated by
reference to Exhibit 10.48 filed with the Company's Annual Report on
Form 10-K for the year ended September 30, 1989.)
48
<PAGE>
10.3 Second Amendment to Facility Lease Agreement dated November 2, 1998,
with Gilbert Scherer and Marlyn Friedlander, Lessors. (Incorporated
by reference to Exhibit 10.3 filed with the Company's Annual Report on
Form 10-K for the year ended September 26, 1998.)
10.4 Consent to Sublease dated September 30, 1996, between Gilbert Scherer
and Marlyn Friedlander and Seattle FilmWorks, Inc. (Incorporated by
reference to Exhibit 10.3 filed with the Company's Annual Report on
Form 10-K for the year ended September 28, 1996.)
10.5 Incentive Stock Option Plan, as amended and restated as of April 1,
1996. (Incorporated by reference to Exhibit 10.1 filed with the
Company's Quarterly Report on Form 10-Q for the quarter ended June 29,
1996.)
10.6 Form of Incentive Stock Option Agreement. (Incorporated by reference
to Exhibit 10.2 filed with the Company's Registration Statement on
Form S-8, file no. 33-24107.)
10.7 1987 Stock Option Plan, as amended and restated as of April 1, 1996.
(Incorporated by reference to Exhibit 10.2 filed with the Company's
Quarterly Report on Form 10-Q for the quarter ended June 29, 1996.)
10.8 Form of Stock Option Agreement. (Incorporated by reference to Exhibit
10.4 filed with the Company's Registration Statement on Form S-8, file
no. 33-24107.)
10.9 1993 Employee Stock Purchase Plan as amended and restated as of May
31, 1995. (Incorporated by reference to Exhibit 10.58 filed with the
Company's Annual Report on Form 10-K for the year ended September 30,
1995.)
10.10** 1999 Employee Stock Option Plan dated October 20, 1999.
10.11 Credit Agreement with Wells Fargo Bank, National Association as of
March 1, 1997. (Incorporated by reference to Exhibit 10.1 filed with
the Company's Quarterly Report on Form 10-Q for the quarter ended June
28, 1997.)
10.12 First Amendment to Credit Agreement with Wells Fargo Bank, National
Association as of February 24, 1998. (Incorporated by reference to
Exhibit 10.1 filed with the Company's Quarterly Report on Form 10-Q
for the quarter ended June 27, 1998.)
10.13** Second Amendment to Credit Agreement with Wells Fargo Bank, National
Association as of June 30, 1999.
10.14 Stock Redemption Agreement dated July 20, 1994 between the Company and
Sam Rubinstein and related promissory note. (Incorporated by reference
to Exhibits 5.1 and 5.2 filed with the Company's Report on Form 8-K
dated July 22, 1994.)
10.15 Lease Agreement dated September 22, 1995 between the United States of
America, Lessors, and the Company with respect to certain plant and
warehouse facilities in Seattle, Washington. (Incorporated by
reference to Exhibit 10.63 filed with the Company's Annual Report on
Form 10-K for the year ended September 30, 1995.)
10.16 Addendum to Lease Agreement dated January 1, 1996 between the United
States of America, Lessors, and the Company. (Incorporated by
reference to Exhibit 10.3 filed with the Company's Quarterly Report on
Form 10-Q for the quarter ended March 30, 1996.)
49
<PAGE>
10.17 Supplemental Lease Agreement dated October 21, 1996 between the United
States of America, Lessors, and the Company. (Incorporated by
reference to Exhibit 10.17 filed with the Company's Annual Report on
Form 10-K for the year ended September 28, 1996.)
10.18 Lease agreement dated March 4, 1997 between Smith Cove Partnership and
the Company. (Incorporated by reference to Exhibit 10.3 filed with the
Company's Quarterly Report on Form 10-Q for the quarter ended March
29, 1997.)
10.19* Sales contract dated August 18, 1995 between the Company and Agfa
Division of Miles, Inc. with respect to the purchase of certain
products. (Incorporated by reference to Exhibit 10.64 filed with the
Company's Quarterly Report on Form 10-Q for the quarter ended March
30, 1996.)
10.20* Supplement to sales contract with Agfa Division of Miles, Inc. dated
March 29, 1996. (Incorporated by reference to Exhibit 10.2 filed with
the Company's Quarterly Report on Form 10-Q for the quarter ended
March 30, 1996.)
10.21* Agfa Sales Contract and Sales Contract Addendum dated May 21, 1997.
(Incorporated by reference to Exhibit 10.2 filed with the Company's
Quarterly Report on Form 10-Q for the quarter ended June 28, 1997.)
10.22* Kodak Agreement dated May 13, 1997. (Incorporated by reference to
Exhibit 10.3 filed with the Company's Quarterly Report on Form 10-Q
for the quarter ended June 28, 1997.)
10.23* AT&T Agreement dated March 5, 1997. (Incorporated by reference to
Exhibit 10.2 filed with the Company's Quarterly Report on Form 10-Q
for the quarter ended March 29, 1997.)
10.24** Warehouse Sublease between Seattle FilmWorks, Inc. and OptiColor, Inc.
dated September 26, 1999.
10.25** Warehouse Sublease between Seattle FilmWorks, Inc. and Seattle
FilmWorks Manufacturing Company dated September 26, 1999.
10.26** 1260 16th Avenue West Sublease between Seattle FilmWorks, Inc. and
OptiColor Inc. dated September 26, 1999.
10.27** 1260 16th Avenue West Sublease between Seattle FilmWorks, Inc. and
Seattle FilmWorks Manufacturing Company dated September 26, 1999.
10.28 General Assignment between Seattle FilmWorks, Inc., Seattle FilmWorks
Manufacturing Company and OptiColor, Inc. dated September 30, 1996.
(Incorporated by reference to Exhibit 10.24 filed with the Company's
Annual Report on Form 10-K for the year ended September 28, 1996.)
21** Seattle FilmWorks, Inc. Subsidiaries
23** Consent of Ernst & Young LLP, Independent Auditors
27** Financial Data Schedule
* Exhibit for which confidential treatment has been granted.
** Filed herewith.
50
<PAGE>
SEATTLE FILMWORKS, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
<TABLE>
<CAPTION>
Additions
-----------------------
Balance at Charged to Charged to Balance
Beginning Costs and Other at End
Description of Year Expenses Accounts Deductions of Period
====================================================================================================
<S> <C> <C> <C> <C> <C>
FOR THE YEAR ENDED
SEPTEMBER 27, 1997
Allowance for doubtful accounts $287 $ 97 $0 $144 $240
Allowance for returns $ 45 $155 $0 $147 $ 53
FOR THE YEAR ENDED
SEPTEMBER 26, 1998
Allowance for doubtful accounts $240 $ 53 $0 $ 85 $208
Allowance for returns $ 53 $105 $0 $143 $ 15
FOR THE YEAR ENDED
SEPTEMBER 25, 1999
Allowance for doubtful accounts $208 $110 $0 $195 $123
Allowance for returns $ 15 $ 9 $0 $ 23 $ 1
- -------------------------------
</TABLE>
51
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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.
(REGISTRANT)
DATED: December 20, 1999 By: /s/ Gary R. Christophersen
--------------------------
Gary R. Christophersen
President and Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
NAME TITLE DATE
By: /s/ Gary R. Christophersen President December 20, 1999
-------------------------- Chief Executive Officer
Gary R. Christophersen Director
(Principal Executive
Officer)
By: /s/ Sam Rubinstein Director December 20, 1999
--------------------------
Sam Rubinstein
By: /s/ Douglas A. Swerland Director December 20, 1999
--------------------------
Douglas A. Swerland
By: /s/ Craig E. Tall Director December 20, 1999
--------------------------
Craig E. Tall
By: /s/ Peter H. van Oppen Director December 20, 1999
--------------------------
Peter H. van Oppen
By: /s/ Loran Cashmore Bond Chief Financial Officer December 20, 1999
-------------------------- (Principal Financial and
Loran Cashmore Bond Accounting Officer)
52
<PAGE>
EXHIBIT INDEX
-------------
Annual Report on Form 10-K
For The Year Ended September 25, 1999
Exhibit
Number Exhibit Description
- ------- -------------------
3.1 Bylaws of the Company, as amended and restated on November 13, 1996.
(Incorporated by reference to Exhibit 3.2 filed with the Company's
Annual Report on Form 10-K for the year ended September 28, 1996.)
3.2 Second Restated Articles of Incorporation of Seattle FilmWorks, Inc.
dated March 5, 1996. (Incorporated by reference to Exhibit 3.0 filed
with the Company's Quarterly Report on Form 10-Q for the quarter ended
March 30, 1996.)
3.3 Articles of Amendment to Articles of Incorporation dated February 13,
1997. (Incorporated by reference to Exhibit 3.0 filed with the
Company's Quarterly Report on Form 10-Q for the quarter ended March
29, 1997.)
3.4** Form of Certificate of Designation Preferences and Rights of Series
RP Preferred Stock.
4.1 Rights Agreement dated December 16, 1999 between the Registrant and
Chase Mellon Shareholder Services L.L.C., as Rights Agent
(Incorporated by reference to Exhibit 4.1 to the current report on
Form 8-K filed with the Commission on December 17, 1999.)
10.1 Lease Agreement dated September 10, 1985 between Gilbert Scherer and
Marlyn Friedlander, Lessors, and the Company with respect to certain
office and plant facilities in Seattle, Washington. (Incorporated by
reference to the exhibit with a corresponding number filed with the
Company's registration statement on Form S-1 (file no. 33-4388)
10.2 First Amendment to Facility Lease Agreement dated April 29, 1989,
with Gilbert Scherer and Marlyn Friedlander, Lessors. (Incorporated by
reference to Exhibit 10.48 filed with the Company's Annual Report on
Form 10-K for the year ended September 30, 1989.)
10.3 Second Amendment to Facility Lease Agreement dated November 2, 1998,
with Gilbert Scherer and Marlyn Friedlander, Lessors. (Incorporated
by reference to Exhibit 10.3 filed with the Company's Annual Report on
Form 10-K for the year ended September 26, 1998.)
10.4 Consent to Sublease dated September 30, 1996, between Gilbert Scherer
and Marlyn Friedlander and Seattle FilmWorks, Inc. (Incorporated by
reference to Exhibit 10.3 filed with the Company's Annual Report on
Form 10-K for the year ended September 28, 1996.)
10.5 Incentive Stock Option Plan, as amended and restated as of April 1,
1996. (Incorporated by reference to Exhibit 10.1 filed with the
Company's Quarterly Report on Form 10-Q for the quarter ended June 29,
1996.)
10.6 Form of Incentive Stock Option Agreement. (Incorporated by reference
to Exhibit 10.2 filed with the Company's Registration Statement on
Form S-8, file no. 33-24107.)
10.7 1987 Stock Option Plan, as amended and restated as of April 1, 1996.
(Incorporated by reference to Exhibit 10.2 filed with the Company's
Quarterly Report on Form 10-Q for the quarter ended June 29, 1996.)
53
<PAGE>
10.8 Form of Stock Option Agreement. (Incorporated by reference to Exhibit
10.4 filed with the Company's Registration Statement on Form S-8, file
no. 33-24107.)
10.9 1993 Employee Stock Purchase Plan as amended and restated as of May
31, 1995. (Incorporated by reference to Exhibit 10.58 filed with the
Company's Annual Report on Form 10-K for the year ended September 30,
1995.)
10.10** 1999 Employee Stock Option Plan dated October 20, 1999.
10.11 Credit Agreement with Wells Fargo Bank, National Association as of
March 1, 1997. (Incorporated by reference to Exhibit 10.1 filed with
the Company's Quarterly Report on Form 10-Q for the quarter ended June
28, 1997.)
10.12 First Amendment to Credit Agreement with Wells Fargo Bank, National
Association as of February 24, 1998. (Incorporated by reference to
Exhibit 10.1 filed with the Company's Quarterly Report on Form 10-Q
for the quarter ended June 27, 1998.)
10.13** Second Amendment to Credit Agreement with Wells Fargo Bank, National
Association as of June 30, 1999.
10.14 Stock Redemption Agreement dated July 20, 1994 between the Company and
Sam Rubinstein and related promissory note. (Incorporated by reference
to Exhibits 5.1 and 5.2 filed with the Company's Report on Form 8-K
dated July 22, 1994.)
10.15 Lease Agreement dated September 22, 1995 between the United States of
America, Lessors, and the Company with respect to certain plant and
warehouse facilities in Seattle, Washington. (Incorporated by
reference to Exhibit 10.63 filed with the Company's Annual Report on
Form 10-K for the year ended September 30, 1995.)
10.16 Addendum to Lease Agreement dated January 1, 1996 between the United
States of America, Lessors, and the Company. (Incorporated by
reference to Exhibit 10.3 filed with the Company's Quarterly Report on
Form 10-Q for the quarter ended March 30, 1996.)
10.17 Supplemental Lease Agreement dated October 21, 1996 between the United
States of America, Lessors, and the Company. (Incorporated by
reference to Exhibit 10.17 filed with the Company's Annual Report on
Form 10-K for the year ended September 28, 1996.)
10.18 Lease agreement dated March 4, 1997 between Smith Cove Partnership and
the Company. (Incorporated by reference to Exhibit 10.3 filed with the
Company's Quarterly Report on Form 10-Q for the quarter ended March
29, 1997.)
10.19* Sales contract dated August 18, 1995 between the Company and Agfa
Division of Miles, Inc. with respect to the purchase of certain
products. (Incorporated by reference to Exhibit 10.64 filed with the
Company's Quarterly Report on Form 10-Q for the quarter ended March
30, 1996.)
10.20* Supplement to sales contract with Agfa Division of Miles, Inc. dated
March 29, 1996. (Incorporated by reference to Exhibit 10.2 filed with
the Company's Quarterly Report on Form 10-Q for the quarter ended
March 30, 1996.)
54
<PAGE>
10.21* Agfa Sales Contract and Sales Contract Addendum dated May 21, 1997.
(Incorporated by reference to Exhibit 10.2 filed with the Company's
Quarterly Report on Form 10-Q for the quarter ended June 28, 1997.)
10.22* Kodak Agreement dated May 13, 1997. (Incorporated by reference to
Exhibit 10.3 filed with the Company's Quarterly Report on Form 10-Q
for the quarter ended June 28, 1997.)
10.23* AT&T Agreement dated March 5, 1997. (Incorporated by reference to
Exhibit 10.2 filed with the Company's Quarterly Report on Form 10-Q
for the quarter ended March 29, 1997.)
10.24** Warehouse Sublease between Seattle FilmWorks, Inc. and OptiColor, Inc.
dated September 26, 1999.
10.25** Warehouse Sublease between Seattle FilmWorks, Inc. and Seattle
FilmWorks Manufacturing Company dated September 26, 1999.
10.26** 1260 16th Avenue West Sublease between Seattle FilmWorks, Inc. and
OptiColor Inc. dated September 26, 1999.
10.27** 1260 16th Avenue West Sublease between Seattle FilmWorks, Inc. and
Seattle FilmWorks Manufacturing Company dated September 26, 1999.
10.28 General Assignment between Seattle FilmWorks, Inc., Seattle FilmWorks
Manufacturing Company and OptiColor, Inc. dated September 30, 1996.
(Incorporated by reference to Exhibit 10.24 filed with the Company's
Annual Report on Form 10-K for the year ended September 28, 1996.)
21** Seattle FilmWorks, Inc. Subsidiaries
23** Consent of Ernst & Young LLP, Independent Auditors
27** Financial Data Schedule
* Exhibit for which confidential treatment has been granted.
** Filed herewith.
55
<PAGE>
Exhibit 3.4
Certificate of Designation, Preferences and
Rights of Series RP Preferred Stock
of
Seattle FilmWorks, Inc.
(Pursuant to (S) 23B.06.020 of the Washington Business Corporation Act)
I, Mich Kele Earl, Secretary of Seattle FilmWorks, Inc. (the
"Corporation"), a corporation organized and existing under the Washington
-----------
Business Corporation Act, in accordance with the provisions of Section
23B.01.200 thereof, DO HEREBY CERTIFY:
That pursuant to the authority conferred upon the Board of Directors of the
Corporation by the Amended and Restated Articles of Incorporation of the
Corporation, the said Board of Directors has adopted the following resolutions
creating a series of 105,000 shares of Preferred Stock designated as Series RP
Preferred Stock.
RESOLVED, that pursuant to the authority granted to and vested in the Board
of Directors of the Corporation in accordance with the provisions of the
Articles of Incorporation of the Corporation, the Board of Directors hereby
creates a series of Series RP Preferred Stock, with a par value of $.01 per
share, of the Corporation and hereby states the designation and number of
shares, and fixes the relative rights, preferences and limitations thereof as
follows (the following provisions being intended to operate in addition to any
other provisions of said Articles of Incorporation applicable to any series of
Preferred Stock):
Series RP Preferred Stock
Section 1. Designation, Par Value and Amount. The shares of such series
---------------------------------
shall be designated as "Series RP Preferred Stock" (hereinafter referred to as
"Series RP Preferred Stock"), the shares of such series shall be with par value
- --------------------------
of $.01 per share, and the number of shares constituting such series shall be
105,000; provided, however, that, if more than a total of 105,000 shares of
-------- -------
Series RP Preferred Stock shall be issuable upon the exercise of Rights (the
"Rights") issued pursuant to the Rights Agreement, dated as of December 16,
1999, between the Corporation and ChaseMellon Shareholder Services L.L.C., as
Rights Agent (as amended from time to time, the "Rights Agreement"), the Board
----------------
of Directors of the Corporation shall direct by resolution or resolutions that a
certificate be properly executed, acknowledged and filed providing for the total
number of shares of Series RP Preferred Stock authorized to be issued to be
increased (to the extent that the Articles of Incorporation then permits) to the
largest number of whole shares (rounded up to the nearest whole number) issuable
upon exercise of the Rights.
Section 2. Dividends and Distributions.
---------------------------
2.1 Subject to the prior and superior rights of the holders of any
shares of any series of Preferred Stock ranking prior and superior to the shares
of Series RP Preferred Stock
<PAGE>
with respect to dividends, the holders of shares of Series RP Preferred Stock
shall be entitled to receive, when, as and if declared by the Board of Directors
out of assets legally available for the purpose, quarterly dividends payable in
cash on the first business day of March, June, September and December in each
year (each such date being referred to herein as a "Quarterly Dividend Payment
--------------------------
Date"), commencing on the first Quarterly Dividend Payment Date after the first
- ----
issuance of a share or fraction of a share of Series RP Preferred Stock, in an
amount per share (rounded to the nearest cent) equal to the greater of (a) $1.00
or (b) subject to the provision for adjustment set forth in Section 6.1, 1,000
times the aggregate per share amount of all cash dividends, and 1,000 times the
aggregate per share amount (payable in kind) of all non-cash dividends or other
distributions other than a dividend payable in shares of Common Stock, par value
$.01 per share, of the Corporation (the "Common Stock") or a subdivision of the
-------------
outstanding shares of Common Stock (by reclassification or otherwise), declared
on the Common Stock since the immediately preceding Quarterly Dividend Payment
Date, or, with respect to the first Quarterly Dividend Payment Date, since the
first issuance of any share or fraction of a share of Series RP Preferred Stock.
2.2 The Corporation shall declare a dividend or distribution on the
Series RP Preferred Stock as provided in Section 2.1 above immediately after it
declares a dividend or distribution on the Common Stock (other than a dividend
payable in shares of Common Stock); provided that, in the event no dividend or
-------- ----
distribution shall have been declared on the Common Stock during the period
between any Quarterly Dividend Payment Date and the next subsequent Quarterly
Dividend Payment Date, a dividend of $1.00 per share on the Series RP Preferred
Stock shall nevertheless be payable on such subsequent Quarterly Dividend
Payment Date.
2.3 Dividends shall begin to accrue and be cumulative on outstanding
shares of Series RP Preferred Stock from the Quarterly Dividend Payment Date
next preceding the date of issue of such shares of Series RP Preferred Stock,
unless the date of issue of such shares is prior to the record date for the
first Quarterly Dividend Payment Date, in which case dividends on such shares
shall begin to accrue from the date of issue of such shares, or unless the date
of issue is a Quarterly Dividend Payment Date or is a date after the record date
for the determination of holders of shares of Series RP Preferred Stock entitled
to receive a quarterly dividend and before such Quarterly Dividend Payment Date,
in either of which events such dividends shall begin to accrue and be cumulative
from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall
not bear interest. Dividends paid on the shares of Series RP Preferred Stock in
an amount less than the total amount of such dividends at the time accrued and
payable on such shares shall be allocated pro rata on a share-by-share basis
among all such shares at the time outstanding. The Board of Directors may fix a
record date for the determination of holders of shares of Series RP Preferred
Stock entitled to receive payment of a dividend or distribution declared
thereon, which record date shall be not more than 30 days prior to the date
fixed for the payment thereof.
Section 3. Voting Rights. The holders of shares of Series RP Preferred
-------------
Stock shall have the following voting rights:
3.1 Except as provided in Section 3.3 and subject to the provision
for adjustment hereinafter set forth, each share of Series RP Preferred Stock
shall entitle the holder thereof to 1,000 votes on all matters submitted to a
vote of the shareholders of the Corporation.
2
<PAGE>
3.2 Except as otherwise provided herein or by law, the holders of
shares of Series RP Preferred Stock and the holders of shares of Common Stock
shall vote together as one class on all matters submitted to a vote of
shareholders of the Corporation.
3.3 The following additional provisions shall apply with respect to
the voting of shares of Series RP Preferred Stock:
3.3.1 If, on the date used to determine shareholders of record
for any meeting of shareholders for the election of directors, a default in
preference dividends (as defined in Section 3.3.5 below) on the Series RP
Preferred Stock shall exist, the holders of the Series RP Preferred Stock shall
have the right, voting as a class as described in Section 3.3.2 below, to elect
two directors (in addition to the directors elected by holders of Common Stock
of the Corporation). Such right may be exercised (a) at any meeting of
shareholders for the election of directors or (b) at a meeting of the holders of
shares of Voting Preferred Stock (as hereinafter defined), called for the
purpose in accordance with the Bylaws of the Corporation, until all such
cumulative dividends (referred to above) shall have been paid in full or until
non-cumulative dividends have been paid regularly for at least one year.
3.3.2 The right of the holders of Series RP Preferred Stock to
elect two directors, as described above, shall be exercised as a class
concurrently with the rights of holders of any other series of Preferred Stock
upon which voting rights to elect such directors have been conferred and are
then exercisable. The Series RP Preferred Stock and any additional series of
Preferred Stock that the Corporation may issue and that may provide for the
right to vote with the foregoing series of Preferred Stock are collectively
referred to herein as "Voting Preferred Stock."
-----------------------
3.3.3 Each director elected by the holders of shares of Voting
Preferred Stock shall be referred to herein as a "Preferred Director." A
------------------
Preferred Director shall continue to serve as such for a term of one year,
except that upon any termination of the right of all holders of Voting Preferred
Stock to vote as a class for Preferred Directors, the term of office of
Preferred Directors then serving shall terminate. Any Preferred Director may be
removed by, and shall not be removed except by, the vote of the holders of
record of a majority of the outstanding shares of Voting Preferred Stock then
entitled to vote for the election of directors, present (in person or by proxy)
and voting together as a single class (a) at a meeting of the shareholders, or
(b) at a meeting of the holders of shares of such Voting Preferred Stock, called
for the purpose in accordance with the Bylaws of the Corporation.
3.3.4 So long as a default in any preference dividends of the
Series RP Preferred Stock shall exist or the holders of any other series of
Voting Preferred Stock shall be entitled to elect Preferred Directors, (a) any
vacancy in the office of a Preferred Director may be filled (except as provided
in the following clause (b)) by an instrument in writing signed by the remaining
Preferred Director and filed with the Corporation and (b) in the case of the
removal of any Preferred Director, the vacancy may be filled by the vote or
written consent of the holders of a majority of the outstanding shares of Voting
Preferred Stock then entitled to vote for the election of directors, present (in
person or by proxy) and voting together as a single class, at such time as the
removal shall be effected. Each director appointed as aforesaid by the remaining
Preferred Director shall be deemed, for all purposes hereof, to be a Preferred
Director.
3
<PAGE>
Whenever (x) no default in preference dividends on the Series RP Preferred Stock
shall exist and (y) the holders of other series of Voting Preferred Stock shall
no longer be entitled to elect such Preferred Directors, then the number of
directors constituting the Board of Directors of the Corporation shall be
reduced by two.
3.3.5 For purposes hereof, a "default in preference dividends"
-------------------------------
on the Series RP Preferred Stock shall be deemed to have occurred whenever the
amount of cumulative and unpaid dividends on the Series RP Preferred Stock shall
be equivalent to six full quarterly dividends or more (whether or not
consecutive), and, having so occurred, such default shall be deemed to exist
thereafter until, but only until, all cumulative dividends on all shares of the
Series RP Preferred Stock then outstanding shall have been paid through the last
Quarterly Dividend Payment Date or until, but only until, non-cumulative
dividends have been paid regularly for at least one year.
3.4 Except as set forth herein (or as otherwise required by
applicable law), holders of Series RP Preferred Stock shall have no general or
special voting rights and their consent shall not be required for taking any
corporate action.
Section 4. Certain Restrictions.
--------------------
4.1 Whenever quarterly dividends or other dividends or distributions
payable on the Series RP Preferred Stock as provided in Section 2 are in
arrears, thereafter and until all accrued and unpaid dividends and
distributions, whether or not declared, on shares of Series RP Preferred Stock
outstanding shall have been paid in full, the Corporation shall not:
4.1.1 declare or pay dividends, or make any other distributions,
on any shares of stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Series RP Preferred Stock;
4.1.2 declare or pay dividends, or make any other distributions,
on any shares of stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Series RP Preferred Stock,
except dividends paid ratably on the Series RP Preferred Stock and all such
parity stock on which dividends are payable or in arrears in proportion to the
total amounts to which the holders of all such shares are then entitled;
4.1.3 redeem or purchase or otherwise acquire for consideration
(except as provided in Section 4.1.4 below) shares of any stock ranking junior
(either as to dividends or upon liquidation, dissolution or winding up) to the
Series RP Preferred Stock, provided that the Corporation may at any time redeem,
purchase or otherwise acquire shares of any such junior stock in exchange for
shares of any stock of the Corporation ranking junior (either as to dividends or
upon dissolution, liquidation or winding up) to the Series RP Preferred Stock;
4.1.4 redeem or purchase or otherwise acquire for consideration
any shares of Series RP Preferred Stock, or any shares of stock ranking on a
parity (either as to dividends or upon liquidation, dissolution or winding up)
with the Series RP Preferred Stock, except in accordance with a purchase offer
made in writing or by publication (as determined by the Board of Directors) to
all holders of such shares upon such terms as the Board of Directors, after
consideration of the respective annual dividend rates and other relative rights
and
4
<PAGE>
preferences of the respective series and classes, shall determine in good faith
will result in fair and equitable treatment among the respective series or
classes.
4.2 The Corporation shall not permit any subsidiary of the
Corporation to purchase or otherwise acquire for consideration any shares of
stock of the Corporation unless the Corporation could, under Section 4.1,
purchase or otherwise acquire such shares at such time and in such manner.
Section 5. Reacquired Shares. Any shares of Series RP Preferred Stock
-----------------
purchased or otherwise acquired by the Corporation in any manner whatsoever
shall be retired and canceled promptly after the acquisition thereof. All such
shares shall upon their cancellation become authorized but unissued shares of
Preferred Stock and may be reissued as part of a new series of Preferred Stock
subject to the conditions and restrictions on issuance set forth herein, in the
Certificate of Incorporation, in any other Certificate of Amendment creating a
series of Preferred Stock or as otherwise required by law.
Section 6. Liquidation, Dissolution or Winding Up.
--------------------------------------
6.1 Subject to the prior and superior rights of holders of any
shares of any series of Preferred Stock ranking prior and superior to the shares
of Series RP Preferred Stock with respect to rights upon liquidation,
dissolution or winding up (voluntary or otherwise), no distribution shall be
made to the holders of shares of stock ranking junior (either as to dividends or
upon liquidation, dissolution or winding up) to the Series RP Preferred Stock
unless, prior thereto, the holders of shares of Series RP Preferred Stock shall
have received per share an amount equal to the greater of 1,000 times $22.00 or
1,000 times the payment made per share of Common Stock, plus an amount equal to
accrued and unpaid dividends and distributions thereon, whether or not declared,
to the date of such payment (the "Series RP Liquidation Preference"). Following
--------------------------------------
the payment of the full amount of the Series RP Liquidation Preference, no
additional distributions shall be made to the holders of shares of Series RP
Preferred Stock unless, prior thereto, the holders of shares of Common Stock
shall have received an amount per share (the "Capital Adjustment") equal to the
------------------------
quotient obtained by dividing (i) the Series RP Liquidation Preference by (ii)
1,000 (as appropriately adjusted as set forth in Section 6.3 to reflect such
events as stock splits, stock dividends and recapitalizations with respect to
the Common Stock) (such number in clause (ii) being hereafter referred to as the
"Adjustment Number"). Following the payment of the full amount of the Series RP
-----------------
Liquidation Preference and the Capital Adjustment in respect of all outstanding
shares of Series RP Preferred Stock and Common Stock, respectively, holders of
Series RP Preferred Stock and holders of Common Stock shall receive their
ratable and proportionate share of the remaining assets to be distributed in the
ratio of the Adjustment Number to 1 with respect to such Preferred Stock and
Common Stock, on a per share basis, respectively.
6.2 In the event, however, that there are not sufficient assets
available to permit payment in full of the Series RP Liquidation Preference and
the liquidation preferences of all other series of preferred stock, if any,
which rank on a parity with the Series RP Preferred Stock, then such remaining
assets shall be distributed ratably to the holders of Series RP Preferred Stock
and the holders of such parity shares in proportion to their respective
liquidation preferences. In the event, however, that there are not sufficient
assets available to permit
5
<PAGE>
payment in full of the Capital Adjustment, then such remaining assets shall be
distributed ratably to the holders of Common Stock.
6.3 In the event the Corporation shall (i) declare any dividend on
Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding
Common Stock, or (iii) combine the outstanding Common Stock into a smaller
number of shares, then in each such case the Adjustment Number in effect
immediately prior to such event shall be adjusted by multiplying such Adjustment
Number by a fraction the numerator of which is the number of shares of Common
Stock outstanding immediately after such event and the denominator of which is
the number of shares of Common Stock that were outstanding immediately prior to
such event.
Section 7. Consolidation, Merger, etc. In case the Corporation shall
---------------------------
enter into any consolidation, merger, combination or other transaction in which
the shares of Common Stock are exchanged for or changed into other stock or
securities, cash and/or any other property, then in any such case the shares of
Series RP Preferred Stock shall at the same time be similarly exchanged or
changed in an amount per share equal to the Adjustment Number (as appropriately
adjusted as set forth in Section 6.3 to reflect such events as stock splits,
stock dividends and recapitalizations with respect to the Common Stock) times
the aggregate amount of stock, securities, cash and/or any other property
(payable in kind), as the case may be, into which or for which each share of
Common Stock is changed or exchanged.
Section 8. No Redemption. The shares of Series RP Preferred Stock shall
-------------
not be redeemable.
Section 9. Ranking. The Series RP Preferred Stock shall rank junior to
-------
all other series of the Corporation's Preferred Stock as to the payment of
dividends and the distribution of assets, unless the terms of any such other
series shall provide otherwise.
Section 10. Amendment. The Amended and Restated Articles of Incorporation
---------
of the Corporation shall not be further amended in any manner that would
materially alter or change the powers, preferences or special rights of the
Series RP Preferred Stock so as to affect them adversely without the affirmative
vote of the holders of a majority or more of the outstanding shares of Series RP
Preferred Stock, voting separately as a class.
Section 11. Fractional Shares. Series RP Preferred Stock may be issued in
-----------------
fractions of a share which shall entitle the holder, in proportion to such
holder's fractional shares, to exercise voting rights, receive dividends,
participate in distributions and have the benefit of all other rights of holders
of Series RP Preferred Stock.
RESOLVED, that the proper officers of the Corporation be, and each of them
hereby is, authorized to execute a Certificate of Designation with respect to
the Series RP Preferred Stock pursuant to Section 23B.06.020 of the Washington
Business Corporation Act and to take all appropriate action to cause such
Certificate to become effective, including, but not limited to, the filing and
recording of such Certificate with and/or by the Secretary of State of the State
of Washington.
[REST OF PAGE INTENTIONALLY LEFT BLANK]
6
<PAGE>
IN WITNESS WHEREOF, I have executed and subscribed to this Certificate and
do affirm the foregoing as true under penalty of perjury this 16th day of
December, 1999.
_________________________________
Secretary
7
<PAGE>
Exhibit 10.10
SEATTLE FILMWORKS, INC.
1999 EMPLOYEE STOCK OPTION PLAN
1. PURPOSES
1.1 The purpose of the Seattle Filmworks, Inc. 1999 Employee Stock Option
Plan (the "Plan") is to enhance the long-term shareholder value of Seattle
Filmworks, Inc., a Washington corporation (the "Company"), by offering
opportunities to employees, persons to whom offers of employment have been
extended, consultants, agents, advisors and independent contractors of the
Company and its Subsidiaries (as defined in Section 2) to participate in the
Company's growth and success, and to encourage them to remain in the service of
the Company and its Subsidiaries and to acquire and maintain stock ownership in
the Company.
2. DEFINITIONS
For purposes of the Plan, the following terms shall be defined as set forth
below:
2.1 Acquired Entities.
----------------------
"Acquired Entities" has the meaning given in Section 6.
2.2 Acquisition Transaction.
----------------------------
"Acquisition Transaction" has the meaning given in Section 6.
2.3 Board.
----------
"Board" means the Board of Directors of the Company.
2.4 Cause.
----------
"Cause" means dishonesty, fraud, misconduct, disclosure of confidential
information, conviction of, or a plea of guilty or no contest to, a felony under
the laws of the United States or any state thereof, habitual absence from work
for reasons other than illness, intentional conduct which causes significant
injury to the Company, habitual abuse of alcohol or a controlled substance, in
each case as determined by the Plan Administrator, and its determination shall
be conclusive and binding.
2.5 Change in Control.
----------------------
"Change in Control" means (i) the consummation of a merger or consolidation
of the Company with or into another entity or any other corporate
reorganization, if more
<PAGE>
than 50% of the combined voting power of the continuing or surviving entity's
securities outstanding immediately after such merger, consolidation or other
reorganization is owned by persons who were not shareholders of the Company
immediately prior to such merger, consolidation or other reorganization or (ii)
the sale, transfer or other disposition of all or substantially all of the
Company's assets. A transaction shall not constitute a Change in Control if its
sole purpose is to change the state of the Company's incorporation or to create
a holding company that will be owned in substantially the same proportions by
the persons who held the Company's securities immediately before such
transaction.
2.6 Common Stock.
-----------------
"Common Stock" means the common stock, par value $.01, of the Company.
2.7 Disability.
---------------
"Disability" means a medically determinable mental or physical impairment
or condition of the Holder which is expected to result in death or which has
lasted or is expected to last for a continuous period of 12 months or more and
which causes the Holder to be unable, in the opinion of the Plan Administrator
on the basis of evidence acceptable to it, to perform his or her duties for the
Company. Upon making a determination of Disability, the Plan Administrator
shall, for purposes of the Plan, determine the date of the Holder's termination
of employment, service or contractual relationship.
2.8 Exchange Act.
-----------------
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
2.9 Fair Market Value.
----------------------
"Fair Market Value" shall be as established in good faith by the Plan
Administrator or (a) if the Common Stock is listed on the Nasdaq National
Market, the closing sales price for the Common Stock as reported by the Nasdaq
National Market for a single trading day or (b) if the Common Stock is listed on
the New York Stock Exchange or the American Stock Exchange, the closing sales
price for the Common Stock as such price is officially quoted in the composite
tape of transactions on such exchange for a single trading day. If there is no
such reported price for the Common Stock for the date in question, then such
price on the last preceding date for which such price exists shall be
determinative of Fair Market Value.
2
<PAGE>
2.10 Grant Date.
----------------
"Grant Date" means the date the Plan Administrator adopted the granting
resolution or a later date designated in a resolution of the Plan Administrator
as the date an Option is to be granted.
2.11 Holder.
------------
"Holder" means the Participant to whom an Option is granted or the personal
representative of a Holder who has died.
2.12 Option.
------------
"Option" means the right to purchase Common Stock granted under Section 7.
Options granted under the Plan are not intended to be "incentive stock options"
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended from time to time.
2.13 Option Shares.
-------------------
"Option Shares" means the shares of Common Stock issuable upon a Holder's
exercise of an Option granted under the Plan.
2.14 Participant.
-----------------
"Participant" means an individual who is a Holder of an Option or, as the
context may require, any employee, consultant, agent, advisor or independent
contractor of the Company or a Subsidiary who has been designated by the Plan
Administrator, subject to the limitations in Section 5, as eligible to
participate in the Plan.
2.15 Plan Administrator.
------------------------
"Plan Administrator" means the Board or any committee designated to
administer the Plan under Section 3.1.
2.16 Securities Act.
--------------------
"Securities Act" means the Securities Act of 1933, as amended.
2.17 Subsidiary.
----------------
"Subsidiary," except as expressly provided otherwise, means any entity that
is directly or indirectly controlled by the Company or in which the Company has
a significant ownership interest, as determined by the Plan Administrator, and
any entity that may become a direct or indirect parent of the Company.
3
<PAGE>
3. ADMINISTRATION
3.1 Plan Administrator.
-----------------------
The Plan shall be administered by the Board or a committee or committees
(which term includes subcommittees) appointed by, and consisting of two or more
members of, the Board. Any such committee shall have the powers and authority
vested in the Board hereunder (including the power and authority to interpret
any provision of the Plan or of any Option). The Board, or any committee
thereof appointed to administer the Plan, is referred to herein as the "Plan
Administrator." The Board or Plan Administrator may delegate the responsibility
for administering the Plan with respect to designated classes of eligible
Participants to one or more senior executive officers or committees thereof, the
members of which need not be members of the Board, subject to such limitations
as the Board deems appropriate. Committee members shall serve for such term as
the Board may determine, subject to removal by the Board at any time.
3.2 Administration and Interpretation by the Plan Administrator.
----------------------------------------------------------------
Except for the terms, conditions and limitations explicitly set forth in
the Plan, the Plan Administrator shall have exclusive authority, in its absolute
discretion, to determine all matters relating to Options under the Plan,
including the selection of individuals to be granted Options, the number of
shares of Common Stock subject to an Option, all terms, conditions, restrictions
and limitations, if any, of an Option and the terms of any instrument that
evidences the Option. The Plan Administrator shall also have exclusive
authority to interpret the Plan and may from time to time adopt, change and
rescind rules and regulations of general application for the Plan's
administration. This authority shall include the sole authority to correct any
defect, supply any omission or reconcile any inconsistency in this Plan and make
all other determinations necessary or advisable for the administration of the
Plan and do everything necessary or appropriate to administer the Plan. The
Plan Administrator's interpretation of the Plan and its rules and regulations,
and all actions taken and determinations made by the Plan Administrator pursuant
to the Plan, shall be conclusive and binding on all parties involved or
affected. The Plan Administrator may delegate administrative duties to such of
the Company's officers as it so determines.
4. STOCK SUBJECT TO THE PLAN
4.1 Authorized Number of Shares.
--------------------------------
Subject to adjustment from time to time as provided in Section 9.1, a
maximum of 800,000 shares of Common Stock shall be available for issuance under
the Plan. Shares issued under the Plan shall be drawn from authorized and
unissued shares.
4
<PAGE>
4.2 Reuse of Shares.
--------------------
Any shares of Common Stock that have been made subject to an Option that
cease to be subject to the Option (other than by reason of exercise or payment
of the Option) shall again be available for issuance in connection with future
grants of Options under the Plan. Also, upon a stock-for-stock exercise only
the net number of shares will be deemed to have been used under this Plan.
5. ELIGIBILITY
Options may be granted under the Plan to those employees, consultants,
agents, advisors and independent contractors who provide services to the Company
and its Subsidiaries as the Plan Administrator from time to time selects;
provided that no individual who is an officer or director of the Company may be
granted Options under the Plan.
6. ACQUIRED COMPANY OPTIONS
Notwithstanding anything in the Plan to the contrary, but subject to the
limitations in Section 5, the Plan Administrator may grant Options under the
Plan in substitution for awards issued under other plans, or assume under the
Plan options issued under other plans, if the other plans are or were plans of
other acquired entities ("Acquired Entities") (or the parent of the Acquired
Entity) and the new Option is substituted, or the old Option is assumed, by
reason of a merger, consolidation, acquisition of property or of stock,
reorganization or liquidation (an "Acquisition Transaction"). Such Options
shall not reduce the number of shares of Common Stock available for issuance
pursuant to this Plan. If a written agreement pursuant to which an Acquisition
Transaction is completed is approved by the Board and said agreement sets forth
the terms and conditions of the substitution for or assumption of outstanding
awards of the Acquired Entity, said terms and conditions shall be deemed to be
the action of the Plan Administrator without any further action by the Plan
Administrator, except as may be required for compliance with Rule 16b-3 under
the Exchange Act, and the persons holding such Options shall be deemed to be
Participants and Holders.
7. STOCK OPTIONS
7.1 Grant of Options. The Plan Administrator is authorized under the
---------------------
Plan, in its sole discretion, to grant Options to those individuals who meet the
eligibility requirements in Section 5.
7.2 Option Exercise Price.
--------------------------
5
<PAGE>
The exercise price for shares purchased under an Option shall be as
determined by the Plan Administrator, but shall not be less than 100% of the
Fair Market Value of the Common Stock on the Grant Date.
7.3 Term of Options.
--------------------
The term of each Option shall be as established by the Plan Administrator
or, if not so established, shall be five (5) years from the Grant Date.
7.4 Exercise of Options.
------------------------
The Plan Administrator shall establish and set forth in each
instrument that evidences an Option the time at which or the installments in
which the Option shall become exercisable. If not so established in the
instrument evidencing the Option or otherwise set at the time of grant, the
Option will be subject to the following: (a) 25% of the Option shall vest and
become exercisable one year after the Grant date and the balance of the Option
shall vest and become exercisable in a series of twelve (12) successive
quarterly installments for each additional quarter thereafter; and (b) in no
event shall any additional Option Shares vest after termination of Holder's
employment by or service to the Company.
To the extent that the right to purchase shares has accrued thereunder, an
Option may be exercised from time to time by written notice to the Company, in
accordance with procedures established by the Plan Administrator, setting forth
the number of shares with respect to which the Option is being exercised and
accompanied by payment in full as described in Section 7.5. An Option may not
be exercised as to less than 100 shares at any one time (or the lesser number of
remaining shares covered by the Option).
7.5 Payment of Exercise Price.
------------------------------
The exercise price for shares purchased under an Option shall be paid in
full to the Company by delivery of consideration equal to the product of the
Option exercise price and the number of shares purchased. Such consideration
must be paid in cash or check (unless, at the time of exercise, the Plan
Administrator determines not to accept a personal check), except that the Plan
Administrator, in its sole discretion, may, either at the time the Option is
granted or at any time before it is exercised and subject to such limitations as
the Plan Administrator may determine, authorize payment in cash and/or one or
more of the following alternative forms: (a) tendering (either actually or, if
and so long as the Common Stock is registered under Section 12(b) or 12(g) of
the Exchange Act, by attestation) Common Stock already owned by the Holder for
at least six months (or any shorter period necessary to avoid a charge to the
Company's earnings for financial reporting purposes) having a Fair Market Value
on the day prior to the exercise date equal to the aggregate Option exercise
price; (b) if and so long as the Common Stock is
6
<PAGE>
registered under Section 12(b) or 12(g) of the Exchange Act, delivery of a
properly executed exercise notice, together with irrevocable instructions, to
(i) a third party designated by the Company to deliver promptly to the Company
the aggregate amount of sale or loan proceeds to pay the Option exercise price
and (ii) the Company to deliver the certificates for such purchased shares
directly to such third party, all in accordance with the regulations of the
Federal Reserve Board; or (c) such other consideration as the Plan Administrator
may permit.
7.6 Post-Termination Exercises.
-------------------------------
In case of termination of the Holder's employment or services other than by
reason of death or Cause, the Option shall be exercisable, to the extent of the
number of shares purchasable by the Holder at the date of such termination, only
(a) within one year if the termination of the Holder's employment or services
are coincident with Disability or (b) within three months after the date the
Holder ceases to be an employee, consultant, agent, advisor or independent
contractor of the Company or a Subsidiary if termination of the Holder's
employment or services is for any reason other than death or Disability, but in
no event later than the remaining term of the Option. Any Option exercisable at
the time of the Holder's death may be exercised, to the extent of the number of
shares purchasable by the Holder at the date of the Holder's death, by the
personal representative of the Holder's estate entitled thereto at any time or
from time to time within one year after the date of death, but in no event later
than the remaining term of the Option. In case of termination of the Holder's
employment or services for Cause, the Option shall automatically terminate upon
first discovery by the Company of any reason for such termination and the Holder
shall have no right to purchase any Shares pursuant to such Option, unless the
Plan Administrator determines otherwise. If a Holder's employment or services
with the Company are suspended pending an investigation of whether the Holder
shall be terminated for Cause, all the Holder's rights under any Option likewise
shall be suspended during the period of investigation.
A transfer of employment or services between or among the Company and its
Subsidiaries shall not be considered a termination of employment or services.
The effect of a Company-approved leave of absence or short-term break in service
on the terms and conditions of an Option shall be determined by the Plan
Administrator, in its sole discretion.
8. ASSIGNABILITY
Except as otherwise specified or approved by the Plan Administrator at the
time of grant or any time prior to its exercise, no Option granted under the
Plan may be assigned, pledged or transferred by the Holder other than by will or
by the laws of descent and distribution, and during the Holder's lifetime, such
Options may be exercised only by the
7
<PAGE>
Holder. Notwithstanding the foregoing, the Plan Administrator, in its sole
discretion, may permit such assignment, transfer and exercisability and may
permit a Holder of such Option to designate a beneficiary who may exercise the
Option or receive compensation under the Option after the Holder's death;
provided, however, that (i) any Option so assigned or transferred shall be
subject to all the same terms and conditions contained in the instrument
evidencing the Option, (ii) the original Holder shall remain subject to
withholding taxes upon exercise, (iii) any subsequent transfer of an Option
shall be prohibited and (iv) the events of termination of employment or
contractual relationship set forth in subsection 7.6 shall continue to apply
with respect to the original transferor-Holder.
9. ADJUSTMENTS
9.1 Adjustment of Shares.
-------------------------
In the event that, at any time or from time to time, a stock dividend,
stock split, spin-off, combination or exchange of shares, recapitalization,
merger, consolidation, distribution to shareholders other than a normal cash
dividend, or other change in the Company's corporate or capital structure
results in (a) the outstanding shares, or any securities exchanged therefor or
received in their place, being exchanged for a different number or class of
securities of the Company or of any other corporation or (b) new, different or
additional securities of the Company or of any other corporation being received
by the holders of shares of Common Stock of the Company, then the Plan
Administrator, in its sole discretion, shall make such equitable adjustments as
it shall deem appropriate in the circumstances in the maximum number and class
of securities subject to the Plan as set forth in Section 4.1 and the number and
class of securities that are subject to any outstanding Option and the per share
price of such securities, without any change in the aggregate price to be paid
therefor. The determination by the Plan Administrator as to the terms of any of
the foregoing adjustments shall be conclusive and binding.
9.2 Dissolution, Liquidation or Change in Control Transactions.
---------------------------------------------------------------
(a) In the event of the proposed dissolution or liquidation of the
Company, the Company shall notify each Holder at least fifteen (15) days prior
to such proposed action. To the extent not previously exercised, all Options
will terminate immediately prior to the consummation of such proposed action.
(b) If, in connection with a Change in Control, an Option does not
remain outstanding, and either such Option is not assumed by the surviving
entity or its parent, or the surviving entity or its parent does not substitute
options with substantially the same terms for such Option, such Option shall,
unless the applicable agreement representing an Option provides otherwise, or
unless the Plan Administrator determines
8
<PAGE>
otherwise in its sole and absolute discretion, become exercisable in full,
whether or not the vesting requirements set forth in the Option Agreement have
been satisfied, for a period prior to the effective date of such Change in
Control of a duration specified by the Plan Administrator, and thereafter the
Option shall terminate.
(c) Notwithstanding Subsection (b) above, if the Company and the other
party to the transaction constituting a Change in Control agree that such
transaction is to be treated as a "pooling of interests" for financial reporting
purposes, and if the Company's independent public accountants and such other
party's independent public accountants separately determine in good faith that
the transaction constituting a Change in Control would qualify for treatment of
as a "pooling of interests" but for the acceleration of vesting provided for in
Subsection (b) above, then the acceleration of exercisability shall not occur to
the extent that the Company's independent public accountants and such other
party's independent public accountants separately determine in good faith that
such acceleration would preclude the use of "pooling of interests" accounting
for such transaction.
9.3 Further Adjustment of Options.
----------------------------------
Subject to the preceding Section 9.2, the Plan Administrator shall have the
discretion, exercisable at any time before a sale, merger, consolidation,
reorganization, dissolution, liquidation or Change in Control of the Company, as
defined by the Plan Administrator, to take such further action as it determines
to be necessary or advisable, and fair and equitable to Participants, with
respect to Options. Such authorized action may include (but shall not be
limited to) establishing, amending or waiving the type, terms, conditions or
duration of, or restrictions on, Options so as to provide for earlier, later,
extended or additional time for exercise, payment or settlement and other
modifications, and the Plan Administrator may take such actions with respect to
all Participants, to certain categories of Participants or only to individual
Participants. The Plan Administrator may take such actions before or after
granting Options to which the action relates and before or after any public
announcement with respect to such sale, merger, consolidation, reorganization,
dissolution, liquidation or Change in Control that is the reason for such
action. Without limiting the generality of the foregoing, if the Company is a
party to a merger or consolidation, outstanding Options shall be subject to the
agreement of merger or consolidation. Such agreement, without the Holder's
consent, may provide for:
(a) the continuation of such outstanding Option by the Company (if the
Company is the surviving corporation);
(b) the assumption of the Plan and some or all outstanding Options by
the surviving corporation or its parent;
9
<PAGE>
(c) the substitution by the surviving corporation or its parent of
Options with substantially the same terms for such outstanding Options; or
(d) the cancellation of such outstanding Options with or without
payment of any consideration.
9.4 Limitations.
----------------
The grant of Options will in no way affect the Company's right to adjust,
reclassify, reorganize or otherwise change its capital or business structure or
to merge, consolidate, dissolve, liquidate or sell or transfer all or any part
of its business or assets.
9.5 Fractional Shares.
----------------------
In the event of any adjustment in the number of shares covered by any
Option, any fractional shares resulting from such adjustment shall be
disregarded and each such Option shall cover only the number of full shares
resulting from such adjustment.
10. WITHHOLDING
The Company may require the Holder to pay to the Company the amount of any
withholding taxes that the Company is required to withhold with respect to the
grant, exercise, payment or settlement of any Option. In such instances, the
Plan Administrator may, in its discretion and subject to the Plan and applicable
law, permit the Holder to satisfy withholding obligations, in whole or in part,
by paying cash. The Company may deduct from any Option any other amounts due
from the Participant to the Company or a Subsidiary.
11. AMENDMENT AND TERMINATION OF PLAN
11.1 Amendment of Plan.
-----------------------
The Plan may be amended by the Board in such respects as it shall deem
advisable including, without limitation, such modifications or amendments as are
necessary to maintain compliance with applicable statutes, rules or regulations.
The Board may condition the effectiveness of any amendment on the receipt of
shareholder approval at such time and in such manner as the Board may consider
necessary for the Company to comply with or to avail the Company, the Holders or
both of the benefits of any securities, tax, market listing or other
administrative or regulatory requirement which the Board determines to be
desirable. Whenever shareholder approval is sought, and unless required
otherwise by applicable law or exchange requirements, the proposed action shall
require the affirmative vote of holders of a majority of the shares present,
entitled to vote
10
<PAGE>
and voting on the matter without including abstentions or broker non-votes in
the denominator.
11.2 Termination Of Plan.
-------------------------
The Company's shareholders or the Board may suspend or terminate the Plan
at any time. The Plan will have no fixed expiration date.
12. GENERAL
12.1 Option Agreements.
-----------------------
Options granted under the Plan shall be evidenced by a written agreement
which shall contain such terms, conditions, limitations and restrictions as the
Plan Administrator shall deem advisable and which are not inconsistent with the
Plan.
12.2 Continued Employment or Services; Rights In Options.
---------------------------------------------------------
None of the Plan, participation in the Plan as a Participant or any action
of the Plan Administrator taken under the Plan shall be construed as giving any
Participant or employee of the Company any right to be retained in the employ of
the Company or limit the Company's right to terminate the employment or services
of the Participant.
12.3 Registration; Certificates For Shares.
-------------------------------------------
The Company shall be under no obligation to any Participant to register for
offering or resale or to qualify for exemption under the Securities Act, or to
register or qualify under state securities laws, any shares of Common Stock,
security or interest in a security paid or issued under, or created by, the
Plan, or to continue in effect any such registrations or qualifications if made.
The Company may issue certificates for shares with such legends and subject to
such restrictions on transfer and stop-transfer instructions as counsel for the
Company deems necessary or desirable for compliance by the Company with federal
and state securities laws.
Inability of the Company to obtain, from any regulatory body having
jurisdiction, the authority deemed by the Company's counsel to be necessary for
the lawful issuance and sale of any shares hereunder or the unavailability of an
exemption from registration for the issuance and sale of any shares hereunder
shall relieve the Company of any liability in respect of the nonissuance or sale
of such shares as to which such requisite authority shall not have been
obtained.
12.4 No Rights As A Shareholder.
--------------------------------
11
<PAGE>
No Option shall entitle the Holder to any cash dividend, voting or other
right of a shareholder unless and until the date of issuance under the Plan of
the shares that are the subject of such Option, free of all applicable
restrictions.
12.5 No Trust Or Fund.
----------------------
The Plan is intended to constitute an "unfunded" plan. Nothing contained
herein shall require the Company to segregate any monies or other property, or
shares of Common Stock, or to create any trusts, or to make any special deposits
for any immediate or deferred amounts payable to any Participant, and no
Participant shall have any rights that are greater than those of a general
unsecured creditor of the Company.
12.6 Severability.
------------------
If any provision of the Plan or any Option is determined to be invalid,
illegal or unenforceable in any jurisdiction, or as to any person, or would
disqualify the Plan or any Option under any law deemed applicable by the Plan
Administrator, such provision shall be construed or deemed amended to conform to
applicable laws, or, if it cannot be so construed or deemed amended without, in
the Plan Administrator's determination, materially altering the intent of the
Plan or the Option, such provision shall be stricken as to such jurisdiction,
person or Option, and the remainder of the Plan and any such Option shall remain
in full force and effect.
13. EFFECTIVE DATE
The Plan's effective date is the date on which it is adopted by the Board.
Original Plan adopted by the Board on October 20, 1999.
-----------------
12
<PAGE>
PLAN ADOPTION AND AMENDMENTS/ADJUSTMENTS
----------------------------------------
<TABLE>
<CAPTION>
Date of
Adoption/
Amendment/
Adjustment Section Effect of Amendment
---------- ------- -------------------
<S> <C> <C>
Adoption by Board on -- -- ______, ____
________, 1999
</TABLE>
13
<PAGE>
Exhibit 10.13
SECOND AMENDMENT TO CREDIT AGREEMENT
THIS SECOND AMENDMENT TO CREDIT AGREEMENT (this "Amendment") is entered
into as of June 30, 1999, by and between SEATTLE FILMWORKS, INC., a Washington
corporation, OPTICOLOR, INC., a Washington corporation, and SEATTLE FILMWORKS
MANUFACTURING COMPANY, INC., 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 by that certain First Amendment to Credit Agreement
dated as of February 24, 1998 and extended by that certain letter extension
dated as of April 1, 1999, and as the same may be further 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 "June 30, 1999" as the
last day on which Bank will make advances under the Line of Credit, and by
substituting for said date "June 30, 2000," 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. The parties acknowledge and agree that no conversion of the Line of
Credit balance has occurred under Section 1.1.(d). Section 1.1.(d) is hereby
deleted in its entirety, without substitution therefor, together with Exhibit B
and all references in the Credit Agreement to the "Converted Term Loan" and the
"Converted Term Loan Note."
<PAGE>
3. Section 1.1.(e)(iii) is hereby deleted in its entirety, and the
following substituted therefor:
"(iii) The term "Permitted Acquisition" means an
Acquisition in any given fiscal year which meets the
following conditions: The aggregate consideration paid or to
be paid in the Acquisition for the assets or business to be
acquired from the Target, or the stock, partnership
interests or membership interests of the Target (whether
paid or to be paid in the form of cash, stock, contingent or
non-contingent liabilities assumed, or other consideration)
(collectively, "Aggregate Consideration") shall not, when
combined with (i) all such consideration paid or to be paid
with respect to all other Permitted Acquisitions that have
been consummated in such fiscal year as of the date of the
proposed Acquisition and (ii) the aggregate of all other
fixed asset and capital asset investments by Borrowers in
such fiscal year as of the date of the proposed Acquisition,
does not exceed the greater of (i) $9,000,000.00, 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 Acquisition shall be
considered a Permitted Acquisition at any time that Parent
Company is delinquent in filing its annual or quarterly
report on Form 10-Q or Form 10-K with the SEC."
4. Section 4.3.(a) is hereby amended by deleting the words "...a
consolidated and consolidating financial statement..." in the second line
thereof and substituting therefor the words "...audited consolidated financial
statements...".
5. Sections 4.8.(a) and (b) are hereby deleted in their entirety, and the
following substituted therefor:
"(a) Net income after provision for taxes of not less
than $1.00 on a trailing four-quarter basis, determined as
of each fiscal quarter end (excluding from each such
computation, the amortization expense associated with
certain capitalized
-2-
<PAGE>
Acquisition costs in the amount of, at fiscal year end September 26,
1998, $16,800,000.00).
(b) Net Worth measured quarterly at the end of each fiscal
quarter, not less than $28,000,000.00, with "Net Worth" defined as
total stockholders' equity."
6. The following is hereby added to the Credit Agreement as Section
4.8.(e):
"(e) Quick Ratio not at any time less than 1.3 to 1.0,
with "Quick Ratio" defined as the aggregate of unrestricted
cash, unrestricted marketable securities and receivables
convertible into cash divided by total current liabilities."
7. The following is hereby added to the Credit Agreement as Section 4.11.:
"SECTION 4.11. YEAR 2000 COMPLIANCE. Perform all acts
reasonably necessary to ensure that (a) Borrower and any
business in which Borrower holds a substantial interest, and
(b) all customers, suppliers and vendors that are material
to Borrower's business, become Year 2000 Compliant in a
timely manner. Such acts shall include, without limitation,
performing a comprehensive review and assessment of all of
Borrower's systems and adopting a detailed plan, with
itemized budget, for the remediation, monitoring and testing
of such systems. As used herein, "Year 2000 Compliant" shall
mean, in regard to any entity, that all software, hardware,
firmware, equipment, goods or systems utilized by or
material to the business operations or financial condition
of such entity, will properly perform date sensitive
functions before, during and after the year 2000. Borrower
shall, immediately upon request, provide to Bank such
certifications or other evidence of Borrower's compliance
with the terms hereof as Bank may from time to time
require."
8. Section 5.2. is hereby deleted in its entirety, and the following
substituted therefor:
-3-
<PAGE>
"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 paid by Borrowers in Permitted Acquisitions
(iii) in such fiscal year as of such date, exceeds the
greater of (i) $9,000,000.00, 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."
9. Section 5.3. is hereby amended by deleting the reference to the amount
"$500,000.00" in the first sentence thereof and substituting therefor the amount
"$1,300,000.00".
10. 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.
11. 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.
12. 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.
-4-
<PAGE>
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 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/ L. Cashmore Bond By: /s/Donald Ralston
Donald Ralston
Title: CFO/Treasurer Vice President
OPTICOLOR, INC.
By: /s/ L. Cashmore Bond
Title: CFO/Tresurer
SEATTLE FILMWORKS MANUFACTURING COMPANY
By: /s/ L. Cashmore Bond
Title: CFO/Treasurer
-5-
<PAGE>
Exhibit 10.24
WAREHOUSE
SUBLEASE
(OPTICOLOR, INC.)
THIS SUBLEASE is between SEATTLE FILMWORKS, INC., a Washington corporation
("Parent") and OPTICOLOR, INC., a Washington corporation ("Subsidiary").
RECITALS
WHEREAS, Parent is a party to that certain U.S. Government Lease of Real
Property, dated September 22, 1995, between Parent and the United States of
America ("Lessor"), as amended by the Supplemental Lease Agreement, dated
January 1, 1996, between Parent and Lessor (collectively, the "Lease");
WHEREAS, pursuant to the Lease, Parent currently leases approximately
80,000 square feet of enclosed warehouse space, located in the northern most
portion of the 1202 Warehouse, at column markers C46 south to F33 north, west to
F33 north, south to G 36 inclusive, Federal Center South, 4735 E. Marginal Way
South, Seattle, WA 98134 (the "Leased Real Property");
WHEREAS, Subsidiary is a wholly-owned subsidiary of Parent; and
WHEREAS, Parent desires to sublease the portion of the Leased Real Property
indicated on Exhibit A hereto (the "Subleased Real Property") to Subsidiary and
---------
Subsidiary desires to sublease the Subleased Real Property on the terms and
conditions set forth herein.
NOW, THEREFORE, the parties agree as follows:
AGREEMENT
1. Sublease. Parent hereby subleases to Subsidiary and Subsidiary hereby
--------
subleases from Parent the Subleased Real Property.
2. Term. The term of this Sublease is coextensive with the terms of the
----
Lease, provided, however, that Parent may terminate this Sublease term as of the
end of any calendar month by giving Subsidiary notice of termination at least 60
days prior to the effective date of termination; on the effective date of
termination, Subsidiary shall return to Parent possession of the Subleased Real
Property in as good condition as when delivered to Subsidiary under this
Sublease.
3. Lease Obligations. This Sublease is subject and subordinate to the
-----------------
Lease, and will become effective when and if Lessor consents. Provisions of the
Lease control to the extent, if any, inconsistent with this Sublease. The
Subleased Real Property and rights of Subsidiary as provided in this Sublease
are intended to include no more or less than whatever rights Subsidiary has
under the Lease. Subsidiary agrees to comply with all provisions of the Lease.
Subsidiary and Parent each agree not to cause the Lease to be in default.
Subsidiary agrees to reimburse Parent to the extent, if any, Subsidiary causes
Parent to incur additional rent or other expenses under provisions of the Lease
except for any increases in rent or other amounts arising from acts beyond the
control of Subsidiary.
<PAGE>
4. Rent. Parent agrees to pay to Lessor all rent when due under the Lease
----
during the term of this Sublease. Subsidiary agrees to pay to Parent subrent on
the first day of each month during the term of this Sublease of $500 per month.
5. Parent Warranties. Parent warrants that the Lease is now in full force
-----------------
and effect, no default exists on the part of Parent under the Lease, the
Subsidiary will have and quietly enjoy possession of the Subleased Real Property
for the term of this Sublease as long Subsidiary is not in default under this
Sublease or the Lease.
6. Subsidiary Indemnity. Except for Parent's obligation to pay rent under
--------------------
paragraph 4 above, Subsidiary agrees to indemnify, defend and hold harmless
Parent and all of its officers, directors, employees and agents from and against
all claims, suits, actions, demands, damages, obligations, liabilities, costs,
taxes and expenses (including attorney's fees) arising during the Sublease term
under the Lease or from any act or omission or real property damage or injury to
or death of any person on or in or to the Subleased Real Property arising during
the Sublease term. Subsidiary assumes all risk of loss, damage, destruction,
alteration or other matter affecting personal real property and equipment on or
in the Subleased Real Property.
7. Parent Indemnity. Except for Subsidiary's obligation to pay rent under
----------------
paragraph 4 above, Parent agrees to indemnify, defend and hold harmless
Subsidiary and all of its officers, directors, employees and agents from and
against all claims, suits, actions, demands, damages, obligations, liabilities,
costs, taxes and expenses (including attorney's fees) arising prior to the
Sublease term under the Lease or from any act or omission or real property
damage or injury to or death of any person on or in or to the Subleased Real
Property occurring prior to the Sublease term.
8. Notices. All notices and consents under this Sublease will be
-------
ineffective unless in writing, delivered in person or mailed by certified or
registered mail return receipt requested postage prepaid, to an officer of the
receiving party at its address below or to such other address as the receiving
party may notify the sender beforehand referring to this Sublease, and will be
deemed given when so delivered if delivered or three days after placed in the
mail if so mailed.
9. General. Each party is an independent contractor, no party is an
-------
agent of any other party, and no party has any right to bind or obligate any
other party. This Agreement binds and inures to the benefit of the parties,
their heirs, personal representatives, successors and assigns; except that no
party may assign or delegate any right or duty under this Agreement without the
prior written consent of all others. If any provision of this Agreement is held
invalid by a court of competent jurisdiction, all other provisions will remain
in fully force and effect. This Agreement is governed by and will be
interpreted, construed and enforced in accordance with all laws of the State of
Washington. Headings are for convenience only, and do not affect, limit or
control the meaning, effect or application of any provision of this Agreement.
No consent to or waiver of any breach or default under or affected in any way by
this Agreement will be deemed a consent or waiver of any other right,
obligation, breach or default. This Agreement may be executed in two or more
counterparts, each of which will be deemed an original and all of which together
will constitute the same agreement whether or not all parties execute each
counterpart.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Sublease as of September
26, 1999.
SEATTLE FILMWORKS, INC.
By: /s/ Loran Cashmore Bond
Its: Chief Financial Officer (Interim)
1260 - 16th Avenue West
Seattle, Washington 98119
OPTICOLOR, INC.
By: /s/ Gary R. Christophersen
Its: President
1260 - 16th Avenue West
Seattle, Washington 98119
<PAGE>
Exhibit 10.25
WAREHOUSE
SUBLEASE
(SEATTLE FILMWORKS MANUFACTURING COMPANY)
THIS SUBLEASE is between SEATTLE FILMWORKS, INC., a Washington corporation
("Parent") and SEATTLE FILMWORKS MANUFACTURING COMPANY, a Washington corporation
("Subsidiary").
RECITALS
WHEREAS, Parent is a party to that certain U.S. Government Lease of Real
Property, dated September 22, 1995, between Parent and the United States of
America ("Lessor"), as amended by the Supplemental Lease Agreement, dated
January 1, 1996, between Parent and Lessor (collectively, the "Lease");
WHEREAS, pursuant to the Lease, Parent currently leases approximately
80,000 square feet of enclosed warehouse space, located in the northern most
portion of the 1202 Warehouse, at column markers C46 south to F33 north, west to
F33 north, south to G 36 inclusive, Federal Center South, 4735 E. Marginal Way
South, Seattle, WA 98134 (the "Leased Real Property");
WHEREAS, Subsidiary is a wholly-owned subsidiary of Parent; and
WHEREAS, Parent desires to sublease the portion of the Leased Real Property
indicated on Exhibit A hereto (the "Subleased Real Property") to Subsidiary and
---------
Subsidiary desires to sublease the Subleased Real Property on the terms and
conditions set forth herein.
NOW, THEREFORE, the parties agree as follows:
AGREEMENT
1. Sublease. Parent hereby subleases to Subsidiary and Subsidiary hereby
--------
subleases from Parent the Subleased Real Property.
2. Term. The term of this Sublease is coextensive with the terms of the
----
Lease, provided, however, that Parent may terminate this Sublease term as of the
end of any calendar month by giving Subsidiary notice of termination at least 60
days prior to the effective date of termination; on the effective date of
termination, Subsidiary shall return to Parent possession of the Subleased Real
Property in as good condition as when delivered to Subsidiary under this
Sublease.
3. Lease Obligations. This Sublease is subject and subordinate to the
-----------------
Lease, and will become effective when and if Lessor consents. Provisions of the
Lease control to the extent, if any, inconsistent with this Sublease. The
Subleased Real Property and rights of Subsidiary as provided in this Sublease
are intended to include no more or less than whatever rights Subsidiary has
under the Lease. Subsidiary agrees to comply with all provisions of the Lease.
Subsidiary and Parent each agree not to cause the Lease to be in default.
Subsidiary agrees to reimburse Parent to the extent, if any, Subsidiary causes
Parent to incur additional rent or other expenses under provisions of the Lease
except
<PAGE>
for any increases in rent or other amounts arising from acts beyond the control
of Subsidiary.
4. Rent. Parent agrees to pay to Lessor all rent when due under the Lease
----
during the term of this Sublease. Subsidiary agrees to pay to Parent subrent on
the first day of each month during the term of this Sublease of $4,500 per
month.
5. Parent Warranties. Parent warrants that the Lease is now in full force
-----------------
and effect, no default exists on the part of Parent under the Lease and the
Subsidiary will have and quietly enjoy possession of the Subleased Real Property
for the term of this Sublease as long Subsidiary is not in default under this
Sublease or the Lease.
6. Subsidiary Indemnity. Except for Parent's obligation to pay rent under
--------------------
paragraph 4 above, Subsidiary agrees to indemnify, defend and hold harmless
Parent and all of its officers, directors, employees and agents from and against
all claims, suits, actions, demands, damages, obligations, liabilities, costs,
taxes and expenses (including attorney's fees) arising during the Sublease term
under the Lease or from any act or omission or real property damage or injury to
or death of any person on or in or to the Subleased Real Property arising during
the Sublease term. Subsidiary assumes all risk of loss, damage, destruction,
alteration or other matter affecting personal real property and equipment on or
in the Subleased Real Property.
7. Parent Indemnity. Except for Subsidiary's obligation to pay rent under
----------------
paragraph 4 above, Parent agrees to indemnify, defend and hold harmless
Subsidiary and all of its officers, directors, employees and agents from and
against all claims, suits, actions, demands, damages, obligations, liabilities,
costs, taxes and expenses (including attorney's fees) arising prior to the
Sublease term under the Lease or from any act or omission or real property
damage or injury to or death of any person on or in or to the Subleased Real
Property occurring prior to the Sublease term.
8. Notices. All notices and consents under this Sublease will be
-------
ineffective unless in writing, delivered in person or mailed by certified or
registered mail return receipt requested postage prepaid, to an officer of the
receiving party at its address below or to such other address as the receiving
party may notify the sender beforehand referring to this Sublease, and will be
deemed given when so delivered if delivered or three days after placed in the
mail if so mailed.
9. General. Each party is an independent contractor, no party is an agent
-------
of any other party, and no party has any right to bind or obligate any other
party. This Agreement binds and inures to the benefit of the parties, their
heirs, personal representatives, successors and assigns; except that no party
may assign or delegate any right or duty under this Agreement without the prior
written consent of all others. If any provision of this Agreement is held
invalid by a court of competent jurisdiction, all other provisions will remain
in fully force and effect. This Agreement is governed by and will be
interpreted, construed and enforced in accordance with all laws of the State of
Washington. Headings are for convenience only, and do not affect, limit or
control the meaning, effect or application of any provision of this Agreement.
No consent to or waiver of any breach or default under or affected in any way by
this Agreement will be deemed a consent or waiver of any other right,
obligation, breach or default. This Agreement may be executed in two or more
counterparts, each of which will be deemed an original and all of which together
will constitute the same agreement whether or not all parties execute each
counterpart.
2
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Sublease as of September
26, 1999.
SEATTLE FILMWORKS, INC.
By: /s/ Gary R. Christophersen
Its: President
1260 - 16th Avenue West
Seattle, Washington 98119
SEATTLE FILMWORKS MANUFACTURING COMPANY
By: /s/ Loran Cashmore Bond
Its: Chief Financial Officer (Interim)
1260 - 16th Avenue West
Seattle, Washington 98119
3
<PAGE>
Exhibit 10.26
1260 - 16TH AVENUE WEST
SUBLEASE
(OPTICOLOR, INC.)
THIS SUBLEASE is between SEATTLE FILMWORKS, INC., a Washington corporation
("Parent") and OPTICOLOR, INC., a Washington corporation ("Subsidiary").
RECITALS
WHEREAS, Parent is a party to that certain Lease Agreement, dated September
10, 1985 between Parent (formerly known as American Passage Marketing
Corporation) and Gilbert David Scherer and Marlyn J. Friedlander (collectively,
"Lessor"), as amended by the First Amendment to Lease, dated April 28, 1989
between Parent and Lessor (collectively, the "Lease");
WHEREAS, pursuant to the Lease, Parent currently leases approximately
60,000 square feet of office and manufacturing space, located at 1260 - 16th
Avenue West, Seattle, Washington (the "Leased Real Property");
WHEREAS, Subsidiary is a wholly-owned subsidiary of Parent; and
WHEREAS, Parent desires to sublease the portion of the Leased Real Property
indicated on Exhibit A hereto (the "Subleased Real Property") to Subsidiary and
---------
Subsidiary desires to sublease the Subleased Real Property on the terms and
conditions set forth herein.
NOW, THEREFORE, the parties agree as follows:
AGREEMENT
1. Sublease. Parent hereby subleases to Subsidiary and Subsidiary hereby
--------
subleases from Parent the Subleased Real Property.
2. Term. The term of this Sublease is coextensive with the terms of the
----
Lease, provided, however, that Parent may terminate this Sublease term as of the
end of any calendar month by giving Subsidiary notice of termination at least 60
days prior to the effective date of termination; on the effective date of
termination, Subsidiary shall return to Parent possession of the Subleased Real
Property in as good condition as when delivered to Subsidiary under this
Sublease.
3. Lease Obligations. This Sublease is subject and subordinate to the
-----------------
Lease, and will become effective when and if Lessor consents. Provisions of the
Lease control to the extent, if any, inconsistent with this Sublease. The
Subleased Real Property and rights of Subsidiary as provided in this Sublease
are intended to include no more or less than whatever rights Subsidiary has
under the Lease. Subsidiary agrees to comply with all provisions of the Lease.
Subsidiary and Parent each agree not to cause the Lease to be in default.
Subsidiary agrees to reimburse Parent to the extent, if any, Subsidiary causes
Parent to incur additional rent or other expenses under provisions of the Lease
except for any increases in rent or other amounts arising from acts beyond the
control of Subsidiary.
<PAGE>
4. Rent. Parent agrees to pay to Lessor all rent when due under the
----
Lease during the term of this Sublease. Subsidiary agrees to pay to Parent
subrent on the first day of each month during the term of this Sublease of $200
per month.
5. Parent Warranties. Parent warrants that the Lease is now in full
-----------------
force and effect, no default exists on the part of Parent under the Lease and
the Subsidiary will have and quietly enjoy possession of the Subleased Real
Property for the term of this Sublease as long Subsidiary is not in default
under this Sublease or the Lease.
6. Subsidiary Indemnity. Except for Parent's obligation to pay rent
--------------------
under paragraph 4 above, Subsidiary agrees to indemnify, defend and hold
harmless Parent and all of its officers, directors, employees and agents from
and against all claims, suits, actions, demands, damages, obligations,
liabilities, costs, taxes and expenses (including attorney's fees) arising
during the Sublease term under the Lease or from any act or omission or real
property damage or injury to or death of any person on or in or to the Subleased
Real Property arising during the Sublease term. Subsidiary assumes all risk of
loss, damage, destruction, alteration or other matter affecting personal real
property and equipment on or in the Subleased Real Property.
7. Parent Indemnity. Except for Subsidiary's obligation to pay rent
----------------
under paragraph 4 above, Parent agrees to indemnify, defend and hold harmless
Subsidiary and all of its officers, directors, employees and agents from and
against all claims, suits, actions, demands, damages, obligations, liabilities,
costs, taxes and expenses (including attorney's fees) arising prior to the
Sublease term under the Lease or from any act or omission or real property
damage or injury to or death of any person on or in or to the Subleased Real
Property occurring prior to the Sublease term.
8. Notices. All notices and consents under this Sublease will be
-------
ineffective unless in writing, delivered in person or mailed by certified or
registered mail return receipt requested postage prepaid, to an officer of the
receiving party at its address below or to such other address as the receiving
party may notify the sender beforehand referring to this Sublease, and will be
deemed given when so delivered if delivered or three days after placed in the
mail if so mailed.
9. General. Each party is an independent contractor, no party is an
-------
agent of any other party, and no party has any right to bind or obligate any
other party. This Agreement binds and inures to the benefit of the parties,
their heirs, personal representatives, successors and assigns; except that no
party may assign or delegate any right or duty under this Agreement without the
prior written consent of all others. If any provision of this Agreement is held
invalid by a court of competent jurisdiction, all other provisions will remain
in fully force and effect. This Agreement is governed by and will be
interpreted, construed and enforced in accordance with all laws of the State of
Washington. Headings are for convenience only, and do not affect, limit or
control the meaning, effect or application of any provision of this Agreement.
No consent to or waiver of any breach or default under or affected in any way by
this Agreement will be deemed a consent or waiver of any other right,
obligation, breach or default. This Agreement may be executed in two or more
counterparts, each of which will be deemed an original and all of which together
will constitute the same agreement whether or not all parties execute each
counterpart.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Sublease as of September
26, 1999.
SEATTLE FILMWORKS, INC.
By: /s/ Loran Cashmore Bond
Its: Chief Financial Officer (Interim)
1260 - 16th Avenue West
Seattle, Washington 98119
OPTICOLOR, INC.
By: /s/ Gary R. Christophersen
Its: President
1260 - 16th Avenue West
Seattle, Washington 98119
<PAGE>
Exhibit 10.27
1260 - 16TH AVENUE WEST
SUBLEASE
(SEATTLE FILMWORKS MANUFACTURING COMPANY)
THIS SUBLEASE is between SEATTLE FILMWORKS, INC., a Washington corporation
("Parent") and Seattle FilmWorks Manufacturing Company, a Washington corporation
("Subsidiary").
RECITALS
WHEREAS, Parent is a party to that certain Lease Agreement, dated September
10, 1985 between Parent (formerly known as American Passage Marketing
Corporation) and Gilbert David Scherer and Marlyn J. Friedlander (collectively,
"Lessor"), as amended by the First Amendment to Lease, dated April 28, 1989
between Parent and Lessor (collectively, the "Lease");
WHEREAS, pursuant to the Lease, Parent currently leases approximately
60,000 square feet of office and manufacturing space, located at 1260 - 16th
Avenue West, Seattle, Washington (the "Leased Real Property");
WHEREAS, Subsidiary is a wholly-owned subsidiary of Parent; and
WHEREAS, Parent desires to sublease the portion of the Leased Real Property
indicated on Exhibit A hereto (the "Subleased Real Property") to Subsidiary and
---------
Subsidiary desires to sublease the Subleased Real Property on the terms and
conditions set forth herein.
NOW, THEREFORE, the parties agree as follows:
AGREEMENT
1. Sublease. Parent hereby subleases to Subsidiary and Subsidiary hereby
--------
subleases from Parent the Subleased Real Property.
2. Term. The term of this Sublease is coextensive with the terms of the
----
Lease, provided, however, that Parent may terminate this Sublease term as of the
end of any calendar month by giving Subsidiary notice of termination at least 60
days prior to the effective date of termination; on the effective date of
termination, Subsidiary shall return to Parent possession of the Subleased
Property in as good condition as when delivered to Subsidiary under this
Sublease.
3. Lease Obligations. This Sublease is subject and subordinate to the
-----------------
Lease, and will become effective when and if Lessor consents. Provisions of the
Lease control to the extent, if any, inconsistent with this Sublease. The
Subleased Real Property and rights of Subsidiary as provided in this Sublease
are intended to include no more or less than whatever rights Subsidiary has
under the Lease. Subsidiary agrees to comply with all provisions of the Lease.
Subsidiary and Parent each agree not to cause the Lease to be in default.
Subsidiary agrees to reimburse Parent to the extent, if any, Subsidiary causes
Parent to incur additional rent or other expenses under provisions of the Lease
except for any increases in rent or other amounts arising from acts beyond the
control of Subsidiary.
<PAGE>
4. Rent. Parent agrees to pay to Lessor all rent when due under the
----
Lease during the term of this Sublease. Subsidiary agrees to pay to Parent
subrent on the first day of each month during the term of this Sublease of
$15,000 per month.
5. Parent Warranties. Parent warrants that the Lease is now in full
-----------------
force and effect, no default exists on the part of Parent under the Lease and
the Subsidiary will have and quietly enjoy possession of the Subleased Real
Property for the term of this Sublease as long Subsidiary is not in default
under this Sublease or the Lease.
6. Subsidiary Indemnity. Except for Parent's obligation to pay rent
--------------------
under paragraph 4 above, Subsidiary agrees to indemnify, defend and hold
harmless Parent and all of its officers, directors, employees and agents from
and against all claims, suits, actions, demands, damages, obligations,
liabilities, costs, taxes and expenses (including attorney's fees) arising
during the Sublease term under the Lease or from any act or omission or real
property damage or injury to or death of any person on or in or to the Subleased
Real Property arising during the Sublease term. Subsidiary assumes all risk of
loss, damage, destruction, alteration or other matter affecting personal real
property and equipment on or in the Subleased Real Property.
7. Parent Indemnity. Except for Subsidiary's obligation to pay rent
----------------
under paragraph 4 above, Parent agrees to indemnify, defend and hold harmless
Subsidiary and all of its officers, directors, employees and agents from and
against all claims, suits, actions, demands, damages, obligations, liabilities,
costs, taxes and expenses (including attorney's fees) arising prior to the
Sublease term under the Lease or from any act or omission or real property
damage or injury to or death of any person on or in or to the Subleased Real
Property occurring prior to the Sublease term.
8. Notices. All notices and consents under this Sublease will be
ineffective unless in writing, delivered in person or mailed by certified or
registered mail return receipt requested postage prepaid, to an officer of the
receiving party at its address below or to such other address as the receiving
party may notify the sender beforehand referring to this Sublease, and will be
deemed given when so delivered if delivered or three days after placed in the
mail if so mailed.
9. General. Each party is an independent contractor, no party is an
-------
agent of any other party, and no party has any right to bind or obligate any
other party. This Agreement binds and inures to the benefit of the parties,
their heirs, personal representatives, successors and assigns; except that no
party may assign or delegate any right or duty under this Agreement without the
prior written consent of all others. If any provision of this Agreement is held
invalid by a court of competent jurisdiction, all other provisions will remain
in fully force and effect. This Agreement is governed by and will be
interpreted, construed and enforced in accordance with all laws of the State of
Washington. Headings are for convenience only, and do not affect, limit or
control the meaning, effect or application of any provision of this Agreement.
No consent to or waiver of any breach or default under or affected in any way by
this Agreement will be deemed a consent or waiver of any other right,
obligation, breach or default. This Agreement may be executed in two or more
counterparts, each of which will be deemed an original and all of which together
will constitute the same agreement whether or not all parties execute each
counterpart.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Sublease as of September
26, 1999.
SEATTLE FILMWORKS, INC.
By: /s/ Gary R. Christophersen
Its: President
1260 - 16th Avenue West
Seattle, Washington 98119
SEATTLE FILMWORKS MANUFACTURING COMPANY
By: /s/ Loran Cashmore Bond
Its: Chief Financial Officer (Interim)
1260 - 16th Avenue West
Seattle, Washington 98119
<PAGE>
Exhibit A
1250 16/th/ Avenue West
First Floor
1260 16/th/ Avenue West
First Floor (except retail and purchasing space)
<PAGE>
EXHIBIT 21
SEATTLE FILMWORKS, INC.
LIST OF SUBSIDIARIES
(as of September 25, 1999)
Seattle FilmWorks Manufacturing Company, a Washington corporation
OptiColor, Inc., a Washington corporation
FilmWorks Express, Inc., a Washington Corporation
<PAGE>
EXHIBIT 23
Consent of Ernst & Young LLP, Independent Auditors
We consent to the incorporation by reference in the Registration Statement
(Form S-8 Number 33-24107) pertaining to the Seattle FilmWorks, Inc. Incentive
Stock Option Plan, the Registration Statement (Form S-8 Number 33-36020)
pertaining to the Seattle FilmWorks, Inc. 1987 Stock Option Plan, the
Registration Statement (Form S-8 Number 33-69530) pertaining to the Seattle
FilmWorks, Inc. 1993 Employee Stock Purchase Plan, and the Registration
Statements (Form S-8 Number 33-81332 and 333-02431) pertaining to the Seattle
FilmWorks, Inc. Amended and Restated Incentive Stock Option Plan and the Amended
and Restated 1987 Stock Option Plan of our report dated November 5, 1999, with
respect to the consolidated financial statements and schedule of Seattle
FilmWorks, Inc. included in its Annual Report (Form 10-K) for the year ended
September 25, 1999.
/S/ ERNST & YOUNG LLP
Seattle, Washington
December 22, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SEATTLE
FILMWORKS INC 1999 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-25-1999
<PERIOD-START> SEP-27-1998
<PERIOD-END> SEP-25-1999
<CASH> 19,514
<SECURITIES> 0
<RECEIVABLES> 1,460<F1>
<ALLOWANCES> 0
<INVENTORY> 6,475
<CURRENT-ASSETS> 29,964
<PP&E> 10,424<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 41,100
<CURRENT-LIABILITIES> 8,258
<BONDS> 0
0
0
<COMMON> 163
<OTHER-SE> 32,158
<TOTAL-LIABILITY-AND-EQUITY> 41,100
<SALES> 0
<TOTAL-REVENUES> 89,613
<CGS> 57,872
<TOTAL-COSTS> 48,036
<OTHER-EXPENSES> (403)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (15,892)
<INCOME-TAX> (5,765)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,127)
<EPS-BASIC> (.62)
<EPS-DILUTED> (.62)
<FN>
<F1>ASSET VALUES REPRESENT NET AMOUNTS
</FN>
</TABLE>
