-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RcHEDMpvrtxyao6/R1UxgJn5S3k0Zd2KdgARKcrllS5ZlKI4cr0GrCcfEU5LA5EJ L+5G7VOnhv8LoIxveu51UA== 0001032210-99-000928.txt : 19990615 0001032210-99-000928.hdr.sgml : 19990615 ACCESSION NUMBER: 0001032210-99-000928 CONFORMED SUBMISSION TYPE: 10-K405/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980926 FILED AS OF DATE: 19990614 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SEATTLE FILMWORKS INC CENTRAL INDEX KEY: 0000791050 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PHOTOFINISHING LABORATORIES [7384] IRS NUMBER: 910964899 STATE OF INCORPORATION: WA FISCAL YEAR END: 0928 FILING VALUES: FORM TYPE: 10-K405/A SEC ACT: SEC FILE NUMBER: 000-15338 FILM NUMBER: 99645751 BUSINESS ADDRESS: STREET 1: 1260 16TH AVE WEST CITY: SEATTLE STATE: WA ZIP: 98119 BUSINESS PHONE: 2062811390 MAIL ADDRESS: STREET 1: 1260 16TH AVENUE WEST CITY: SEATTLE STATE: WA ZIP: 98119 FORMER COMPANY: FORMER CONFORMED NAME: AMERICAN PASSAGE MARKETING CORP DATE OF NAME CHANGE: 19890320 10-K405/A 1 AMENDMENT NO. 1 TO FORM 10-K405 FORM 10-K/A 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 26, 1998 [_] 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. ----------------------- (Exact name of registrant as specified in its charter) Washington 91-0964899 ---------------------------------- ------------------- (State or other jurisdiction (IRS Employer of incorporation or organization) Identification No.) 1260 16th Avenue West, Seattle, WA 98119 - --------------------------------------- --------------------- (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, 1998, there were issued and outstanding 16,242,011 shares of Common Stock, par value $.01 per share. As of November 30, 1998, the aggregate market value of the Registrant's Common Stock held by non-affiliates of the Registrant was $47,041,269, 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 1998 annual meeting of shareholders, to be held on February 9, 1999, are incorporated by reference into Part III of this Annual Report on Form 10-K. Page 1 of 29 Exhibit Index at Page 25 Explanatory Note This 10-K/A is being filed to clarify or expand certain disclosures in Notes A, B, H, and J of Notes to Consolidated Financial Statements set forth in Item 8 of this report. This amendment does not restate reported results for any period. ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 2 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 26, 1998 and September 27, 1997, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended September 26, 1998. Out 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 26, 1998 and September 27, 1997, and the results of its operations and its cash flows for each of the three years in the period ended September 26, 1998, 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 6, 1998 3 SEATTLE FILMWORKS, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except per share and share data) ASSETS
September 26, September 27, 1998 1997 ------------- ------------- CURRENT ASSETS Cash and cash equivalents $11,780 $10,252 Securities available-for-sale 4,555 5,062 Accounts receivable, net of allowance for doubtful accounts of $208 and $240 in 1998 and 1997, respectively 1,914 3,680 Inventories 7,561 8,998 Capitalized promotional expenditures 121 211 Prepaid expenses and other 831 743 Deferred income taxes 387 313 ------- ------- TOTAL CURRENT ASSETS 27,149 29,259 FURNITURE, FIXTURES, AND EQUIPMENT, at cost, less accumulated depreciation (Note D) 10,954 7,564 CAPITALIZED CUSTOMER ACQUISITION EXPENDITURES (Note B) 16,800 13,882 DEPOSITS AND OTHER ASSETS 213 285 NONCOMPETE AGREEMENT (Note C) 376 ------- ------- TOTAL ASSETS $55,116 $51,366 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 2,359 $ 3,588 Current portion of capital lease obligation 174 Accrued expenses 1,376 1,402 Accrued compensation 1,570 1,931 Income taxes payable 7 2,450 ------- ------- TOTAL CURRENT LIABILITIES 5,486 9,371 LONG-TERM CAPITAL LEASE OBLIGATIONS, net of current portion (Note F) 706 DEFERRED INCOME TAXES 5,223 4,394 ------- ------- TOTAL LIABILITIES 11,415 13,765 SHAREHOLDERS' EQUITY (Notes H and I) 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 16,641,891 and 16,436,258 in 1998 and 1997, respectively 167 164 Additional paid-in capital 981 2,459 Retained earnings 42,553 34,978 ------- ------- TOTAL SHAREHOLDERS' EQUITY 43,701 37,601 ------- ------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $55,116 $51,366 ======= =======
See notes to consolidated financial statements. 4 SEATTLE FILMWORKS, INC. CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share and share data)
Fiscal Years Ended -------------------------------------------- September 26, September 27, September 28, 1998 1997 1996 ============= ============= ============== Net revenues $ 96,716 $ 101,189 $ 84,152 Cost of goods and services 56,023 58,624 49,159 ----------- ----------- ----------- GROSS PROFIT 40,693 42,565 34,993 Operating expenses: Customer acquisition costs 17,903 15,764 11,981 Other selling expenses 7,654 7,789 6,911 Research and development 588 696 732 General and administrative 4,361 3,503 3,460 ----------- ----------- ----------- Total operating expenses 30,506 27,752 23,084 ----------- ----------- ----------- INCOME FROM OPERATIONS 10,187 14,813 11,909 Other income (expense): Interest income 731 561 449 Nonoperating income (expense), net 209 13 (121) ----------- ----------- ----------- Total other income 940 574 328 ----------- ----------- ----------- INCOME BEFORE INCOME TAXES 11,127 15,387 12,237 Provision for income taxes (Note G) 3,552 5,242 4,220 ----------- ----------- ----------- NET INCOME $ 7,575 $ 10,145 $ 8,017 =========== =========== =========== Diluted earnings per share $.43 $.57 $.45 =========== =========== =========== Basic earnings per share $.45 $.62 $.50 =========== =========== =========== Weighted average shares and equivalents outstanding - Diluted 17,474,000 17,770,000 17,726,000 =========== =========== =========== Weighted average shares - Basic 16,652,000 16,307,000 16,170,000 =========== =========== ===========
See notes to consolidated financial statements. 5 SEATTLE FILMWORKS, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (in thousands, except share data)
Common Stock -------------------------------------------------- Shares Par Paid-In Retained Outstanding Value Capital Earnings Total ============ ====== ======== ======== ======== BALANCE AS OF SEPTEMBER 30, 1995 16,073,484 $160 $ 954 $16,816 $17,930 Stock options exercised 155,902 2 350 352 Income tax benefit of stock options 424 424 Employee stock purchase plan 20,172 162 162 Purchase and retirement of Common Stock (17,712) (210) (210) Net income 8,017 8,017 ---------- --- ------ ------- ------- 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 ========== ==== ======= ======= =======
See notes to consolidated financial statements. 6 SEATTLE FILMWORKS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Fiscal Years Ended ------------------------------------------------ September 26, September 27, September 28, 1998 1997 1996 =============== =============== ============== OPERATING ACTIVITIES: Net income $ 7,575 $ 10,145 $ 8,017 Charges to income not affecting cash: Depreciation 3,422 2,488 1,642 Amortization of non-compete 375 376 376 Amortization of capitalized customer acquisition expenditures 16,558 14,723 10,772 Deferred income taxes 755 790 1,379 Net change in receivables, inventories, payables, and other 1,302 (1,785) (2,802) Capitalized promotional expenditures, net 90 27 (80) Additions to capitalized customer acquisition expenditures (19,476) (17,271) (14,750) -------- -------- -------- NET CASH FROM OPERATING ACTIVITIES 10,601 9,493 4,554 INVESTING ACTIVITIES: Purchase of furniture, fixtures, and equipment (5,750) (4,779) (4,067) Purchases of securities available-for-sale (4,898) (9,642) (7,409) Sales of securities available-for-sale 5,405 9,139 4,195 -------- -------- -------- NET CASH USED IN INVESTING ACTIVITIES (5,243) (5,282) (7,281) FINANCING ACTIVITIES: Proceeds from issuance of Common Stock 1,088 730 512 Payment on purchase of Common Stock (4,829) (824) (210) Payment on capital lease obligations (89) -------- -------- -------- NET CASH FROM (USED IN) FINANCING ACTIVITIES (3,830) (94) 302 -------- -------- -------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,528 4,117 (2,425) Cash and cash equivalents at beginning of year 10,252 6,135 8,560 -------- -------- -------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 11,780 $ 10,252 $ 6,135 ======== ======== ======== Supplemental cash flow information: Cash paid for interest $ 26 Cash paid for income taxes $ 3,315 $ 2,095 $ 2,300 Supplemental non-cash financing and investing activity: Capital lease obligation incurred $ 969
See notes to consolidated financial statements. 7 SEATTLE FILMWORKS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A -- OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES SEATTLE FILMWORKS, INC. and subsidiaries (the "Company") is a leading direct-to- consumer marketer and provider of high-quality amateur traditional photofinishing and digital imaging services and products. The Company offers an array of complementary services and products, primarily on a mail-order basis, under the brand name SeattleFilmWorks. 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 November 1999. Company policy limits the amount of credit exposure with any one financial institution. The fiscal 1998 and fiscal 1997 balance consisted primarily of government securities. Securities available-for-sale are carried at amortized cost, which approximates market. OTHER FINANCIAL INSTRUMENTS: At September 26, 1998, the carrying value of financial instruments such as trade receivables and payables, approximate their fair values, based on the short-term maturities of these instruments. ACCOUNTS RECEIVABLE: Accounts receivable primarily include amounts due from mail-order customers from the sale of related photographic products and 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. CAPITALIZED PROMOTIONAL EXPENDITURES: The Company's promotional programs run for periods of one to six months. Promotional expenditures primarily consist of advertising and media costs related to generating consumer interest in the Company's photofinishing services. The Company capitalizes these costs as capitalized promotional expenditures and expenses them the first time the promotion is run. Advertising expense was $3,610,000, $3,582,000, and $2,989,000 in fiscal years 1998, 1997, and 1996, respectively. DEPRECIATION: Furniture, fixtures, and equipment are depreciated using the straight-line and accelerated methods based on the estimated useful asset lives ranging from three 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 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 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. 8 SEATTLE FILMWORKS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE A -- OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 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, but included in the computation of diluted earnings per share. 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 H 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 1998 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 will adopt the new requirements in fiscal 1999. Management has not yet determined the manner in which it will present the information required by SFAS No. 131. 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 balances have been reclassified to conform to the current year's presentation. NOTE B -- CUSTOMER AQUISITION EXPENDITURES The Company's principal technique for acquiring new customers is its Introductory Offer of two rolls of 35mm film for $2.00 or less. Customer acquisition costs are comprised of the costs of generating a lead and the amortization of direct costs associated with the Company's promotional offers sent to prospective and existing customers. The costs of generating a lead, which are expensed when the promotion is run, include all direct-response media, advertising, and other costs associated with developing target customer lists. The direct costs of customer acquisition include film, postage, and printed material costs associated with mailings to prospective and existing customers. For periods prior to and including fiscal year 1998, the direct costs of customer acquisition were capitalized as an asset on the Company's consolidated balance sheet under "capitalized customer acquisition expenditures" and amortized over a three year period on an accelerated basis. 9 SEATTLE FILMWORKS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE B -- CUSTOMER AQUISITION EXPENDITURES (Continued) In accounting for customer acquisition costs, the Company follows the American Institute of Certified Public Accountants Statement of Position 93-7, Reporting on Advertising Costs (SOP 93-7). Using unique customer numbers and coded promotional response forms the Company tracks both the direct-response mailing to which the customer responded and the revenues generated over the life of the customer. The Company has therefore been capable of matching specific revenues associated with a specific pool of customers with the related capitalized customer acquisition cost. For all periods prior to the fourth quarter of fiscal 1998, this data provided the basis for the three year amortization schedule of 55% the first year, 29% the second year and 16% the third year. Quarterly analyses prior to fiscal year 1998 indicated that the marketing programs for which costs were capitalized were consistently yielding net profits from identifiable rolls in excess of the program costs. During fiscal year 1998, the quarterly analyses of identifiable rolls began to show a decline in net profitability from identifiable rolls, but the programs were still profitable overall. The analysis done during the third quarter of fiscal 1998 indicated that production problems during the fourth quarter of fiscal 1997 had caused an extraordinary impact on customer responses, but the amount of customer acquisition costs then capitalized were not believed to be in excess of the estimated net profit from future identifiable rolls to be received under the programs. In the fourth quarter, continued deterioration in the performance of the Company's customer acquisition programs occurred. This trend was discussed in the MD&A set forth in the Company's Form 10-Q for the quarter ended June 27, 1998 when the Company indicated photofinishing revenues were weaker in the latter part of June (1998) and this pattern was continuing into the month of July. While increased competition and other factors may have been contributing to reduced photofinishing volumes, management's statistical analysis of marketing programs indicated that photofinishing volumes continued to be negatively affected by extended delivery times experienced by customers during the summer of fiscal 1997. Upon completing the quarterly review of the recoverability of the 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. The Company recorded a charge of $613,000 in the fourth quarter of fiscal 1998 to write-down the Customer Acquisition Costs recorded as an asset to the probable remaining future net profitability expected to result directly from the deferred customer acquisition costs. The assessment of the realizability of the asset was completed on a monthly pool-by-pool basis. Based upon photofinishing volumes through the fourth quarter of 1998, estimates for future net profitability of the majority of customer acquisition programs conducted during fiscal 1998 were less than the corresponding amounts that remained unamortized. In accordance with SOP 93-7, these estimates only included revenue that could be specifically identified as resulting from a particular program. Although these marketing programs remained profitable on an overall basis if customer orders which could not be specifically tracked were included in the analysis, the net profit that could be specifically isolated to the capitalized costs did not support the amount of unamortized costs on the balance sheet. Thus, the net realizability of a portion of the asset could not be supported and expensing of certain previously capitalized costs became appropriate. Accordingly, the asset was written down $613,000 to bring the net capitalized cost to estimated break- even performance for estimated future identifiable roll volume. The Company believes the reliability of accounting estimates decreases as the length of the period for which such estimates are made increases. Therefore, the period over which the benefits of direct response advertising should be amortized is no longer than the greater of one year or one operating cycle. During the past, when the nature of the marketing programs was essentially static and consistently utilized, the Company was able to demonstrate, with reasonable reliability, that the duration of the probable future benefits was up to three years. Management now expects the percentage of unidentifiable respondents to increase. New marketing programs scheduled for launch in the next several quarters will remove management's ability to reliably measure 10 SEATTLE FILMWORKS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued NOTE B -- CUSTOMER AQUISITION EXPENDITURES (Continued) customer responses beyond twelve months. With changes in marketing programs, coupled with expansion of retail operations, management can no longer conclude as to the specific advertising, if any (e.g. in the case of retail signage promotions) to which a customer is responding. Under current marketing plans, a significant number of customers, for which a portion of the costs of previous direct marketing efforts remain capitalized, will be impacted by the new programs during fiscal 1999. As a result, management does not believe that the prior measured timing of responses is indicative of future measurable responses from the prior marketing programs, and that, once these pools are tainted by the supplemental marketing to these customers, conclusive data no longer will exist to continue to support amortizing the remaining capitalized costs of previous programs for more than a period of twelve months. Planned marketing programs in 1999 contemplate that pools will become tainted at some point throughout the year by supplemental marketing efforts. Accordingly, effective in the first quarter of fiscal 1999, the Company will expense customer acquisition costs as incurred and will amortize the remaining $16,800,000 of capitalized customer acquisition costs over a twelve month period on a straight-line basis. This is management's best estimate of the period in which the benefits of the previous marketing costs to this customer base will be visible before the measurable benefits of these previous programs are obsoleted by the supplemental marketing efforts to this customer base. Furthermore, management estimates that the gross margin associated with future photofinishing orders would support a twelve month amortization period. This change in estimate does not impact fiscal year 1998 and management believes the change in estimate from a three year accelerated amortization to a twelve month straight-line amortization will result in incremental amortization of previously deferred customer acquisition costs during fiscal year 1999 of approximately $5,810,000, or $.24 per share. NOTE C -- ACQUISITION OF PRIVATE LABEL FILM BUSINESS On December 30, 1993, the Company acquired certain assets of Private Label Film, Inc. for approximately $1,637,000. The assets relate to the manufacture and sale of private-label film and related products to retailers and commercial users. This acquisition has been accounted for using the purchase method. The purchase price was recorded as follows: equipment $100,000; and other assets of $1,536,830 related to non-compete agreements, which includes capitalized legal and accounting expenses. The non-compete agreement was amortized as other selling expenses on a straight-line basis over five years and has been fully amortized at September 26, 1998. NOTE D -- FURNITURE, FIXTURES, AND EQUIPMENT Furniture, fixtures, and equipment, at cost consist of the following:
September 26, September 27, 1998 1997 ============== ============== (in thousands) Furniture, fixtures, and equipment $ 20,437 $ 15,389 Equipment under capital lease 969 Leasehold improvements 3,176 2,949 -------- -------- 24,582 18,338 Less accumulated depreciation and amortization (13,628) (10,774) -------- -------- $ 10,954 $ 7,564 ======== ========
11 SEATTLE FILMWORKS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE E -- CREDIT AGREEMENT At September 26, 1998, 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 1998 or fiscal 1997 under the line of credit. NOTE F -- 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 1999 with an option to extend the lease for two one-year periods. 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 transaction to finance the purchase of certain equipment. At September 26, 1998, future minimum payments under capital leases and non-cancelable operating leases are as follows:
Capital Operating Lease Leases ======== ========= (in thousands) Fiscal 1999 $ 227 $1,149 Fiscal 2000 227 993 Fiscal 2001 227 586 Fiscal 2002 227 430 Fiscal 2003 111 400 Thereafter 774 ------ ------ 1,019 $4,332 ====== Amounts representing interest (139) ------ Present value of net minimum lease payments (including current portion of $174) $ 880 ======
Rental expense relating to operating leases for fiscal years 1998, 1997, and 1996 was $1,119,000, $792,000, and $481,000, respectively. Interest expense relating to the capital lease was $26,000 for fiscal year 1998. 12 SEATTLE FILMWORKS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE G -- INCOME TAXES The provision for income taxes is as follows (in thousands): 1998 1997 1996 ====== ====== ====== Provision for income taxes: Current $2,797 $4,452 $2,841 Deferred 755 790 1,379 ------ ------ ------ $3,552 $5,242 $4,220 ====== ====== ====== A reconciliation of the federal statutory tax rates to the effective tax rates is as follows: 1998 1997 1996 ====== ====== ====== Statutory tax rate 34.0% 35.0% 35.0% Research and development tax credits (.4) (.3) (.1) Tax exempt interest (.8) (.5) (.1) Other, net (.9) (.1) (.3) ------ ------ ------ 31.9% 34.1% 34.5% ====== ====== ====== Principal items comprising the cumulative deferred income taxes are as follows: 1998 1997 ====== ====== Deferred tax liabilities: Customer acquisition expenditures $5,880 $4,859 Other liabilities 190 300 ------ ------ Total deferred tax liabilities 6,070 5,159 Deferred tax assets: Accrued expenses 577 342 Non-compete agreement 368 272 Depreciation and amortization 289 464 ------ ------ Total deferred tax assets 1,234 1,078 ------ ------ Net deferred tax liabilities $4,836 $4,081 ====== ======
NOTE H -- 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. 13 SEATTLE FILMWORKS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE H -- STOCK-BASED COMPENSATION (Continued) The following schedule summarizes stock option activity for fiscal years 1996, 1997, and 1998.
Number Price Per Weighted Average of Shares Share Exercise Price =========== ============== ================ Balance at September 30, 1995 1,947,932 $ 0.19 - $ 9.44 $ 1.72 Granted during 1996 213,075 $ 8.55 - $13.67 $11.37 Canceled during 1996 (28,886) $ 2.07 - $ 9.44 $ 4.68 Exercised during 1996 (155,902) $ 0.19 - $ 6.78 $ 2.24 ---------- 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 $ 0.78 ---------- Balance at September 26, 1998 1,060,993 $ 0.21 - $14.67 $ 7.41 ==========
The following schedule summarizes the weighted-average remaining contractual life and weighted-average exercise price of options outstanding and options exercisable as of September 26, 1998.
Options Outstanding Options Exercisable ----------------------------------- ------------------- Remaining Range of Options Contractual Exercise Options Exercise Exercise Prices Outstanding Life (Years) Price Exercisable Price - ------------------------- ----------- ----------- -------- ----------- -------- $0.21 - $2.00 151,212 1.7 $ 0.92 151,212 $ 0.92 $2.01 - $5.00 210,264 3.2 $ 3.79 192,554 $ 3.71 $5.01 - $10.00 338,968 4.1 $ 7.90 161,432 $ 6.89 $10.01 - $14.67 360,549 3.9 $11.79 197,019 $11.77 -------- ------- 1,060,993 2.3 $ 7.41 702,217 $ 6.10 ========== =======
Options considered fully vested as of September 26, 1998, September 27, 1997 and September 28, 1996 were 702,217, 1,553,053 and 1,562,568, respectively, at weighted average exercise prices of $6.10, $2.31 and $1.60, respectively. Shares of Common Stock reserved for issuance under these stock option plans totaled 1,269,514 at September 26, 1998, of which 208,521 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 1998, 1997 and 1996 was $.26, $5.90, and $5.49, respectively. 14 SEATTLE FILMWORKS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE H -- 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: Risk free interest rate of 5.59% for fiscal year 1998, 6.39% for fiscal year 1997, and 5.74% for fiscal year 1996, expected volatility of 58.27% for fiscal year 1998 and 46.75% for fiscal years 1997 and 1996, expected option life of 4.47 years for fiscal year 1998 and 4.99 for fiscal years 1997 and 1996, and a dividend yield of 0.0%. 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:
September 26, September 27, September 28, 1998 1997 1996 ------------- ------------- ------------- (in thousands, except per share data) Net income: As reported............................................... $7,575 $10,145 $8,017 Pro forma................................................. $7,034 $ 9,687 $7,706 Diluted earnings per share: As reported............................................. $ .43 $ .57 $ .45 Pro forma................................................. $ .40 $ .54 $ .43 Basic earnings per share: As reported............................................. $ .45 $ .62 $ .50 Pro forma................................................. $ .42 $ .59 $ .48
The pro forma effects on net income for fiscal year 1998, 1997 and 1996 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 would be granted options for two shares of common stock in exchange for the surrender of options for three shares of common stock. All vesting periods would start 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. 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 1998 and 1997, shares totaling 35,382 and 37,410 were issued under the Plan at an average price of $8.47 and $9.89 per share, respectively. At September 26, 1998, 231,492 shares were reserved for future issuance. 15 SEATTLE FILMWORKS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE I -- SHAREHOLDERS' EQUITY Stock Splits All share data, per share data, and related accounts in the accompanying consolidated financial statements and these notes reflect a retroactive adjustment for a three-for-two stock split effective March 15, 1996, and a three-for-two stock split effective March 17, 1997. 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 1998, the Company had purchased a total of 843,367 shares for a total of $4,829,000. In addition, in October 1998, the Company purchased a total of 466,000 shares for a total of $1,493,000. NOTE J -- EARNINGS PER SHARE The Company calculates earnings per share in accordance with the Financial Accounting Standards Board Statement of Financial Accounting Standards No. 128, "Earnings per Share". Statement No. 128 replaced the previously reported primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options. Diluted earnings per share is similar to the previously reported primary earnings per share. All earnings per share amounts for all prior periods presented have been restated to conform to Statement No. 128 requirements. The following table sets forth the computation of basic and diluted earnings per share:
September 26, 1998 September 27, 1997 September 26, 1996 ================== ================== ================== Numerator for basic and diluted earnings per share: Net income $ 7,575,000 $10,145,000 $ 8,017,000 =========== =========== =========== Denominator: Denominator for basic earnings per share - weighted-average shares 16,652,000 16,307,000 16,170,000 Effect of dilutive securities: Stock options 822,000 1,463,000 1,556,000 ----------- ----------- ----------- Denominator for diluted earnings per share 17,474,000 17,770,000 17,726,000 =========== =========== =========== Basic earnings per share $ .45 $ .62 $ .50 =========== =========== =========== Diluted earnings per share $ .43 $ .57 $ .45 =========== =========== ===========
16 SEATTLE FILMWORKS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE J -- EARNINGS PER SHARE (Continued) 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. Excluded from the computation of diluted earnings per share for the year ended September 28, 1996 are options to acquire 168,150 shares of common stock with a weighted average exercise price of $11.73. The impact of these options were excluded from the computation of diluted earnings per share because their effects would be antidilutive. NOTE K -- 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 $377,000, $547,000, and $488,000 for fiscal years 1998, 1997, and 1996, respectively. NOTE L -- CONTINGENCIES The Company is a defendant in a legal proceeding filed by Fuji Photo Film Co., Ltd. ("Fuji") with the International Trade Commission ("ITC") 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 on single use cameras through the importation and resale into the U.S. of recycled cameras. Fuji is seeking an order prohibiting importation of the alleged infringing cameras into the U.S. and prohibiting further sales of such products which have been imported. Sales of recycled cameras accounted for 3.8 % of the Company's net revenues during fiscal 1998. An evidentiary hearing before an ITC Administrative Law Judge ("ALJ") was held in November, 1998 and the ALJ is expected to issue an initial decision in February, 1999. Such decision is subject to review by the ITC Commissioners, who would then issue a final decision, most likely in May, 1999. That decision would be subject to appeal to the Federal Circuit Court of Appeals. In addition, the Company is involved in various routine legal proceedings incident to the ordinary course of its business. NOTE M -- SELECTED QUARTERLY FINANCIAL DATA (Unaudited) The following table sets forth summary financial data for the Company by quarter for fiscal years 1998 and 1997 (in thousands, except per share data).
Quarters ---------------------------------- First Second Third Fourth ------- ------- -------- ------- 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 Fiscal 1997 - ----------- Net revenue $21,236 $21,657 $25,553 $32,743 Gross profit 8,254 8,895 11,576 13,840 Net income 1,357 1,146 2,792 4,850 Diluted earnings per share* .08 .06 .16 .27 Basic earnings per share* .08 .07 .17 .30
17 SEATTLE FILMWORKS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE M -- SELECTED QUARTERLY FINANCIAL DATA (Unaudited) (Continued) * The 1997 earnings per share amounts have been restated to comply with Statement of Financial Accounting Standards No. 128, Earnings per share. 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. All diluted earnings per share data presented above have been adjusted to reflect stock splits. See Note J. ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 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 31 Consolidated Balance Sheets as of September 26, 1998 and September 27, 1997 32 Consolidated Statements of Income for the years ended September 26, 1998, September 27, 1997, and September 28, 1996 33 Consolidated Statements of Shareholders' Equity for the years ended September 26, 1998, September 27, 1997, and September 28, 1996 34 Consolidated Statements of Cash Flows for the years ended September 26, 1998, September 27, 1997, and September 28, 1996 35 Notes to Consolidated Financial Statements 36-44
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. 18 (2) Schedule Page II - Valuation and Qualifying Accounts 50 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 only exhibit filed with this 10-K/A is an updated consent of Ernst & Young, LLP, at item 23 below. 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 Articles of Incorporation of the Company, as amended through February 23, 1989. (Incorporated by reference to Exhibit 3.1 filed with the Company's Annual Report on Form 10-K for the year ended September 30, 1989.) 3.2 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.) 3.3 Articles of Amendment to Articles of Incorporation dated March 2, 1994. (Incorporated by reference to Exhibit 3.4 filed with the Company's Annual Report on Form 10-K for the year ended September 24, 1994.) 3.4 Articles of Amendment to Articles of Incorporation dated February 16, 1995. (Incorporated by reference to Exhibit 3.4 filed with the Company's Annual Report on Form 10-Q for the year ended March 25, 1995.) 3.5 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.) 19 3.6 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.) 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. 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 Purchase and Sale Agreement dated as of December 16, 1993 and related Amendment to Purchase and Sale Agreement dated December 30, 1993 among Seattle FilmWorks, Inc., Private Label Film, Inc. and certain shareholders of Private Label Film, Inc. (Incorporated by reference to Exhibits 2.1 and 2.2 filed with the Company's Report on Form 10-Q dated February 7, 1994.) 10.11 Business Loan Agreement with First Interstate Bank of Washington N.A. as amended and restated on March 31, 1994. (Incorporated by reference to Exhibit 10.60 filed with the Company's Annual Report on Form 10-K for the year ended September 24, 1994.) 20 10.12 Business Loan Agreement with First Interstate Bank of Washington N.A. as amended and restated on February 28, 1995. (Incorporated by reference to Exhibit 10.0 filed with the Company's Quarterly Report on Form 10-Q for the quarter ended March 25, 1995.) 10.13 Business Loan Agreement with First Interstate Bank of Washington N.A. as amended and restated on January 31, 1996. (Incorporated by reference to Exhibit 10.1 filed with the Company's Quarterly Report on Form 10-Q for the quarter ended March 30, 1996.) 10.14 Business Loan Agreement with Wells Fargo Bank, National Association as amended and restated on December 13, 1996. (Incorporated by reference to Exhibit 10.13 filed with the Company's Annual Report on Form 10-K for the year ended September 28, 1996.) 10.15 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.) 10.16 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.) 10.17 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.) 10.18 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.) 10.19 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.) 10.20 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.) 10.21 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.) 10.22* 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.) 10.23* 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.) 21 10.24* 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.) 10.25* Supply Agreement effective January 1, 1997 with Fuji Photo Film U.S.A., Inc. (Incorporated by reference to Exhibit 10.1 filed with the Company's Quarterly Report on Form 10-Q for the quarter ended March 29, 1997.) 10.26* 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.) 10.27* 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.) 10.28 Warehouse Sublease between Seattle FilmWorks, Inc. and OptiColor, Inc. dated September 30, 1996. (Incorporated by reference to Exhibit 10.20 filed with the Company's Annual Report on Form 10-K for the year ended September 28, 1996.) 10.29 Warehouse Sublease between Seattle FilmWorks, Inc. and Seattle FilmWorks Manufacturing Company dated September 30, 1996. (Incorporated by reference to Exhibit 10.21 filed with the Company's Annual Report on Form 10-K for the year ended September 28, 1996.) 10.30 1260 16th Avenue West Sublease between Seattle FilmWorks, Inc. and OptiColor Inc. dated September 30, 1996. (Incorporated by reference to Exhibit 10.22 filed with the Company's Annual Report on Form 10-K for the year ended September 28, 1996.) 10.31 1260 16th Avenue West Sublease between Seattle FilmWorks, Inc. and Seattle FilmWorks Manufacturing Company dated September 30, 1996. (Incorporated by reference to Exhibit 10.23 filed with the Company's Annual Report on Form 10-K for the year ended September 28, 1996.) 10.32 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 27.1 Financial Data Schedule 27.2 Financial Data Schedule Restated 1997 27.3 Financial Data Schedule Restated 1996 * Exhibit for which confidential treatment has been granted. 22 SEATTLE FILMWORKS, INC. SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS (in thousands)
Additions ---------------------- Balance at Charged to Charged to Balance Beginning Costs and Other at End Description of Year Expenses Accounts Deductions of Period ================================= ========== ========== ========== ========== ========= FOR THE YEAR ENDED SEPTEMBER 28, 1996 Allowance for doubtful accounts $546 $158 $0 $417 $287 Allowance for returns $ 97 $130 $0 $182 $ 45 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
____________________________ 23 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: June 11, 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 June 11, 1999 ---------------------------- Chief Executive Officer Gary R. Christophersen Director (Principal Executive Officer) By: /s/ Case H. Kuehn Vice President-Finance June 11, 1999 ------------------ Chief Financial Officer Case H. Kuehn (Principal Financial and Accounting Officer) 24 The only exhibit filed with this 10-K/A is an updated consent of Ernst & Young, LLP, at item 23 below. EXHIBIT INDEX Annual Report on Form 10-K For The Year Ended September 26, 1998 Exhibit Number Exhibit Description - ------- ------------------- 3.1 Articles of Incorporation of the Company, as amended through February 23, 1989. (Incorporated by reference to Exhibit 3.1 filed with the Company's Annual Report on Form 10-K for the year ended September 30, 1989.) 3.2 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.) 3.3 Articles of Amendment to Articles of Incorporation dated March 2, 1994. (Incorporated by reference to Exhibit 3.4 filed with the Company's Annual Report on Form 10-K for the year ended September 24, 1994.) 3.4 Articles of Amendment to Articles of Incorporation dated February 16, 1995. (Incorporated by reference to Exhibit 3.4 filed with the Company's Annual Report on Form 10-Q for the year ended March 25, 1995.) 3.5 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.) 3.6 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.) 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. 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.) 25 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 Purchase and Sale Agreement dated as of December 16, 1993 and related Amendment to Purchase and Sale Agreement dated December 30, 1993 among Seattle FilmWorks, Inc., Private Label Film, Inc. and certain shareholders of Private Label Film, Inc. (Incorporated by reference to Exhibits 2.1 and 2.2 filed with the Company's Report on Form 10-Q dated February 7, 1994.) 10.11 Business Loan Agreement with First Interstate Bank of Washington N.A. as amended and restated on March 31, 1994. (Incorporated by reference to Exhibit 10.60 filed with the Company's Annual Report on Form 10-K for the year ended September 24, 1994.) 10.12 Business Loan Agreement with First Interstate Bank of Washington N.A. as amended and restated on February 28, 1995. (Incorporated by reference to Exhibit 10.0 filed with the Company's Quarterly Report on Form 10-Q for the quarter ended March 25, 1995.) 10.13 Business Loan Agreement with First Interstate Bank of Washington N.A. as amended and restated on January 31, 1996. (Incorporated by reference to Exhibit 10.1 filed with the Company's Quarterly Report on Form 10-Q for the quarter ended March 30, 1996.) 10.14 Business Loan Agreement with Wells Fargo Bank, National Association as amended and restated on December 13, 1996. (Incorporated by reference to Exhibit 10.13 filed with the Company's Annual Report on Form 10-K for the year ended September 28, 1996.) 10.15 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.) 10.16 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.) 10.17 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.) 26 10.18 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.) 10.19 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.) 10.20 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.) 10.21 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.) 10.22* 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.) 10.23* 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.) 10.24* 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.) 10.25* Supply Agreement effective January 1, 1997 with Fuji Photo Film U.S.A., Inc. (Incorporated by reference to Exhibit 10.1 filed with the Company's Quarterly Report on Form 10-Q for the quarter ended March 29, 1997.) 10.26* 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.) 10.27* 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.) 10.28 Warehouse Sublease between Seattle FilmWorks, Inc. and OptiColor, Inc. dated September 30, 1996. (Incorporated by reference to Exhibit 10.20 filed with the Company's Annual Report on Form 10-K for the year ended September 28, 1996.) 10.29 Warehouse Sublease between Seattle FilmWorks, Inc. and Seattle FilmWorks Manufacturing Company dated September 30, 1996. (Incorporated by reference to Exhibit 10.21 filed with the Company's Annual Report on Form 10-K for the year ended September 28, 1996.) 10.30 1260 16th Avenue West Sublease between Seattle FilmWorks, Inc. and OptiColor Inc. dated September 30, 1996. (Incorporated by reference to Exhibit 10.22 filed with the Company's Annual Report on Form 10-K for the year ended September 28, 1996.) 27 10.31 1260 16th Avenue West Sublease between Seattle FilmWorks, Inc. and Seattle FilmWorks Manufacturing Company dated September 30, 1996. (Incorporated by reference to Exhibit 10.23 filed with the Company's Annual Report on Form 10-K for the year ended September 28, 1996.) 10.32 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 27.1 Financial Data Schedule 27.2 Financial Data Schedule Restated 1997 27.3 Financial Data Schedule Restated 1996 * Exhibit for which confidential treatment has been granted. 28 EX-23 2 CONSENT OF INDEPENDENT AUDITORS 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 6, 1998, with respect to the consolidated financial statements and schedule of Seattle FilmWorks, Inc. included in its Amended Annual Report (Form 10-K/A) for the year ended September 26, 1998. /s/ ERNST & YOUNG LLP Seattle, Washington June 9, 1999 -----END PRIVACY-ENHANCED MESSAGE-----